Question 1

Discuss the relationship between the postponement of realized gain under § 1031 (like-kind exchanges) and the adjusted basis and holding period for the replacement property.

Accepted Answer

Section 1031 results in the mandatory postponement of realized gain or realized loss on like-kind exchanges.Therefore, the basis for the replacement property is a carryover basis and the holding period is a carryover holding period.

Question 2

Alice is terminally ill and does not expect to live much longer.Pondering the consequences of her estate, she decides how to allocate her property to her nieces.She makes a gift of depreciated property (i.e., adjusted basis exceeds fair market value) to Marsha, a gift of appreciated property (i.e., fair market value exceeds adjusted basis) to Jan, and leaves appreciated property to Cindy in her will.Each of the properties has the same fair market value.From an income tax perspective, which niece is her favorite?

Accepted Answer

Alice appears to like Cindy best.Cindy receives the most beneficial tax treatment by receiving a stepped-up basis (i.e., fair market value on the date of Alice's death) in the inherited property.Therefore, she would recognize less gain than Jan.Further, she would not have to deal with the dual basis issue like Marsha if she decided to sell the property.Because Jan receives a gift of appreciated property, she will realize gain equal to the amount of appreciation if she decides to sell.This is because her basis (i.e., carryover) is equal to Alice's adjusted basis.
Alice appears to be indifferent about Marsha.A gift of depreciated property receives a loss basis to Marsha of the lower of the adjusted basis or the fair market value on the date of the gift.This eliminates a possible loss deduction for Alice and also prevents Marsha from taking a loss deduction for the decline in value while Alice owned the property.On the other hand, Marsha's gain basis is equal to Alice's adjusted basis for the property (and is greater than Cindy's basis).Therefore, if the property appreciates while owned by Marsha, she will have recognized gain on the sale only if the property appreciates to a fair market value in excess of Alice's adjusted basis for the property.

Question 3

What types of exchanges of insurance contracts are eligible for nonrecognition treatment under § 1035?

Accepted Answer

Exchanges of insurance contracts qualifying for nonrecognition treatment include the following:
· The exchange of life insurance contracts.
· The exchange of a life insurance contract for an endowment or annuity contract.
· The exchange of an endowment contract for another endowment contract that provides for regular payments beginning at a date not later than the date payments would have begun under the contract exchanged.
· The exchange of an endowment contract for an annuity contract.
· The exchange of annuity contracts.

Question 4

Lynn transfers her personal use automobile to her business (a sole proprietorship).The car's adjusted basis is $35,000 and the fair market value is $12,000.No cost recovery had been deducted by Lynn, since she held the car for personal use.Determine the adjusted basis of the car to Lynn's sole proprietorship including the basis for cost recovery.

Accepted Answer

The answer of Lynn transfers her personal use automobile to...

Question 5

Can related parties take advantage of the like-kind exchange provisions?

Accepted Answer

The answer of Can related parties take advantage of the...

Question 6

Define a bargain purchase of property and discuss the related tax consequences.

Accepted Answer

The answer of Define a bargain purchase of property and...

Question 7

Hubert purchases Fran's jewelry store for $950,000.The identifiable assets of the business are as follows:
  Hubert and Fran agree to assign $110,000 to a 7-year covenant not to compete.How should Hubert allocate the $950,000 purchase price to the assets?

Accepted Answer

The answer of Hubert purchases Fran's jewelry store for $950,000.The...

Question 8

Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?

Accepted Answer

The answer of Under what circumstances will a distribution by...

Question 9

Mandy and Greta form Tan, Inc., by transferring the following assets to the corporation in exchange for 5,000 shares of stock each.
Mandy: Cash of $450,000
Greta: Land (worth $450,000; adjusted basis of $90,000).
How much gain must Tan recognize on the receipt of these assets?

Accepted Answer

The answer of Mandy and Greta form Tan, Inc., by...

Question 10

Libby's principal residence is destroyed by a tornado. She is single and her realized gain is $360,000. Is it possible for Libby's recognized gain to be $0?

Accepted Answer

The answer of Libby's principal residence is destroyed by a...

Question 11

Janet, age 68, sells her principal residence for $500,000.She purchased it twenty-two years ago for $150,000.Selling expenses are $30,000 and repair expenses to get the house in a marketable condition to sell are $15,000.Janet's objective is to minimize the taxes she must pay associated with the sale.Calculate her recognized gain.

Accepted Answer

The answer of Janet, age 68, sells her principal residence...

Question 12

On January 5, 2012, Waldo sells his principal residence with an adjusted basis of $270,000 for $690,000.He has owned and occupied the residence for 15 years.He pays $35,000 in commissions and $2,000 in legal fees in connection with the sale.One month before the sale, Waldo painted the exterior of the house at a cost of $5,000 and repaired various items at a cost of $3,000.On October 15, 2012, Waldo purchases a new home for $600,000.On November 15, 2013, he pays $25,000 for completion of a new room on the house, and on January 14, 2014, he pays $15,000 for the construction of a pool.What is the Waldo's recognized gain on the sale of his old principal residence and what is the basis for the new residence?

Accepted Answer

The answer of On January 5, 2012, Waldo sells his...

Question 13

Discuss the effect of a liability assumption on the seller's amount realized and the buyer's adjusted basis.

Accepted Answer

The answer of Discuss the effect of a liability assumption...

Question 14

Discuss the relationship between realized gain and boot received in a § 1031 like-kind exchange.

Accepted Answer

The answer of Discuss the relationship between realized gain and...

Question 15

Boyd acquired tax-exempt bonds for $430,000 in December 2012.The bonds, which mature in December 2017, have a maturity value of $400,000.Boyd does not make any elections regarding the amortization of the bond premium.Determine the tax consequences to Boyd when he redeems the bonds in December 2017.

Accepted Answer

The answer of Boyd acquired tax-exempt bonds for $430,000 in...

Question 16

Katrina, age 58, rented (as a tenant) the house that was her principal residence from January 1, 2012 through December 31, 2013.She purchased the house on January 1, 2014, for $150,000 and continued to occupy it through June 30, 2015.She leased it to a tenant from July 1, 2015, through December 31, 2016.On January 1, 2017, she sells the house for $350,000.She incurs a realtor's commission of $20,000.Calculate her recognized gain if her objective is to minimize the recognition of gain and she does not intend to acquire another residence.

Accepted Answer

The answer of Katrina, age 58, rented (as a tenant)...

Question 17

Tariq sold certain U.S.Government bonds and State of Oregon bonds at a loss to offset short-term capital gain from a previous transaction.He felt that the U.S.Government and State of Oregon bonds were "good" investments, so he repurchased identical securities within one week.Do these transactions constitute wash sales?

Accepted Answer

The answer of Tariq sold certain U.S.Government bonds and State...

Question 18

Samuel's hotel is condemned by the City Housing Authority on July 5, 2012, for which he is paid condemnation proceeds of $950,000.He first received official notification of the pending condemnation on May 2, 2012.Samuel's adjusted basis for the hotel is $600,000 and he uses a fiscal year for tax purposes with a September 30 tax year-end.

Accepted Answer

The answer of Samuel's hotel is condemned by the City...

Question 19

When a property transaction occurs, what four questions should be considered with respect to the sale or other disposition?

Accepted Answer

The answer of When a property transaction occurs, what four...

Question 20

Butch sells land with an adjusted basis of $88,000 and a fair market value of $160,000 to Cynthia, his wife, for $160,000.Discuss how the tax consequences would differ if Butch and Cynthia had never been married.

Accepted Answer

The answer of Butch sells land with an adjusted basis...

Exam 13: Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges-Part 2