Question

7. Annette owns land worth $77 (adjusted basis of $1). She transfers it to Landcorp for voting common stock worth $77. At the same time Helmut agrees to provide legal services for Landcorp in exchange for stock worth $23. There is no other stock in landcorp. a. Does Annette recognize the gain of the transfer and if yes, how much? b. What is Landcorp's basis in the land? c. What are the tax consequences to Helmut, including what is his basis and holding period in the stock? d. Would the answer to part (a) change (and if so how?) if Helmut received 3 shared for cash and 20 shares for his legal services/

Answer 1

a. Gain on transfer of asset is equal to sale price of the asset less adjusted basis where adjusted basis of an asset is the current value of the asset arrived at after adding the capital expenditures, if any, and deducting the relevant tax related expenses from the original cost of the asset. In the given question, adjusted basis of land owned by Annette is $1 while land is sold at price of $77. Hence, Annette will recognize the transfer gain of $76 ($77-$1).

b. Landcorp has purchased the land for $77 from Annette. So, Landcorp's basis in land is cost at which land is purchased which is $77 in the given case.

c. Helmut is providing legal services to Landcorp in exchange of stock worth $23. Since, value of stock received in exchange of services rendered is to treated as ordinary income, Helmut will recognize $23 as taxable income in his books and pay tax accordingly. Since, Helmut has received stock in exchange of legal services which is to be treated as income as explained above, so his basis in stock will be NIL and holding period will be irrelevant in this case as cost is NIL.

d. Transactions of land sale by Annette and rendering of legal services by Helmut are two different events and income arising out of both transactions are to be treated separately in books of both. Hence, receiving of 3 shares in cash and 20 shares in shares for legal services will not have any impact on gain on transfer recognized by Annette.