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43 Cards in this Set
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Student working towards an A.B. degree is awarded a scholarship of $15,000 for full tuition and for room and board during the academic year. The tuition, including the cost of books, is $10,000, and the room and board costs $5,000. As a scholarship recipient, Student is required to do about 300 hours of research for the professor to whom he is assigned. Non scholarship students, if hired receive $10.00 per hour for such work.
(a)What tax consequences to student? |
1. a. Student will have to include the scholarship as GI b/c the scholarships covers “room and board costs” which is outside the exclusion exception of §117(a). Also, student would have to include in GI that portion of the scholarship that represents payment for research if the student is a graduate student b/c of the employment-related exclusions see 117(c). Here, the includible amount in GI would be $10 x 300 hours 117(c).
$3,000 + $5,000 = $8,000 included in gross income. |
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Student working towards an A.B. degree is awarded a scholarship of $15,000 for full tuition and for room and board during the academic year. The tuition, including the cost of books, is $10,000, and the room and board costs $5,000. As a scholarship recipient, Student is required to do about 300 hours of research for the professor to whom he is assigned. Non scholarship students, if hired receive $10.00 per hour for such work.
(b) What tax consequences to Student if all students are required to do 300 hours of research or faculty? |
b. Student would still have to include it as GI even though all students are required to do research Regs. 1.117(6)(d) and 117(c).
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Student working towards an A.B. degree is awarded a scholarship of $15,000 for full tuition and for room and board during the academic year. The tuition, including the cost of books, is $10,000, and the room and board costs $5,000. As a scholarship recipient, Student is required to do about 300 hours of research for the professor to whom he is assigned. Non scholarship students, if hired receive $10.00 per hour for such work.
(c) What result if Student is not required to do any research but receives the $15,000 as an athletic Scholarship. |
Initially the scholarship is excluded under §117(a). However $5,000 will be included in gross income because room and board is not listed §115(b)2 as a qualified tuition related expense.
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Student working towards an A.B. degree is awarded a scholarship of $15,000 for full tuition and for room and board during the academic year. The tuition, including the cost of books, is $10,000, and the room and board costs $5,000. As a scholarship recipient, Student is required to do about 300 hours of research for the professor to whom he is assigned. Non scholarship students, if hired receive $10.00 per hour for such work.
(d) What tax consequences to Student if Student receives only a tuition scholarship worth $9,000 (no books) because Student's spouse is an employee at a neighboring education institution and the tuition scholarship is part of a nondiscrimnatory plan between several institutions applicable to all employees of such institutions? |
Excluded from income under §117(d)2 as a Qualified tuition reduction. Students qualifies because (treated as an employee through spouse 132(h)(2)(A)
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Secretary, in a large tax law firm, receives $10,000 stipend from her firm to assist her while on leave of absence to obtain a college degree. The stipend is part of a firm plan under which al recipients are required to return to the firm following their educational leave.
(a)What tax consequences to Secretary? |
Excluded from income under §127(a)(1). However, only 127(a)(1) Only allows exclusion for the first $5,250. The remainder would have to be included in GI.
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Secretary, in a large tax law firm, receives $10,000 stipend from her firm to assist her while on leave of absence to obtain a college degree. The stipend is part of a firm plan under which al recipients are required to return to the firm following their educational leave.
(b) What tax consequences to Secretary if she is not required to return to the firm after completing her degree? |
It would be includible under Prop. Reg §1.117-6(d)(2) because the $ represents compensation for past, present, or future services. Education grants made by employer to a current or former employee are taxable.
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Secretary, in a large tax law firm, receives $10,000 stipend from her firm to assist her while on leave of absence to obtain a college degree. The stipend is part of a firm plan under which all recipients are required to return to the firm following their educational leave.
(c) What are the tax consequences to Secretary if she is not an employee, but instead receives the stipend as a prize in an essay contest? |
Includible b/c the prize for essay contest resulted from action on her part and therefore does not meet the exceptions of §74(b)(1)
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1. Owner purchases some land for $10,000 and later sells it for $16,000.
(a) Determine the amount of owner’s gain on the sale. |
For computation of gain or loss from (sale or other disposition of property) 1001(a).
