ExpertMedium1 markMultiple Choice
CPA · Question 24 · Area II: Entity Tax Compliance
Shareholder A contributes property (Basis $20,000, FMV $50,000) to a C Corporation in exchange for 100% of the stock and $5,000 cash. What is Shareholder A's recognized gain and basis in the stock?
Shareholder A contributes property (Basis $20,000, FMV $50,000) to a C Corporation in exchange for 100% of the stock and $5,000 cash. What is Shareholder A's recognized gain and basis in the stock?
Answer options:
A.
Gain $0; Basis $20,000
B.
Gain $5,000; Basis $20,000
C.
Gain $5,000; Basis $25,000
D.
Gain $30,000; Basis $50,000
How to approach this question
1. Realized Gain = $50k - $20k = $30k. 2. Recognized Gain = Lesser of Realized ($30k) or Boot ($5k) = $5k. 3. Stock Basis = Old Basis ($20k) + Recognized Gain ($5k) - Boot Received ($5k) = $20k.
Full Answer
B.Gain $5,000; Basis $20,000✓ Correct
IRC §351(b) and §358. Gain is recognized to the extent of boot received ($5,000). Basis in stock = Basis of property transferred ($20,000) + Gain recognized ($5,000) - Money received ($5,000) = $20,000.
Common mistakes
Forgetting to subtract the cash received from the basis calculation.
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