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

question 6

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 due to a bank of $390,000. 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:

Material Services

Significant or essential services provided that contribute directly to the output of the production process or operational efficiency.

Franchisor

An entity that grants the right to use a brand, product, or operational model to an individual or entity (franchisee), typically for a fee.

Bundled Sales

The practice of selling multiple products or services together as a single combined offering, often at a discounted rate.

Software Sales Arrangement

A commercial agreement detailing the terms of sale and licensing conditions for software products between vendors and customers.