Chapter 14 Property Transactions: Capital Gains And Losses, § 1231, And Recapture Provisions

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66. LO.5 For 2016, Wilma has properly determined taxable income of $36,000, including $3,000 of unrecaptured § 1250 gain and $8,200 of 0%/15%/20% gain.
Wilma qualifies for head-of-household filing status. Compute Wilma’s tax liability and the tax savings from the alternative tax on net capital gain.
67. LO.5 Asok’s AGI for 2016 is $133,050. Included in this AGI is a $45,000 25% longterm capital gain and a $13,000 0%/15%/20% long-term capital gain. Asok is single, uses the standard deduction, and has only his personal exemption. Compute his taxable income, the tax liability, and the tax savings from the alternative tax on net capital gain.
68. LO.6 Gray, Inc., a C corporation, has taxable income from operations of $1,452,000 for 2016. It also has a net long-term capital loss of $355,000 from the sale of a subsidiary’s stock. The year 2016 is the first year in the last 10 years that Gray has not had at least $500,000 per year of net long-term capital gains. What is Gray’s
2016 taxable income? What, if anything, can it do with any unused capital losses?
69. LO.3, 14 Harriet, who is single, is the owner of a sole proprietorship. Two years ago, Harriet developed a process for preserving doughnuts that gives the doughnuts a much longer shelf life. The process is not patented or copyrighted, and only Harriet knows how it works. Harriet has been approached by a company that would like to buy the process. Harriet insists that she receive a long-term employment contract with the acquiring company as well as be paid for the rights to the process. The acquiring company offers Harriet a choice of two options: (1) $650,000 in cash for the process and a 10-year covenant not to compete at $65,000 per year or (2) $650,000 in cash for a 10-year covenant not to compete and $65,000 per year for 10 years in payment for the process. Which option should Harriet accept?
What is the tax effect on the acquiring company of each approach?
70. LO.8 A sculpture that Korliss Kane held for investment was destroyed in a flood.
The sculpture was insured, and Korliss had a $60,000 gain from this casualty.
He also had a $17,000 loss from an uninsured antique vase that was destroyed by the flood. The vase was also held for investment. Korliss had no other property transactions during the year and has no nonrecaptured § 1231 losses from prior years. Both the sculpture and the vase had been held more than one year when the flood occurred. Compute Korliss’s net gain or loss, and identify how it would be treated. Also write a letter to Korliss, explaining the nature of the gain or loss.
Korliss’s address is 2367 Meridian Road, Hannibal, MO 63401.
71. LO.8 Keshara has the following net § 1231 results for each of the years shown.
What would be the nature of the net gains in 2015 and 2016?
Tax Year Net § 1231 Loss Net § 1231 Gain
2011 $18,000
2012 33,000
2013 42,000
2014 $41,000
2015 30,000
2016 41,000
72. LO.8, 14 Jingie owns two parcels of business land (§ 1231 assets). One parcel can be sold at a loss of $60,000, and the other parcel can be sold at a gain of $70,000. Jingie has no nonrecaptured § 1231 losses from prior years. The parcels could be sold at any time because potential purchasers are abundant. Jingie has a $35,000 short-term capital loss carryover from a prior tax year and no capital assets that could be sold to generate long-term capital gains. Both land parcels have been held more than one year. What should Jingie do based upon these facts? (Assume that tax rates are constant, and ignore the present value of future cash flow.)
73. LO.7, 8, 9 Siena Industries (a sole proprietorship) sold three § 1231 assets during
2016. Data on these property dispositions are as follows:
Asset Cost Acquired Depreciation Sold for Sold on
Rack $100,000 10/10/12 $62,000 $85,000 10/10/16
Forklift 35,000 10/16/13 23,000 5,000 10/10/16
Bin 87,000 03/12/15 34,000 60,000 10/10/16
a. Determine the amount and the character of the recognized gain or loss from the disposition of each asset.
b. Assuming that Siena has no nonrecaptured net § 1231 losses from prior years, how much of the 2016 recognized gains is treated as capital gains?
74. LO.8, 9 Copper Industries (a sole proprietorship) sold three § 1231 assets during
2016. Data on these property dispositions are as follows:
Asset Cost Acquired Depreciation Sold for Sold on
Rack $110,000 10/10/13 $70,000 $55,000 10/10/16
Forklift 45,000 10/16/12 21,000 15,000 10/10/16
Bin 97,000 03/12/15 31,000 60,000 10/10/16
a. Determine the amount and the character of the recognized gain or loss from the disposition of each asset.
b. Assuming that Copper has $6,000 nonrecaptured net § 1231 losses from prior years, how much of the 2016 recognized gains is treated as capital gains?
