[youngstyle]

I have a few questions on Becker simulation.

Jones, Mitchell, Carey, and Gorman are knowledgeable about landscape design. They have decided to pool their knowledge and resources to form Arrington Enterprises, Inc., a C corporation. They will provide professional services to area businesses and homeowners. All participants expect to work full time for Arrington Enterprises, and each expects to contribute sufficient assets to become a 25% shareholder with a total stock equity of $50,000 each.

In addition to the skills that each brings to the new entity, the owners will contribute assets that will enhance the company’s ability to provide quality technical design and planning services. These assets include a building, land, lawn care equipment, office furniture and equipment, and cash for initial operating expenses.

The table below shows the assets contributed by each shareholder. In all cases, the liabilities are recourse and are assumed by Arrington Enterprises, Inc. There are no tax avoidance purposes inherent in the assumption of shareholder liabilities.

Shareholder contributions to Arrington Enterprises.Inc

Jones $120,000 $60,000 $100,000 $0 $10,000

Mitchell $ 80,000 $50,000 $40,000 $20,000 $0

Carey $40,000 $20,000 $20,000 $30,000 $0

Gorman $70,000 $0 $50,000 $0 $20,000

*the first number: Noncash property contributed (FMV)

the second number: Liability associated with property

the third number: Basis in noncash property contributed

the fourth number: Cash contributed

the fifth number: Cash distributed to shareholder

So the first question is

What is Jones’ tax basis in shares?

The answer is $40,000.

But here is what I think.

Jones contributed $100,000 basis in property with haas $ 600,000 liability attached to it

so his basis is $40,000 ( this is how Becker got their answer). However, the corporation distributed $10,000.

His basis should be $30,000 since he received boot when contributing the property.

My second question is

What is corporation tax basis for assets that Mitchell and Carey transferred in.

.

So for Mitchell, even though the liability assumed by corporation was greater than the basis of Mitchell’s property,

she also contributed cash of $20,000, which makes the corporation basis of $60,000. but the answer is $40,000

Also for Carey, the basis of Carey’s property was $20,000 and the cash contributed was $30,000. I believe the tax basis of the corporation should be $50,000. but the answer is $20,000

For both Mitchell and Carey, the corporation did not take the cash contributed by Mitchell and Carey into the answer.

I know it is a very long question. Please someone help me out..I thought I was pretty much ready but this is killing

my confidence!!

 

 

[PJJW90810]

For Carey

VALUE OF STOCK RECEIVED: 50k + 20k (liabilities assumed) = 70k

REALIZED GAIN: 70k – 50k (adjusted basis 30k + 20k cash) = 20k gain

RECOGNIZED GAIN: 0 because no boot received and and liabilities assumed is not greater than adjusted basis. 20k < 50k

Therefore, basis of C Corp is just the adjusted basis of 20k. There is no recognized gain to add nor do you add the cash. See last not in example for Mitchell.

REALIZED GAIN is just the (valuation of stock + liabilities assumed + cash distributed) LESS (adjusted basis of property contributed + cash contributed)

FAR: 77 (08/07/13)
AUD: 78 (08/29/13)
REG: 76 (11/07/13)
BEC: 79 (12/06/13)
Ethics: 98%

Application sent 12/31/13

Used Becker Self-Study

[PJJW90810]

For the Jones example in calculating Jones Basis you subtract the liabilities assumed by the C Corp because you are relieve of the debt. The liabilities assumed is not incorporated in the adjusted basis. If you look at the adjusted basis it's just the basis of non cash property contributed 100k.

FAR: 77 (08/07/13)
AUD: 78 (08/29/13)
REG: 76 (11/07/13)
BEC: 79 (12/06/13)
Ethics: 98%

Application sent 12/31/13

Used Becker Self-Study

[PJJW90810]

For the Jones example in calculating Jones Basis you subtract the liabilities assumed by the C Corp because you are relieve of the debt. The liabilities assumed is not incorporated in the adjusted basis. If you look at the adjusted basis it's just the basis of non cash property contributed 100k.

FAR: 77 (08/07/13)
AUD: 78 (08/29/13)
REG: 76 (11/07/13)
BEC: 79 (12/06/13)
Ethics: 98%

Application sent 12/31/13

Used Becker Self-Study

[youngstyle]

@PJJW Thank you sou much.

So for corporation basis, the cash contributed is not put into calculation, but only when the liability exceeds the adjusted basis. However, this is different for “like-kind” basis right? I believe boot paid(cash) is also part of the calculation.

I think this is the part where I was confused.

I don't quite get what you mean by “in which case the cash contributed will already be incorporated per se in the gain that you would recognize and add to the C corp basis”

[youngstyle]

@PJJW Thank you sou much.

So for corporation basis, the cash contributed is not put into calculation, but only when the liability exceeds the adjusted basis. However, this is different for “like-kind” basis right? I believe boot paid(cash) is also part of the calculation.

I think this is the part where I was confused.

I don't quite get what you mean by “in which case the cash contributed will already be incorporated per se in the gain that you would recognize and add to the C corp basis”

[youngstyle]

Assume the stock is now just worth 30k and liabilities assumed by C corp 40k. Adjusted basis of property and cash contributed is 30k.

