[Anonymous]

Washington, Lincoln, and Roosevelt formed President Corporation during 2013. Pursuant to the incorporation agreement, Washington transferred cash of 60,000 for 600 shares of stock, Lincoln transferred property with an adjusted basis of 5000 and a FMV of 15,000 for 150 shares of stock, and Roosevelt performed services valued at 25,000 for 250 share sof stock. Assuming FMV of President Corporation stock is 100 per share, what is President Corporation’s basis for the property received from Lincoln?

A. 25,000

B. 5000

C. 15,000

D. 0

C. The requirement is to determine President Corporation’s tax basis for the property received in the incorporation from Lincoln. Since Washington and Lincoln are the only transferors of property and they in the aggregate own only 750 of the 1000 shares outstanding immediately after the exchange, Sec. 351 does not apply to provide nonrecognition treatment to Lincoln’s transfer of property. As a result, Lincoln is taxed on his realized gain of $10,000, and President Corporation has a cost basis of $15,000, (i.e., FMV) for the transferred property.

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Why is it 15,000 and not 5000? To my understanding, you recognize the adjusted basis, not FMV of the contributed property.

[MikeHoncho]

The corporation's basis in property= basis of property received + gain recognized by shareholder

The shareholders basis in stock = basis of property transferred to the corporation + gain recognized by shareholder – boot received by shareholder – liabilities assumed by the corporation

Since the property transfer failed the 80% control test, the gain must be recognized by the transferor (Lincoln)

Done: 5/22/14

"Always do sober what you said you'd do drunk. That will teach you to keep your mouth shut."
- Ernest Hemingway

[MikeHoncho]

The corporation's basis in property= basis of property received + gain recognized by shareholder

The shareholders basis in stock = basis of property transferred to the corporation + gain recognized by shareholder – boot received by shareholder – liabilities assumed by the corporation

Since the property transfer failed the 80% control test, the gain must be recognized by the transferor (Lincoln)

Done: 5/22/14

"Always do sober what you said you'd do drunk. That will teach you to keep your mouth shut."
- Ernest Hemingway

[Only Reg Left]

I want to add that the reason it failed the control test is because Roosevelt only transferred services which would exclude him from the the 80% control test. If he was only receiving 200 shares, then your reasoning would apply for this example.

So we look at Washington and Lincoln who combined for 75%. Therefore, income should be reported by all three. Washington contributed cash for stock, so no income for him. Lincoln contributed appreciated property, so gain for him. And the FMV of the services is treated as ordinary income to Roosevelt.

So the Corp's basis in Lincoln's property is his adjusted basis plus gain recognized (5,000 + 10,000 = 15,000)

AUD - 68, 77
REG - 84* (Expired)
FAR - 83
BEC - 74, 74, 72, 72, 84

[Only Reg Left]

I want to add that the reason it failed the control test is because Roosevelt only transferred services which would exclude him from the the 80% control test. If he was only receiving 200 shares, then your reasoning would apply for this example.

So we look at Washington and Lincoln who combined for 75%. Therefore, income should be reported by all three. Washington contributed cash for stock, so no income for him. Lincoln contributed appreciated property, so gain for him. And the FMV of the services is treated as ordinary income to Roosevelt.

So the Corp's basis in Lincoln's property is his adjusted basis plus gain recognized (5,000 + 10,000 = 15,000)

AUD - 68, 77
REG - 84* (Expired)
FAR - 83
BEC - 74, 74, 72, 72, 84

[Author]

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