Melba contributes land (basis of $190,000; fair market value of $250,000) to a business entity in exchange for 100% of the stock. During the first year of operations, the entity earns a profit of $75,000. At the end of the first year, the entity has outstanding liabilities of $30,000 ($20,000 recourse and $10,000 nonrecourse).
A) If the entity is a C corporation, Melba's basis for her stock at the end of the first year is $265,000 ($190,000 + $75,000) and her at-risk basis is $265,000.
B) If the entity is a partnership, Melba's basis for her partnership interest (outside basis) at the end of the first year is $355,000 ($250,000 + $75,000 + $30,000) and her at-risk basis is $345,000 ($250,000 + $75,000 + $20,000).
C) If the entity is an S corporation, Melba's basis for her stock at the end of the first year is $345,000 ($250,000 + $75,000 + $20,000) and her at-risk basis is $345,000.
D) Only a. and c. are correct.
E) a., b., and c. are incorrect.

Question

Quizplus · Accepted Answer

Melba's basis in a C corporation is her initial basis of $190,000 plus any additional contributions or income, but not liabilities. For a partnership, her basis would include her share of liabilities, but the calculation provided is incorrect. For an S corporation, liabilities do not affect stock basis, and the calculation provided is incorrect.

Melba Contributes Land (Basis of $190,000; Fair Market Value of $250,000)