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Respond to the following question in your textbook C:2-26: Carl...

Respond to the following question in your textbook C:2-26: Carl contributes equipment with a $50,000 adjusted basis and an $80,000
FMV to Cook Corporation for 50 of its 100 shares of stock. His son, Carl Jr., contributes $20,000 cash for the remaining 50 Cook shares.
What tax issues regarding the exchange should Carl and his son consider?

Law Social Science Tax law ACC 668 섈 쉋

Answer & Explanation Solved by verified expert 숨

Carl and Carl Jr. should consider the following tax issues:
1.Gain or loss on the asset exchange
2.Period of holding
3.Basis of the SOS of Cook Corporation

Step-by-step explanation

Note:
The Basis here mentioned as Th.B.
Adjusted Basis mentioned as AB.
SOS mentioned as SOS.
 
At the point of exchange of equipment, Carl can face the following issues:
 
1. Gain or loss at the course of  exchange of property:
 
Gain on exchange is applicable only to Carl because Carl Jr. made a contribution in names of cash.
Equipment's AB and the FMV difference is the gain/loss on the transfer( equipment).
 
2.Period of holding:
Period of holding is considered at the time of sale of such shares of stock and it is taken from the date on which the equipment is
held by Carl.
 
But for Carl Jr., it should be the date on which he acquired the SOS in the corporation.
 
3.Basis of the Share:
 
While exchanging the equipment to get the share of the stock of Cook Corporation, Carl has to find out what is Th.B. of such stock.
 
For the calculation of the Stock Basis, we have to find the AB, and then we have to add any amount such as dividend further. It is
decreased by the contribution made in the cash for the stock is received and if at the time of transfer the taxpayer incurred any loss,
it should also be deducted.
 
Calculations for Th.B. of the Stock are as follows:

Image transcription text

섘 A B 1 Calculation of the Th.B.of the share of stock 2

Particular Amount(in S) 3 AB of the equipment $50.000.00 4

Add: Gain incurred on the date of transfer $30.... Show more

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Image transcription text

섘 A B Calculation of the Th.B.of the share of stock 2 Particular

Amount(in $) 3 AB of the equipment $50.000.00 4 Add: Gain

incurred on the date of transfer $30.000.00 5 L... Show more

 
* Gain on transfer is the difference between FMV and the AB of the property.
 
Further, Carl contributes equipment of $80,000 which has an AB of $50,000 for 50% of the stock of Cool Corporation. So, for Carl,
Th.B. of the stock is as it is determined for the corporation which is $60,000.
 
For exchange of the equipment, Carl gets an SOS and for that, Th.B. of such stock is $60,000.
 
But when the cash contribution is made by any taxpayer in the Corporation, Th.B. of the stock is calculated on Th.B. of cash
contribution made by them.
 
Therefore, for Carl Jr., Th.B. for the stock is $20,000 as he contributed such an amount by cash in the corporation.
 
References:
Basis at the time of exchange:
https://www.irs.gov/publications/p542#en_US_201809_publink1000257764
Basis of Stock:
https://www.irs.gov/publications/p542#en_US_201809_publink1000257768

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