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ACC 364 - Chapter 9 (Nontaxable Exchanges)
Terms in this set (67)
What is a nontaxable exchange?
A transaction resulting in a realized gain or loss that is not recognized (in whole or in part) in the current year.
Nontaxable exchanges allow taxpayers to convert ____________________ from one form to another without tax cost.
An asset exchange is taxable unless......
it meets the requirements of the nontaxable exchange provisions in the IRC.
The _______________________________ is not a party to a nontaxable exchange, so the tax law is ____________________________.
PROBLEM: Jacob owns a NYC skyscraper with a FMV of $1,000 and a $200 tax basis. He wants to sell it and move to Chicago and buy a Chicago skyscraper for $1,000.
1) What is the issue with this situation?
2) How can this problem be solved?
1) If Jacob is taxed on the $800 realized gain on the sale of the NYC skyscraper, he won't have $1,000 to buy a Chicago skyscraper.
2) The problem can be solved by a nontaxable exchange.
In a generic nontaxable exchange, one _____________________________ property is exchanged for another.
What is the value-for-value presumption in a nontaxable exchange?
The properties exchanged have an equal FMV.
TRUE or FALSE - In a generic nontaxable exchange, realized gain or loss is recognized in the current tax year.
FALSE - It is NOT recognized in the current tax year.
What is the substituted basis rule?
The deferred gain or loss from a nontaxable exchange is embedded in the tax basis of the qualifying property received.
In a nontaxable exchange, if no boot is involved, the tax basis in the property equals....
(Basis of property surrendered)
(FMV of property received) -/+ deferred gain / loss
PROBLEM - Fred has property with FMV $100 and basis $60. Vanessa has property with FMV $100 and basis $110. Fred and Vanessa exchange properties.
1) What is the gain/loss realized and recognized for Fred?
2) What is the gain/loss realized and recognized for Vanessa?
3) What is the basis in the new property for Fred?
4) What is the basis in the new property for Vanessa?
1) $40 gain realized; $0 gain recognized ($40 gain deferred)
2) $10 loss realized; $0 loss recognized ($10 loss deferred)
3) $60 basis in new property (FMV $100 - $40 deferred gain)
4) $110 basis in new property (FMV $100 + $10 deferred loss)
What is boot?
Cash or other non-qualifying property in a nontaxable exchange.
How is debt relief treated by....
1) The party relieved of debt?
2) The party assuming debt?
1) Boot received
2) Boot paid
If both parties to a nontaxable exchange are relieved of debt, the ________ _____________________ is treated as boot.
The party receiving the boot must recognize what?
A portion of realized gain equal to the FMV of the boot.
For the party receiving boot, the substituted basis rule is:
(Basis of property surrendered) + (gain recognized) - (FMV boot received)
For the party paying boot, the substituted basis rule is:
(Basis of qualifying property surrendered) + (FMV of boot paid)
PROBLEM - Ana has qualifying property with a $1,000 FMV and $700 basis. Darrell has qualifying property with a $900 FMV and $300 basis. If they exchange properties, Darrell must also give Ana $100 cash.
1) What is Ana's gain / loss realized and recognized?
2) What is Darrell's gain / loss realized and recognized?
3) What is Ana's basis in the new property?
4) What is Darrell's basis in the new property?
1) $300 realized gain; $100 gain recognized ($200 gain deferred)
2) $600 realized gain; $0 gain recognized ($600 gain deferred)
3) $700 basis in property received and $100 basis in cash received
-Calculating basis in qualifying property received: ($900 FMV - $200 deferred gain)
4) $400 basis in qualifying property received
-Calculating basis in qualifying property received: ($1,000 FMV - $600 deferred gain)
When can receiving boot not trigger the recognition of a realized gain?
When it exceeds the amount of the realized gain.
PROBLEM - From previous example, if Ana had received $400 cash in the previous example...
1) What would her realized gain be?
2) What would her recognized gain be?
3) What is her basis in the new property?
1) $300 realized gain
2) $300 recognized gain
3) $600 basis in the new property
-Calculating basis in new property: ($700 basis in surrendered property + $300 gain recognized - $400 boot)
Receiving boot does not cause ___________ _________________________________.
PROBLEM - From the previous example, if Ana's property surrendered had a basis of $1,200 in the previous example...
1) How much would her realized loss be?
2) How much would her recognized loss be?
3) What is her basis in the new property?
