[Anonymous]

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

Can anyone make sense of this for me? The answer is showing boot of $20,000 and gain recognized of $30,000 from the receipt of cash.

I understand the boot but how is there a recognized gain? I am reading this as giving up $40,000 (adjust. basis) and receiving $20,000. Isn’t that a loss? So, I’m getting gain of $0 and boot of $20,000. Lesser would be $0, so tax basis to corp would be $40,000 + $0 = $40,000

[Anonymous]

Is it because the stock received is implied to have a $70,000 value (FMV of the land)

[momto5]

I found that question in Becker and this is Becker's explanation:

X Corporation will record the basis of the land at the basis of “B” ($40,000) plus any cash it paid to secure the land ($20,000), or $60,000 total basis. 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. As there is no indicated debt on the land nor any gain recognized by “B” on the transfer (because “A” and “B” own at least 80% of the voting stock immediately after the transaction and there is no taxable boot (no cash withdrawn and no cancellation of debt) on the transaction), the basis is the adjusted net book value of “B” ($40,000) plus any cash X Corporation pays for the land ($20,000). Note that we have not addressed the shareholder consequences in this question.

So I would think the basis answer would be $60,000. I also think the basis of the stock for the transferor would be $20,000 – the value of what was given up minus the boot received. There would be no gain because the amount of boot was not in excess of the basis.

If he would have received $50,000 in cash, then there would be a $10,000 recognized gain (boot > adj basis), which would also change the basis for the corp. I am thinking in that case it would be:

Shareholder basis – $40,000

Cash given up – $20,000

Gain recognized – $10,000

=Corp basis of $70,000

(I am not 100% sure on this one – Becker does not really discuss examples with boot involved)

Where are you getting the answer of $30,000 recognized gain?

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[momto5]

OK, so I looked at some more information online and it appears that the boot received is supposed to be gain to the shareholder, so now I am confused too. Becker says there is no gain recognized.

. §351(b): If an exchange otherwise would have qualified under §351(a) but for the fact that transferor received “other property or money (boot)” in addition to stock, then the transferor’s realized gain must be recognized to the extent of the boot received.

If that would be the case, the transferor in your example would have to recognize a $20,000 gain, but the basis to the corp would still be $60,000: the $40,000 adj basis + the $20,000 gain recognized by shareholder.

Anyone else have any input? Becker just does not cover the “boot” situation adequately.

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[momto5]

Based on my college books on the subject, gain is recognized by the shareholder at the lesser of gain realized or boot received. Therefore, the shareholder realized a $30,000 gain but would recognize a $20,000 gain. The basis to the corp is $60,000 as explained before.

Sorry I responded so many times, but this has been confusing to me as well. This helped me to get the concept down a little better, I think (I hope).

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[Anonymous]

My issue is the gain. Recognized Gain = Lesser of Realized Gain or Boot Received

The boot is very clear: $20,000 in cash.

I thought Realized Gain = Amt. Received – Adjusted Basis of prop given up

So I calculated, $20,000 (cash received) – $40,000 (land given up) = Loss of $20,000

So, isn't the recognized gain $0? That is where I am lost.

Edit: I got 30,000 in my first post from assuming the land is worth $50,000 since the corp also had to give $20,000 in cash to put the total at $70,000 (FMV of land received) to make it a “fair” trade. So $70,000 received – $40,000 given up = $30,000 gain?

[momto5]

I think you are forgetting that the stockholder is getting the FMV of the stock in exchange, he is not just getting the cash.

Because A contributed $50,000 in cash, and they each got 50% ownership, we can only assume that the FMV of the stock received must be $50,000. Therefore, B received the $50,000 FMV of the stock plus the $20,000 cash.

In that case, realized gain would be $50,000 + $20,000 – adj basis of $40,000 = $30,000.

But recognized gain would only be the cash (boot), which is $20,000.

At least that is the best I can come up with.

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[Anonymous]

I think we are saying the same thing. If you look at my “Edit” in my last post I state that the FMV of the stock received is $50,000. We are calculating the same thing: $20,000 boot and $30,000 realized gain.

Amount recognized would be the lesser, or $20,000. So, corps basis is $40,000 (shrholder's basis) +$20,000 (shrholder's gain) = $60,000

I think we got it! 🙂

[Author]

Replies