Question

Mr. Boyd and Ms. Tuck decide to form a new corporation named BT Inc. Mr. Boyd transfers $10,000 cash and business inventory ($20,000 FMV; adjusted tax basis $3,200), and Ms. Tuck transfers business equipment (FMV $60,000; adjusted tax basis $41,500) to BT. In exchange for their cash and property, BT issues 1,200 shares of common stock to its two shareholders. How many shares should Mr. Boyd and Ms. Tuck each receive? Compute Mr. Boyd’s realized and recognized gain on his exchange of property for stock, and determine his tax basis in his BT common shares. Compute Ms. Tuck’s realized and recognized gain on her exchange of property for stock, and determine her tax basis in her BT common shares. Determine BT Inc.’s book and tax basis in the inventory transferred by Mr. Boyd and the equipment transferred by Ms. Tuck.

Answer 1

Answer:

1. Mr Boyd's share = 400, Ms Tuck = 800

2. Mr Boyd's realised gain = $16,800, recognized gain = $0, basis = $13200

Ms Tuck's realized gain = $18500, gain recognized = 0, basis = $41500

Explanation:

1.

Total share = $1200

Cash received from Mr Boyd = 10000

FMV from him = 20000

Total value = 30000

FMV of equipment from Ms Tuck = 60000

Total value from both of them = 60000 + 30000 = $90000

Number of share Mr Boyd is to receive = 1200x(30000/90000)

= 400

Number of share Ms Tuck is to receive

= 1200x(60000/90000)

= 800

2.

Mr Boyd's gains

Cash received = 10000

FMV = 20000

Total = 30000

Adjusted basis = 3200

Total tax basis = 10000+3200

Gain realized = 30000-13200

= 16800

Gain realized = 0 because it is a non taxable exchange.

Mr Boyd's realised gain = $16800, recognised gain = $0, basis = $13200

Ms Tuck

FMV = 60000

Adjusted tax basis = 41500

Gain realized = 60000-41500

= 18500

Gain recognized = 0(non taxable exchange)

Ms Tuck's realized gain = $18500, recognized gain = $0, basis = $41500

3

the FMV basis of inventory = 20000

carryover basis = 3200

equipment basis FMV = 60000

carryover basis = 41500

note that no gain if equal to or more than 80 percent of the ownership of the stock in a non taxable exchange.