Question

Betty joined Jim in forming DBJ Corp. Betty contributed appreciated land for 90 percent of the stock in DBJ Inc. Jim received 10 percent of the DBJ stock valued at $15,000. Determine Jim's tax consequences in each of the following alternative scenarios.

a. Jim received the stock in exchange for providing computer-related services for the corporation. What amount of income or gain does Jim recognize on the exchange? What is Jim's basis in the stock he received in the exchange?

b. Jim contributed the rights to a patent he owned to DBJ in exchange for the DBJ stock. The patent was worth $15,000 and Jim's basis in the patent was $8,000. How much gain does Jim recognize on the exchange? What is Jim's basis in the DBJ stock?

Answer 1

Jim must recognize $15,000 of income if he receives stock for services. If he exchanges a patent for the stock, he has a capital gain of $7,000, and his basis in the stock is $8,000.

Step-by-step explanation:

The tax consequences for Jim in exchanging services for stock or contributing a patent for stock in DBJ Corp have implications for his income tax and basis in the stock. Here are the scenarios:

1. Exchange for Services: When Jim receives the stock in exchange for services, he must recognize ordinary income equal to the fair market value of the stock received. Thus, if the stock is valued at $15,000, Jim must report $15,000 of income. Jim's basis in the stock would be equal to the fair market value on the date of the exchange, hence, a basis of $15,000.
2. Exchange for a Patent: If Jim contributes a patent in exchange for the stock and the patent is worth $15,000 but his basis in the patent is only $8,000, Jim would recognize a capital gain of $7,000 ($15,000 fair market value minus $8,000 basis). His basis in the DBJ stock would be the same as his basis in the patent, which is $8,000.