[Anonymous]

Becker Question –

In April, X and Y formed Z Corp. X contributed $50,000 cash, and Y contributed land worth $70,000 (with an adjusted basis of $40,000). Y also received $20,000 cash from the corporation. X and Y each receives 50% of the corporation’s stock. What is the tax basis of the land to Z Corp.?

a.

$60,000

b.

$40,000

c.

$70,000

d.

$50,000

Explanation

Rule: There is no gain or loss to the corporation issuing stock in exchange for property for the issuance of stock. The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation.

Choice “c” is incorrect. This answer option is the amount of the fair market value of the land at the date of transfer. Per the above general rule, the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. Refer to the calculation for answer option “a”.

Here’s my problem: X didn’t transfer any property. Doesn’t that trigger gain to be recognized by the transferors and thus increase the tax basis to the corporation?

[Mary 2496]

No– for the tax basis of land, they're taking NBV + boot of $20,000 in connection with the land.

>> Here's my problem: X didn't transfer any property. Doesn't that trigger gain to be recognized by the transferors and thus increase the tax basis to the corporation?

From what I understand, you'd have to look at each partner's contribution separately. In this case, it would be NBV + cash received to that same partner. Someone please correct if there is more to it than that.

[Anonymous]

I guess they're saying that not each contributor has to contribute property to satisfy the section 351 stipulations, just that the control group has to contribute property. I thought we learned way back when in tax class that everyone in the control group (80%) had to contribute property of more than nominal value. Perhaps my memory failed me. I guess I'll read the IRC section to clarify.

[kleon52]

Corporation Basis are two lines:

Basis in shareholder + Gain recognized by shareholder

X Corp's basis in the land is B's basis in the land ($40,000) plus any gain recognized by B. B's recognized gain is the lower of 1) the realized gain, or 2) the boot received. The realized gain is $30,000 ($70,000 – $40,000). The boot received is the cash of $20,000. Thus, the gain recognized is $20,000. X Corp's basis in the land is $60,000 ($40,000 + $20,000).

REG: 80
AUD: 82
BEC: 83
FAR: 83
Finished Feb 2015, 5-6months

Ninja MCQ for AUD, BEC, & FAR

[Author]

Replies