Question

This year, John, Meg and Karen form Frost corporation. John contributes land purchased as an investment four years ago for $15,000 that has a $30,000 FMV in exchange for 30 shares of Frost stock. Meg contributes machinery (sec. 1231 property) purchased four years ago and used in her business having a $35,000 adjusted basis and a $30,000 FMV in exchange for 30 shares of Frost stock. Karen contributes services worth $20,000 in exchange for 20 shares of Frost stock. What is John's basis in his Frost shares? When does his holding period begin?

Answer 1

John's basis in the Frost shares is the same as what he originally paid for the land, which is $15,000, and his holding period for the shares begins when he initially bought the land, four years before forming the corporation.

Step-by-step explanation:

When John formed Frost Corporation and contributed land to it, his tax basis of the shares he received in exchange would typically be the same as the basis of the property he contributed. Since the land was purchased for $15,000, and there are no indications of adjustments to this basis, John's basis in the Frost shares would also be $15,000. The fair market value (FMV) of the land is not used to determine the basis for the contributor in this case.

Regarding his holding period for the stock, it will include the period he held the land since the property contributed (the land) is a capital asset. This means John's holding period for the shares begins from when he originally purchased the land, which was four years prior to the exchange.

It is important to note that if John had received some form of monetary compensation or relief of liability together with the shares, or if there were other specific circumstances, there could be additional considerations for determining the basis and the holding period. However, with the facts provided, we consider only the original cost of the land for basis and calculate the holding period from the date of land purchase.