Several years ago, your client, Brooks Robinson, 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, âThe Human Vacuum Cleaner.â 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 companyâs common stock. The corporation would also assume the companyâs liabilities (payables and mortgage). (Negative amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)
Balance Sheet Adjusted Basis FMV Assets Accounts receivable $ 0 $ 5,000 Cleaning equipment (net) 25,000 20,000 Building 50,000 75,000 Land 25,000 50,000 Total assets $ 100,000 $ 150,000 Liabilities Accounts payable $ 0 $ 10,000 Salaries payable 0 5,000 Mortgage on land and building 35,000 35,000 Total liabilities $ 35,000 $ 50,000
a. How much gain or loss does Brooks realize on the transfer of each asset to the corporation?
Realized gain/loss Accounts receivable Equipment Building Land Total $0
b. How much, if any, gain or loss (on a per asset basis) does Brooks recognize?
Realized gain/loss Accounts receivable Equipment Building Land Total $0
c. How much gain or loss, if any, must the corporation recognize on the receipt of the assets of the sole proprietorship in exchange for the corporationâs stock?
Gain or loss recognized -
d. What tax basis does Brooks have in the corporationâs stock?
Tax Basis $
e. What is the corporationâs tax basis in each asset it receives from Brooks?
Tax Basis Accounts Receivable Equipment Building Land Total
f. How much if any gain or loss will Brooks recognize if he had taken back a 10-year note worth $25,000 plus stock worth $75,000 plus the liability assumption? (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)
Realized gain/loss Accounts receivable Equipment Building Land Total $0
Several years ago, your client, Brooks Robinson, 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, âThe Human Vacuum Cleaner.â 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 companyâs common stock. The corporation would also assume the companyâs liabilities (payables and mortgage). (Negative amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)
| Balance Sheet | |||||
| Adjusted Basis | FMV | ||||
| Assets | |||||
| Accounts receivable | $ | 0 | $ | 5,000 | |
| Cleaning equipment (net) | 25,000 | 20,000 | |||
| Building | 50,000 | 75,000 | |||
| Land | 25,000 | 50,000 | |||
| Total assets | $ | 100,000 | $ | 150,000 | |
| Liabilities | |||||
| Accounts payable | $ | 0 | $ | 10,000 | |
| Salaries payable | 0 | 5,000 | |||
| Mortgage on land and building | 35,000 | 35,000 | |||
| Total liabilities | $ | 35,000 | $ | 50,000 | |
a. How much gain or loss does Brooks realize on the transfer of each asset to the corporation?
|
b. How much, if any, gain or loss (on a per asset basis) does Brooks recognize?
| Realized gain/loss | |
| Accounts receivable | |
| Equipment | |
| Building | |
| Land | |
| Total | $0 |
c. How much gain or loss, if any, must the corporation recognize on the receipt of the assets of the sole proprietorship in exchange for the corporationâs stock?
Gain or loss recognized -
d. What tax basis does Brooks have in the corporationâs stock?
|
e. What is the corporationâs tax basis in each asset it receives from Brooks?
| Tax Basis | |
| Accounts Receivable | |
| Equipment | |
| Building | |
| Land | |
| Total |
f. How much if any gain or loss will Brooks recognize if he had taken back a 10-year note worth $25,000 plus stock worth $75,000 plus the liability assumption? (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)
| Realized gain/loss | |
| Accounts receivable | |
| Equipment | |
| Building | |
| Land | |
| Total | $0 |
