TAX HOMEWORK

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A.

Gail and John decide to form a new corporation called Titans Corporation.

Gail transfer property with a basis of $25,000 and a current value of $200,000 in exchange for 50 shares of Titans Corporation.  John transfers property with a basis of $50,000 and a current value of $165,000. John also will provide accounting and tax services to Titans Corporation.  John receives 50 shares in the new Titans Corporation. The value of John’s services provided is $35,000.

  1. What gain or income do Gail and John recognize on the exchange?
  2. What is Titan’s basis in the property transferred by Gail and Jane?
  3. How does Titan treat the value of the accounting services rendered by John?

B.

Jerome Howard exchanges property with a basis of $300,000 and a fair market value of $900,000 for 70% of the stock of Stooges Corporation.  The other 30% of the stock is owned by Jules White who acquired his stock several years ago. 

You are a CPA in private practice and Jerome comes to you and asks you whether he must report a gain on the transfer on his tax return.

Please draft a letter to your client Jerome and an associated memo to the tax files with documentation for your response.

Your memo to the files should incorporate the following sections:

FACTS

ISSUES

LAW & ANALYSIS

CONCLUSION

 

C.

1.  Some say that the Tax Code favors the use of debt over equity when capitalizing a corporation.

Please state whether or not you agree with this proposition and fully explain your rationale.

2. Please state whether or not you agree with the assertion that in terms of justification and effect, Section 351 incorporations and Section 1031 like-kind exchanges are much alike. 

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