On May 1, Amica and Bob (both U.S. citizen) form a corporation, ABC. Amica and Bob become the equal shareholders of ABC. In the formation transaction, each shareholder receives 100 shares of common stock of ABC. The common stok has a fair market value of $1,000 per share.

In the formation transaction, Amica transfers to ABC a piece of equipment with a fair market value of $170,000 and an adjusted basis in Amica’s hands of zero. The equipment is subject to a loan which has a balance of $20,000 remaining. The debt was also transferred to ABC.

Also in the formation transaction, Bob receives his ABC stock in exchange for $60,000 cash and $90,000 worth of personal services that Bob promises to perform in connection with starting up ABC’s business. The issuance of some of the stock in exchange for services to be rendered in the future is valid under controlling state corporate law.

What are the federal income tax consequences to Amica, Bob, and ABC of each of the transaction just described? Be sure to discuss the amount, timing, and character (capital or ordinary) of any income, gain, loss, or deduction realized or recognized by each party; and each party’s basis in the stock or assets that party holds, at each stage of the transactions.

Answer rating: 100% (QA)

The federal income tax consequences to Amica Bob and ABC of each of the transaction just described a... View the full answer