Question

Pamela and Amanda form Pansy Corporation. Pamela transfers land (basis

of $40,000 and fair market value of $90,000) for 50 shares plus $10,000 cash. Amanda transfers $80,000 cash for 50 shares in Pansy Corporation.
a. Pamela's basis in the Pansy Corporation stock is $40,000.
b. Pansy Corporation's basis in the land is $40,000.
c. Pansy Corporation's basis in the land is $90,000.
d. Pamela recognizes a gain on the transfer of $50,000.

e. None of the above.

Answer 1

The option (a) Pamela's basis in the Pansy corporation stock is $40,000, is CORRECT.

FORMULA of calculating Shareholder's basis in the Company's Stock is as follows:

Stock basis = Basis of property sharehoder transferred to the corporation (A) - Fair market value of the boot and cash shareholder received in return (B) + Amount of gain recognised by the shareholder on transfer of the stock (C)

where, BOOT = any other property that shareholder receive in addition to the stock in company. And, in the given question, Pamela didn't received any boot. She just has received $ 10,000 in addition to the stock in company.

and, Amount of gain to the shareholder always come equal to the sum of cash and fair market value of the any other property that shareholder receives from company in addition to the stock.

As per the question:

(A) = Basis of property Pamela transferred to the corporation is : $ 40,000

(B) = Fair market value of the boot and cash that Pamela received in return is : $ 10,000

(C) = Amount of gain recognised by Pamela on transfer is : $ 10,000

THEREFORE, Pamela's Stock basis in the corporation stock will be : $40,000 - $10,000 + $10,000 = $40,000

• Option b and option c will be incorrect because the Pansy Corporation's basis in the land will come equal to $ 50,000 (As the company's basis in the stock is always equal to the sum of shareholders's basis in the stock i.e. 40,000 and the gain recognised to the shareholder i.e. 10,000 and there sum will come equal to $ 50,000)
• Option d will also be incorrect because the gain recognised by Pamela on the transfer is $ 10,000.