Question 1

Shareholders A (80%) and B (20%) form a C Corporation. A contributes property with a basis of $20,000 and FMV of $80,000. B contributes services worth $20,000. What is the tax consequence to Shareholder A?

Accepted Answer

1. Identify transferors of PROPERTY (A only). 2. Do they own >= 80%? (Yes, A owns 80%). 3. If yes, §351 applies to them. 4. Service provider (B) always recognizes income.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Thinking B's service contribution invalidates A's control. (It would only invalidate if A owned <80%).

Shareholders A (80%) and B (20%) form a C Corporation. A contributes property with a basis of $20,000 and FMV of $80,000. B contributes services worth $20,000. What is the tax consequence to Shareholder A?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA REG Practice Exam 4

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