Question

16. Suppose A transfers land worth $85 with an adjusted basis of $10 in exchange for 85% of the stock of Dog Corp. B provides services to Dog Corp in exchange for the remaining 15% of the stock.

a) Is A taxed on the transfer of the land?

b) Is B taxed on the receipt of stock for services?

c) If A’s land were worth $79 and she transferred it for 79% of the stock and B’s services were worth $21 so he received 21% of the stock is A taxed?

d) Suppose B’s services were worth $19 so he also transferred $2 in cash to get the 21% of the stock. Does your answer to the prior question change? (See the bottom of page 7)

e) Suppose A’s land is worth $100,000 (adjusted basis is $500). Dog Corp wants to acquire the land. A transfers the land in exchange for $100,000 worth of stock which is 2% of Dog Corp. Canine owns 90% of Dog and agrees to transfer $1 in exchange for 1 additional share of Dog. Is A taxed on the transfer of the land?

Answer 1

First four parts have been answered.

Part a:

Yes, A is taxed on the transfer of the land as 85% of the stock of Dog Corp. has been transferred for $75, i.e. $85 reduced by the adjusted basis of $10.

Part b:

Yes, B is taxed for the receipt of stock for services as it is a revenue transaction and will result in increase of taxable income of B.

Part c:

No, in that case A has not been taxed as the $79 is fully attributable to the 79% share in Dog Corp.

Part d:

In this case B will not be taxed as the 21% of the stock in Dog Corp. has been transferred partly by the services performed by B and partly by the cash payment made by B.