PROBLEM SETS–2011

Non Taxable Transactions & Section 1231

EXAMPLE A:An elderly married couple owns a condominium in Miami Beach. Their purchase cost in 1986 was $ 35,000 and they have rented the condominium since that date. Assume they have claimed $ 30,000 in depreciation and they now look to dispose or sell the condo for its FMV of $ 425,000. The couple lives in their own condominium in Los Angeles (they have lived there for 4 years). Issues for consideration?

  1. If they sell the Miami condo, what gain will they recognize in the transaction? In your answer, address the following…
  1. What kind of asset is the condo? Ordinary, Capital, 1231
  2. What tax rates will we use to tax the recognized gain here?
  3. Do recapture rules apply?
  4. Is this considered Section 1245 or Section 1250 property?
  1. What can they do with the sales proceeds to defer taxation on this gain?
  1. What could they do with the sales proceeds to eliminate taxation altogether?

EXAMPLE B:Assume that Marty and Sally enter into a like kind exchange. Marty transfers equipment to Sally (Basis of $ 25,000, FMV of $ 30,000) in exchange for Sally’s “like kind” equipment (Basis of $ 20,000, FMV of $ 26,000, plus cash paid by Sally to Marty in the amount of $ 4,000). Based on this scenario…

  1. What, if any, gain will Marty recognize in this transaction?
  1. What will Marty’s basis be in the new equipment?
  1. What, if any, gain will Sally recognize in this transaction?
  1. What will be Sally’s basis in the new equipment?
  1. If Sally’s property had a FMV of $ 24,000 and Sally paid Marty the sum of $ 6,000, what would Marty’s gain be in THAT situation?
  1. What would Marty’s basis in the new equipment be based on the scenario described in No. 5?

EXAMPLE C:A tornado destroyed the following property owned by Dorothy, a Kansas resident: Her car, her boat and her home. Dorothy received $ 20,000 from her insurance for the car (car basis was $ 15,000), $ 15,000 for the boat (boat basis was $ 12,000) and $ 300,000 for her home (basis of $ 150,000). Based on this information:

  1. Will Dorothy recognize gains in this situation?
  1. How will those gains be taxed?
  1. What can she do to defer taxation in this situation?
  1. Assume Dorothy purchases a used boat, to replace the boat destroyed by the tornado, for $ 14,000. She seeks your advice about the following:

 Will she recognize a gain in this instance? Why?

 How will that gain be taxed (rates, type of income)?

 What will the basis of her new boat be?

EXAMPLE D:John, a single man, purchased his primary residence in Los Angeles on July 15, 2009 for $ 200,000. He is thinking of selling his home in the next 6 months, because John’s employer may transfer him to another state. The home is now worth $ 460,000 (this is an imaginary scenario, I know). Advise John of the following:

  1. What should he do to avoid taxation on this gain of $ 260,000?
  1. If he sells the home now in May2011, what gain will he RECOGNIZE and how will it be taxed? Can he qualify for any exclusion on the gain?
  1. Assume John is married to Susan. Further assume that John purchased the home on July 15, 2009 when he was single and he then married Susan on October 1, 2009. How would that change the advice you give them on tax avoidance?

EXAMPLE E:Bruin Corporation is eyeing a takeover of Westwood Industries, Inc. Bruin is considering an acquisition by way of EITHER a Stock Purchase or a Purchase of Assets (assets include inventory, investments, land, equipment, vehicles, furnishings and an office building). Assume this will be a taxable transaction and does not qualify for any of the non-recognition options under the IRC. Further assume the gain to the shareholders from the stock sale and the gain to the corporation from the purchase of assets will be an identical $ 1 million (depreciation taken by Westwood on its assets = $ 100,000). How will these two transactions be taxed? Who will have the higher tax rate on the gain – Westwood Industries (asset purchase) or its shareholder (stock purchase)?