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 companys common stock The corporation would also assume the companys liabilities (payables and mortgage) Balance Sheet Adjusted Basis FMV Assets Accounts receivable $ 0 $ 8,000 Cleaning equipment (net) 28,000 23,000 Building 56,000 78,000 Land 28,000 53,000 Total assets $ 112,000 $ 162,000 Liabilities Accounts payable $ 0 $ 13,000 Salaries payable 0 8,000 Mortgage on land and building 38,000 38,000 Total liabilities $ 38,000 $ 59,000 e What is the corporations tax basis in each asset it receives from Brooks f 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 $78,000 plus the liability assumption g Will Brooks be able to transfer the accounts receivable to the corporation and have the corporation recognize the income when the receivable is collected h Brooks was depreciating the equipment (200 percent declining balance) and building (straight line) using MACRS when it was held inside the proprietorship How will the corporation depreciate the equipment and building Assume Brooks owned the equipment for four years (seven year property) and the building for six years i 1 In consideration of whether or not the corporation can deduct liabilities when paid, will it matter which accounting method is used i 2 Which accounting method should the corporation use

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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

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 companys common stock. The corporation would also assume the companys liabilities (payables and mortgage).

Balance Sheet
		Adjusted Basis		FMV
Assets
Accounts receivable	$	0	$	8,000
Cleaning equipment (net)		28,000		23,000
Building		56,000		78,000
Land		28,000		53,000
Total assets	$	112,000	$	162,000
Liabilities
Accounts payable	$	0	$	13,000
Salaries payable		0		8,000
Mortgage on land and building		38,000		38,000
Total liabilities	$	38,000	$	59,000

e. What is the corporations tax basis in each asset it receives from Brooks?
f. 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 $78,000 plus the liability assumption?
g. Will Brooks be able to transfer the accounts receivable to the corporation and have the corporation recognize the income when the receivable is collected?
h. Brooks was depreciating the equipment (200 percent declining balance) and building (straight-line) using MACRS when it was held inside the proprietorship. How will the corporation depreciate the equipment and building? Assume Brooks owned the equipment for four years (seven-year property) and the building for six years.
i-1. In consideration of whether or not the corporation can deduct liabilities when paid, will it matter which accounting method is used?
i-2. Which accounting method should the corporation use?