Question

Gearty and Olinto organized The Worthington Corp., which issued voting common stock with a fair market value of $240,000. They each transferred property in exchange for stock as follows:

Property Adjusted Fair Market Percentage of The Worthington
Basis Value Corp. Stock Acquired
Gearty Building $80,000 $164,000 60%
Olinto Land 10,000 96,000 40%
The building was subject to a $20,000 mortgage that was assumed by The Worthington Corp. What was The Worthington Corp.'s basis in the building?

Answer 1

$80,000.

Step-by-step explanation:

From the given question:

Gearty and Olinto organized The Worthington Corp., which issued voting common stock with a fair market value of $240,000.

They each transferred property in exchange for stock as follows:

Property Adjusted Fair Market Percentage of The

Basis Value Worthington Corp.

Stock Acquired

Gearty Building $80,000 $164,000 60%

Olinto Land 10,000 96,000 40%

The building was subject to a $20,000 mortgage that was assumed by The Worthington Corp.

What was The Worthington Corp.'s basis in the building?

From the above given information;

Gearty and Olinto usually issued voting common stock which will be later exchange for property.

Now;

Under section 351 ; the issuance of common stock in exchange for property that is less than 80% of all the contributors is a taxable transaction.

Thus; as Gearty and Olinto who organized The Worthington Corp. altogether have more than 80% control (i.e 100%), this is a non taxable transaction and the basis of the corporation is the carryover basis.

Therefore;

Worthington Corp.'s basis in the building = Carryover basis = $80,000.