This year, Sigma Inc. generated $681,750 income from its routine business operations. In addition, the corporation sold the following assets, all of which were held for more than 12 months:
|
Initial
Basis
|
Acc.
Depr.*
|
Sale
Price
|
Marketable securities |
$ |
166,800 |
$ |
0 |
$ |
66,250 |
Production equipment |
|
114,000 |
|
91,200 |
|
52,750 |
Business realty: |
|
|
|
|
|
|
Land |
|
195,000 |
|
0 |
|
221,750 |
Building |
|
242,000 |
|
72,600 |
|
239,000 |
|
*Through date of sale.
Required:
- Compute Sigma’s taxable income assuming that it used the straight-line method to calculate depreciation on the building and has no nonrecaptured Section 1231 losses.
- Recompute taxable income assuming that Sigma sold the securities for $174,800 rather than $66,250.
1. This year, Sigma Inc. generated $681,750 income from its routine business operations. In addition, the corporation sold the following assets, all of which were held for more than 12 months: Initial Basis Acc. Depr.* Sale Price Marketable securities $ 166,800 $ 0 $ 66,250 Production equipment 114,000 91,200 52,750 Business realty: Land 195,000 0 221,750 Building 242,000 72,600 239,000 *Through date of sale. Required: a. Compute Sigma’s taxable income assuming that it used the straight-line method to calculate depreciation on the building and has no nonrecaptured Section 1231 losses. b. Recompute taxable income assuming that Sigma sold the securities for $174,800 rather than $66,250. 2. Five years ago, Firm SJ purchased land for $110,000 with $10,000 of its own funds and $100,000 borrowed from a commercial bank. The bank holds a recourse mortgage on the land. For each of the following independent transactions, compute SJ’s positive or negative cash flow. Assume that SJ is solvent, any recognized loss is fully deductible, and SJ’s marginal tax rate is 21 percent. (Negative amounts should be indicated by a minus sign.) Required: a. SJ sells the land for $43,000 cash and the buyer’s assumption of the $80,000 principal balance of the mortgage. b. SJ sells the land for $123,000 cash and pays off the $80,000 principal balance of the mortgage. c. SJ sells the land for $87,000 cash and pays off the $80,000 principal balance of the mortgage. d. SJ defaults on the $80,000 mortgage. The bank forecloses and sells the land at public auction for $65,000. The bank notifies SJ that it will not pursue collection of the $15,000 remaining debt. e. SJ defaults on the $80,000 mortgage. The bank forecloses and sells the land at public auction for $65,000. The bank requires SJ to pay off the $15,000 remaining debt. 3. Firm ML, a noncorporate taxpayer, exchanged residential rental property plus $15,200 cash for 20 acres of investment land with a $209,000 FMV. ML used the straight-line method to compute depreciation on the rental property. Required: a. Assuming that ML’s exchange was negotiated at arm’s length, what is the FMV of the rental property? b. If the adjusted basis of the rental property is $186,750, compute ML’s realized and recognized gain. c. Compute ML’s basis in the 20 acres of investment land. 4. Firm Q exchanged old property with an $84,100 tax basis for new property with a $68,000 FMV. Apply the generic rules under each of the following assumptions: Required: a. Compute Q’s realized loss, recognized loss, and tax basis in the new property assuming old property and new property are not qualified property for nontaxable exchange purposes. b. Compute Q’s realized loss, recognized loss, and tax basis in the new property assuming old property and new property are qualified property for nontaxable exchange purposes. c. Compute Q’s realized loss, recognized loss, and tax basis in the new property assuming old property and new property are not qualified property for nontaxable exchange purposes. To equalize the values exchanged, Firm Q paid $3,400 cash to the other party. d. Compute Q’s realized loss, recognized loss, and tax basis in the new property assuming old property and new property are qualified property for nontaxable exchange purposes. To equalize the values exchanged, Firm Q paid $3,400 cash to the other party. e. Compute Q’s realized loss, recognized loss, and tax basis in the new property assuming old property and new property are not qualified property for nontaxable exchange purposes. To equalize the values exchanged, Firm Q received $10,250 cash from the other party. f. Compute Q’s realized loss, recognized loss, and tax basis in the new property assuming old property and new property are qualified property for nontaxable exchange purposes. To equalize the values exchanged, Firm Q received $10,250 cash from the other party. 5. Firm ML, a noncorporate taxpayer, exchanged residential rental property plus $15,200 cash for 20 acres of investment land with a $209,000 FMV. ML used the straight-line method to compute depreciation on the rental property. Required: Assuming that ML’s exchange was negotiated at arm’s length, what is the FMV of the rental property? If the adjusted basis of the rental property is $186,750, compute ML’s realized and recognized gain. Compute ML’s basis in the 20 acres of investment land. 6. Company B and Firm W exchanged the following business real estate: Blackacre (exchanged by B) Whiteacre (exchanged by W) FMV $ 442,000 $ 544,000 Mortgage (110,500 ) (212,500 ) Equity $ 331,500 $ 331,500 Required: If B’s adjusted basis in Blackacre was $265,200, compute B’s realized gain, recognized gain, and basis in Whiteacre. If W's adjusted basis in Whiteacre was $108,800, compute W’s realized gain, recognized gain, and basis in Blackacre. 7. On January 10, 2018, a fire destroyed a warehouse owned by NP Company. NP’s adjusted basis in the warehouse was $540,000. On March 12, 2018, NP received a $670,000 reimbursement from its insurance company. In each of the following cases: Required: a. Determine NP’s recognized gain on this property disposition. Assume that NP would elect to defer gain recognition when possible. NP’s board of directors decided not to replace the warehouse. b. Determine NP’s recognized gain on this property disposition. Assume that NP would elect to defer gain recognition when possible. On January 2, 2020, NP paid $710,000 to acquire a warehouse to store its inventory. c. Determine NP’s recognized gain on this property disposition. Assume that NP would elect to defer gain recognition when possible. On February 8, 2021, NP paid $710,000 to acquire a warehouse to store its inventory. 8. Mr. ZJ owns a sole proprietorship. The business assets have a $294,000 aggregate adjusted basis. According to an independent appraisal, the business is worth $431,000. Mr. ZJ transfers his business to ZJL Corporation in exchange for 1,000 shares of ZJL stock. In each of the following cases: Required: a. Compute Mr. ZJ’s recognized gain on the exchange of assets for stock. Assume immediately after the exchange, ZJL has 20,000 shares of outstanding stock, of which Mr. ZJ owns 1,000 shares. b. Compute Mr. ZJ’s recognized gain on the exchange of assets for stock. Assume immediately after the exchange, ZJL has 1,500 shares of outstanding stock, of which Mr. ZJ owns 1,000 shares. c. Compute Mr. ZJ’s recognized gain on the exchange of assets for stock. Assume immediately after the exchange, ZJL has 1,200 shares of outstanding stock, of which Mr. ZJ owns 1,000 shares. 9. Eight years ago, SW purchased 1,400 shares of Delta stock. On May 20 of the current year, it sold these shares for $78 per share. In each of the following cases, compute SW’s recognized gain or loss on this sale: a. SW’s cost basis in the 1,400 shares was $86 per share. It did not purchase any other Delta shares during this year. b. SW’s cost basis in the 1,400 shares was $86 per share. It purchased 1,600 shares of Delta on May 1 for $80 per share. c. SW’s cost basis in the 1,400 shares was $86 per share. It purchased 1,600 shares of Delta on June 8 for $80 per share. d. SW’s cost basis in the 1,400 shares was $73 per share. It purchased 1,600 shares of Delta on June 8 for $80 per share.