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

ASSET ADJ BASIS FMV

Client Receivables $ -0- $ 60,000

Supplies -0- 20,000

Unimproved Land 60,000 120,000

Total $60,000 $200,000

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 the incorporation. The supplies were acquired nine months ago and their cost was immediately deducted by Architect as an ordinary and necessary business expense.

In exchange, Architect receives 100 shares of Design common stock with a FMV 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 assumed the environmental liabilities associated with the land.

Design elects to become a cash method, calendar year TP.

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 taxable year, Design paid $20,000 in environmental remediation expenses that qualified for a current deduction when paid or accrued under Section 162.

questions: (a)What are the tax consequences (gain or loss recognized, basis and holding period) of the incorporation to Architect and Design, Inc.? (b) Who will be taxable upon collection of the accounts receivable: Architect, Design or both? (c) When Design pays the accounts payable assumed from Architect and incurs the environmental remediation costs, may it properly deduct these expenses?