75. LO.8, 9 On December 1, 2014, Lavender Manufacturing Company (a corporation) purchased another company’s assets, including a patent. The patent was used in Lavender’s manufacturing operations; $49,500 was allocated to the patent, and it was amortized at the rate of $275 per month. On July 30, 2016, Lavender sold the patent for $95,000. Twenty months of amortization had been taken on the patent. What are the amount and nature of the gain Lavender recognizes on the disposition of the patent? Write a letter to Lavender, discussing the treatment of the gain. Lavender’s address is 6734 Grover Street, Boothbay Harbor, ME 04538. The letter should be addressed to Bill Cubit, Controller.
76. LO.8, 10 On June 1, 2012, Skylark Enterprises (not a corporation) acquired a retail store building for $500,000 (with $100,000 being allocated to the land).
The store building was 39-year real property, and the straight-line cost recovery method was used. The property was sold on June 21, 2016, for $385,000.
a. Compute the cost recovery and adjusted basis for the building using Exhibit 8.8 from Chapter 8.
b. What are the amount and nature of Skylark’s gain or loss from disposition of the building? What amount, if any, of the gain is unrecaptured § 1250 gain?
77. LO.8, 9, 10 On May 2, 1987, Hannah acquired residential real estate for $450,000.
Of the cost, $100,000 was allocated to the land and $350,000 to the building. On August 20, 2016, the building, which then had an adjusted basis of $0, was sold for $545,000 and the land for $200,000.
a. Determine the amount and character of the recognized gain from the sale of the building.
b. Determine the amount and character of the recognized gain from the sale of the land.
78. LO.8, 9, 10 Larry is the sole proprietor of a trampoline shop. During 2016, the following transactions occurred:
• Unimproved land adjacent to the store was condemned by the city on February 1.
The condemnation proceeds were $15,000. The land, acquired in 1985, had an allocable basis of $40,000. Larry has additional parking across the street and plans to use the condemnation proceeds to build his inventory.
• A truck used to deliver trampolines was sold on January 2 for $3,500. The truck was purchased on January 2, 2012, for $6,000. On the date of sale, the adjusted basis was zero.
• Larry sold an antique rowing machine at an auction. Net proceeds were $4,900.
The rowing machine was purchased as used equipment 17 years ago for $5,200 and is fully depreciated.
• Larry sold an apartment building for $300,000 on September 1. The rental property was purchased on September 1, 2013, for $150,000 and was being depreciated over a 27.5-year life using the straight-line method. At the date of sale, the adjusted basis was $124,783.
• Larry’s personal yacht was stolen on September 5. The yacht had been purchased in August at a cost of $25,000. The fair market value immediately preceding the theft was $19,600. Larry was insured for 50% of the original cost, and he received $12,500 on December 1.
• Larry sold a Buick on May 1 for $9,600. The vehicle had been used exclusively for personal purposes. It was purchased on September 1, 2012, for $20,800.
• Larry’s trampoline stretching machine (owned two years) was stolen on May
5, but the business’s insurance company will not pay any of the machine’s value because Larry failed to pay the insurance premium. The machine had a fair market value of $8,000 and an adjusted basis of $6,000 at the time of theft.
• Larry had AGI of $102,000 from sources other than those described above.
• Larry has no nonrecaptured § 1231 lookback losses.
a. For each transaction, what are the amount and nature of recognized gain or loss?
b. What is Larry’s 2016 AGI?
79. LO.8, 10 On January 1, 2007, Stephanie Bridges acquired depreciable real property for $50,000. She used straight-line depreciation to compute the asset’s cost recovery. The asset was sold for $96,000 on January 3, 2016, when its adjusted basis was $38,000.
a. What are the amount and nature of the gain if the real property is residential?
b. Stephanie is curious about how the recapture rules differ for tangible personal property and for residential rental real estate acquired in 1987 and thereafter.
Write a letter to Stephanie, explaining the differences. Her address is 2345 Westridge
Street #23, Edna, KS 67342.
80. LO.8, 9, 11, 14 Joanne is in the 28% tax bracket and owns depreciable business equipment that she purchased several years ago for $135,000. She has taken $100,000 of depreciation on the equipment, and it is worth $55,000.
