Problem - Incorporating a Cash Basis Proprietorship:
Ted decides to incorporate his medical practice. He uses the cash method of accounting. On the date of incorporation, the practice reports the following balance sheet:
|
Basis |
FMV |
| Assets |
|
|
| Cash |
$5,000 |
$5,000 |
| A/R |
$0 |
$65,000 |
| Equip. (net of $15,000 depreciation) |
$35,000 |
$40,000 |
| Total |
$40,000 |
$110,000 |
|
|
|
| Liabilites and Owner's Equity |
|
|
| Current liabilities |
$0 |
$35,000 |
| Note payable on equip. |
$15,000 |
$15,000 |
| Owner's equity |
$25,000 |
$60,000 |
| Total |
$40,000 |
$110,000 |
All the current liabilities would be deductible by Ted if he paid them. Ted transfers all assets and liabilities to a professional corporation in exchange for all of its stock.
A) What are the amount and character of Ted's recognized gain or loss?
B) What is Ted's basis in the stock?
C) What is the corporation's basis in the property?
D) Who recognized income on the receivables upon their collection? Can the corporation obtain a deduction for the liabilities when it pays them?