1001(a) (excess of amount realized (1001(b) over adjusted basis (1012)) (Amount Realized 1001(b) $16,000) - (Adjusted basis 1012) $10,000 =$6,000 The $6,000 gain is then recognized under 1001(c) |
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1. Owner purchases some land for $10,000 and later sells it for $16,000.
(a)Determine the amount of owner’s gain on the sale. (b)What difference in result in (a), above, if owner purchased the land by paying $1,000 for an option to purchase the land for an additional $9,000 and subsequently exercised the option? |
No difference b/c owner's cost basis would still equal 10k (1k+9k = 10K). It's the fair market value.
Owners realized gain is still $16k. 1012 Basis of property = Cost Basis |
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1. Owner purchases some land for $10,000 and later sells it for $16,000.
(a)Determine the amount of owner’s gain on the sale. (b)What difference in result in (a), above, if owner purchased the land by paying $1,000 for an option to purchase the land for an additional $9,000 and subsequently exercised the option? (c) What result to owner in (b), above if rather than ever actually acquiring the land Owner sold the option to investor for $1,500. |
For computation of gain or loss from (sale or other disposition of property) 1001(a).
1001(a) (excess of amount realized (1001(b) over adjusted basis (1012)) (Amount Realized 1001(b) $1,500) - (Adjusted basis 1012) $1,000 =$500 The $500 gain is then recognized under 1001(c) |
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1.Owner purchases some land for $10,000 and later sells it for $16,000.
(a)Determine the amount of owner’s gain on the sale. (d) What difference in result in (a) above if Owner purchased the land by making $2,000 cash payment from Owner’s funds and an $8,000 payment by borrowing $8,000 from bank in a recourse mortgage (on which Owner is personally liable)? Would it make any difference if the mortgage was a nonrecourse liability (onwhich only the land was security for the obligation)? |
Same result as in (a) because basis would still be 10K (2k cash + 8k mortgage) (The basis of property is the cost of that property which includes not only cash but the mortgage of the property section 1012)
Results are the same for non recourse mortgages (See Crane v. Commissioner) (A taxpayer who sells property encumbered by a nonrecourse mortgage must include the unpaid balance of the mortgage in the computation of the amount realized on the sale). |
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1.Owner purchases some land for $10,000 and later sells it for $16,000.
(a)Determine the amount of owner’s gain on the sale. (e) What result in (a), above, if Owner purchased the land for $10,000, spent $2,000 in clearing the land prior to its sale, and sold it for $18,000. |
Cost basis 1012 = $10,000 + Adjustments to basis = $2,000 (1016(a)(1))
Amount realized 1001(b) $18,000 – Adjusted basis 1012 $12,000 = $6,000 and the gain is recognized under 1001(c) |
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1. Owner purchases some land for $10,000 and later sells it for $16,000.
(f) What difference in result in (e), above, if Owner had previously rented the land to Lessee for five years for $1,000 per year cash rental and permitted Lessee to expend $2,000 clearing the property? Assume that, although Owner properly reported the cash rental payments as gross income. What about the $2,000 expenditures? |
Section 109
Ecludes the improvements made by tenant from gross income. Section 1019 The improvements excluded from gross income under section 109 do not affect the basis of the property. |
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1. Owner purchases some land for $10,000 and later sells it for $16,000.
(a)Determine the amount of owner’s gain on the sale. (g) What difference in result in (a), above, if when the land had a value of $10,000, Owner, a real estate salesperson, received it from Employer as a bonus for putting together a major real estate development, and Owner’s income tax was increased $3,000 by reason of receipt of the land? |
(T got taxed when he acquired the property. He had $10k in GI when he got it, b/c he got it from employer as compensation for services. GI = to the vlaue of the property received. "CONCEPT OF TAX BASIS," presumption of value At the time of receipt, T had GI of $10 on which he paid $3k in tax. AR= $16k, AB <10k>, RG=$6k. If he didn't have any costs then his basis would be $0. But he's already paid taxes on $10k.
•WE GIVE HIM A TAX BASIS = TO WHAT HE HAD TO PAY TAX ON IN THE 1st PLACE! (the FMV value of the property, not the employer's basis). 2 KINDS OF AB's: 1). Cost Basis OR 2). Tax Basis §1001 is triggered by disposal of property. Figure out amount realized, then figure out diff b/w _______________?) |
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1.Owner purchases some land for $10,000 and later sells it for $16,000.
