[Harry]

Question:
In year 1, Michael purchases 100 shares of stock in Motor Co, by contributing the following:
– Cash $50,000
– Building with an adjusted basis to Michael of $120,000 and a mortgage of $150,000

The following transactions occur during the next few years:
– In year 2, Motor Co. makes a distribution to Michael of $10,000 in cash when current and accumulated E&P is fully depleted.
– At the beginning of year 3, E&P was completely depleted. During year 3, Motor Co. makes a distribution of an asset with a basis of $2,000 and FMV of $2,500.
– In year 4, Michael contributed property to the corporation with a basis of $5,000 and FMV of $6,000

Solution:
1. Michael’s initial basis in his Motor stock in year 1
2. Michael’s stock basis at the end of year 2
3. Michael’s stock basis at the end of year 3
4. Michael’s stock basis at the end of year 4

The correct answer for above solutions are 1) $50,000 2) $40,000 3) $38,000
4) $43,000. I do understand how to get correct answers for 1, 2, 3 but do not understand why the answer for 4) is $43,000. It means the basis of the stock went up by $5,000 from $38,000, which is by adjusted basis of the property Michael contributed to the Corporation. What I believe is that the basis should go up by FMV ($6,000) because Michael recognized $1,000 gain due to not satisfying 80% control rule. Therefore, his basis should be calculated as below:
Basis of C/S = adjusted basis + gain recognized = $5,000 + $1,000 = $6,000
If this is the case, the correct answer for 4) should be $44,000.

Does anybody have a different opinion about this question? If I am wrong, can anybody tell me why the answer is $43,000 please?

Thank you so much