Question

An individual contributes property and cash of $15000 to a corporation in a 351 exchange. The individual is the sole shareholder. The property has a basis of $15000, and a fair market value of $50000. The corporation then elects to be taxed as an S-corporation. At the end of the S-corporation's first year, it has non-separately stated income of $50000. What is the shareholder's basis in the s-corporation after year 1?

A.30,000 B.80,000 C.50,000 D. 0

Answer 1

Issuance of stock in exchange for property is a non taxable transaction under section 351 only if all the contributors of cash + propertry have 80% or more control.

Shareholder's basis for stock = Carryover basis - Mortgage debt (if any)

As the indivial is the sole shareholder, the individual has 100% control

Individual basis = Cash + Basis of the property

= 15,000 + 15,000

= 30,000

Shareholder's basis in the S-Corporation = Initial basis +/- % income/loss +/- % seperately stated items + % tax-exempt income - % non deductible income - Distributions received

= 30,000

The answer is A.