Please do not cut and paste the code when writing out your answers. It is important to cite the code, as well as explain the facts of the scenarios given and how they meet or do not meet the elements of the code, but cutting and pasting the code from a website is not allowed.
Do not convert this PDF to Word and write your answers under the question. Please type all answers on a separate Word document and just make sure label your answers. For example, Question 1 has 2 parts. When you are answering Question 1a, please write “1a” before you begin writing your answer, then write “1b” before you answer the second question. By writing it like this, I can easily follow your answers.
It is your analysis of these questions that is receiving the full credit. Therefore, you must fully explain your answer to receive full credit. Please make sure to back up all your answers with the relevant tax code, regulations, revenue rulings, or legal cases we have gone over in class, where applicable. One sentence answers will not be considered a full analysis, and will not receive full credit. Also just writing the code section without explaining the elements of the code will also not receive full credit.
Additionally make sure to explain, for each part of the question, how the circumstances of the hypothetical given to you either meet or do not meet the elements of that tax law. If you attempt to just give an answer without a thorough analysis as required here, then I cannot give any credit if the answer is incorrect. Moreover, I cannot give full credit for answers without a full analysis, even if the resulting answer may be correct.
Question 1 (worth 20 points)
In 2011, Jack and Joan executed a contract providing the sale of Blackacre by Jack to Joan for $100,000. Two weeks later, pursuant to negotiations that were in process at the time the Blackacre contract was executed, they also executed a contract from Joan to Jack of Whiteacre for $150,000, which for the convenience of both parties, was scheduled and closed by July 1, 2011, which was also the date specified in the Blackacre sale.
At the closing, Jack executed a deed of Blackacre to Joan, and Joan executed a deed of Whiteacre to Jack, and Jack paid in cash Joan the $50,000 excess of the price of Whiteacre over that of Blackacre. Both properties were used before and after the transaction by their respective owners as farms.
Please answer the following based on the above information:
.a) What are the tax consequences of this transaction to Jack? Fully explain the steps to your analysis.
.b) What are the tax consequences of this transaction to Joan? Fully explain the steps to your analysis.
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Question 2 (worth 30 points)
Michelle has made several investments over the years. First, she bought undeveloped Seafront land a few years ago for $50,000. She had been leasing this land to a lobster fisherman who used it to assemble and repair lobster traps. She sells the land this year for $40,000.
Michelle also bought Whiteacre several years ago. This is also unimproved land held for the purpose of potential developments, but no work had been done. She purchased it for $20,000, but it was condemned by the state this year for a road project, and she received $26,000 for it.
Michelle had also been holding on to some gold coins in a safe deposit box at a local bank. The bank was burglarized and she made a claim. The coins cost her $3,000 several years ago and the insurance proceeds she received on the claim was $12,000.
Michelle also has a few rental properties that have been held for several years. She sells an office building this year for $800,000, of which $450,000 is attributable to the building and $350,000 attributable to the land. She had purchased the building for $500,000 ($400,000 attributable to the building and $100,000 attributable to the land), and took the allowed straight line depreciation on the building. At the time of sale, Michelle had taken a total of $155,000 in depreciation deductions over the years held.
Please answer the following based on the above information:
a) What is the character of the gain or loss on all of the transactions Michelle has been a part of this year? Make sure you back up each answer using the specific code sections for each transaction.
b) What are the gains in the current year and each year thereafter, if the sale of the office building was made on an instalment basis where the buyer gives Michelle $100,000 in the current year and $100,000 for seven additional years with appropriate stated interest?
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Question 3 (Worth 20 points)
Cliff purchased Blackacre for $80,000 cash, taking the property subject to an outstanding $70,000 nonrecourse mortgage debt. Subsequently, Cliff borrowed $75,000 on a nonrecourse basis from First Bank, giving First Bank a second mortgage on Blackacre.
Cliff used $30,000 of the second mortgage loan proceeds to install a drainage system on Blackacre. He used $45,000 of the loan proceeds to acquire a new personal automobile.
A few years later, whe the outstanding balance of the first mortgage loan was $55,000 and the outstanding balance on the second mortgage was $65,000, Cliff transferred Blackacre to Norm, who took the property subject to the outstanding mortgages and gave a check to Cliff in the amount of $80,000.
Please answer the following based on the above information:
a) What is Cliff’s amount realized on the disposition of Blackacre and how much must he recognize on his return?
b) What is Norm’s basis in the property?
4
Question 4 (Worth 30 points)
Acme Co. adopted a shareholder approved employer equity based compensation plan in 2011 that provides for granting stock appreciation rights (SARs), NSOs, and ISOs. It specifies a maximum number of shares that can be granted under the plan, and that no more than one-half of that number can be ISOs.
In 2011, Acme granted Emily, its CEO an ISO for 50,000 Acme shares at $10 per share, the quoted market price, initially exercisable at 40 percent (20,000 share) on the second anniversary of the grant, and in 20 percent (10,000 share) increments beginning each subsequent anniversary, with a final exercise date of the tenth anniversary of the date of grant in 2021.
At the same time, Acme also granted Emily an NSO for 50,000 shares exercisable in full beginning on the first anniversary of the grant, and a SAR for 100,000 shares, initially exercisable 50 percent on the first anniversary of the grant and the balance on the second anniversary of the grant, both expiring 15 years from the date of grant in 2026.
Immediately following the anniversary date in 2014, when Acme shares are selling at $16, Emily exercises the NSO for 10,000 shares, then immediately sells the shares and makes a $600,000 profit. On the same date, she collects an additional $600,000 by exercising 10,000 shares of SAR. Finally, just before the end of 2014, she exercises the ISO for 10,000 shares when Acme shares were down at $14 per share.
Please answer the following based on the above information: a) What tax consequences to Emily and Acme upon each of the transactions in 2014?
b) Would you advise Emily to take advantage of any tax planning elections for any of the types of deferred compensation offered here? If so, what would it be, and what are the advantages and disadvantages of this?