Partnership Taxation Homework Essay

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Freedom Drones, Inc. will be formed to mass produce and market drones that will be sold to the US government and various delivery services. Individual A and B will initially capitalize the company as described below. Your clients, Individual A and B, have asked you to consider the tax implications of the following initial contributions to the capital of Freedom Drones, Inc.

Individual A contributes cash of $50,000 and receives 10 shares of stock worth $50,000 in exchange for the cash contribution.

Individual B contributes a prototype for the drone with a FMV of $50,000 and an adjusted basis of $5,000. In building the prototype, B borrowed $10,000 from a bank. B will receive 8 shares of stock with a FMV of $40,000 and Freedom …show more content…
Therefore, we can draw a conclusion that this transaction qualifies for nonrecognition treatment under IRC section 351.

2. Will either A or B recognize gain or loss on this transaction? (If so, how much? – If gain or loss, please show me the calculation and the citations supporting your conclusions)
Answer: For A, since this transaction qualifies for nonrecognition treatment under Section 351 and A received only stocks, A will not recognize any gain or loss.

Section 357 (c) provides that when liabilities on the property exceed the transferor’s basis, the excess is treated as gain from a sales or exchange of the property. Therefore, for B,

Section 357 (c)
Assumed Liabilities: $10,000
Less: Adjusted Basis: $5,000
Recognized Gains: $5,000

In a conclusion, A recognized no gain or loss and B recognized a gain of $5,000 on this transaction.

3. Please answer the following questions about basis in stock received from Freedom Drones.
a. What is A’s basis in the stock she receives from Freedom Drones? (show me the calculation and the citations supporting your conclusions)

Answer:

A’s Basis (Section 358)
Basis in Property Transferred $50,000
Less: FMV of Boot Received and/or Amount of Money Received $0
Plus: Gain Recognized $0
Basis for A: $50,000

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