Assume the same facts as in Case Study Problem I:13-69 except you have the following market values as a result of an appraisal: Equipment $ 250,000 Building 500,000 Land 140,000 Inventory 110,000 Total $1,000,000 Tom insists that $150,000 of the purchase price should be allocated to inventory and $100,000 should be allocated to land. He refuses to complete the purchase unless the allocation is made as he requests. What action should you take with respect to Tomâs request? (See Chapter I:10 for a discussion of valuation issues in the purchase and sale of a business.) From problem 69: Your client, Kent Earl, whose tax rate is 35%, owns a bowling alley and has indicated that he wants to sell the business for $1 million and purchase a minor league baseball franchise. His business consists of the following tangible assets:
Because you have another client, Tom Quick, who is interested in purchasing a business, you informed Tom of Kentâs interest in selling. Tom wants to purchase the bowling alley, and the price sounds right to him. The bowling alley business has been very profitable in the last few years because Kent has developed a loyal group of customers by promoting bowling leagues during the week days and a special Saturday afternoon session for children in the elementary school grades. Kent and Tom have come to you and want to know how the transaction should be handled for the best tax results. You know that the $1 million purchase price will have to be allocated among the assets and it will be necessary to estimate the FMV of all assets. Because FMV is often subjective, Kent and Tom recognize that some flexibility might exist in allocating the purchase price. For example, it might be just as easy to justify a FMV of $300,000 or $325,000 for the equipment. a. What advice do you have for Kent with respect to the allocation (i.e., should he be interested in allocating more to some assets than others)? Explain the reasoning for your advice. b. Would your advice to Kent be different if he had a large amount of capital losses and no nonrecaptured net Sec. 1231 losses? c. What advice do you have for Tom with respect to the allocation (i.e., should he be interested in allocating more of the purchase price to some assets than to others)? Explain the reasoning for your advice. d. What advantages might result from having Kent sign an agreement not to compete (i.e., operate a bowling alley)? e. Should you have a concern about the ethical implications of advising both Kent and Tom?
Acquisition Date Original Cost Adjusted Basis Equipment Building Land Inventory 2005 2005 2000 Current year $600,000 900,000 100,000 50,000 $150,000 494,000 100,000 50,000
> Name three primary sources of authority that tax professionals should check against the citator before relying on those sources for important matters.
> Assume the same facts as in Problem I:13-47 except the taxpayer is a corporation and answer the same questions. From problem 37: Charles owns an office building and land that are used in his trade or business. The office building and land were acquired i
> General Corporation owns equipment which cost $70,000 and has a $44,000 adjusted basis. General exchanges the equipment for other equipment ($42,000 FMV) and marketable securities ($30,000 FMV). Determine the following: a. Realized gain b. Recognized g
> Arnie, a college student, purchased a truck in 2015 for $6,000. He used the truck 70% of the time as a distributor for the local newspaper and 30% of the time for personal use. The truck has a five-year recovery period, and he claimed depreciation deduct
> Elizabeth owns equipment that cost $500,000 and has an adjusted basis of $230,000. If the straight-line method of depreciation had been used, the adjusted basis would be $300,000. a. What is the maximum selling price that she could sell the equipment fo
> Consider the following summary of Sec. 1231 gains and losses recognized by Janet during the period 2012â€“2017. Janet had no nonrecaptured Sec. 1231 losses at the beginning of 2012. If Janet has no capital gains and losses during the six-
> During the current year, Sean’s office building is destroyed by fire. After collecting the insurance proceeds, Sean has a $50,000 recognized gain. The building was acquired in 1998, and the straight-line method of depreciation has been used. He does not
> Vicki has an AGI of $70,000 without considering the sale of a nondepreciable asset for $23,000. The asset was acquired six years ago and has an adjusted basis of $35,000. She has no other sales or exchanges. Determine her AGI for the following independen
> Edith, who has no other sales or exchanges and no nonrecaptured Sec. 1231 losses, sells three tracts of land that are used in her trade or business. Edith is single, and her regular income tax rate is 33%. Asset #1—$15,000 gain and holding period of 20 m
> All assets listed below have been held for more than one year. Which assets might be classified as Sec. 1231, Sec. 1245, or Sec. 1250 property? An asset may be classified as more than one type of property. a. Land on which a factory is located b. Equip
> Ed operates a storage business as a sole proprietorship and owns the following assets acquired in 1998: Warehouse…………………………………..$400,000 Minus: Accumulated depreciation…..(230,000) Adjusted basis………………………………$170,000 Land……………………………………………….65,000 The FM
> What two functions does a citator serve?
