Question

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Ramon incorporated his 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 values and tax bases:

				Tax
	FMV			Basis
Inventory	$	14,500		$	5,600
Building		61,000			52,000
Land		156,000			55,500
Total	$	231,500		$	113,100

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 Ramon. (Any answer representing a loss should be entered as a negative number. Leave no answer blank. Enter zero if applicable.)

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

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

c. What is Ramon’s basis in the stock he receives in his corporation?

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MWC Corp. is currently in the sixth year of its existence (2017). In 2012–2017, it reported the following income and (losses) (before net operating loss carryovers or carrybacks).

2012:	$	(55,500	)
2013:		(20,750	)
2014:		37,750
2015:		165,000
2016:		(15,500	)
2017:		412,500

A.) Assuming the original facts and that MWC elects to not carry back NOLs, what was MWC’s 2015 taxable income?

b. If MWC does not elect to forgo any NOL carrybacks, what is its 2017 taxable income after the NOL deduction?

c-1. If MWC always elects to forgo NOL carrybacks, what is its 2017 taxable income after the NOL deduction?

c-2. Considering c-1, what is its 2017 book-tax difference associated with its NOL? Is it favorable or unfavorable? Is it permanent or temporary?

	Book-tax difference

    

      

Answer 1

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

FMV of stock received                                           231,500

Adjusted tax basis of property transferred            113,100

Gain realised                                                         118,400

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

No gain or loss will be recognized by Ramon as requirements of section 351 are met and no boot is received.

c. What is Ramon’s basis in the stock he receives in his corporation?

Ramon's basis will be equal to the substituted basis of assets transferred i.e. $113,100

A.) Assuming the original facts and that MWC elects to not carry back NOLs, what was MWC’s 2015 taxable income?

After NOL deductions, taxable income of 2015 will be = - (55500 + 20750 ) + (37750 + 165000) = $126,500

b. If MWC does not elect to forgo any NOL carrybacks, what is its 2017 taxable income after the NOL deduction?

$412,500 as $(15,500) from 2016 would have been used when carried back to 2015.

c-1. If MWC always elects to forgo NOL carrybacks, what is its 2017 taxable income after the NOL deduction?

$412,500 - 15,500 = $397,000

c-2. Considering c-1, what is its 2017 book-tax difference associated with its NOL? Is it favorable or unfavorable? Is it permanent or temporary?

The NOL carryover will create a temporary favourable book-tax difference of $15,500