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					Tax 4001
Spring 2010
Judd
Exam 2 Practice Questions
Solution



1. For each of the following transactions, identify how much gain the taxpayer will recognize and the
taxpayer’s basis in the new property.

         a. Maude exchanges computer equipment with a basis of $25,000 and a FMV of $45,000, for
         computer equipment with a FMV of $37,000 and a motorcycle with a FMV of $8,000.


         Maude’s Recognized Gain _____$8,000 (motorcycle is boot property)


         Maude’s basis in new computer equipment ___$25,000 (25,000 + 8,000 – 8,000)

         Maude’s basis in motorcycle _______$8,000 (FMV)

         b.Cane Corporation’s warehouse is destroyed by a hurricane in September, 2009, when its
         basis is $130,000, and its FMV is $180,000. The insurance company reimburses Cane
         $180,000. In December, 2009, Cane Corporation purchases a new warehouse for $140,000.


         Cane’s Recognized Gain _______$40,000 (the unreinvested proceeds)

         Cane’s Basis in new warehouse ____$130,000



2. White Corporation’s first disposition of a Section 1231 Asset occurred in 2005. Fill in the table below to
indicate the character of White’s Net 1231 Gain/(losses) for the period 2005-2009.

       Year            Sec 1231 Gains        Sec 1231 Losses       Ordinary Income          Capital Gain
                                                                        (loss)                 (loss)
       2005                 $10,000                $8,000                                     $2,000

       2006                 $10,000               $15,000               ($5,000)

       2007                 $6,000                 $5,000                $1,000

       2008                 $9,000                 $3,000                $4,000                $2,000

       2009                 $2,000                 $8,000               ($6,000)
3. Taxpayer exchanges an apartment building with an adjusted basis of $47,000 and a FMV of $55,000,
and boot (Green, Inc stock) with an adjusted basis of $9,000 and a FMV of $6,000 for a rental house with
a FMV of $61,000 in a like-kind exchange. What is the recognized gain or loss and what is the taxpayer’s
basis in the rental house?

Taxpayer has a realized gain of $8,000 on apartment building. Zero is recognized. Taxpayer has a
realized and recognized a loss on the boot property of $3,000. Basis in rental house = 47000 +
9,000 – 3,000 = $53,000.


4. Melody gives her niece, Joy, a machine to be used in her business with a FMV of $8,500 and an
adjusted basis in Melody’s hands of $9,500. What is Joy’s basis for depreciation? Assuming Joy takes
$3,000 of depreciation and then sells the machine for $4,000, how much is her recognized gain or loss?

Joy’s depreciation basis = Melody’s adjusted basis = $9,500.

Joy has a “gain” basis = 9,500 – 3,000 = 6,500
and a “loss” basis = 8,500 – 3,000 = 5,500.
Therefore, Joy can recognize a $1,500 loss on the sale of the machine.



5. Kevin purchased 5,000 shares of Purple Corporation stock at $10/share, to be held for investment.
Two years later he receives a 5% nontaxable common stock dividend. At the time, the common stock
had a FMV of $12.50/share. What is the per/share basis of the Purple Corporation stock? If two months
after receiving the stock dividend, Kevin sells 100 of the new shares he receives for $12.00/share, what is
the amount and character of his recognized gain or loss?

Kevin receives 250 shares. So he now has 5,250 shares with a basis = 50,000, or $9.52/ share. If
he sells 100 shares for $12/share, he will recognized a LTCG = 1200 – 952 = $248. (hp of new
shares includes hp of old shares).



6. During the current year, Max recognizes a $30,000 Section 1231 gain and a $20,000 Section 1231
loss. Prior to this year, Max's only Section 1231 item was a $12,000 loss two years ago. What is the
amount and character of gain recognized by Max this year?

      $10,000 Net Sec 1231 Gain treated as ordinary income because of the 5-year lookback rule.


7. This year, a corporation sells equipment for $280,000 that it had purchased and placed in service
several year ago. The equipment cost $270,000, and $70,000 of depreciation deductions were taken.
What is the amount and character of the gain recognized by the corporation?


Gain = 280,000 – 200,000 = $80,000 gain.
$70,000 is Sec 1245 ordinary income and $10,000 is Sec 1231 gain.
8. Wilson Corporation, a C Corp, sells an office building on September 30 of this year. The building was
originally purchased in 1994 for $200,000. MACRS-SL Depreciation of $50,000 has been taken on the
building since its purchase. The building was sold for $220,000. What is the amount and character of
gain recognized by Wilson Corp on the sale?

