Research Problems
Research Problem 1. Terry owns real estate with an adjusted basis of $600,000 and a fair market value of $1.1 million. The amount of the nonrecourse mortgage on the property is $2.5 million. Because of substantial past and projected future losses associated with the real estate development (occupancy rate of only 37% after three years), Terry deeds the property to the creditor.
a. What are the tax consequences to Terry?
b. Assume that the data are the same, except that the fair market value of the property is $2,525,000. Therefore, when Terry deeds the property to the creditor, she also receives $25,000 from the creditor. What are the tax consequences to Terry?
Research Problem 2. Your client, Jacob, turned 66 years old this year. Jacob has no heirs and has decided that he would like to sell a life insurance policy to fund a trip to Africa that he has wanted to take.
Jacob knew that he could surrender the policy (a whole-life policy) back to the insurance company, but a friend told him he could get more for the policy if he sold it to a life settlement company. A life settlement company buys life insurance policies from policyholders who are not ill and who generally have a life expectancy of between 2 and 15 years. In return, the seller of the policy receives a lump-sum payment.
The life settlement company either holds the policy to maturity or resells the policy to an investor.
The lump sum received depends on factors such as age, health, and the terms and conditions of the policy, but is generally more than the policy’s cash surrender value (which would be received from the life insurance company upon surrender of the policy).
In November 2016, Jacob (who was not terminally or chronically ill) sold his policy to a life settlement company for $160,000. During the time he owned the policy,
Jacob did not borrow against the policy or receive any distributions. Jacob also had paid premiums totaling $122,000 (of which $32,000 was paid for the provision of insurance before the sale of the policy).
How should Jacob calculate his basis in the life insurance policy to determine if he has a realized gain or loss on the surrender of the policy?
Research Problem 3. Ted and Marvin Brown purchased an apartment building in
2005 as equal tenants in common. After a hectic decade of co-ownership, the brothers decided that their business association should be terminated. This led to the sale of the apartment building and a division of the proceeds.
The realized gain on the sale of the apartment building for each brother was $350,000. Ted recognized gain on his share and used the net proceeds to invest in stock. Marvin wanted to defer any recognized gain, so he worked with a realtor to identify property that would be eligible for § 1031 like-kind exchange treatment. After one prospect failed, the realtor identified a single-family home on Lake Tahoe that was currently being rented by the owner. Marvin agreed with the choice and acquired the single-family house using the proceeds from the apartment building.
Because the single-family house qualified as like-kind property, Marvin deferred all of his realized gain.
After attempting to rent the property for eight months without success, Marvin concluded that he could not continue to make the mortgage payments on his primary residence and this rental property. To ease his financial liquidity problem, Marvin sold his principal residence for a realized gain of $190,000 and moved into the Lake
Tahoe house. He reported no recognized gain on the sale of his principal residence as the sale qualified for § 121 exclusion treatment.
The IRS issued a deficiency notice to Marvin associated with the sale of the apartment building. The position of the IRS was that Marvin did not hold the single-family residence for investment purposes as required by § 1031. Instead, his intention was personal—to use it as a replacement for his current residence that he planned on selling.
Who should prevail?
Research Problem 4. Many see the “step-up in basis at death” rule of § 1014 as an expensive tax loophole enjoyed by the wealthy. Find the latest estimates of the revenue loss to the Treasury that is attributable to this rule.
a. How does Canada’s tax law determine the basis of property acquired from a decedent?
b. Send an e-mail to a member of the House Ways and Means Committee expressing a preference for the preservation of the current § 1014 rule or the modifications made to it by the Tax Relief Reconciliation Act of 2001 and the Tax Relief Act of
2010.
Research Problem 5. In general, the 45-day identification period and the 180-day exchange period for like-kind exchanges cannot be extended. Does this rule change if the like-kind property or the taxpayer involved in the exchange is located in a Presidentially declared disaster area? Use the IRS’s website (www.irs.gov) to find the answer.
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Internet
Activity
Roger CPA Review Questions
1. Stephen purchased a video game console five years ago for $500. In order to raise money for the “latest and greatest” console, Stephen sold his console for $100.
