Basis

Question 1

Under a section 351 property transfer, when is a gain generally recognized?

Answer 1

Gain is recognized when boot is received or when a mortgage in excess of basis is assumed by the corporation. Loss is not recognized.

Question 2

Under a section 351 property transfer, how is the shareholder’s basis determined?

Answer 2

The basis of the shareholder’s stock is equal to the basis of the property contributed.

Question 3

Under a section 351 property transfer, how is the corporation’s basis in property received determined?

Answer 3

The basis of the property to the corporation is equal to the contributing shareholder’s basis.

Question 4

Under section 351 property transfers, what are the holding periods?

Answer 4

Holding periods tack on to properties and stock.

Question 5

How are shareholder’s who contribute services handled in a section 351 property transfer?

Answer 5

Shareholders contributing services will always be taxed on the value of the services as compensation, and the shares are generally not counted in applying the 80% test.

Question 6

How is a property transfer handled if the conditions for a section 351 property transfer are not met?

Answer 6

If the 80% control test is not met, the exchange will be fully taxable, comparing the FMV of the stock received with the adjusted basis of the property contributed to the organization.

Question 7

What is considered boot under a section 351 transfer?

Answer 7

Boot refers to any nonstock property received, including cash, debt (such as bonds), other property, and certain preferred stock. A corporation’s assumption of a shareholder’s liabilities is generally not treated as boot received by the shareholder and does not cause the recognition of gain on property transferred.

Question 8

How are the gain and loss configured when boot is received under a section 351 property transfer?

Answer 8

Loss is never recognized. Gain is recognized to the extent of the lesser of the boot received or the realized accounting gain.

Question 9

Under a section 351 property transfer how are assumed liabilities treated?

Answer 9

Liabilities assumed by the corporation are not treated as boot received for purposes of determining gain on the transfer. Liabilities are, however, treated as boot received for determining shareholder basis of the stock received.

Question 10

When is gain recognized on a liability assumed by the corporation in a section 351 property transfer?

Answer 10

If the liabilities assumed exceed the tax basis of the property, such excess must be recognized as taxable gain, as this prevents a negative basis in the stock received.

Question 11

What is the formula for basis of stock received by the shareholders under a section 351 transfer?

Answer 11

Adjusted basis of property transferred to corporation
Plus: Gain recognized (for tax purposes) on the transfer
Less: Boot received (including liabilities assumed by corp)

Question 12

What is the formula for basis of property received by the corporation under a section 351 transfer?

Answer 12

Adjusted basis of property to transferring shareholder

Plus: Gain recognized (for tax purposes) by shareholder

Question 13

What are the loss rules between related parties?

Answer 13

Losses between related parties is disallowed under section 267.

Question 14

How does loss affect future gains under section 267?

Answer 14

A related party can reduce a gain recognized on a future sale by any loss previously disallowed on the related party sale. The offset is only against any realized gain and cannot be used to create or increase a loss on resale.
Disallowed Loss: $20,000 disallowed loss.
Gain: $13,000
Only $13,000 of the disallowed loss can be used

Question 15

Does section 267 affect basis for gain and depreciation and holding period?

Answer 15

The basis for determining gain/depreciation is not affected by this rule and the holding period of the related parties does not “tack on” for purposes of determining long-term and short-term status.

Question 16

Explain deferred gain or loss on partnership formation.

Answer 16

The formation of a partnership does not trigger income, but requires that both the partners and the partnership calculate adjusted basis. Generally, partners and partnerships recognized no gain or loss on contributions in exchange for a partnership interest.

Question 17

How are services contributed for a partnership interest handled?

Answer 17

Services contributed for a partnership interest create income in amount of the partnership interest. The individual reports taxable income equal to the FMV of the partnership interest received.
Ex:: Partnership net assets basis $70,000, FMV $100,000
Individual receives 10% interest for services contributed
Recognize $10,000 ordinary income

Question 18

How is basis of partnership interest calculated?

Answer 18

Adjusted basis of property contributed
Less: Debt assumed by the partnership
Plus: Proportionate share of debt assumed
Equals: Ending basis
If negative, gain must be recognized to the extent of bringing the ending basis to 0, since basis cannot be negative.

Question 19

What is inside basis?

Answer 19

The aggregate basis of assets in the partnership. A partnership takes a carryover basis (the adjusted basis of the property in the hands of the partners) for contributed property.

Question 20

What is outside basis?

Answer 20

The adjusted basis of each partners’ interest in the partnership.

Question 21

How is a partner’s basis interest increased?

