[Anonymous]

On the third task of the first Becker R3 simulation, we are asked to calculate, among other things, the adjusted bases a corporation has in assets contributed in the formation of the corporation (the forming group ends with over 80% control). One of the contributing members is Mitchell, who contributes an asset with a FMV of $80,000 and basis of $40,000. He also contributes cash of $20,000, and the corporation absorbs a liability associated with the contributed asset of $50,000.

The solution says the corporation’s basis in the asset should be $40,000 as a rollover basis from Mitchell. However, the corporation is supposed carry the contributed asset at the greater of the stockholder’s basis (plus any gain recognized) and liabilities assumed. Mitchell’s gain should be $10,000 (excess of liability over his basis). Thus, either way, the corporation’s basis in the new asset should be $50,000, not the given $40,000.

Can anybody explain the discrepancy, or do you think it’s just an error in the solution? Thanks.

[Minimorty]

Is this the same question? (If so, hope this answer helps).

https://www.another71.com/cpa-exam-forum/topic/please-help-i-dont-understand-corporate-formation-basis-at-all

[Anonymous]

Thanks for the link Mini — that is the same question. However, I'm not quite satisfied by the answer :D. Assuming assets are compared cumulatively compared to the total liabilities, the lack of a shareholder gain on contribution makes sense. But the corporation is still supposed to adopt as a basis the GREATER of the liability assumed and the basis (+gain). The liability assumed is $50,000, so that should be the corporation's basis, right?

[Anonymous]

Or does that mean that the corporation's basis is the greater of the $60,000 TOTAL basis of assets contributed or the $50,000 liability assumed, in which case that $60,000 is then allocated to the cash at $20,000 and the other property at $40,000?

Hmm, I think that must be it! Becker has an absolutely terrible explanation of the whole process.

[Minimorty]

The liability assumed won't impact the adjusted basis of the property to the corporation. The corporation's basis in the property is simply the NBV of the property plus gain recognized by the shareholder. Since the shareholder is not recognizing a gain, the basis of the property to the corporation remains the NBV.

Intuitively, you (or your corporation) are not going to get a step-up in basis unless you are recognizing some sort of gain and paying taxes.

[Anonymous]

Good point. I'm not sure why Becker says the basis is the greater of the liability assumed or the NBV + gains. That can easily lead to confusion due to its ambiguity as to application. And even if it's interpreted correctly, it's worthless because the liability assumed will NEVER be greater than the NBV + gains because any excess of liability over NBV is gain!

My faith in Gearty is forever tarnished.

[Anonymous]

Becker does a piss poor job of explaining this, and of explaining DNI. I struggled with this question for way too long.

To review the rules:

1) The basis in the property of a corporation is determined by the greater of A) NBV + gain or B) liabilities assumed by the corp.

2) Liabilities can trigger boot, if NBV – liabilities assumed = NEGATIVE number.

The important point that Becker failed to mention is that NBV is not just the NBV of the PROPERTY, but that it also includes cash. So in #1, you have to include the cash and compare the A) NBV $40000 property + $20000 cash to B) $50000. As $60,000 is greater than $50,000, you use A to determine your basis in the property.

BUT, you have to remember that this is the rule to figure out what is used as the basis of the property. The $60,000 NBV isn't entirely allocated to the property — $20,000 is allocated to that CASH. Thus, $40,000 is the basis in the property.

FURTHER, there is no gain because the total assets transferred by the corporation ($40,000 + $20,000) is greater than the liabilities assumed ($50,000).

Screw Becker.

[Keely]

I think the above explanation is a great way to understand the problem. I agree about Becker with this topic. Literally, ALL they said was “basis to corporation is either NBV or debt assumed by corp., whichever is larger.” They didn't even talk about the gain recognized by the shareholder, I had to figure that out myself through the examples. Frustrating.

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

VA CPA #42010

[jokami]

@battipjw gave you the best explanation!!!

The trick is to remember what is he/she putting in as a whole to the corporation… We focus in the FMV and NBV and all of the sorts with the property and how it goes in the company but we forget about the cash…

I think is best way to get it also.. Is what Gearty says in the lecture… think about the journal entry of the company and what do you have to do for it to be balanced. It is an easy way to remember it.

B - 62, 70, 72, 79!!!
A - 68, 81
R - 70, 82
F - 84

"The limit to your abilities is where you place them" - Fortune Cookies

[Author]

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