write an explanation in Word format for the answer to Example 16

EXAMPLE The Big Picture Return to the facts of The Ria Picture on p. 4-1. Assume that you learn that David is not inta becoming a stockholder in Transformation, Inc., and that Emily and Ethan will transfer their for 100% of the stock. In addition, you learn that Emily's building is subject to a liability of that Transformation assumes. Consequently, Emily receives her Transformation stock and is of the $70,000 liability in exchange for property with an adjusted basis of $400,000 and fair value of $2,000,000 The exchange is tax-free to Emily under $ 351 because the release of a liability is not treated asbe under $ 357(a). However, the basis to Emily of the Transformation stock is $330,000 15400.000 (hal. property transferred) - $70,000 (amount of the liability assumed by Transformation)]. (basis of not interested in fer their property Wity of $70,000 ock and is relieved 000 and fair market das boot The general rule of 8 357(a) has two exceptions: (1) 8 357(b) provides that if the principal purpose of the assumption of the liabilities is to avoid tax or if there is no bona fide business purpose behind the exchange, the liabilities are treated as boot (2) 8 357(c) provides that if the sum of the liabilities exceeds the adjusted basis of the properties transferred, the excess is taxable gain. Exception (1): Tax Avoidance or No Bona Fide Business Purpose Satisfying the bona fide business purpose under $ 357(b) is not difficult if the liabilities are incurred in connection with the transferor's normal course of conducting a trade or business. But this requirement can cause difficulty if the liability is taken out shortly before the property is transferred and the proceeds are utilized for personal purposes." This type of situation is analogous to a cash distribution by the corporation to the share holder, which is taxed as boot. Emily has operated her startup venture as a sole proprietorship Startup venture as a sole proprietorship since launching the business two years nd from college, has been collaborating with Emily, and together they have developed an innovative software app. They were overoved that as so Ware app. They were overjoyed that as soon as the app was introduced into the market, it was an immediate hit-and it has gained increasing recogs h and it has gained increasing recognition and market traction as sales continue to rise. After only a short period of suc only a short period of success though, Emily becomes convinced that the upside potential for even more growth is significant. However, she realizes that a leap to that level of growth and market pen- etration can only be achieved with a large infusion of capital that she is unable to fund from her resources. Fortunately, Emily's friend Ethan, who is a venture capitalist, is enthusiastic about making a large invest ness in exchange for an equity stake. Ethan agrees that Emily's startup easily will enjoy remarkable success once it has the necessary additional resources. To integrate Ethan's capital into the ven- ture, the sole proprietorship will be incorporated with Emily and Ethan each contributing assets in exchange for stock in newly formed Transformation, Inc. Emily also has asked David, an invaluable employee and a major contributor to the app's development, if he would be interested velopment, if he would be interested in becoming a shareholder in Transformation. He was given the option of transferring either property or services in exchange for stock. However, at this point, David is undecided about what he will do. Emily receives 200 shares of Transformation stock in exchange for the transfer of the following sole proprietorship assets to the new corporation as follows: Fair Market Value Accounts receivable Building Proprietary information-app Adjusted Basis $ -0- 100,000 300,000 $400,000 $ 50,000 400,000 1,550,000 $2,000,000 Ethan will contribute $48 million of cash for 4,800 shares of Transformation stock. What will be the tax and nontax implications relating to the formation of Transformation, Inc.? Read the chapter and formulate your response