Lori Smith, Bill Baxter, and Wayne Shaw decide to form a new business to be operated as a C corporation. Lori Smith plans to transfer §1231 assets (FMV $10,000, basis $2,500) to LBS Inc. in exchange for 500 of the corporation's 2,000 shares of newly issued common stock. Bill Baxter plans to transfer inventory assets (FMV $14,000, basis $15,000) and $2,000 cash in exchange for 800 LBS shares. Wayne Shaw, an attorney, plans to perform the legal services required during the incorporation process in exchange for 700 LBS shares. If the incorporation takes place as planned, what will be the tax consequences to Lori, Bill & Wayne in terms of gain or loss recognition? Question options: 。 a) b) c) Baxter will recognize a $1,000 ordinary loss ($14,000 (FMV)-$15,000 (Basis)) on the exchange. Shaw must recognize ordinary compensation on the value of the 700 LBS shares, which will equal to $14,000. Smith will recognize a total gain of $7,500 ($10,000 (FMV) - $2,500 (Basis)) on the exchange. Shaw must recognize ordinary compensation on the value of the 700 LBS shares, which will equal to $14,000. Baxter can not recognize any loss and Smith will recognize a total gain of $7,500 ($10,000 (FMV) - $2,500 (Basis)) on the exchange. This is a qualified section 351 exchange, therefore none of the parties will recognize income on the exchange.
Lori Smith, Bill Baxter, and Wayne Shaw decide to form a new business to be operated as a C corporation. Lori Smith plans to transfer §1231 assets (FMV $10,000, basis $2,500) to LBS Inc. in exchange for 500 of the corporation's 2,000 shares of newly issued common stock. Bill Baxter plans to transfer inventory assets (FMV $14,000, basis $15,000) and $2,000 cash in exchange for 800 LBS shares. Wayne Shaw, an attorney, plans to perform the legal services required during the incorporation process in exchange for 700 LBS shares. If the incorporation takes place as planned, what will be the tax consequences to Lori, Bill & Wayne in terms of gain or loss recognition? Question options: 。 a) b) c) Baxter will recognize a $1,000 ordinary loss ($14,000 (FMV)-$15,000 (Basis)) on the exchange. Shaw must recognize ordinary compensation on the value of the 700 LBS shares, which will equal to $14,000. Smith will recognize a total gain of $7,500 ($10,000 (FMV) - $2,500 (Basis)) on the exchange. Shaw must recognize ordinary compensation on the value of the 700 LBS shares, which will equal to $14,000. Baxter can not recognize any loss and Smith will recognize a total gain of $7,500 ($10,000 (FMV) - $2,500 (Basis)) on the exchange. This is a qualified section 351 exchange, therefore none of the parties will recognize income on the exchange.
Chapter13: Choice Of Business Entity—general Tax And Nontax Factors/formation
Section: Chapter Questions
Problem 55P
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Transcribed Image Text:Lori Smith, Bill Baxter, and Wayne Shaw decide to form a new business to be operated as a C
corporation. Lori Smith plans to transfer §1231 assets (FMV $10,000, basis $2,500) to LBS Inc. in
exchange for 500 of the corporation's 2,000 shares of newly issued common stock. Bill Baxter plans to
transfer inventory assets (FMV $14,000, basis $15,000) and $2,000 cash in exchange for 800 LBS shares.
Wayne Shaw, an attorney, plans to perform the legal services required during the incorporation process
in exchange for 700 LBS shares.
If the incorporation takes place as planned, what will be the tax consequences to Lori, Bill & Wayne in
terms of gain or loss recognition?
Question options:
0
a)
b)
c)
Baxter will recognize a $1,000 ordinary loss ($14,000 (FMV)-$15,000 (Basis)) on the exchange.
Shaw must recognize ordinary compensation on the value of the 700 LBS shares, which will
equal to $14,000. Smith will recognize a total gain of $7,500 ($10,000 (FMV) - $2,500 (Basis)) on
the exchange.
Shaw must recognize ordinary compensation on the value of the 700 LBS shares, which will
equal to $14,000. Baxter can not recognize any loss and Smith will recognize a total gain of
$7,500 ($10,000 (FMV) - $2,500 (Basis)) on the exchange.
This is a qualified section 351 exchange, therefore none of the parties will recognize income on
the exchange.
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