Ms. Pinellla contributed property (adjusted basis $50,000, FMV $84,000) to Price Inc. in exchange for 200 shares of its stock (FMV=$74,000) and $10,000 cash. This exchange qualified under Section 351. Her adjusted basis in the Price stock is?
To determine Ms. Pinella's adjusted basis in the Price Inc. stock, we need to consider the contributions she made to the company.
In this case, Ms. Pinella contributed property with an adjusted basis of $50,000 and a fair market value (FMV) of $84,000. She also received 200 shares of stock with an FMV of $74,000 and $10,000 cash in exchange.
Under Section 351 of the Internal Revenue Code, the exchange of property for stock in a qualifying transaction is generally not taxed. Instead, the shareholder's basis in the stock is equal to the basis of the property she contributed, increased by any gain recognized and decreased by any cash received.
Based on the information you provided, the total value of the property Ms. Pinella contributed (adjusted basis) is $50,000. This forms the starting point for the basis calculation.
Next, we need to determine if there was any gain recognized in the transaction. Gain is calculated as the excess of the fair market value of the property over its adjusted basis. In this case, the FMV of the property is $84,000, and the adjusted basis is $50,000. Therefore, the gain recognized is $84,000 - $50,000 = $34,000.
Since Ms. Pinella did not receive any cash in excess of her basis, there is no additional gain to be recognized.
To calculate her adjusted basis in the Price Inc. stock, we add the recognized gain to the adjusted basis of the property contributed, which is:
$50,000 (adjusted basis) + $34,000 (recognized gain) = $84,000.
Therefore, Ms. Pinella's adjusted basis in the Price Inc. stock is $84,000.