(h) What difference if Owner is a salesperson in an art gallery and owner purchases a $10,000 painting from the art gallery, but is required to pay only $9,000 for it (instead of $10,000 because Owner is allowed a 10% employee discount which is excluded from gross income under §132(a)(2)), and owner later sells the painting for $16,000? |
NO GI under section 132.
The adjusted basis of the property woudl be 9k. Owner's realized gain is 6k (16k - 10k) the 1k is included 10k FMV (1k differential 132(a)(2) not includible in GI) If basis is 9k section 132 would not act as eclusion section. 1k would be recognized 132(a)(2) employee discount 132(c)(4) Qualified Property or Services (doesn't include real property or investment property???) |
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2. In an arm’s-length exchange, Sharp exchanges some land with a cost basis of $6,000 and a value of $9,000 with Dull for some non-publicly trades stock which Dull owns and in which Dull has a basis of $8,000 and is worth $10,000 at the time of the exchange.
(a) Consider Sharp and Dull’s gains on the exchange and their respective cost bases in the assets they receive. |
Basis equals = FMV = Property received
Sharp Basis = $6,000 Value = $9,000 Exchange = (AR 10K)- (AB 6k) = (Gain = 4k) New Basis = 10k Dull $8,000 $10,000 Exchange = (AR 9K)- (AB 8k) = (Gain = 2k) New Basis = 2k |
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2. In an arm’s-length exchange, Sharp exchanges some land with a cost basis of $6,000 and a value of $9,000 with Dull for some non-publicly trades stock which Dull owns and in which Dull has a basis of $8,000 and is worth $10,000 at the time of the exchange.
(b) What results in (a), above, if the value of Dull’s stock cannot be determined with any reasonable certainty? |
Philadelphia Park Amusement
***The Cost basis of the property received in a taxable exchange is the FMV of the property received in the exchange ***The value of two properties exchanged in an arms-length exchange are either equal in fact or are presumed equal Sharp Basis = $6,000 Value = $9,000 Exchange = (AR 9K)- (AB 6k) = (Gain = 3k) New Basis = 10k Dull $8,000 $9,000 Exchange = (AR 9K)- (AB 8k) = (Gain = 2k) New Basis = 2k |
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1. Donor gave Donee property under circumstances that required no payment of gift tax. What gain or loss to Donee on the subsequent sale of the property if:
a. The property had cost Donor $20,000, had a $30,000 fair market value at the time of gift, and Donee sold it for: (1) $35,000? |
Cost Donor 20k
FMV 30K Sold for 35k 102(a) gross income does not include the value of property from acquired by gift, bequest, devise, or inheritance. 1001(a) Computation of gain or loss from sale or other disposition of property. Excess of the adjusted basis over the amount realized. 1001(b) Amount Realized 1015(a) If property acquired by gift the basis the same as if in the hands of the donor except: If such basis is adjusted before gift is greater than FMV of the property at time of gift. Than for the purpose of determining loss than he the basis shall be such FMV. AR 35k – AB 20k =15K 1001(c) Gain or loss recognized |
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1. Donor gave Donee property under circumstances that required no payment of gift tax. What gain or loss to Donee on the subsequent sale of the property if:
b. The property had cost Donor $20,000, had a $30,000 fair market value at the time of gift, and Donee sold it for: (1) $15,000? |
Cost Donor 20k
FMV 30K Sold for 15k 102(a) gross income does not include the value of property from acquired by gift, bequest, devise, or inheritance. 1001(a) Computation of gain or loss from sale or other disposition of property. Excess of the adjusted basis over the amount realized. 1001(b) Amount Realized 1015(a) If property acquired by gift the basis the same as if in the hands of the donor except: If such basis is adjusted before gift is greater than FMV of the property at time of gift. Than for the purpose of determining loss than he the basis shall be such FMV. AR 15k – AB 20k =-5K 1001(c) Gain or loss recognized |
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1. Donor gave Donee property under circumstances that required no payment of gift tax. What gain or loss to Donee on the subsequent sale of the property if:
c. The property had cost Donor $20,000, had a $30,000 fair market value at the time of gift, and Donee sold it for: (1) $25,000? |
Cost Donor 20k
FMV 30K Sold for 25k 102(a) gross income does not include the value of property from acquired by gift, bequest, devise, or inheritance. 1001(a) Computation of gain or loss from sale or other disposition of property. Excess of the adjusted basis over the amount realized. 1001(b) Amount Realized 1015(a) If property acquired by gift the basis the same as if in the hands of the donor except: If such basis is adjusted before gift is greater than FMV of the property at time of gift. Than for the purpose of determining loss than he the basis shall be such FMV. AR 25k – AB 20k = 5K gain 1001(c) Gain or loss recognized |
