17) This year, Blake, Charlotte, and Olivia form Heron Corporation. Blake contri
ID: 2549627 • Letter: 1
Question
17) This year, Blake, Charlotte, and Olivia form Heron Corporation. Blake contributes land purchased as an investment four years ago for $25,000 that has a $30,000 FMV in exchange for 30 shares of Heron stock. Charlotte contributes machinery (Sec. 1251 property) purchased four years ago and used in her business having a $50,000 adjusted basis and a $30,000 FMV in exchange for 30 shares of Heron stock. Olivia contributes services worth $15,000 and $5,000 cash in exchange for 20 shares of Heron stock. a) What is the amount of Blake's recognized gain or loss? b) What is Blake's basis in his Heron shares? When does his holding period begin? c) What is the amount of Charlotte's recognized gain or loss? d) What is Charlotte's basis in her Heron shares? When does her holding period begin? e) How much income, if any, must Olivia recognize? f) What is Olivia's basis in her Heron shares? When does her holding period begin? g) What is Heron Corporation's basis in the land and the machinery? When does its holding period begin? How does Heron Corporation treat the amount paid to Olivia for services?Explanation / Answer
a) Blake had purchased land four years ago for $25000. Now the FMV of the land is $30000. He received 30 shares in exchange of land. Thus Gain to Blake = 30000 - 25000 = $5000
b) The basis of blake in Heron shares is the Current Fair Value of Asset exchanged i.e. Land ($30000). The Holding Period begins when the shares get registered in his name in the company's register.
c) Recognised Loss for Charlotte= 50000-30000
= $20000
As she exhanged machine worth $50000 and received shares worth $30000 which is the fair value of Machinery.
d) Fair Value of Machinery exchanges is the basis in Heron share for Charlotte. Holding Period begins when her name gets registered.
e) No Income shall be recognised by Olivia as she rendered services worth $20000 and received 20 shares. Hence No Income is recognised.
f) olivia's basis in Heron Sharesis the Fair Value of common stock which can be easily calculated based on above transactions i.e. $1000 per share.
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