Question

Mickey, Mickayla, and Taylor are starting a new business (MMT). To get the business started, Mickey is contributing $292,000 for a 40 percent ownership interest, Mickayla is contributing a building with a value of $292,000 and a tax basis of $219,000 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.

b. MMT is formed as an S corporation

c. MMT is formed as an LLC.

Answer 1

Solution - Calculation of gain to be recognised (Note 1)

Particulars	Mickey	Mickayla	Taylor
a) MMT is C Corporation	$0	$0	$146000 (Gain on ordinary Incone) (Note 2)
b) MMT is S Corporation	$0	$0	$146000 (Gain on ordinary Income) (Note 2)
c) MMT is LLC	$0	$0	$146000 (gain on ordinary income) (Note 3)

Note 1 - Calculation of Gain

Contribution of Mickey = $292000 for 40% ownership Interest

Total value of business = ($292000/40%) = $730000

Share of taylor = ($730000*20%).= $146000

Note 2 - §351 - as per this provision, No gain on ordinary income will be recognised for mickey and mickayla. Since thry both are contributing property. But taylor is contributing services in exchange of stock hence gain on ordinary income will be recognised for Taylor amounting to $146000

Note 3 - §721 - As per this Provision, No gain is recognised 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 incone will be recognised.

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