TAX HOMEWORK

TAX HOMEWORK

Gail and John decide to form a new corporation called Titans Corporation.

Gail transfer property with a basis of $25,000 and a current value of $200,000 in exchange for 50 shares of Titans Corporation. John transfers property with a basis of $50,000 and a current value of $165,000. John also will provide accounting and tax services to Titans Corporation. John receives 50 shares in the new Titans Corporation. The value of John’s services provided is $35,000.

What is Titan’s basis in the property transferred by Gail and John?

Jerome Howard exchanges property with a basis of $300,000 and a fair market value of $900,000 for 70% of the stock of Stooges Corporation. The other 30% of the stock is owned by Jules White who acquired his stock several years ago.

You are a CPA in private practice and Jerome comes to you and asks you whether he must report a gain on the transfer on his tax return.

Please draft a letter to your client Jerome and an associated memo to the tax files with documentation for your response.

Your memo to the files should incorporate the following sections:

FACTS

ISSUES

LAW & ANALYSIS

CONCLUSION

What gain or income do Gail and John recognize on the exchange?

Must Jerome Howard report a gain or a loss on the transfer on his tax return.?

Please state whether or not you agree with this proposition and fully explain your rationale