> At the beginning of 2017, Silver Corporation has a $95,000 capital loss carryforward from 2016. During 2017, the corporation sells land, held for four years, and realizes an $80,000 gain. Silver has no unrecaptured net Sec. 1231 losses, and it made no ot
> Jeremy purchased undeveloped oil and gas property five years ago. He paid $300,000 for intangible drilling and development costs and elected to expense the $300,000. During the current year, Jeremy sells the property, which has an $800,000 adjusted basis
> Sylvester owns and operates an unincorporated pizza business that delivers pizza to customers. Three years ago, he acquired an automobile for $30,000 to provide delivery service. Recently, Sylvester hired an employee who prefers to use his personal autom
> Sarah, who has been in the business of erecting, maintaining, and renting outdoor advertising displays for 18 years, has an offer to purchase her business. Two basic types of advertising displays are used in her business: structure X and structure Y. Str
> Green Acres, Inc., owns 1,400 acres adjacent to land owned by the U.S. government. The government, wanting to sell timber from its land, had to assure prospective bidders of access to the timber. The government entered into an agreement with Green Acres
> Six years ago Joelle started raising chinchillas. She separates her chinchillas into two groups, a breeding group and a market group. During the year, she had the following sales of chinchillas from her market group: 400 to producers of fur products; 100
> Dale owns business equipment with a $100,000 FMV and an adjusted basis of $60,000. The property was originally acquired for $150,000. Which one of the following transactions would result in recognition of $40,000 ordinary income by Dale due to the deprec
> Why may a corporation recognize a greater amount of ordinary income due to the sale of Sec. 1250 property than a noncorporate taxpayer?
> John and Karen are unrelated individuals. John sold land that is Sec. 1231 property held for three years and recognized a $50,000 gain. Karen sold a building that is Sec. 1231 property held for three years and recognized a $50,000 gain. Straight-line dep
> Will an individual taxpayer ever have to recognize Sec. 1250 ordinary income on the sale of a building used for business and placed in service after 1986? Explain.
> Under what circumstances might a tax advisor find the provisions of a tax treaty useful?
> Jackie purchases equipment during the current year for $800,000 that has a seven-year MACRS recovery period. She expects to sell the property after three years. Jackie anticipates that her marginal tax rate in the year of sale will be significantly highe
> Why is it unlikely that gains due to the sale of equipment will be treated as Sec. 1231 gains?
> Carlie who is single has a Sec. 1231 gain of $10,000 and no Sec. 1231 losses during the current year. Explain why the gain might be taxed at (a) 15%, (b) 39.6%, (c) 25%, (d) 20%, or (e) zero.
> Explain how the gain from an involuntary conversion of business property held more than one year is taxed if the involuntary conversion is the result of a condemnation. Explain the tax treatment if the involuntary conversion is due to a casualty.
> Alice owns timber, purchased six years ago, with an adjusted basis of $50,000. The timber is cut for use in her furniture business on October 1, when the FMV of the timber is $200,000. The FMV of the timber on January 1 is $190,000. May Alice treat any o
> Explain how the gain on the sale or exchange of land could be classified as either ordinary income, a Sec. 1231 gain, or a LTCG, depending on the facts and circumstances.
> Ted owns a warehouse that cost $850,000 in 1984 and is subject to depreciation recapture under Sec. 1245. The warehouse, which has an adjusted basis of zero, is destroyed by a tornado and Ted receives $580,000 from the insurance company. Within nine mont
> William owns two appreciated assets, land and a building, which have been used in his trade or business since purchased in 1990. If he sells the two assets to his 100%-owned corporation, will William have to recognize any ordinary income? Explain.
