I have this problem for a practice exam, and am stumped. For the corporation's basis of $40,000, since corporations don't get stepped-up basis, however I am not sure if that is right. Parts b-d I really don't have a clue (was eric's basis $100,000 or $125,000?), and would appreciate help from a qualified professional.
Problem: Eric transferred property with a basis of $100,000 and a fair market value of $125,000 to his 100% controlled corporation. The property was subject to a note payable to the bank for $60,000. Compute the following:
a. The corporation's basis in the property.
b. Eric's basis in the stock.
c. When the corporation was in the 22% marginal tax bracket, the corporation sold the property contributed by Eric for $125,000 and distributed to Eric an amount equal to the after tax gain. Eric was in the 20% marginal tax bracket. Compute the total tax on the gain and distribution.
d. What is the corporation's basis in the property assuming Eric's basis was $100,000 and its fair market value was $80,000 at the time that Eric made the transfer for stock?
This solution illustrates how to compute the basis for property owned by person and corporation, and total tax.