[Mich-CPA-Soon]

Hello all,

This is my first post! Been a longtime lurker on the forum, so thanks for the all the help so far. Got my last test REG on Monday and just have a quick question on corporate taxes.

Basis for a SHAREHOLDER for contributed property = Basis transferred(including cash) + Gain recognized – Boot received (includes liabilities assumed by corp).

Basis for the CORPORATION for the contributed property = Basis of property transferred(including cash) + gain recognized

So here’s my question. Why is there a difference in the two formulas? I understand shareholder basis would be used when the corporation dissolves to calculate a capital gain on the final distributions. But what is the corporation basis used for? I encountered a simulation where it asked to record the balance sheet amounts for the contributed property, which I guess is only based on the FMV? So this lead me to ask why is the balance sheet and tax basis to the CORPORATION different..?

I know it’s probably some simple logic I’m probably missing but I don’t understand why there is basically three different amounts being used..

Any help is much appreciated!

AUD 8/14/15 - 84
BEC 9/10/15 - 83
FAR 11/4/15 - 85
REG 12/9/15 - 80

[EuroAddict]

@Mich – another one for ya:

“Martha transferred equipment to a corporation in exchange for 100 shares of common stock. The equipment had a basis of $120,000 and a fair value of $160,000 which is equal to the value of the shares received. There are three other shareholders who each own 100 shares of stock. What is Martha's basis in the stock?”

The answer is $160,000 with explanation being “160,000 which is equal to the value of shares received”.

“In the current year, Dr. Spencer Patel decides to form a corporation. Cash of $120,000 is transferred to the business along with equipment having a tax basis of $100,000 but a fair value of $150,000. Dr. Patel received all of the stock of this new corporation. What is his tax basis in this new business?”

Answer is $220,000. Is this b/c it doesn't state that the FMV of the shares received is such and such amount?

-----------------------------
BEC - 77, 03/2015 (first try)
FAR - 79, 05/2015 (second try)
REG - 83, 12/2015 (first try)
AUD - 84, 03/2015 (first try)

I got 99 problems but the CPA ain't one.

[tuanxn]

Hey @EuroAddict,

I like watching the progression of this thread.

Scenario 1 with Martha:
More than 80% of the ownership in the corporation isn't transferred in the transaction so § 351 does not apply.
Only 25% of the ownership is being transferred in this transaction.
The transaction will treat is as if Martha sold the equipment to the corporation, so Martha will recognize $40,000 of gain ($160,000 FMV of stock – $120,000 basis in equipment) and take a $160,000 basis in the stock.

Scenario 2 with Dr. Patel:
More than 80% of the ownership is being transferred (100% actually).
Therefore the basis in the stock will equal the basis of all capital and property contributed.
So $220,000 ($120,000 cash + $100,000)
*You didn't need to know the FMV of the stock in the second one because it was a proper § 351 transaction.

[EuroAddict]

@TUANXN

Ah wow thanks! It's so easy to overlook these items.

-----------------------------
BEC - 77, 03/2015 (first try)
FAR - 79, 05/2015 (second try)
REG - 83, 12/2015 (first try)
AUD - 84, 03/2015 (first try)

I got 99 problems but the CPA ain't one.

[Mich-CPA-Soon]

Yeah great answers. Also note in the second example Dr Patel got no cash FROM the corp so there cant be any recognized gain and the above formula just simplifies to ” Basis transferred(including cash)”.

AUD 8/14/15 - 84
BEC 9/10/15 - 83
FAR 11/4/15 - 85
REG 12/9/15 - 80

[for425]

Will the gain recognized (for computing shareholder basis) by the shareholder always be the cash received from the shareholder, or are there other instances as well?

FAR - 72, 81
BEC - 76
REG - 78
AUD - 61 (1/24), Retake (6/6)

Materials: Becker
FAR Retake: + Wiley TB
REG & AUD: + Ninja MCQ

[EuroAddict]

A gain is also recognized by the shareholder if their liability EXCEEDS their basis in the item donated.

-----------------------------
BEC - 77, 03/2015 (first try)
FAR - 79, 05/2015 (second try)
REG - 83, 12/2015 (first try)
AUD - 84, 03/2015 (first try)

I got 99 problems but the CPA ain't one.

[for425]

FAR - 72, 81
BEC - 76
REG - 78
AUD - 61 (1/24), Retake (6/6)

Materials: Becker
FAR Retake: + Wiley TB
REG & AUD: + Ninja MCQ

[for425]

@Euro

Thanks!