Answer 21

Additional contributions
Additional interest purchased or inherited
Partner’s share of partnership income (including tax-exempt income)
Any increase in the partner’s share of partnership liabilities

Question 22

How is a partner’s basis interest decreased?

Answer 22

Cash and the partnership’s adjusted basis of property received by the partner in a non liquidating distribution
Adjusted basis allocable to any part of the partner’s interest sold or transferred
Partner’s share of partnership’s losses
Decrease in the partner’s share of partnership liabilities

Question 23

How do partnership debt decreases affect partner basis?

Answer 23

Partnership debt decreases also decrease partnership interest by the proportionate amount.

Question 24

How is debt assumption treated in partnership contribution?

Answer 24

If the contributed property is subject to any liabilities, the partner’s basis is reduced by the amount of liabilities assumed by the other partners.

Question 25

How is partnership basis determined?

Answer 25

The partnership’s basis in the assets received from the contributing partners is the basis in the hands of the partner. Liabilities assumed do not factor into partnership basis in the asset.

Question 26

Do guaranteed payments reduce a partner’s basis?

Answer 26

No, a guaranteed payment is not a flow-through item. It is a payment for services rendered and would be used in the computation for ordinary income or loss, not basis.

Question 27

How do non liquidating distributions affect basis?

Answer 27

Non liquidating distributions are a return of capital that reduces outside basis (in a specific order).

Question 28

What are the ordering rules for adjusting basis for both S corporation shareholders and partners in a partnership?

Answer 28

First, contributions to capital increase basis.
Second, share of income (including exempt income)
Third, distributions decrease basis
Fourth, share of loss (including nondeductible expenses) decrease basis

Question 29

How is basis determined in a lump sum purchase?

Answer 29

When several properties are purchased for a lump sum, the total cost must be allocated among the properties according to the relative FMVs of the properties.

Question 30

How is basis determined in a nontaxable stock dividend (stock dividend, stock split)?

Answer 30

The basis of the shareholder’s original stock is allocated between the dividend stock and the original stock in proportion to their relative FMVs.

Question 31

How is the basis of property determined in a taxable exchange or bargain purchase?

Answer 31

The property’s FMV at the date of exchange or purchase.

Question 32

How is basis determined for property acquired by gift?

Answer 32

Must be separated into gain basis and loss basis. The gain basis is the adjusted basis of the donor plus gift tax attributable to appreciation. Basis for loss is the lesser of the gain basis or the FMV at the date of the gift.

Question 33

How is the basis determined for property acquired from a decedent?

Answer 33

FMV at date of death or the alternative valuation date six months later. If the alternative date is chosen and property is distributed prior to the date, then the basis is the FMV at the distribution date.

Question 34

How is the basis of property determined that is converted to business use?

Answer 34

The basis for gain is the adjusted basis at the date of conversion. The basis for loss and depreciation is equal to the lesser of the gain basis or FMV at the date of conversion.

Question 35

How is basis determined for property in a sale or exchange with a related taxpayer?

Answer 35

No loss is recognized and the transferor’s disallowed loss has no effect on the basis of property to the transferee. On later disposition, gain is recognized only to the extent that it exceeds the transferor’s disallowed loss allocated to the property.

Question 36

What is a like kind exchange? How is the basis of like-kind property received determined?

Answer 36

Like kind exchanges occur if property held for business use or for investment is exchanged solely for property of a like kind to be similarly held. 
Basis of like kind property received is:
Adjusted basis of like-kind property given:
\+ Gain recognized
- Boot received (FMV)
or
FMV of like-kind property received:
- Deferred gain
\+ Deferred loss

Question 37

In a like-kind exchange, how is boot received handled?

Answer 37

If boot is received, a realized gain is recognized to the extent of lesser of (1) the realized gain or (2) boot received.

Question 38

How are liabilities treated in a like-kind exchange?

Answer 38

Liabilities assumed or to which the property exchanged is subject (or either or both sides of the exchange) are treated as boot.
Boot received - if the liability was assumed by the other party
Boot given - if the taxpayer assumes a liability on the property acquired
The realized gain is recognized to the extent of the “boot” received (in the form of cash for payment of mortgage)

Question 39

How is basis determined for involuntarily converted property?

Answer 39

If property is involuntarily converted directly into other property similar or related in service or use, no gain or loss is recognized, and the basis of the new property is the same as the adjusted basis of the old.

Question 40

When is gain recognized on involuntary conversion? How is the basis determined for involuntarily converted property where a gain is recognized?

Answer 40

Gain is recognized only to the extent of the amount realized on conversion exceeds the cost of the replacement property. The basis of replacement property is the cost of the replacement less any gain not recognized.