[xl2333]

Hi guys my test is this Friday and right now I am extremely confused about corporation/shareholder tax consequences regarding formation.So I tried to come up with 4 different scenarios to kind of summarize different treatment under each scenario. Please take a look and let me know if my understanding is right!!! (Assuming shareholding is exchanging for 100% of the shares)

Scenario 1: FMV of asset: 50 Basis: 30 Mortgage assumed: 40

SH realized gain: 50-30 =20

SH recognized gain: 40-30=10

SH basis in stock = 30-40+10 = 0

Corporation basis in the asset: 40

Scenario 2: FMV of asset: 50 Basis: 30 cash received by SH: 5

SH realized gain: 50-30 =20

SH recognized gain: 5

SH basis in stock = 30 (correct me if I am wrong my understanding is cash received is not added to SH basis in stock)

Corporation basis in the asset: 35

Scenario 3: FMV of asset: 50 Basis: 30 Mortgage assumed: 40 cash received by SH: 5

SH realized gain: 50-30 =20

SH recognized gain: 10+5=15

SH basis in stock = 30-40+10 = 0

Corporation basis in the asset: 30+15 gain recognized by SH = 45 (I am not sure)

Scenario 4: FMV of asset: 50 Basis: 30 Mortgage assumed: 40 cash paid by SH: 5

SH realized gain: 50-30 =20

SH recognized gain: 40-5-30 =5

SH basis in stock = 0

Corporation basis in the asset: 35

And in any kind of situation the corporation do not recognize any gain right?

please advise!!!!! thank you so much!

[Whopper Warrior]

Do not forget to add boot received to realized gain:

What would you do in this case?

FMV Asset: 30, Basis 30, Mortgage 40

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[futureCPA12]

A 351 transaction involves a transfer of property solely in exchange for stock of a C Corporation. Thus, any cash (boot) should be treated as gain recognized to the shareholder. Also, the mortgage assumed by the C Corp acts as boot to the extent mortgage exceeds the adjusted basis of the property given. Basically, the logic here is the adjusted basis can't go below zero, so gain must be recognized.

The way I always think about the C Corps basis in the property received is that they take the transferor's basis and add the recognized gain to the shareholder on the transaction. It's the simplest way for me to remember.

I'm pretty sure I am right, but please let me know if I am mistaken.

[xl2333]

@Whopper Warrior

I am guessing realized gain is 0 even though boot is received, and recognized gain is also 0 since it is the less of realized gain or boot received….but that doesn't make any sense to not have any recognized gain because otherwise shareholder basis would be negative 10 instead of 0.

i think the confusion is coming from the calculation of realized gain. According to a becker simulation(question #2 from 1st set of simulation in chapter 3), realized gain = fmv of the property – basis, and any mortgage assumed or cash received/paid is not included in calculating realized gain. I guess becker is wrong about that?

[xl2333]

@futureCPA12

correct me if i am wrong:shareholder recognized gain consists of two parts 1. excess debt assumed over basis and 2. cash received.

so for example in scenario 3 total gain recognized by shareholder is 10 excess debt plus 5 cash received = 15 total?

[futureCPA12]

Now I'm looking back through my school notes and found this:

351(b) gain recognized = the lesser of boot received (which would obviously include cash) and the built in gain on the property.

Hope that clears anything up.

[futureCPA12]

Ok CORRECTION! The cash received from the C Corporation does not factor into the AB of the stock received for the shareholder. Let me give you an example from my Becker SIM:

Jones contributes property with a FMV of 120,000, AB of 100,000, liability attached of 60,000, and receives stock worth 50,000 and 10,000 cash.

Thus, Gain realized = stock received of 50,000 + liability assumed 60,000 + cash 10,000 – AB of property given 100,000 = $20,000.

Gain recognized = lesser of gain realized or boot received = 10,000 cash

AB in stock = old AB 100,000 – liability assumed 60,000 = 40,000

Actually, I think in this case it only does not apply because the 10,000 cash received is equal to the gain recognized. And we all know that boot received is subtracted to basis and gain recognized is added to basis. Thus, it just cancels out in this example. Just remember the following formula for calculating a shareholder AB in stock in 351 transaction.

old AB

+cash given

-cash received

+gain recognized

-liabilities assumed in excess of basis given

= new AB

You can't go wrong!

[Whopper Warrior]

@xl I do believe that the basis used for realized gain is the Greater of FMV or Liabilities assumed. In that case; 40 – 30. Its a small caveat but it could be tested, because you can NEVER have negative basis.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Author]

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