Question

Ron and Susan form a corporation in 2019. Ron contributes real estate worth $200,000 in exchange for 50% of the corporation’s only class of stock. Ron’s basis in the real estate is $140,000. Susan contributes cash of $90,000 and a machine worth $110,000 for the other 50% of the corporation’s stock. The machine has a basis of $95,000 to Susan. What is the realized and recognized gain on this transfer for both Ron and Susan? What is Ron’s basis in his stock and what is Susan’s basis in her stock? What is the corporation’s basis in the assets contributed? How would this scenario change if instead of the machine, Susan contributed services to the corporation?

Answer 1

		Ron	Susan	Total	Basis	Realized Gain
Real Estate	200,000	-	200,000	140,000	60,000
Cash		-	90,000	90,000	90,000	-
Machine		-	110,000	110,000	95,000	15,000
		200,000	200,000	400,000	325,000	75,000

Ron's Basis = $140,000 and the Realized gain is $60,000

Susan's Basis = $185,000 and the Realized gain is $15,000

Corporation’s basis in the assets contributed is $325,000

Instead of the machine, if Susan contributed services to the corporation, she would have been eligible of Remunaration of minimum $110,000.