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1. Donor gave Donee property under circumstances that required no payment of gift tax. What gain or loss to Donee on the subsequent sale of the property if:
b. The property had cost Donor $30,000, had a $20,000 fair market value at the time of gift, and Donee sold it for: (1) $35,000? |
Cost Donor 30k
FMV 20K Sold for 35k 102(a) gross income does not include the value of property from acquired by gift, bequest, devise, or inheritance. 1001(a) Computation of gain or loss from sale or other disposition of property. Excess of the adjusted basis over the amount realized. 1001(b) Amount Realized 1015(a) If property acquired by gift the basis the same as if in the hands of the donor except: If such basis is adjusted before gift is greater than FMV of the property at time of gift. Than for the purpose of determining loss than he the basis shall be such FMV. AR 35k – AB 30k = 5K gain 1001(c) Gain or loss recognized |
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1. Donor gave Donee property under circumstances that required no payment of gift tax. What gain or loss to Donee on the subsequent sale of the property if:
b. The property had cost Donor $30,000, had a $20,000 fair market value at the time of gift, and Donee sold it for: (1) $15,000? |
Cost Donor 30k
FMV 20K Sold for 15k 102(a) gross income does not include the value of property from acquired by gift, bequest, devise, or inheritance. 1001(a) Computation of gain or loss from sale or other disposition of property. Excess of the adjusted basis over the amount realized. 1001(b) Amount Realized 1015(a) If property acquired by gift the basis the same as if in the hands of the donor except: If such basis is adjusted before gift is greater than FMV of the property at time of gift. Than for the purpose of determining loss than he the basis shall be such FMV. AR 15k – AB 20k = 5K loss 1001(c) Gain or loss recognized |
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1. Donor gave Donee property under circumstances that required no payment of gift tax. What gain or loss to Donee on the subsequent sale of the property if:
b. The property had cost Donor $30,000, had a $20,000 fair market value at the time of gift, and Donee sold it for: (1) $24,000? Cost Donor 30k FMV 20K Sold for 24k |
Cost Donor 30k
FMV 20K Sold for 24k 102(a) gross income does not include the value of property from acquired by gift, bequest, devise, or inheritance. 1001(a) Computation of gain or loss from sale or other disposition of property. Excess of the adjusted basis over the amount realized. 1001(b) Amount Realized 1015(a) If property acquired by gift the basis the same as if in the hands of the donor except: If such basis is adjusted before gift is greater than FMV of the property at time of gift. Than for the purpose of determining loss than he the basis shall be such FMV. 1.1015-1(a) in cases where the property acquired by gift sells for less than cost basis and more than fmv there is neither a gain nor loss. AR 24k – (AB 20k?? or 30k??) = no gain or loss 1001(c) Gain or loss recognized |
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2. Father had some land that he had purchased for $100,000 but which had increased in value to $200,000. He transferred it to daughter for $100,000 in cash in a transaction properly identified as in part a gift and in part a sale. Assume no gift tax was paid on the transfer.
(a) What gain to Father and what basis to Daughter? |
No gain or loss to father, daughter has $100,000 basis in the property.
Father purchased property for 100k sold it for 100k no gain. §1.1001-1(e) Where a transfer of property is in part a sale and in part a gift, the transferor has a gain to the extent that the amount realized by him exceeds his adjusted basis in the property. However, no loss is sustained on such a transfer if the amount realized is less than the adjusted basis. §1.1015-4 Where the transfer of property is in part a sale and in part a gift, the unadjusted basis of the property in the hands of the transferee is the sum of (1)Whichever the following is greater: (i)The amount paid by the transferee for theproperty, or (ii) The transferor’s adjusted basis for the property at the time of the transfer, and 2. The amount of increase, if any in the basis authorized by section 1015(d) for gift tax paid. For determining loss the unadjusted basis of the property in the hands of the transferee shall not be greater than the fair market value of the property at the time of transfer. See §1.1001-1(e) |
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1. Andre purchased some land ten years ago for $4,000 cash. The property appreciated for $7,000 at which time Andre sold it to his wife Steffi for $7,000 cash, its fair market value.