Gain = 220,000 – 150,000 = $70,000
Sec 1250 Recapture = 0 (because in 1990 SL was required for buildings)
Sec 291 Recapture = .20(50,000 – 0) = $10,000
Therefore: Character of $70,000 gain is $10,000 ordinary income and $60,000 Sec 1231 gain.


9. Answer #8 again assuming Wilson is an individual instead of a Corporation.

Gain = 220,000 – 150,000 = $70,000
Sec 1250 Recapture = 0 (because in 1990 SL was required for buildings)
Therefore: $70,000 gain is Sec 1231 gain, although $50,000 is also “unrecaptured Sec 1250 gain”
and, if characterized as LTCG when it “comes out of the 1231 bucket” would be subject to a
maximum rate of 25%.

10. Ryan, a single individual, has taxable income of $80,000 in 2009, before consideration of the
following capital gains and losses, all recognized in August, 2007: $3,000 STCL; $3,000 28% LTCG;
$2,000 25% LTCG; $6,000 Regular LTCG. Compute Ryan’s additional tax due as a result of these
capital gains and losses.

Ryan’s marginal tax rate is 28%. Therefore, the additional tax due as a result of these
transactions, would be: (2000 * .25) + (6000 * .15) = $1,400. [The STCL would offset the $3,000 28%
LTCG, which would leave him with a $2,000 25% gain and a $6,000 Regular LTCG gain (taxed at
15%)]


11. Kimberly, a single taxpayer, sold three capital assets during September 2009. She sold a painting
held eight years for a gain of $4,000; stock held three years for a loss of $2,300; and stock held seven
months for a gain of $7,900. Kimberly’s ordinary income marginal tax rate is 35%. Compute Kimberly’s
additional tax due as a result of these capital transactions.


Kimberly has a net “collectible” LTCG of $1,700, and a STCG of $7,900.
Her tax would be: (1,700 * .28) + (7,900 *.35) = $3,241.
12.Fran purchased computer equipment on March 1, 2006, for $10,000. She used the equipment 100%
in her small business until November 15, 2009 when she sold it. She has been depreciating the
equipment as MACRS 5 year property since 2005 (1/2 year convention, she elected out of bonus
depreciation). Identify the amount and character of gain/(loss) that Fran would recognize in each of the
following independent situations:

First compute basis of asset disposed. Depreciation expense computed as follows:
2006: 10,000 * .20 = 2000.
2007: 10,000 * .32 = 3200.
2008: 10,000 * .192 = 1920.
2009: 10,000 * .1152 * ½ = 576.
Total Depreciation Expense = 7,696. Therefore Basis of equipment = 10,000 – 7696 = 2304.

         a) Sold for cash $8,400.

         8400 – 2304 = 6,096 gain, all sec 1245 ordinary income.

         b) Sold for cash of $2,000.

         2000 – 2304 = $304 loss, all Sec 1231 loss.


         c) Sold for cash of $11,000.

         11000 – 2304 = 8696. Of this amount, $7696 is Sec 1245 ordinary income recapture, and
         $1000 is Sec 1231 gain.
13. Hero Corporation, a C Corp, disposed of the following assets, all Sec 1231 property this year:

       Asset          Deprec Method               Cost                  Basis              Sale Price
Equipment            MACRS - DDB                $40,000                $10,000              $22,000
Building             MACRS - SL                 $100,000               $60,000             $105,000
Land                 N/A                        $50,000                $50,000              $60,000

     a) How much is Hero Corporation's Sec 1245 ordinary income recapture?


         Equipment is the only Sec 1245 property. The gain from the equipment is $12,000, since
         depreciation taken was $30,000, this is ALL Sec 1245 ordinary income.


     b) How much is Hero Corporation's Sec 1250 ordinary income recapture?

         The building is the only Sec 1250 property. Since SL was used, there is NO Sec 1250
         recapture.



     c) How much is Hero Corporation's Sec 291 ordinary income recapture?

         Sec 291 Recapture applies to Sec 1250 property. It is equal to 20% times (the amount that
         would have been recaptured under Sec 1245 less the amount that was recaptured under
         sec 1250). In this case that is .20(40,000 – 0) = $8,000. Therefore, $8,000 of the $45,000
         gain on the building will be treated as ordinary income.

     d) What is Hero's net Sec 1231 gain (loss) for the 2008?

         Building: 45000 – 8000 = 37,000
         Land:                        10,000
         Total                        47,000
         (note: all of the gain on the equipment is ordinary income).

     e) If Hero has $6,000 of unrecaptured Sec 1231 losses from last year, what is the character of the
        current year net Sec 1231 gain (loss)?

         $6,000 will be ordinary income, and $41,000 will be LTCG.

				
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