Question

Firm CS performed consulting services for Company P. The two parties agreed that Company P would pay for the services by transferring investment securities to Firm CS. At date of transfer, the securities had a $38,500 FMV. Company P's tax basis in the securities was $25,000.

Answer 1

the requirements are missing, so I looked for similar questions:

a. How much income must Firm CS recognize on receipt of the securities? What is Firm CS’s tax basis in the securities?

CS must report $38,500 as ordinary income. If they decide to hold he stocks, their basis will be $38,500

b. How much income must Company P recognize on disposition of the securities?

Company P must report a realized gain = $38,500 - $25,000 = $13,500.

c. Can Company P deduct the consulting expense?

The cost of the consulting services is $38,500, and they can be deducted by Company P.

First they must recognize a realized gain from holding the investment, and then they can deduct the expense. The net transaction for Company P will be -$25,000, since they first report income and then deduct an expense.