PROBLEM

This year, John, Meg, and Karen form Frost Corporation. John contributes land purchased as an investment four years ago for $25,000 that has a $30,000 FMV in exchange for 30 shares of Frost stock. Meg contributes machinery purchased four years ago and used in her business having a $50,000 adjusted basis and a $30,000 FMV in exchange for 30 shares of Frost stock. Karen contributes services worth $19,500 and $500 cash in exchange for 20 shares of Frost stock.

a. What is the amount of John's recognized gain or loss?

b. What is John's basis in his Frost shares? When does his holding period begin?

c. What is the amount of Meg's recognized gain or loss?

d. What is Meg's basis in her Frost shares? When does her holding period begin?

e. How much income, if any, must Karen recognize?

f.What is Karen's basis in her Frost shares? When does her holding period begin?