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Two sole proprietors in the same business join their businesses by incorporating. Harvey Holmes transfers assets with a total basis of $10,000 and a value of $40,000 for 40 shares of stock. Mortimer Morgan transfers assets with a total basis of $15,000, subject to liabilities of $50,000, with a value of $110,000, for 60 shares of stock. The following statements about the transaction are all false, except:

Since transferred liabilities of $50,000 exceed aggregate basis of $25,000, both parties must recognize gain.

Harvey may have a different basis and holding period in different shares of the stock received.

Most likely, there will be some general business tax credit recapture upon the transfer of assets to the corporation.

At least one of the parties may have compensation income in the above transaction.

Accounting Basics, Accounting

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