[Biff-1955-Tannen]

Is the corporations basis the same basis as for the owners, or is it the FMV? Two questions have given me different answers. Is it relevant if it is contributed during the formation of the corporation? That’s the only difference I can see between the two following explanations.

Q# 1321

Ames and Roth formed Homerun, a C corporation. Ames contributed several autographed baseballs to Homerun. Ames purchased the baseballs for $500, and they have a total fair market value of $1,000. Roth contributed several autographed baseball bats to Homerun. Roth purchased the bats for $5,000, and they have a fair market value of $7,000. What is Homerun’s basis in the contributed bats and balls?

A.

$0

B.

$5,500

C.

$6,000

D.

$8,000

“Because Ames and Roth formed the C corporation called Homerun, the new corporation should report the same basis for assets contributed by the owners ($500 + $5,000). There is no reason for a step up in basis above the cost of acquisition.

No gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange the persons are in control (80% or more) of the corporation.”

Q#1575

Porter, the sole shareholder of Preston Corp., transferred 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

Fair market value 200,000 500,000

What amount represents the corporation’s basis in the property received?

A.

$700,000

B.

$550,000

C.

$450,000

D.

$300,000

“When property is transferred to a corporation, the basis of any property received is the fair market value (FMV) at the time of the transfer. Porter’s transfer two years ago had an FMV of $50,000, but the current FMV does not have an impact on the corporation’s basis in the property. The basis in Corley’s contribution is the current FMV, and their basis in the property does not affect the corporation’s basis. The total basis in property contributed to the corporation is the $50,000 original contribution (FMV) from Porter, plus the $500,000 current contribution (FMV) for Corley, which equals a total of $550,000.”

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REG 84 May 16

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[monikernc]

it is hard to tell with info you provided but the 1st one looks like a sect 351 transfer where formation results in more than 80% ownership so basis is recognized

the second one i need more info. but it appears to be a post formation transfer

if these are ninja questions post the numbers and i will read through them and respond with whatever help i can provide

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[Tncincy]

I am currently working on Partnership basis, Corporation basis, and Property transactions…at least nailing these areas down, so I believe when calculating the basis you would be using the adjusted basis not fmv.

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[Biff-1955-Tannen]

Edited for monikernc

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

99% Ninja MCQ only

[monikernc]

#1, This is a Sect 351 transfer whether at formation or not – No gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange the persons are in control (80% or more) of the corporation.”

#2 The individual is transferring property for only 10% ownership of a C Corp, FMV is applied.

The difference in the two is not the timing but the % of control or ownership that results immediately from an individual's or group's exchange for stock only in C Corp

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Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
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[Biff-1955-Tannen]

Thanks monikernc, Q#1575 explanation is just outright misleading.

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

99% Ninja MCQ only

[monikernc]

it is a confusing topic. i am not sure why Porter's original transfer was at FMV – i am certain about the basis of Corley's being FMV for 10% ownership

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
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[Tncincy]

the % of stock is what I was focusing on, not 80% control, but the 10%, I'm not finding where you should use fmv instead of adjusted basis.

It begins with a 75
Been here too long as a cheerleader....ready to pass

[monikernc]

an old thread refers to the q1575 and the response (i believe, correctly) refers to Porter's $50,000as the AB not the FMV of the property at the time he contributed it. i dragged out my tax textbook again and it confirms that contributions to capital (transfers for which no stock is received) are received by the corp at the carryover basis.

here is the old thread

https://www.another71.com/cpa-exam-forum/topic/be-my-hero-explain-this-reg-question

FAR 7/25/15 76!
AUD 10/30/15 93
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REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
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[Spartans92]

Sorry dont mean to hijack the thread biff. But I dont understand why 351 doesn't apply in this question. Thought section 351 applies when exchange of property for stock, ownership is more than 80%. Here is the question

Ann transferred land worth $200,000, with a tax basis of $40,000, to Brown Corporation, an existing entity, for 100 shares of its stock. Brown Corporation has two other shareholders, Bill and Bob, each of whom holds 100 shares. With respect to the transfer:
a. Ann has no recognized gain.

b. Brown Corporation has a basis of $160,000 in the land.

c. Ann has a basis of $200,000 in her 100 shares in Brown Corporation.

d. Ann has a basis of $40,000 in her 100 shares in Brown Corporation.


I thought B was the answer since it was land for stocks. Sec 351 applies. How come Section 351 does not apply here? I know the other two (bill and bob) aren't part of the control group because they didnt give property. I figured this relates to the topic so I ask in here. My apologies.

BEC- PASS

[Biff-1955-Tannen]

Very nice monikernc, thanks a bunch!

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

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[Biff-1955-Tannen]

@Spartans92 so since they are the only one contributing property, and they only have â…“ interest in the corporation, their basis in the stock will be be 200,000. The answer should be C

AUD 93 Jan 16
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FAR 83 Apr 16
REG 84 May 16

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[monikernc]

she is receiving less than 80% of control when she enters alone. therefore her transfer does not qualify as a sect 351 exchange and her property goes at FMV. SHe gets the basis of $200,000 and has to recognize the gain of $160,000.

if sect 351 does not apply everything goes at FMV and all gains are recognized.

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Ninja Book and MCQ and the forum - all the way!!!
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[Spartans92]

ahh I see. I was little confused, thought regardless of ownership when you contribute property sec 351 immediately applies. Thanks guys!

BEC- PASS

[monikernc]

at the end of the day, this shit makes no sense. but i have to pass this exam

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[c1oth]

Is it correct to think of it like this?

For a corporation, when determining the basis contributed ( either FMV or Adjusted basis) we would look at

1) If at the beginning when the corporation is formed, and at least 80% owner ship is in property and cash .. then the property's basis would be at adjusted basis… otherwise it would be at fair value…

2) If a new partner in a different year contributed property for 10% of the stock, or even 50% of the stock… the property contributed is at FMV??

[Author]

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