chap07 - CHAPTER 7 Capital Gains: An Introduction Problem 1...

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CHAPTER 7 Capital Gains: An Introduction Problem 1 Jean-Luc, the taxpayer in this case, was experienced in retail real estate, having originally been employed by a fast-food chain of restaurants. His duties were to locate, acquire and open restaurants on behalf of his employer. He acquired extensive knowledge in packaging sites for retail operations. Two years ago, Jean-Luc began to work as an employee for Jorge, a successful builder of homes and condominiums, real estate developer for investment of rental apartments and retail plazas, and trust company owner. Jean-Luc was employed on a salary and bonus basis. At the time, Jean-Luc was also a licensed real estate broker and owned a brokerage firm. Jean-Luc’s first project for Jorge involved developing a retail complex in Toronto. He was instrumental in obtaining two anchor tenants as well as two others. This was a successful venture. His second venture involved a strip plaza in London, Ontario. By the time Jean-Luc and Jorge were prepared to purchase the property, most of the pre-development work had been completed and two nationally recognized restaurant chains had signed letters of intent and/or offers to lease. These two tenants represented 60% of the rentable area of the plaza. With those tenants in place, other tenants were prepared to rent because of the traffic which would be generated by the presence of the two popular fast-food restaurants. As a result, financing the project would not be a problem. All of the leases which were negotiated were of the “net-net” type — the landlord being responsible only for its financing costs. The tenants were responsible for all other costs and expenses involved with the plaza, in addition to their own businesses. A partnership of Jorge (74%), Jean-Luc (24%) and Shloimie (2%), the long-time accountant for Jorge, was established to own the plaza. Neither Jean-Luc nor Shloimie paid for his respective interest in the partnership. Jean-Luc considered this to be a long-term project that would provide income for his children’s future. Jorge and Shloimie regarded the project as an opportunity to acquire and own an income-producing property with very little investment, since most of the funds were provided by debt financing. City planning and zoning for the plaza was approved and most of the financing was in place. Last year, about a year after the purchase by the partnership, the building was completed to the point where the tenants took possession. Shortly thereafter, the tenants completed their respective areas and were in operation and paying rent. Temporary financing was in place and permanent financing was being negotiated pending a drop in interest rates at the time. This year, Jorge began to have financial difficulties and his assets were liquidated by his creditors. Since his
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This note was uploaded on 03/10/2010 for the course ACC ACC742 taught by Professor Sydor during the Spring '10 term at Ryerson.

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chap07 - CHAPTER 7 Capital Gains: An Introduction Problem 1...

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