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

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Cumulative Problems
96. Alton Newman, age 67, is married and files a joint return with his wife, Clair, age 65.
Alton and Clair are both retired, and during 2015, they received Social Security benefits of $10,000. Both Alton and Clair are covered by Medicare. Alton’s Social Security number is 111-11-1112, and Clair’s is 123-45-6789. They reside at 210 College
Drive, Columbia, SC 29201.
Alton, who retired on January 1, 2015, receives benefits from a qualified pension plan of $2,750 a month for life. His total contributions to the plan (none of which were deductible) were $168,250. In January 2015, he received a bonus of $2,000 from his former employer for service performed in 2014. Although the former employer accrued the bonus in 2014, it was not paid until 2015.
Clair, who retired on December 31, 2014, started receiving benefits of $1,400 a month on January 1, 2015. Her contributions to the qualified pension plan (none of which were deductible) were $74,100.
On September 27, 2015, Alton and Clair received a pro rata 10% stock dividend on
600 shares of stock they owned. They had bought the stock on March 5, 2008, for $20 a share. On December 16, 2015, they sold the 60 dividend shares for $55 a share.
On October 10, 2015, Clair sold the car she had used in commuting to and from work for $17,000. She had paid $31,000 for the car in 2009.
On July 14, 2007, Alton and Clair received a gift of 1,000 shares of stock from their son, Thomas. Thomas’s basis in the stock was $35 a share (fair market value at the date of gift was $25). No gift tax was paid on the transfer. Alton and Clair sold the stock on October 8, 2015, for $24 a share.
On May 1, 2015, Clair’s mother died, and Clair inherited her personal residence.
In February 2015, her mother had paid the property taxes for 2015 of $2,100. The residence had a fair market value of $235,000 and an adjusted basis to the mother of $160,000 on the date of her death. Clair listed the house with a real estate agent, who estimated it was worth $240,000 as of December 31, 2015.
Clair received rent income of $6,000 on a beach house she inherited three years ago from her uncle Charles. She had rented the property for one week during the
July 4 weekend and one week during the Thanksgiving holiday. Charles’s adjusted basis in the beach house was $150,000, and its fair market value on the date of his death was $240,000. Clair and Alton used the beach house for personal purposes for
56 days during the year. Expenses associated with the house were $3,700 for utilities, maintenance, and repairs; $2,200 for property taxes; and $800 for insurance.
There are no mortgages on the property.
Clair and Alton paid estimated Federal income tax of $3,100 and had itemized deductions of $6,800 (excluding any itemized deductions associated with the beach house). If they have overpaid their Federal income tax, they want the amount refunded.
Both Clair and Alton want $3 to go to the Presidential Election Campaign Fund.
Compute their net tax payable or refund due for 2015. If you use tax forms for your computations, you will need at a minimum Form 1040 and Schedule D. Suggested software: H&R BLOCK Tax Software.
Tax Return Problem
97. Devon Bishop, age 45, is single. He lives at 1507 Rose Lane, Albuquerque, NM
87131. His Social Security number is 111-11-1112. Devon does not want $3 to go to the Presidential Election Campaign Fund.
Devon’s wife, Ariane, passed away in 2011. Devon’s son, Tom, who is age 16, resides with Devon. Tom’s Social Security number is 123-45-6788.
Devon owns a sole proprietorship for which he uses the accrual method of accounting and maintains no inventory. His revenues and expenses for 2015 are as follows:
Sales revenue $740,000
Cost of goods sold (based on purchases for the year) 405,000
Salary expense 88,000
Rent expense 30,000
Utilities 8,000
Telephone 6,500
Advertising 4,000
Bad debts 5,000
Depreciation* 21,000
Health insurance** 26,000
Accounting and legal fees 7,000
Supplies 1,000 *New office equipment ($21,000); Devon chose to use the immediate expense election. ** $18,000 for employees and $8,000 for Devon.
Other income received by Devon includes the following:
Dividend income (qualified dividends):
Swan, Inc. $10,000
Wren, Inc. 2,000
Interest income:
First Bank 11,000
Second Bank 2,500
City of Asheville bonds 17,000
During the year, Devon and his sole proprietorship had the following property transactions:
a. Sold Blue, Inc. stock for $45,000 on March 12, 2015. He had purchased the stock on September 5, 2012, for $50,000.
b. Received an inheritance of $300,000 from his uncle, Henry. Devon used $200,000 to purchase Green, Inc. stock on May 15, 2015, and invested $100,000 in Gold,
Inc. stock on May 30, 2015.
c. Received Orange, Inc. stock worth $9,500 as a gift from his aunt, Jane, on June
17, 2015. Her adjusted basis for the stock was $5,000. No gift taxes were paid on the transfer. Jane had purchased the stock on April 1, 2009. Devon sold the stock on July 1, 2015, for $22,000.
