ACCT460-1204A-01 Professional Accounting AssignmentName: Unit 4 Individual Project Deliverable Length: 500 words Details: machines for the construction industry. Mary and Sarah are asking for advice...

CONCEPTS OF REALIZED GAIN, RECOGNIZED GAIN AND
INVESTORS BASIS IN THE STOCK WITH EXCHANGE
SCENARIO
Mary and Sarah are contemplating transferring property to start a new company, M&S
Incorporated that will manufacture machines for the construction industry. Mary and
Sarah are asking for advice and direction on Section 351 exchanges of property for new
corporate stock. They would like you to assist them in understanding the realized gain,
recognized gain, and investor basis in the stock with the exchange. They are contemplating
transferring property—cash and equipment—to start M&S Incorporated. Mary and Sarah
will be 100% owners of the new company.
DESCRIPTIONS
REALIZED GAIN – The realized gain arises on property when the amount of the gain a
taxpayer will generate relative to the basis of the property possessed by the taxpayer. Let’s
consider an example, when the taxpayer sells a piece of equipment with a basis of $25,000
for $50,000, that taxpayers realized gain is $25,000. This implies that the taxpayer has made
a gain of $25,000 relative to his basis.
RECOGNIZED GAIN – The Recognized gain refers to the amount of gain realized on the
sale or disposition of property that’s considered taxable by the IRS. In the previous example,
all of $25,000 of the realized gain is recognized gain. This is due to the fact that the taxpayer
traded his asset for cash. However if the taxpayer instead traded the equipment of $25,000
having a Fair Market Value of $50,000 with another asset for $50,000, then in this situation
the taxpayers recognized gain will be nil, because...