Betty joined Jim in forming DBJ Corp. Betty contributed appreciated land for 90
ID: 2599621 • Letter: B
Question
Betty joined Jim in forming DBJ Corp. Betty contributed appreciated land for 90 percent of the stock in DBJ Inc. Jim received 10 percent of the DBJ stock valued at $25,500. Determine Jim's tax consequences in each of the following alternative scenarios. (Leave no answer blank. Enter zero if applicable.)
a-1. Jim received the stock in exchange for providing computer-related services for the corporation. What amount of income or gain does Jim recognize on the exchange?
a-2. What is Jim's basis in the stock he received in the exchange?
b-1. Jim contributed the rights to a patent he owned to DBJ in exchange for the DBJ stock. The patent was worth $25,500 and Jim's basis in the patent was $15,350. How much gain does Jim recognize on the exchange?
b-2. What is Jim's basis in the DBJ stock?
Explanation / Answer
a-1) As Jim provides computer related services for the corporation and received in exchange 10% of the DBJ stock valued at $25,500 his income will be recognized for $25,500. Jim is not entitled to tax deferral under §351 because services are not considered as property.
a-2) Tax basis of the stock equals the income recognized on the receipt of the stock in exchange for services. In this case the income recognized on the receipt of stock in exchange for computer related services provided by Jim is $25,500. Therefore Jim's basis in stock he received is $25,500.
b-1) Jim is not entitled to tax deferral under §351 because he does not control the corporation immediately after his transfer of rights to patent (he must own 80% or more for fulfilling control requirements). As a result he recognises gain of $10,150 ($25,500-$15,350) on exchange.
b-2) Jim's basis in the DBJ stock is $25,500 which is equal to the fair market value of the patent transferred.
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