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 TV Assets Accounts receivable cleaning equipment (net) Building Land Total assets Liabilities Accounts payable Salaries payable Mortgage on land and building Total liabilities 25,000 50.000 25,000 $100,000 $ 5.000 20,000 75.000 50,000 $150,000 0 0 35,000 $ 35,000 $10,000 5 ,000 35,000 $50,000 Required: a. How much gain or loss does Brooks realize on the transfer of each asset to the corporation? b. How much, if any, gain or loss (on a per-asset basis) does Brooks recognize? 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? 1. 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? 9. Will Brooks be able to transfer the accounts receivable to the corporation and have the corporation recognize the income when the receivable is collected? h. Brooks was depreciating the equipment (200 percent declining balance) and building (straight-line) using MACRS when it was held inside the proprietorship. How will the corporation depreciate the equipment and building? Assume Brooks owned the equipment for four years (seven-year property, and the building for six years. 1-1. In consideration of whether or not the corporation can deduct liabilities when paid, will it matter which accounting method is used? 1-2. Which accounting method should the corporation use? Complete this question by entering your answers in the tabs below. Rega Re Reg CD Reg HF Rego Reg# Req2 Real

Answer 1

a.Calculation of Total Gain.

A. Gain on sale of Assets.

1. Assets FMV = 1,50,000
2. Book value or adjusted value = -1,00,000
3. Gain on transfer of assets = 50,000

B. Gain on liabilities

1. As per adjusted value = (35,000) (If Brooks pay it would have to pay this amount)
2. FMV = 50,000 (Corporation will pay extra 15,000 and brooks need to pay)
3. Gain on transfer of liablities = 15,000

Total gain (A+B) = 65,000

b.Gain or loss per asset basis

Difference between adjusted value and FMV

1. Account receivable = 5,000
2. Clearning equipment = (5,000)
3. Building = 25,000
4. Land = 25,000

c.Need Extra information.

d.corporation tax base is FMV

e.FMV

f.Total gain in 10years would be 1,15,000

g.Yes it can transfer the AR and Corporation can recoginse as income as and when it receives.

h.Need extra information like opening value of asset ( Beacuse if it was dep for 200 then actual asset would have been nil)

i.a Yes

i.b Merchantile method.