Problem
Ken and Ji 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 $120,000. Ji 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.
I. Answer the following questions about the tax consequences of the transaction to Ken.
i. What amount of gain or loss does Ken realize on the formation of the corporation?
ii. What amount of gain or loss, if any, does he recognize?
iii. What is Ken's tax basis in the stock he receives in return for his contribution of property to the corporation?
II. Answer the following questions about the tax consequences of the transaction to Ji.
i. What amount of income, gain or loss, does Ji realize on the formation of the corporation?
ii. What amount of gain or loss, if any, does he recognize?
iii. What is Ji's tax basis in the stock he receives in return for his contribution of services to the corporation?