Question

Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Inc. (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa's tax basis in her Cook, Inc. stock after formation?

Answer 1

Vanessa's tax basis in Cook, Inc. stock after the contribution of cash and land would be the sum of the cash and adjusted basis of the land, minus the debt the corporation assumes, resulting in an initial basis of $30,000 in the stock.

Step-by-step explanation:

The question is about calculating the tax basis in Vanessa's Cook, Inc. stock after she has contributed both cash and land to the corporation. When Vanessa contributes property to an S corporation at formation, her initial basis in the S corporation stock is the sum of the cash contributed plus her adjusted basis in the land contributed, minus any debt that the corporation assumes, which in this case is the mortgage on the land.

Hence, Vanessa's initial stock basis calculation would be:

• Cash contribution: $20,000
• + Adjusted basis of land contributed: $40,000
• - Mortgage assumed by Cook, Inc.: ($30,000)
• = Initial tax basis in Cook, Inc. stock: $30,000