Question

On March 1 of the current year, Alice, Carla, and David form Talon, Inc., a Corporation (Bob transfers the equipment on June 1 of the current year due to the needs of his sole proprietorship, however the others were all aware of the delay and took this into consideration when planning the formation of Talon Corporation) and transfer the following items:

Transferor	Asset	Basis	FMV	Ownership Percentage
Alice	Building (subject to $60,000 mortgage)	$45,000	$100,000	62.5%
Bob	Equipment	25,000	40,000	25%
Carla	Van	15,000	10,000	6.25%
David	Accounting services	0	10,000	6.25%

1. What is the amount and character of the income, gains or losses realized and recognized by Alice?

2. What is the amount and character of the income, gains or losses realized and recognized by Bob?

40,000-2

3. What is the amount and character of the income, gains or losses realized and recognized by Carla?

4. What is the amount and character of the income, gains or losses realized and recognized by David?

5. What is each shareholder’s basis in his or her Talon Corporation stock?

Answer 1

a.
For Alice
Since, the $60,000 assumed by the corporation is in excess of $45,000 basis. Alice has a recognised section 1250 gain of $15,000 ($60,000 - $45,000).
b.
For Bob
He has a realised gain of $15,000 ($45,000 - $25,000). According to section 1245, Bob's gain will be the lesser of the realized gain or the boot received. Since there is no mention of any boot received, I'll assume it is zero. So Bob's income is zero.
c.
For Carla
Carla will not recognize any gain or loss because of section 351 treatment.
d.
For David
David will recognize ordinary income of $10,000 as compensation for the accounting services.
e.
Alice's basis in the stock = Alice's basis in property relinquished - Liabilities assumed by the corporation + Alice's recognized gain
= $45,000 -$60,000 + $15,000 = $0
Alice's basis in the stock is 0$
Bob's basis in the stock = basis+gain - boot = $25,000 +0 -0 =$25,000
Bob's basis in the stock is $25,000.
Carla's basis in the stock = basis - boot = $15,000 - 0
Carla's basis in the stock = $15,000
David's basis in the stock is equal to the value of service performed by him.
David's basis in the stock = $10,000
The transactions must meet the requirements/criteria of Sec. 351.
Sec. 351 allows a tax-free incorporation transfer if specific requirements are met, including that the property must be transferred to a corporation by one or more persons in exchange for stock in the corporation, and, immediately after the exchange, the transferor(s) is (are) in control (as defined in Sec. 368(c)) of the corporation. Here, the property's transferors own 88.2% (750 / 850) of the Talon Corporation stock.

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