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21 Cards in this Set
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1. In year 1, A purchases unimproved land for $100 in cash. At the end of year 1, the land is worth $105. A continues to hold the land without making improvements. In year 10, A transfers the land to B in exchange for $80 in cash and stock worth $35 (sold for $115). What is A's basis in the land immediately after he purchased it? Does A realize and recognize his gain in the land at the end of year 1? What is the effect of the transaction in year 10 to A? What is the effect to B?
2. What would the result be of the transaction in year 10 if it can be established that although the stock he received was worth $35, the land sold by A was only worth $110? Would A recognize less gain? What would the effect be on A's basis in the stock? What would be the effect on B's basis in the land?
3. What would be the result if instead of selling all the land to B, A instead sold a portion of the land compromising 20 percent of its area and value to B for $23 in cash?
4. What if A in our example originally received the land from E for services rendered to E, who is A's employer? Assume the property was worth $100 when A received the land from E.
5. What if instead of receiving the property from E for services rendered the property was received by A from E in settlement of a claim for a personal injury incurred by A while working for E? Should it matter that A recognizes no income on the receipt of land under §104 of the Code?
6. Suppose instead, A originally received the land in a gift from his mother M in year 1. At that time the land was worth $100, but M's basis in the land was $25. Assuming no improvements to the land, what will A's basis in the land be for purposes of computing his gain when A sells it to B in year 10 for consideration worth $135.
7. What if instead M's basis in the land was $150 when she gifted the land (value $100) to A? What is the result on A's sale of the land to B for $135 of consideration? |
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FACTS: In year 1, A purchases unimproved land for $100 in cash. At the end of year 1, the land is worth $105. A continues to hold the land without making improvements. In year 10, A transfers the land to B in exchange for $80 in cash and stock worth $35
Assume that, under the facts described above, A had gone to the Bank in year 2, at a time the property is worth $115, and had given the Bank a mortgage on the property for $80 in exchange for a loan of $80. Assume that the note is recourse, that it bears an arm's length interest rate and that it is payable in 10 years in a balloon payment. Is the $80 loan from the Bank a realization event?
2. Assume that under these facts when A sells the property to B in year 10, B assumes the $80 mortgage and in addition, gives A stock worth $35. What is A's gain on the sale (assuming §1274 is not applicable)?
3. Assume that instead of mortgaging the property in year 2, A had given the property to his creditor C, in settlement of a $115 obligation that A owed to C at that time? What is the result to A?
4. Assume now again that A did in fact mortgage the property in year 2 and entered into a debt obligation to repay principal of $80 in ten years. As the due date approaches, the parties agree to extend the due date for ten more years. Their agreement to extend the due date is effective six months before the ten year due date. What is the effect of this transaction under Code §1001 with respect to the debt obligation? What if the due date had been extended only four years?
5. NOT TESTED What if instead the original ten-year note between A as issuer and Bank as holder gave A the unilateral option to extend the due date for eight years and A exercised that option prior to the end of the ten year period pursuant to the terms contained in the original loan agreement? Would your answer be changed if the option required A to pay $1 to Bank to exercise the option? What if Bank had the option to extend the due date rather than A and exercised the option?
6. What if instead of entering into an explicit agreement to extend the due date, A did not pay the debt when due and Bank did not exercise its rights in the event of default for a period of eighteen months, at which time A paid the $80 debt in full (together with accrued interest)? What if instead Bank's forbearance lasted thirty months?
7. What is the effect under §1001 in relation to the debt instrument if B assumes A's obligation under the debt instrument pursuant to A's sale of the property to B? Does it matter if the loan agreement provided the right to assumption by a buyer in the document? Assume the property is only one of several properties A owns.
8. How would the result change if A and B were corporations and B's assumption of the debt to Bank occurred by operation of law in a tax free reorganization described in §381 in which all A's assets were transferred to B? |
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P, a cash basis partnership, borrows $100 in a recourse loan payable in ten years? Is the loan a liability for purposes of §752? Why? |
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P, a cash basis partnership, buys land from S for $100 of consideration comprised of $20 cash and a nonrecourse debt of $80 payable in ten years. Does the $80 debt give rise to a liability under §752? Why? |
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NOT TESTED P, a cash basis partnership, agrees with its landlord, effective January 1, 2015, to pay landlord $10 per month for rent due on the first day of the month. P pays landlord $10 on January 1 for the rent for the first month. Is the rental obligation of P under the lease a "liability" under §752? Why? |
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P, an accrual basis partnership, agrees to pay Smith $10 as compensation for services rendered 30 days after Smith performs the services. Smith has now performed the services. Is the obligation of Smith now a liability under §752? Why? |
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P, a cash basis partnership, for an option premium paid of $10, grants an option to B to buy a piece of land anytime in the next year for $100. Does this transaction give rise to a liability under §752? |
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C is a corporation taxable under subchapter C of the Code. C borrows $100 from A pursuant to a recourse note with a maturity of ten years. After five years the note obligation is cancelled by the parties. What is the effect of this cancellation on C? What Code section is implicated?
