Five individuals transferred property to NEWCO on 1-1-Y4 with each receiving 20%

Question

Five individuals transferred property to NEWCO on 1-1-Y4 with each receiving 20% of NEWCO's common stock. Jake transferred a receivable for his 20% interest. The receivable was a result of an installment sale made on 1-1-Y1 for $1,000,000 when the property had a basis of $400,000. The buyer paid $100,000 to Jake in Y1 and signed a 6% annual interest note for $900,000 with payments of $225,000 each December 31 plus interest. All payments have been made as of 12-31-Y3 when Jake transfers the note to the new corporation. Determine:

B. Jake's basis for the stock_________________

Explanation / Answer

Jakes basis for the stock $225000/20%= $1,125,000

Sale on 1.1.Y1    1,000,000 cash received       100,000 opening Y1 balance       900,000 6% Annual note Payment -principal       225,000 Payment -interest          54,000 (900000*6%) total payment       279,000 opening Y2 Balance dues 675000 (900000-225000) Payment -principal       225,000 Payment -interest 40500 (675000*6%) total payment       265,500 opening Y3 Balance dues       450,000 Payment -principal       225,000 Payment -interest          27,000 (450000*6%) total payment       252,000 Closing Y3 Balance dues       225,000

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