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review_ex_3_fall_2010 - (2 Original cost $125,000...

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TAX 5015 (Fall 2010) – Chapter Review Exercise #3 Topic review: Corporate Formation Due date: September 16, 2010 Name(s): On September 9, 2010, Robert, Larry, Kevin, Danny and Dennis contribute the following assets to form the Celtic Corporation: Transferor Property Transferred to Corporation Stock/assets received by shareholder basis fair value Robert Land 1 75,000 75,000 Stock (fair value) – 100,000 Building 1 112,500 2 250,000 Mortgage (225,000) (225,000) Note: The mortgage associated with the property was assumed by Celtic. Larry Equipment 3 60,000 125,000 Stock (fair value) – 100,000 Note (fair value) – 25,000 Kevin Truck 4 50,000 35,000 Stock (fair value) – 30,000 Cash – 5,000 Danny Machinery 5 26,875 30,000 Stock (fair value) – 31,250 Cash 1,250 Dennis Services 25,000 Stock (fair value) – 32,500 Cash 7,500 Note: Dennis’ exchange involved legal services for organizing the Celtic Corporation. Notes: (1) Both assets were held by Robert for business- related purposes & for more than one year.
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Unformatted text preview: (2) Original cost $125,000, depreciated using MACRS (39-year property). (3) Original cost $110,000, depreciated using MACRS (7-year property). (4) Original cost $75,000, depreciated using MACRS (5-year property). (5) Original cost $50,000, depreciated using MACRS (7-year property). Required: (a) Does Sec. 351 apply to this corporate formation? Explain – why or why not. (b) For each shareholder: (1) compute their realized gain or loss (2) compute their recognized gain or loss (if any) (3) determine the character of the gain or loss (4) compute the basis for the stock received from the corporation (5) determine when the holding period begins for the stock (c) Prepare Celtic’s tax basis balance sheet as of September 9, 2010. (d) Determine how the corporation would treat the services provided by Dennis. (e) Describe in general terms how the results would change, if at all, for each shareholder if this corporate formation did not qualify for Sec. 351 treatment....
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