Because of advances in technology, Stephen can purchase the new console for $400. What is the tax treatment of Stephen’s sale of his console?
a. Stephen recognizes a $400 loss
b. Stephen does not report the sale
c. Stephen recognizes a $300 loss
d. Stephen recognizes a $100 gain
2. Uncle Ubb gave his nephew, Leroy Lamprey, a gift of stock worth $10,000. Uncle
Ubb’s basis in the stock was $15,000. Leroy sold the stock to an unrelated party for $11,000. What amount of gain or loss should Leroy report as a result of this sale?
a. $0
b. $4,000 loss
c. $200 gain
d. $1,000 gain
3. On June 1, 2015, Heloise gave Henrietta a gift of stock worth $10,000. Heloise had purchased the stock on January 1, 2015, for $13,000. Henrietta sold the stock to an unrelated party on January 1, 2016, for $13,500. What is the amount and character of Henrietta’s gain or loss upon the sale?
a. $500 short-term capital gain
b. $3,500 short-term capital gain
c. $500 long-term capital gain
d. $3,500 long-term capital gain
4. On July 1, 2015, Penelope gave Peter a gift of stock worth $9,000. Penelope had purchased the stock for $10,000 in 2013. On November 1, 2015, Peter sold the stock to an unrelated party for $8,500. What is the amount and character of Peter’s gain or loss upon the sale?
a. $500 short-term capital loss
b. $1,500 long-term capital loss
c. $500 long-term capital loss
d. $1,500 short-term capital loss
5. On June 1, 2016, Gary gave Gertrude a gift of stock worth $10,000, paying no gift tax on the transaction. Gary had purchased the stock for $7,500 in 2012. On October
1, 2016, Gertrude sold the stock to an unrelated party for $11,000. What is the amount and character of Gertrude’s gain upon the sale?
a. $1,000 short-term capital gain
b. $3,500 long-term capital gain
c. $1,000 long-term capital gain
d. $3,500 short-term capital gain
6. Shomit purchases 100 shares of stock in Classy Corporation for $500 in year 1. On
December 20 of year 2, he purchases an additional 100 shares in the company for $400.
On December 27 of year 2, Shomit sells the 100 shares acquired in year 1 for $410.
What is Shomit’s resulting basis in the shares acquired on December 20 of year 2?
a. $400
b. $500
c. $490
d. $410
7. Helmut purchases 100 shares of stock in Caisson Corporation for $1,000 in year 1.
On December 1 of year 2, he purchases an additional 100 shares in the company for $1,500. On December 28 of year 2, Helmut sells the 100 shares acquired in year 1 for $1,200. What is Helmut’s recognized gain or loss from the December 28 sale, and what is his resulting basis in the stock purchased on December 1 of year 2?
Recognized Gain or Loss on Sale
Resulting Basis in
December 1 Purchase
a. $ 0 $1,800
b. 0 1,500
c. 300 loss 1,200
d. 200 gain 1,500
8. Sengupta died on February 1, 2015, and bequeathed two different assets to a beneficiary,
Roberts. Asset One was distributed to Roberts on April 24, 2015; Asset Two was distributed to Roberts on October 25, 2015. The executor of Sengupta’s estate makes a qualified alternate valuation date election. The basis of each bequeathed asset will thus be the fair market value on which date?
Asset One Asset Two
a. August 1, 2015 August 1, 2015
b. April 24, 2015 August 1, 2015
c. April 24, 2015 October 25, 2015
d. August 1, 2015 October 25, 2015
9. Kellye purchased her home in 2011 for $140,000. After living in it for five years, she sold it in 2016 for $170,000, its market value. What is the tax treatment of the sale of
Kellye’s home?
a. A $30,000 gain is recognized but not reported
b. A $30,000 gain is recognized and reported
c. A $30,000 gain is carried forward
d. The transaction is not reported
10. Ike, a single taxpayer, is reassigned for his job and must move to a new state. While searching for a place to live, he encounters a person who is selling her home in order to move to Ike’s current city. The two agree to trade their properties to each other without any further consideration. Ike’s house has a fair market value of $200,000 and basis of $130,000. He has lived in the house for one year. The house he is acquiring in the trade has a fair market value of $300,000. What gain will Ike recognize for Federal tax purposes?
a. $50,000
b. $100,000
c. $0
d. $300,000
11. Kathryn has lived in her house for one year. Her company recently relocated to a city 100 miles away, forcing her to move. She purchased her house a year ago for $400,000 and sold it for $525,000, its current fair market value. What amount of gain will Kathryn recognize for Federal tax purposes?
a. $0
b. $62,500
c. $125,000
d. $250,000
12. An office building owned by Milo was destroyed by Hurricane Mel on September
25, 2015. On October 2, 2015, the President of the United States declared the area where the office building was located a Federal disaster area. Milo received settlement of his insurance claim for the destruction of his building on January 2, 2016. In order to qualify for nonrecognition of gain on this involuntary conversion, what is the last date for Milo to acquire qualified replacement property?
a. December 31, 2019
b. October 2, 2019
c. December 31, 2020
d. January 2, 2020
13. Mikhail owns real estate with a basis of $400,000 and a fair market value of $650,000. He exchanges it for other real estate with a fair market value of $480,000.
In addition, Mikhail is relieved of a mortgage on the old property of $200,000, assumes a mortgage on the new property of $100,000, and receives $70,000 in cash.
