Question

Jack and Jill are friends that form a company called Gingerbread Corp. Mike, Jill's brother wants to participate in the business venture and provides $133,000 in services.

Jack will contribute the following assets to Gingerbread: Total Tax Basis: 1,625,000 and FMV: 2,375,000

Jill will contribute the following assets to Gingerbread: Total Tax Basis: 230,000 and FMV: 1,680,000

Mike will contribute the following assets to Gingerbread: Total Tax Basis: 630,000 and FMV: 240,000

Gingerbread will issue stock as follows:

16800 shares of common stock, 100 par value, issued to Jack

16800 shares of common stock, 100 par value, issued to Jill

3730 shares of common stock , 100 par value, issued to Mike

Because Jack has contributed assets to Gingerbread with a fair market value of $2,375,000 in exchange for stock with a fair market value of $1,680,000, he will receive cash from Gingerbread of $695,000 upon its formation.

Jill also borrows a $400,000 loan to cover costs.

Based on the fact patterns, answer the short questions below:

a How much gain (loss) will Mike realize on the contribution of the assets and services to Gingerbread?

b. How much gain (loss) will Mike recognize on the contribution of the assets and services to Gingerbread? [hint: you should consider how services will be treated for tax purposes]

c. What will be Mike's basis in the 3,730 shares of Gingerbread common stock he receives?

d. How much gain (loss) will Gingerbread recognize on Jack’s contribution of assets to Gingerbread?

e. How much gain (loss) will Gingerbread recognize on Jill’s contribution of assets to Gingerbread?

f. How much gain (loss) will Gingerbread recognize on Mike’s contribution of assets and services to Gingerbread? [hint: you should consider how services will be treated for tax purposes]

Answer 1

A.Gain/(loss) will Mike realize on the contribution of the assets and services to Gingerbread = $630,000

B. As general practice/rules contribution to partnership in form of services in exchange for a partnership interest will not qualify for tax-free treatment, Mike shall recognize as gain what he gets from the Gingerbread i.e. value of 3730 shares which is $373,000.

C.   Total Tax Basis   FMV of Assets   Total Assets   Shares Issued   Value of Shares Gain/(Loss) to GB
Jack   16,25,000    16,80,000 33,05,000 16,800 16,80,000 D.55,000
(less cash received)           
Jill 2,30,000    16,80,000 19,10,000    16,800 16,80,000 E.1,450,000
                  
Mike 6,30,000    3,73,000 10,03,000 C.3,730 3,73,000 F.(257,000)
(including service)           
Totals   24,85,000    37,33,000 62,18,000 37,330 3,733,000