Question

Hazel transferred the following assets to Starling Corporation:

Adjusted Basis Fair Market Value

Cash $100,000    $100,000

Machinery   $60,000 $40,000

Land $100,000 $150,000

In exchange, Hazel received 50% of Starling Corporation's only class of stock outstanding. The stock has no established value.

However, all parties sincerely believe that the value of the stock Hazel received is the equivalent of the value of the assets she transferred.

The only other shareholder, Rick, formed Starling Corporation five years ago. What are the income tax consequences to Hazel and Starling Corporation with regard to the exchange.

Answer 1

Ans:

For Hazel Corporation:

Basis of Assets Transferred : $260,000

Far value of assets Transferred: $290,000

Fair value of stock received: $290,000 as all parties sincerely believe that the value of the stock Hazel received is the equivalent of the value of the assets she transferred.

So capital Gain taxable in the hands of Hazel corporation: $290,000-$260,000= $30,000

For Starling corporation:

For starling corporation no tax effect will be their. Stock issued in response to assets will be credited as Share Capital and Share Premium if shares issued above par value.

However in case of stock received from Rick, it will be taxable in the hands of Rick.