2. NOT TESTED Under the same facts, what is the result if C's liabilities exceed its assets by $150 at the time of the cancellation? Assume C has $125 of NOL carryovers at the time of the cancellation.
3. What if instead of cancelling the debt, A contributed the note to C for stock worth $50?
4. What if instead A were a pre-existing 33 1/3 percent shareholder and A simply contributed the note to C in a shareholder capital contribution?
5. What if instead P, the parent corporation of C, simply purchased the debt of C from A for $50?
6. What if the debt of C to A were originally incurred pursuant to a purchase of property by C from A. After a dispute, A agreed to reduce the debt to $50 as an adjustment to purchase price of the property. What result? |
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A wants to purchase property worth $100 form S. A goes to the Bank and agrees to borrow $80 from Bank on a nonrecourse basis to be secured by the property. At the closing of the purchase, A borrows $80 from Bank, enters into a loan agreement with Bank, grants Bank a mortgage on the property of $80, and directs that the $80 loan proceeds plus $20 of equity provided by A be transferred to S in exchange for the property. What is A's basis in the property after this transaction? What is the rationale for this result?
2. Assume instead that the property in question was subject to the $80 nonrecourse mortgage in the hand of S as a result of a prior transaction and that A purchased the property from S for cash of $20 and takes the property subject to the $80 nonrecourse indebtedness. Assuming that the mortgage bears a reasonable rate of interest (and that therefore §1274 rules do not apply), what is A's basis in the property?
3. Assume instead that at the time of the transaction the property is only worth $60 and A gives $2 to S and takes the property subject to the nonrecourse mortgage indebtedness of $80.
4. Assume now that A Corporation, a publicly held corporation, wishes to purchase depreciable equipment form B Corporation to lease to C, who will use the equipment in its business. A goes to the Bank, borrows $80 from Bank on a nonrecourse basis pursuant to a ten year loan and simultaneously purchases the equipment from B for $100, $80 funded by the nonrecourse indebtedness from Bank and $20 by cash from A. The equipment is immediately leased to C under a ten year lease. The payments under the lease are sufficient to fund the payments due under the ten-year loan, which fully amortize the loan over the ten year period and in addition pay 1% of the purchase price in additional cash flow to A under the lease. The lease is a triple net lease under which all maintenance and insurance obligations relating to the property are paid by C, the lessee. The property has a useful life at the inception of the lease of 15 years; and it is expected to be worth 25% of its current value at the end of the lease. Will A be entitled to the depreciation deductions relating to the property?
5. How would your views change (if at all) if the expected useful life of the property were 10 years rather than 15 years.
6. What would be the effect on your analysis, if any, if A granted C the right to purchase the property at the end of the lease for its appraised fair market value at that time? What if instead the price were an amount fixed today equal to the anticipated fair market value at the end of the lease? What if instead the price under the option to purchase were $1?
7. What if at the time of the purchase and lease it were expected that the fair market value of the property at the end of the lease would be only 5% of its current value? What if it were expected to be 25% of its current value, but halfway through the lease term it became clear that the equipment would have no real value at the end of the lease term?
8. What would be the effect on your analysis if under the lease C had the right to renew the lease at the end of the original term for a five year term with a rent expected to be well below the then fair market rental for the property? |
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A purchased a building in year 1 for $100, financed by a nonrecourse loan by Bank on the property of $80. The property was worth $100 at that time. In year 5, after the building had been partially depreciated, A sold the property to B for $5, subject to the nonrecourse indebtedness, $80 of which remained at the time of the sale. The fair market value of the property at that time was $65. How, generally speaking, is A treated with respect to this transaction? Does it matter that the property is worth less than the mortgage? How should B be treated? What should the result be to B if Bank later cancelled $20 of the loan?
