[Anonymous]

Hi, I’m a bit stumped with this question from the Wiley Test bank:

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 $5,000 and a fair market value of $15,000 for 150 shares of stock, and Roosevelt performed services valued at $25,000 in exchange for 250 shares of stock. Assuming the FMV of President Corporation’s stock is $100/share, what is President Corporation’s tax basis for the property received from Lincoln?

A: $150,000. 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.

Does anyone know where I can find some good notes that cover this, I don’t think Becker does. I never knew that a partner contributing services would also affect other partners that contribute property. Thanks.

[Whopper Warrior]

section 351 is a provision in the tax code that allows indivuals to transfer property into a partnership, or even a c corp if I remember correctly, if they have 80 percent of ownership in the aggregate (cash and property). Services are always considered a “sale” and includeable in the performers taxable income in year performed. therefore they do not add value to the corporation but are theoretically considered an expense instead of a contribution.

example

(debit) legal fees 25,000

(credit) common stock 25,000

this is so because there is no asset account called services accrued.

In this example we have (60 (cash) plus 15 (fmv property)) / (60 plus 15 plus 25 (services)) or 75%. Which is not 80% so all appreciated property must be recognized.

therefore Lincoln must recognize the 10,000 gain because he sold instead of contributed.

Now if the threshold was met, cash plus property exceeded 80%, then the tax basis would remain at 5. However, if the partnership immediately sold the property then Lincoln would recognize a 10k gain because of the built in gains tax.

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

Becker Only

[Whopper Warrior]

section 351 is a provision in the tax code that allows indivuals to transfer property into a partnership, or even a c corp if I remember correctly, if they have 80 percent of ownership in the aggregate (cash and property). Services are always considered a “sale” and includeable in the performers taxable income in year performed. therefore they do not add value to the corporation but are theoretically considered an expense instead of a contribution.

example

(debit) legal fees 25,000

(credit) common stock 25,000

this is so because there is no asset account called services accrued.

In this example we have (60 (cash) plus 15 (fmv property)) / (60 plus 15 plus 25 (services)) or 75%. Which is not 80% so all appreciated property must be recognized.

therefore Lincoln must recognize the 10,000 gain because he sold instead of contributed.

Now if the threshold was met, cash plus property exceeded 80%, then the tax basis would remain at 5. However, if the partnership immediately sold the property then Lincoln would recognize a 10k gain because of the built in gains tax.

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

Becker Only

[ZSRizvi]

@Whopper Warrior

This is off topic but I was looking at your scores and the amount of study time you put in for each…how did you do that?! (If you don't mind me asking)

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[ZSRizvi]

@Whopper Warrior

This is off topic but I was looking at your scores and the amount of study time you put in for each…how did you do that?! (If you don't mind me asking)

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[Whopper Warrior]

recent college graduate, employment lagged after graduation, moved back in with the folks and made studying my full time job (I get a signing bonus). That being said when I did questions, I used no help what so ever because you do not have help taking the test. I may of written 2 pages of notes for each test. But that is just me, everyone studies differently.

Also, I accept I will never know everything, and I hope I do not spread misinformation (why I avoid audit, in one ear and out the other) but the cpa is a toddler pool the size of an ocean. You need to know basics but not very in depth. Depending on what material you used, I used Becker Fast Pass, I would stress their review tests. I would rather get a 75 on a review test of all possible subjects then a 100 on a single chapter, that I worked on for 5 hours, I would average 65 to 90 on each section (and that is 2nd time!). Odds are you are only going to see 1 to 4 questions on that material but 90% of the review questions. However, you should still go through each section. I did it twice, once for fast pass and once before the test, again 1 minute a question. Answer, read explination wrong or right, and why the the others were wrong, move on. Then finish with a progress test. If you work, and can not do a chapter a day, still do a progress test. Example I did progress tests in C1 before I even got to C8 because it gives you early exposure and it hammers all subjects 24/7.

Sorry for the repition, but I think people say they don't have time for progress tests because of regular questions. Honestly they have it backwards in my opinion.

sent from an android, more of a ramble and less of a precise answer, hope it could help.