REALIZED GAIN: 70k – 40k = 30k

RECOGNIZED GAIN: 10k (liabilities assumed in excess of basis 40k – 30k = 10k)

BASIS OF S/H: 30k (adjusted basis) + 10k (recognized gain) – 40k (liabilities assumed) = 0

BASIS OF C CORP: 30k (adjusted basis) + 10k (recognized gain) = 40k

---

Oh i think I get what you mean by “”in which case the cash contributed will already be incorporated per se in the gain that you would recognize and add to the C corp basis

“

For the question above, 10K (recognized gain) is already included in 40K (liabilities assumed). is this what you mean?

[youngstyle]

Assume the stock is now just worth 30k and liabilities assumed by C corp 40k. Adjusted basis of property and cash contributed is 30k.

REALIZED GAIN: 70k – 40k = 30k

RECOGNIZED GAIN: 10k (liabilities assumed in excess of basis 40k – 30k = 10k)

BASIS OF S/H: 30k (adjusted basis) + 10k (recognized gain) – 40k (liabilities assumed) = 0

BASIS OF C CORP: 30k (adjusted basis) + 10k (recognized gain) = 40k

---

Oh i think I get what you mean by “”in which case the cash contributed will already be incorporated per se in the gain that you would recognize and add to the C corp basis

“

For the question above, 10K (recognized gain) is already included in 40K (liabilities assumed). is this what you mean?

[PJJW90810]

The way I think about it is that the recognized gain when liabilities is greater than adjusted basis already incorporates the cash by subtracting the adjusted basis lets say in this case the adjusted basis was 20k property and 10k cash from the liabilities assumed. Therefore the 10k in gain takes into consideration the cash contributed in the calculation.

FAR: 77 (08/07/13)
AUD: 78 (08/29/13)
REG: 76 (11/07/13)
BEC: 79 (12/06/13)
Ethics: 98%

Application sent 12/31/13

Used Becker Self-Study

[PJJW90810]

The way I think about it is that the recognized gain when liabilities is greater than adjusted basis already incorporates the cash by subtracting the adjusted basis lets say in this case the adjusted basis was 20k property and 10k cash from the liabilities assumed. Therefore the 10k in gain takes into consideration the cash contributed in the calculation.

FAR: 77 (08/07/13)
AUD: 78 (08/29/13)
REG: 76 (11/07/13)
BEC: 79 (12/06/13)
Ethics: 98%

Application sent 12/31/13

Used Becker Self-Study

[PJJW90810]

I just noticed that in the hypothetical example the realized gain is calculated wrong but dissent really make a difference

REALIZED GAIN: 70k (value of stock plus liabilities assumed) – 30k (adjusted basis) = 40k

I previously had 40k as the adjusted basis. Sorry is this throw u off.

FAR: 77 (08/07/13)
AUD: 78 (08/29/13)
REG: 76 (11/07/13)
BEC: 79 (12/06/13)
Ethics: 98%

Application sent 12/31/13

Used Becker Self-Study

[PJJW90810]

I just noticed that in the hypothetical example the realized gain is calculated wrong but dissent really make a difference

REALIZED GAIN: 70k (value of stock plus liabilities assumed) – 30k (adjusted basis) = 40k

I previously had 40k as the adjusted basis. Sorry is this throw u off.

FAR: 77 (08/07/13)
AUD: 78 (08/29/13)
REG: 76 (11/07/13)
BEC: 79 (12/06/13)
Ethics: 98%

Application sent 12/31/13

Used Becker Self-Study

[PJJW90810]

Yes it has its similarities to like kind exchanges but mind you, you are not exchanging like kind property in this case.

FAR: 77 (08/07/13)
AUD: 78 (08/29/13)
REG: 76 (11/07/13)
BEC: 79 (12/06/13)
Ethics: 98%

Application sent 12/31/13

Used Becker Self-Study

[PJJW90810]

Yes it has its similarities to like kind exchanges but mind you, you are not exchanging like kind property in this case.

FAR: 77 (08/07/13)
AUD: 78 (08/29/13)
REG: 76 (11/07/13)
BEC: 79 (12/06/13)
Ethics: 98%

Application sent 12/31/13

Used Becker Self-Study

[youngstyle]

@PJJW not at all, I totally get it. You are saying when the liabilities are greater than the adjusted basis, you just think of that liabilities as the amount of adjusted basis. right?

just to make myself clear, so for corporation basis, cash contributed is not put into the calculation, only the gain that transferor recognizes goes in.

However, for like-kind basis, cash contributed DOES go into the calculation. Am I right?

[youngstyle]

@PJJW not at all, I totally get it. You are saying when the liabilities are greater than the adjusted basis, you just think of that liabilities as the amount of adjusted basis. right?

just to make myself clear, so for corporation basis, cash contributed is not put into the calculation, only the gain that transferor recognizes goes in.

However, for like-kind basis, cash contributed DOES go into the calculation. Am I right?

[Author]

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