2. What if instead A gifted the property to his daughter D at the time the property's basis was $50 and value was $65, but the indebtedness continued to be $80.
3. What if instead A simply abandoned the property when its value was less than the mortgage? |
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A owns no IBM stock, and wishes to bet against the IBM stock market value i.e., take a short position. Thus, A goes to Investment Banker, and in an integrated transaction "borrows" 10 shares of IBM stock and sells such shares into the market for a price of $200 per share. The proceeds are pledged as security for the stock borrow. At the end of the year, when the stock of IBM has declined to $150 per share, A buys 10 shares of IBM stock and settles the stock borrow transaction and short sale by delivering the shares to the Investment Bank. What is A's treatment on this transaction?
2. Assume instead that A actually owned 10 shares of IBM, which she originally purchased for $100 per share and which are now worth $200. In order to hedge her position in the stock, she enters into the borrow and short sale transaction described above, borrowing an additional 10 shares and selling those shares into the market for $200 per share. What is the result of this transaction under current law?
3. Assume again that A owns 10 shares of IBM stock worth $200 each with $10 of untaxed appreciation in each share. A enters with a prepaid forward transactions with Investment Bank for delivery of IBM stock in three years. The Investment Bank "prepays" $1600 ($160 per share) at the inception of the contract. Under the variable delivery contract, if the price of IBM stock on the delivery date is equal to or less than $200, A will deliver all 10 shares to Investment Bank. If the value of the IBM stock on the delivery date is between $200 and $250, A will deliver stock worth $2000 to Investment Bank. If the market price exceeds $250 per share on the delivery date, A will deliver 8 shares. Will this transaction be taxed at the time the parties enters into the transaction? If A were a partnership, would a "liability" under §752 be created by this transaction?
4. Assume the same facts as to the prepaid forward, but Investment Bank requires as a condition to entering to the transaction that A loan it the 10 IBM shares for no borrow fee. What tax issues are raised by this transaction? |
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T, an unmarried taxpayer, is in business for herself as a doctor. This year, T has $500,000 of taxable income without regard to the transactions listed below. The character of this $500,000, is entirely derived from ordinary income transactions (e.g., fees for services). On June 1 of this year, T also engages in the sales transactions described in the questions below. Determine T's net capital gain. Additionally, determine the amount of any net capital loss and any loss carryovers. In general terms, specify the rate applicable toT's income from capital asset transactions. Do not bother computing T's actual tax liability, and disregard Section 1411.
1. T has the following gains and losses from sales:
(a) T sold shares of IBM stock that T had held for investment for three years at a gain of $40,000;
(b) T also sold shares of AT&T stock that T had held for investment for two years at a loss of $5,000;
(c) T also sold shares of Microsoft stock that T had held for investment for ten months at a gain of $16,000; and
2. Assume the same facts as in part (I) above, except that the loss on the AT&T stock in (ii) was, alternatively, $50,000, or $75,000.
3. Assume instead that T only has three items of gain or loss in the year; $40,000 of gain from the sale of IBM stock held for three years; $40,000 of loss from the sale of AT&T stock held for two years; and $40,000 of gain from the sale of Microsoft stock held for ten months. How will T's tax from this income be computed? What is the net capital gain? |
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Determine whether the properties being sold are capital assets in T's hands:
T's full-time occupation is trading in securities. She spends her days researching stocks and bonds, talking on the telephone with brokers, and keeping records of her trades. Last year, she made 253 purchases of stocks and bonds and 362 sales. What is it about the nature of their activities that distinguishes "traders" in securities from, say, retailers, e.g., the local grocer, whose inventory sales produce ordinary income? |
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Determine whether the properties being sold are capital assets in T's hands:
T is always on the lookout for land to buy in a local area, usually holds about 20 tracts; does not actively market the land but is always willing to listen to offers to buy her land; and makes a sale every year or two. Ten years ago, T bought an underdeveloped tract of land with the intention of holding it for appreciation. The land was rented to a farmer, but the rents were barely sufficient to cover the real estate taxes and interest on a mortgage T took out to finance the purchase. This year, T sold this still-undeveloped tract of land at a substantial gain. What is the character of gain on this sale? |
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Determine whether the properties being sold are capital assets in T's hands:
P, a limited partnership with equal partners A, B and C, now holds about 20 separate tracts of land in a local area. It has a basis of 20X in the property and believes that the land is worth 50X. It now believes the land is ripe for development, and would like to commence development activities such as subdividing, advertising and various improvements with the end goal of disposing of its investment at an even higher profit. L, the lawyer for P, has suggested that the partners implement a Bramlett structure. What in general terms is he referring to? |
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T manufactures baseball bats. The principal raw material for the business is ash lumber. T has occasionally suffered losses when the prices for ash lumber unexpectedly rose. One of the means T uses to protect against these possible losses is to purchase futures contracts in pine lumber. Pine futures are purchased because (1) no futures market in ash lumber exists and (2) the spot prices for pine and ash lumber tend to move in parallel. Since T has no desire to acquire a stock of pine lumber, the futures contracts are always closed out by cash settlements.
