Chapter 19 Corporate Formation, Reorganization, and Liquidation

39. [LO 2] Zhang incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair market value and adjusted basis.

FMV Adjusted Basis

Inventory $ 20,000 $ 10,000
Building 150,000 100,000
Land 230,000 300,000
Total $ 400,000 $ 410,000

The corporation also assumed a mortgage of $100,000 attached to the building and land. The fair market value of the corporation’s stock received in the exchange was $300,000. The transaction met the requirements to be tax-deferred under §351.

a. What amount of gain or loss does Zhang realize on the transfer of the property to her corporation?

b. What amount of gain or loss does Zhang recognize on the transfer of the property to her corporation?

.

c. What is Zhang’s tax basis in the stock she receives in the exchange?

d. What is the corporation’s adjusted basis in each of the assets received in the exchange?

.

e. How much, if any, gain or loss does Zhang recognize on the exchange assuming the revised facts?

.

f. What is Zhang’s basis in the stock she receives in the exchange?

g. What is the corporation’s adjusted basis in each of the assets received in the exchange?

40. [LO 2] {planning} Sam and Devon agree to go into business together selling college-licensed clothing. According to the agreement, Sam will contribute inventory valued at $100,000 in return for 80 percent of the stock in the corporation. Sam’s tax basis in the inventory is $60,000. Devon will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualified as organizational expenditures). The accounting services are valued at $25,000.

a. What amount of gain or loss does Sam realize on the formation of the corporation? What amount, if any, does he recognize?

b. What is Sam’s tax basis in the stock he receives in return for his contribution of property to the corporation?

c. What amount of income, gain, or loss does Devon realize on the formation of the corporation? What amount, if any, does he recognize?

d. What is Devon’s tax basis in the stock he receives in return for his contribution of services to the corporation?

Assume Devon received 25 percent of the stock in the corporation in return for his services.

e. What amount of gain or loss does Sam recognize on the formation of the corporation?

f. What is Sam’s tax basis in the stock he receives in return for his contribution of property to the corporation?

g. What amount of income, gain, or loss does Devon recognize on the formation of the corporation?

.

h. What is Devon’s tax basis in the stock he receives in return for his contribution of services to the corporation?

i. What tax advice could you give Sam and Devon to change the tax consequences?

41. [LO 2] {form and research} Jekyll and Hyde formed a corporation (Halloween Inc.) on October 31 to develop a drug to address split personalities. Jekyll will contribute a patented formula valued at $200,000 in return for 50 percent of the stock in the corporation. Hyde will contribute an experimental formula worth $120,000 and medical services in exchange for the remaining stock. Jekyll’s tax basis in the patented formula is $125,000, whereas Hyde has a basis of $15,000 in his experimental formula.

a. Describe the tax consequences of the transaction.

b. Prepare the §351statement that must be included with the return.

42. [LO 2] Ron and Hermione formed Wizard Corporation on January 2. Ron contributed cash of $200,000 in return for 50 percent of the corporation’s stock. Hermione contributed a building and land with the following fair market value and adjusted basis in return for 50 percent of the corporation’s stock.

FMV Adjusted Basis

Building $ 75,000 $ 20,000
Land 175,000 80,000
Total $ 250,000 $ 100,000

To equalize the exchange, Wizard Corporation paid Hermione $50,000 in addition to her stock.

a. What amount of gain or loss does Ron realize on the formation of the corporation? What amount, if any, does he recognize?

.

b. What is Ron’s tax basis in the stock he receives in return for his contribution of property to the corporation?

c. What amount of gain or loss does Hermione realize on the formation of the corporation? What amount, if any, does she recognize?

d. What is Hermione’s tax basis in the stock she receives in return for her contribution of property to the corporation?

e. What adjusted basis does Wizard Corporation take in the land and building received from Hermione?

f. What amount of gain or loss does Hermione realize on the formation of the corporation? What amount, if any, does she recognize?

g. What adjusted basis does Wizard Corporation take in the land and building received from Hermione?

h. What amount of gain or loss does Hermione realize on the formation of the corporation? What amount, if any, does she recognize?

i. What adjusted basis does Wizard Corporation take in the land and building received from Hermione?

j. What election can Hermione and Wizard Corporation make to allow Wizard Corporation to take a carryover basis in the land?