Joanne’s niece, Susan, is starting a new business and is short of cash. Susan has asked Joanne to gift the equipment to her so that Susan can use it in her business.
Joanne no longer needs the equipment. Identify the alternatives available to Joanne if she wants to help Susan and the tax effects of those alternatives. (Assume that all alternatives involve the business equipment in one way or another, and ignore the gift tax.)
81. LO.8, 9, 11 Anna received tangible personal property with a fair market value of $65,000 as a gift in 2014. The donor had purchased the property for $77,000 and had taken $77,000 of depreciation. Anna used the property in her business.
Anna sells the property for $23,000 in 2016. What are the tax status of the property and the nature of the recognized gain when she sells the property?
82. LO.8, 9, 11 Miguel receives tangible personal property as an inheritance in 2014.
The property was depreciated by the deceased (Miguel’s father), and
Miguel will also depreciate it. At the date of the deceased’s death, the property was worth $532,000. The deceased had purchased it for $900,000 and taken $523,000 of depreciation on the property. Miguel takes $223,000 of depreciation on the property before selling it for $482,000 in 2016. What are the tax status of the property and the nature of the recognized gain when Miguel sells the property?
83. LO.11 David contributes to charity some tangible personal property that he had used in his business and depreciated. At the date of the donation, the property has a fair market value of $233,000 and an adjusted basis of zero; it was originally acquired for $400,000. What is the amount of David’s charitable contribution?
84. LO.8, 9, 11 Dedriea contributes to her wholly owned corporation some tangible personal property that she had used in her sole proprietorship business and depreciated. She had acquired the property for $566,000 and had taken $431,000 of depreciation on it before contributing it to the corporation. At the date of the contribution, the property had a fair market value of $289,000. The corporation took $100,000 of depreciation on the property and then sold it for $88,000 in
2016. What are the tax status of the property to the corporation and the nature of the recognized gain or loss when the corporation sells the property?
85. LO.8, 9, 12 Tan Corporation purchased depreciable tangible personal property for $100,000 in 2014 and immediately expensed the entire cost under § 179. In 2016, when the property was worth $80,000, Tan distributed it as a dividend to the corporation’s sole shareholder. What was the tax status of this property for Tan? What is the nature of the recognized gain or loss from the distribution of the property?
86. LO.7, 8, 10 Jasmine owned rental real estate that she sold to her tenant in an installment sale. Jasmine acquired the property in 2004 for $400,000; took $178,000 of depreciation on it; and sold it for $210,000, receiving $25,000 immediately and the balance (plus interest at a market rate) in equal payments of $18,500 for 10 years. What is the nature of the recognized gain or loss from this transaction?
87. LO.9 Jay sold three items of business equipment for a total of $300,000. None of the equipment was appraised to determine its value. Jay’s cost and adjusted basis for the assets are shown below.
Asset Cost Adjusted Basis
Skidder $230,000 $ 40,000
Driller 120,000 60,000
Platform 620,000 –0–
Total $970,000 $100,000
Jay has been unable to establish the fair market values of the three assets. All he can determine is that combined they were worth $300,000 to the buyer in this arm’s length transaction. How should Jay allocate the sales price and figure the gain or loss on the sale of the three assets?
Cumulative Problems
88. Ashley Panda lives at 1310 Meadow Lane, Wayne, OH 43466, and her Social Security number is 123-45-6789. Ashley is single and has a 20-year-old son, Bill. His
Social Security number is 111-11-1112. Karl lives with Ashley, and she fully supports him. Bill spent 2015 traveling in Europe and was not a college student. He had gross income of $4,655 in 2015.
Ashley owns the Enterprises LLC sole proprietorship, a data processing service (98-
7654321), which is located at 456 Hill Street, Wayne, OH 43466. The business activity code is 514210. Her 2015 Form 1040, Schedule C for Panda Enterprises shows revenues of $315,000, office expenses of $66,759, employee salary of $63,000, employee payroll taxes of $3,560, meals and entertainment expenses (before the 50% reduction) of $22,000, and rent expense of $34,000. The rent expense includes payments related to renting an office ($30,000) and payments related to renting various equipment ($4,000). There is no depreciation because all depreciable equipment owned has been fully depreciated in previous years. No fringe benefits are provided to the employee. Ashley personally purchases health insurance on herself and Bill.
The premiums are $23,000 per year.
