Chap08 - Chapter 08 Property Dispositions Chapter 8...

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Chapter 08 - Property Dispositions Chapter 8 Property Dispositions Questions and Problems for Discussion 1. a. Section 1231 asset. b. Capital asset. c. Section 1231 asset. d. Capital asset. e. Noncapital asset. f. Capital asset. g. Capital asset. h. Section 1231 asset. 2. In a sale of property, the amount realized consists of cash or a cash equivalent (purchaser’s note). In an exchange of property, the amount realized includes noncash assets. 3. If a taxpayer is relieved of a debt on the disposition of an asset (i.e., the purchaser assumes the seller’s debt), the relief of debt is an amount realized. If the taxpayer receives services in exchange for the asset, the fair market value of the services is an amount realized. 4. If a taxpayer has losses that could be deducted against gain recognized on an installment sale, the taxpayer might elect out of the installment sale method. Alternatively, if the taxpayer’s marginal rate in the year of sale is considerably lower than the projected marginal rate in future years, the taxpayer might prefer to recognize the entire gain in the year of sale. 5. The characterization of gain or loss for tax purposes has no effect on the computation of net income per books. 6. A firm’s tax basis in an asset includes any portion of the asset’s cost that the firm borrowed from another party to purchase the asset, even if the asset is the collateral for the debt. A firm’s equity in an asset equals the fair market value of the asset less any creditor claims on the asset. 7. Corporation A generated its goodwill through its own business operations. Such internally created goodwill is not a depreciable or amortizable business asset and, therefore, is a capital asset by default. Corporation Z acquired its goodwill by purchase of an existing business, thereby establishing an amortizable cost basis in this business asset. Amortizable goodwill meets the definition of a Section 1231 asset. 8. Mrs. Carly’s gain on sale will be capital gain only if the land is a capital asset in her hands. Whether the land is a capital asset depends on how Mrs. Carly has held the land since she acquired it eight years ago. If she held the land as inventory in a real estate business, the land is not a capital asset, and her gain on sale will be ordinary income. If she held the land as an investment, the land is a capital asset, and her gain on sale will be capital. The accountant cannot answer the question without further information from Mrs. Carly. 9. a. Firm OP bears the entire risk of a $125,000 loss because it must repay $550,000 to the creditor regardless of any decrease in the value of the land. 8-1
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Chapter 08 - Property Dispositions b. In this case, Firm OP bears the risk of loss for its $50,000 equity in the land, and the commercial creditor bears the risk of loss for the $75,000 excess of the $550,000 debt over the $475,000 value of the land.
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