John Smith provided legal services to a startup corporation in exchange for stock. The value of John’s services is $100,000 and he will have 10% of the corporation’s initial stock offering. Mr. Smith also contributed property with a basis of $50,000 and the corporation assumed a mortgage on the property of $75,000. The initial stock offering was 100,000 shares at par $10 per share.
What are the tax consequences for John Smith as well as the tax consequences of the corporation?
What will the basis of the stock in John Smith’s hands?
What kind of gain will John Smith have if he should decide to sell the stock after holding it for one year.
Cite the relevant Internal revenue codes or primary cases used to find the answer.