Question

Several years ago, your client, Brooks Robertson, 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).

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

Required:

1. e. What is the corporation’s tax basis in each asset it receives from Brooks?

2. f. How much, if any, gain or loss (on a per-asset basis) will Brooks recognize if he had taken back a 10-year note worth $25,000 plus stock worth $75,000 plus the liability assumption?

Answer 1

e. What is the corporation’s tax basis in each asset it receives from Brooks?

f. How much, if any, gain or loss (on a per-asset basis) will Brooks recognize if he had taken back a 10-year note worth $25,000 plus stock worth $75,000 plus the liability assumption?

Refer to the below images for more detailed solution with explanation.

+②: in What is the each asset it corporation's tax basis recerves from brooks? Requirement @. Answer: The corporation takes a carry over batis in each asser transferred increased by any gain recognized on the transfer by Brooks ( § 362). In this care no gain was recognized by Brooks: Therefore the tax basis of each asset corries over to the corporation on changed. particulars Amount Accounts Recenable Equipment Building Land Total → a 5000 5oooo 25000 100000 elit x : How much, if any gain basis) will Brooks recognize it a To-year note worth $25000 plus the liability assumption ? con loss Con a per-asset he had talcen back plus stock worth $75000 Requirement Answe- The so-year note is considered boot under $350 (b). Brooks must allocate the fair market value of the note to each asset transferred and then recognize gain (not loss) earual to the lesser of the : - Gain realized on the asset transter, or - The fair market value of the note allocated to the asset.

is allocated The Fair market value of the to the assets transferred using values of the assets. . the - note relative fair market Accounts Receivable Equipment Building Land 5000/150000 * $ 25000 20000/150000 4 $25000 75000/150000 $ 25000 50000 1500004 $25000 = $833 = $3333 = $12.500 = $8333 i Gain recognized : Accounts Receivable : lesser of $ 1000 Cor) 1833. Equipment the $5000 loss is not recognized. Building : lesser of $25000 (or) $ 12500 lesser of $25000 (or) $8333. : Total gain recognized is $21667 land INote : The day yearts) in which the gain is recognized depends on whether BrookS accounts for the gain under the installment method ( § 453) cors elects to recognize the entire gain corrently. If he does not elect out of the installment method, he will recognize the gain as the principal on the security is collected (12167 per year for den years) Brooks will be subject to interest payments on the deferred tax.