[mczarnecka]

Hi guys! I’m trying to wrap my head around the Reg 3 C Corporation section, I’ve never posted but am so desperate I’m hoping someone can help. I can’t grasp any part of the explanations for when gains are recognized or what the shareholder’s basis is or a corporation’s basis in the property received, all of the rules seem really convoluted to me (it doesn’t help that I’ve never taken a tax class). I know the first rule, during organization, is that the basis of property of the corp is the NBV plus the shareholder gain or the debt assumed. But what is the shareholder gain?? And what if it’s not during organization? What if the shareholder doesn’t control 80% afterwards? What if cash is given back to the shareholder during any of these transactions? Has anyone created a clear outline of these scenarios? please please please help me :'(

[Zuly]

@mczarnecka I had the same problem as you with corp and partnerships for my recent REG re-take so I did create a side by side chart. I actually did this the day before the exam because I thought I was getting it but I kept getting the questions wrong. Anyway, the morning before the exam I took about an hour and went through the Roger text book going through the different scenarios. I'm not sure when your exam is but if you take a good solid hour and start to break down the differences you will see that it will come together for you when you start to re-do the MCQs. It seems so overwhelming at first but I learned that the more I did this with topics I struggled with the better it was to take that time out to really dig deep and figure out what I was not understanding. Thankfully I did this because I did get quite a few questions in the exam that if I hadn't done that I would have completely struggled. Good luck!

FAR - (11/01/14) 71 (02/07/15) 79
AUD - (04/30/15) 86
BEC - (07/21/15) 73 (10/01/15) 75
REG - (11/30/15) 55 (05/19/16) 74

[Broag]

C-Corporations

Shareholder Initial Basis:
Adjusted basis of property transferred (including cash)
+ FMV of services
+ Gain recognized by shareholder
– Cash received (distribution)
– Liabilities assumed by corporation
– FMV of nonmoney boot received (bonds/debt securities
= Basis of Common Stock
Note: A contribution of 80% must be made to qualify for a non-taxable transaction

Taxable transaction – property transferred at FMV
Services do NOT count towards the 80% contribution
Initial basis – corporation
The greater of shareholder’s basis in property (NBV + gain recognized) or debt assumed

E&P calculation:
Taxable Income
+ Nontaxable income (perm. Differences)
– Nondeductible expenses (perm. Differences)
+/- Temporary GAAP vs Tax differences
= Current E & P
[Summary R3 pg 22)

Classifications of distributions:
E&P (current and accumulated) = taxable dividend
No E&P = return of capital (reduces basis – remember CANNOT have negative basis)
No basis = capital gain distribution (long term)

Current earnings are allocated to distributions on a pro rata basis (ratio of each distribution to total distributions)

Accumulated earnings are allocated to distributions in chronological order

Current E&P +, Accum E&P + = taxable dividend
Current E&P +, Accum E&P – = taxable dividend to extent of current
Current E&P -, Accum E&P – = no dividend at all
Current E&P -, Accum E&P + = net the two together and a taxable dividend exists to the extent of positive accum E&P

Preferred stock – paid a set amount, always get paid first, always a dividend

Taxable amounts to shareholders:
Cash dividend – amount received
Property dividend – FMV of prop received
Taxable amounts to corporation:
Property dividend – FMV of prop – NBV = corporate gain = current E&P

REG - 79
FAR - ?
AUD - ?
BEC - ?

[Martin]

?

Through God all things can happen!

“You never fail until you stop trying.”
― Albert Einstein
When I was young, I used to admire intelligent people;as I grow older, I admire kind people.
“Just keep swimming, just keep swimming.”

FAR= 72-84
Audit= 73-82
BEC= 74-75
Reg=77

[nothingsenough99]

I have a good summary I used for the exam. It really helped me differentiate between corporations and partnerships.

Hope it helps !

https://www.facebook.com/photo.php?fbid=10153605109173715&set=a.10150236760453715.325625.512678714&type=3&theater

AUD: 97
FAR: 76
BEC: 85
REG: 85

[mczarnecka]

Thank you both so much.

@Broag, so how do I calculate the gain recognized by the shareholder? Your first formula is for the shareholder basis, what about the corp basis?

What does this calculation look like when its a taxable transaction? I see your notes but I can't seem to be able to come up with the actual formula. Regarding taxable transactions, the same question regarding gains recognized applies, hoping you could help?

