[wjun15]

Can someone explain the equations for stock basis for corporation and partnership’s original basis? I have included reasons for each addition/subtraction, can someone verify that my thought process is correct and explain conceptually, why gain recognized by shareholder is added to a corporation stock basis? And also, why do you add the adj basis of the property for each equation and no the FV of property?

Corporation Stock Basis:

+Cash contributed (increasing the value of the corp)

+FV services (increasing the value of the corp)

-liabilities assumed by corporation (you dont owe this anymore so its like your getting money)

+gain recognized by shareholder (Why is this added? What is concept behind this?)

+property adjusted basis (why do you add the adj basis of the property and not the FV?)

Partner’s Basis:

+Cash contribtued (increasing value of partnership)

+FV services (increasing value of partnership)

-your liabilities assumed by others (you dont owe their portion anymore but still owe your portion)

+other partners liabilites assumed by you (you owe their portion, but is it wrong to say that adding this increases the “value” of the partnership?)

+property adjusted basis (why do you add the adj basis of the property and not the FV?)

And Im having a hard time grasping basis…Is it wrong to say that you always want your basis to be high so that you pay less taxes when you sell? (amount realized – adj basis = gain realized)

Thanks alot!

[Anonymous]

Sorry I can't help. I am struggling with these too..

[Anonymous]

The higher your basis is, the less tax you would pay on a sale. Gain on sale of partnership, stock, asset etc. is computed as selling price-adjusted basis. Therefore, the higher the basis, the lower the gain. Continuing with the partnership, when the partnership has income the partner pays tax on that income. As a benefit, the partners basis is increased by their share of the income so that when they sell they don't pay tax again on that income. Make sense?

[wjun15]

thanks for the explanation

why do you add the adj basis of property to figure out basis of corp and partnership interest, and not FV?

why would a liablity assumed by you increase your partnership basis. i associate liability as being a “bad” thing. if your liability is bad, shouldnt it make you pay more taxes? but instead the liability is increasing ur basis, which then decreases the tax u pay later on.

[JamesBJames]

I finished R3 (corporations) and started the property stuff in R4 today, and, yeah, basis is rough. I keep adding things when I should be subtracting them and vice versa. I think I've got to let it sink in a little bit.

Generally, you're gonna have to pay tax on a gain. If you can defer it until later then you'll have a lower basis than if you had to recognize the gain now.

It's still kind of confusing, unfortunately. I just know that the corporation's basis will be the NBV of the asset contributed (so, I guess, you're just taking the shareholder's basis?) unless the amount of the liability exceeds that number. Becker also has one simulation where the corporation pays out cash in addition to this and that's added to the corporation's basis.

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[subie_rex]

The reason you add the adjusted basis of the property and not it's FMV is because there can be a difference in your basis and it's FMV at the time of contribution into either the partnership or corp. For example, if you purchased land in 1970 for 100 dollars that is your tax basis. In 1970 that was also te FMV. If the land has appreciated to 200 and you contribute it to th patternship today, your capital account is increased by the 200 FMv. However because this is a nontaxable transfer of property to a partnership for an interest in the P&L of the partnership, you simply take a carryover of te basis of 100 you had in the property. This way the built in gain of 100 remains in your partnership basis. If you sold your interest that same day as you transferred the property you'd have a gain of 100-the same gain you'd have if you sold the land outright. In other words, if you transfer property to a partnership in exchange for an interest, you have to preserve that built in gain

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[leglock]

Not to confuse the situation further, but Becker's explanation relative to loans (recourse and nonrecourse) is not very good. Note that loans will increase your basis, but if it is a nonrecourse loan, your “at risk” amount is not increased. It is in actuality your amount at risk that determines taxability, not basis when nonrecourse loans are involved. I only bring this up because if asked what is basis, and a nonrecourse loan is involved, your basis is increased but your “at risk” is not.

To your question above, if you were able to capitalize a partnership with property and use FV as basis, this would seemingly provide a way to avoid paying taxes on appreciated property when sold, because you could always get your basis to be FV before being sold, thus realizing no gain.

[leglock]

As a further follow-up as to the reasoning behind why a partner's basis is increased when a partnership assumes a liability, I pulled out my tax book.

It states that when a partner capitalizes a pship with property encumbered by debt, the partner's basis in the pship will be the adjusted basis of the property less the percentage of debt he has been relieved of. My book states that the logic is that it is basically considered that the other partners contributed cash to the pship which was then used to basically relieve the contributing partner of some of his debt. So in essence, it's viewed as a cash contribution to the pship when a pship receives property encumbered by debt of which the contributing partner is relieved. So this supposed cash contribution causes an increase in basis.

Don't know if that helps or not. I never tried to understand the logic of why assumption of debt increased basis, I just memorized that it does.

[wjun15]

thank you for the explanations. one quick question: how do you determine whether to use FV or adj basis?

