CPA Regulation (REG) : Stock Issuance in Exchange for Property & Services
Study concepts, example questions & explanations for CPA Regulation (REG)
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Example Questions
Example Question #1 : Taxation Of Property Transactions
Acre, Boss, and Craft organized Plumb Corp. with authorized voting common stock of $100,000. Acre received 10% of the capital stock in payment for the organizational services she rendered for the benefit of the newly formed corporation. Acre did not contribute property to Plumb and was under no obligation to be paid by Boss or Craft. Boss and Craft transferred property in exchange for stock as follows:
What amount of gain did Acre recognize from this transaction?
$15,000
$0
$10,000
$5,000
$10,000
When shares of stock are received in exchange for services, the recipient’s basis in the stock is the FMV of the shares, or $10,000 here (10% of the $100,000 authorized stock). The stock received is treated as ordinary income.
Example Question #2 : Taxation Of Property Transactions
Acre, Boss, and Craft organized Plumb Corp. with authorized voting common stock of $100,000. Acre received 10% of the capital stock in payment for the organizational services she rendered for the benefit of the newly formed corporation. Acre did not contribute property to Plumb and was under no obligation to be paid by Boss or Craft. Boss and Craft transferred property in exchange for stock as follows:
What amount of gain did Craft recognize from this transaction?
$40,000
$10,000
$15,000
$0
$0
When a corporation is formed (or when ownership changes) through the contribution of property, the transaction will result in no recognized gain if:
- Those contributing property will own at least 80% of the voting stock and at least 80% of nonvoting stock; and
- The property is exchanged solely for stock (e.g., no cash is transferred to those contributing property)
In this case, Boss and Craft both contributed property and together will have 90% ownership of all stock. Since they only received stock in exchange for the property, neither Boss nor Craft will recognize a gain.
Example Question #3 : Taxation Of Property Transactions
Clint, Darren, and Ellen form a corporation. Clint exchanges $25,000 of accounting fees for 30 shares of stock. Darren exchanges equipment with a basis of $10,000 and a fair market value of $100,000 for 60 shares of stock. Ellen exchanges $10,000 cash for 10 shares of stock. What amount of income should each shareholder recognize?
Clint: $25,000
Darren: $90,000
Ellen: $0
Clint: $25,000
Darren: $90,000
Ellen: $10,000
Clint: $0
Darren: $90,000
Ellen: $0
Clint: $0
Darren: $0
Ellen: $0
Clint: $25,000
Darren: $90,000
Ellen: $0
When shares of stock are received in exchange for services, the recipient’s basis in the stock is the FMV of the shares, or $25,000 for Clint as ordinary income. Owners who contribute property (here, Darren) will not recognize a gain if they will own more than 80% of the corporation’s stock; that threshold is not met here (Darren will only own 60%), and so income is recognized for the difference between the shareholder’s basis in the property ($10,000) and the property’s FMV ($100,000), or $90,000. No gain or income is recognized when cash is exchanged for stock.
Example Question #4 : Taxation Of Property Transactions
The sale of which of the following types of business property should be reported as Section 1231 property?
Inventory held for resale
Machinery held for 6 months
Land held for 18 months
Cattle held for 6 months
Land held for 18 months
1231 assets are depreciable personal property and real property used in a business and held for over 12 months. Land held for 18 months meets this definition.
Example Question #5 : Taxation Of Property Transactions
Of the following items, which is a capital asset?
Depreciable business property
Real property used in a trade or business
An automobile for personal use
A/R for inventory sold
An automobile for personal use
An automobile for personal use is a capital asset. Real property in a trade or business is a Section 1231 asset just as is depreciable business property.
Example Question #6 : Taxation Of Property Transactions
A corporate combination is tax-free to the ______ if it is a qualifying reorganization.
Neither
Both
Corporation
Shareholder
Both
When a corporate reorganization is qualifying, it is tax-free to both all corporations involved and their shareholders.
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