Question

Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land worth $20,000 (basis of $11,000) for 20 shares; and Ron, cattle worth $9,000 (basis of $6,000) for 9 shares and services worth $21,000 for 21 shares.
a. These transfers are fully taxable and not exempt under IRC § 351 because Ron’s stock received for services does not count toward the 80% control test.
b. Ron’s basis in his stock is $30,000.
c. Ron’s basis in his stock is $21,000.
d. Ron has income on the transaction of $21,000.
e. Brad’s basis in his stock is $20,000.

Answer 1

Answer: d. Ron has income on the transaction of $21,000

Explanation:

Ron’s stock received for services counts toward the 80% control test so the transfers are eligible for IRC § 351 exemption.

This means that the total income that Ron has as a result of this transaction is the $21,000 for services.

Ron's basis will therefore be;

= Cattle basis + Income from services rendered

= 6,000 + 21,000

= $27,000