Tom and Gail form Owl Corporation with the following consideration:

The installment note has a face amount of $350,000 and was acquired last year from the sale of land held for investment purposes (adjusted basis of $240,000). As to these transactions, provide the following information: 

a. Tom’s recognized gain or loss. 

b. Tom’s basis in the Owl Corporation stock. 

c. Owl Corporation’s basis in the installment note. 

d. Gail’s recognized gain or loss. 

e. Gail’s basis in the Owl Corporation stock. 

f. Owl Corporation’s basis in the inventory, equipment, and patentable invention. 

g. How would your answers to the preceding questions change if Tom received common stock and Gail received preferred stock? 

h. How would your answers change if Gail was a partnership? 

i. 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%.

j. Prepare your solution to part (i) using spreadsheet software such as Microsoft Excel.

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Consideration Transferred Basis to Fair Market Number of Transferor Value Shares Issued From Tom- Cash $ 50,000 $ 50,000 Installment note 240,000 350,000 40 From Gail- Inventory Equipment 60,000 50,000 125,000 250,000 Patentable invention 15,000 300,000 60