Question

In the current​ year, Mick​, Hank​, and Dawn form Ares Corporation. Mick contributes land​ (a capital​ asset) having a $62,500 FMV in exchange for 200 shares of Ares stock. He purchased the land three years ago for $110,000. Hank contributes machinery​ (Sec. 1231 property purchased four years​ ago) having a $75,000 adjusted basis and a $37,500 FMV in exchange for 120 shares of Ares stock. Dawn contributes services worth $25,000 in exchange for 80 shares of Ares stock.

a. What is the amount of Mick​'s recognized gain or​ loss?

b. What is Mick​'s basis in his Ares shares? When does his holding period​ begin?

c. What is the amount of Hank​'s recognized gain or​ loss?

d. What is Hank​'s basis in his Ares shares? When does his holding period​ begin?

e. How much​ income, if​ any, does Dawn recognize?

f. What is Dawn​'s basis in her Ares shares? When does her holding period​ begin?

g. What is Ares​'s basis in the land and the​ machinery? When does its holding period​ begin? How does Ares treat the amount paid to Dawn for her​ services?

Answer 1

Solution:

Assuming assessment year 2016

Details	Amount $
(a). Mick's realized gain = 1,10,000 - 62500	47500
The amount of mick's recognized gain or loss	0
According to sec 351 neither the transferor nor the transferee corporation recognizes gain or loss when property is exchanged for stock
(b).Mick's basis in his ares shares	1,10,000
His holding period begin in year 2013
(c). Hank's realized gain = 75000 - 37500	37500
The amount of hank's recognized gain or loss	0
According to sec 351 neither the transferor nor the transferee corporation recognizes gain or loss when property is exchanged for stock
(d). Dawn's basis in his ares shares	75000
His holdings period begin in year 2012
(e).   Dawnb recognizes ordinery income	25000
(f).   Dawn's basis in his ares shares	25000
His holdings period begin in year 2015 after the exchange date
(g). Ares's basis in land	62500
Machinery	37500
The basis of these asset5s are reduced to their respective FMVs because of loss property limitation rule.
Both assets holdings period begin in year 2015 after the exchange date.
Ares's basis is 25000 if services capitalised and a holding period starting in 2015