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413sol12-04 - Chapter 12 Nonrecognition Transactions 12-1...

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Chapter 12: Nonrecognition Transactions 12 - 1 ___________________________________________________________________ CHAPTER 12 NONRECOGNITION TRANSACTIONS _________________________________________________________________ DISCUSSION QUESTIONS 1. How does the wherewithal-to-pay concept affect the recognition of gains on asset dispositions? What else is necessary for nonrecognition of a gain upon disposition of an asset? Under the wherewithal-to-pay concept, gains are not taxed when the transaction creating the gain does not provide the means to pay the tax. Therefore, in the nonrecognition transactions, gain is not recognized when there is no wherewithal- to-pay from the transaction. However, when there are proceeds remaining after the nonrecognition transaction requirements have been fulfilled, gain is taxed to the extent any proceeds remain that are available to pay tax. The second criteria for nonrecognition is that the disposition be part of a continuing investment in an asset. In each of the nonrecognition transactions, a qualified replacement asset must be acquired to defer gain on the disposition. 2. How is the tax treatment of a deferred gain similar to and different from the treatment of an excluded gain? The two types of gains are similar in that there is no tax paid on the gain in period of realization. However, an excluded gain is never subject to tax. A deferred gain will be taxed in a future period. Therefore, the tax savings on a deferred gain is the time value of money savings of deferring payment of the tax. 3. When a gain on a property disposition is deferred, the basis of the replacement property is reduced by the amount of gain deferred. Which concept supports this treatment? Explain. The capital recovery concept allows the recovery of capital investment before any income is recognized. A taxpayer cannot recover more than what they have invested in the property. A gain is a recovery of capital in excess of the capital investment. By reducing the basis of the replacement asset, the amount of capital investment that can recovered is reduced, insuring that the taxpayer does not recover more than they have invested in the two properties. 4. When a gain on a depreciable property is deferred through a nonrecognition transaction, the tax attributes of the first property carry over to the second property. Why is this important, particularly with respect to like-kind exchanges of property? The carryover of tax attributes eliminates the use of like-kind exchanges to avoid depreciation recapture. By requiring that the recapture potential of the exchanged asset be attributed to the replacement asset, taxpayers cannot avoid depreciation recapture by exchanging assets that would result in ordinary income from depreciation recapture and then selling the replacement asset to obtain Section 1231 gain treatment.
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Chapter 12: Nonrecognition Transactions 12 - 2 5. What is boot? How does boot affect the recognition of gains or losses on like-kind exchanges?
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