> When a taxpayer disposes of oil, gas, or geothermal property, part or all of the gain may be recaptured as ordinary income. Explain how the recapture amount is determined for oil and gas and geothermal properties.
> Carlos owns equipment with an $800,000 acquisition cost, a $270,000 adjusted basis, and a $500,000 FMV. Carlos makes a gift of the equipment to a charitable organization. The equipment is used by the charity in its exempt function. What is the amount of
> Which official publication(s) contain(s) the following: a. Transcripts of Senate floor debates b. IRS announcements c. Tax Court regular opinions d. Treasury decisions e. U.S. district court opinions f. Technical advice memoranda
> Assume a taxpayer sells equipment used in a trade or business for a gain that is less than the depreciation allowed. If the taxpayer is a corporation, will a greater amount of Sec. 1245 income be recognized than if the taxpayer is an individual? Explain.
> Rashad owns a duplex used 100% as residential rental property. Under what conditions, if any, will any gain that he recognizes be Sec. 1245 ordinary income?
> Roger owns an apartment complex with a FMV of $2 million. If he sells the apartment complex, $700,000 of the gain is Sec. 1231 gain with $600,000 taxed at 25% because it is unrecaptured Sec. 1250 gain. If he dies before selling the apartment complex and
> Does a building that is 60% rented for residential use and 40% for commercial use qualify as residential rental property?
> When is an office building subject to the depreciation recapture rules of Sec. 1245?
> Which of the following assets (assume all assets have a holding period of more than one year) do not qualify as Sec. 1231 property: inventory, a pig held for breeding, land used as a parking lot for customers, and marketable securities?
> Marty sells his fully depreciated building at a gain to an unrelated party. The building is purchased before 1981. Is any of the gain taxed as ordinary income?
> Sheila owns a motel that is used in a trade or business. If she sells the motel, the gain will be Sec. 1245 ordinary income. During what period of time was the motel placed into service?
> Karen purchased a computer three years ago for $15,300 to use exclusively in her business. She expensed the entire cost of the computer under Sec. 179. If she sells the computer during the current year for $3,721, what is the amount and character of her
> Hank sells equipment used in a trade or business for $25,000. The equipment costs $30,000 and has an adjusted basis of $25,500. Why is it important to know the holding period?
> Assume that the only precedents relating to a particular issue are as follows: Tax Court—decided for the taxpayer Eighth Circuit Court of Appeals—decided for the taxpayer (affirming the Tax Court) U.S. District Court for Eastern Louisiana— decided for th
> When is a net Sec. 1231 gain treated as ordinary income?
> When is livestock considered Sec. 1231 property?
> Why were taxpayers reluctant to sell appreciated business property between 1938 and 1942? What effect did this reluctance have on the tax law?
> Betty, whose tax rate is 33%, is in the business of breeding and racing horses. Except for the transactions below, she has no other sales or exchanges and she has no unrecaptured net Sec. 1231 losses. Consider the following transactions that occur during
> Your client, Kent Earl, whose tax rate is 35%, owns a bowling alley and has indicated that he wants to sell the business for $1 million and purchase a minor league baseball franchise. His business consists of the following tangible assets: Because you h
> Ray and Ellie have each owned a principal residence used for more than five years. Ray’s residence has an adjusted basis of $100,000 and a FMV of $325,000, while Ellie’s residence has an adjusted basis of $300,000 and a FMV of $490,000. They plan to marr
> George, age 68, decides to retire from farming and is considering selling his farm. The farm has a $100,000 basis and a $400,000 FMV. George’s two sons are not interested in farming. Both sons have large families and would like to own houses suitable for
> For the last nine years, Mr. and Mrs. Orchard live in a residence located on eight acres. In January of the current year they sell the home and two acres of land. The purchaser of the residence does not wish to own the entire eight acres of land. In Dece
> Mr. and Mrs. Hattan have lived in their residence for 20 years and purchased the house for $100,000 as joint tenants with right of survivorship. Mr. Hattan died in May of the current year when the house’s FMV was $800,000. Mrs. Hattan wants to sell the h
> Explain the Golsen Rule. Give an example of its application.
> According to the AICPA’s Statements on Standards for Tax Services, what duties does the tax practitioner owe the client?
