Exam 8: Property Dispositions

A fire completely destroyed a warehouse owned by Della Company and used for nine years in its shipping business. Della's adjusted basis in the warehouse was $748,200, and its replacement value was $1 million. Unfortunately, the warehouse was uninsured. As a result of the destruction, Della recognizes:

Several years ago, Y&S Inc. purchased a patent on a production process for $250,000 and has amortized $91,000 of the cost. Y&S has learned that a rival company recently developed a new process that renders the patent worthless. Consequently, Y&S made a public announcement that it would no longer enforce the patent. What is the tax consequence to Y&S of this unfortunate situation?

Bastrop Inc. generated a $169,000 ordinary loss from operations this year. It also recognized $35,920 recaptured ordinary income, $18,000 net Section 1231 loss, and $125,750 net capital gain on the sale of assets. Compute Bastrop's net operating loss.

The general rule is that a net Section 1231 loss is treated as a capital loss and a net Section 1231 gain is treated as ordinary income.

Both corporate and individual taxpayers may be taxed at a preferential rate on net capital gain.

In 2016, Mary recognized a $45,000 gain on the sale of Section 1231 property. Over the previous five-year period, Mary recognized the following net Section 1231 gains and (losses): 2015 $(28,000) 2014 $16,000 2013 $(30,000) Mary's 2016 gain is characterized as

The sale of business inventory always generates ordinary income or loss.

O&V sold an asset with a $78,300 adjusted tax basis for $100,000. The purchaser paid $30,000 in cash and assumed O&V's $70,000 mortgage on the asset. Compute O&V's net cash flow from the sale assuming a 35% tax rate.

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. Jason realized a gain on sale of a residential apartment complex that he had placed in service in 1993. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain.

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.

Six years ago, Alejo Company purchased real property by paying $250,000 cash and giving the seller its $1 million note for the balance of the purchase price. This year, Alejo deducted $30,800 depreciation on the property and made a $125,000 principal payment on the note. Which of the following statements is false?

A fire destroyed business equipment that was worth $160,000 and had a $118,100 adjusted tax basis. The equipment was uninsured. The owner can recognize a $160,000 ordinary casualty loss.

Mr. and Mrs. Marley operate a small business. This year, the Marleys sold a commercial office building used in their business for $1.1 million. They purchased the building in 2002 for a cost of $900,000 and have deducted $300,000 MACRS depreciation through date of sale. The Marleys should characterize the $500,000 gain recognized on sale as:

Every gain or loss realized on the disposition of property is ultimately characterized as either ordinary or capital for tax purposes.

Which of the following is a capital asset?

Which of the following is a capital asset?

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.

In its current tax year, PRS Corporation generated $300,000 ordinary income from the performance of consulting services for its clients. PRS sold two assets, recognizing a $20,000 gain on the first sale and a $31,000 loss on the second sale. Which of the following statements is false?

Tullia Inc. recognized $500,000 ordinary income, $22,600 net Section 1231 gain, and $6,000 net capital loss this year. Tullia's taxable income is $522,600.