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

Becker Only

[Whopper Warrior]

recent college graduate, employment lagged after graduation, moved back in with the folks and made studying my full time job (I get a signing bonus). That being said when I did questions, I used no help what so ever because you do not have help taking the test. I may of written 2 pages of notes for each test. But that is just me, everyone studies differently.

Also, I accept I will never know everything, and I hope I do not spread misinformation (why I avoid audit, in one ear and out the other) but the cpa is a toddler pool the size of an ocean. You need to know basics but not very in depth. Depending on what material you used, I used Becker Fast Pass, I would stress their review tests. I would rather get a 75 on a review test of all possible subjects then a 100 on a single chapter, that I worked on for 5 hours, I would average 65 to 90 on each section (and that is 2nd time!). Odds are you are only going to see 1 to 4 questions on that material but 90% of the review questions. However, you should still go through each section. I did it twice, once for fast pass and once before the test, again 1 minute a question. Answer, read explination wrong or right, and why the the others were wrong, move on. Then finish with a progress test. If you work, and can not do a chapter a day, still do a progress test. Example I did progress tests in C1 before I even got to C8 because it gives you early exposure and it hammers all subjects 24/7.

Sorry for the repition, but I think people say they don't have time for progress tests because of regular questions. Honestly they have it backwards in my opinion.

sent from an android, more of a ramble and less of a precise answer, hope it could help.

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

Becker Only

[ZSRizvi]

That is amazing!

I've been doing something similar to that; taking 100 MCQ practice test from Wiley Test Bank and then doing 50+ questions on each Becker chapter each day so it reinforces what I learned. I also took about 2-4 pages of notes on each Becker chapter.

And I'm hoping that what went for you is also the case for me when I take FAR at least. I know I have a pretty good grasp of concepts (at least 80%) but then the minute details… such as what disclosures are required, IFRS vs. GAAP (for various things), and just small info that you can't possibly remember with all the other information overload.

I think what I'm worried about the most are the SIMs. Don't really know what to expect for those (in terms of FAR).

BTW, I think you're eligible for the Elijah Watts Sells Award then!

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[ZSRizvi]

That is amazing!

I've been doing something similar to that; taking 100 MCQ practice test from Wiley Test Bank and then doing 50+ questions on each Becker chapter each day so it reinforces what I learned. I also took about 2-4 pages of notes on each Becker chapter.

And I'm hoping that what went for you is also the case for me when I take FAR at least. I know I have a pretty good grasp of concepts (at least 80%) but then the minute details… such as what disclosures are required, IFRS vs. GAAP (for various things), and just small info that you can't possibly remember with all the other information overload.

I think what I'm worried about the most are the SIMs. Don't really know what to expect for those (in terms of FAR).

BTW, I think you're eligible for the Elijah Watts Sells Award then!

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[Anonymous]

Thanks for your answer, I thought the 80% rule only applied for corporations. I don't think Becker makes it very clear it applies to partnerships too, and almost every question I saw was much more straightforward than this example. Cheers.

[Anonymous]

Thanks for your answer, I thought the 80% rule only applied for corporations. I don't think Becker makes it very clear it applies to partnerships too, and almost every question I saw was much more straightforward than this example. Cheers.

[Whopper Warrior]

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

Becker Only

[Whopper Warrior]

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

Becker Only

[Whopper Warrior]

@almadoey here I go typing misinformation. 351 does not apply to formation of partnerships but it does apply to partnerships forming c corporations, which is the case in your question.

A PARTNERSHIP has its OWN RULES for recognition. If they were just forming a partnership no gain or loss would be recognized from the contributed property, but the services will still be income.

I apologize, when I get to a computer I will edit my first response.

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

Becker Only

[Whopper Warrior]

@almadoey here I go typing misinformation. 351 does not apply to formation of partnerships but it does apply to partnerships forming c corporations, which is the case in your question.

A PARTNERSHIP has its OWN RULES for recognition. If they were just forming a partnership no gain or loss would be recognized from the contributed property, but the services will still be income.

I apologize, when I get to a computer I will edit my first response.

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

Becker Only

[Anonymous]

Oh i got tricked, this quesiton has nothing to do with partnerships at all.

[Author]

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