Question

Jane, Jon, and Clyde incorporate their respective businesses and form Starling Corporation. On March 1 of the current year, Jane exchanges her property (basis of $50,000 and value of $150,000) for 150 shares in Starling Corporation. On April 15, Jon exchanges his property (basis of $70,000 and value of $500,000) for 500 shares in Starling. On May 10, Clyde transfers his property (basis of $90,000 and value of $350,000) for 350 shares in Starling.a. If the three exchanges are part of a prearranged plan, what gain will each of the parties recognize on the exchanges?b. Assume Jane and Jon exchanged their property for stock four years ago while Clyde transfers his property for 350 shares in the current year. Clyde's transfer is not part of a prearranged plan with Jane and Jon to incorporate their businesses. What gain will Clyde recognize on the transfer?c. Returning to the original facts, if the property that Clyde contributes has a basis of $490,000 (instead of $90,000), how might the parties otherwise structure the transaction?

Answer 1

Step-by-step explanation:

a)

No gain on exchanged would be recognized by any parties if the three exchanges are part of a pre-arranged plan.

b)

The gain that C will recognize on exchange is calculated below:

Recognized gain = value of property - Basic of property

= $350,000 -$90,000

=$260,000

Therefore the gain that C will recognized on exchange is $260,000

c)

The parties could structure the transaction by using $351 if the property that Clyde contributes has a basis of $490,000(instead of $90,000).The realized gains would not be recognized under this section.Hence,it would be a benefit for all the parties.Moreover,the loss of $140,000,{$490,000(FMV) -$350,000(basic)}on C's exchange could be recognized