> On March 10, 2014, Elizabeth, a college professor, purchased a house for $300,000. She did not move into the house until August 8, 2014. On August 1, 2015, she accepted a position as a visiting professor at Hogwatts University for one year and moved to L
> Sherron, who is single, purchased a house to use as rental property on April 1, 2007, for $300,000. He moved into the house on June 1, 2016, and used it as a personal residence until August 1, 2017, when he sells the house for $500,000. Depreciation allo
> In 1970, Mr. and Mrs. Self purchased their first principal residence for $80,000. In 1995, they sold the house for $300,000 and purchased a new residence for $1.5 million. At that time, the Selfs were allowed to defer the $220,000 gain because they purch
> Mr. and Mrs. Snell own and live in a house, with an adjusted basis of $300,000, that was purchased in 1994. The house is destroyed by a tornado on March 10 of the current year, and the Snells receive insurance proceeds of $410,000. They purchase another
> Twelve years ago, Marilyn purchased two lots in an undeveloped subdivision as an investment. Each lot has a $10,000 basis and a $40,000 FMV when the city condemns one lot for use as a municipal sewage treatment plant. As a result of the condemnation, Mar
> On September 3, 2017, Federal Corporation’s warehouse is totally destroyed by fire. $800,000 of insurance proceeds are received, and the realized gain is $300,000. Whenever possible, Federal elects to defer gains. For each of the following independent si
> On April 27, 2017, an office building owned by the Ava James Corporation, an offshore drilling company that is a calendar-year taxpayer, is destroyed by a hurricane. The basis of the office building is $600,000, and the corporation receives $840,000 from
> The Madison Corporation paid $3,000 for several acres of land in 1993 to use in its business. The land is condemned and taken by the state in March 2017. The company receives $25,000 from the state. Whenever possible, the corporation elects to minimize t
> Duke Corporation owns an office building with a $400,000 adjusted basis. The building is destroyed by a tornado. The insurance company paid $750,000 as compensation for the loss. Eight months after the loss, Duke uses the insurance proceeds and other fun
> Assume the same facts as in I:12-36 except Cindy sells the duplex to a nonrelated individual more than two years after the exchange with Bob. Ignore any changes in adjusted basis due to depreciation that would have occurred after the exchange. Determine:
> Why do some revenue ruling citations refer to the Internal Revenue Bulletin (I.R.B.) and others to a Cumulative Bulletin (C.B.)?
> Bob owns a duplex used as rental property. The duplex has a basis of $86,000 and $300,000 FMV. He transfers the duplex to Cindy, his sister, in exchange for a triplex that she owns. The triplex has a basis of $279,000 and a $300,000 FMV. Two months after
> Wayne exchanges unimproved land with a $50,000 basis and marketable securities with a $10,000 basis for an eight-unit apartment building having a $150,000 FMV. The land and marketable securities are held by Wayne as investments, and the apartment buildin
> Carol owns land used in her business with a basis of $70,000 and a fair market value of $90,000. She is planning to exchange the land for a warehouse owned by Jeff and used in his business. Jeff’s warehouse has a basis of $50,000 and a fair market value
> Helmut exchanges his apartment complex for Heidi’s farm, and the exchange qualifies as a like-kind exchange. Helmut’s adjusted basis for the apartment complex is $600,000 and the complex is subject to a $180,000 liability. The FMV of Heidi’s farm is $770
> Paul owns a building used in his business with an adjusted basis of $340,000 and a $750,000 FMV. He exchanges the building for a building owned by Kelley. Kelley’s building has a $950,000 FMV but is subject to a $200,000 liability. Paul assumes Kelley’s
> Consider the following information for Mr. and Mrs. Gomez: • On May 26, 2016, they sold their principal residence, acquired in 1999, for $200,000. They paid $8,000 of selling expenses. Their basis in the residence was $70,000. • On July 25, 2016, they
> Which of the following exchanges qualify as like-kind exchanges under Sec. 1031? a. A motel in Texas for a motel in Italy b. An office building held for investment for an airplane to be used in the taxpayer’s business c. Land held for investment for m
> Which of the following exchanges qualify as like-kind exchanges under Sec. 1031? a. Acme Corporation stock held for investment purposes for Mesa Corporation stock also held for investment purposes b. A motel used in a trade or business for an apartment
> Mr. and Mrs. Kitchens purchased their first home in Ohio for $135,000 on October 1, 2016. Because Mr. Kitchens’ employer transferred him to Utah, they sold the house for $160,000 on January 10, 2017. How much of the gain is recognized?
