Mr. Johnson will beincorporating his sole proprietorship in the very near future (within the current taxable year). As such, he is planning to visit Mrs. Smith, his CPA advisor of many years, for tax planning advice. He provided the following list of assets which he is considering transferring over to the new corporation:

Cost Adjusted Basis FMV

Cash $30,000 $30,000 $30,000

Inventory $70,000 $50,000 $50,000

Building $150,000 $120,000 $150,000

Mr. Johnson lives in a high tax state resulting in acombined marginal federal and effective state tax rate for the current tax year of 40%. While he is planning to transfer all the assets to the corporation, he will be ultimately selling that building in 18 months. The CPA believes based on the information provided by Mr. Johnson that the corporation will be at a combined state and federal tax rate of 28% at the time of the building sale. Lastly, the FMV of the building will be slightly lower as a result of depreciation resulting in a FMV of $130,000 by the time he sells the building.

As one can imagine, Mr. Johnson and Mrs. Smith discussed various tax implications at their meeting. They conducted "what-if" analyses as to various alternative actions. The CPA has recently hired you as a tax trainee and wanted to acquaint you with typical client tax scenarios such as the one just discussed. She asked you to answer the following questions:

3) What would be the tax consequences if Mr. Johnson sells the building within 2 years of itsTAX-FREEtransfer to the corporation? Are there are any gains or losses and if so, how much?

4) Now, what would be the tax consequences if Mr. Johnson instead decides to sell only the building to the Corporation for $120,000 in promissory notes?

5) What are some of the tax and non-tax consequences (positive or negative) of keeping the building outside of the corporation? Please explain your answers.

Dont assume extra information than whats given. Example building its mortgage free because no mortage its mentioned.