Rob,Bill,and Steve form Big Company.Rob performs $45,000 of services for his shares of the company.Bill transferred property with a basis of $5,000 for $75,000 of stock.Steve contributes cash of $100,000 for his shares.Which of the three must recognize income in the year of the formation?

Question

Quizplus · Accepted Answer

Only Rob must recognize income in the year of formation because he performed services in exchange for his shares. The value of the services he performed, $45,000, is considered compensation income to him. Bill and Steve did not perform services in exchange for their shares and therefore do not have to recognize income in the year of formation. Bill did contribute property with a basis of $5,000, but because he received stock worth $75,000 in exchange, he does not have to recognize any income at this time. Similarly, Steve contributed cash for his shares, which is not considered income.

Rob,Bill,and Steve Form Big Company