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Chapter 13 Property Transactions: Determination Of Gain Or Loss, Basis Considerations, And Nontaxable Exchanges


Discussion Questions
1. LO.1 Ivan invests in land, and Grace invests in taxable bonds. The land appreciates by $8,000 each year, and the bonds earn interest of $8,000 each year. After holding the land and bonds for five years, Ivan and Grace sell them. There is a $40,000 realized gain on the sale of the land and no realized gain or loss on the sale of the bonds. Are the tax consequences to Ivan and Grace the same for each of the five years? Explain.
2. LO.1 Carol and Dave each purchase 100 shares of stock of Burgundy, Inc., a publicly owned corporation, in July for $10,000 each. Carol sells her stock on December
31 for $8,000. Because Burgundy’s stock is listed on a national exchange,
Dave is able to ascertain that his shares are worth $8,000 on December 31. Does the tax law treat the decline in value of the stock differently for Carol and Dave?
Explain.
3. LO.1 If a taxpayer sells property for cash, the amount realized consists of the net proceeds from the sale. For each of the following, indicate the effect on the amount realized:
a. The property is sold on credit.
b. A mortgage on the property is assumed by the buyer.
c. A mortgage on the property is assumed by the seller.
d. The buyer acquires the property subject to a mortgage of the seller.
e. Stock that has a basis to the purchaser of $6,000 and a fair market value of $10,000 is received by the seller as part of the consideration.
4. LO.1 Taylor is negotiating to buy some land. Under the first option, Taylor will give
Ella $150,000 and assume her mortgage on the land for $100,000. Under the second option, Taylor will give Ella $250,000, and she will immediately pay off the mortgage. Taylor wants his basis for the land to be as high as possible. Given this objective, which option should Taylor select?
5. LO.1 Marge owns land and a building (held for investment) with an adjusted basis of $75,000 and a fair market value of $250,000. The property is subject to a mortgage of $400,000. Because Marge is in arrears on the mortgage payments, the creditor is willing to accept the property in return for canceling the amount of the mortgage.
a. How can the adjusted basis of the property be less than the amount of the mortgage?
b. If the creditor’s offer is accepted, what are the effects on the amount realized, the adjusted basis, and the realized gain or loss for Marge?
c. Does it matter in part (b) if the mortgage is recourse or nonrecourse? Explain.
6. LO.4 On July 16, 2016, Logan acquires land and a building for $500,000 to use in his sole proprietorship. Of the purchase price, $400,000 is allocated to the building, and $100,000 is allocated to the land. Cost recovery of $4,708 is deducted in 2016 for the building (nonresidential real estate).
a. What is the adjusted basis for the land and the building at the acquisition date?
b. What is the adjusted basis for the land and the building at the end of 2016?
7. LO.1 Auralia owns stock in Orange Corporation and Blue Corporation. She receives a $10,000 distribution from both corporations. The instructions from Orange state that the $10,000 is a dividend. The instructions from Blue state that the $10,000 is not a dividend. What could cause the instructions to differ as to the tax consequences?
8. LO.2 Wanda is considering selling two personal use assets that she owns. One has appreciated in value by $20,000, and the other has declined in value by $17,000. Wanda believes that she should sell both assets in the same tax year so that the loss of $17,000 can offset the gain of $20,000.
a. Advise Wanda regarding the tax consequences of her plan.
b. Could Wanda achieve better tax results by selling the assets in different tax years? Explain.
9. LO.2 Ron sold his sailboat for a $5,000 loss in the current year because he was diagnosed with skin cancer. His spouse wants him to sell his Harley Davidson motorcycle because her brother broke his leg while riding his motorcycle. Because
Ron no longer has anyone to ride with, he is seriously considering accepting his wife’s advice. Because the motorcycle is a classic, Ron has received two offers. Each offer would result in a $5,000 gain. Joe would like to purchase the motorcycle before Christmas, and Jeff would like to purchase it after New Year’s. Identify the relevant tax issues Ron faces in making his decision.
10. LO.1, 2, 3, 10 Simon owns stock that has declined in value since acquired. He has decided either to give the stock to his nephew, Fred, or to sell it and give Fred the proceeds. If Fred receives the stock, he will sell it to obtain the proceeds. Simon is in the 15% tax bracket, while Fred’s bracket is 25%. In either case, the holding period for the stock will be short term. Identify the tax issues relevant to Simon in deciding whether to give the stock or the sale proceeds to Fred.
11. LO.3 Robin inherits 1,000 shares of Wal-Mart stock from her aunt in 2016. According to the information received from the executor of her aunt’s estate, Robin’s adjusted basis for the stock is $55,000. Albert, Robin’s fianc_e, receives 1,000 shares of
Wal-Mart stock from his uncle as a gift in 2016. His uncle tells Albert that his adjusted basis for the Wal-Mart stock is $7,000. What could cause the substantial difference in the adjusted basis for Robin’s and Albert’s respective 1,000 shares of Wal-Mart stock?
12. LO.3 Thelma inherited land from Sadie on June 7, 2016. The land appreciated in value by 100% during the six months it was owned by Sadie. The value has remained stable during the three months Thelma has owned it, and she expects it to continue to do so in the near future. Although she would like to sell the land now,
Thelma has decided to postpone the sale for another three months. The delay is to enable the recognized gain to qualify for long-term capital gain treatment. Evaluate
Thelma’s understanding of the tax law.
