Exam 9: Nontaxable Exchanges

Doppia Company transferred an old asset with a $68,750 adjusted tax basis in exchange for a new asset worth $90,000 and $10,000 cash. Which of the following statements is false?

Eight years ago, Prescott Inc. realized a $16,200 gain on the exchange of old equipment for new equipment. Prescott included the gain in book income, but the exchange was nontaxable. This year, Prescott sold the new equipment for $2,500. At date of sale, the equipment's book basis and tax basis had both been depreciated to zero. Which of the following statements is true?

Grantly Seafood is a calendar year taxpayer. In 2016, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2016, Grantly received a $1 million reimbursement from its insurance company. On May 19, 2017, 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.

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?

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. Compute IPM and Zeta's realized and recognized gain on the exchange.

Nontaxable exchanges typically cause a temporary difference between book income and taxable income.

Muro Inc. exchanged an old inventory item for a new asset. If the new asset is also an inventory item, the exchange is nontaxable.

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

On January 21, 2006, Andy purchased 350 shares of Baker common stock for $24,500. On November 13, 2016, he sold the 350 shares for $7,250. On December 1, 2016, Andy purchased 350 shares of Baker common stock for $8,000. What is Andy's basis in these shares?

Vincent Company transferred business realty (FMV $2.3 million; adjusted tax basis $973,000) to Massur Inc. in exchange for Massur common stock. Which of the following statements is false?

Three individuals transferred property to newly formed Triple Inc. in exchange for 1,000 shares of common stock. Mr. Albert transferred assets with a $50,000 tax basis in exchange for 820 shares, Mrs. Billig transferred assets with a $9,000 tax basis in exchange for 148 shares, and Mrs. Crisp transferred $4,000 cash for 32 shares. Based on the FMV of the transferred assets, each Triple share is worth $125. Which of the following is false?

Nixon Inc. transferred Asset A to an unrelated party in exchange for Asset Z and $15,750 cash. Nixon's tax basis in Asset A was $400,000, and Asset Z had a $510,000 appraised FMV. Which of the following statements is true?

Mr. Bentley exchanged investment land subject to a $300,000 mortgage for commercial real estate subject to a $188,000 mortgage. Mr. Bentley is treated as paying $112,000 boot in the exchange.

Mrs. Cooley exchanged 400 shares of stock for corporate bonds. If the stock and bonds were issued by the same corporation, they are like-kind properties, and the exchange is nontaxable.

Kornek Inc. transferred an old asset with a $200,000 adjusted tax basis plus $12,000 cash in exchange for a new asset worth $260,000. Which of the following statements is false?

A taxpayer who exchanges property for an interest in a partnership never recognizes gain or loss on the exchange.

A taxpayer who pays boot in a nontaxable exchange includes the value of the boot in the basis of the qualifying property received.

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 equipment (-0- tax basis; $44,200 book basis) for new equipment (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.

The goodwill of one business is never of a like-kind to the goodwill of a different business.

Toffel Inc. exchanged investment land subject to a $240,000 mortgage for unencumbered farmland. If Toffel realized a $168,000 gain on the exchange, it must recognize the entire gain.