Under § 1031, what is Mikhail’s recognized gain on the exchange?
a. $170,000
b. $270,000
c. $70,000
d. $350,000
Research Problem 1. Terry owns real estate with an adjusted basis of $600,000 and a fair market value of $1.1 million. The amount of the nonrecourse mortgage on the property is $2.5 million. Because of substantial past and projected future losses associated with the real estate development (occupancy rate of only 37% after three years), Terry deeds the property to the creditor.
a. What are the tax consequences to Terry?
b. Assume that the data are the same, except that the fair market value of the property is $2,525,000. Therefore, when Terry deeds the property to the creditor, she also receives $25,000 from the creditor. What are the tax consequences to Terry?
Research Problem 2. Your client, Jacob, turned 66 years old this year. Jacob has no heirs and has decided that he would like to sell a life insurance policy to fund a trip to Africa that he has wanted to take.
Jacob knew that he could surrender the policy (a whole-life policy) back to the insurance company, but a friend told him he could get more for the policy if he sold it to a life settlement company. A life settlement company buys life insurance policies from policyholders who are not ill and who generally have a life expectancy of between 2 and 15 years. In return, the seller of the policy receives a lump-sum payment.
The life settlement company either holds the policy to maturity or resells the policy to an investor.
The lump sum received depends on factors such as age, health, and the terms and conditions of the policy, but is generally more than the policy’s cash surrender value (which would be received from the life insurance company upon surrender of the policy).
In November 2016, Jacob (who was not terminally or chronically ill) sold his policy to a life settlement company for $160,000. During the time he owned the policy,
Jacob did not borrow against the policy or receive any distributions. Jacob also had paid premiums totaling $122,000 (of which $32,000 was paid for the provision of insurance before the sale of the policy).
How should Jacob calculate his basis in the life insurance policy to determine if he has a realized gain or loss on the surrender of the policy?
Research Problem 3. Ted and Marvin Brown purchased an apartment building in
2005 as equal tenants in common. After a hectic decade of co-ownership, the brothers decided that their business association should be terminated. This led to the sale of the apartment building and a division of the proceeds.
The realized gain on the sale of the apartment building for each brother was $350,000. Ted recognized gain on his share and used the net proceeds to invest in stock. Marvin wanted to defer any recognized gain, so he worked with a realtor to identify property that would be eligible for § 1031 like-kind exchange treatment. After one prospect failed, the realtor identified a single-family home on Lake Tahoe that was currently being rented by the owner. Marvin agreed with the choice and acquired the single-family house using the proceeds from the apartment building.
Because the single-family house qualified as like-kind property, Marvin deferred all of his realized gain.
After attempting to rent the property for eight months without success, Marvin concluded that he could not continue to make the mortgage payments on his primary residence and this rental property. To ease his financial liquidity problem, Marvin sold his principal residence for a realized gain of $190,000 and moved into the Lake
Tahoe house. He reported no recognized gain on the sale of his principal residence as the sale qualified for § 121 exclusion treatment.
The IRS issued a deficiency notice to Marvin associated with the sale of the apartment building. The position of the IRS was that Marvin did not hold the single-family residence for investment purposes as required by § 1031. Instead, his intention was personal—to use it as a replacement for his current residence that he planned on selling.
Who should prevail?
Research Problem 4. Many see the “step-up in basis at death” rule of § 1014 as an expensive tax loophole enjoyed by the wealthy. Find the latest estimates of the revenue loss to the Treasury that is attributable to this rule.
a. How does Canada’s tax law determine the basis of property acquired from a decedent?
b. Send an e-mail to a member of the House Ways and Means Committee expressing a preference for the preservation of the current § 1014 rule or the modifications made to it by the Tax Relief Reconciliation Act of 2001 and the Tax Relief Act of
2010.
Research Problem 5. In general, the 45-day identification period and the 180-day exchange period for like-kind exchanges cannot be extended. Does this rule change if the like-kind property or the taxpayer involved in the exchange is located in a Presidentially declared disaster area? Use the IRS’s website (www.irs.gov) to find the answer.
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Internet
Activity
Roger CPA Review Questions
1. Stephen purchased a video game console five years ago for $500. In order to raise money for the “latest and greatest” console, Stephen sold his console for $100.
