Mickey, Mickayla, and Taylor are starting a new business (MMT). To get the business started, Mickey is contributing $200,000 for a 40 percent ownership interest, Mickayla is contributing a building with a value of $200,000 and a tax basis of $150,000 for a 40 percent ownership interest, and Taylor is contributing legal services for a 20 percent ownership interest. What amount of gain is each owner required to recognize under each of the following alternative situations?

a. MMT is formed as a C corporation
b. MMT is formed as an S corporation
c. MMT is formed as an LLC

Solution:

a. MMT is formed as a C corporation

No benefit is understood by Michkey and Mickayla.

Nevertheless, since Taylor provides services (and services are often not property)

Taylor is obligated to accept $150,000 of ordinary transaction profits from the $150,000 stock obtained from MMT.

$200,000 + $200,000 = $400,000 ÷ 60% = $666,666 x 20% = $133,333

b. MMT is formed as an S corporation

Every benefit is known by Mickey and Mickayla.

As Taylor provides services and facilities are not assets,

Taylor shall, on receipt of the $150,000 stock she collects from MMT, accept the $150,000 of the earned income.

( Calculation same as (a) )

c. MMT is formed as an LLC

None are informed of any gain on the move by Mickey or Mickayla.

But Taylor has a 20% stake of MMT, she accepts $150,000 from the transaction's ordinary profits.