A transfers machines valued at $170,000 (basis = $150,000)along with $30,000 cash to AB Corporation and B transfers real property valued at $320,000 (basis = $310,000)to the corporation.A receives 40 percent of the outstanding stock and B receives 60 percent.B also receives $20,000 from the corporation.What is AB Corporation's basis for the real property?
A)$300,000
B) $310,000
C)$320,000
D)$330,000
E)None of the above

Question

Quizplus · Accepted Answer

The basis for the real property transferred by B is $310,000. However, since B received $20,000 cash from the corporation, the total consideration received by B is $340,000. A received only 40% of the outstanding stock, so the total value of the corporation is $850,000 ($170,000 divided by 0.4). Therefore, B's share of the corporation is worth $510,000 ($850,000 minus $340,000). B's basis in the corporation is $510,000 times 0.6 (since B received 60% of the outstanding stock) which equals $306,000. Adding B's basis in the real property ($310,000) to B's basis in the corporation ($306,000) gives a total basis of $616,000. Since the total consideration paid by the corporation for the property and machines transferred is $500,000 ($320,000 for the property plus $170,000 for the machines), the corporation's total basis is $500,000. Therefore, AB Corporation's basis for the real property is $320,000.

A Transfers Machines Valued at $170,000 (Basis = $150,000)along with $30,000