Individuals Allen and Betty form an S corporation, with Allen contributing cash
ID: 2361649 • Letter: I
Question
Individuals Allen and Betty form an S corporation, with Allen contributing cash of $100,000 for a 50% interest and Betty contributing appreciated ordinary income property with an adjusted basis of $20,000 and a fair market value of $100,000. (I) Determine Betty's initial basis in her stock, assuming that she receives a 50% interest. (II) The S corporation sells the property for $120,000. Determine Allen and Betty's stock basis after the sale. (III) Determine Allen and Betty's gain or loss if the company is liquidated.Explanation / Answer
a.
initial basis in her stock is $20,000, pursuant to §§ 1371 and 358.
b.
Allen and Betty in their stock after the sale of the property contributed by Betty is determined as follows.
allen
Betty
Initial basis (§ 358)
$100,000
$20,000
Gain on sale (§§ 1363 and 1366)
50,000
50,000
Adjusted basis
$150,000
$70,000
c.
If the sale described in b. took place, Adam’s and Bonnie’s gain (loss) recognized upon the liquidation of the company is determined as follows.
allen
Betty
FMV of property distributed (§ 331)
$110,000
$110,000
Less: Adjusted basis
(150,000)
(70,000)
Gain/(loss) recognized
($ 40,000)
$ 40,000
a.
initial basis in her stock is $20,000, pursuant to §§ 1371 and 358.