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.