IRD Question Father & Daughter

[Edsel]

Some years ago, father purchased land for $60,000 and sold it for $100,000.  He carried the note which provided for interest and principal on a monthly payment.  While he was alive, he collected $70,000 in principal and $35,000 in interest over the course of several years.

Father dies and leaves the note receivable to daughter.  There is $30,000 remaining in principal, and since the profit margin was 40%, he had to recognize $28,000 in capital gains while he was still alive.  Since unrecognized installment sale income is taxable to the recipient, there is another $12,000 in capital gains yet to be recognized in the hands of the daughter.  If remaining loan plays out as scheduled, what is true among the following statements?

1. Asset Balance is $30,000 or $18,000?
2. Basis in the loan is $30,000 or $18,000 or $12,000?
3. If daughter transfers the loan into a C Corp (whether intelligent or not), the capital balance added to equity is $30,000 or $18,000 or $12,000?

 

[jklcpa]

Sometimes we don't have to look and further than our own backyard.  See the last 2 responses in this topic here on this forum:

 

[Edsel]

7 hours ago, Edsel said:

1.  Asset Balance is $30,000 or $18,000?

2.  Basis in the loan is $30,000 or $18,000 or $12,000?

3.  If daughter transfers the loan into a C Corp (whether intelligent or not), the capital balance added to equity is $30,000 or $18,000 or $12,000?

 

The discussion thread confirms the IRD factor and methodology.  My best answers for the specific handling of the above questions are:

1.  Asset Balance $30,000.

2.  Basis in loans is $18,000.

3.  Capital balance added to equity is $30,000.  The capital investment pumps out capital gains to add to income just like it pumps out interest.

[jklcpa]

For your item #3, the answer depends on whether this transfer is part of a tax-free exchange for stock in a newly formed C corp where tax attributes may be retained, or is this transfer into an existing C corp?

[Edsel]

1 hour ago, jklcpa said:

For your item #3, the answer depends on whether this transfer is part of a tax-free exchange for stock in a newly formed C corp where tax attributes may be retained, or is this transfer into an existing C corp?

No tax free exchange.  C corp is new, and awaits further capital contributions which have already been made as of this writing.

Thanks, Judy.