Rose and Wayne form a new corporation. Rose contributes cash for 85% of the stock and Wayne contributes services for 15% of the stock. The tax effect is
A)Rose and Wayne must recognize their realized gains, if any.
B)Wayne must report the FMV of the stock received as capital gain.
C)Rose and Wayne are not required to recognize their realized gains.
D)Wayne must report the FMV of the stock received as ordinary income.

Question

Quizplus · Accepted Answer

When a shareholder contributes services in exchange for stock, the value of the stock received is considered ordinary income to the shareholder. Therefore, Wayne must report the FMV of the stock received as ordinary income on his tax return. Rose, on the other hand, contributed cash and did not receive any taxable transaction, so she does not recognize any realized gain.

Rose and Wayne Form a New Corporation