Problem 18-26 (LO. 1, 3)

Seth, Pete, Cara, and Jen form Kingfisher Corporation with the following consideration:

			Consideration Transferred
			Basis to Transferor		Fair Market Value		Number of Shares Issued
From Seth
	Inventory		$30,000		$96,000		30	*
From Pete
	Equipment ($30,000 of depreciation taken by Pete in prior years)		45,000		99,000		30	**
From Cara
	Proprietary process		15,000		90,000		30
From Jen
	Cash		30,000		30,000		10

*Seth receives $6,000 in cash in addition to the 30 shares. **Pete receives $9,000 in cash in addition to the 30 shares.

The value of each share of Kingfisher stock is $3,000.

As to these transactions, provide the following information:

a. Seth recognizes $__________ as _____________(ORDINARY GAIN/ORDINARY LOSS/RETURN OF CAPITAL) .

b. Seth's basis in the Kingfisher Corporation stock is $_________________.

c. Kingfisher Corporation's basis in the inventory. $_____________

d. Pete recognizes a ______________(GAIN/ RETURN OF CAPITAL/LOSS) of $____________.

e. Pete's basis in the Kingfisher Corporation stock is $_____________________.

f. Kingfisher Corporation's basis in the equipment is $___________________.

g. Cara's has_____________(RECOGNIZED GAIN/ RECOGNIZED LOSS/ NO GAIN OR LOSS) .

h. Cara has a basis of $______________ in the Kingfisher Corporation stock.

i. Kingfisher Corporation has a basis of $___________ in the proprietary process.

j. Jen has ________________(GAIN/LOSS/ NO GAIN OR LOSS) on the transfer.

k. Jen has a basis of $_________ in the Kingfisher Corporation stock.

l. During discussions relating to the formation of Kingfisher, Seth mentions that he may be interested in either (1) just selling all of his inventory in the current year for its fair market value of $96,000 or (2) proceeding with his involvement in Kingfisher's formation as shown above but followed by a sale of his stock five years later for $90,000. What would be the tax cost of these alternative plans, stated in present value terms?

Assume a discount rate of 6%. The present value factors at 6% are 1.000 for year 1 and 0.7473 for year 5. Further, assume Seth's marginal income tax rate is 35% and his capital gains rate is 15%.

If required, round your answers to the nearest dollar.

Seth's tax cost associated with the current sale of inventory for $96,000 is $______________

Seth's tax cost associated with the current receipt of 30 Kingfisher shares and $6,000 cash and the subsequent sale of 30 Kingfisher shares for $90,000 in five years is $____________.