[Broag]

Hey mczarnecka-

I haven't studied for REG in awhile so my answers to your questions might be wrong. I don't have my book handy either. These are the notes that I studied from for my exam. I have much more pertaining to S corps, partnerships, estates, and trusts that could help if you'd like.

To calculate the gain recognized by the shareholder:
– In order to calculate the gain, you first must determine the distribution amount. To the extent that a distribution is made from the corporation’s earnings and profits, it is taxed to the shareholder as a dividend.[1] The portion of the distribution that is not considered a dividend is applied first to reduce the shareholder’s basis in the corporation’s stock.[2] Any remaining portion is treated as gain from the sale or exchange of property (capital gain). Like my notes say, if the shareholder doesn't have any basis left and the dividend exceeds basis, then the rest is considered 1231 Long-Term capital gain. My memory is extremely foggy. If someone has a better explanation please correct me.

I tried googling C Corp basis and I couldn't find anything worth noting. I just can't remember at the moment haha. I hope this helped at least a little.

Btw, sweet bike in the bg.

REG - 79
FAR - ?
AUD - ?
BEC - ?

[Anonymous]

@mczarnecka,

Most problem will have some kind of Boot related (Cash received and/or Liability relieved).

1. Determined if the transaction is Taxable or Non-taxable (80% ownership/controlled), I got sims on both cases on my practice exam.

Here is a Sample that hopefully will help:
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.

Jones, Mitchell, Carey, and Gorman will own/control 100% (Non-Taxable recognition)

Problem # 1:

Jones contributed Property: FMV = 120k, LIABILITY(MORTGAGE) 60k, BASIS = 100K

Jone Received:
25% shareholder with a total stock equity of $50,000 each, CASH = 10K

Question: What is Jone's REALIZED, RECOGNIZED, and TAX BASIS

This is my cheat sheet:

1. ALWAYS CALCULATE BOOT FIRST = CASH RECEIVED + LIABILITY RELIEVED
IN THIS PROBLEM = 10 + 60 = 70k

2. JONE'S REALIZED GAIN = STK (FMV RECEIVED) + BOOT – BASIS
IN THIS PROBLEM = 50 + 70 – 100 = 20k (REALIZED)

3. JONE'S RECOGNIZED GAIN = LESSER OF CASH RECEIVED OR REALIZED
IN THIS PROBLEM = 10 VS 20, THEREFORE 10K is RECOGNIZED

NOTE: If LIABILITY > BASIS = GAIN RECOGNIZED as well

4. JONE'S BASIS (USE BASIS ONLY) = BASIS + RECOGNIZED GAIN – BOOT
IN THIS PROBLEM = 100 + 10 – 70 = 40k

5. CORP'S BASIS (USE BASIS ONLY) = PROPERTY BASIS RECEIVED + SHAREHOLDER RECOGNIZED GAIN
IN THIS PROBLEM = 100 + 10 = 110k

Problem # 2:

Carey contributed Property: FMV = 40k, LIABILITY(MORTGAGE) 20k, BASIS = 20K
contributed Cash = 30K

Carey Received:
25% shareholder with a total stock equity of $50,000 each, CASH = 0

Question: What is Carey's REALIZED, RECOGNIZED, and TAX BASIS

This is my cheat sheet:

1. ALWAYS CALCULATE BOOT FIRST = CASH RECEIVED + LIABILITY RELIEVED
IN THIS PROBLEM = 0 + 20 = 20k

2. CAREY'S REALIZED GAIN = STK (FMV RECEIVED) + BOOT – BASIS (20 +30)
IN THIS PROBLEM = 50 + 20 – 50 = 20k (REALIZED)

3. CAREY'S RECOGNIZED GAIN = LESSER OF CASH RECEIVED OR REALIZED
IN THIS PROBLEM = 0 VS 20, THEREFORE 00 is RECOGNIZED

NOTE: If LIABILITY > BASIS = GAIN RECOGNIZED as well

4. CAREY'S BASIS (USE BASIS ONLY) = BASIS + RECOGNIZED GAIN – BOOT
IN THIS PROBLEM = 50 + 0 – 20 = 30k

5. CORP'S BASIS (USE BASIS ONLY) = PROPERTY BASIS RECEIVED + SHAREHOLDER RECOGNIZED GAIN
IN THIS PROBLEM = 20 + 0 = 20k

I remembered the formula by writing it down multiple times and doing the problem multiple times.

