Gail is considering an alternative to the plan as presented above. She is considering selling the inventory to an unrelated third party for $50,000 in the current year instead of contributing it to Owl. After the sale, she will transfer the $50,000 sales proceeds along with the equipment and patentable invention to Owl for 60 shares of Owl stock. Whether or not she pursues the alternative, she plans to sell her Owl stock in six years for an anticipated sales price of $700,000. In present value terms and assuming she later sells her Owl stock, determine the tax cost of (1) contributing the property as originally planned or (2) pursuing the alternative she has identified. Referring to Appendix G, assume a discount rate of 6%. Further, assume Gail’s marginal income tax rate is 32% and her capital gains rate is 15%. background info:
Gail is considering an alternative to the plan as presented above. She is considering selling the inventory to an unrelated third party for $50,000 in the current year instead of contributing it to Owl. After the sale, she will transfer the $50,000 sales proceeds along with the equipment and patentable invention to Owl for 60 shares of Owl stock. Whether or not she pursues the alternative, she plans to sell her Owl stock in six years for an anticipated sales price of $700,000. In present value terms and assuming she later sells her Owl stock, determine the tax cost of (1) contributing the property as originally planned or (2) pursuing the alternative she has identified. Referring to Appendix G, assume a discount rate of 6%. Further, assume Gail’s marginal income tax rate is 32% and her capital gains rate is 15%. background info:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Gail is considering an alternative to the plan as presented above. She is considering selling the inventory to an unrelated third party for $50,000 in the current year instead of contributing it to Owl. After the sale, she will transfer the $50,000 sales proceeds along with the equipment and patentable invention to Owl for 60 shares of Owl stock. Whether or not she pursues the alternative, she plans to sell her Owl stock in six years for an anticipated sales price of $700,000. In present value terms and assuming she later sells her Owl stock, determine the tax cost of (1) contributing the property as originally planned or (2) pursuing the alternative she has identified. Referring to Appendix G, assume a discount rate of 6%. Further, assume Gail’s marginal income tax rate is 32% and her
background info:
Tom & Gail form Owl Corporation with the following consideration. The installment obligation has a face amount of $350000 and was acquired last year from the sale of land held for investment purposes (adjusted basis fo $240000) Also these transactions, provide the following information:
a. Tom’s recognized gain or loss. $0
b. Tom’s basis in the Owl Corporation stock. (40000+250000)=$290000
c. Owl Corporation’s basis in the installment obligation. $240000
d. Gail’s recognized gain or loss $0
e. Gail’s basis in the Owl Corporation stock (60000+125000+15000)=$200000f. Owl Corporation’s basis in the inventory, equipment, and patentable inventiong.
How would your answers to the preceding questions change if Tom received common stock and Gail received preferred stock ?If Gail had nonqualified preferred stock it would be considered as boot and she would have a capital gain.
h. How would your answers change if Gail as a partnership?It wouldn’t change because there isn’t a requirement for it to be an individual.
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