Exam 9: Nontaxable Exchanges

Mrs. Volter exchanged residential real estate for a commercial office building. The residential real estate was subject to a $92,800 mortgage, which was assumed by the other party to the exchange. Mrs. Volter must treat the relief of the mortgage as $92,800 boot received.

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.

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.

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

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.

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?

Which of the following statements about boot included in a nontaxable exchange is false?

Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged. Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute OMG's gain recognized on the exchange and its tax basis in the property received from Babex.

A flood destroyed a business asset owned by Boochi Company. Boochi's adjusted tax basis in the asset was $87,100. Six months after the flood, Boochi used its $100,000 insurance settlement to replace the asset. Boochi can recognize a $12,900 gain or it can elect to defer gain recognition.

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?

A taxpayer who realizes a loss on the exchange of like-kind property can elect to recognize the loss.

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

Tibco Inc. exchanged an equity interest in ABM Partnership for an equity interest in Jolla Partnership. This exchange is taxable.

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

Mr. Jamail transferred business personalty (FMV $187,000; adjusted tax basis $29,900) to J&K Partnership in exchange for a partnership interest. Which of the following statements is true?

Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged. Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute Johnson's gain recognized on the exchange and its tax basis in the property received from C&K.

Teco Inc. and MW Company exchanged like-kind production assets. Teco's asset had an $80,000 FMV and $53,900 adjusted tax basis, and MW's asset had an $87,500 FMV and a $28,100 adjusted tax basis. Teco paid $7,500 cash to MW as part of the exchange. Which of the following statements is false?

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.

A taxpayer who receives boot in a nontaxable exchange must recognize gain equal to the lesser of the FMV of the boot or the gain realized.

Mr. Jamail transferred business personalty (FMV $187,000; adjusted tax basis $29,900) to J&K Inc. in exchange for J&K common stock. Which of the following statements is true?