(a) What are the income tax consequences to Andre? |
No Tax Consequences to Andre.
1041(a) – No gain or loss shall be recognized on a transfer of property from an individual to (1) a spouse, or (2) a gormer spouse, but only if the transfer is incident to the divorce. |
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1. Andre purchased some land ten years ago for $4,000 cash. The property appreciated for $7,000 at which time Andre sold it to his wife Steffi for $7,000 cash, its fair market value.
(a) What are the income tax consequences to Andre? |
No Tax Consequences to Andre.
1041(a) – No gain or loss shall be recognized on a transfer of property from an individual to (1) a spouse, or (2) a gormer spouse, but only if the transfer is incident to the divorce. |
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1. Andre purchased some land ten years ago for $4,000 cash. The property appreciated for $7,000 at which time Andre sold it to his wife Steffi for $7,000 cash, its fair market value.
(b) What is Steffi’s basis in the property? |
$4,000, her basis will be the same as her husband.
1041(b)(2) the basis of the transferee in property shall be the adjusted basis of the transferor. |
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1. Andre purchased some land ten years ago for $4,000 cash. The property appreciated for $7,000 at which time Andre sold it to his wife Steffi for $7,000 cash, its fair market value.
(c) What gain to Steffi if she immediately resells the property. |
1001(a) Computation of gain or loss for the sole or other disposition of property. The excess of the adjusted basis over the amount realized.
1041(b)(2) the basis of the transferee in property shall be the adjusted basis of the transferor. 1001(b) Amount Realized AR $7,000 – AB $4,000 = $3,000 1001(c) $3,000 gain recognized |
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1. Andre purchased some land ten years ago for $4,000 cash. The property appreciated for $7,000 at which time Andre sold it to his wife Steffi for $7,000 cash, its fair market value.
(c) What results in (a)-(c), above, if the property had declined in value to $3,000 and Andre sold it to steffi for $3,000? |
1041(a) – No gain or loss shall be recognized on a transfer of property from an individual to (1) a spouse, or (2) a former spouse, but only if the transfer is incident to the divorce.
1001(a) Computation of gain or loss for the sole or other disposition of property. The excess of the adjusted basis over the amount realized. 1041(b)(2) the basis of the transferee in property shall be the adjusted basis of the transferor. 1001(b) Amount Realized (ANDRE) AR $3,000 – AB $4,000 = $1000 LOSS (HOWEVER 1041(a) NON recognition statute) (STEFFI) AR $3,000 – AB $4,000 = $1000 LOSS (1041(b)(2) Steffi gets the same basis as her spouse) 1001(c) $1,000 loss recognized |
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1.Andre purchased some land ten years ago for $4,000 cash. The property appreciated for $7,000 at which time Andre sold it to his wife Steffi for $7,000 cash, its fair market value.
(e) What results (gains, losses, bases) to Andre and Steffi if Steffi transfers other property with a basis of $5,000 and value of $7,000 (rather than cash) to Andree in return for his property? |
1041(a) – No gain or loss shall be recognized on a transfer of property from an individual to (1) a spouse, or (2) a gormer spouse, but only if the transfer is incident to the divorce.
1001(a) Computation of gain or loss for the sole or other disposition of property. The excess of the adjusted basis over the amount realized. 1041(b)(2) the basis of the transferee in property shall be the adjusted basis of the transferor. 1001(b) Amount Realized (ANDRE) AR $7,000 – AB $4,000 = $3,000 Gain (HOWEVER 1041(a) NON recognition statute) (ANDRE) Now has a property with FMV of 7k and AB of 5K (ANDRE gets the same basis as her spouse) (STEFFI) AR $7,000 – AB $5,000 = $2,000 gain (1041(b)(2) 1041(a) NON recognition statute) (STEFFI) Now has a property with a FMV of 7k and AB of 4k (Steffi gets the same basis as her spouse) |
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1. In the current year, giver holds two blocks of identical stock, both worth $1,000,000. Giver purchased the first block years ago for $50,000 and the second block more recently for $950,000. Giver plans to make an inter vivos gift of one block and retain the second until death. Which block of stock should giver transfer inter vivos and why?
