Question

A, B and C form X Corporation by transferring the following assets, each of which has been held long-term:

Answer 1

Answer:

Part (a)

For every business, the most important consideration for any non-cash asset contribution is its fair market value. The importance of assets is to generate financial results in future, where the adjusted basis cannot do this. On the contrary, the shareholders are more interested in the basis recognized from such assets as this informs their share of potential profits.

While the value of stocks and cash each contributor received equals to the fair market value of their contributions. it exceeds the amount of their individual adjusted bases held in the assets contributed. This is a gain on the part of the contributing shareholder, hence must be recognized as such.

The calculation of values received can be determined as under.

A)

Common Stock = $15,000 (15)  

Preferred Stock= $5000 (100)  

Cash = $2,000

Total = $22,000  

B)  

Common Stock = $15,000 (15)  

Cash = $15,000

Total = $30,000  

C)  

Common Stock = $10,000 (15)  

Cash = $5,000

X's Note = $35,000

Total = $50,000  

As such A, B and C should recognize financial gains amounting $7,000, $10,000 and $30,000 respective y. As this gain benefits the individual contributors, X Corporation should recognized and amortize the sum of these gains over a decided period of time. The amount of loss would thus be $47,000.

 

Part (b)

The amount of the basis would have been considered under the installment method where the company would only recognize the income earned for any taxable year as a proportion of the payment in the year in which the gross profit realized or to be realized bears to the total price of the property transfer contract.