Question

harriet, herm, and ronde formed an s corporation called innovet. harriet and herm both contributed cash of $39,400 to get things started. ronde was a bit short on cash but had a parcel of land valued at $94,000 (basis of $78,800) that he decided to contribute. the land was encumbered by a $54,600 mortgage. what tax bases will each of the three have in his or her stock of innovet?

Answer 1

The stock tax bases in the S corporation Innovet for Harriet and Herm are $39,400 each due to their cash contributions. Ronde's stock basis is $24,200, which is his basis in the contributed land minus the assumed mortgage by the corporation.

Step-by-step explanation:

The tax bases for Harriet, Herm, and Ronde in their S corporation stock of Innovet are determined based on their individual contributions and the associated liabilities of those contributions. Harriet and Herm each contributed cash of $39,400 without any associated liabilities, so their stock basis in Innovet would be $39,400 each. Ronde contributed a parcel of land with a fair market value of $94,000 and a basis of $78,800; however, the land was encumbered by a $54,600 mortgage. In an S corporation, the basis of the property contributed is reduced by the amount of any debt that the corporation assumes. Therefore, Ronde's basis in his stock would be the basis of the land ($78,800) minus the debt transferred to the corporation ($54,600), resulting in a basis of $24,200 for Ronde's stock in Innovet.