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§1015 - If the property was acquired by gift the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift.
***He should give the $950,000, so that the donee has a basis of $950,000. §1014 – The basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, or exchanged or otherwise disposed of before the decedents death by such person be – (1) the FMV of the property at the date of the decedent’s death ***Then, when he dies, the $50,000 basis stock will be inherited at market value, eliminating the huge gain that would need to be otherwise recognized. |
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1. Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate.
(a) What is Mortgagors cost basis in the land? |
§1012 The basis of property shall be the cost of such property.
Crane v. Commissioner The court held that the amount of a nonrecourse liability incurred on the acquisition of property is included in the basis. In other words if one takes property that is subject to a nonrecourse mortgage by sale, devise, or gift, that person has a basis in the property equal to the balance on the mortgage plus any other money or property that he gave in order to obtain the property. 100k cost basis |
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1.Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate.
(b)Two years later when the land has appreciated in value to $300,000 and Mortgagor has paid only interest on the $80,000 mortgage, Mortgagor takes out a second nonrecourse mortgage of $100,000 with adequate rates of interest from Bank again using the security. Does Mortgagor have income when she borrows the $100,000? |
No, loans are not income because they have to be repaid.
Woodsam Associates v. Commissioner Taking equity out of property doesn't trigger §1001(a). |
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1. Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate.
(c) What is Mortgagor’s basis in the land if the $100,000 of mortgage proceeds are used to improve the land? (b)Two years later when the land has appreciated in value to $300,000 and Mortgagor has paid only interest on the $80,000 mortgage, Mortgagor takes out a second nonrecourse mortgage of $100,000 with adequate rates of interest from Bank again using the security. Does Mortgagor have income when she borrows the $100,000? |
§1016(a)(1) Adjustments to basis
Proper adjustment in respect of property shall in all cased be made for expenditures, receipts, losses, or other items, properly chargeable to capital account. Mortgagor made a capital expenditure and therefore her basis is 200k |
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1.Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate.
(d) What is Mortgagor’s basis in the land if $100,000 of mortgage proceeds are used to purchase stocks and bonds worth $100,000? (b)Two years later when the land has appreciated in value to $300,000 and Mortgagor has paid only interest on the $80,000 mortgage, Mortgagor takes out a second nonrecourse mortgage of $100,000 with adequate rates of interest from Bank again using the security. Does Mortgagor have income when she borrows the $100,000? |
§1016(a)(1) Adjustments to basis
Proper adjustment in respect of property shall in all cased be made for expenditures, receipts, losses, or other items, properly chargeable to capital account. 100K none of the loan proceeds were used as capital expenditure. |
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1.Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate.
(e) What result under the facts of (d), above, if when the principal amount of the two mortgages is still $180,000 and the land is still worth $300,000, Mortgagor sells the property subject to both Mortgages to purchaser for 120,000 of cash? What is purchasers cost basis in the land. |
§1012 The basis of property shall be the cost of such property.
Crane v. Commissioner The court held that the amount of a nonrecourse liability incurred on the acquisition of property is included in the basis. In other words if one takes property that is subject to a nonrecourse mortgage by sale, devise, or gift, that person has a basis in the property equal to the balance on the mortgage plus any other money or property that he gave in order to obtain the property. 1001(a) Calculating gains and losses from sale and dispositions of property. The excess of the adjusted basis over amount realized. Mortgagor AR $300k - AB <$100k> = RL <$200k> Purchaser is paying 120K cash + 180K subject to loans = 300k cost basis in property. |
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1.Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate.
