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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 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?

Only need answer to H and I2, thank you.

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. Use the same depreciation schedule as Brooks was using prior to the transfer. Which accounting method should the corporation use

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