> Jaharta, Inc., owns land used for truck farming and cattle raising. The California Division of Highways condemned 36 acres of Jaharta’s land to build a new highway. Jaharta owned a 50% interest in property being used for apricot, prune, and walnut orchar
> The decisions of which courts are reported in the AFTR? In the USTC?
> Chauvin Oil Corporation operates primarily in the United States and owns an offshore drilling rig with an adjusted basis of $400,000 that it uses near Louisiana. Chauvin exchanges the rig for a new rig with a FMV of $1,000,000, and Chauvin also pays $250
> John owns 25% of the ABC Partnership and Jane owns 25% of the XYZ Partnership. The ABC Partnership owns a farm and produces corn and the XYZ Partnership owns a farm and produces soybeans. John and Jane agree to exchange their partnership interests. What
> What are severance damages? What is the tax treatment for severance damages received if the taxpayer does not use the severance damages to restore the retained property?
> When does a nonsimultaneous exchange qualify as a like-kind exchange?
> Kay owns equipment used in her business and exchanges the equipment for other like-kind equipment and marketable securities. a. Will Kay’s recognized gain ever exceed the realized gain? b. Will Kay’s recognized gain ever exceed the FMV of the marketabl
> Why might a taxpayer want to avoid having an exchange qualify as a like-kind exchange?
> Prior to the Taxpayer Relief Act of 1997, taxpayers could defer a gain on the sale of a principal residence sold before May 7, 1997, if they purchased and occupied a new principal residence within two years before or after the sale and the cost of the ne
> What requirements must be satisfied by an unmarried taxpayer under Sec. 121 to be eligible for the election to exclude a gain up to $250,000 on the sale or exchange of a principal residence?
> The Nelsons purchased a new residence in 1992 for $300,000 from David who owned and used the residence as rental property. When the Nelsons wanted to purchase the property, it was being rented to tenants who had four months remaining on their lease. The
> Steve maintains that the cost of wallpapering his three-bedroom house is a capital expenditure while Martha maintains that the cost of wallpapering her three-bedroom house is an expense. Steve uses his house as his personal residence while Martha’s house
> Does the IRS acquiesce in decisions of U.S. district courts?
> One reason Congress expanded the exclusion of gain on the sale of a principal residence and eliminated the deferral provision was to eliminate the need for many taxpayers to keep records of capital improvements that increase the basis of their residence.
> In what situations may a gain due to an involuntary conversion of real property be deferred if like-kind property is purchased to replace the converted property?
> The functional use test is often used to determine whether the replacement property is similar or related in service or use to the property converted. Explain the functional use test.
> Must property be actually condemned for the conversion of property to be classified as an involuntary conversion? Explain.
> What is the justification for Sec. 1033, which allows a taxpayer to elect to defer a gain resulting from an involuntary conversion? May a taxpayer elect under Sec. 1033 to defer recognition of a loss resulting from an involuntary conversion?
> When must a taxpayer who gives boot recognize a gain or loss?
> Does the receipt of boot in a transaction that otherwise qualifies as a like-kind exchange always cause the exchange to be at least partially taxable?
> Lanny wants to purchase a farm owned by Jane, but Jane does not want to recognize a gain on the transfer of the appreciated property. Explain how a three-party exchange might be used to allow Lanny to obtain the farm without Jane having to recognize a ga
> Burke is anxious to purchase land owned by Kim for use in his trade or business. Kim’s basis for the land is $150,000, and Burke has offered to pay $800,000 if she will sell within the next 10 days. Kim is interested in selling but wants to avoid recogni
> What is personal property of a like class that meets the definition of like-kind?
> Explain whether the following decisions are of the same precedential value: (1) Tax Court regular decisions, (2) Tax Court memo decisions, and (3) decisions under the Small Cases Procedures of the Tax Court.