Question

Mickey, Mickayla, and Taylor are starting a new business (MMT). To get the business started, Mickey is contributing $315,000 for a 40 percent ownership interest, Mickayla is contributing a building with a value of $315,000 and a tax basis of $178,750 for a 40 percent ownership interest, and Taylor is contributing legal services for a 20 percent ownership interest. What amount of gain is each owner required to recognize under each of the following alternative situations? [Hint: Look at §351 and §721.]

1. MMT is formed as a C corporation.
2. MMT is formed as an S corporation.
3. MMT is formed as an LLC.

Answer 1

26 U.S code §721: As per code §721 no gain or loss shall be recognized to partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership

26 U.S code §351: No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation.

Partners	%	Amount Contributed
Mickey	40%	315000
Mickayla	40%	315000
Taylor	20%	($315000*20/40%)=$157500

1. MMT is formed as C Corporation

Under §351, Mickey and Mickayla do not recognize any gain. Taylor is not contributed any property so Taylor must recognize $157500 of ordinary income on the receipt of $157500 worth of stock.

2. MMT is formed as S Corporation

Under §351, Mickey and Mickayla do not recognize any gain. Taylor is not contributed any property so Taylor must recognize $157500 of ordinary income on the receipt of $157500 worth of stock.

3. MMT is formed as LLC

26 U.S code §721: Mickey and Mickayla do not recognize any gain. Taylor is contributed 20% interest in property in MMT so Taylor must recognize $157500 of ordinary income .