ASSIGNMENT #2 – Chapter 14
1: Upon the sale or other
disposition of property, what four questions should be considered for income
tax purposes?
2: A realized gain occurs when the
amount realized is greater than the adjusted basis, and a realized loss occurs
when the adjusted basis is greater than the amount realized. Evaluate this statement.
3: In addition to sales and
exchanges, what other transactions are treated as dispositions of
property?
4: 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
5: 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 treat the decline in value of the stock differently for Carol and
Dave? Explain.
6: 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.
7: Sally owns real property for
which the annual property taxes are $8,000.
She sells the property to Shelley on February 28, 2013, for
$550,000. Shelley pays the real property
taxes for the entire year on October 1.
a. How much of the property taxes can be deducted by Sally and how much by
Shelley?
b.
What effect does the property tax
apportionment have on Shelley’s adjusted basis in the property?
c.
What effect does the apportionment have on
Sally’s amount realized from the sale?
d.
How would the answers in (b) and (c) differ
if the taxes were paid by Sally
8: 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?
9: Melba purchases land from
Adrian. Melba gives Adrian $225,000 in
cash and agrees to pay Adrian an additional $400,000 one year later plus
interest at 5%.
a. What is Melba’s adjusted basis for the land at the acquisition
date?
b. What is Melba’s adjusted basis for the land one year later
10: 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 (b) if the mortgage is
recourse or nonrecourse? Explain.
11: Distinguish between the terms
allowed depreciation and allowable depreciation. What effect does the difference have on adjusted
basis?
12: On July 16, 2013, 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 $5,820 is deducted in 2013
for the building.
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
2013
13: Auralia owns stock in Orange
Corporations 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 stat that the $10,000 is not a dividend. What could cause the instructions to differ
as to the tax consequences?
14: On July 1, 2013, Katrina
purchased tax-exempt bonds (face value of $75,000) for $82,000. The bonds mature in five years, and the
annual interest rate is 6%. The market
rate of interest is 2%.
a. How much interest income and/or
interest expense must Katrina report in 2013?
b. What is Katrina’s adjusted basis for the bonds on January 1, 2014?
15: 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
16: 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.
17: Monty owns a life insurance
policy that will pay $500,000 to Pearlie, his spouse, on his death. At the date of Monty’s death, he had paid
total premiums of $115,000 on the policy.
In accordance with §101(a)(1), Pearlie excludes the $500,000 of
insurance proceeds. Discuss the
relationship, if any, between the §101 exclusion and the recovery of capital
doctrine
18: In the case of a bargain
purchase, why is the adjusted basis to the buyer the fair market value of the
property rather than the purchase price?
19: How is cost allocated when a
taxpayer acquires multiple assets in a lump-sum purchase?
20: Discuss how the tax treatment differs
when stock rights are allocated on a cost basis versus when no such allocation
occurs. When must an allocation be
made?