(f) What result under the facts of (d), above, if instead Mortgagor gives the land subject to the mortgages and still worth $300,000 to her Son? What is Son's basis in the land? |
Crane v. Commissioner
The court held that the amount of a nonrecourse liability incurred on the acquisition of property is included in the basis. In other words if one takes property that is subject to a nonrecourse mortgage by sale, devise, or gift, that person has a basis in the property equal to the balance on the mortgage plus any other money or property that he gave in order to obtain the property. Commissioner v. Tufts Transfers of property encumbered by a nonrecourse mortgage with an unpaid balance, the transfor has realized an amount equal to the unpaid mortgage balance. 1.1001-1(e)(1) Where a transfer of property is in part a sale and in part a gift, the transferor has a gain to the extent that the amount realized by him exceeds his adjusted basis in the property. No loss is sustained if transfer is less then adjusted basis. 1.1015-4(a) Where transfer of property is part a sale and in part a gift, the unadjusted basis of the property in the hands of of the transfereree is the sum of-(1) which ever the following is the greater: (i)The amount paid by the transferee for the property, or (ii)The transferor’s adjusted basis for the property at the time of the transfer Mortgagor AR $180 - AB $100k = RL 80K Gain Son has 180K basis nonrecourse loans are treated as purchase price Mortgagor is realieved of burden of repaying loans treated as a gain |
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1.Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate.
(g) What results under the facts of (f), above, if Mortgagor gives the land to her Spouse rather than to her Son? What is Spouse’s basis in the land? What is Spouse’s basis in the land after Spouse pays off the $180,000 of mortgages? (f) What result under the facts of (d), above if instead Mortgagor gives the land subject to the mortgages and still worth $300,000 to her son? What is the Son’s basis in the land? (d) What is mortgagor’s basis in the land if the $100,000 of mortgage proceeds are used to purchase stocks and bonds worth $100,000. |
Mortgagor’s basis is the cost basis §1012
$20,000 cash + $80,000 mortgage = $100K §1041(a) No gain or loss shall be recognized on a transfer of property from n individual to (1) a spouse. §1041(b)(2) the basis of the transferee in the property shall be the adjusted basis of the transferor. Crane v. Commissioner The basis is determined on a cost basis of the property not on an equity basis of the property. Construing property to mean equity would result in unreasonable consequences. Spouse giving the property to spouse triggers 1001(a) for calculating the gain or loss from the sale or other disposition of property. The excess of the adjusted basis over the Amount realized. AR $180k – 100k = 80k However because this is an exchange between spouses than 1041(a) prevents the gain from being recognized and then 1041(b)(2) gives the spouse the same basis in the property. So spouse now has a 100k basis in the property. The basis will be the same once the mortgages are paid off. Per Crane v. Commissioner. |
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1.Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate.
(h) What results to Mortgagor under the facts of (d), above, if the land declines in value from $300,000 to $180,000 and Mortgagor transfers the land by means of quitclaim deed to bank? (d) What is mortgagor’s basis in the land if the $100,000 of mortgage proceeds are used to purchase stocks and bonds worth $100,000. |
Crane v. Commissioner
The basis is determined on a cost basis of the property not on an equity basis of the property. Construing property to mean equity would result in unreasonable consequences. Mortgagor’s basis is the cost basis §1012 $20,000 cash + $80,000 mortgage = $100K 1001(b) the amount realized from sale or other disposition of property shall be the sum of any money received plus the fair market value of the property. 80k + 100k loans = 180k Mortgagor giving the property to the bank triggers 1001(a) for calculating the gain or loss from the sale or other disposition of property. The excess of the adjusted basis over the Amount realized. AR $180k – 100k = 80k 1001(c) 80k gain amount recognized |
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2. Investor purchased three acres of land, each acre worth $100,000 for $300,000. Investor sold one of the acres in year one for $140,000 and a second in year two for $160,000. The total amount realized by Investor was $300,000 which is not in excess of her total purchase price. Does Investor have any gain or loss on the sales?
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§1.61-6(a) Gain from Dealings Property, which says that when part of the larger property is sold, the cost or basis of the entire property shall be equitably apportioned among the several parts, and the gain realized or loss sustained on the part of the entire property is the difference between the selling price and the cost or other basis allocated to such part.
