Question

Joe and Kay form Gull Corporation. Joe transfers cash of 250,000 for 200 shares in Gull Corporation. Kay transfers property with a basis of50,000 and fair market value of 240,000. She agrees to accept 200 shares in Gull Corporation for the property and for providing bookkeeping services to the corporation in its first year of operation. The value of Kay's services is10,000. With respect to the transfer, which of the following statements is correct?

1) Gull Corporation has a compensation deduction of $10,000.
2) Gull capitalizes $10,000 as organizational costs.
3) Neither Joe nor Kay recognizes gain or income on the exchanges.
4) Gull Corporation has a basis of $240,000 in the property transferred by Kay.
5) None of these choices are correct.

Answer 1

Gull Corporation does not have a compensation deduction of $10,000, nor does it capitalize $10,000 as organizational costs. Joe and Kay may recognize gain or income on the transfers. Gull Corporation does not have a basis of $240,000 in the property transferred by Kay.

Step-by-step explanation:

In this situation, Gull Corporation receives cash and property from Joe and Kay. Joe transfers cash of $250,000 for 200 shares in Gull Corporation. Kay transfers property with a basis of $50,000 and a fair market value of $240,000. She agrees to accept 200 shares in Gull Corporation for the property and for providing bookkeeping services worth $10,000 in the first year of operation.

With respect to these transfers:

1) Gull Corporation has a compensation deduction of $10,000. This is correct because Kay is providing bookkeeping services worth $10,000, and the corporation can deduct this expense.

2) Gull Corporation does not capitalize $10,000 as organizational costs. Organizational costs refer to the expenses incurred by a corporation during its formation, such as legal fees and registration costs.

3) Neither Joe nor Kay recognizes gain or income on the exchanges. This is incorrect because both Joe and Kay are transferring property and cash, which may lead to recognizing gain or income.

4) Gull Corporation has a basis of $240,000 in the property transferred by Kay. This is incorrect because the basis in the property remains $50,000.

Based on the given information, none of these choices are correct.