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ACTG532-Chapter_4_Solutions - Chapter 4 Solutions...

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Chapter 4 Solutions Corporations: Organization & Capital Structure (2009) updated: August 13, 2008 26. a. $30,000 of ordinary gain (compensation income). b. $30,000. c. $0. Rod may not recognize the realized loss of $45,000 because such losses are disallowed by § 351. d. $345,000 (basis of property contributed). Because Rod contributed property with a built-in loss, the basis of the equipment to the corporation (see part e. below) generally cannot exceed its fair market value. However, at the election of both Rod and Zelcova Corporation, Zelcova may take a carryover basis of $345,000 if Rod accepts a basis in his stock of $300,000. Rod may be willing to take a lower basis if he plans to hold the stock for a long period of time. e. $300,000. Because Rod contributed property with a built-in loss, the basis of the equipment to the corporation generally cannot exceed its fair market value. However, at the election of both Rod and Zelcova Corporation (see part d. above), Zelcova may take a carryover basis of $345,000 if Rod accepts a basis $300,000. The election may be worthwhile if Zelcova plans to sell the equipment soon or needs additional depreciation deductions. f. $20,000 of ordinary gain (related to accounts receivable). g. $60,000 [$60,000 (basis of cash and unrealized accounts receivable) + $20,000 (gain recognized) – $20,000 (boot received)]. h. $20,000 [$0 (basis in unrealized accounts receivable) + $20,000 (gain recognized)]. i. $90,000 [$300,000 (mortgage) – $210,000 (basis in property)]. The character of the gain is dependent on the nature of the assets in Whit’s hands. Assuming Whit held the assets for business use, the gain will likely be given § 1231 treatment; however, the depreciation recapture rules could cause a portion of the gain to be ordinary. j. $0 [$210,000 (basis in property) + $90,000 (gain recognized) – $300,000 (release of liability)]. k. $300,000 [$210,000 (basis of property) + $90,000 (gain recognized)]. pp. 4-3, 4-4, 4-9 to 4-12, Figures 4-1 and 4-2, and Examples 21 and 22 27. a. $0. b. $180,000. c. $140,000. d. $0. e. $264,000. f. $120,000 (basis in the equipment) and $4,000 (basis in the patent). g. The answers would not change. There is no requirement that the transferors receive the same type of stock. Further, both common stock and most preferred stock qualify as ‘‘stock.” However, if Gail received “nonqualified preferred stock,” her realized gain would be recognized because this type of preferred stock is treated as boot. 4-2 h. The answers would not change. There is no requirement that the transferors be individuals. Example 2 and Figures 4-1 and 4-2 30. a. The transfers will qualify under § 351. Vera’s stock is counted in determining control for purposes of § 351; thus, the transferors own 100% of the stock in Crane. All of Vera’s stock, not just the shares received for the machinery, is counted in determining control because property she transferred has more than a nominal value in comparison to the value of the services rendered. b. Dan recognizes no gain on the transfer of the land. His basis in the Crane stock is $60,000, his basis in the land. Vera recognizes gain of $50,000 on the transfer. Even though the transfer of the machinery qualifies under § 351, her transfer of services for stock does not.
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