write an explanation in Word format for the answers to Example 6
EXAMPLE The Big Picture Return to the facts of The Big Picture on p. 4-1. Assume that the proposed transaction involving Emily and Ethan occurs as described. However, in addition, David decides to contribute property to the new corporation in exchange for an equity interest As a result, Emily exchanges her property for 200 shares of Transformation, Inc. stock on January 7, 2018, David exchanges his property for 10 shares of Transformation stock on January 14, 2018, and Ethan exchanges his property for 4,800 shares in Transformation on March 5, 2018 Because the three exchanges are part of a prearranged plan and the control test is met, the non- recognition provisions of 5 351 apply to all of the exchanges. Stock need not be issued to the property transferors in the same proportion as the relative value of the property transferred by each. However, when stock received is not proportionate to the value of the property transferred, the actual effect of the transac- tions must be properly characterized. For example, in such situations, one transferor may actually be making a gift to another transferor. Emily has operated her startup venture as a sole proprietorship startup venture as a sole proprietorship since launching the business two years ago. David, a friend from college, has been collaborating with Emily, and together they have developed an software app. They were overioved that as soon as the app was introduced into the market, it was an immediate hit-and it has gained increasino recognition and market traction as sales continue to rise. Alter 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
