Dick,a cash basis taxpayer,incorporates his sole proprietorship.He transfers the following items to newly created Orange Corporation. Adjusted Basis Fair Market Value Cash $ 10,000 $ 10,000 Building 120,000 175,000 Mortgage payable (secured by the building and held for 15 years) 135,000 135,000 With respect to this transaction:

Question

Dick,a cash basis taxpayer,incorporates his sole proprietorship.He transfers the following items to newly created Orange Corporation. Adjusted Basis Fair Market Value Cash $ 10,000 $ 10,000 Building 120,000 175,000 Mortgage payable (secured by the building and held for 15 years) 135,000 135,000 ​ With respect to this transaction:

Quizplus · Accepted Answer

In this transaction, Dick transfers his cash, building, and mortgage payable to Orange Corporation. The cash transfer has no tax consequences. However, the transfer of the building results in a recognized gain for Dick because the fair market value of the building ($175,000) exceeds its adjusted basis ($120,000) by $55,000.

Since Dick is a cash basis taxpayer, the gain is recognized in the year of the transfer, which is the current year. Therefore, Dick has a recognized gain of $5,000 ($55,000 - $50,000 mortgage payable). Orange Corporation's basis in the building is the same as Dick's adjusted basis, which is $120,000.

Dick,a Cash Basis Taxpayer,incorporates His Sole Proprietorship