Dick, a cash basis taxpayer, incorporates his sole proprietorship. He transfers the following items to newly created Orange Corporation.

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.

With respect to this transaction:

Quizplus · Accepted Answer

Since Dick is a cash basis taxpayer, he only recognizes income when he receives payment. Therefore, when he transfers the building to Orange Corporation, he recognizes the fair market value of the building as income. The fair market value of the building is $125,000 ($120,000 basis + $5,000 recognized gain). Therefore, Dick has a recognized gain of $5,000.

Dick, a Cash Basis Taxpayer, Incorporates His Sole Proprietorship