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Assumption: X owns a rental building (its only asset) with a gross FMV of $1,000,...

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Accounting

Assumption:

X owns a rental building (its only asset) with a gross FMV of $1,000, subject to a nonrecourse mortgage of $400. Xs adjusted basis for this building is $300. A owns all of Xs stock, with a basis of $100. X has $200 of E&P. X is on the accrual method of accounting and reports on the calendar year. Assume that the corporate tax payable by X on $700 gain is $250 and on $600 gain is $200.

Problem:

A sells the stock in X to B for $600 in cash. B promptly liquidates X to get direct ownership of, and a $1,000 basis in, the building. Was B wise to pay $600? Could B obtain a better tax result by electing X corporation status for X before liquidating X?

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