Question

On January 1, 2017 Taylor (“T”) and Rose (“R”) formed YUnion Corporation (“YCorp”), a company devoted to making products for giveaways and/or sales at Union soccer games held in Chester PA.

           T transfers inventory, such as unbranded soccer balls; tshirts; beer steins; Ben Franklin posters, etc. (basis of $60,000 and fair market value of $100,000) for 50% of the stock in YUnion Corp. She had been holding all this valuable inventory in a public warehouse located in the hills just outside Pittsburgh, hoping that that city would one day get its own professional soccer franchise!

           R also gets 50% of the P Corp stock when she does two things. First, R transfers production printing machinery (which a basis of $50,000 and a fair market value of $60,000). Second, R, an former honor student, also wants to get paid for the services she supplied in helping set up the company and will serve as General Manager of YCorp for the first couple months. She figures that these services are worth $40,000, and part of the P Corp stock will cover these items.

1. What are the tax consequences to T –

1. does she recognize any gain on the transfer of inventory for stock? _______

2. If so, how much gain does she recognize? _________________

3. What is her basis in the YCorp stock? _____________________

2. What are the tax consequences to R –

1. does she recognize any gain, or income, when she receives the YCorp stock? _______________________

2. What is her basis in the P Corp stock? ___________________

3. What are the consequences to P Corp - –

1. Does P Corp recognize gain when it receives the inventory and production machinery? _______________________

2. What basis does it have in the inventory and production machinery received? _________________________________

3. Does P Corp have any other tax deduction(s) as a consequence of this deal? __________________________________

Answer 1