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Mary and Todd form the MT Corporation, with a transfer of the following properties:             Mary               &nbs

Mary and Todd form the MT Corporation, with a transfer of the following properties:

            Mary                            $500,000 cash

            Todd                            $500,000 FMV property

                                                $300,000 tax basis

Both Mary and Todd receive a 50% interest in the corporate stock.

Complete the following blanks:

                                                                        Mary                            Todd

           

Realized gain                                        ________                     ________

            Recognized gain                                    ________                     _________

            Basis of stock                                        _________                   _________

            MT basis in contributed asset               _________                   _________

VARIATION 1:  In addition to Mary and Todd, Karla joins the corporation at its inception.  Karla will provide services to the corporation in exchange for a 25% interest in the stock.  That is, she receives 25% of the outstanding shares.  Does anything change?  Why or why not?

VARIATION 2:  return to original facts (no Karla).  Todd’s property is valued at $700,000 but is contributed subject to a $200,000 liability.   

Complete the following blanks

                                                                        Mary                            Todd

            Realized gain                                        ________                     ________

            Recognized gain                                    ________                     _________

            Basis of stock                                        _________                   _________

            MT basis in contributed asset               _________                   _________

Business   Accounting   
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Homework Answers

Answer #1

Variation 1

there is no change in the professional service and scenario provided by Karla and it will be ordinary income.

Variation 2

As per the tax rules, when a person contributes a property in partnership and gets a share in the partnership, he/she is not required to realize any gains.

- since he has not sold the property,

- hence, no gain for mary & todd.

Mary & Todd's decrease in liability = $200,000 * 20% = $100,000

Mary & Todd's basis in the partnership = $500,000 - $ 100,000 = $400,000

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