[hamza]

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.( Wiley online test bank Reg Sim -0006)

In all cases, the liabilities are recourse and are assumed by Arrington Enterprises, Inc. There are no tax avoidance purposes inherent in the assumption of shareholder liabilities.”

Jones contributed non cash property with a estimated FMV of 120,000.

Liability associated with property of 60,000.

Cash distributed to Jones 10,000.

WHAT IS JONES TAX BASIS IN THE SHARES OF THE CORPORATION ? ( Wiley online test bank Reg Sim -0006)

If 4 people form a new corporation. And each of them provide property and services for 25 % ownership. Since each of the 4 individuals contributed property I am assuming section 351 rules apply ? Since in aggregate they own more than 80 %. ? Am I right ?

According to me Jones basis should be :

Adjusted value of property – reduction of liability (which was assumed by the corporation) – boot received.

So that amount is 100,000 – 60,000 – 10,000. = 30,000.

The wiley test bank explanation is confusing for me. The 10,000 dollars that Jones received from the Corporation , I subtracted it. Because my understanding is that boot received decreases shareholder basis. But should that 10,000 $ received from the corporation also cause a recognition of gain ??

So them the amount would be 100,000 – 60000 – 10000 + 10,000. = 40,000. This is the answer in the wiley online test bank.

SO what I understand is that under section 351, receipt of boot will decrease shareholder’s basis. But receipt of boot will also cause a gain for the shareholder. And does that receipt of boot have to be cash to cause a gain ?

Is my thinking correct ? Please Help

FAR - 80 Feb 2012
BEC - 77 July / Aug 2012
Reg - 56 30th Nov 2012 . Re-take Jan 4th 2013 - 78
AUD - 73 October 2012, Re took it on Feb 1st 2013 - 76
------------------------------------------------------------------
DONE !

[Meadows30]

Did you post the basis of the property to Jones before he contributed it? I am confused where you get the $100k from.

Reg 11/26/2012 80
BEC 01/05/2012
Audit
FAR

[Meadows30]

Did you post the basis of the property to Jones before he contributed it? I am confused where you get the $100k from.

Reg 11/26/2012 80
BEC 01/05/2012
Audit
FAR

[hamza]

Oh Crap ! Thanks Meadows30, yes the basis of the property to Jones before he contributed it was $ 100k.

FAR - 80 Feb 2012
BEC - 77 July / Aug 2012
Reg - 56 30th Nov 2012 . Re-take Jan 4th 2013 - 78
AUD - 73 October 2012, Re took it on Feb 1st 2013 - 76
------------------------------------------------------------------
DONE !

[hamza]

Oh Crap ! Thanks Meadows30, yes the basis of the property to Jones before he contributed it was $ 100k.

FAR - 80 Feb 2012
BEC - 77 July / Aug 2012
Reg - 56 30th Nov 2012 . Re-take Jan 4th 2013 - 78
AUD - 73 October 2012, Re took it on Feb 1st 2013 - 76
------------------------------------------------------------------
DONE !

[Meadows30]

I am really bad at this topic, but I think what happens is that the basis to Jones would be $30k which was $100-60k-10k and then the basis to the corporation would be $100k-60k-10k+10k because Jones had a gain on the cash (boot) received of 10k. Boot is cash received by the shareholder and the shareholder always has gain on that. I could be wrong.

Reg 11/26/2012 80
BEC 01/05/2012
Audit
FAR

[Meadows30]

I am really bad at this topic, but I think what happens is that the basis to Jones would be $30k which was $100-60k-10k and then the basis to the corporation would be $100k-60k-10k+10k because Jones had a gain on the cash (boot) received of 10k. Boot is cash received by the shareholder and the shareholder always has gain on that. I could be wrong.

Reg 11/26/2012 80
BEC 01/05/2012
Audit
FAR

[Anonymous]

[Anonymous]

[Anonymous]

For this problem, I think that the basis is calculated as follows:

AB= $100,000 (as stated in problem)

Minus: Boot received $70,000 (as stated in problem: cash to Jones + liability transferred)

Plus: Recognized gain $10,000 (just the cash boot)

Stock basis= $40,000

The trick in this problem is to remember that a transferred liability is not included as boot for gain recognition purposes; however, it IS treated as boot received for calculation of stock basis.

[Anonymous]

For this problem, I think that the basis is calculated as follows:

AB= $100,000 (as stated in problem)

Minus: Boot received $70,000 (as stated in problem: cash to Jones + liability transferred)

Plus: Recognized gain $10,000 (just the cash boot)

Stock basis= $40,000

The trick in this problem is to remember that a transferred liability is not included as boot for gain recognition purposes; however, it IS treated as boot received for calculation of stock basis.

[jelly]

Just wanted to add to BuckytheCPA's post:

The $10k gain from boot is determined by the lesser of: FMV-AB [$120k-100k] or boot [$10k].

Couldn't pass again!

[jelly]

Just wanted to add to BuckytheCPA's post:

The $10k gain from boot is determined by the lesser of: FMV-AB [$120k-100k] or boot [$10k].

Couldn't pass again!

[Anonymous]

In the calculation of realized gain, do you need to include the FMV of boot received?

[Anonymous]

In the calculation of realized gain, do you need to include the FMV of boot received?

[JoeL]

First, Two conditions cause Recognition of Gain:

1) Less than 80% control–This not applied because it is 100% control

2) Boot received–This applied, So you Should Recognize Gain of less of realized gain or Boot received

Boot = Cash or Excess Liability Assumed

Once you recognized Gain, you should add that to your basis, similar to “in-kind” exchange

New Basis = Old Basis + Gain – Boot received – Liability Assumed

[Author]

Replies