[jeff]

Welcome to the Q4 2016 CPA Exam Study Group for REG.

If this is your first post in the study group – please post your target exam date (just the time frame to preserve your anonymity), and your past history with this exam (optional, of course).

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[sonja90]

Quigley, Roberk, and Storm form a corporation. Quigley exchanges $25,000 of legal fees for 30 shares of stock. Roberk exchanges land with a basis of $10,000 and a fair market value of $100,000 for 60 shares of stock. Storm exchanges $10,000 cash for 10 shares of stock. What amount of income should each shareholder recognize?

A.
Quigley $0, Roberk $0, and Storm $0

B.
Quigley $25,000, Roberk $90,000, and Storm $0

C.
Quigley $25,000, Roberk $90,000, and Storm $10,000

D.
Quigley $0, Roberk $90,000, and Storm $0

[Reg_Slayer]

CHILD AND DEPENDENT CARE CREDIT: (not to be confused w child tax credit, which is refundable)
-only expenses on kids under 13 qualify.
-The maximum eligible for 1 dependent is $3,000.

[then it is further limited because it is limited to the lowest earned income of either spouse]

[jonm857]

@Sonja90

The answer is B. The 80% rule has come back to haunt us, folks….. If you provide services as your only contribution, then you're not in the control group.

B - 81
A - 87
R - 73
F - July 5th

[Reg_Slayer]

i said D. Why does Q deserve any income ?

[jonm857]

Sonja please confirm the answer. But as far as I recall you should recognize income when you contribute services.

B - 81
A - 87
R - 73
F - July 5th

[Reg_Slayer]

@jon

b was correct, I was wrong.

For Section 351 to apply, the shareholders contributing property, including cash, must own, immediately after the transaction, at least 80% of the voting stock and at least 80% of the nonvoting stock of the corporation. A shareholder who contributes only services (Quigley in this question) is not counted as part of the control group. Thus, only Roberk and Storm are counted, and they together own only 70 shares out of the 100 shares (70%). The $25,000 of legal fees to Quigley is compensation for services rendered and is recognized as income by Quigley. A gain of $90,000 (the fair market value of the land of $100,000 – its adjusted basis of $10,000) is recognized to Roberk. Storm bought shares for cash and has no gain.

[jpowell31]

i think 1040 – it's only your contribution that you put in…but that's just from memory/guessing :S:S

@jon – the explanation basically says the buyer has title as the goods were identified but the answer says otherwise. WAH

[sonja90]

You are right the answer is B. This transaction does not qualify for sec 351.

[jpowell31]

ha. i'm with jon…

[jonm857]

I need to look at that again because now I'm starting to question myself. My understanding is that whenever you contribute services (even in addition to contributing cash or property), you will always recognize a gain. I need to make sure that is the case. The other shareholders got screwed because of Quigley here. So does that mean all Quigley had to do was contribute $1.00 and the other shareholders wouldn't have had to recognize a gain? That seems pretty easy to get around.

B - 81
A - 87
R - 73
F - July 5th

[jonm857]

I just looked in the text and it says contributed services = ordinary income. So if Quigley had contributed those services for $25,000 and also $50,000 in cash, he would still have to recognize the $25,000 in income.

B - 81
A - 87
R - 73
F - July 5th

[Reg_Slayer]

this is all I can remember, will hit heavy on it later:

“80% rule” was that 80% counts as control in tax similar to how 50% counted in FAR. So after we own more than 80%, we can't count gains/losses from the c-corp, becuase we own enough to be affected by the gains/losses themselves…

Am I on base here at all?

[sonja90]

yes services are ordinary income to s/h and it would be deducted as an expense to the company. but if he had put 50,000 in cash than they would qualify for sec 351.

[sonja90]

i think sec 351 is more of deferring gains. They will have to recognize it later when they sell or liquidate

[jonm857]

From memory, what are the 4 types of contracts governed by the Common Law?

B - 81
A - 87
R - 73
F - July 5th

[Author]

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