Question

Jocelyn contributes land with a basis of $60,000 and fair market value of $90,000 and inventory with a basis of $5,000 and fair market value of $8,000 in exchange for 100% of Zion Corporation stock. The land is subject to a $15,000 mortgage.
If an amount is zero, enter "0".
The exchange is tax-free under § 351 because the release of a liability not treated as boot under § 357(a). As a result, Jocelyn has income of $0 and a basis $ ____ in her stock.
Whats her basis?

Answer 1

Answer: $50,000

Explanation:

Based on the scenario in the question, Jocelyn's basis in the property contributed will be:

Land = $60,000

Inventory = $5,000

Total = $65,000

We are told that the exchange is tax-free, hence, Jocelyn has income of $0.

Therefore, Jocelyn’s basis in Zion’s Corporation stock will be her original basis in property contributed which is $65,000 plus the gain of $0 and then we deduct the liability that was assumed by the corporation which $15,000. This will now be:

= $65,000 + 0 - $15,000

=$50,000