Taxation

Julie and her son, Wyatt, have been operating a neighborhood garden center. Julie formed the business in 1996 as a sole proprietorship, and it has been very successful. It currently has assets with a fair market value of $250,000 and a basis of $180,000. On the advice of her tax accountant, Julie decides to incorporate her business. Because of Wyatt’s loyalty, Julie would like him to have shares in the corporation.

What are the relevant tax issues?

Frank transfers the following assets to Peach Corporation in exchange for all DECISION MAKING of its stock. (Assume neither Frank nor Peach plans to make any special tax elections at the time of incorporation.)

a. What is Frank’s recognized gain or loss? b. What is Frank’s basis in the stock?

c. What is Peach’s basis in the inventory, delivery vehicles, and shelving?

d. If Frank has no intentions of selling his Peach stock for at least 15 years, what action would you recommend that Frank and Peach Corporation consider? How does this change the previous answers?

Solution:

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