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Adam, Beth, Clayton and David are forming a bakery business, called ABCD Corp, and decided to...

Adam, Beth, Clayton and David are forming a bakery business, called ABCD Corp, and decided to organize as a corporation. Adam Beth and Clayton will each own 300 shares of the common stock and David will own 100 shares of the stock (there are 1000 shares total of the corporation). Adam is contributing cash of $200,000, Beth is contributing equipment from a prior business that was originally purchased for $300,000 and was depreciated for tax purposes by $120,000 (current FMV is $200,000). Clayton is contributing a store front that he purchased two years ago for $250,000, but is currently worth only $200,000. David is contributing his time and will work full time for the business as the manager for the first year to train all the staff and get the business running on its own (David’s services would cost $67,000).

D. What would be the result if Beth’s property were worth $250,000 and so the Corporation gave her $50,000 cash in addition to her stock?

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IF BETH'S PROPERTY WERE WORTH $250000 AND SO THE CORPORATION GAVE HER $50000 CASH IN ADDITION TO HER STOCK THEN THE CORPORATION USES THE HIGHER ADJUSTED BASIS FOR THE PROPERTY IT RECEIVES. YOU MUST BE AWARE OF TWO INTERNAL REVENUE CODE (IRC) SECTIONS.

1) Section 362(e)(2)(A)

2) Section 362(e)(2)(C)

These two IRC sections apply to a situation where the fair market value of property being transferred to a corporation is lower than the property's adjusted basis at the time of the transfer.

Applying the rules of Section 362(e)(2)(A):

  • You use the higher adjusted basis as your stock basis.
  • The corporation uses the lower fair market value for the property it receives.

The result under option 1:

  • Your stock basis would be $250000
  • The corporation's basis for the property it receives would be $200000

Applying the rules of Section 362(e)(2)(C):

  • You use the lower fair market value for the stock you receive.
  • The corporation uses the higher adjusted basis for the property it receives.

The result under option 2:

  • Your stock basis would be $200000
  • The corporation's basis for the property it receives would be $250000

ekkarill92 answered 1 year ago
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