Question

1 TUVILI UJU ILU 8-1, LO 8-2, LU 8-3, LO 8-4, LO 8-5) 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 cleaning equipment (net) Building Land Total assets Liabilities Accounts payable Salaries payable Mortgage on Land and building Total liabilities 0 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:

Answer 1

Answer-a:

$ Account receivable Equipment Building Land Total Adjusted FMV Basis 5,000 $ 20,000 25,000 75,000 50,000 50,000 25,000 150,000 $ 100,000 Realized gain/loss $ 5,000 (5,000) 25,000 25,000 $ 50,000 $

Answer-b:

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

Answer-c:

The corporation does not recognize gain or loss when it exchanges its stock for the property.Section 1032 states that a corporation does not recognize gain or loss on the distribution of its own stock.

Answer-d:

100,000 Tax adjusted basis of property contributed Add: Gain recognized on the exchange Less: Mortgage assumed by corporation Tax basis of stock received (35,000) 65,000