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Running Head: WEEK 5 PROBLEMS 1

The document discusses two problems from accounting and tax chapters. For problem 1, forming a business partnership is recommended over an S or C corporation due to the contributions and roles of the founders. For problem 2, Zhang realizes a $90,000 gain from contributing property to a corporation in exchange for stock, but the gain is not recognized per tax rules. Her stock basis is $310,000 and the corporation takes over her property bases increased by portions of the $90,000 gain.

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75 views3 pages

Running Head: WEEK 5 PROBLEMS 1

The document discusses two problems from accounting and tax chapters. For problem 1, forming a business partnership is recommended over an S or C corporation due to the contributions and roles of the founders. For problem 2, Zhang realizes a $90,000 gain from contributing property to a corporation in exchange for stock, but the gain is not recognized per tax rules. Her stock basis is $310,000 and the corporation takes over her property bases increased by portions of the $90,000 gain.

Uploaded by

petersonbikes802
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Running head: WEEK 5 PROBLEMS

Week 5 Problems ACC 547 May 7, 2012 Peter Christian

WEEK 5 PROBLEMS

Week 5 Problems Chapter 15, Problem 83 a. Given the information presented in the text, there is a wide array of both tax and non-tax issues and concerns regarding the formation of the company. The majority of the nontax issues revolve around the time and cost associated with starting the company. Also, the relationship between all of the people involved is something to consider. A written agreement, while not legally required, is a real must in a situation like this one. While corporations, both S and C, have their tax advantages this company may be most easily formed as a partnership. Since Linda will only be contributing much less than 80 percent of the business tasks those transactions would be taxable transactions if they did indeed choose to form a corporation. Another issue that needs to be investigated is having locations in 2 different cities which will likely have different tax rates. A partnership or LLC will require all involved to pay self-employment taxes, but since the company is a start-up I do not believe these will be large compared to the taxes they would be paying as a corporation. b. As stated above, I believe a partnership is the best type of business to form in this situation. Not only for tax reasons, but non-tax as well. If the company was to become quite profitable in the future they could always visit the idea of transitioning the company into an S corporation. Chapter 19, Problem 39 a. Zhang realizes a gain of $90,000. FMV($400,000) Tax Adjusted Basis($410,000) + Mortgage($100,000). b. The loss is not recognized. According to the rules of Section 351, a loss or gain is not recognized in instances of property being exchanged for stock if the person receiving the stock is in control of the corporation after the exchange. Since Zhang received 100% percent of the stock, she is in control. c. Zhangs tax basis for the stock is $310,000. d. The corporation will have a tax basis of $10,000 for the inventory, $250,000 for the building ($150,000 + $100,000), and $230,000 for the land. e. Zhang would recognize the difference in the total basis, which is $90,000 ($500,000 $410,000). f. The basis for her stock in this scenario is $0. Tax adjusted basis of contribution ($410,000) + Recognized gain ($90,000) Mortgage ($500,000). g. Using their relative Fair Market Values and adding those portions of the $90,000 gain to the tax adjusted basis the new tax basis for the corporation of each asset are as follows: Inventory: $10,000 + ($90,000*.05) = $14,500 Building: $100,000 + ($90,000*.375) = $133,750 Land: $300,000 + ($90,000*.575) = $351,750

WEEK 5 PROBLEMS

Reference Spilker, B. C., Ayers, B. C., Robinson, J. R., Outslay, E., Worsham, R. G., & Barrick, J. A. (2010). Taxation of individuals and business entities. New York, NY: McGrawHill/Irwin.

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