[Keely]

Can anyone please explain to me what the consequences of a person contributing cash to a corporation during a formation? Becker does not explain, but has a SIM on it, and I don’t understand.

If you contribute a piece of property with NBV of $40,000, a mortgage of $50,000 and also contribute $20,000 cash to the corporation, the way I thought you calculated a corporation’s basis in the property was: NBV of property + any gain recognized by shareholder (or cancelation of debt, if greater). This is what Becker says in the beginning of the R3 lecture. However, this question came up during a SIM in Becker, and it says the basis to the corporation is only $40,000 (the NBV of the property). Why is it not $50,000? The way I calculated that is the shareholder would’ve recognized a 10,000 gain on the excess cancelation of debt. So shouldn’t the corp’s basis be $40,000+$10,000?

What is the basis to the corporation, what is the basis to the shareholder? Doesn’t contributing cash to a corporation increase your basis as a shareholder? It does not say anything about that in the book, though. I am so lost and frustrated. I’ve been over this 100 times and still don’t get it.

BEC: (4/2012) 88
AUD: (5/2012) 91
REG: (8/2012) 82
FAR: (1/2013) 78 🙂

VA CPA #42010

[wjun15]

sorry for asking so many questions:

Is cash received ALWAYS a gain recgonized? so if i gave up property with adj basis of 100K and liability of 60K, and received cash of 10K, that 10K is considered a GAIN? No matter how much cash I receive, its always considered gain recognized?

becker has a problem where:

shareholder (sole owner) gives a building for adj basis 35K and FV 100K for cash of 40K and common stock FV 60K.

The question asks what amount of gain did shareholder recognize?

And the way they explain it is :

Amount realized 100K

– adj basis (35K)

= 65K

Recognized gain = Lower of realized gain 65K or boot received 40K = 40K

Why are we uing this amount realized – adj basis equation here? Can you Always use this equaiton when you do a corp problem? Everytime I did a corp basis problem, I never had to use this equation. I just calculate how much gain there was from if liability > adj basis of what you gave up and that was recognized gain. And also, in all corp basis problems I never ever used FV (unless shareholder didnt own 80% after transfer, in that case you use FV – adj basis to recognize gain), so im curious why we use FV here.

[leglock]

2 situations you have to keep straight are 1. is it a like kind exchange or 2. is it an outright sale or capitalization of a corp

To your first question re is cash received always gain recognized, the answer is it depends. Using your numbers, you need to know what fair value is of your property, so you can calculate if there was a gain realized. If fair value is 120 and your basis is 100, you realized a 20k gain. You received 10k cash so you would need to recogize that 10k you received. You will recognize boot not to exceed gain realized.

You can see another example of this in Becker course r3, the first set of simulations, the second simulation (note if you do review this sim, for basis calc I would also include in the formula that you subtract any cash received and add any gain recognized, it won't change the answer but it follows the becker teachings and formula on page 4 of r3).

Similarly, if it's a likekind exchange, you will recognize your gain realized up to boot received. If your gain realized is 5000 and you receive 4000 cash, then you will recognize 4000 and defer 1000. If your gain realized is 4000 and you receive 5000 cash, then you will recognize 4000 and defer 0. So if you receive cash, the amount recognized depends on the gain realized.

If the becker question you provided was a situation where u sold equipment to someone who gave you cash and stock then they gave you stuff worth 100 for your equipment with a basis of 35. Therefore gain realized is 65, and it does not meet one of the exception criteria so you would recognize 65 as well.

[leglock]

I neglected to state that the Becker chapter problems in the text book did not have you receiving cash boot, so the fvalue of your property was immaterial, hence they had you disregarding it. The sim referenced above states when you receive cash, you need to know your gain realized because you will recognize your cash boot received not to exceed your gain realized, and to calculate gain realized you use fv – basis.

[wjun15]

hm okay, so your saying that it would be wise to consider FV in every corp problem that involves any sort of cash received.

it sucks because whenever i seem to get the cash part, I forget the liability side of it. Because the liability is also considered when theres property given. when i see cash received, and then liability given, its like…do i consider these two things independently or together? another thing thats confusing is when your doing the whole amount realized of 120 (FV) – 100 (adj basis), how is the 20 Cash received not a part of the amount realized? this is so frustrating because this is prolly the first time in my life where i cant figure something out by looking at the book for hours and hours…

[jordan2345]

So basically your saying the FV should be considered everytime there is cash received from the corporation, correct? and if the problem doesnt have any cash or property recieved FROM the corporation, then you just forget about that whole “amount realized – adj basis” equation. so do you look at the liability assumed separately from the cash received? Im having trouble understanding how everything and connects. Like it would be helpful if there was like a step by step direction on how to approach each problem like this. (do you look at the cash first? liability first?

Also, is the S Basis the EXACT same upon formation of the S corp as the C corp? Becker doesnt really explain this. I know that the S Corp basis is much like a partnership interest basis (increases and decreases with withdrawls, ordinary income, losses) but thats AFTER the formation correct?

[leglock]

This topic was frustrating for me with Becker because I think it could be made easy with clear, concise instruction, but that's not what they provide. Also, I am just reciting what I believe to be correct so hopefully others will chime in if I'm wrong. I passed Reg, but take that for what it's worth. So that's my disclaimer.

To answer your question, yes I believe that if you receive cash, you need to know what the gain realized is so that you know how much to recognize. Gain realized is fair value less basis. Please see the above mentioned sim as it provides good example and explanation of this concept.

Yes, if problem has nothing received from corp then you don't need to worry about fvalue bc capitalizing an entity is generally a nontaxable event.

With respect to looking at a liability assumed separately from cash received, yes I look at them separately. Again this is my understanding but I could be wrong. If you receive cash, you are recognizing gain potentially based on if you had a realized gain; however if you give property with basis less than liability assumed, you are recognizing gain so that you can increase your basis so that it is not negative.

I very much agree with you that a step by step would be so helpful and probably not hard to create by one with the knowledge to create it, but unfortunately my knowledge is limited.

I don”t really know if there is a different rule set for forming a c corp vs s corp, as I felt Beckers explanation pertained mostly to s corps and partnerships. The pship and s corp basis rules are quite similar except for how liabilities are handled.

[leglock]

@wjun, i saw your post somehwere about a phone call, but can't find that post. if u want to leave ur email, i will get in contact with you to exchange number

[Author]

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