[k1zuna]

Becker Chap 3 Sim 1 #1 (Jones)

FMV in property contributed = 120,000

liability associated with property = 60,000

AB in property contributed = 100,000

cash contributed = 0

cash distributed to Jones = 10,000

Here’s my answer:

Recognized gain = lesser of boot received (10,000) or built in gain (20,000). So 10,000

Jone’s new AB = old AB (100,000) + gain recognized (10,000) – boot received (60,000) = 50,000

Corp’s new AB = old AB (100,000) + gain recognized by Jones (10,000) = 110,000

Becker says:

Recognized gain = lesser of boot received (10,000) or built in gain (20,000). So 10,000

Jone’s new AB = old AB (100,000) – boot received (60,000) = 40,000

?????????????????????????????????????????

FAR - Passed
AUD - Passed
BEC - Passed
REG - 8/22/2013

[mangos]

What's the question?

FAR (5/07/13): 96

[k1zuna]

This question relates to shareholders contributing assets to corporation during formation.

Question is: What's Jone's new AB in stock received?

FAR - Passed
AUD - Passed
BEC - Passed
REG - 8/22/2013

[mangos]

Asset NBV

– Liability assumed by corp

= Basis in stock

So, 40k.

FAR (5/07/13): 96

[k1zuna]

what happened to the gain recognized by Jones? We don't add it to his basis in stock?

If he sells the stock without adding the gain recognized to his basis, he's going to get taxed again…

FAR - Passed
AUD - Passed
BEC - Passed
REG - 8/22/2013

[mangos]

Yeah – you're right.

Take a look at R3-4 in the pass key.

Adjusted basis

+Gain recognized

-Liabilities assumed

= Basis.

So it should be 50k

FAR (5/07/13): 96

[SeattleAccountant]

Correct answer would be 40K.

Let's review it together:

Contribution to corp is generally nontaxable event unless liability exceeds NBV. In our case NBV 100 > 60 liability, thus, we will use NBV.

Jones basis in corp would be = NBV – debt assumed by the corp + cash paid to corp

Jones basis in corporate stock = 100 – 60 + 0 = 40K

Review example# 2 on page R3-5.

Pass key on R3-4 is an exception to general rule.

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[mangos]

Why isn't the recognized gain relevant?

Both my Business Taxation textbook and Becker say that basis is increased by ANY gain recognized as a result of the transaction?

FAR (5/07/13): 96

[mangos]

Ah…. I get it!

Basis is reduced by CASH received and increased by GAIN recognized.

So in the case of Jones, they cancel each other out!

Adjusted basis + gain recognized – cash received

40,000 + 10,000 – 10,000 = 40,000

there it is.

FAR (5/07/13): 96

[mangos]

God, I hate tax.

FAR (5/07/13): 96

[SeattleAccountant]

Tax Basis in Corporate shares: “General Rule: The shareholder's tax basis in the shares is generally equal to the shareholder's net book value of the property immediately before the contribution plus any cash contributed.”

source: Becker 2013

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[mangos]

@Seattle

Any boot will lead to a gain being recognized.

ANY recognized gain is added to the basis of the stock, it just so happens that in this particular case the gain recognized is equal to the cash received, which reduces the basis, cancelling out the gain.

The issue is we were correctly adding the gain in – which makes conceptual sense – but the answer still came out to be his old basis. I guess we just failed to see that just like excess liability reduces basis, so does cash received since conceptually they're the same (both benefit the shareholders).

But, yeah, you're right. Cancellation of debt is only considered boot if it exceeds the basis.

FAR (5/07/13): 96

[k1zuna]

Ok I re-read my old tax notes from college and realized I forgot to subtract the 10,000 cash received. So it should be:

100000+10000-60000-10000=40000

old basis + gain recognized – boot received – boot received

FAR - Passed
AUD - Passed
BEC - Passed
REG - 8/22/2013

[Author]

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