Mickey, Mickayla, and Taylor are starting a new business (MMT). To get the busin
ID: 2359668 • Letter: M
Question
Mickey, Mickayla, and Taylor are starting a new business (MMT). To get the business started, Mickey is contributing $200,000 for a 40 percent ownership interest, Mickayla is contributing a building with a value of $200,000 and a tax basis of $150,000 for a 40 percent ownership interest, and Taylor is contributing legal services for a 20 percent ownership interest. What amount of gain is each owner required to recognize under each of the following alternative situations? a. MMT is formed as a C corporation b. MMT is formed as an S corporation c. MMT is formed as an LLCExplanation / Answer
Mickey, Mickayla, and Taylor are starting a new business (MMT). To get the business started, Mickey is contributing $200,000 for a 40% ownership interest, Mickalya is contributing a building with a value of $200,000 and a tax basis of $150,000 for a 40% ownership interest, and Taylor is contributing legal services for a 20% ownership interest. What amount of gain is each owner required to recognize under each of the following alterative situations? [Hint: Look at 351 and 721.]
a. MMT is formed as a C corporation.
Under 351, Mickey and Mickalya do not recognize any gain. However, because Taylor is contributing services (and services are not property) Taylor must recognize $100,000 of ordinary income on the receipt of the $100,000 worth of stock she receives from MMT.
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b. MMT is formed as an S corporation.
Same answer as part a. Under 351, Mickey and Mickalya do not recognize any gain. However, because Taylor is contributing services (and services are not property) Taylor must recognize $100,000 of ordinary income on the receipt of the $100,000 worth of stock she receives from MMT.
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c. MMT is formed as an LLC. Under 721,
neither Micky nor Mickayla recognize any gain on the transfer. However, because Taylor has a twenty percent interest in MMT, she recognizes $100,000 of ordinary income on the transaction.