So when you do like kind exchanges, the amount realized is always the FV of property received but when I do partnership problems, it always seems to be adj basis. What is the rule for determining when to use what?

[leglock]

The rule we were taught is when its a non taxable event you use nbv. Notice nontyaxable and nbv both start with the letter n. when its a taxable event like a property dividend then you use fv. With like kind exchange just memorize that the easy formula is to use fvalue even tho its generally nontaxable

[wjun15]

ok thank you…heres my last question here: this may be a dumb one…but when you sell an equipment for 200K and the adjusted basis was 180K the gain realized is 20K. Many times becker will just refer to this 20K as gain “recognized” instead of realized. How do you determine when its recognized or not? Like kind exchanges confuses me because it says the lower of boot received and gain realized is always the gain recognized. So in the above example I gave, if theres no boot then your gain recognized would be 0 instead of 20K. Am I missing some crucial point here?

Is the 200K sell considered “boot” in this case and as such, we take lower of 20K and 200K to be recongized? Is cash ALWAYS considered boot? Like if I sold you equipment in return for cash, is that cash BOOT? I always considered boot to be something in addition to what you are giving up. maybe im wrong?

Thanks so much!

[leglock]

A realized gain is recognized unless there is a rule that allows you to not recognize it. For instance, in a like kind exchange, you do not recognize a gain unless you receive boot. If you receive boot (cash for example), then you will recognize gain up to boot received. For example, assume you trade a machine with a basis of 20k and a fmv of 30k for another machine and you also RECEIVE cash of 3000. Your gain realized is 10k (30k-20k). Normally, because it's a like kind exchange, you would not have to recognize the gain; however, you RECEIVED boot, so now you are going to have to recognize some gain. How much? You recognize gain up to boot received. So in this case, you would recognize 3000 gain, and defer 7000.

So to answer your questions, in your example, you are correct that if no boot was received, you would not recognize the gain of 20,000.

You are kind of intermixing like kind exchanges and sale of equipment for cash. So in your second paragraph when you state that you sell equipment for 200k cash, you aren't really dealing with a like kind exchange. You are merely selling a piece of equipment for 200k cash. When you sell equipment for cash, you are generally going to recognize any gain realized. The 200k is not considered boot, it is the proceeds you received. Your basis was 180k, so your gain realized was 20k and you will also have to recognize this gain. Boot deals more with like kind exchanges when you are trading equipment for equipment for example, and one piece of equipment is not of equal value to the other, so one party give cash to make things equal. So to answer your second question of paragraph 2, if you sold me equpment for cash, the cash is not really considered boot, the cash is the amoutn I realized (not the gain I realized, but the proceeds realized).

To answer your thrid question, our instructor said the term boot comes from old english, where someone might say I will trade you your machine for mine and 5000 to boot. the boot is given in addtion to the machine.

Another situation where you might realize a gain butnot have to recognize it is if you sell your personal residence that you lived in and owned for 2 of the last 5 yrs. If you are single, you can exclude up to 250,000 of gain realized.

Hopefully this helps. Feel free to ask followup questions. I got my reg score today and passed so it's still somewhat fresh. Ive officially passed all 4 parts as of today, thank God.

[wjun15]

wow you are money…thanks for the explanations…i guess like-kind is more like an exception like you said…on previous post of yours you said that:

“The rule we were taught is when its a non taxable event you use nbv. Notice nontyaxable and nbv both start with the letter n. when its a taxable event like a property dividend then you use fv. With like kind exchange just memorize that the easy formula is to use fvalue even tho its generally nontaxable”

I did see that same explanation in becker. But whats the easiest way to know if something is a nontaxable event? Is the best way to determine if its a nontaxable vs taxable event based on whether you are selling something?

what do you recommend I focus on? I remember when I took the test there were suprisingly many questions on statement on stadards for tax services…i really need to master the ethics and responsbilities section

[leglock]

I would not say whether you are selling something or not is the determining factor on whether something is taxable.

I would make a list as you read the chapters noting which are taxable and those that aren't. i believe there was a mneumonic HIDE IT in Becker

also, starting a sub s corp or pship is genrally nontaxable so use nbv for those

there is an alternate method of calculating basis in a like kind exchange that uses nbv; however the easier formula is to use fv so thats why i said to just memorize that u can use fv with like kind exchange

lastly, with like kind exchange if you both receive cash boot and pay cash, you cannot offset the cash you received with the cash you paid. For example, in my above example you haf a 10k gain, and received 3000 cash boot, assume u also paid 1000 cash to the other party. You would still recognize 3000 (you do not get to offset the the 3k with the 1k u paid and only recognize 2k). However assume you had the 10 k gain, did not recieve or pay any cash, but assumed the liability on the equipment you received in the amount of 2000 but the person you traded with assumed your liability on your equipment in the amount of 6000. In this situation, you CAN net them together so you would only recognize 4000 of gain (6k – 2k)

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