Sean, a Sole Proprietor, Is Engaged in a Service Business

question 47

Essay

Sean, a sole proprietor, is engaged in a service business and uses the cash basis of accounting. In the current year, Sean incorporates his business by forming Aqua Corporation. In exchange for all of its stock, Aqua receives: assets basis of $400,000 and fair market value of $2 million), trade accounts payable of $110,000, and loan of $390,000 due to a bank. The proceeds from the bank loan were used by Sean to provide operating funds for the business. Aqua Corporation assumes all of the liabilities transferred to it.
a. Does Sean recognize any gain on the incorporation? Explain.

b. What basis does Sean have in the Aqua stock?
c. What basis does Aqua Corporation have in the assets it receives?

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Definitions:

Political Office

A position of authority within a government, obtained typically through election or appointment, where one can influence public policy and decision-making.

Free Labor Ideology

The belief prevalent before and during the American Civil War in the Northern states that work ethic and labor should be freely chosen and rewarded, contrasting with the forced labor system of slavery.

Slave Labor

The forced, unpaid work of enslaved people, utilized extensively in various societies throughout history, notably in the Americas up until the 19th century.

Kansas-Nebraska Act

A 1854 law that created the territories of Kansas and Nebraska, allowing settlers in those territories to decide on the legality of slavery through popular sovereignty, leading to increased tensions that contributed to the American Civil War.