Question

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Chapter 19 Corporate Organization Exercise Kathy and Carl formed a corporation by each contributing an asset with a FMV of $50,000 for half of the stock in the corporation. Prior to the transfer, Kathy had an adjusted basis of $40,000 in her asset and Carl had an adjusted basis of $60,000 in his asset. a. Does this exchange qualify for 351 treatment? Why? b. What is Kathy's realized gain on the transaction? c. What is Kathy's recognized gain on the transaction? d. What is Kathy's basis in her stock? e. What is the corporation's basis in Kathy's asset? f. What would Kathy's recognized gain/loss be if she sold her stock for $50,000? g. What would the corporation's recognized gain/loss be if it sold her asset for $50,000? Does Carl have any positive or negative consequences if the corporation sells Kathy's asset for $50,000? Quantify the impact assuming the corporation's marginal tax rate is 21%. h. Answer the following assuming Carl and the corporation did not make the election i. What is Carl's realized loss on the transaction? j. What is Carl's recognized loss on the transaction? k. What is Carl's basis in his stock? 1. What is the corporation's basis in Carl's asset? n. What would Carl's recognized gain loss be if he sold his stock for $50,000? n. What would the corporation's recognized gain/loss be if it sold his asset for $50,0003 Does Kathy have any positive or negative consequences if the corporation sells Carl's o. asset for $50,000? Quantify the impact assuming the corporation's marginal tax rate is 21%. Answer the following assuming Carl and the corporation did make the election p. What is Carl's realized loss on the transaction? q. What is Carl's recognized loss on the transaction? r. What is Carl's basis in his stock? s. What is the corporation's basis in Carl's asset? t. What would Carl's recognized gain/loss be if he sold his stock for $50,000? What would the corporation's recognized gain/loss be if it sold his asset for $50,000? u. Does Kathy have any positive or negative consequences if the corporation sells asset for $50,000? Quantify the impact assuming the corporation's marginal tax rate is 21%. v. Carl's

Answer 1

Sec 351 allows for corporations to issue stock/shares for the machinery/equipment bought.

The section explicitly states that - "No gain or loss shall be recognized if property is transferred to a corporation by one or persons solely in exchange for stocks in such corporations and immediately after the exchange such person or persons are in control of the corporations."

Answer 1 a - Yes, the exchange qualifies for an exchange it is being exchanged solely for the purpose of stock. Here, in the given question, both Kathy and Carl have contributed an asset for the purpose of taking stock of the corporations.

Answer 1 b. - In the given question, The Fair Market Value or FMV of the asset is $ 50000. Kathy exchanged her asset on the basis of $ 40000. Therefore, Kathy has received a realized gain of $10000.

Answer 1 c. - According to the section, no gain or loss is recognized from the property transferred to the corporation. Therefore, in the given question, Kathy's recognized gain in the books of the corporation is nil. But had Kathy sold the asset outside, she would have had a recognized gain of $10000.

Answer 1 d. Kathy's basis in her stock is $ 50000.

Answer 1. d -