[hamza]

Jones, Mitchell, Carey, and Gorman are knowledgeable about landscape design. They have decided to pool their knowledge and resources to form Arrington Enterprises, Inc., a C corporation. They will provide professional services to area businesses and homeowners. All participants expect to work full time for Arrington Enterprises, and each expects to contribute sufficient assets to become a 25% shareholder with a total stock equity of $50,000 each.( Wiley online test bank Reg Sim -0006)

In all cases, the liabilities are recourse and are assumed by Arrington Enterprises, Inc. There are no tax avoidance purposes inherent in the assumption of shareholder liabilities.”

Jones contributed non cash property with a estimated FMV of 120,000.

Liability associated with property of 60,000.

Cash distributed to Jones 10,000.

WHAT IS JONES TAX BASIS IN THE SHARES OF THE CORPORATION ? ( Wiley online test bank Reg Sim -0006)

If 4 people form a new corporation. And each of them provide property and services for 25 % ownership. Since each of the 4 individuals contributed property I am assuming section 351 rules apply ? Since in aggregate they own more than 80 %. ? Am I right ?

According to me Jones basis should be :

Adjusted value of property – reduction of liability (which was assumed by the corporation) – boot received.

So that amount is 100,000 – 60,000 – 10,000. = 30,000.

The wiley test bank explanation is confusing for me. The 10,000 dollars that Jones received from the Corporation , I subtracted it. Because my understanding is that boot received decreases shareholder basis. But should that 10,000 $ received from the corporation also cause a recognition of gain ??

So them the amount would be 100,000 – 60000 – 10000 + 10,000. = 40,000. This is the answer in the wiley online test bank.

SO what I understand is that under section 351, receipt of boot will decrease shareholder’s basis. But receipt of boot will also cause a gain for the shareholder. And does that receipt of boot have to be cash to cause a gain ?

Is my thinking correct ? Please Help

FAR - 80 Feb 2012
BEC - 77 July / Aug 2012
Reg - 56 30th Nov 2012 . Re-take Jan 4th 2013 - 78
AUD - 73 October 2012, Re took it on Feb 1st 2013 - 76
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DONE !

[JoeL]

First, Two conditions cause Recognition of Gain:

1) Less than 80% control–This not applied because it is 100% control

2) Boot received–This applied, So you Should Recognize Gain of less of realized gain or Boot received

Boot = Cash or Excess Liability Assumed

Once you recognized Gain, you should add that to your basis, similar to “in-kind” exchange

New Basis = Old Basis + Gain – Boot received – Liability Assumed

[calicpa]

why doesn't his basis increase by 15? his % of the liabilities assumed of the 60k?

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[calicpa]

why doesn't his basis increase by 15? his % of the liabilities assumed of the 60k?

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[calicpa]

do shareholders basis increase if the C-corp assumes more liabililties? No, right?

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[calicpa]

do shareholders basis increase if the C-corp assumes more liabililties? No, right?

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[Author]

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