[Anonymous]

Becker Question –

In April, X and Y formed Z Corp. X contributed $50,000 cash, and Y contributed land worth $70,000 (with an adjusted basis of $40,000). Y also received $20,000 cash from the corporation. X and Y each receives 50% of the corporation’s stock. What is the tax basis of the land to Z Corp.?

Rule: There is no gain or loss to the corporation issuing stock in exchange for property for the issuance of stock. The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation.

Choice “b” is correct. X and Y form Z Corporation so that each receives a 50% interest in the corporation. X contributes $50,000 in cash, and Y contributes land worth $70,000 and receives $20,000 from the corporation . Z Corporation will record the basis of the land at the basis of Y ($40,000) plus any cash it paid to secure the land ($20,000), or $60,000 total basis. Per the above general rule, the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. As there is no indicated debt on the land nor any gain recognized by Y on the transfer [because X and Y own at least 80% of the voting stock immediately after the transaction and there is no taxable boot (no cash withdrawn and no cancellation of debt) on the transaction], the basis is the adjusted net book value of Y ($40,000) plus any cash Z Corporation pays for the land ($20,000). [Note that we have not addressed the shareholder consequences in this question.]

I thought the rule was that there is no taxable gain if 1) 80% of voting stock is owned 2) no boot / COD is received. However, the shareholder receives $20,000 cash, which is taxable boot. Doesn’t this trigger a taxable gain of $20,000 which is the reason why the corp basis is $40,000 NBV + 20,000 gain to the shareholder?

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@cpastudent22. You know after reading this question over a few times it started to get more and more confusing. I think at this point when in doubt you just have to stick to two main points and that is what is the question asking you and what is the general rule when it comes to formation of corporation. The question is asking you about the corporations tax consequences which is a non taxable event of 60k (40k basis plus the additional cash they paid to acquire the land). If the question were to ask you what are the shareholders tax consequences then the answer would be the 20k but again, the question is not asking you about the shareholder its asking you about the corporation. The answer even addresses “[Note we have not addressed the shareholder consequences in this question]” Hope this helps.

This is actually a really good point and a good reminder of how something can be easily overlooked and how tricky these questions can be sometimes. Thanks for bringing this up as this makes me study harder!

Mario Marcel, CPA

FAR. Feb 2014 76
REG. Jan 2015 79 half way there!!
BEC. Feb 2015 79 thank you God!!
AUD. Apr 20, 2015 and will be done. Hold that thought 65, 7/14/15 85!
Ok where was I? Oh thats right now I'm Done!!!!!!!!!
Ethics 92!!

"You down wit SEC?, yeah you know me!!!"

Cali Candidate

All Becker Materials, Wiley Test Bank, Ninja audio, Ninja MCQ, Ninja Notes

[leglock]

but the question is asking for tax basis of land to corp, which according to the formula means you must include any gain recognized

I am uncertain of this answer too. I took Reg in July and have forgotten much of the material and am curious as to why the answer states no gain is recognized by shareholder even though boot was received.

[leglock]

Can u post what becker question number that is

[NJPRU]

CPA-06003

I don't think Becker mixes them up so out of 139 questions, it's #99.

AUD: DONE
FAR: DONE
BEC: DONE
REG: DONE

IM GOING TO BE A CPA!!!!!

[leglock]

it appears i completely misread the answer. I would have selected 60000 as the answer, but would have assumed the shareholder would need to recognize20000 boot in contrast to what the answer states.

I just reviewed my Becker questions, and I had asked about this very same issue. The Becker expert who replied who is very knowledgeable stated that he agreed that there was a gain to Y that would have needed to be recognzied.

[Anonymous]

Thank you all for replying!!

@leglock, so the Becker expert agreed that there should be a gain to the shareholder Y, and therefore this makes Becker's explanation incorrect?

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Which is very annoying because we spend so much time money and effort into our preparation. I know mistakes happen but stuff like is very critical because we can only get as good as the material that is given to us. This should also be stated as a correction in the Becker updates and its not.

Mario Marcel, CPA

FAR. Feb 2014 76
REG. Jan 2015 79 half way there!!
BEC. Feb 2015 79 thank you God!!
AUD. Apr 20, 2015 and will be done. Hold that thought 65, 7/14/15 85!
Ok where was I? Oh thats right now I'm Done!!!!!!!!!
Ethics 92!!

"You down wit SEC?, yeah you know me!!!"

Cali Candidate

All Becker Materials, Wiley Test Bank, Ninja audio, Ninja MCQ, Ninja Notes

[leglock]

yes, the becker advisor who is a cpa and extremely knowledgeable agrees that Becker's explanation is incorrect.

Shareholder Y would need to recognize a gain of 20k in his opinion.

[jeff]

NINJA MCQ Explanation:

The Corp received land with an adjusted basis of $40,000.

Corp paid shareholder an additional $20,000 in cash.

The tax basis of the land for the Corp is $60,000, made up of the $40,000 in basis from Shareholder and the $20,000 paid.

AUD - 79
BEC - 80
FAR - 76
REG - 92

Jeff Elliott, CPA (KS)
NINJA CPA | NINJA CMA | NINJA CPE | Another71

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Thanks Jeff!

Mario Marcel, CPA

FAR. Feb 2014 76
REG. Jan 2015 79 half way there!!
BEC. Feb 2015 79 thank you God!!
AUD. Apr 20, 2015 and will be done. Hold that thought 65, 7/14/15 85!
Ok where was I? Oh thats right now I'm Done!!!!!!!!!
Ethics 92!!

"You down wit SEC?, yeah you know me!!!"

Cali Candidate

All Becker Materials, Wiley Test Bank, Ninja audio, Ninja MCQ, Ninja Notes

[highlightnumb]

I know there has been a confirmation from an expert regarding this issue but an expert won't be taking the exam for me so I just have to confirm to my self that the explanation for this answer is not 100% correct. I think we can all agree that the transferor/shareholder does have to recognize a gain because transferor/shareholder did receive 20,000 cash from the corporation which is taxable boot to the transferor/shareholder. The study material states that ” The shareholder contributing property in exhange for corporation common stock has no gain or loss if the following two conditions have been met” which are 80% control and boot not involved. In this question there is 80% control but boot was involved. Do these rules have to happen simultaneously or is it 80% OR boot not involved? Because if its either or then this is probably why the answer explanation says the transferor/shareholder does not recognize a gain from the 20,000. Sorry but we all know the calm before the storm when it comes to these exams and no stone should be left unturned. Lets attack this now.

Mario Marcel, CPA

FAR. Feb 2014 76
REG. Jan 2015 79 half way there!!
BEC. Feb 2015 79 thank you God!!
AUD. Apr 20, 2015 and will be done. Hold that thought 65, 7/14/15 85!
Ok where was I? Oh thats right now I'm Done!!!!!!!!!
Ethics 92!!

"You down wit SEC?, yeah you know me!!!"

Cali Candidate

All Becker Materials, Wiley Test Bank, Ninja audio, Ninja MCQ, Ninja Notes

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