Exam 9: Tax-Deferred Exchanges

The taxpayer-use test for deferral of gain on an involuntary conversion requires the taxpayer to acquire property that has the same function or use as the involuntarily converted property that he or she used prior to the conversion.

Four shareholders form a new corporation in exchange for stock with a fair market value of $1,000 per share. Benjamin transfers investment land (current fair market value of $35,000) that he purchased 10 year ago for $15,000. In exchange, Benjamin receives 30 shares of stock and $5,000 cash. Andrew transfers a machine with a basis of $45,000 and a fair market value of $35,000. Andrew receives 30 shares of stock and $5,000 cash. Emily transfers a rental office building (current fair market value of $45,000) that she purchased 20 years ago for $60,000. Its current basis is $15,000 after recognition of $45,000 in depreciation expense. The corporation assumes the $20,000 balance on the original mortgage and Emily receives 25 shares of stock from the corporation in the exchange. Jackson provided the legal services to organize the corporation (value $5,000) and contributes $10,000 in cash in exchange for 15 shares of stock. What is Andrew's basis for the stock he receives?

Georgia's home was damaged by flood. Its fair market value before and after the flood are $125,000 and $75,000, respectively. Its adjusted basis was $90,000. Georgia received $50,000 from her insurance company and she was able to have the house repaired for $40,000. What is the amount of Georgia's basis in the house after the repairs?

A transfers machines valued at $170,000 (basis = $150,000) along with $30,000 cash to AB Corporation and B transfers real property valued at $320,000 (basis = $310,000) to the corporation. A receives 40 percent of the outstanding stock and B receives 60 percent. B also receives $20,000 from the corporation. What is B's basis for his AB stock?

Which type of reorganization is a recapitalization?

In 2017, Larry's car, which he purchased six years ago for $6,000, was demolished in a traffic accident. As a result of the delay caused by this accident, Larry missed a business meeting and lost out on an important sale on which he could have earned a $1,200 commission. When he arrived home, he found his house had been broken into and his personal video equipment currently worth $3,200 (original cost = $5,000) had been stolen, along with his baseball card collection valued at $2,000 (basis = $1,500). Larry's homeowner's policy covered only $3,000 of this theft loss. He had dropped the collision coverage on his auto insurance policy because that portion was too expensive, so he had no insurance coverage for his auto accident. His adjusted gross income is $82,000 and the fair market value of the car at the time of the accident was $8,000. How much can Larry deduct as an itemized deduction for his casualty and theft losses? If this occurred in 2018 (instead of 2017), what amount is deductible?

Elizabeth exchanges an office building valued at $400,000 with a $75,000 mortgage and adjusted basis of $180,000 for land valued at $275,000. What is Elizabeth's recognized gain on the exchange?

When may a taxpayer deduct a casualty loss in a year other than the year in which the loss occurred?

Juan owned a small rental property, which was condemned by the county to expand a local park. His adjusted basis in the property was $40,000 and he received a payment of $75,000 from the county. A year later he purchased a similar piece of real estate for $70,000. What is Juan's basis in the replacement property?

What is a wash sale?

A condemnation is one type of involuntary conversion.

Four shareholders form a new corporation in exchange for stock with a fair market value of $1,000 per share. Benjamin transfers investment land (current fair market value of $35,000) that he purchased 10 year ago for $15,000. In exchange, Benjamin receives 30 shares of stock and $5,000 cash. Andrew transfers a machine with a basis of $45,000 and a fair market value of $35,000. Andrew receives 30 shares of stock and $5,000 cash. Emily transfers a rental office building (current fair market value of $45,000) that she purchased 20 years ago for $60,000. Its current basis is $15,000 after recognition of $45,000 in depreciation expense. The corporation assumes the $20,000 balance on the original mortgage and Emily receives 25 shares of stock from the corporation in the exchange. Jackson provided the legal services to organize the corporation (value $5,000) and contributes $10,000 in cash in exchange for 15 shares of stock. What is the corporation's basis for the building it received from Emily?

In early 2018, Conrad Corporation discovered their bookkeeper had embezzled $30,000 over the last three years at a rate of approximately $10,000 per year. Conrad also suffered uninsured hurricane damage of $40,000 late in 2018 in a presidentially declared disaster area. If Conrad wants to deduct its losses at the earliest time possible, what are the amounts (before any limitations) and year(s) of its loss deduction?

Dylan, Luke, and Hannah form a partnership. Dylan contributes land with a fair market value of $25,000 (basis of $15,000) in exchange for a 25% interest. Luke contributes equipment with a $35,000 fair market value (basis of $38,000) in exchange for a 35% interest, and Hannah contributes a building with a $100,000 fair market value (basis = $35,000) and a mortgage of $60,000 (assumed by the partnership) in exchange for a 40% interest. How much gain does Hannah recognize?

Boot received in a like-kind exchange never causes loss to be recognized.

A tax-deferred reorganization can involve all of the following except:

In what year is a theft loss reported for tax purposes?

Zandu Corporation exchanged a building (fair market value = $1,000,000, adjusted basis = $700,000) and two semi-tractor-trailers (fair market value = $300,000; adjusted basis = $225,000), all five years old, for land to build a new facility valued at $1,300,000. What is Zandu's realized and recognized gain and its basis in the land? Realized gain Recognized gain Basis of land

James corporation exchanges a building (fair market value = $800,000, adjusted basis = $600,000) that has a $100,000 mortgage for another building owned by Pete Corporation (fair market value = $1,100,000, adjusted basis = $600,000) that is encumbered by a $400,000 mortgage. Each party assumed the mortgage on the building received. What are James's and Pete's recognized gains on the exchange, respectively?

Molly and Dolly form MD Corporation. Molly transfers a building with a fair market value of $800,000 and a basis of $400,000 that is encumbered by a $100,000 mortgage that the corporation assumes in exchange for 50 percent of MD's stock (fair market value = $700,000). Dolly contributes equipment valued at $900,000 with a basis of $500,000 that is encumbered by a $200,000 liability that the corporation assumes in exchange for the other 50 percent of MD's stock. What are Molly and Dolly's realized and recognized gains and their bases in the stock received. What is the corporation's basis in the contributed assets?