Final answer:
Adam's basis in the corporation stock is calculated by starting with the basis of the land ($120,000), subtracting the mortgage liability assumed by the corporation ($50,000), and adding the cash received ($30,000), resulting in a basis of $100,000 in the stock.
Step-by-step explanation:
Adam's basis in the corporation stock involves calculating his initial investment and adjusting for the mortgage liability and the cash received. The basis of the land transferred is $120,000. Seeing as the land is subject to a $50,000 mortgage, which the corporation will now assume, Adam's basis would decrease by that amount. However, after including the $30,000 cash received, the basis would then increase by this cash amount. The net effect on Adam's basis in the stock would be a deduction of $20,000 ($50,000 - $30,000).
The formula for Adam's basis in the stock can be explained as:
- Beginning basis (cost of land): $120,000
- Less mortgage assumed by corporation: -$50,000
- Add cash received: +$30,000
Therefore, Adam's basis in the corporation stock would be the adjusted basis of the land:
$120,000 (initial basis) - $50,000 (mortgage liability) + $30,000 (cash received) = $100,000 (basis in stock).