Question

Mickey, Mickayla, and Taylor are starting a new business (MMT). To get the business started, Mickey is contributing $260,000 for a 40 percent ownership interest, Mickayla is contributing a building with a value of $260,000 and a tax basis of $165,000 for a 40 percent ownership interest, and Taylor is contributing legal services for a 20 percent ownership interest. What amount of gain is each owner required to recognize under each of the following alternative situations? [Hint: Look at §351 and §721.] (Leave no answer blank. Enter zero if applicable.)

a. MMT is formed as a C corporation.

Answer 1

Answer :

a. MMT is formed as a C corporation.

Mickey	$0
Mickayla	$0
Taylor	$130,000

Explanation:

As per Section 351 , no gain or loss is recognized when starting a new business , taxpayer gets only stock in exchange of property invested in the business . Accordingly Mickey & Mickayla are not require to recognize any gain.

However Taylor is contributing legal services instead of any property . Thus he is require to recognize gain.

Gain to be recognize by Taylor = [($260,000 + $260,000) / 80 %] * 20 %

= $650,000 * 20 % = $130,000