On August 1, 2012, four unrelated individuals created West Coast Production, Inc. to produce South Pacific styled furniture. William Sauter transferred two pieces of equipment, a lathe with a fair market value (adjusted basis) of $42,520 ($32,450) and a table saw with a fair market value (adjusted basis) of $37,480 ($33,500) for 320 shares of stock. James Wilson, a cash basis taxpayer, transferred receivables with a FMV of $30,000, land with a FMV (adjusted basis) of $40,000 ($37,500) and $75,000 of cash for 580 shares of stock.  The receivables were collected in 2012. The land will be held as an investment. Walter Jones transferred a building with an adjusted basis of $108,000 subject to a mortgage of $124,000 into the business for 420 shares of stock. Mr. Jones rented the land on which the building was located to the corporation for $11,250 per month. Finally, Jojo Latime contributed a truck with a fair market value (adjusted basis) of $37,500 ($42,400) for 115 shares of stock and cash. Cash McCoy, an attorney, was given 248 shares of stock for legal services in creating the company, including $9,500 for registering and issuing the stock. The company elected to adjust stock basis for unrecognized losses. Mr. McCoy sold his shares to Mr. Sauter on April 6, 2013 for $235 per share.

On September 1, 2017, as part of an expansion, the company purchased a sander for $52,000. On December 31, 2017, Sauter, Wilson and Jones transferred from a cash basis joint venture into the company receivables with a FMV of $37,800 and a new undepreciated saw with a fair market value (adjusted basis) of $52,200 ($51,000). Each man received 150 shares of stock. $32,400 of the receivables was collected in 2018 with the remainder written off that year (the only bad debts in 2018). 

 

           At December 31, 2018, the company issued the following income statement on a pre-tax basis. 

West Coast Production, Inc.

Income Statement for the Year Ended

December 31, 2018

 

Sales                                                                                      $2,740,350

Cost of Goods Sold                                                                1,375,954

           Gross Profit                                                              $1,364,396

Operating Expenses

           Salaries                                             $776,321

           Rent Expense                                      135,000

           Bad Debt Expense                                  5,400

           Impairment of Building                        12,000

           Depreciation Expense                          30,203

           Marketing                                             68,222

           Other business expenses                         7,350   1,034,496

           

Operating Income                                                                 $  329,900

           Other Income and (Expense)                                         (26,990)

Net income before tax                                                          $  302,910

West Coast Production, Inc.

Balance Sheet as of December 31, 2018

 

 

Cash                                                                                                  $ 97,846

Marketable Securities (at FMV)                                                          48,000

Accounts Receivable                                                                         125,450

Inventory                                                                                            73,777

           Total Current Assets                                                             $345,073

Property, Plant and Equipment                                 $446,700

           Less: Accumulated Depreciation                     91,310          355,390

Total Assets                                                                                      $700,463

 

You obtained the following additional information:

           The assets were recorded for book purposes at FMV at the date of formation. The building cost was reduced by $12,000 in 2018 for an impairment charge.

           The vehicles and equipment were depreciated for tax purposes using MACRS lives of 5 and 7 years, respectively and straight line over 10 years for financial reporting purposes. The equipment transferred in 2012 was sold in 2015. New equipment was purchased on Mach 15, 2015 including a lathe costing $47,000, a Chevy truck costing $27,500 and a table saw costing $40,000.

           On 3/1/18, the company purchased a company car for $51,000. The table saw purchased on 3/15/15 was sold for $20,200 on 7/1/18. It also sold the land contributed by Mr. Wilson for $27,550 on 11/23/2018.

           Rent on the similar pieces of land could be found at $10,500 per month.

           On 2/1/18, the company purchased 150 shares of IBM stock for $72 with excess funds. It sold the stock on 10/3/18 for $75.40 per share. On 2/28/18, it purchased 1000 Microsoft shares for $45.20 per share. FMV of Microsoft was 48 at 12/31/18.

           Other income consists of:

                       Interest expense                                            $(12,500)

                       Loss on sale of land                                      (12,450)

                       Gain on the sale of stock                                     510

                       Loss on sale of saw                                          (6,800)

                       Dividend income                                              1,450

                       Unrealized gain on marketable securities            2,800

           Cost of goods sold is on a LIFO basis 

           Marketing expense includes a $32,000 payment to the United Way. 

On your books you show the following property values at December 31, 2018:

           Lathe                                                 $ 47,000

           Chevy Truck                                         27,500

           Company Car                                        51,000

           Sander                                                   52,000

           Band Saw (new)                                   52,200

           Building                                              217,000

           Total cost                                         $446,700

 Based on this information 

A) Provide the tax basis in each person's stock and detail the gain or loss realized and recognized by each person on their contributions to the company on August 1, 2012.

 

B) Calculate the amount and character of the gain recognized by McCoy on the sale of his stock on April 6, 2013.

 

C) Calculate taxable income for the company for the year ended December 31, 2018.