Dahlia, Rose, and Daisy decide to pool the resources from their respective sole proprietorships and form Flower, Corporation. These three individuals contribute the following items to form this corporation:

Asset Adj. Basis Fair Mkt Value Shares of Stock

Dahlia Cash 10,000 10,000 1000 shares

Fixtures 20,000 80,000

Rose Equipment 3,000 55,000* 500 shares

Daisy Building/Land 80,000 280,000**

Mortgage (100,000) (100,000) 2,000 shares

*Rose received $10,000 of cash in addition to the 1,000 shares of stock.

**The corporation assumed the mortgage associated with Daisys building.

Required:

Part 1:

Dahlia:

Does Dahlia recognize gain, loss or income from this transaction? If so, what is the amount and character of this gain, income or loss?

What is Dahlias basis in Flower Corporation stock?

What is Flower Corporations basis in the fixtures?

Rose:

Does Rose recognize gain, loss or income from this transaction? If so, what is the amount and character of this gain, income or loss?

What is Roses basis in Flower Corporations stock?

What is Flower Corporations basis in the equipment?

Daisy:

Does Daisy recognize gain, loss or income from this transaction? If so, what is the amount and character of this gain, income or loss?

What is Daisys basis in Flower Corporation stock?

What is Flower Corporations basis in the building/land?

Part 2:

Assume that in addition to the 3,500 shares of stock issued to Dahlia, Rose, and Daisy from their transfer of assets to Flower Corporation (see the chart above), they would also like to issue 1000 shares of stock to Fern in exchange for $90,000 of services she performed. In other words, the transaction would include Dahlia, Rose, Daisy and Fern

As their tax advisor, what are the potential tax implications to include Fern in this transactions? What are your recommendations?