Ken and Jim agree to go into business together selling old comic books and recor

Question

Ken and Jim agree to go into business together selling old comic books and records. According to the agreement, Ken will contribute inventory valued at $200,000 in return for 80 percent of the stock in the corporation. Ken's tax basis in the inventory is $100,000. Jim 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 $50,000. a. Please answer the following questions about the tax consequences of the transaction to Jim. b. a. What amount of income, gain or loss does Jim realize on the formation of the corporation? c. b. What amount of gain or loss, if any, does he recognize? d. c. What is Jim's tax basis in the stock he receives in return for his contribution of services to the corporation? Cite the Internal Revenue Code and/or other authorities in support of your response.

Explanation / Answer

Ans b a Jim realises $50000 compensation as gain on the formation of the corporation. As his services is valued @$50000.

Ans c B $50000 compensation is recognized gain. Jim has provided services so this is not considered as property on which tax can be deferred under section 351. As section 351 says that no gain or recognized if the following conditions are satisfied 1) Transfer of property not services b) in exchange of corporate stock c) after exchnage the shareholder holds minimum 80% of outstanding stock.

Ans d c $50000 is the tax basis.

Actually the tax basis of the stock is equal to the income which is recognized on receipt of the stock in exchange for services.

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