[Keely]

Can anyone please explain to me what the consequences of a person contributing cash to a corporation during a formation? Becker does not explain, but has a SIM on it, and I don’t understand.

If you contribute a piece of property with NBV of $40,000, a mortgage of $50,000 and also contribute $20,000 cash to the corporation, the way I thought you calculated a corporation’s basis in the property was: NBV of property + any gain recognized by shareholder (or cancelation of debt, if greater). This is what Becker says in the beginning of the R3 lecture. However, this question came up during a SIM in Becker, and it says the basis to the corporation is only $40,000 (the NBV of the property). Why is it not $50,000? The way I calculated that is the shareholder would’ve recognized a 10,000 gain on the excess cancelation of debt. So shouldn’t the corp’s basis be $40,000+$10,000?

What is the basis to the corporation, what is the basis to the shareholder? Doesn’t contributing cash to a corporation increase your basis as a shareholder? It does not say anything about that in the book, though. I am so lost and frustrated. I’ve been over this 100 times and still don’t get it.

BEC: (4/2012) 88
AUD: (5/2012) 91
REG: (8/2012) 82
FAR: (1/2013) 78 🙂

VA CPA #42010

[TaxThreat]

There is no gain on cancellation of debt because you have $40,000 NBV of property and $20,000 cash which makes it $60,000. Since this amount exceeds the mortgage of $50,000 the shareholder will not recognize any gain on contribution. Shareholder's basis is $10,000: $60,000 cash and property contributed less $50,000 mortgage. Basis to the corp. is $40,000 (the NBV of land since the question is most likely asking what is the basis in property to the corporation).

REG - 7/2/12 - 88
BEC - 7/25/12 - 83
FAR - 10/01/12 - 86
AUD - 11/24/12 - 90
Ethics -DONE

[Keely]

This really helps! Thanks! My first problem is I wasn't reading the question properly…sigh. Thanks for the help 🙂

BEC: (4/2012) 88
AUD: (5/2012) 91
REG: (8/2012) 82
FAR: (1/2013) 78 🙂

VA CPA #42010

[Shay]

@keelydare1 are you talking about SIM 1.2 in R3? I got confused too, b/c I was mixing it with concept in R4 with partnership formation.

Corp Basic

Greater of NBV + gain rec. by. SH OR Liability Assumed by Corp.

Shareholder Basic

Cash Contributed + NBV of of Property.

S.H recognize gain, if boot received (cash) OR NBV – Liability = (negative #)

example, $100K A.B of Building with 200K mortgage assumed by Corp, so $100,000 — 200,000= (100,000), this 100K is taxable to S.H…S.H basics will be 0, because you CAN NOT have (negative) basic

[wjun15]

how is this even possible? the property basis is the greater of debt assumed by corp or adjusted basis + gain recognized by shareholder,

you have Debt of 50K in this example. and adj basis is 40K

and your saying the answer is 40K? how is that even possible? 50 is greater than 40

thanks

[leglock]

I remember working that Sim and realizing Becker's material is not specific enough.

As stated above, the rule is to take the basis of ALL items given 40 plus 20 and compare that to liability assumed 50. Therefore, no gain is recognized bc liability assumed is not in excess of basis of ALL items given.

Basis to corp in the property is nbv of property plus gain recognized by shhldr, which is 40 plus 0 = 40.

So, Becker's presentation of the material of taking the greater of nbv plus gain recognized or liability assumed seems misleading to me. I am trying to envision a scenario where you actually use liability assumed for basis. In that problem if no cash were given basis would be 50 which is nbv of 40 plus 10 gain, so why does Becker even mention the liability assumed as potential basis.

[wjun15]

leglock….thanks yet again haha

yeah i just realized that the adjusted basis becker is referring to is the Adjusted basis of not only the property you give up, but also the cash that you give as well…as you said the 40+20 = 60. So since the liability of 50K is not greater than the 60, you just take the adjusted basis of property as the corporations property basis….

I feel like Becker doesnt explain enough for some of the Corp section:

Per Becker (R3 page 4): basis of the stock (shareholder) is

Adjusted Basis

cash

-liability given

+FV service

+gain recognized

-cash received

-FV of nonmoney boot received.

In the becker sim, we have a case where you contribute property with basis of 100K, give liability associated with property of 60K and you receive cash of 10K from the Corp. In this case are you adding the 10K (gain recognized) and subtracting the 10K (cash received) in that equation? because in the Sim solution it says the stock basis is 100K – 60K + 0 gain recognized. but then they dont do anything with the 10K receipt of cash.

[leglock]

I specifically asked the same question via the online becker help and was told yes add gain recognized subtract cash received which nets that out to zero

Its unfortunate they do not clear up these issues up. Im sure u and i arent the only ones who e had this issue. To me their handling of recourse and nonrecorse debt as it relates to basis and at risk is severely lacking

[wjun15]

What are the ways a corporations basis can decrease or increase after the initial formation?

are distributions (to the effect over E&P) the only way a shareholders basis can change (besides the addition or subtraction of any of the items in the following intial basis equation:)

Cash contributed

property adj basis

FV services contributed

– liabilites assumed by corp

+ gain recognized

– cash received

-non money boot received.

I ask because it seems that for partnerships its always increases or decreasing based on the income, losses, withdrawls, etc….

[leglock]

I was under the assumption the shareholder basis and prtnr basis will increase/ decrease for the same things except that liabilities taken on by pship will increase a prtnrs basis but will have no effect on a shrhldr basis if its a corp

Hopefully someone else will chime in on this

[thechapman]

In Becker I thought it said that to arrive at the shareholder's basis in the common stock, any liability assumed by the corporation is subtracted…

Passed - 2014

[leglock]

Yes u r correct. I am speaking of after the entity is formed. If a pship takes on a liability it increses a prtnrs basis and pmt of a liability will decrease a prtnrs basis but if its an scorp that takes on a liability i believe it has no effect on basis

But at formation of the entity, liability assumed by corp will decrease basis of shrhldr and if its a pship it will also decrease basis of prtnr but only in the pro rata amt the prtnr is no longer responsible for

[wjun15]

are you saying that a corporation having income will increase the shareholders (stock) basis in the corp? how come I never seen a problem where they ask for a shareholders basis (after formation) ?

[leglock]

I know ive seen questions with respect to partners basis after formation I am unsure if there were questions regarding basis after formation of sn s corp and its something i am going to ask becker about. I do know that liabilities taken on by pship will increase prtnr basis and decreasing a pship liability will reduce prtnr basis and was told for an scorp there is no effect by increase or decrease of liability

In reviewing my becker notes it says basis after formation for scorp is very similar to pship For scorp, shhldr basis is increased by income items both sep and nonseparately stated and additional capital contributions and basis is reduced by losses , distributions, or expenses

[wjun15]

oh sorry, i meant does the shareholders basis for a C Corp increase by income and losses.. i think your right about the s corp one. it increases with income and losses. but i wasnt sure about C Corps

[leglock]

c corp situation would be akin to you buying stock in Motorola for example. Your basis is what you paid for the stock. Motorola's earnings will not affect your basis.

[Author]

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