What is Elaine’s basis in her Forest Corporation stock? Elaine, James, and Jeremy form Forest Corporation by transferring the following items to thecorporation:Items transferredBasisFair Market ValueNumber of SharesIssuedFrom Elaine:CashEquipment$60,00030,000$60,000340,000200 sharesFrom James:LandMortgage100,000140,000200 shares540,000140,000From Jeremy:Office equipment50,000260,000*100 sharesBesides the receiving 100 shares of stock, Jeremy also received $60,000 of cash. ForestCorporation assumed the mortgage transferred by James.

ANSWER General Rule under sec 351(a) : No gain or lossshall be recognized if the property is transferred to corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation. Exception under sec 351(b): If the contributor receives other property or money in addition to the stock then : 1. The receipient must recognize gain not in excess of (a.) the amount of money received(including debt transferred in excess of basis) plus (b.) the fair market value of such other property (boot) received. 2. No loss on transfer can be recognized. 3. Debt is only considered "boot" when it is in excess of basis. 4. Qualifying transfers apply only to Shareholders contributing money and property but not services. 5. The "solely in exchange" requirement applies only if the contributors are in control of at least 80% of corporation stock immediately after the corporation. Realized gain = FMV of assets received less adjusted basis. Basis to corporation in the assets is a substantiated basis i.e., equal to transferring shareholder's basis in the asset. In the given case, Elaine,James and Jeremy transferred cash or assets equal to 100% of stock, so sec 351 control is statisfied. Elaine basis in corporation stock is $ 340,000 (realized gain $310,000 + $30,000 Equipment basis). Corporation basis in the asset is the carryover basis from Elaine i.e., $30,000.

Business

Accounting

Elaine, James, and Jeremy form Forest Corporation by transferring the following items to the corporation: Items transferred Basis Fair Market Value Number of Shares Issued From Elaine: $60,000 30,000 $60,000 340,000 Cash 200 shares Equipment From James: Land 540,000 140,000 200 shares 100,000 140,000 Mortgage From Jeremy: Office equipment 50,000 260,000* 100 shares Besides the receiving 100 shares of stock, Jeremy also received $60,000 of cash. Forest Corporation assumed the mortgage transferred by James.

Elaine, James, and Jeremy form Forest Corporation by transferring the following items to the corporation: Items transferred Basis Fair Market Value Number of Shares Issued From Elaine: $60,000 30,000 $60,000 340,000 Cash 200 shares Equipment From James: Land 540,000 140,000 200 shares 100,000 140,000 Mortgage From Jeremy: Office equipment 50,000 260,000* 100 shares Besides the receiving 100 shares of stock, Jeremy also received $60,000 of cash. Forest Corporation assumed the mortgage transferred by James.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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