Problem 18-27 (LO. 1, 3)

Tom and Gail form Owl Corporation with the following consideration:

		Consideration Transferred
		Basis to Transferor		Fair Market Value		Number of Shares Issued
From Tom
	Cash	$50,000		$50,000
	Installment note	240,000		350,000		40
From Gail
	Inventory	60,000		50,000
	Equipment	125,000		250,000
	Patentable invention	15,000		300,000		60

The installment note has a face amount of $350,000 and was acquired last year from the sale of land held for investment purposes (adjusted basis of $240,000). Regarding these transactions, provide the following information:

If an amount is zero, enter "0".

a. Tom's recognized gain or loss is $_____________.

b. Tom's basis in the Owl Corporation stock is $______________.

c. Owl Corporation's basis in the installment note is $________________.

d. Gail's recognized gain or loss is $_______________.

e. Gail's basis in the Owl Corporation stock is $_________________.

f. Owl Corporation's basis in the inventory is $______________ and equipment is $______________. Its basis in the patentable invention is $.

g. Would your answers to the preceding questions change if Tom received common stock and Gail received preferred stock? ______________(YES/NO), because there ____________ (IS A/IS NOT) requirement that the transferors receive the same type of stock.

h. Would your answers change if Gail was a partnership instead of an individual? _____________(YES/NO), because there ____________(IS A /IS NOT) requirement that the transferors be individuals.

i. Gail is considering an alternative to the plan as presented above. She is considering selling the inventory to an unrelated third party for $50,000 in the current year instead of contributing it to Owl. After the sale, she will transfer the $50,000 sales proceeds along with the equipment and patentable invention to Owl for 60 shares of Owl stock. Whether or not she pursues the alternative, she plans to sell her Owl stock in six years for an anticipated sales price of $700,000. In present value terms and assuming she later sells her Owl stock, determine the tax cost of (1) contributing the property as originally planned, or (2) pursuing the alternative she has identified.

Assume a discount rate of 6%. The present value factors at 6% are 1.000 for year 1 and 0.7050 for year 5. Further, assume Gail's marginal income tax rate is 28% and her capital gains rate is 15%.

If required, round your answers to the nearest dollar.

Tax cost associated with sale of Owl stock for $700,000 is $_______________. Tax cost associated with the current sale of inventory for $50,000 and subsequent sale of Owl stock for $700,000 is $________________. The present value of the tax cost of the alternative is $_______________.