(a) Does the transaction qualify as a hedge under Section 122l(a)(7), (b)(2) and Reg. Sec. 1.1221-2(b), (c)(2) as a definitional matter? If so, what must T do mechanically to perfect qualification?
(b) Would your answer in (b) change if T expects to need 100 units of ash, but buys 1 ,000 units of pine futures? |
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M Corp. has plans to build a new semiconductor plant that will cost $200 million. It is borrowing $100 million pursuant to a ten-year loan under which the interest rate varies monthly based on LIBOR plus a spread. The current interest rate payable under the loan would be 2.5 percent annually. M Corp. wishes to hedge its obligation against the risk that interest rates will rise as the Fed starts to tighten. M Corp. enters into a ten-year interest rate swap with Bank on a $100 million notional amount under which M will swap a fixed obligation of 4 percent per year for the same LIBOR based rate (plus spread) upon which the loan interest payments are based.
(a) Does the interest rate swap qualify as a hedge under the Section 1221-2 Regulations?
(b) What are the consequences if M Corp. fails to identify the hedge?
(c) Assuming that M Corp. does properly identify the hedging transaction, and closes it out in year 5 by a payment to Bank of $10 million, what is the character of M Corp.'s loss?
(d) Will M be able to claim the full amount of the deduction in year 5? |
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On January 1 of year 1 , B pays S $100 for an option to purchase a tract of undeveloped land for $1,000 at any time during year 1 or year 2. B intends to hold the land as an investment. S has held the land for investment five years and as a basis in it of $500. What are the tax consequences to the parties if, alternatively:
(a) B exercises the option during year 2;
(b) B sells the option to A for $75 during year 1, and A exercises the option during year 2; or
(c) B neither transfers nor exercises the option, which expires at the end of year 2?
(d) What would be the treatment if instead the parties entered into a transaction under which B agreed in year 1 to buy the land twenty months later in year 3 for $1 ,200? After fifteen months have elapsed, B pays $200 to S to extinguish the contract. What is the character of B's deduction with respect to this payment?
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1. P Corporation owns all the stock of S Corporation and files consolidated returns with S. S has four assets: $10 cash in the bank; $20 of inventory; $50 of depreciable plant and equipment; and goodwill. A Corporation buys all S's assets for $100, and S liquidates into P. How is the consideration of $100 allocated for federal income tax purposes in the absence of an agreement by the parties.
2. If P, S and A agree that the consideration will be allocated $10 to the cash, $30 to the inventory, $50 to the depreciable plant, and equipment, and $10 to goodwill, will the allocation be respected? |
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S sells stock in a closely held corporation to B on July 1 of year 1 for $100, of which amount $10 is received at the time of the sale and $90 is payable in nine equal annual installments (starting in July of year 2) of $10 each plus interest at 8 percent per annum. B s obligation is secured by a pledge of the stock. S's basis in the stock is $20.
(a) When is S 's gain reportable? In answering this question, do you need to know:
(1) Whether S uses the cash or accrual method of accounting, or
(2) The value of the installment obligation?
(b) How does your answer to (a) change if the stock is traded on the New York Stock Exchange? |
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S sells a tract of undeveloped land, acquired years earlier for $20, to B on July 1 of year 1 for $100. When is S's gain reportable in the following alternative cases?
(a) The land is subject to a mortgage (incurred several years ago) of $20 due in a single balloon payment in 10 years. B assumes the mortgage, gives S a cash down payment of $30, and agrees to pay the remaining $50 in 5 annual installments (starting in July of year 2) with interest at 8 percent per annum.
(b) Same as (a) except the mortgage is $40, the cash down payment is $30, and the installment obligatlion is $30. |
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