Question

Ricky Bledsoe, CPA is going through a frustrating day trying to get his hands around several transactions. Quartney comes by and recommends they go to their local pub and discuss it over drinks. After reaching the bar, Ricky begins to explain the situation.  

Sarah and Briana form SarahBriana Corporation. Sarah exchanges cash and other property for 700 shares (70% of the outstanding shares) of SarahBriana stock. Briana performs accounting services in exchange for 300 shares of SarahBriana stock worth $20,000 and property worth $10,000.

For the last four years, Stephan and Elom have each owned 100 of the 200 outstanding shares of Snow Corporation's stock. Stephan transfers land having a $10,000 basis and a $30,000 FMV to Snow for an additional 30 shares of stock, and Elom transfers $2,000 for an additional two shares of stock.   

Stephanie, who owns 100% of Thomas Corporation, transfers land having a $50,000 FMV and a $30,000 adjusted basis to Thomas. In return, Stephanie receives additional shares of Thomas common stock having a $40,000 FMV and Cap Corporation common stock having a $20,000 FMV. The Cap Corporation common stock, a Capital asset, has a $5,500 basis on Thomas's books.

Analyze these transactions. Provide full explanations.

Answer 1

There are three transactions:

1. Sarah and Briana together form a corporation named SarahBriana Corporation.

Sarah exchanges cash and other property for 700 shares. this transaction is not taxable as Sarah is getting the control of the corporation after this exchange.

Briana is performing accounting service in exchange for 300 shares worth $20,000 and property worth $10,000. this transaction is taxable as the the term property does not include any service rendered or to be rendered to the corporation in exchage of shares. The shares are taxable as income in the hands of Briana.

2. Stephan and Elom each owned 100 of the 200 outstanding shares of Snow Corporation's Stock.

Here Elom is transfering $2000 for additional two shares means Value of stock per share is $1000 (2000/2)

Now Stephan transfered land having a basis of $10,000 and FMV of $30,000 for additional 30 shares. He will have to recognize a gain of $20000 on transfer of land to Snow Corporation's Stock. As he is not receiving any control immediately after the transaction.

3. Stephanie transfers land having $50000 FMV and Adjusted basis of $30000 to Thomas corporation and receives addittional Common stock having $40,000 FMV and Cap corporation common stock having a $20000 FMV.

in this case, Stephanie will recognize a gain of $10,000 (lower of realised gain or FMV of boot received).

FMV of the Stock $40,000

Adjusted basis of Land $30,000

Realised gain $10,000

FMV of Cap Corporation

Common Stock $20,000

Recognized Gain $10,000

Also the Thomas Corporation must recognize a capital gain of $14,500 ($20000-$5500).