[donnychristal]

Porter, the sole shareholder of Preston Corp., transferred property to the corp s a contribution to capital. Two years later, Corley transferred property to the corp in exchange for a 10% interest in corporate stock. The properties transferred was values as follows:

Porter’s transfer Corley’s transfer
Basis $50,000 $250,000
FMV 200,000 500,000

A. $300,000
B. $550,000
C. $700,000

The answer is B ($550,000). The explanation is ‘when property is transferred to a corporation, the basis of any property received is the FMV at the time of the transfer’.

I chose answer A. As I think about the corp basis in a property, it should be the adjusted basis (NBV) of the property minus any debt assumed. I dont understand the explanation. Can someone explain to me?

FAR - 75
AUD - 64/71
BEC - 85

[donnychristal]

Up! Can anyone explain this to me?

FAR - 75
AUD - 64/71
BEC - 85

[Spartans92]

Can you post the remaining of the question? not sure what exactly the question is asking..

BEC- PASS

[Spartans92]

So this question is asking about basis.Generally, when someone contributes property to the corp the corporation will take on the carry over basis. Furthermore, if the transferor has at least 80% ownership which relates to the concept of section 351 defer gain recognition then they dont have to recognized gain. Corley only got 10% interest she would have to recognized a gain of 250,000 (FMV 500- Basis 250). So for the corporation the rule is Corps basis is equal to the greater of the basis of the transferor plus any gain or debt assumed.

No debt in this case. so the corps basis is hence 250,000 + 250,000 (gain). This 500k is from Corley. Then they will also have a 50k basis from porter. That is because porter was the “sole shareholder” which means he doesn't recognized any gain. Hope that helps.

This question relates to the corps basis plus the shareholder gain recognition concept. So you have to understand both concepts. Good Luck!

BEC- PASS

[donnychristal]

Thanks! I guess I am really confused about the shareholder gain recognition rules.

I remember in a lot of the questions that I took, the shareholders usually hold 50/50 interest. So individually, they dont have more than 80%. But why wouldnt they recognize any gains?

My assumption will be before they contribute at the same time and the percentage summed up is over 80%. However, in the question I posted earlier, Corley got her interest later and it was only 10%, that's why she had to recognize the gain.

Is this correct?

FAR - 75
AUD - 64/71
BEC - 85

[Spartans92]

Yes, it also depends on the type of asset each individual is contributing. For instance, if cash or services are contributed then those do not factor into the control group. Services are always recognized at FMV. I think in becker there were some examples of what assets can't be factored in but the main ones are services and real property (at least what I have seen).

BEC- PASS

[donnychristal]

i think cash is still considered into the control group?

my becker expired so I am just using other materials to study 🙂

FAR - 75
AUD - 64/71
BEC - 85

[Author]

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