[IfThereIsaGod]

I am really struggling as to why the tax side of simulation 3 of the first set of sims is what the answer is. I was under the impression that the basis of the corporation was the greater of the liability assumed or the NBV of the shareholder. The answer they provide is very non-descriptive. Please help me understand.

It is the simulation that starts like:

“Jones, Mitchell, Carey, and Gorman are knowledgeable about landscape design. They have decided to pool their knowledge and resources to form Arrington Enterprises, Inc., a C corporation. They will provide professional services to area businesses and homeowners. All participants expect to work full time for Arrington Enterprises, and each expects to contribute sufficient assets to become a 25% shareholder with a total stock equity of $50,000 each.

The table below shows the assets contributed by each shareholder. In all cases, the liabilities are recourse and are assumed by Arrington Enterprises, Inc. There are no tax avoidance purposes inherent in the assumption of shareholder liabilities.”

More specifically, I do not understand Mitchell and Carey on the tax basis. If Mitchell’s property FMV is 80, the Liability is 50, his basis is 40, and the cash he contributed is 20. How is the tax basis 40??? I thought it would be 50 because the liability of 50 is greater than the basis of 40.

Carey is similar: FMV of 40, Liability is 20, contributed 30. What is his basis? I kind of get this because 20 is the same either way but if someone could help me understand this better I would appreciate it. The answer just says, since its nontaxable then its always the NBV, well that’s not what the book says.

Thanks!

AUD----92 5/31/12
FAR----92 7/3/12
RED----85 8/3/12
BEC----?? 8/29/12

[IfThereIsaGod]

anyone?? 🙁

AUD----92 5/31/12
FAR----92 7/3/12
RED----85 8/3/12
BEC----?? 8/29/12

[Anonymous]

Mitchell's amout contributed is 40 000 (aj. basis) + 20 000- cash contributed (thus liabilities are not greater than amt contributed) = 60 000. He does not recognize gain, so the basis for corp. is the memeber's basis for non-cash property.

Same for Carey. He contributed cash, so the amt contributed is greater than liabilities assumed by corp. That's why you take the basis of the non-cash property without considering boot.

I hope this helps. I struggled with this problem also. I got it wrong the first time, but explanation in Wiley helped me understand (they have the same problem there).

[IfThereIsaGod]

@cornelizza Thank you. So the basis is really 60,000 for Mitchell but it is just reported in two separate places with cash above and then the property below? Am I following this right? And since the gain is only realized and not recognized then it goes back to the adjusted basis? That is a very confusing problem. very technical.

AUD----92 5/31/12
FAR----92 7/3/12
RED----85 8/3/12
BEC----?? 8/29/12

[Anonymous]

I think the basis of Mitchell's total interest in corporation is 60 000. The TAX basis of non-cash property is 40 000 because he did not recognize gain (he contributed more than the liabilities on the property. You recognize gain/boot only IF the amt contributed –cash +property– is below the liabilities).

Balance Sheet reporting (first column) is different. Everything is reported at FMV.

That's my understanding, but who knows, I might be wrong.

[Anonymous]

@ cornelizza : I thought we enter NBV in Balance sheet not the fair market value? correct me if i am wrong?

this sim was really tricky but made my concepts clear.

[Author]

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