Exam 9: Nontaxable Exchanges

A taxpayer who receives or pays boot in a nontaxable exchange must recognize gain to the extent of the FMV of the boot.

Grantly Seafood is a calendar year taxpayer.In 2019,a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis.On October 12,2019,Grantly received a $1.2 million reimbursement from its insurance company.What is the latest date that Grantly can replace the boats to avoid gain recognition from the involuntary conversion?

Texark Inc.,a calendar year taxpayer,reported $5,210,300 net income before tax on its financial statements prepared in accordance with GAAP.The corporation's records reveal the following information. • Depreciation expense per books was $713,700,and MACRS depreciation was $662,000. • Texark exchanged old realty (-0- tax basis; $44,200 book basis)for new realty (FMV $50,000).Book gain was included in book income,although the exchange was nontaxable for tax purposes. • Texark received a $100,000 insurance reimbursement for the destruction of machinery with a $29,000 tax basis and a $70,000 book basis.Texark spent $110,000 to replace the machinery before year-end. Compute Texark's taxable income.

In March,a flood completely destroyed three delivery vans owned by Totle Inc.Totle's adjusted tax basis in the vans was $48,900.Totle received a $90,000 reimbursement from its property insurance company,and on September 8,it purchased one new delivery van for $70,000.Compute Totle's recognized gain on loss on the involuntary conversion and its tax basis in the new van.

A corporation's tax basis in property received in exchange for corporate stock depends on whether the exchange was taxable or nontaxable to the transferors of the property.

Thirty years ago,Prescott Inc.realized a $16,200 gain on the exchange of an old building for a new building.Prescott included the gain in book income,but the exchange was nontaxable.This year,Prescott sold the new building for $250,000.At date of sale,the new building's book basis and tax basis had both been depreciated to zero.Which of the following statements is true?

Ms.Ellis sold 889 shares of publicly traded Omer stock (tax basis $161,400)for $125,000 cash on July 2.She paid $136,200 cash to purchase 900 Omer shares on August 8.Compute Ms.Ellis' loss recognized on the July 2 sale and determine her tax basis in the 1,000 shares.

A taxpayer who realizes a loss on the sale of marketable securities and reacquires substantially the same securities within the 30 day period before the sale cannot recognize the loss.

On May 13,2019,a flood destroyed the building in which SDF Inc.manufactured its product.SDF's adjusted tax basis in the building was $984,000.On November 29,2019,SDF received a $1.2 million reimbursement from its casualty insurance company.In each of the following cases,compute SDF's recognized gain on this involuntary conversion and its initial basis in the replacement property. a.On June 2,2020,SDF completed construction of a replacement building for $1.3 million. b.On February 18,2022,SDF paid $1.3 million to purchase a replacement building. c.On August 30,2021,SDF paid $1.1 million to purchase a replacement building.

Luce Company exchanged investment land for a building to be used in its business.Luce's gain on the exchange was nontaxable (because the assets were like-kind)but was included in financial statement income.Which of the following statements is false?

Carman wishes to exchange 10 acres of Iowa farm land in a like-kind exchange.Which of the following properties will qualify for like-kind exchange treatment?

Lorch Company exchanged an old asset with a $120,700 tax basis and a $155,000 FMV for a new asset with a $142,250 FMV and $12,750 cash. a.If the old asset and the new asset are like-kind properties,compute Lorch's realized and recognized gain and Lorch's tax basis in the new asset. b.How would your answers change if the new asset is worth only $116,000,and Lorch received $39,000 cash in the exchange?

Five years ago,Q&J Inc.transferred land with a $345,000 book and tax basis for a different parcel of land worth $472,000.Q&J included its $127,000 realized gain in book income,but the exchange was nontaxable.This year,Q&J sold the parcel of land received in the exchange for $533,000 cash.Compute Q&J's book and tax gain on sale.

The wash sale rule can result in the nonrecognition of both gains and losses.

Gem Company's manufacturing facility was destroyed by a flood.The facility's adjusted basis was $665,000,and Gem received an $850,000 insurance reimbursement.Within 18 months of the flood,Gem rebuilt the facility at a total cost of $975,000.Which is Gem's basis in the new facility?

Mr.Lexon owns investment property with a $719,000 basis.If the property is worth only $500,000,Mr.Lexon would prefer a taxable disposition of the property over a like-kind exchange.

IPM Inc.and Zeta Company formed IPeta Inc.by transferring business assets in exchange for 1,000 shares of IPeta common stock.IPM transferred assets with a $675,000 FMV and a $283,000 adjusted tax basis and received 600 shares.Zeta transferred assets with a $450,000 FMV and a $98,000 adjusted tax basis and received 400 shares.Determine IPM and Zeta's tax basis in their IPeta stock and IPeta's aggregate tax basis in the transferred assets.

Rydell Company exchanged business realty (initial cost $55,250; accumulated depreciation $25,450)for like-kind realty worth $44,000 and $2,000 cash.Assume that depreciation on the realty exchanged was computed using the straight-line method and that Rydell Company is not a corporation.As a result,Rydell must recognize:

Mrs.Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700)to M&W Inc.in exchange for a 36% interest in M&W Partnership.Determine Mrs.Brinkley's realized and recognized gain on the exchange and the tax basis in her partnership interest.

Grantly Seafood is a calendar year taxpayer.In 2019,a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis.On October 12,2019,Grantly received a $1 million reimbursement from its insurance company.On May 19,2020,Grantly purchased a new fishing boat for $750,000.Compute Grantly's recognized gain or loss on the involuntary conversion and its tax basis in the new boat.