CPA Regulation (REG) : Stock Issuance in Exchange for Property & Services

Study concepts, example questions & explanations for CPA Regulation (REG)

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Example Questions

Example Question #1 : Stock Issuance In Exchange For Property & Services

Acre, Boss, and Craft organized Plumb Corp. with authorized voting common stock of $100,000. Acre received 10% of the capital stock in payment for the organizational services she rendered for the benefit of the newly formed corporation. Acre did not contribute property to Plumb and was under no obligation to be paid by Boss or Craft. Boss and Craft transferred property in exchange for stock as follows:

12 q1 table

What amount of gain did Acre recognize from this transaction?

Possible Answers:

$0

$5,000

$15,000

$10,000

Correct answer:

$10,000

Explanation:

When shares of stock are received in exchange for services, the recipient’s basis in the stock is the FMV of the shares, or $10,000 here (10% of the $100,000 authorized stock). The stock received is treated as ordinary income. 

Example Question #2 : Stock Issuance In Exchange For Property & Services

Acre, Boss, and Craft organized Plumb Corp. with authorized voting common stock of $100,000. Acre received 10% of the capital stock in payment for the organizational services she rendered for the benefit of the newly formed corporation. Acre did not contribute property to Plumb and was under no obligation to be paid by Boss or Craft. Boss and Craft transferred property in exchange for stock as follows:

12 q2 table

What amount of gain did Craft recognize from this transaction?

 

Possible Answers:

$40,000

$0

$10,000

$15,000

Correct answer:

$0

Explanation:

When a corporation is formed (or when ownership changes) through the contribution of property, the transaction will result in no recognized gain if:

  1. Those contributing property will own at least 80% of the voting stock and at least 80% of nonvoting stock; and
  2. The property is exchanged solely for stock (e.g., no cash is transferred to those contributing property)

In this case, Boss and Craft both contributed property and together will have 90% ownership of all stock. Since they only received stock in exchange for the property, neither Boss nor Craft will recognize a gain.

Example Question #3 : Stock Issuance In Exchange For Property & Services

Clint, Darren, and Ellen form a corporation. Clint exchanges $25,000 of accounting fees for 30 shares of stock. Darren exchanges equipment with a basis of $10,000 and a fair market value of $100,000 for 60 shares of stock. Ellen exchanges $10,000 cash for 10 shares of stock. What amount of income should each shareholder recognize?

 

Possible Answers:

Clint: $25,000
Darren: $90,000
Ellen: $0

Clint: $0
Darren: $0
Ellen: $0

Clint: $0
Darren: $90,000
Ellen: $0

Clint: $25,000
Darren: $90,000
Ellen: $10,000

Correct answer:

Clint: $25,000
Darren: $90,000
Ellen: $0

Explanation:

When shares of stock are received in exchange for services, the recipient’s basis in the stock is the FMV of the shares, or $25,000 for Clint as ordinary income. Owners who contribute property (here, Darren) will not recognize a gain if they will own more than 80% of the corporation’s stock; that threshold is not met here (Darren will only own 60%), and so income is recognized for the difference between the shareholder’s basis in the property ($10,000) and the property’s FMV ($100,000), or $90,000. No gain or income is recognized when cash is exchanged for stock.

Example Question #4 : Stock Issuance In Exchange For Property & Services

The sale of which of the following types of business property should be reported as Section 1231 property?

Possible Answers:

Cattle held for 6 months

Machinery held for 6 months

Inventory held for resale

Land held for 18 months

Correct answer:

Land held for 18 months

Explanation:

1231 assets are depreciable personal property and real property used in a business and held for over 12 months. Land held for 18 months meets this definition.

Example Question #5 : Stock Issuance In Exchange For Property & Services

Of the following items, which is a capital asset?

Possible Answers:

Real property used in a trade or business

A/R for inventory sold

An automobile for personal use

Depreciable business property

Correct answer:

An automobile for personal use

Explanation:

An automobile for personal use is a capital asset. Real property in a trade or business is a Section 1231 asset just as is depreciable business property.

Example Question #6 : Stock Issuance In Exchange For Property & Services

A corporate combination is tax-free to the ______ if it is a qualifying reorganization.

Possible Answers:

Both

Shareholder

Corporation

Neither

Correct answer:

Both

Explanation:

When a corporate reorganization is qualifying, it is tax-free to both all corporations involved and their shareholders.

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