Question

Michael contributes cash and property to a corporation in exchange for its stock which results in a deferred gain. Michael's basis in the stock will be _______ by the deferred gain.

Answer 1

Michael's basis in the stock of a corporation, to which he contributes cash and property resulting in a deferred gain, is reduced by the amount of the deferred gain. This calculation ensures the deferral of gain is accounted for in the basis of the new stock.

Step-by-step explanation:

When Michael contributes cash and property to a corporation in exchange for its stock and this transaction results in a deferred gain, the tax basis of Michael's stock in the corporation will be adjusted.

Specifically, Michael's basis in the stock will generally be equal to the fair market value of the contributed cash and property at the time of the contribution reduced by the amount of any deferred gain. In other words, Michael's basis is decreased by the amount of the deferred gain.

For example, if Michael contributes property worth $100,000 with a tax basis of $60,000, and he does not recognize any gain on the contribution (thus deferring a gain of $40,000), his basis in the new corporate stock will be the fair market value of the contributed property ($100,000) minus the deferred gain ($40,000), resulting in a stock basis of $60,000.