Question

Noah and Olivia form the Gray Corporation with the following investment.

	FMV
Noah—
Cash	$180,000
Olivia—
Property (basis of $140,000)	200,000

Each received 1,000 shares of Gray stock, but Olivia also receives cash of $20,000. Assume that each share of the Gray stock is worth $180.

a. Olivia's recognized gain is
b. Olivia's basis in her Gray stock is
c. Gray's basis in the property received is

Answer 1

a. Property basis is $140,000 which is the cost of property

Olivia receives 1000 shares at 180 each plus 20000 cash

Total amount received by her = (1000 x 180) + 20000 = $200000

Recognized gain of olivia = 200000 - 140000 = $60,000

(As olivia does not meet any expense out of 60000, the entire amount of gain is treated as recognized gain)

b. Olivia receives 1000 shares from Gray's stock at $180 per share

Her basis in Gray stock is 1000 x 180 = $180,000 which the purchase price at the time she received 1000 shares.

c. Gray's basis in property received is $140,000

FMV is $200000 which is greater than the donor's (olivia) basis

So Gray's basis of the property is the adjusted basis of the donor when gray received the property.

As there is no adjustments, the entire donor basis of property is taken as Gray's basis in property