What would be the situation when a gain is recognized and included in the corporation's basis?

FAR - 72, 81
BEC - 76
REG - 78
AUD - 61 (1/24), Retake (6/6)

Materials: Becker
FAR Retake: + Wiley TB
REG & AUD: + Ninja MCQ

[for425]

Also, if the shareholder is contributed property with a liability attached to it, is that liability considered boot? So a gain could be technically recognized up to the amount of the liability?

FAR - 72, 81
BEC - 76
REG - 78
AUD - 61 (1/24), Retake (6/6)

Materials: Becker
FAR Retake: + Wiley TB
REG & AUD: + Ninja MCQ

[EuroAddict]

Boot is only cash.

Example:

shareholder basis is 70k but the liability is 80k. 10k recognized gain. I know that is a dead simple example. I will give another later when I'm not at work.

-----------------------------
BEC - 77, 03/2015 (first try)
FAR - 79, 05/2015 (second try)
REG - 83, 12/2015 (first try)
AUD - 84, 03/2015 (first try)

I got 99 problems but the CPA ain't one.

[EuroAddict]

Question time!

Adj basis is 140,000, liability is 20,000, FMV is 260,000 and that shareholder received a boot of 15,000.

Is the answer: 140,000 + (gain limited to boot)15,000 – (Boot)15,000 – 20,000 = 120,000?

-----------------------------
BEC - 77, 03/2015 (first try)
FAR - 79, 05/2015 (second try)
REG - 83, 12/2015 (first try)
AUD - 84, 03/2015 (first try)

I got 99 problems but the CPA ain't one.

[Mich-CPA-Soon]

Yep that's correct!

AUD 8/14/15 - 84
BEC 9/10/15 - 83
FAR 11/4/15 - 85
REG 12/9/15 - 80

[EuroAddict]

I am failing to see where using formula of adding gain recognized and subtracting boot makes a diff since the gain you recognize is only available to the amount of boot received, which negate each other.

In my above example I could have just done adj basis – liability and would have came to the correct answer.

-----------------------------
BEC - 77, 03/2015 (first try)
FAR - 79, 05/2015 (second try)
REG - 83, 12/2015 (first try)
AUD - 84, 03/2015 (first try)

I got 99 problems but the CPA ain't one.

[tuanxn]

@EuroAddict

Remember that it's the LESSER of gain realized or boot received.
Therefore if the gain realized is less than the boot than that's the gain we add to the adjusted basis, but we still subtract the full amount of the boot.

Example:
*I'm going to leave out liability to make it a little easier

Shareholder transfers:
Property Adjusted Basis $100,000

Corporation transfers:
Stock worth $90,000
Boot worth $20,000

So the gain realized on the transfer is $10,000 ($110,000 – $100,000)
However the boot is $20,000
The gain recognized is the lesser of the two so $10,000 is recognized.

So the basis in the stock would be $90,000 ($100,000 basis + $10,000 gain recognized – $20,000 boot)
Shareholder takes a $90,000 basis in the stock and recognizes $10,000 in gain.

Corporation takes a basis in the property of $110,000 ($100,000 basis + $10,000 gain recognized)

Now look back at what we started with and what we ended up with:
Beginning:
Shareholder had $100,000 ($100,000 basis in property)
Corporation had $110,000 ($90,000 stock + $20,000 boot)
Ending:
Shareholder has collectively received $100,000 ($90,000 in stock and $10,000 gain recognized)
Corporation now has $110,000 (Basis in the property that consists of: carryover basis $100,000 + $10,000 gain added to it)
**Take-away is that everything is equal

You could throw liability into the mix, but the point is that you shouldn't always assume the gain recognized will be the amount of the boot. Using the original equation will keep things straight when the examiners try to trick you.

Hope that helps 🙂

[EuroAddict]

That def. helps me out. Backers book mentions the formula but doesn't give example of when boot is received. My 18 mos on the software ran out so I am only using the book + ninja MCQ's and sims. Hard to find an example that illustrated the above scenarios.

Test is Monday..AHH!!!!! lol

-----------------------------
BEC - 77, 03/2015 (first try)
FAR - 79, 05/2015 (second try)
REG - 83, 12/2015 (first try)
AUD - 84, 03/2015 (first try)

I got 99 problems but the CPA ain't one.

[Author]

Replies