Question

Several years ago, your client, Brooks Robinson, started an office cleaning service. His business was very successful, owing much to his legacy as the greatest defensive third baseman in major league history and his nickname, “The Human Vacuum Cleaner.” Brooks operated his business as a sole proprietorship and used the cash method of accounting. Brooks was advised by his attorney that it is too risky to operate his business as a sole proprietorship and that he should incorporate to limit his liability. Brooks has come to you for advice on the tax implications of incorporation. His balance sheet is presented below. Under the terms of the incorporation, Brooks would transfer the assets to the corporation in return for 100 percent of the company’s common stock. The corporation would also assume the company’s liabilities (payables and mortgage). (Negative amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)

Balance Sheet
		Adjusted Basis			FMV
Assets
Accounts receivable	$	0		$	5,000
Cleaning equipment (net)		25,000			20,000
Building		50,000			75,000
Land		25,000			50,000
Total assets	$	100,000		$	150,000
Liabilities
Accounts payable	$	0		$	10,000
Salaries payable		0			5,000
Mortgage on land and building		35,000			35,000
Total liabilities	$	35,000		$	50,000
a. How much gain or loss does Brooks realize on the transfer of each asset to the corporation? Realized gain/loss Accounts receivable Equipment Building Land Total b. How much, if any, gain or loss (on a per asset basis) does Brooks recognize? Recognized gain/loss Accounts receivable Equipment Building Land Total c. How much gain or loss, if any, must the corporation recognize on the receipt of the assets of the sole proprietorship in exchange for the corporation’s stock? d. What tax basis does Brooks have in the corporation’s stock? e. What is the corporation’s tax basis in each asset it receives from Brooks? Tax Basis Accounts receivable Equipment Building Land Total

f. How much if any gain or loss will Brooks recognize if he had taken back a 10-year note worth $25,000 plus stock worth $75,000 plus the liability assumption? (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)

Tax Basis
Accounts receivable
Equipment
Building
Land
Total

Answer 1

according to policy first four parts will be answered

Requirement A

	Realized gain or loss
Accounts receivable	5000 (5000-0)
Equipment	(5000) (20000-25000)
Building	25000 (75000-50000)
Land	25000 (50000-25000)
total	50000 (150000-100000)

Requirement B

	Recognized gain or loss
Accounts receivable	0
Equipment	0
Building	0
Land	0
total	0

Brooks satisfies the §351 requirements and he has not received any boot from the corporation so he does not recognize any gain or loss on this transaction.

Requirement C

$0

According to Section 1032, a corporation does not recognize gain or loss on the distribution of its own stock. So, the corporation does not recognize gain or loss when it exchanges its stock for property.

Requirement D

Tax adjusted basis of property contributed - $100,000

+ Gain recognized on the exchange - 0

- Mortgage assumed by corporation - (35,000 )

Tax basis of stock received - $65,000