Architect, a cash basis taxpayer, has been conducting a business as a sole proprietorship for several years. Architect decides to incorporate, and on July 1 of the current year he forms Design, Inc., to which he transfers the following assets: Asset A.B. FMV Accounts Receivable $ 0 $ 60,000 Supplies 0 20,000 Unimproved Land 60,000 120,000 Total $ 60,000 200,000 The supplies were acquired nine months ago and their cost was immediately deducted by Architect as an ordinary and necessary business expense. In exchange, Architect receives 100 shares of Design common stock with a FMV of $100,000. In addition, Design assumes $70,000 of accounts payable to trade creditors of Architect's sole proprietorship and a $30,000 bank loan incurred by Architect two years ago for valid business reasons. Design elects to become a cash method, calendar year taxpayer. During the remainder of the current year, it pays the accounts payable and collects $40,000 of the accounts receivable transferred by Architect. (a) What are the tax consequences (gain or loss recognized, basis, and holding period) of the incorporation to Architect and Design, Inc.? (b) Who will be taxable upon collection of the accounts receivable: Architect, Design, or both?
Architect, a cash basis taxpayer, has been conducting a business as a sole proprietorship for several years. Architect decides to incorporate, and on July 1 of the current year he forms Design, Inc., to which he transfers the following assets:
Asset A.B. FMV
Supplies 0 20,000
Unimproved Land 60,000 120,000
Total $ 60,000 200,000
The supplies were acquired nine months ago and their cost was immediately deducted by Architect as an ordinary and necessary business expense.
In exchange, Architect receives 100 shares of Design common stock with a FMV of $100,000. In addition, Design assumes $70,000 of accounts payable to trade creditors of Architect's sole proprietorship and a $30,000 bank loan incurred by Architect two years ago for valid business reasons.
Design elects to become a cash method, calendar year taxpayer. During the remainder of the current year, it pays the accounts payable and collects $40,000 of the accounts receivable transferred by Architect.
(a) What are the tax consequences (gain or loss recognized, basis, and holding period) of the incorporation to Architect and Design, Inc.?
(b) Who will be taxable upon collection of the accounts receivable: Architect, Design, or both?
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