Your client, Cara Ramos, is forming a T-shirt business, Equities, with three of her colleagues. Each has something to contribute to the business.

1. Cara is contributing property (land) that has a debt (mortgage) on it, encumbered property. She will receive a 30% stock of the company. It is important to note, since the land still has a mortgage on it, the business will be assuming this existing mortgage.
2. Michael is contributing cash to the business and will receive a 30% stock.
3. Cathy is contributing property (machinery). The property, while without debt, has been used in her own previous business and has depreciated in value over the years. Cathy will receive 30% equity in return for her contribution.
4. Nate doesnt have anything to contribute, so he is going to perform services (managing the business) for the corporation. On the open market, his services are worth approximately $50,000 a year. In return, he will not receive compensation but 10% equity instead.

The groups lawyer is advising them that their form of corporation should be a C Corporation, to best position themselves for potential future sale or for a venture capital investor. The lawyer will handle the legal aspect of putting together the corporation, everything from creating bylaws to filings.

In total, the company needs about $500,000 to get the business off the ground.

Cara has come to your manager to better understand the tax implications of each shareholder and of the corporation. Your manager has asked you to document the details of the tax implications at the shareholder and corporate level upon formation.

Determine the basis at both the corporate and shareholder levels.

In an Excel workbook, create two tabs, one for shareholders and one for the corporation.

On the Shareholder tab, calculate the following areas for each shareholder:

1. Fair market value (FMV) of stock received
2. Adjusted basis of stock received
3. Applicable basis code section
4. Realized gain (income) on transfer
5. Recognized gain (income) on transfer
6. Gain (income) deferred, if present

On the Corporation tab, calculate the following for the corporation that is receiving the property:

1. FMV of property received
2. Adjusted basis of property received
3. Applicable basis code section
4. Realized gain (income) on property
5. Recognized gain (income) on property
6. Gain (income) deferred, if present

1. Property is being contributed and the corporation will be assuming the existing mortgage. 2. Nate does not have any property to contribute. Instead, he will provide services in the form of being the Manager of the business. On the open market, his services are worth approximately $50,000 per year. *As you can see by the table, the company needs a total of about $500,000 to get the business off the ground