Bernie Sanders and his friend Donald Trump decide to establish a corporation (“Presidential Corp.”) to sell real estate in the San Juan Island. Bernie Sanders has previously purchased two properties over the years. One of his properties, Progressiveacre, has an adjusted basis of $30,000 and a fair market value of $100,000. His other property, Bernacre, has an adjusted basis of $170,000 and a fair market value of $100,000. Bernie Sanders has held Progressiveacre for six months and Bernacre for five years. Bernie Sanders contributes the two properties to Presidential Corp. in return for 80% of the stock (worth $190,000) plus $10,000 cash. Donald Trump contributes only one parcel, Apprenticeacre, to Presidential Corp. with a basis of $70,000, a fair market value of $90,000, to the corporation in return for 20% of the stock. Presidential Corp. takes Donald Trump’s property subject to a mortgage of $40,000
Questions to address:
- What are the tax consequences to Bernie Sanders, Donald Trump, and Presidential Corp?
- What would the result be if Apprenticeacre was subject to an $80,000 mortgage?
- How might your answer to question number two change if Donald Trump had taken out the $80,000 mortgage against his property just one week prior to contributing the property as part of the incorporation exchange, using the $80,000 to pay off lawyer fees for his criminal defense?
- In their second year of business, Bernie Sanders and Donald Trump decide to purchase an additional piece of property and build three additional houses for sale, Rubiuoacre, Cruzacre, and Clintonacre. They are curious about what the tax implications will be of this business activity. How would you advise them?
All answers need to be supported with citations to the relevant authority, this includes noting not only the section numbers but also the relevant subsection whenever appropriate.