Yvonne and Simon form Ion Corporation. Yvonne transfers equipment (basis of $110,000 and fair market value of $165,000). Simon invests $130,000 of cash. They each receive 100 shares in Ion Corporation, worth $130,000, but Yvonne also receives $35,000 in cash from Ion. Calculate Ion Corporation’s basis in the equipment. In addition, determine Yvonne and Simon’s basis in the Ion stock.

Basis

Ion Corporation $145,000

Yvonne $110,000

Simon $130,000

Explanation:

First of all calculate the realized gain

Realized Gain = Fair Market value of Stock + Additions of cash - basis of Equipment = $130,000 + $35,000 - $110,000 = $55,000

From the total gain of $55,000 is recognized, because it is received in cash and realized, other $20,000 of gain is unrealized.

Now calculate the basis of each.

Ion Corporation basis = Equipment basis + realized gain = $110,000 + $35,000  = $145,000

Yvonne's basis = Equipment basis - any additional cash received + realized gain = $110,000 - $35,000 + $35,000  = $110,000

Simon's basis is $130,000 same as the cash contributed by him.

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