Zeppo and Harpo are equal owners of the Marx Corporation. During the current year, they agree to admit Groucho as a shareholder. Groucho will contribute $25,000 in cash and property worth $50,000 (adjusted basis of $35,000) for 25% of Marx Corporation's stock. What is Groucho's basis in the Marx Corporation stock?

Question

Quizplus · Accepted Answer

Groucho's basis in the Marx Corporation stock is the sum of the cash contributed ($25,000) and the adjusted basis of the property contributed ($35,000), totaling $60,000. However, since Groucho is receiving 25% of the corporation's stock in exchange for these contributions, the value of the stock received is actually based on the fair market value of the contributions, which is $75,000 ($25,000 in cash + $50,000 in property value). Therefore, Groucho's basis in the Marx Corporation stock is $75,000.

Zeppo and Harpo Are Equal Owners of the Marx Corporation