Our client John, had been in business for several years as a sole proprietorship (using the cash basis method of accounting) engaged in an office cleaning service. He had been very successful, but grew concerned that his business could be a source of personal financial liability should something happen while performing cleaning services. He was also interested in expanding his business and joined his business efforts with three of his former college classmates, Bob, Gary and Shelly. The business was incorporated last year on January 1. John contributed the property listed in the attached balance sheet. In return for the transfer of the assets of the business, John received 150 shares of the stock of the new corporation "MRHS Inc." Bob contributed a building with a fair market value of $250,000 and an adjusted tax basis of $150,000 in return for 200 shares of HRHS, Inc. and $50,000 cash. Gary contributed land with a fair market value of $350,000 and a basis of $250,000 in exchange for 250 shares of HRHS, Inc. The land Gary contributed was subject to a $100,000 liability which HRHS assumed. Shelly contributed services in the amount of $50,000 for 50 shares and $50,000 of cash for an additional 50 shares. The total shares of stock issued and outstanding upon formation of MRHS was 700 shares; all common voting stock. Please prepare a memorandum which discusses the tax issues for all the parties to the transactions with supporting computations and citations to authority as applicable.

Johns Assets

Tax Basis / FMV Assets

Cleaning Equipment (net) $25,000.00/ $25,000.00

Inventory $5,000.00/ $25,000.00

Land $25,000.00 $50,000.00

Cash $50,000.00 $50,000.00