CREATION OF CORPORATION

John Payne is the sole owner of a classic car restoration business that specializes in the restoration of classic and muscle cars for individuals. It is not incorporated at this time.

John has called his company the GAS MONKEE CAR RESTORATION. John believes there might be an advantage to creating a corporation for limited liability reasons. John has assets to transfer for the stock in Gas Monkee totaling approximately $250,000.00. In addition, he manages Gas Monkee's operations on a full-time basis and pays himself a salary of $80,000.00. John has a key mechanic and restoration specialist employee, Richard Rogers, that he would like to make a shareholder in the new corporation. It is John's intent to be an eighty percent (80%) owner in the corporation and Richard would be a twenty percent (20%) owner. Richard only has cash of Ten Thousand Dollars to invest and would like to substitute his mechanic skills (i.e. services) for the twenty percent ownership.

Discuss in detail the relevant issues for John and Richard. Can the new corporation be formed? Would there be tax consequences for either John or Richard? Is there a way to avoid any tax consequences? Do you have any other suggestions for John and Richard from a tax perspective? You must cite in detail, using the IRAC method and Blue Book Method.