13. LO.4 Marilyn owns land that she acquired three years ago as an investment for $250,000. Because the land has not appreciated in value as she anticipated, she sells it to her brother, Amos, for its fair market value of $180,000. Amos sells the land two years later for $240,000.
a. Explain why Marilyn’s realized loss of $70,000 ($180,000 amount realized _ $250,000 adjusted basis) is disallowed.
b. Explain why Amos has neither a recognized gain nor a recognized loss on his sale of the land.
c. Is the family unit treated fairly under the related-party disallowance rule under
§ 267? Explain.
d. Which party wins, and which party loses?
e. How could Marilyn have avoided the loss disallowance on her sale of the land?
14. LO.4, 5 Comment on the following transactions:
a. Mort owns 500 shares of Pear, Inc. stock with an adjusted basis of $22,000. On
July 28, 2016, he sells 100 shares for $3,000. On August 16, 2016, he purchases another 100 shares for $3,400. Mort’s realized loss of $1,400 ($3,000 _ $4,400) on the July 28 sale is not recognized, and his adjusted basis for the 100 shares purchased on August 16 is $4,800. Explain.
b. How would your answer in part (a) change if Mort purchased the 100 shares on
December 27, 2016, rather than on August 16, 2016?
15. LO.6 Karla exchanges personal use property for property to be held for productive use in a trade or business. Can this transaction qualify for like-kind exchange treatment? Explain.
16. LO.6 Which of the following qualify as like-kind exchanges under § 1031?
a. Improved for unimproved real estate.
b. Vending machine (used in business) for inventory.
c. Rental house for personal residence.
d. Business equipment for securities.
e. Warehouse for office building (both used for business).
f. Truck for computer (both used in business).
g. Rental house for land (both held for investment).
h. Ten shares of stock in Blue Corporation for 10 shares of stock in Red
Corporation.
i. Office furniture for office equipment (both used in business).
j. Unimproved land in Jackson, Mississippi, for unimproved land in Toledo,
Spain.
k. General partnership interest for a general partnership interest.
17. LO.6 Ross would like to dispose of some land he acquired five years ago because he believes that it will not continue to appreciate. Its value has increased by $50,000 over the five-year period. He also intends to sell stock that has declined in value by $50,000 during the eight-month period he has owned it. Ross has four offers to acquire the stock and land:
Buyer 1: Exchange land.
Buyer 2: Purchase land for cash.
Buyer 3: Exchange stock.
Buyer 4: Purchase stock for cash.
Identify the tax issues relevant to Ross in disposing of this land and stock.
18. LO.6 Edith exchanges a machine used in her business for another machine and stock of Teal, Inc. If Edith had sold her machine, she would have had a realized gain. Explain why the new machine will have a different holding period than the stock.
19. LO.6 Mortgaged real estate may be received in a like-kind exchange. If the taxpayer’s mortgage is assumed, what effect does the mortgage have on the recognition of realized gain? On the basis of the real estate received?
20. LO.7 Sheila’s appreciated property is involuntarily converted. She receives insurance proceeds equal to the fair market value of the property. What is the minimum amount Sheila must reinvest in qualifying property to defer recognition of realized gain?
21. LO.7 Vera owns an office building that she leases to tenants. If the building is destroyed by a tornado, is the functional use test or the taxpayer use test applied as to replacement property? Explain the differences between the two tests.
22. LO.7 Reba, a calendar year taxpayer, owns an office building that she uses in her business. The building is involuntarily converted on November 15, 2016. On
January 5, 2017, Reba receives enough proceeds to produce a realized gain. What is the latest date she can replace the building and qualify for § 1033 postponement treatment if the conversion event is:
a. A flood?
b. A condemnation?
c. A tornado?
23. LO.7 Bob is notified by the city public housing authority on May 3, 2016, that his apartment building is going to be condemned as part of an urban renewal project. On June 1, 2016, Carol offers to buy the building from Bob. Bob sells the building to Carol on June 30, 2016. Condemnation occurs on September 1, 2016, and Carol receives the condemnation proceeds from the city. Assume that both Bob and Carol are calendar year taxpayers.
a. What is the earliest date on which Bob can dispose of the building and qualify for § 1033 postponement treatment?
b. Does the sale to Carol qualify as a § 1033 involuntary conversion? Why or why not?
c. What is the latest date on which Carol can acquire qualifying replacement property and qualify for postponement of the realized gain?
d. What type of property will be qualifying replacement property?
24. LO.7 A warehouse owned by Martha and used in her business (i.e., to store inventory) is being condemned by the city to provide a right of way for a highway.
The warehouse has appreciated by $180,000 based on Martha’s estimate of its fair market value. In the negotiations, the city is offering $35,000 less than what Martha believes the property is worth. Alan, a real estate broker, has offered to purchase
Martha’s property for $20,000 more than the city’s offer. Martha plans to invest the proceeds she will receive in an office building she will lease to various tenants.
a. Identify the relevant tax issues for Martha.
b. Would the answer in part (a) change if Martha’s warehouse was property being held for investment rather than being used in her business? Explain.
25. LO.8 To qualify for exclusion treatment on the sale of a principal residence, the residence must have been owned and used by the taxpayer for at least two years during the five-year period ending on the date of the sale. Are there any exceptions to this provision? Explain.