Question

PROBLEM :

This year, John, Meg, and Karen form Frost Corporation. John contributes land purchased as an investment four years ago for $25,000 that has a $30,000 FMV in exchange for 30 shares of Frost stock. Meg contributes machinery purchased four years ago and used in her business having a $50,000 adjusted basis and a $30,000 FMV in exchange for 30 shares of Frost stock. Karen contributes services worth $19,500 and $500 cash in exchange for 20 shares of Frost stock.

a. What is the amount of John's recognized gain or loss?

b. What is John's basis in his Frost shares? When does his holding period begin?

c. What is the amount of Meg's recognized gain or loss?

d. What is Meg's basis in her Frost shares? When does her holding period begin?

e. How much income, if any, must Karen recognize?

f.​What is Karen's basis in her Frost shares? When does her holding period begin?

Answer 1

a)

Since Sec 351 doesn’t apply because 25% ( 20 out of 80 shares) of the stock is issued for services, John must recognise $ 5000( $30,000-$25,000) of capital gain.

b)

John basis in the Frost's shares is $ 30,000 and his holding period begins on the day after the exchange date.

c)

Meg recognises a $ 20,000 ( $50,000-$30,000)loss

d)

Meg basis in her shares is $ 30,000 and her holding period begins on the day after the exchange date.

e)

Karen must recognise $ 20,000 of ordinary income

f)

Karen basis in her shares is $ 20,000 and her holding period begins on the day after the exchange date.