Question

Mickey, Mickayla, and Taylor are starting a new business (MMT). To get the business started, Mickey is contributing $270,000 for a 40 percent ownership interest, Mickayla is contributing a building with a value of $270,000 and a tax basis of $167,500 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.

	Gain to be recognized by: Mickey Mickayla Taylor

b. MMT is formed as an S corporation.

	Gain to be recognized by: Mickey Mickayla Taylor

c. MMT is formed as an LLC.

	Gain to be recognized by: Mickey Mickayla Taylor

Answer 1

Answer :(a.) In case MMT is formed as Corporation :

Mickey and Mickayla will not recognize gain as per US code §351 , gain or losses should not be recognized in case of contribution of property to Corporation for stock in exchange and immediately after exchange to take control of operations . Taylor doesnot contributed any property therefore Taylor should record $135000(270000 * 20% / 40%) of ordinary income on receiving $157500 of stock.

(b.) If MMT is formed as S Corporation :

Mickey and Mickayla will not recognize gain as per US code §351 , gain or losses should not be recognized in case of contribution of property to Corporation for stock in exchange and immediately after exchange to take control of operations . Taylor doesnot contributed any property therefore Taylor should record $135000(270000 * 20% / 40%) of ordinary income on receiving $157500 of stock.

(c.) MMT is formed as LLC :

Mickey and Mickayla will not recognize gain as per US code §721 , gain or losses should not be recognized to partnership or any partner in case of contribution of property to partnership for interest in exchange . Taylor doesnot contributed any property therefore Taylor should record $135000(270000 * 20% / 40%) of ordinary income on receiving $157500 of stock.