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Tax Researh memo (Corporate Formation and Basis Calculation) - Research Paper Example

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Tax Researh memo (Corporate Formation and Basis Calculation)

Fred Horn decides to contribute equipment that has a basis of $100,000 and an FMV of $80,000. Sam Yang will provide his legal services to Acme, Inc., which has an FMV of $20,000, and Wade Kent will use his know-how to develop software that will mass-produce the road runner trap. This software development is worth $75,000 and in addition, Wade Kent will contribute cash worth $100,000. The four shareholders will receive a share of stock as follows: Barry – 140, Fred –150, Sam – 40, and Wade – 350. Each share costs $500. Issue: It was the decision of the four shareholders to come together to form Acme, Inc. However, since each has a personal contribution to the formation of Acme, Inc., there are tax implications involved. Therefore, the issue is that the four shareholders would like to know what tax implications of the formation of Acme, Inc. are to them considering the analysis of their realized and recognized gains/losses. Another issue is the tax implication of the transaction to Acme, Inc., including the basis of the assets the shareholders will include in their books. Authorities: District of Columbia v. Universal Computers Assocs. Code Section 351 Code Section 83 Conclusion: Software is classified as a property. However, the classification of software as a property should specify that software is an intangible property. Know-how being non-discardable is also classified as a property, and more specifically as an intangible property for that matter. Any gain or loss recognized by any shareholder will be guided by the satisfaction of the conditions of the Code Section 351. Wade will not have any loss or gain recognized since there is a transfer of property. A cash or property contribution in return for long-term debt, such as bond, does not qualify for Section 351 treatment. Therefore, Wade’s cash contribution is not considered under the Code Section 351 as he receives 175,000 of stock in return. Analysis: Barry will contribute a land and a building in return of stock shares. The land has a basis of $60,000 and an FMV of $80,000. Acme, Inc. will also assume a mortgage of $90,000 on the land. The amount realized will include $170,000 from the stock shares ($500 per stock share x 340 stock shares). Therefore, Barry will realize a gain of $20,000 of cash, $170,000 from stock and the $90,000 mortgage. The asset-by-asset analysis would be: the total amount of the FMV of the assets transferred would be $200,000 + 80,000 + 90,000, which gives $370,000. From this, the land portion is $200,000 and the building portion is $170,000, which translates to 54% for the land and 46% for the building out of 100% that represents $370,000 (total amount of the assets transferred by Barry). When portioned according to the percentages, the total FMV of the stock received would be $170,000 (Building of $91,800 + Land of $78,200). The total cash realized would be $20,000, which would come from both the building and the land, with the building contributing $10,800 and the land contributing $9,200. He would recognize a total of $10,800 from the land and $92,000 from the building. Therefore, his would recognize a total of $102,800 from his transfers. He would, however, receive a basis of $60,000 in stock (60,000 + 90,000 – 20,000 + 20,000 – 90,000 = 60,000). He will also have gains realized as follows: from the ...Show more
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Summary

AC 750 Research File Memo Name: (Tax Research Memo of Acme, Inc. Corporate Formation) Tax File Memo Below is the tax implication to Acme, Inc. Corporate Formation Facts: Barry Brown, Fred Horn, Wade Kent, and Sam Yang decide to form Acme, Inc…
Tax Researh memo (Corporate Formation and Basis Calculation)
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