Several years ago, your client, Brooks Robinson, started an office cleaning serv

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-basis 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 i return for 100 percent of the company's common stock. The corporation would also assume the company's liabilities (payables and mortgage). Balance Sheet IV 5,000 20,000 75,000 50,000 $150,000 10,000 5,000 35,000 $50,000 Adjusted Basis Accounts receivable Cleaning equipment (net) Building Land Total assets Accounts payable Salaries payable Mortgage on land and building Total liabilities 25,000 50,000 35,000 $35,000 How much gain or loss does Brooks realize on the transfer of each asset to the corporation? How much, if any, gain or loss (on a per asset basis) does Brooks recognize? 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? What tax basis does Brooks have in the corporation's stock? What is the corporation's tax basis in each asset it receives from Brooks? a. b. c. d. e.

Explanation / Answer

a) account receivable = FMV - adjusted basis
                                       = 5000-0
                        Gain/loss       =$5000
Cleaning equipment = FMV - adjusted basis
                                       = 20000-25000
                        Gain/loss     =$(5000)

Building = FMV - adjusted basis
                   = 75000-50000
     Gain/loss    =$25000

Land        = FMV - adjusted basis
                   = 50000-25000
     Gain/loss    =$25000

b)brook does not recognise any gain or loss on this transaction because he satisfy the §351 requirement and he has not received any boot from the corporation.

c) The corporation does not recognise gain or loss when it exchange its stock for property. Section 1032 states that a corporation does not recognise gain or loss on distribution of its own stock.

d) Tax basis of property contributed = $100,000
     + gain receive on exchange =                0
     - Mortgage assume for corporation = $(35000)
   Tax basis of stock received =               $65000

e) The corporation take a carryover basis in each asset transfered, increased by any gain recognized on the transfer by Brooks (§362).In this case, no gain was recognized by Brooks; therefore the tax basis of each asset carries over to thecorporation unchanged.
       Accounts receivable = $        0
        Cleaning equipment =            25000
         Building =                                50000
         Land =                                      25000
TOTAL =                                        $ 100,000

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.