$1.$ Architect, a cash basis taxpayer, has been conducting a business as a sole proprietorship for several years. Architect decides to incorporate, and on July $1$ of the current year forms Design, Inc. a C corporation to which he transfers the following assets:

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Asset$$ Basis$$ FMV

Accounts Receivable$$ $$0$ $$60,000$

Supplies$020,000$

Unimproved land$60,000120,000$

Total$$ $$60,000$ $$200,000$

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The land was subject to contingent environmental liabilities that Architect had not taken into account $($i$.$e$.,$ had not deducted or capitalized$)$ for tax purposes at the time of incorporation. The supplies were acquired nine months ago, and their cost was immediately deducted by Architect as an ordinary and necessary business expense.

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In exchange, Architect receives $100$ shares of Design common stock with a fair market value of $$100,000.$ In addition, Design assumes $$70,000$ of accounts payable to trade creditors of Architect$$s sole proprietorship and a $$30,000$ bank loan incurred by Architect two years ago for valid business reasons, and it assumes the environmental liabilities associated with the land.

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Design elects to become a cash method, calendar year taxpayer. During the remainder of the current year, it pays $$30,000$ of the accounts payable and collects $$40,000$ of the accounts receivable transferred by Architect. In the following tax year, Design paid $$20,000$ in environmental remediation expenses that qualified for a current deduction under Section $162$ when paid.