The income recognized upon receiving the shares in exchange for services is $38,500, which is Devon's tax basis in the stock he receives.
The ownership of a portion of the issuing company is represented by a stock, sometimes referred to as equity, which is a type of security. The term "shares" refers to the units of stock, each of which rights the owner to a certain percentage of the company's assets and profits, based on the number of shares they own.
The cornerstone of the portfolios of many individual investors stocks, which are mostly bought and sold on stock exchanges. Government laws enforcing investor protection from dishonest tactics must be followed during stock exchanges. The ratio of the number of shares an investor owns to the total number of outstanding shares determines whether they are regarded as shareholders or owners of the issuing firm.
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Question:
Sam and Devon agree to go into business together selling college-licensed clothing. According to the agreement, Sam will contribute inventory valued at $154,000 in return for 80 percent of the stock in the corporation. Sam's tax basis in the inventory is $94,000. Devon will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualify as organizational expenditures). The accounting services are valued at $38,500. What is Sam's tax basis in the stock he receives in return for his contribution of property to the corporation?
