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

Rob must recognize $45,000 of income for the services he performed in exchange for his shares. Bill must recognize a gain of $70,000 ($75,000 fair market value of stock received minus $5,000 basis in the property transferred) and thus must recognize income. Steve does not need to recognize any income as he simply contributed cash for his shares.

Rob, Bill, and Steve Form Big Company