Our client Mervyn, 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, Ron, Hermione and Snape. The business was incorporated last year on January 1. Mervyn contributed the property listed in the attached balance sheet and the corporation assumed the liabilities (the mortgage). In return for the transfer of the assets of the business, Harry received 150 shares of the stock of the new corporation "MRHS Inc." Ron contributed a building with a fair market value of $250,000 and an adjusted tax basis of $100,000 in return for 200 shares of HRHS, Inc. and $50,000 cash. Hermione contributed land with a fair market value of $225,000 and a basis of $250,000 in exchange for 200 shares of HRHS, Inc. Note: the building is subject to a $25,000 mortgage, which HRHS, Inc. assumed. The mortgage was taken on the building 8 months before the transfer. Snape contributed services in the amount of $50,000 for 50 shares. The total shares of stock issued and outstanding upon formation of MRHS was 600 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.

Mervyns Assets
		Tax Basis	FMV
Assets
Cleaning Equipment (net)		$25,000.00	$25,000.00
Building		$5,000.00	$25,000.00
Land		$25,000.00	$50,000.00
Cash		$50,000.00	$50,000.00