PROBLEM 2 Eric incorporated his sole proprietorship by transferring inventory, f
ID: 2562625 • Letter: P
Question
PROBLEM 2 Eric incorporated his sole proprietorship by transferring inventory, furniture, 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 FMV 24,000 Inventory Furnituroe Building Land Total $ 10,000 $ 10,000 100,000 250,000 $ 360,000 $ 56,000 175,000 120,000 S 375,000 The corporation also assumed a mortgage of $120,000 attached to the building and land. The fair market value of the corporation's stock received in the exchange was $375,000.Explanation / Answer
As per U.S. Code § 351, 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 immediately after transfer, 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 Eric has transferred her inventory, building, Furniture and Land to the corporation in return of 100 percent of the corporation's stock and therefore even if there is realized gain to Eric but the same will not be recognized.
a. Amount of realized gain to Eric = Fair Market Value of corporation's stock received - Adjusted basis of assets transferred.
= $375,000 - $360,000
= $15,000.
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 Eric will have control over the corporation immediately after the stocks are received by him/her.
c. Eric's basis in the stock is the adjusted basis of the property she transferred as decreased by the mortgage of $120,000 that corporation assumed attached to the building and land. Therefore, Eric's basis in stock is:
Basis in Stock of Eric = Adjusted Basis of Property - Liability Assumed by corporation.
= $360,000 - $120,000 = $240,000
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