$300K/3 acres = $100k basis for each acre YEAR 1 §1001(b) the amount realized from the sale or other disposition of property shall be the sum of any money received plus the FMV of the property (other than money) received. Sale of the property triggered: §1001(a) Calculation for the gain or loss from the sale or other disposition of property. The excess of the adjusted basis over the amount realized AR 140k – AB 100k = 40K gain 1001(c) 40k gain recognized YEAR 2 §1001(b) the amount realized from the sale or other disposition of property shall be the sum of any money received plus the FMV of the property (other than money) received. Sale of the property triggered: §1001(a) Calculation for the gain or loss from the sale or other disposition of property. The excess of the adjusted basis over the amount realized AR 160k – AB 100k = 60K gain 1001(c) 60k gain recognized |
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3. Gainer acquired an apartment in a condominium Complex by inter vivos gift from Relative. Both used it only as a residence. It had been purchased by Relative for $200,000 cash and was given to Gainer when it was worth $300,000. Relative paid a $60,000 gift tax on the transfer. Gainer later sell the apartment to Shelterer.
(a) What gain or loss to Gainer on his sale to Shelterer for $320,000. |
The 300k gift of property from relative to Gainer does not result in gross income because §102(a) gross income does not result from the value of property acquired by Gift, Bequest, Devise or inheritance.
Gainer takes the property with the same basis as relative because 1015(a) if a property was acquired by gift the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift. Gainers basis in the property is also increased the amount of the gift tax associated with the net appreciation paid §1015(d)(6)(A) FORMULA: appreciation in value while donor had it / Total value of property at time of gift * gift tax paid = increase in basis to donee $100k/$300k * $60k = $20k AR $320k - AB $220k =Gain $100k |
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3. Gainer acquired an apartment in a condominium Complex by inter vivos gift from Relative. Both used it only as a residence. It had been purchased by Relative for $200,000 cash and was given to Gainer when it was worth $300,000. Relative paid a $60,000 gift tax on the transfer. Gainer later sell the apartment to Shelterer.
(b) WHAT IS SHELTER’S BASIS IN THE PROPERTY (a) What gain or loss to Gainer on his sale to Shelterer for $320,000. |
§1012 the basis of property shall be the cost of such property.
In this case Shelter paid $320K for the property and therefore that will be his basis. |
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3. Gainer acquired an apartment in a condominium Complex by inter vivos gift from Relative. Both used it only as a residence. It had been purchased by Relative for $200,000 cash and was given to Gainer when it was worth $300,000. Relative paid a $60,000 gift tax on the transfer. Gainer later sell the apartment to Shelterer.
(c) Same questions now assuming that Relative acquired the property for $80,000 cash, but subject to a $120,000 mortgage on which neither she nor Gainer was ever personally liable or ever paid any amount of principal, and that Relative paid $30,000 tax on the gift. (b) WHAT IS SHELTER’S BASIS IN THE PROPERTY (a) What gain or loss to Gainer on his sale to Shelterer for $320,000. |
§1.1001-1(e) Where a transfer of property is in part a sale and in part a gift, the transferor has a gain to the extent that the amount realized by him exceeds his adjusted basis in the property. HOWEVER, no loss is sustained on such a transfer if the amount realized is less than the adjusted basis.
§1.1015-4 Where a transfer of property is in part a sale and in part a gift, the unadjusted basis of the property in the hands of the transferee is the sum of- (1) which ever the following is greater: (i) the amount paid by the transferee for the property, or (ii) the transferor’s adjusted basis property at the time of the transfer, and (2) the amount of increase if any in the basis authorized by section 1015(d) for gift tax paid. RELATIVES gift to gainer triggers 1001(a) Calulating the gain or loss from the sale or other disposition in property. The excess of the adjusted basis over the amount realized. 1001(b) the amount realized from the sale or other disposition of property shall be the sum of any money received plus the FMV of the property (other than money) received. AR = 120k mortgage AB = §1012 the basis of property shall be the cost of such property. = 120K mortgage + 80k cash = $200k AR 120k – 200k = 80k loss however relative cannot sustain a loss under 1.1001-1(e). GAINER will have a 200k basis in the property because it is greater than what he paid. Gainers basis in the property is also increased the amount of the gift tax associated with the net appreciation paid §1015(d)(6)(A) FORMULA: appreciation in value while donor had it / Total value of property at time of gift * gift tax paid = increase in basis to donee $100k/$300k * $60k = $20k AR $320k - AB $220k =Gain $100k |
