[Anonymous]

I know this has been posted before but I cannot fathem it. The question is:

Porter, the sole shareholder of Preston Corp., transferred property to the corporation as contribution to capital. Two years later, Corley transferred property in exchange for a 10% interest in the Corporate stock. The property transferred was valued as follows:

Porter’s Transfer:

Basis: $ 50,000

FMV: $200,000

Corley

Basis: $250,000

FMV: $500,000

What amount represents the corporation’s basis in the property received?

A- $300,000

B- $450,000

C- $700,000

D- $550,000

Correct Answer D.

WHY?? Why are we either taking the FMV or adding the gain here? In Becker Chapter 3 it clearly states that the corps basis in the stock is the greater of the Shareholders’ adjusted basis + gain recognized or the Liabity assumed when greater than adjusted basis.

No gain is recognized by the shareholder as there was no boot received nor liability

I understand that the 80% corp stays the same

What is this mention about Sect. 351? Where is this in Becker?

Please help. Going crazy trying to figure this one out

[lavendersky]

so this is my reasoning:

Porter is sole shareholder which means he must own at least 80%. Since the 80% rule is met, he does NOT recognize any gain in his transfer. Therefore, basis for Porter you use his adjusted basis of 50,000. Say if 80% is not met, he will need to recognize a gain of 150,000 (200,000-50,000).

Corey in the other hand does NOT meet the 80% rule. So he will need to recognize the gain. So for him you use the adjusted basis which is 250,000 plus any gain which will be 250,000 (500,000-250,000). So total will be 500,000.

Porter 50,000 + Corey 500,000 = 550,000

Hope this helps.

FAR- PASSED
AUD- PASSED
REG- PASSED
BEC-

You got to do what you have to do!

[Anonymous]

But does this rule always apply?

And where does the rule come in about gains not being recognized unless there is boot / excess liabilities?

[leglock]

i had a nice write up on this last year when i took reg. unfortunately i have forgotten most of it. If no one else posts, i will look it up again and post as i recall becker was not exactly clear on how they presented this. With respect to this rule, one of the most important things to pay attention to is if the 80% rule is met or not. Becker's questions and sims actually do a good job of providing enough scenarios to instill the nuances of this rule in your brain.

You will ALWAYS recognize boot RECEIVED. The excess liability rule is where Becker is not exactly clear.

[WaitingonScoreRelease]

Chancpa,

I think one of the tricks in this Becker problem is that Corley transfers the assets TWO YEARS LATER, and not at the date of corporate formation, so I think different rules apply.

Becker generally only teaches you about what happens about transfers at the date of corporate formation, so that may be why the answer is different. I may be mistaken though.

Aud: 99. (May)
Bec: 89. (April)
Far: 84. (Feb)
Reg: 79. (July)

[Anonymous]

Porter formed the corporation and contributed property, after which he owned 100% of the corp (sole shareholder). This is why the corporations basis in his property is the $50,000 adjusted basis to Porter before incorporation. Corley contributed property at a later time to receive a 10% interest in the company. Essentially, Corley is buying 10% of the company with his contributed asset after formation. If you look at R3 pg 3 A1, it says “there is no gain or loss to the corporation issuing stock in exchange for property in the following transactions: formation, reacquisition and resale (treasury stock)”. This is definitely not a very clearly explained topic, but the way I understand it is that corporate formation is tax free, but future transactions are taxed. So basically, it is assumed that the 10% interest is worth the $500,000 that Corley transferred for it, and the corporation recognizes that full value.

[Author]

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