Question

Nancy Pelosi formed a new corporation which she owns 100% on January 1, 2017, Losing Is My New Role, Inc. She contributed an e-mail server to the corporation. The e-mail server had a basis of $90,000. The e-mail server had a debt on it of $150,000 which was contributed along with the server. The e-mail server had a fair market value of $190,000 based upon its value as a collectible as Nancy Pelosi was not the original owner. Pelosi owned 100% of the stock. What is Pelosi's gain or loss resulting from the contribution, if any? What is Pelosi's basis in the corporation? What is corporation's basis in the equipment?

Answer 1

Generally, there is no gain or loss on the transfer of property to a corporation that, after the transfer, is controlled by the transferor. Controlled by transferor means ownership of 80 per cent or more of the voting stock and 80 per cent or more of every class of nonvoting stock.

Liabilities in excess of basis will trigger recognition to the extent that the liabilities exceed the aggregate basis of all properties transferred. This rule is designed to prevent a negative basis in the stock received in the exchange.

In the above case, Nancy Pelosi formed a new corporation which she owns 100% and contributed an email server with basis $ 90000. Debt on e-mail server is of $150,000

1) Gain on transfer = $ 150000 -$ 90000

= $ 60000

2)  Pelosi's basis in the corporation

If a Corporation accepts debt related to an asset then such debt is reduced from the basis of the transferor any excess is treated as gain.

= $ 90000 - $150000 = $60000 (gain) and transferor(Pelosi's Basis) basis will be 0

3)

Ordinarily, the basis of property transferred to the corporation is a carryover basis equal to the transferor’s basis in the property and increased for any gain recognized by the shareholder on the exchange.

Transfror basis = 90000

Gain recognised = 60000

Corporation basis in equipment = $150000