Question

Mickey, Mickayla, and Taylor are starting a new business (MMT). To get the business started, Mickey is contributing $290,000 for a 40 percent ownership interest, Mickayla is contributing a building with a value of $290,000 and a tax basis of $172,500 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.

b. MMT is formed as an S corporation.

c. MMT is formed as an LLC.

Answer 1

Calculation of gain to be recognized

Particulars	Mickey	Mickayla	Taylor
a)MMT is C Corporation	0	0	145000(note 2)
b)MMT is S Corporation	0	0	145000(note 2)
c)MMT is LLC	0	0	145000(note 3)

Note 1 calculation of gain

Contribution of Mickey = 290000for 40% ownership interest

Total value of business = 290000/40% = 725000

Share of Taylor = 725000*20% = 145000

Note 2 §351 - as per this provision, No gain on ordinary income will be recognized for Mickey and Mickayla. Since they both are contributing property. But Taylor is contributing services in exchange of stock hence gain on ordinary income will be recognized for Taylor amounting to $145000

Note 3 - §721 - As per this Provision, No gain is recognized on transfer of property in exchange of ownership Interest. Since Mickey and Mickayla both are contributing property in exchange of ownership interest, hence no gain on ordinary income will be recognized.

Gain on ordinary income will be recognized for Taylor only. Since he is not contributing property but services