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

Question

Quizplus · Accepted Answer

Both Rob and Bill must recognize income in the year of formation. Rob performed $45,000 of services for his shares, which is considered compensation income. Bill transferred property with a basis of only $5,000 for $75,000 worth of stock, resulting in a gain of $70,000 that must be recognized as taxable income. Steve's contribution of cash does not create taxable income.

Rob, Bill, and Steve Form Big Company