Question

Problem 4-30 (LO. 1, 3)

Dan Knight and Patricia Chen, who are good friends, form Crane Corporation. Dan transfers land (worth $200,000, basis of $60,000) for 50% of the stock in Crane. Patricia transfers machinery (worth $150,000, adjusted basis of $30,000) and provides services worth $50,000 for 50% of the stock.

a. Will the transfers qualify under § 351?

, because

of Patricia's stock is counted in determining control since the property she transferred has

than a nominal value in comparison to the value of the services rendered.

b. What are the tax consequences to Dan and Patricia?
Dan recognizes

on the transfer of the land. His basis in the Crane stock is $
. Patricia recognizes

of $
on the transfer. Patricia has a basis of $
in her Crane stock.

c. What is Crane Corporation's basis in the land and the machinery?
Crane Corporation has a basis of $
in the land and a basis of $
in the machinery.

In addition, Crane either has

of $
for the services provided by Patricia, or it will capitalize the $
as

.

d. Enter the results of this transaction to Patricia on her Form 1040 (page 1). Assume Patricia is single, age 40, has no other income, and claims a standard deduction of $12,200 (for 2019).

She does not want $3 to go to the presidential election campaign. Enter all amounts as positive numbers.

Form
1040
Department of the Treasury—Internal Revenue Service (99)
U.S. Individual Income Tax Return   2019   OMB No. 1545-0074   IRS Use Only
Filing Status   

Your first name and middle initial
Patricia   Last name
Chen       Your social security number
123-45-6789
If joint return, spouse's first name and middle initial

Last name
Spouse's social security number
Home address (number and street). If you have a P.O. box, see instructions.

Apt. no.
Presidential Election Campaign
Check here if you, or your spouse if filing jointly, want $3 to go to this fund. Checking a box below will not change your tax or refund.

City, town or post office, state, and ZIP code. If you have a foreign address, also complete spaces below (see instructions).

Foreign country name   Foreign province/state/country

Foreign postal code   If more than four dependents, see instructions and ✓ here ► ◻
Standard Deduction   Someone can claim:   

Age/Blindness   You:

Spouse:

Dependents (see instructions):   (2) Social security number   (3) Relationship to you   (4) ✓ if qualifies for (see instructions):
(1) First name   Last name   Child tax credit   Credit for other dependents
◻   ◻
◻   ◻
◻   ◻
◻   ◻
1     Wages, salaries, tips, etc. Attach Form(s) W-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1  
2a   Tax-exempt interest . .   2a       b   Taxable interest. Attach Sch. B if required   2b  
Standard Deduction for–
Single or Married filing separately, $12,200
Married filing jointly or Qualifying widow(er), $24,400
Head of household, $18,350
If you checked any box under Standard Deduction, see instructions.
3a   Qualified dividends . . .   3a       b   Ordinary dividends. Attach Sch. B if required   3b  
4a   IRA distributions . . . . .   4a       b   Taxable amount . . . . . . . . . .   4b  
c   Pensions and annuities   4c       d   Taxable amount . . . . . . . . . .   4d  
5a   Social security benefits   5a       b   Taxable amount . . . . . . . . . .   5b  
6     Capital gain or (loss). Attach Schedule D if required. If not required, check here . . . ► ◻   6  
7a   Other income from Schedule 1, line 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7a  
b   Add lines 1, 2b, 3b, 4b, 4d, 5b, 6, and 7a. This is your total income . . . . . . . . . . . . ►   7b  
8a   Adjustments to income from Schedule 1, line 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8a  
b   Subtract line 8a from line 7b. This is your adjusted gross income . . . . . . . . . . . . . . ►   8b  
9     Standard deduction or itemized deductions (from Schedule A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   9  
10   Qualified business income deduction. Attach Form 8995 or Form 8995-A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10          
11a   Add lines 9 and 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   11a  
b   Taxable income. Subtract line 11a from line 8b . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   11b  
For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions.   Cat. No. 11320B   Form 1040 (2019)

Answer 1

A. yes because all of Patricia's stock is counted in determining control since the property she transferred has more
than a nominal value in comparison to the value of the services rendered.

B. Dan recognizes no gain or loss on the transfer of the land. His basis in the Crane stock is $60,000. Patricia recognizes compensation income of $50,000 on the transfer. Patricia has a basis of $80,000 in her Crane stock.

C. Crane Corporation has a basis of $60,000 in the land and a basis of $30,000 in the machinery.
In addition, Crane either has a deduction of $50,000 for the services provided by Patricia, or it will capitalize the $50,000 as organizational costs.

D.

Filling Status	Single
Your standard deduction:	12000
Spouse standard deduction	$0