Ashley has an extensive stock portfolio and has prepared the following analysis:
Stock
Number of
Shares
Date
Purchased Date Sold
Per-Share
Cost
Per-Share
Selling Price
Total
Dividends
Beige 10 10/18/14 10/11/15 $80 $ 74 $30
Garland 30 10/11/08 10/11/15 43 157 70
Puce 15 3/10/15 8/11/15 62 33 45
NOTE: Ashley received a Form 1099–B from her stockbroker that included the adjusted basis and sales proceeds for each of her stock transactions. The per-share cost includes commissions, and the per-share selling price is net of commissions.
Also, the dividends are the actual dividends received in 2015, and these are both ordinary dividends and qualified dividends.
Ashley had $800 of interest income from State of Ohio bonds and $600 of interest income on her Wayne Savings Bank account. She paid $25,000 of alimony to her former husband. His Social Security number is 123-45-6788.
Tax Return Problem
Ashley itemizes her deductions and had the following items, which may be relevant to her return:
Item Amount Comment
Unreimbursed medical expenses for Ashley (all for visits to doctors) $1,786 Does not include health insurance premiums.
State income taxes paid 1,830
Real property taxes on personal residence 3,230
Interest paid on home mortgage (Form 1098) 8,137 The loan is secured by the residence and was incurred when the home was purchased.
Charitable contributions 940 Cash paid to Ashley’s church.
Sales taxes 619 Amount per sales tax table.
Ashley made a $30,000 estimated Federal income tax payment, does not want any of her taxes to finance presidential elections, has no foreign bank accounts or trusts, and wants any refund to be applied against her 2016 taxes.
Compute Ashley’s net tax payable or refund due for 2015. If you use tax forms for your computations, you will need Form 1040 and its Schedules A, C, D, and SE and Form 8949. Suggested software: H&R BLOCK Tax Software.
89. Justin Stone was an employee of DataCare Services, Inc. His salary was $45,000 through
November 10, 2015, when he was laid off. DataCare Services provided medical insurance for Justin and his family during his employment and agreed to continue this coverage through the end of 2015. He received $7,000 of unemployment compensation from November 11, 2015 through December 31, 2015. FICA withholdings were as follows: Social Security of $2,790 ($45,000 _ 6:2%) and Medicare of $653 ($45,000 _ 1:45%). Justin lives at 112 Green Road, Crown City, OH 45623. His Social
Security number is 111-11-1112. Justin owned an apartment building until November
22, 2015, when he sold it for $200,000 (the apartment building’s address is 4826 Orange
Street, Crown City, OH 45623). For 2015, he had rent revenue of $33,000. He incurred and paid expenses as follows: $4,568 of repairs, $22,000 of mortgage interest, and $1,000 of miscellaneous expenses. He purchased the building on January 2, 2009, for $125,000. The building generated an operating profit each year that Justin owned it.
Other information follows:
• On November 22, 2015, Justin sold for $3,500 equipment that had been used for repairing various items in the apartments. The equipment was purchased for $25,000 on July 10, 2008, and was fully depreciated prior to 2015.
• Justin has $3,000 of unrecaptured § 1231 losses from prior years.
• Justin is age 38; is single; is divorced; and has custody of his 9-year-old son, Flint.
Justin provides more than 50% of Flint’s support. Flint’s Social Security number is
123-45-6789.
• Justin had $1,000 interest income from Blue Corporation bonds.
• Justin had $1,500 interest income from a State Bank certificate of deposit.
• Justin had a $2,000 0%/15%/20% long-term capital gain distribution from the
Brown Stock Investment Fund.
• Justin had the following itemized deductions: $4,600 real estate taxes on his home; $8,900 mortgage interest on his home; $4,760 charitable contributions (all in cash, all properly documented, and no single contribution exceeding $25); $4,300 state income tax withholding during 2015; $2,000 state estimated income tax payments during 2015; $2,600 sales taxes paid.
• Justin does not want to donate to the Presidential Election Campaign Fund.
• He had $12,000 of Federal income tax withholding during 2015 and made total
Federal estimated income tax payments of $14,000 during 2015.
Tax Return Problem
Compute Justin’s 2015 net tax payable or refund due. If you use tax forms for your computations, you will need Form 1040 and Schedules A, B, D, and E. You will also need Form 4797. Suggested software: H&R BLOCK Tax Software.
See Appendix E for Comprehensive Tax Return Problems—Form 1040