Question

Mickey, Mickayla, and Taylor are starting a new business (MMT). To get the business started, Mickey is contributing $235,000 for a 40 percent ownership interest, Mickayla is contributing a building with a value of $235,000 and a tax basis of $158,750 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.

Find the Gain to be recognized for A through C

Answer 1

Solution :-

Calculation of Gain =

Contribution of Mickey = $235000 for 40% ownership Interest

Total value of business = ($235000/40%) = $587500

Share of taylor = ($587500*20%).= $117500

Particulars	Mickey	Mickayla	Taylor
a) MMT is C Corporation	$0	$0	$117500 (Gain on ordinary Incone) (Note 2)
b) MMT is S Corporation	$0	$0	$117500 (Gain on ordinary Income) (Note 2)
c) MMT is LLC	$0	$0	$117500 (gain on ordinary income) (Note 3)

Note 2 - §351 = As per this no gain on ordinary income recognise for Mickey and Mickayla Since these two are contributing Property but in case of Taylor we see it is contributing services for exchange of stock hence ordinary income for taylor recognised $117500

Note 3 - §721 = As per this in case of exchange of ownership interest with transfer of property no gain recognised So ordinary income only for Taylor Since he is contributing services not the property