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

Given the fact patterns, answer the short questions below:

a. How much gain (loss) will Jack realize on the contribution of the assets to Gingerbread?

b. How much gain (loss) will Jack recognize on the contribution of the assets to Gingerbread?

c. What will be Jack’s basis in the 16,800 shares of Gingerbread common stock he receives?

d. How much gain (loss) will Jill realize on the contribution of the assets to Gingerbread?

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

f. What will be Jill’s basis in the 16,800 shares of Gingerbread common stock she receives?

Answer 1

Note: Basis is the original price/cost for acquiring an asset.

a) Gain realized by Jack

= Amont actually received - Total Tax Basis of Asset

= (16800*100+695000) - 1625000 = 750,000

b) Gain recognized by Jack

= FMV - Total Tax Basis of asset

= 2375000 - 1625000 = 750,000

c) Jack’s basis in the 16,800 shares = 16800*100 = 1,680,000

(This value of 100 Per share is the basis of the shares since this is the cost of aquisition of the shares which will be considered as the cost for capital gains calculation while selling the shares in the future)

d) Gain realized by Jill

= Amont actually received - Total Tax Basis of Asset

= (16800*100) - 230,000

= 1,395,000

e) Gain recognized by Jill

= FMV - Total Tax Basis of asset

= 1,680,000 - 230,000

= 1,450,000

f) Jill’s basis in the 16,800 shares = 16800*100 = 1,680,000

(This value of 100 Per share is the basis of the shares since this is the cost of aquisition of the shares which will be considered as the cost for capital gains calculation while selling the shares in the future)