A corporation receives equipment with a built-in loss (adjusted basis exceeds fair market value) from a shareholder in exchange for stock. What is the corporation's basis in the eq... A corporation receives equipment with a built-in loss (adjusted basis exceeds fair market value) from a shareholder in exchange for stock. What is the corporation's basis in the equipment for depreciation purposes?
Understand the Problem
The question describes a scenario where a corporation receives equipment from a shareholder in exchange for stock. The equipment has a built-in loss, meaning its adjusted basis (original cost less depreciation) is higher than its fair market value. The question asks what basis the corporation should use for calculating depreciation on the equipment.
Answer
Basis is limited to FMV due to net built-in loss rule under IRC §362(e)(2).
The corporation's basis in the equipment for depreciation purposes is limited to the fair market value (FMV) due to the net built-in loss rule, as per IRC §362(e)(2).
Answer for screen readers
The corporation's basis in the equipment for depreciation purposes is limited to the fair market value (FMV) due to the net built-in loss rule, as per IRC §362(e)(2).
More Information
When a corporation receives property with a built-in loss from a shareholder in exchange for stock, IRC §362(e)(2) limits the corporation's basis to the fair market value of the property. This rule prevents duplicating losses for tax purposes.
Tips
A common mistake is assuming the corporation's basis in the property is the shareholder's adjusted basis, without considering the impact of the net built-in loss rule.
Sources
- Carryover income tax bases - law.uh.edu
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