Exam 8: Property Dispositions

Princetown Inc.has a $4.82 million basis in 88% of the outstanding stock of Merryvale Corporation.Merryvale manufactures Christmas decorations,cards,and wrapping paper.Princetown's board of directors recently learned that Merryvale is bankrupt.The board voted unanimously to dissolve the corporation and distribute all assets to Merryvale's creditors.What is the tax consequence to Princetown of the board's actions?

Hugo Inc.,a calendar year taxpayer,sold two operating assets this year.The first sale generated a $38,700 Section 1231 gain,and the second sale generated a $59,400 Section 1231 loss.As a result of these sales,Hugo should recognize:

Proctor Inc.was incorporated in 2013 and adopted a calendar year.Here is a schedule of Proctor's net Section 1231 gains and (losses)reported on its tax returns through 2018. In 2019,Proctor recognized a $25,000 gain on the sale of business land.How is this gain characterized on Proctor's tax return?

Milton Inc.recognized a $1,300 net Section 1231 loss in 2015.If Milton recognizes a $5,000 net Section 1231 gain in 2016,it must characterize $1,300 as ordinary income.

Mrs.Stile owns investment land subject to a $600,000 nonrecourse mortgage.Her basis in the land is $212,000,and the land's appraised FMV is $575,000.Mrs.Stile is considering defaulting on the mortgage and allowing the creditor to foreclose.If Mrs.Stile disposes of the land through a foreclosure,she will recognize:

Netelli Inc.owned a tract of land with a $175,000 basis that was subject to a $228,500 nonrecourse mortgage.Netelli defaulted on the mortgage,and the creditor foreclosed on the land.Netelli must recognize a $53,500 gain on the disposition of the land.

Mr.and Mrs.Churchill operate a small business.This year,the Churchills sold a commercial office building used in their business for $1.5 million.They purchased the building in 1999 for a cost of $1.4 million and had deducted $538,000 MACRS depreciation through date of sale.The Churchills should characterize the $638,000 gain recognized on sale as:

Winslow Company sold investment land to an unrelated purchaser.The purchaser paid $250,000 cash,assumed Winslow's $600,000 mortgage on the land,and gave Winslow its $580,000 ten-year,interest-bearing note.Compute Winslow's amount realized on sale.

A tornado demolished several delivery vans owned for three years by Wadham Company.Wadham's adjusted basis in the vans was $28,400,and Wadham paid $90,000 to purchase new vans.Wadham received a $25,000 settlement from its casualty insurance company.Consequently,Wadham recognizes:

Noble Inc.paid $310,000 for equipment three years ago.This year,it sold the equipment for $200,000.Through date of sale,accumulated book depreciation was $93,840 and accumulated tax depreciation was $147,327.Assuming a 21% tax rate,what is the effect of the sale on Noble's deferred tax accounts?

McOwen Inc.reported $6,029,400 net income before tax on this year's financial statements prepared in accordance with GAAP.The corporation's records reveal the following information. • A tornado destroyed an office building and its contents.McOwen's book basis in the building and contents was $4,100,000 and its tax basis in the building and contents was $1,539,000.McOwen's reimbursement from its insurance company was $1 million. • Four years ago,McOwen realized a $90,000 gain on the sale of investment property and elected the installment sale method to report the gain for tax purposes.Its gross profit percentage is 37.45%,and it received a $40,000 principal payment on its installment note this year. • Net income per books includes a $13,670 net capital gain.McOwen has a $63,000 capital loss carryforward into the current year. • Depreciation expense per books was $111,400,and MACRS depreciation was $398,100. Compute McOwen's taxable income.

Ficia Inc.owned investment land subject to a $294,500 recourse mortgage.Ficia failed to make timely mortgage payments,so the creditor foreclosed.At date of foreclosure,Ficia's basis in the land was $300,000,and the land's appraised FMV was $260,000.The creditor informed Ficia that it would not pursue collection of the $34,500 unpaid balance of the mortgage.Which of the following statements is true?

According to the realization principle,an increase in the value of an asset is not accounted for as income unless the amount of the increase can be accurately measured.

Mr.Quick sold marketable securities with a $112,900 tax basis to his 100% owned corporation for $95,000 cash.Which of the following statements is true?

B&I Inc.sold a commercial office building used in the corporate business for $862,000.B&I purchased the building in 2009 for a cost of $700,000 and had deducted $167,200 MACRS depreciation through date of sale.B&I should characterize the $329,200 gain recognized on sale as:

Mr.and Mrs.Plame sold an investment asset to their grandson Leonard.Because Leonard is a related party,the Plames do not recognize any gain or loss realized on sale.

If a taxpayer sells business realty that was depreciated using the straightline method,the entire gain is characterized as Section 1231 gain.

Ms.Cregg has a $43,790 basis in 2,460 shares of ABD Inc.common stock.ABD recently declared bankruptcy and announced that its common stock is worthless.As a result,Ms.Cregg can recognize a $43,790 ordinary loss.

Mrs.Lex realized a $78,400 gain on sale of investment land to S&T,which issued a 10-year note in full payment.Mrs.Lex must recognize the gain in the year of sale unless she elects to use the installment sale method to recognize gain over the term of the note.

In 2018,TPC Inc.sold investment land with a $474,000 book and tax basis for $775,000.The purchaser paid $100,000 in cash and gave TPC a note for the $675,000 balance of the price.In 2019,TPC received a $105,500 payment on the note ($67,500 principal + $38,000 interest).Assuming that TPC is using the installment sale method,compute its gain recognized in 2019.