Cynthia, a sole proprietor, was engaged in a service business and reported her income on the cash basis. On February 2, 2016, she incorporates her business as Dove Corporation and transfers the assets of the business to the corporation in return for all of the stock in addition to the corporation's assumption of her proprietorship's liabilities. All of the receivables and the unpaid trade payables are transferred to the newly formed corporation. The balance sheet of the corporation immediately after its formation is as follows:
Assets
....................................................... Basis to Dove ......... Fair Market Value
Cash ...................................................... $ 80,000...................... $ 80,000
Accounts receivable ....................................... -0- ........................ 240,000
Equipment (cost $180,000; depreciation
previously claimed $60,000) ........................... 120,000 ..................... 320,000
Building (straight-line depreciation) .................. 160,000 ..................... 400,000
Land ........................................................ 40,000 ...................... 160,000
Total ...................................................... $400,000 .................. $1,200,000
Liabilities and Stockholder's Equity
Liabilities:
Accounts payable-trade .............................................................. $ 120,000
Notes payable-bank ..................................................................... 360,000
Stockholder's equity:
Common stock ............................................................................ 720,000
Total .................................................................................... $1,200,000
Discuss the tax consequences of the incorporation of the business to Cynthia and to Dove Corporation?