Regulation Question for help!

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  • #1573946
    Harry
    Participant

    Question:
    In year 1, Michael purchases 100 shares of stock in Motor Co, by contributing the following:
    – Cash $50,000
    – Building with an adjusted basis to Michael of $120,000 and a mortgage of $150,000

    The following transactions occur during the next few years:
    – In year 2, Motor Co. makes a distribution to Michael of $10,000 in cash when current and accumulated E&P is fully depleted.
    – At the beginning of year 3, E&P was completely depleted. During year 3, Motor Co. makes a distribution of an asset with a basis of $2,000 and FMV of $2,500.
    – In year 4, Michael contributed property to the corporation with a basis of $5,000 and FMV of $6,000

    Solution:
    1. Michael’s initial basis in his Motor stock in year 1
    2. Michael’s stock basis at the end of year 2
    3. Michael’s stock basis at the end of year 3
    4. Michael’s stock basis at the end of year 4

    The correct answer for above solutions are 1) $50,000 2) $40,000 3) $38,000
    4) $43,000. I do understand how to get correct answers for 1, 2, 3 but do not understand why the answer for 4) is $43,000. It means the basis of the stock went up by $5,000 from $38,000, which is by adjusted basis of the property Michael contributed to the Corporation. What I believe is that the basis should go up by FMV ($6,000) because Michael recognized $1,000 gain due to not satisfying 80% control rule. Therefore, his basis should be calculated as below:
    Basis of C/S = adjusted basis + gain recognized = $5,000 + $1,000 = $6,000
    If this is the case, the correct answer for 4) should be $44,000.

    Does anybody have a different opinion about this question? If I am wrong, can anybody tell me why the answer is $43,000 please?

    Thank you so much

    Harry Kim
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