Tom incorporates his sole proprietorship as Total Corporation and transfers its assets to Total in exchange...

Tom incorporates his sole proprietorship as Total Corporation and transfers its assets to Total in exchange for all 100 shares of Total stock and four $10,000 interest-bearing notes. The stock has a $125,000 FMV. The notes mature consecutively on the first four anniversaries of the incorporation date. The assets transferred are as follows:

Assets

Adjusted Basis FMV

Cash $ 5,000 $ 5,000

Equipment $130,000

Minus: Accumulated depreciation (70,000) 60,000 90,000

Building $100,000

Minus: Accumulated depreciation (49,000) 51,000 40,000

Land 24,000 30,000

Total $140,000 $165,000

a. What are the amounts and character of Tom’s recognized gains or losses?

b. What is Tom’s basis in the Total stock and notes?

c. What is Total’s basis in the property received from Tom?

Please use the new tax rules.

Expert Solution

a)
	Cash	Equipment	Building	Land	Total
FMV of assets	$5,000	90,000	40,000	30,000	$165,000
% of totalvalue	3.03%	54.55%	24.24%	18.18%	100.00%
FMV of stock received	$3,787.88	$0.00	$0.00	$0.00	$ 125,000.00
Plus: Boot property (Interst bearing notes)	$ 1,212.12	$ 21,818.18	$ 9,696.97	$ 7,272.73	$ 40,000.00
Total proceeds	$5,000.00	$90,000.00	$40,000.00	$30,000.00	$165,000.00
Less: Basis of assets	$ (5,000.00)	$ (60,000.00)	$ (51,000.00)	$ (24,000.00)	$ (140,000.00)
Gain (loss) realized	$0.00	$30,000.00	($11,000.00)	$6,000.00	$25,000.00
Allocation of boot	$ 1,212.12	$ 21,818.18	$ 9,696.97	$ 7,272.73	$ 40,000.00
Gain recognized (Lesser of the gain realized or allocation of boot to that asset)	0	$ 21,818.18	$0.00	$6,000.00	$ 27,818.18

a)
Gain on the equipment is ordinary income (due to Sec. 1245 recapture)	$ 21,818.18
Gain on land is Section 1231	$6,000.00
Total gain recognized	$ 27,818.18

b)	Basis
Stock
Adj. basis of property transferred	$ 140,000.00
Less: FMV of boot received	40000
Add: gain recognized	$ 27,818.18
Tom Basis in stock	$ 127,818.18
Tom Basis in Notes
Notes = Equal to FMV	$ 40,000.00

c)
	Tom's Basis	Gain recongnized	Reduction	Total
Cash	$ 5,000.00	0	0	$ 5,000.00
Equipment	$ 60,000.00	$ 21,818.18	0	$ 81,818.18
Building (127,818 + 40000)= 167,818 -165000 FMV	$ 51,000.00	$0.00	$ (2,818.18)	$ 48,181.82
Land	$ 24,000.00	$6,000.00	0	$ 30,000.00
Total	$ 140,000.00	$ 27,818.18	$ (2,818.18)	$165,000.00

Total basis in property received	$ 165,000.00

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