Because of advances in technology, Stephen can purchase the new console for $400. What is the tax treatment of Stephen’s sale of his console?
a. Stephen recognizes a $400 loss
b. Stephen does not report the sale
c. Stephen recognizes a $300 loss
d. Stephen recognizes a $100 gain
2. Uncle Ubb gave his nephew, Leroy Lamprey, a gift of stock worth $10,000. Uncle
Ubb’s basis in the stock was $15,000. Leroy sold the stock to an unrelated party for $11,000. What amount of gain or loss should Leroy report as a result of this sale?
a. $0
b. $4,000 loss
c. $200 gain
d. $1,000 gain
3. On June 1, 2015, Heloise gave Henrietta a gift of stock worth $10,000. Heloise had purchased the stock on January 1, 2015, for $13,000. Henrietta sold the stock to an unrelated party on January 1, 2016, for $13,500. What is the amount and character of Henrietta’s gain or loss upon the sale?
a. $500 short-term capital gain
b. $3,500 short-term capital gain
c. $500 long-term capital gain
d. $3,500 long-term capital gain
4. On July 1, 2015, Penelope gave Peter a gift of stock worth $9,000. Penelope had purchased the stock for $10,000 in 2013. On November 1, 2015, Peter sold the stock to an unrelated party for $8,500. What is the amount and character of Peter’s gain or loss upon the sale?
a. $500 short-term capital loss
b. $1,500 long-term capital loss
c. $500 long-term capital loss
d. $1,500 short-term capital loss
5. On June 1, 2016, Gary gave Gertrude a gift of stock worth $10,000, paying no gift tax on the transaction. Gary had purchased the stock for $7,500 in 2012. On October
1, 2016, Gertrude sold the stock to an unrelated party for $11,000. What is the amount and character of Gertrude’s gain upon the sale?
a. $1,000 short-term capital gain
b. $3,500 long-term capital gain
c. $1,000 long-term capital gain
d. $3,500 short-term capital gain
6. Shomit purchases 100 shares of stock in Classy Corporation for $500 in year 1. On
December 20 of year 2, he purchases an additional 100 shares in the company for $400.
On December 27 of year 2, Shomit sells the 100 shares acquired in year 1 for $410.
What is Shomit’s resulting basis in the shares acquired on December 20 of year 2?
a. $400
b. $500
c. $490
d. $410
7. Helmut purchases 100 shares of stock in Caisson Corporation for $1,000 in year 1.
On December 1 of year 2, he purchases an additional 100 shares in the company for $1,500. On December 28 of year 2, Helmut sells the 100 shares acquired in year 1 for $1,200. What is Helmut’s recognized gain or loss from the December 28 sale, and what is his resulting basis in the stock purchased on December 1 of year 2?
Recognized Gain or Loss on Sale
Resulting Basis in
December 1 Purchase
a. $ 0 $1,800
b. 0 1,500
c. 300 loss 1,200
d. 200 gain 1,500
8. Sengupta died on February 1, 2015, and bequeathed two different assets to a beneficiary,
Roberts. Asset One was distributed to Roberts on April 24, 2015; Asset Two was distributed to Roberts on October 25, 2015. The executor of Sengupta’s estate makes a qualified alternate valuation date election. The basis of each bequeathed asset will thus be the fair market value on which date?
Asset One Asset Two
a. August 1, 2015 August 1, 2015
b. April 24, 2015 August 1, 2015
c. April 24, 2015 October 25, 2015
d. August 1, 2015 October 25, 2015
9. Kellye purchased her home in 2011 for $140,000. After living in it for five years, she sold it in 2016 for $170,000, its market value. What is the tax treatment of the sale of
Kellye’s home?
a. A $30,000 gain is recognized but not reported
b. A $30,000 gain is recognized and reported
c. A $30,000 gain is carried forward
d. The transaction is not reported
10. Ike, a single taxpayer, is reassigned for his job and must move to a new state. While searching for a place to live, he encounters a person who is selling her home in order to move to Ike’s current city. The two agree to trade their properties to each other without any further consideration. Ike’s house has a fair market value of $200,000 and basis of $130,000. He has lived in the house for one year. The house he is acquiring in the trade has a fair market value of $300,000. What gain will Ike recognize for Federal tax purposes?
a. $50,000
b. $100,000
c. $0
d. $300,000
11. Kathryn has lived in her house for one year. Her company recently relocated to a city 100 miles away, forcing her to move. She purchased her house a year ago for $400,000 and sold it for $525,000, its current fair market value. What amount of gain will Kathryn recognize for Federal tax purposes?
a. $0
b. $62,500
c. $125,000
d. $250,000
12. An office building owned by Milo was destroyed by Hurricane Mel on September
25, 2015. On October 2, 2015, the President of the United States declared the area where the office building was located a Federal disaster area. Milo received settlement of his insurance claim for the destruction of his building on January 2, 2016. In order to qualify for nonrecognition of gain on this involuntary conversion, what is the last date for Milo to acquire qualified replacement property?
a. December 31, 2019
b. October 2, 2019
c. December 31, 2020
d. January 2, 2020
13. Mikhail owns real estate with a basis of $400,000 and a fair market value of $650,000. He exchanges it for other real estate with a fair market value of $480,000.
In addition, Mikhail is relieved of a mortgage on the old property of $200,000, assumes a mortgage on the new property of $100,000, and receives $70,000 in cash.
Under § 1031, what is Mikhail’s recognized gain on the exchange?
a. $170,000
b. $270,000
c. $70,000
d. $350,000