Ken and Jim Agree to Go into Business Together Selling

question 50

Essay

Ken and Jim agree to go into business together selling old comic books and records. According to the agreement, Ken will contribute inventory valued at $200,000 in return for 80 percent of the stock in the corporation. Ken's tax basis in the inventory is $100,000. Jim will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualify as organizational expenditures). The accounting services are valued at $50,000.
Please answer the following questions about the tax consequences of the transaction to Ken.
a. What amount of gain or loss does Ken realize on the formation of the corporation?
b. What amount of gain or loss, if any, does he recognize?
c. What is Ken's tax basis in the stock he receives in return for his contribution of property to the corporation?

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Definitions:

Indirect Contact

The spread of disease through touching surfaces or objects contaminated by an infected person, instead of direct physical contact.

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Small, parasitic worms that infect the intestines, especially in children, causing itching and discomfort around the anus.

Sterile Package

Packaging that has been treated to ensure it is free of microorganisms, used for medical instruments and supplies to maintain asepsis.

Dry Heat Oven

A type of equipment used to sterilize medical and laboratory instruments through the application of high temperature without moisture.