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Sam and Devon agree to go into business together selling college-licensed clothing. According to the agreement, Sam will contribute inventory valued at $100,000 in return for 80 percent of the stock in the corporation. Samâs tax basis in the inventory is $60,000. Devon will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualify as organizational expenditures). The accounting services are valued at $25,000.

Required:
a. What amount of income gain or loss does Sam realize on the formation of the corporation? What amount, if any, does he recognize?
b. What is Samâs tax basis in the stock he receives in return for his contribution of property to the corporation?
c. What amount of income, gain, or loss does Devon realize on the formation of the corporation? What amount, if any, does he recognize?
d. What is Devonâs tax basis in the stock he receives in return for his contribution of services to the corporation?

Sagot :

Parrain

Based on Section 351, and the transactions between Sam and Devon, the following are true:

  • Income realized is $40,000 and income recognized is $0.
  • Sam's tax basis is $60,000.
  • Income realized is $25,000. Income recognized is $25,000.
  • Devon's tax basis in the stock is $25,000.

What income, gain or loss will be recognized and realized?

The income realized will be:
= 100,000 - 60,000

= $40,000

Section 351 will not recognize a gain or loss.

What is Sam's tax basis?

Based on the Carryover principle, Sam's basis in the inventory will remain the same at $60,000.

What is the Income, gain, or loss recognized by Devon?

This will be the value of the accounting services of $25,000 because it is the fair value of the service.

What would be Devon's tax basis?

This would be the income recognized of $25,000 which is what the accounting services are worth.

Find out more on recognizing income at https://brainly.com/question/21851842.

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