[TheGoodCPA]

Fox, the sole shareholder in Fall, a C corporation, has a tax basis of $60,000. Fall has $40,000 of accumulated positive earnings and profits at the beginning of the year and $10,000 of current positive earnings and profits for the current year. At year end, Fall distributed land with an adjusted basis of $30,000 and a fair market value (FMV) of $38,000 to Fox. The land has an outstanding mortgage of $3,000 that Fox must assume. What is Fox’s tax basis in the land?
a.
$35,000
b.
$27,000
c.
$30,000
d.
$38,000

Explanation
Choice “d” is correct. Absent information to the contrary, we should assume this distribution is in the form of a dividend (especially because Fox is the sole shareholder). If the shareholder is an individual, the taxable amount of a property dividend from a corporation’s earnings and profits is the fair market value of the property received (and the property’s basis then becomes that fair market value). In this case, the shareholder is also taking on the responsibility for the mortgage on the property, but this affects only the amount of taxable income, as the debt is reported as a separate line item and does not affect the basis of the land. The tax journal entry follows and indicates that the basis of the land is $38,000:
Debit (Dr) Credit (Cr)
Land $ 38,000
Debt $ 3,000
Taxable income 35,000

Question: I’m not sure why we would use the FMV, because I thought you use the adjusted basis (NBV) when a corporation distributes property. Can someone please walk me through this problem? Thanks.

AUD - 83 (5/13/16)
FAR - 77 (7/20/16)
BEC - (8/12/16)
REG - (10/15/16)

[aaronmo]

No – distributions from a corp are ALWAYS FMV and you'd recognize the gain at corp level.

[Wannafree]

When corporation distributes property it is assumed as sales.When sales then FMV. Pretend its appreciated then you will see that if you take it as NBV it would avoid tax ( NBV – NBV ).

[Wannafree]

If you take 30K as basis then none ( corp or Fox ) is paying taxes on 8k.

[Wannafree]

Aaron what is YMMV and also any tips on Audit would be highly appreciated as I see you got 96.

[Anonymous]

Ymmv = your mileage may vary

[aaronmo]

Your mileage may vary. In other words, my approaches and methodology work for me…they may not work for you. I have some extreme strengths and weaknesses, so my approach may not apply to others. I'm extremely analytical, but I also have learning disabilities in other areas…so I'm very good at what I'm good at, and incompetent at other things. For instance…flow charts and process maps give me immediate anxiety and are very hard for me to learn. I'm very good on concept/strategy.

I did the questions and I read the material. Audit came more naturally to me than other areas…my strength is reading/analysis.
I guess my advice would be focus on the principles behind the rules…not just the process but the why of the process. Ask yourself where each piece fits in the strategic scope. Why? How does that fit the strategy?

Audit is basically remember what/who the engagement is for, how that forms the goals of the engagement, your process and which goals the process flows to.
So just keep in mind – the focus is disclosure, or useful information…how do you determine adequate disclosure? Which standards apply to which engagement/entity? Who is responsible for what piece?

The rest is just the process to determine adequate disclosure in each area. Focus on the needs/issues of each account, traansaction and branch of operations and how that relates to disclosure. What are the risks…how, and when, do we establish the adequacy of disclosure in the various parts of process.
So you have various disclosure requirements for different entities. Government, registered Corp, small business, etc. Think of it entity down…what are the needs of this entity? Who is the user of reporting?

The grand strategy of audit is to reduce information risk for users…so the key is to understand the entity, ID needs of the users…learn that process and then associate the process with that entity and its users.

I’d maybe suggest a spreadsheet with columns that ID different entities, uses rows like users, moment requirements, opinion structure, etc. Study the identified differences. I did that for REG and it helped me ID some differences.

Also do a spread sheet for different types of audits, reviews, examinations, etc.
Understand the difference from the perspective of the user…and make sure you id all users. Is it internal or both? If it reports externally, risk and reporting standards increase. If it’s just internal usage, you usually aren’t attesting.

[TheGoodCPA]

Thanks! So if a corporation distributes property we don't take in consideration of the debt assumed? Also, if the question asks for the gain, would it be $8000?

AUD - 83 (5/13/16)
FAR - 77 (7/20/16)
BEC - (8/12/16)
REG - (10/15/16)

[Wannafree]

The goodCPA that's correct , it seems you are thinking when corps formed or contributed assets basis.This time it's distributed and considered as constructive divided.So 38K is FMV and 30k Basis for corp.For Shareholder 38k is the dividend (FMV ) – any amount paid ( debt assumed )

[TheGoodCPA]

Thank you so much!! That makes sense now.

AUD - 83 (5/13/16)
FAR - 77 (7/20/16)
BEC - (8/12/16)
REG - (10/15/16)

[Wannafree]

Arron as you said YMMV , what you said is too generic ,can you give an example ? It would be great help.I understood the concept part but an example would be big help.

[aaronmo]

I don't know how to be more specific.

OK…as I recall, in audit you mainly had these “big concepts”…

Different types of engagements. So first recognize the type of engagement being performed. Who is the end user? Internal or external? THat will help you determine risks and reporting, as well as the applicable standards.

Different types of entities. Different entities – whether issuer, government, smaller corp – have different reporting requirements. That means different end users and different standards.

Think in reverse…who is the end user of the information? Who is the entity? Then relate that to your process concepts…the kinds of reporting, standards, and procedures you follow. The rest is really process…what transactions/accounts are you auditing, and what are the primary risks?

[Wannafree]

Got it Arron.

[Author]

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