[Kent]

I’m extremely confused on sim #68 on NINJA MCQ, having to deal with Corporate Formation.

To compute a shareholder’s realized gain in a C Corporation, when do you subtract the basis instead of FMV of the asset (and vice-versa) from his interest? I see two contradicting excerpts explaining this in the answer key for two different shareholders:

“Clay’s 40% interest is valued at $80,000, and he contributed land and cash worth $80,000, with no gain.”

“Lark’s realized gain ($10,000) is the difference between the valued of his interest ($50,000) and the $40,000 he surrendered ($50,000 basis in land less $10,000 cash received by Lark).”

[IwannabeaCPA2017]

@kent, I haven't touched any of the REG stuff in a year and rarely deal with these on a daily basis even I'm in tax. But if I recall,in order to realized gain you have to see whether or not boot was received… there bunch of rules and minutia. in your second example, because boot was received u have to consider that.. I could be totally wrong but could u possibly post both questions so we could get a better picture?

[Kent]

I can't post the whole question because the formatting would be weird, but as a summary, and for the two shareholders:

4 people form a C Corp, and they make contributions of assets in exchange for stock. Total net FMV of contribution from all 4 shareholders is $200,000.

Clay has a 40% interest in the C Corp. He contributes $20,000 in cash; property worth $60,000 ($40,000 basis).
Lark has a 25% interest in the C Corp. He contributes property worth $60,000 ($50,000 basis), received $10,000 in cash from Amber Co.

[LCros]

In this problem, Clay did not receive any boot, where Lark received boot so you have to subtract the boot to arrive at Lark's basis.

I hope this is what you are referring too.

[Kent]

@LCros No; for Clay, the FMV of the land is subtracted from his interest to arrive at gain (which is zero). For Lark, the BASIS seems to be subtracted from his interest to arrive at gain. I get the whole thing about you have to net the boot received with your asset contribution. I'm just not sure why one is subtracting out FMV and the other is subtracting out basis.

@iwannabeaCPA2017 Perhaps.. I guess that might be one of the criteria for using basis, but I want to be sure.

[LCros]

for this remember that realized and recognized gains are two different things.

For Clay to get what his recognized gain is: compare the realized gain vs boot received and take the lower of the two.

Realized gain = FMV-adjusted basis = 60,000-40,000 = 20,0000

vs

Boot Received = 0,

So take the lower of the two and that is your recognized gain, which is 0

For Lark using the same rules: Realized Gain: FMV-adjusted basis = 60,000-50,000 = 10,000

vs

Boot Received=10,000

Recognized gain = 10,000

To get the recognized gain take the lower of the two.

Both equal so recognized gain = 10,000

I think this is what you are referring to.

[Kent]

@LCros I don't think that's right (although your answers are coincidentally the same). The shareholders are receiving interest in the corporation in the form of stocks, and I need to calculate the gain based on their contribution.

[LCros]

Yes, they are… using Yaeger CPA review and this is exactly how they showed us to calculate when forming a corp.

[Author]

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