Question

Kyle, Brett, and Jordan formed a corporation and made an S election. Kyle, Brett, and Jordan were equal owners. Kyle transferred services of $20,000 and property worth $10,000 ($2,000 basis) in exchange for his stock. Brett transferred property worth $50,000 subject to a mortgage of $30,000 in which he had a basis of $5,000. Jordan transferred cash of $20,000. The amount of gain/loss recognized by the shareholders as the result of forming the S corporation is:

Kyle : Brett : Jordan

A. No G/L : No G/L : No G/L

B. $20,000 income : No G/L : No G/L

C. $20,000 income : $25,000 income : No G/L

D. $20,000 income : $20,000 income : No G/L

E. $28,000 income : $45,000 income : No G/L

Answer 1

Answer Explanation     E.$28,000 income: $45,000 income: No G/L

As per IRC 351, no gain or loss is recognized on contribution of property to a corporation in exchange of its shares, if, after contribution, that person or persons are in control. example (80 %).

In this case, both Brett and Jordan are getting 33% + 33% = 66% control in corporate immediate after contribution. Therefore, gain will be recognized by shareholders on transfer of property:

                 Gain or income recognized by Kyle 28000 (200000 + (10000) – 2000)