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 Topic: Becker Simulation Question ( Topic Closed)
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akh89
Newbie
Joined: 10 Feb 2012
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Posts: 4
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| Posted: 10 Feb 2012 at 13:12 | IP Logged
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Hey everyone,
I had to sign up for CPAnet just because of this one question, I just am failing to see where the answer is coming from. The information that pertains to my question is as follows:
Mitchell contributes property and cash to form a corporation.
FMV of property contributed: $80,000
Liability associated with the property: $50,000
Mitchell's basis in property: $40,000
Cash contributed: $20,000
So I get that his realized gain is $40,000 ($80,000-$40,000) and his recognized gain is $10,000 (liability assumed by corp. exceeds basis by $10,000). What I don't get is the corporation's basis for the property received. I have calculated that the corporation's basis in the property would be $50,000. I am basing this off of R3 in Becker where it says the general rule is the corporation's basis is the greater of:
a) Adjusted basis of transeror (plus any gain recognized by transferor)
or
b) Debt assumed by the corporation.
Well for a) I get $50,000 ($40,000+$10,000) and for b) I get $50,000. That gets me to my answer of $50,000. The Becker simulation says the basis for the corporation is $40,000 since that was Mitchell's basis. What?
Any help would be greatly appreciated.
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CPA#1
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Joined: 01 Dec 2009
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| Posted: 10 Feb 2012 at 14:12 | IP Logged
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He also contributed cash of $20,000. The liability does not exceed the $60,000 (40k for property and 20k for cash). Thus, no gain is recognized. So, the basis of Mitchell's property is the basis that the Corporation will use.
__________________
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DONE!!!!!!!
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akh89
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Joined: 10 Feb 2012
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Posts: 4
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| Posted: 10 Feb 2012 at 14:30 | IP Logged
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Ah, that makes sense. I always thought that you would account for the cash and the property separately when assigning basis to the corporation. So, if I understand correctly, he would not recognize a gain at all? In order to recognize a gain, the liability would have to be greater than $60,000 ($40,000 NBV + $20,000 cash), correct? And if that were the case, I'm assuming the corporation's basis would be the value of that liability over $60,000.
I had never seen a problem like that before. I stared at it and my book for about 30 minutes trying to figure it out. Thank you so much for your help.
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CPA#1
Major Contributor
Joined: 01 Dec 2009
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Posts: 439
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| Posted: 10 Feb 2012 at 14:57 | IP Logged
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Yes, the corporation would have a basis of $40,000 for the property and $20,000 for the cash.
The liabilities assumed must exceed then TOTAL basis of the property contributed in order for a gain to recognize. Property is considered to be anything other than services. So, cash is included as "property."
__________________
FAR: 52,66,73,61,89
AUD: 47,87
BEC: 80
REG: 64,74,84
DONE!!!!!!!
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