CPA Regulation (REG) : Shareholder & Partnership Basis

Example Questions

Example Question #7 : Taxation Of Flow Through Entities

Strom acquired a 25% interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of$50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace? Possible Answers:$16,000

$32,000$26,000

$0 Correct answer:$0

Explanation:

Since Strom contributed property subject to a liability, where the value of the liability exceeded the property, Strom begins with a negative basis of $(8,000). Strom’s partnership basis is increased by the assumption of the 25% share of the liability (=$6,000), bringing Strom’s basis up to $(2,000). Since a negative basis is not possible, Strom would have to recognize a gain to bring the partnership basis up to zero. Example Question #1 : Taxation Of Flow Through Entities Lemon owned 2,000 shares of Spectrol Corp. common stock that were purchased in year 1 at$10.50 per share. In year 4, Lemon received a 5% non-taxable dividend of Spectrol common stock. In year 5, the stock split 2-for-1. In the current year Lemon sold 800 shares. What is Lemon's basis in the 800 shares of stock sold?

$16,800$4,000

$8,000$8,400

$4,000 Explanation: The original basis in the stock was$21,000 (2,000 shares at $10.50/share). The stock dividend of 5% increased the number of shares by 100 (2,000 * 5%), bringing the total shares to 2,100, while the basis remained the same ($21,000) and consequently the per share value decreased to $10/share. The stock split doubled the number of shares from 2,100 to 4,200, but the basis remained the same and the per share value was halved (from$10/share to $5/share). As a result, the 800 shares sold had a basis of$4,000 (800 shares * $5/share). Example Question #9 : Taxation Of Flow Through Entities Mark and Mary formed MM, Inc. as an S corporation. Each contributed$50,000 in exchange for five shares of corporate stock. In addition, MM obtained a $60,000 loan from a local bank that was still outstanding at the end of the year. In MM's first year of operation, it reported a loss of$20,000 and did not make any distributions to the shareholders. What is Mark's basis in his MM shares at the beginning of the second year?

$70,000$50,000

$100,000$40,000

$40,000 Explanation: Mark began with a basis of$50,000, which was decreased by his 50% share of the operating loss of $20,000. As a result, his basis was$40,000 at the beginning of the second year. For S corporations, unlike partnerships, liabilities assumed by the corporation do not increase shareholders’ basis in the organization.

Example Question #10 : Taxation Of Flow Through Entities

Steve received a one third interest in a partnership by contributing $3,000 in cash, stock with FMV of$5,000 and a basis of $2,000, and a new computer that cost Steve$2,500. Of the following, which amount represents Steve’s basis in the partnership?

$7,500$5,500

$10,500$3,000

$5,500 Explanation: Steve’s basis in the partnership is calculated as$3,000 cash + $2,000 stock basis +$2,500 computer basis.

Example Question #11 : Taxation Of Flow Through Entities

Gary is a 50% partner in ABC Partnership. Gary’s basis in ABC at the beginning of the year was $5,000. ABC made not distributions to the partners during the year and recorded the following items:$20,000 ordinary income, $8,000 tax exempt income, and$4,000 portfolio income. What is Gary’s tax basis in ABC at the end. Of the year?

$21,000$10,000

$16,000$12,000

$21,000 Explanation: A partner’s basis is increased by the partner’s share of partnership ordinary income, separately stated income, and tax exempt income.$5,000 + 50% * ($20,000 +$8,000 + $4,000) =$21,000

Example Question #12 : Taxation Of Flow Through Entities

Payments from a partnership to a partner for services or the use of capital without regard to partnership income are:

Contractor checks

Loans

Guaranteed payments

Salaries