[Anonymous]

Shouldn’t cash you receive, just like debt relief, reduce your tax basis in property contributed to a corporation?

Example:

You contribute property with $100,000 basis, with a $60,000 liability to a corporation.

Your new basis = 100,000 less the debt relief of $60,000 = $40,000 new basis.

I get and understand this, but I am now working on a Becker simulation, and in this case the person contributed property with a liability, and also received cash from the corporation.

Here are the facts from the Becker sim:

You contribute property that you have a 100,000 basis in, which has an $60,000 liability associated with it. It also says that you received $10,000 cash from the corp.

Shouldn’t this reduce your basis down to $30,000? Even on page R3-4 of the Becker textbook it says cash reduces your basis, but when you look at the solution for this question, it says the answer is $40,000 [100,000 basis less 60,000 debt relief, no mention of the cash]

Am I missing or misunderstanding something, or is the Becker sim wrong? I checked the Becker update site, and there is no change for this problem.

[Anonymous]

Another question as I try to make sense of this sim. Why doesn't the debt relief count as boot rec'd? According to their answer, you recognize gain to the lesser of boot received or realized gain, but in their answer, the calculation does not include debt relief as boot. Boy, I was going through all the MCQs with no problems, and this one sim is now killing my confidence.

[Anonymous]

Refer to R-3 (For Becker 2011), p 4.

The formula they give to come up with the shareholder basis is:

+ FMV of services rendered

+ Gain recognized by shareholder

– Cash received

– Liabilities assumed by the Corp

– FMV of non-money boot received

---

= Basis of common stock

For this specific sim, we can calculate as follows:

+ (100,000) Basis on Contributed Property

+ (0) FMV of services rendered

+ (10,000) Gain recognized by shareholder

– (10,000) Cash received

– (60,000) Liabilities assumed by the Corp

– FMV of non-money boot received

---

= Basis of common stock 40,000

I got confused with this also but Wiey explained that you must defer this gain. Please someone correct me if I am wrong

[Anonymous]

Yes, you are exactly right. The Becker explanation didn't mention the 10,000 gain recognized by the S/H, and I had forgotten about this real. Makes sense now. I saw that Wiley had the exact same sim, but a different explanation, which did include the 10k gain. As for my other question, I figured out that debt relief is not really “boot received” for taxable gain purposes unless it is in excess of basis. In this case, it just reduces basis, but isn't boot for tax purposes.

[Anonymous]

One more question, hopefully my last. If you contribute property with a liability greater than it's basis AND you also contribute cash… does the cash offset the excess liability, or do you calculate gain on the excess liability without taking it to consideration the cash?

Example:

You contribute property with a basis of 40,000, a liability of 50,000 AND 20,000 cash

Do you recognize a 10,000 gain on the excess liability? Or does the 20,000 cash soak that up? I guess my question really is… do you include the cash you contribute in your “beginning basis”, or do you determine gain on the property/liability only, THEN add in the cash?

[Author]

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