d. On July 15, 2015, Devon sold one-half of the Green, Inc. stock for $40,000.
e. Devon was notified on August 1, 2015, that Yellow, Inc. stock he purchased from a colleague on September 1, 2014, for $52,500 had become worthless. While he perceived that the investment was risky, he did not anticipate that the corporation would declare bankruptcy.
f. On August 15, 2015, Devon received a parcel of land in Phoenix worth $220,000 in exchange for a parcel of land he owned in Tucson. Because the Tucson parcel was worth $245,000, he also received $25,000 cash. Devon’s adjusted basis for the
Tucson parcel was $210,000. He originally purchased it on September 18, 2012.
g. On December 1, 2015, Devon sold the condominium in which he had been living for the past 20 years (1844 Lighthouse Lane, Albuquerque, NM 87131) and moved into a rented townhouse. The sales price was $480,000, selling expenses were $28,500, and repair expenses related to the sale were $9,400. Devon purchased the condominium for $180,000.
Tax Return Problem
Devon’s potential itemized deductions, exclusive of the aforementioned information, are as follows:
Medical expenses (before the 10% floor) $ 9,500
Property taxes on residence 5,800
State income taxes 4,000
Charitable contributions 10,000
Mortgage interest on residence 9,900
Sales taxes paid 5,000
During the year, Devon makes estimated Federal income tax payments of $40,000.
Compute Devon’s lowest net tax payable or refund due for 2015 assuming that he makes any available elections that will reduce the tax. If you use tax forms for your computations, you will need Forms 1040, 4562, 8824, and 8949 and Schedules
A, B, C, D, and SE. Suggested software: H&R BLOCK Tax Software.
98. Tom and Alice Honeycutt, ages 35 and 36, respectively, live at 101 Glass Road, Delton,
MI 49046. Tom is a county employee, and Alice is a self-employed accountant. Tom’s
Social Security number is 111-11-1111; Alice’s Social Security number is 123-45-6789.
The income and expenses associated with Alice’s accounting practice for 2016 are as follows:
Revenues (cash receipts during 2016) $185,000
Expenses
Salaries $ 45,000
Office supplies 3,200
Postage 2,900
Depreciation of equipment 42,000
Telephone 800 $ 93,900
Because Alice is a cash method taxpayer, she does not record her receivables as revenue until she receives cash payment. At the beginning of 2016, her accounts receivable were $48,000, and the balance had decreased to $8,000 by the end of the year.
Alice used one room in their 10-room house as the office for her accounting practice (400 square feet out of a total square footage of 4,000). They paid the following expenses related to the house during 2016:
Utilities $4,500
Insurance 2,100
Property taxes 5,200
Repairs 3,500
Tom and Alice purchased the house on September 1, 2015, for $400,000 (exclusive of land cost).
Tom and Alice have one child, Connor, age 16. Connor’s Social Security number is 123-45-6788.
Tom received a salary of $50,000 during 2016. The appropriate amounts of Social
Security tax and Medicare tax were withheld. In addition, $5,000 of Federal income taxes and $2,000 of state income taxes were withheld.
Alice provides part of the support of her father, age 69. Her father’s Social Security number is 123-45-6787. The total support in 2016 for her father was as follows:
Social Security benefits $5,200
From Alice 3,200
From Bob, Alice’s brother 2,200
From Susan, Alice’s sister 2,300
Tax Computation Problem
Bob and Susan have both indicated their willingness to sign a multiple support waiver form if it will benefit Alice.
Tom and Alice’s allowable itemized deductions during 2016, excluding any itemized deductions related to the house, were $11,000. They made estimated tax payments of $25,000.
Part 1—Tax Computation
Compute Tom and Alice’s lowest net tax payable or refund due for 2016.
Part 2—Tax Planning
Tom and Alice have 30 acres of prime farmland that they inherited from Tom’s father several years ago. At that time, the fair market value of the land was $150,000 (which became their basis in the land). The Honeycutts have been holding the land as an investment. The property was recently appraised for $190,000, and there is an outstanding mortgage on the land of $28,000. They are considering trading this land for property in the mountains of southern Colorado. Ultimately, they would like to build a vacation home on the Colorado property. The Colorado property owner— who has significant land holdings in the area—has provided two options to Tom and Alice (in both cases, the Colorado property owner would assume the mortgage as part of the exchange):
1. 15 acres of property with a fair market value of $135,000 plus $27,000 of cash; or
2. 10 acres of property with a fair market value of $160,000 plus $2,000 of cash.
The Honeycutts have come to you for advice, believing either transaction to be a like-kind exchange that will allow them to defer any gain. Assume that Tom and
Alice expect their marginal tax rate to remain the same for 2017. Write a letter to
Tom and Alice that contains your advice on the proposed transactions. Also prepare a memo for the tax files.