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Tim is a real estate broker who specializes in commercial real estate.Although he usually buys and sells on behalf of others, he also maintains a portfolio ofproperty of his own. He holds this property, mainly unimproved land, either as aninvestment or for sale to others.In early 2011, Irene and Al contact Tim regarding a tract of land located just outsidethe city limits. Tim bought the property, which is known as the Moore farm, several yearsago for $600,000. At that time, no one knew that it was located on a geological fault line.Irene, a well-known architect, and Al, a building contractor, want Tim to join them indeveloping the property for residential use. They are aware of the fault line but believethat they can circumvent the problem by using newly developed design and constructiontechnology. Because of the geological flaw, however, they regard the Moore farm as beingworth only $450,000. Their intent is to organize a corporation to build the housing project,and each party will receive stock commensurate to the property or services contributed.After consulting his tax adviser, Tim agrees to join the venture if certain modificationsto the proposed arrangement are made. The transfer of the land would be structured asa sale to the corporation. Instead of receiving stock, Tim would receive a note from thecorporation. The note would be interest-bearing and due in five years. The maturity valueof the note would be $450,000the amount that even Tim concedes is the fair marketvalue of the Moore farm.What income tax consequences ensue from Tim’s suggested approach? Compare thisresult with what would happen if Tim merely transferred the Moore farm in return forstock in the new corporation.
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