Hope this will help.

Good luck.

Dlu

[mczarnecka]

@DLu – thank you, this definitely helped a ton! What happens to the formulas in a taxable event? How do they change?

[mczarnecka]

@Broag, thank you for the additional info!

[Anonymous]

@mczarnecka – If the Shareholder does NOT control 80%, then it is a TAXABLE event. Therefore, REALIZED becomes RECOGNIZED.

Here is an example problem:

On September 30, 2015, Kim received from Gimmick 250 shares of Gimmick treasury stock and $25,000 in cash in exchange for an office building. The stock has a $100-per-share par value and had a FMV of $350,000 on September 30, 2015. The FMV of the office building was $500,000, and Kim's adjusted basis in it was $275,000. The building was subject to a $125,000 mortgage, and there was $25,000 of Sec. 1250 recapture inherent in the property. The exchange was for a valid business purpose and not to avoid taxes. Kim had acquired the property on October 31, 2003.

Kim does not have 80% after the exchange, therefore it is TAXABLE event.

Give up BLDG:
AB = 275K, Liability = 125K, FMV = 500K

Received:
STK = 350K, Cash = 25K

What is Kim's REALIZED, RECOGNIZED, and TAX basis?

1. Calculate boot: Cash Received + Liability Relieved
25 + 125 = 150K

2. Realized: FMV received + BOOT – BASIS
350 + 150 – 275 = 225k (REALIZED)

3. Recognized: Since a nonrecognition provision does not apply, all of the realized gain is recognized.
RECOGNIZED = REALIZED (225k)

4. Basis (USE BASIS ONLY) = BASIS + RECOGNIZED GAIN – BOOT (I memorized this to heart, so I prefer this way)
275 + 225 – 150 = 350k

Note – this is the book version: Kim’s basis in her stock is its cost, or $350,000 ($500,000 FMV of property given – $25,000 attributable to cash – $125,000 liability on the property given).

5. Corp's Basis (USE BASIS ONLY) = PROPERTY BASIS RECEIVED + SHAREHOLDER RECOGNIZED GAIN
275 + 225 = 500k

Note – this is the book version: A corporation that acquires property by exchanging its stock in a transaction that is taxable to the transferor of the property uses the property’s acquisition cost, i.e., its FMV, as its basis for the property. FMV = 500

I deviated from the book, but so far my answers have been the same. So, I am sticking with what I have engrained into my head. LoL

Hope this help. FYI, I did like 10 of these problems before it finally sunk in. I actually did the same problem multiple times so that I can rewrite the formula (1 – 5) inside out, and now it is sink it to core. LoL.

Dlu

[Claudia408]

DLu – for the corporations basis… if there was 80% control, would their basis be:

basis of property received + SH gain + cash paid?

BEC 65, 71, 75
AUD 62, 70, 78
REG 67, 66, 65, 66, 64
FAR 68, 64, 73

BEC - 75 (3x)
AUD - 78 (3x)
REG - 67, 66, Aug 1
FAR - 54, Sept 8

[Claudia408]

also for #3 recognized gain…. should this be lower of boot received or realized gain? so this would be the $150k?

BEC 65, 71, 75
AUD 62, 70, 78
REG 67, 66, 65, 66, 64
FAR 68, 64, 73

BEC - 75 (3x)
AUD - 78 (3x)
REG - 67, 66, Aug 1
FAR - 54, Sept 8

[Anonymous]

Claudia408 – For 80% control – it becomes Non-taxable even.

So, if you look at the example above (2 days ago), the calculations for Non-taxable are shown.

Dlu

[Claudia408]

Dlu – thanks. so the control affects these calculations. OMG!!

another question… for Jones in the first problem's recognized gain… you said it's the lower of cash or realized gain. i get the same 20 for realized gain, but why only cash of 10… what about the liability? is it bc the liability is not higher than basis?

BEC 65, 71, 75
AUD 62, 70, 78
REG 67, 66, 65, 66, 64
FAR 68, 64, 73

BEC - 75 (3x)
AUD - 78 (3x)
REG - 67, 66, Aug 1
FAR - 54, Sept 8

[Tncincy]

This post was a really good basis tutorial, it clearly separates the what is received, whether boot, liability or property, what is recognized or realized.and how to handle the questions asked. Thanks you guys for sharing……by George I think I got it.

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

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

[Author]

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