PROBLEM 1 Valerie incorporated her sole proprietorship by transferring inventory
ID: 2561993 • Letter: P
Question
PROBLEM 1 Valerie 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. Adjusted Basis Inventory Equipment Building Land Total FMV S 8,000 S 17,000 60,000 90,000 S 175,000 S 3,000 $ 7,000 30,000 50,000 S 90,000 The fair market value of the corporation's stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Valerie. a. What amount of gain or loss does Valerie realize on the transfer of the property to his corporation? What amount of gain or loss does Valerie recognize on the transfer of the property to her corporation? What is Valerie's basis in the stock she receives in her corporation? b. c.Explanation / Answer
As per the laws, if the individual has transferred his/her property to the corporation in exchange of the corporation's stock and is therefore able to exercise control over that corporation, then the person is not required to recognize his/her realized gain. "Control" means the ownership of 80 percent of the voting power of the voting stock of the corporation’s voting stock and 80 percent of the number of shares in each class of non-voting stock.
In the given question it is important to note that Valerie has transferred her inventory, building, equipment and land to the corporation in return of 100 percent of the corporation's stock and therefore even if there is realized gain to Valerie but the same will not be recognized.
a. Amount of realized gain to Valerie = Fair Market Value of corporation's stock received - Adjusted basis of assets transferred.
= $175,000 - $90,000
= $85,000.
b. Amount of gain to be recognized = $0 (As discussed above)
NOTE: In the above case due to lack of further information, it is assumed that Valerie will have control over the corporation immediately after the stocks are received by him/her.
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