You have a client who is starting a new corporation where they will be manufacturing medical and surgical tools. Your client would like to purchase equipment for this venture from another corporation, as this equipment can be very expensive for a new venture. However, the corporation who owns the equipment still owes $100,000 to the equipment manufacturer, which would need to be paid as part of this purchase.

How would you advise your client in this case? In your discussion post, consider the possible tax ramifications to the party transferring the property to your client's corporation, the tax ramifications to your client's corporation, and whether the possibility that there may be a better way to handle a situation like this where the property being transferred has associated liabilities.

1. What amount of income gain or loss does Sam realize on the formation of the corporation? What amount, if any, does he recognize?

2. What is Sam’s tax basis in the stock he receives in return for his contribution of property to the corporation?

3. What amount of income gain or loss does Devon realize on the formation of the corporation? What amount, if any, does he recognize?

4. What is Devon’s tax basis in the stock he receives in return for his contribution of services to the corporation?

5. Assume Devon received 25 percent of the stock in the corporation in return for his services.

What amount of gain or loss does Sam recognize on the formation of the corporation?

6. What is Sam’s tax basis in the stock he receives in return for his contribution of property to the corporation?

7. What amount of income, gain or loss does Devon recognize on the formation of the corporation?

8. What is Devon’s tax basis in the stock he receives in return for his contribution of services to the corporation?

9. How much gain or loss does Brooks realize on the transfer of each asset to the corporation?

10. How much, if any, gain or loss (on a per asset basis) does Brooks recognize?

11. How much gain or loss, if any, must the corporation recognize on the receipt of the assets of the sole proprietorship in exchange for the corporation’s stock?

12. What tax basis do Brooks have in the corporation’s stock?

13. What is the corporation’s tax basis in each asset it receives from Brooks?

14. How would you answer the question in part (b) if Brooks had taken back a 10-year note worth $25,000 plus stock worth $75,000 plus the liability assumption?

15. Will Brooks be able to transfer the accounts receivable to the corporation and have the corporation recognize the income when the receivable is collected?

16. Brooks was depreciating the equipment (200 percent declining balance) and building (straight-line) using MACRS when it was held inside the proprietorship. How will the corporation depreciate the equipment and building? Assume Brooks owned the equipment for four years (seven-year property) and the building for six years.

Will the corporation be able to deduct the liabilities when paid? Will it matter which accounting method (cash or accrual) the corporation uses?

17. Would you advise Brooks to transfer the land and building to the corporation? What other tax strategy might you suggest to Brooks with respect to the realty?