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 tax basis FMV Assets Accounts receivable $ 0 $ 24,000 Cleaning equipment (net) 44,000 39,000 Building 88,000 94,000 Land 44,000 69,000 Total assets $ 176,000 $ 226,000 Liabilities Accounts payable $ 0 $ 29,000 Salaries payable 0 24,000 Mortgage on land and building 54,000 54,000 Total liabilities $ 54,000 $ 107,000 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 $94,000 plus the liability assumption?

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter6: Business Expenses

Section: Chapter Questions

Problem 86DC

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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).

	Adjusted tax basis	FMV
Balance Sheet
Assets
Accounts receivable	$ 0	$ 24,000
Cleaning equipment (net)	44,000	39,000
Building	88,000	94,000
Land	44,000	69,000
Total assets	$ 176,000	$ 226,000
Liabilities
Accounts payable	$ 0	$ 29,000
Salaries payable	0	24,000
Mortgage on land and building	54,000	54,000
Total liabilities	$ 54,000	$ 107,000