Question

Marie and Ramesh form Roundtree Corporation with the transfer of the following. Marie performs personal services for the corporation with a fair market value of $175,200 in exchange for 400 shares of stock. Ramesh contributes an installment note receivable (basis $25,000; fair market value $30,000), land (basis $50,000; fair market value $170,000), and inventory (basis $400,640; fair market value $500,800) in exchange for 1,600 shares. Determine Marie and Ramesh's current income, gain, or loss and calculate the basis that each takes in the Roundtree stock.

Answer 1

The determination of Marie and Ramesh's current income, recognized gain or loss, and basis of shareholding is as follows:

                                       Marie       Ramesh

Current income          $175,200         $0

Recognized gain        $175,200         $0

Basis in Roundtree    $175,200    $475,640

What is the basis of shareholding interest?

The basis of shareholding interest is the amount of cash contributed plus the adjusted basis value of the contributed property. According to IRS, no gain or loss is recognized upon contributions of property in exchange for a shareholding interest.

Data and Calculations:

Marie's basis = $175,200

Marie's shareholding in Roundtree Corporation = 400 shares

Ramesh's basis = $475,640 ($25,000 + $50,000 + $400,640)

Ramesh's shareholding in Roundtree Corporation = 1,600 shares

Thus, we can conclude that Marie's basis in Roundtree Corporation is $175,200 with a shareholding of 400 shares while Ramesh has a basis of $475,640 with a shareholding of 1,600 shares.

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Answer 2

Marie and Ramesh's current income, gain, or loss and the basis that each takes in the Roundtree stock are: $175,200. $175,200, $0, $475,640.

Current income, gain, or loss and the basis

Marie has a basis equal to fair market value of $175,200.

Ramesh has no recognized gain on the receipt of stock reason being that all of the consideration that Ramesh transfers to Roundtree stock qualifies as property. Hence, Ramesh gain is $0.

Ramesh basis:

Ramesh basis=$25,000 + $50,000 + $400,640

Ramesh basis=$475,640

Hence:

Marie has income of $175,200 and $175,200 basis in her 400 shares

of stock and Ramesh has income of $0 and $475,640 basis in her 1600 shares of stock.

Inconclusion  Marie and Ramesh's current income, gain, or loss and the basis that each takes in the Roundtree stock are: $175,200. $175,200, $0, $475,640.

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