[xpa17]

Hi guys, I am currently reviewing the C-Corp questions, and I am extremely confused on the C-corp basis questions. Do we refer to the adjusted book value or FMV as the basis?

For instance, the following question suggests to use FMV as the basis:

Question 1: Fox, the sole shareholder in Fall, a C corporation, has a tax basis of $60,000. Fall has $40,000 of accumulated positive earnings and profits at the beginning of the year and $10,000 of current positive earnings and profits for the current year. At year-end, Fall distributed land with an adjusted basis of $30,000 and a fair market value (FMV) of $38,000 to Fox. The land has an outstanding mortgage of $3,000 that Fox must assume. What is Fox’s tax basis in the land? ANSWER: 38,000.

But the following question suggests to use adjusted basis as the basis:
Question 2: Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows:

Adjusted Fair Market Percentage of
Property Basis Value Ace Stock Acquired
Lind Building $40,000 $82,000 60%
Post Land 5,000 48,000 40%

The building was subject to a $10,000 mortgage that was assumed by Ace.

What was Lind’s basis in Ace stock?
ANSWER: 30,000. (40,000 – 10,000)

I cannot understand when should we use adjusted basis or FMV in terms of calculating the C-corp basis. I have been browsing online for a clear-cut answer. Any help is extremely appreciated!! Thanks!

[jgod]

I think you need to learn to differentiate the difference between an exchange of assets and a disposition of assets. In an exchange of assets the basis in the asset acquired depends on the basis of the asset given up. In a disposition a gain or loss situation is triggered which means the asset received will depend on one of the asset’s FMV.

I don’t remember the rules of these situations , but I think that’s the concept you need to get a better understanding to understand how these situations are different.

I can tell that the first situation sounds like a disposition and the second sounds like an exchange. This is determined by statute (in the IRC), it isn’t intuitive. You just need to learn the rules, unfortunately. And what is even more frustrating, little changes in the facts can change what seems like an exchange into a disposition. It’s a pain!!!

I hope that helps. Good luck.

AUD- 99 (6/8/16)
REG- TBD
FAR- TBD
BEC- TBD

[jgod]

Also, in the second situation if the total acquired stock was less than 80% (I think that’s the rule) Lind would have to recognize a gain and the basis in the stock would be higher. (That’s why they give you those percentages.)

My point is that this tax stuff isn’t intuitive. So if it feels confusing and seems like it doesn’t make sense, it’s because it doesn’t. It’s all about what the IRC says. If the IRC says up is down and down is up. You just have to go with it.

I wouldn’t get too caught up in this stuff. Don’t get lost in the weeds.

I don’t do very many MCQ’s when I study. I do just enough to get a feel for them. I focus more on concepts and less on learning tricky calculations.

AUD- 99 (6/8/16)
REG- TBD
FAR- TBD
BEC- TBD

[Anonymous]

@xpa17,

There is a big difference between a distribution and an exchange. Generally speaking the value (and basis) of a distribution is based on FMV, while a exchange is generally valued on adjusted basis (AB), unless gain is recognized. Also the AB in these situations is sometimes different for the shareholder than the corporation.

Its definitely worth it to review the rules for basis in these different situations, as basis is heavily tested on the exam.

One helpful way of thinking about basis is to consider what amount of gain is recognized on the transaction. Generally if gain is recognized to the extent of FMV over AB, then the new AB will be FMV.

You should review the rules for these calculations at the same time so you can see the difference between them:

1. Property Transactions (cost vs. transferred vs. exchanged vs. converted basis) (gift vs inherited basis) (amount realized vs. gain realized)(like-kind exchanges Sec. 1031)
2. Corporate Formation (Sec. 351 non recognition rules)
3. Corporate Distribution (how distributions effect basis) (Complete, Partial, Subsidiary Liquidations) (Reorganizations)
4. S Corp basis (how income and distributions effect basis with and with out sub-Chapter E&P)
5. Partnerships (how initial basis is determined) (differences between S-Corp and P-ships) (how assuming and giving up liabilities affects P-ship basis)

Obviously there is an endless amount of material to go over, but from everything I hear understanding basis calculations is key to passing the exam.

[xpa17]

@jgod and @benj2017,

Thank you so much for your information! 😀 It helps to clear the confusion (finally)!

Basically,
-when S/H contribution/exchanges, we use the adjusted basis of property (-liability assumed by corp, if necessary) as the basis.
-when Corporation distributes, we use the FMV of property as the basis.

Please correct me if I am wrong. I will go through the questions again so that I can distinguish the different rules of basis calculation for C-Corp, S-Corp, and Partnerships.

Thanks again!!

[murano]

@benj2017 Hi benj2017
It's 2018 now and I don't know are you still there, but I'm totally with you with regard to the exchange and disposition difference.
From your explanation I can tell you are quiet good at these situations, so please help me with this one:
During a corporation formation, how is the property given by corporation to shareholder treated?
Say A contributed a Car (FMV=$20000,NBV=15000) and B contributed 10 motorcycles(each NBV=500) to form a C corp. They control 100%. The corp gave back A a motorcycle(FMV=1500).And this is at the formation.
A should treat it as boot received, and recognize the realized gain(which is 5000)to this extent(1500）
But How should the corporation treat this realized 500 gain? like a distribution(full recognition of 500),or just doesnt recognize it,since it is given a boot to get the property A contributes?

[Author]

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