QUESTION 1
1 worth 40%) Several years ago, Courtney borrowed $100,000 from the Friendly Local Bank and used it to buy an apartment building. Courtney has not been able to rent any of the apartments in the building and has not made any principal payments on the loan, but she has paid all of the interest due. Courtney has fallen on hard times and her only asset is the apartment building, which is now worth $75,000 and which now has an adjusted basis of $50,000. If the bank cancels the debt in exchange for the apartment building, what are the income tax consequences to Courtney?a) List primary authorities relied on: b) Discussion:
2 worth 20%) Individual A sells an apartment building, its office equipment, furniture and fixtures, and its land to Individual B. Individual A realizes gain on the sale of the building, equipment, furniture and fixtures and land. What is the character of the gain realized? Cite to authority as you discuss it.
3 worth 20%) Address parts a), b) and c), below:a) Please list all primary authority relied upon in completing b) and c):
b) Timon decides to sell 5 acres of land for $100,000. The cost basis for the land is $37,500. Timon agrees to sell the property for four equal payments of $25,000 one now and the other three on January 1 of the next 3 years. The note bears adequate interest. What amount of gain is realized on the sale? What amount of gain is recognized in Year 1? What is Timons basis in the note receivable at the end of Year 2? c) Caleb sells machinery for $90,000 for two equal payments of $45,000 (plus interest). Calebs original basis was $80,000 and he has claimed $30,000 of depreciation deductions up to the time of sale. Caleb will receive 1 payment now and one next year. What amount of gain is realized on the sale? What amount of gain is recognized in Year 1?
4 worth 20%) Address parts a, b and c, below:Barb owns Williams Tower, an apartment building. Barbs adjusted basis in Williams is $400,000 and it is subject to a mortgage of $260,000. Dan owns Portland Arms, a commercial office building. It is worth $800,000 and is subject to a mortgage of $350,000. Dans adjusted basis in Portland is $400,000.Both Barb and Dan acquired their properties 5 years ago and depreciation was straight-line.
Barb and Dan exchange properties and, in addition, Barb transfers antique jewelry, worth $10,000 in which she had a basis of $2,000 to Dan. Barb inherited the jewelry from her mother many years ago. Each assumes the others mortgage (with the consent of the lenders).
a) List the authorities relied upon in answering b and c: b) What are the tax consequences of this exchange to Barb?c) What are the tax consequences of this exchange to Dan?
Harry Hinke is a TV cameraman for Earthwide Sports Presentations Nightly. While Harry was covering a professional basketball game from courtside, the Cook Country Toros famous basketball star, Denny Worm, ran out of bounds, tripped over a chair, knocked Harry down, and stepped on him, severely injuring Harry. Harry retained well known plaintiffs lawyer Willie Gingrich to sue Toros, Inc., the team owner, for negligently placing the courtside chair. After trial, a judgment for $1,000,000 was entered against Toros, Inc. What are the tax consequences to Harry upon the payment of the judgment?The tax consequences to Harry depend on what the payment represents. What is the origin of the claim? We would want a breakdown as to whether the proceeds represented damages, lost wages, punitive damages, etc.The amount received is clearly realized income. That is, per Glenshaw Glass, the receipt is an accession to wealth, clearly realized over which the taxpayer has dominion. Realized income is recognized (i.e., included in taxable income) unless there is some provision excluding it (or allowing for nonrecognition or deferral). See Treas. Reg. section 1.61-1(a).To the extent the judgment represents compensation for damages for the personal physical injuries suffered by Harry, they qualify for exclusion under Code section 104(a)(2).To the extent that the judgment relates to punitive damages or lost wages, the origin of the claim is not in the personal physical injury and the Code section 104 exclusion does not apply. See, e.g., Treas. Reg. section 1.61-14(a) [regarding punitive damages] and Code section 61(a)(1) [regarding wages]. Such amounts would be recognized as ordinary income.To the extent that the judgment relates to damage to capital, the receipt is treated as a return of capital (which could result income recognition if in excess of basis see the Raytheon case). However, the facts do not set forth any injury to capital.