[Harry]

Porter, the sole shareholder of Preston Corp., transferred the property to the corporation as a contribution to capital. Two years later, Corley transferred property to the corporation in exchange for a 10% interest in corporate stock. The property transferred was valued as follows:
Porter’s transfer Corley’s transfer
Basis $50,000 $250,000
FMV $200,000 $500,000
What amount represents the corporation’s basis in the property received?

As what I learned, the answer should be $300,000. But the correct answer is $550,000. Does anyone know why is this and explain it to me please? Thank you so much!!!

[Umer Bhutto]

The issue here is with the 80% rule. According to the 80% rule, if the owner holds >= 80% of the ownership then, the adjusted basis of the property received by corporation is used. if ownership of owner < 80% then the FMV of the property is used

Porter owns 90% of the company and as 90% > 80%, Porter's property basis is $50,000.

However, Corley only owns 10% of the company and as 10% < 80% then the FMV of the property is used. in this case, the basis of Corley's property is the FMV which is $500,000.

As a result 50,000 + 500,000 = $550,000

Hope this helps!

[Harry]

Thank you so much for your help Umer Bhutto!

[Author]

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