Viola and Sebastian agree to form Sail Away, Inc., a small family boat rental business. Viola contributes 20 sailboats purchased for $70,000 but worth $170,000 at the time of incorporation. Sebastian contributes a small piece of waterfront property and a dock purchased many years ago for $30,000, with a fair market value of $150,000 plus cash of $20,000. In return for the contributions, each receives 50% of the 200 authorized common shares of Sail Away stock.

1. What are the tax consequences to Viola, Sebastian, and Sail Away, Inc.?
2. What if Viola’s sailboats were originally purchased for $180,000?
3. What if Sebastian’s contribution consisted of services worth $70,000 and property worth $100,000 (basis still $30,000)? What if he contributed only services valued at $170,000?
4. What if Viola made her contribution in exchange for $160,000 worth of stock plus a Sail Away security valued at $10,000. How would your answer change if Viola’s basis in the property contributed had been $180,000?

Answer rating: 100% (QA)

a In general when a contribution of property is made to a corporation in exchange for shares the basis of the property is its fair market value at the ... View the full answer