Scott incorporates his sole proprietorship as SuperiorCorporation and transfers its assets to Superior in exchange forall 100 shares of Superior stock and four $7,500 interest-bearingnotes. The stock has a $130,000 FMV. The notes mature consecutivelyon the first four anniversaries of the incorporation date. Theassets transferred are asâ follows:
Assets
Adjusted Basis
FMV
Cash
14400
14400
Equipment
135000
Minus: Accumulated Depreciation
(65000)
70000
60800
Building
85000
Minus: Accumulated Depreciation
(50000)
35000
51200
Land
25600
33600
Total
45000
160000
Requirement a. What are the amounts and character of tScottâ'srecognized gains orâ losses?Complete the table to determine theamount and character of Scottâ's recognized gain or loss for eachasset type. If an asset does not have a gain orâ loss, selectâ"N/A" for the character type.
Cash
Equipment
Building
Land
Assetâs FMV
Consideration Received in exchange for asset
Stock
Notes
Total Proceeds
Minus: Adjusted Basis
Realized gain (loss)
Boot Received
Recognized gain (loss)
Character of gain (loss)
Requirement b. What is Scottâ's basis in the Superior stock andânotes? Begin by determining the adjusted basis of the stock.
Adjusted basis of Property transferred to the corporation
Plus
Gain recognized by transferor
Minus
FMV of Boot Received
Adjusted basis of stock
Requirement c. What is Superiorâ's basis in the propertyreceived from Scottâ?
Cash
Equipment
Building
Land
Transferorâs adjusted basis in property transferred to thecorporation
Pus:
Minus:
Transferee corporationâs basis in property
Scott incorporates his sole proprietorship as SuperiorCorporation and transfers its assets to Superior in exchange forall 100 shares of Superior stock and four $7,500 interest-bearingnotes. The stock has a $130,000 FMV. The notes mature consecutivelyon the first four anniversaries of the incorporation date. Theassets transferred are asâ follows:
Assets | Adjusted Basis | FMV | |
Cash | 14400 | 14400 | |
Equipment | 135000 | ||
Minus: Accumulated Depreciation | (65000) | 70000 | 60800 |
Building | 85000 | ||
Minus: Accumulated Depreciation | (50000) | 35000 | 51200 |
Land | 25600 | 33600 | |
Total | 45000 | 160000 | |
Requirement a. What are the amounts and character of tScottâ'srecognized gains orâ losses?Complete the table to determine theamount and character of Scottâ's recognized gain or loss for eachasset type. If an asset does not have a gain orâ loss, selectâ"N/A" for the character type.
Cash | Equipment | Building | Land | |
Assetâs FMV | ||||
Consideration Received in exchange for asset | ||||
Stock | ||||
Notes | ||||
Total Proceeds | ||||
Minus: Adjusted Basis | ||||
Realized gain (loss) | ||||
Boot Received | ||||
Recognized gain (loss) | ||||
Character of gain (loss) |
Requirement b. What is Scottâ's basis in the Superior stock andânotes? Begin by determining the adjusted basis of the stock.
Adjusted basis of Property transferred to the corporation | ||
Plus | Gain recognized by transferor | |
Minus | FMV of Boot Received | |
Adjusted basis of stock |
Requirement c. What is Superiorâ's basis in the propertyreceived from Scottâ?
Cash | Equipment | Building | Land | |
Transferorâs adjusted basis in property transferred to thecorporation | ||||
Pus: | ||||
Minus: | ||||
Transferee corporationâs basis in property |
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Related questions
Several years ago, your client, Brooks Robinson, started an office cleaning service. His business was very successful, owing much to his legacy as the greatest defensive third baseman in major league history and his nickname, âThe Human Vacuum Cleaner.â Brooks operated his business as a sole proprietorship and used the cash method of accounting. Brooks was advised by his attorney that it is too risky to operate his business as a sole proprietorship and that he should incorporate to limit his liability. Brooks has come to you for advice on the tax implications of incorporation. His balance sheet is presented below. Under the terms of the incorporation, Brooks would transfer the assets to the corporation in return for 100 percent of the companyâs common stock. The corporation would also assume the companyâs liabilities (payables and mortgage). (Negative amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)
| Balance Sheet | |||||
| Adjusted Basis | FMV | ||||
| Assets | |||||
| Accounts receivable | $ | 0 | $ | 5,000 | |
| Cleaning equipment (net) | 25,000 | 20,000 | |||
| Building | 50,000 | 75,000 | |||
| Land | 25,000 | 50,000 | |||
| Total assets | $ | 100,000 | $ | 150,000 | |
| Liabilities | |||||
| Accounts payable | $ | 0 | $ | 10,000 | |
| Salaries payable | 0 | 5,000 | |||
| Mortgage on land and building | 35,000 | 35,000 | |||
| Total liabilities | $ | 35,000 | $ | 50,000 | |
a. How much gain or loss does Brooks realize on the transfer of each asset to the corporation?
|
b. How much, if any, gain or loss (on a per asset basis) does Brooks recognize?
| Realized gain/loss | |
| Accounts receivable | |
| Equipment | |
| Building | |
| Land | |
| Total | $0 |
c. How much gain or loss, if any, must the corporation recognize on the receipt of the assets of the sole proprietorship in exchange for the corporationâs stock?
Gain or loss recognized -
d. What tax basis does Brooks have in the corporationâs stock?
|
e. What is the corporationâs tax basis in each asset it receives from Brooks?
| Tax Basis | |
| Accounts Receivable | |
| Equipment | |
| Building | |
| Land | |
| Total |
f. How much if any gain or loss will Brooks recognize if he had taken back a 10-year note worth $25,000 plus stock worth $75,000 plus the liability assumption? (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)
| Realized gain/loss | |
| Accounts receivable | |
| Equipment | |
| Building | |
| Land | |
| Total | $0 |