1) $200 realized loss
2) $0 recognized loss ($200 deferred loss)
3) $1,100 basis in new property
Calculating basis in new property: ($1,200 surrendered property - $0 loss recognized - $100 boot)
PROBLEM - Rachel owns qualifying property with a $200 FMV and $120 basis subject to a $50 mortgage. Horatio owns qualifying property with a $150 FMV and $110 basis. When they exchange properties, Horatio assumes the $50 mortgage on Rachel's property.
1) What is Rachel's gain / loss realized?
2) What is Rachel's gain / loss recognized?
3) What is her basis in the new property?
1) $80 realized gain ($150 FMV property received + $50 debt relief - $120 basis)
2) $50 recognized; $30 deferred
3) $120 basis in property received ($150 FMV - $30 deferred gain)
PROBLEM - From the previous example....
1) What is Horatio's gain / loss realized?
2) What is Horatio's gain / loss recognized?
3) What is his basis in the new property?
1) $40 realized gain
2) $0 gain recognized; $40 gain deferred
3) $160 basis in property received ($200 FMV - $40 deferred gain)
TRUE or FALSE - Gains and losses realized on property exchanges may be included in book income for financial reporting purposes.
If a property exchange is nontaxable, what does the gain / loss realized cause?
A book / tax difference
The book basis of property received equals its ________________________.
TRUE or FALSE - The book basis of property received in a nontaxable exchange is different than its tax basis.
In a nontaxable exchange, the book / tax difference that arises is _________________________.
In a nontaxable exchange, when will the book / tax difference that arises reverse>
As the property is depreciated / amortized.
When the property is disposed of in a taxable transaction.
There is no gain or loss recognized on the exchange of ________________________ properties.
In a like-kind exchange, what triggers gain recognition?
The receipt of boot
In a like-kind exchange, non-recognition is ________________________, not ________________________.
TRUE or FALSE - Like-kind exchanges protect against taxpayers who prefer to sell loss properties in order to recognize their realized loss.
What is a like-kind property?
Business or investment realty (after 2017)
What is not eligible like-kind exchange treatment?
1) Depreciable personalty
2) Intangible assets
4) Stocks / bonds
5) Partnership interests
6) Personal assets
PROBLEM - Bobby owns an office building with $200,000 FMV and $70,000 basis. Jenny owns investment land with a $170,000 FMV and $115,000 basis. If Bobby and Jenny decide to exchange realty....
1) Who must pay boot to equalize the exchange and for how much?
2) What is the gain realized, recognized and deferred by Bobby on the exchange?
3) What is the gain realized, recognized and deferred by Jenny on the exchange?
4) Determine the tax basis of the realty received by Bobby.
5) Determine the tax basis of the realty received by Jenny.
1) Jenny must pay Bobby $30,000 boot.
2) $130,000 realized gain; $30,000 recognized; $100,000 deferred
3) $55,000 realized gain; $0 recognized; $55,000 deferred
4) $70,000 basis in land received ($170,000 FMV property received - $100,000 deferred gain)
5) $145,000 basis in the building received ($200,000 FMV - $55,000 deferred gain)
Most like-kind exchanges of realty are arranged by who?
What are the three steps in the property exchange process?
1) A taxpayer who wants to sell property and defer the tax on the gain will relinquish the party to a qualified intermediary rather than directly to the buyer.
2) Buyer transfers cash to the intermediary and receives the property.
3) Intermediary uses the cash to purchase a replacement property for the seller.
What is an involuntary conversion?
The receipt of insurance or condemnation proceeds for property destroyed by theft or casualty or taken by eminent domain.
If insurance or condemnation proceeds exceed the adjusted basis of the property, what may the taxpayer do?
Elect to defer gain recognition if TWO conditions are met.
If the adjusted basis of the property exceeds the insurance / condemnation proceeds, what does the taxpayer recognize?
An ordinary loss
What are the two requirements to defer a gain from an involuntary conversion?
1) Reinvest the amount realized on the conversion in property similar or related in service / use to the converted property
2) The replacement property must be purchased within two taxable years following the year of conversion.
In an involuntary conversion, if a taxpayer does not reinvest the entire proceeds, how is the non-reinvested amount treated?
Treated as boot and gain is recognized to the extent of the proceeds not reinvested.
In an involuntary conversion, the basis of the replacement property is....
(Property's cost) - (Unrecognized gain)
In an involuntary conversion, unrecognized gain is deferred until when?
When the taxpayer disposes of the replacement property in a future taxable transaction.
PROBLEM - Kenan's factory had a $500,000 adjusted basis. The factory was destroyed by a tornado, and Kenan received $650,000 from the insurance company. Kenan spends $625,000 to build a replacement factory.
1) What is Kenan's realized gain?
2) What is his recognized gain?
3) What is his basis in the new factory?
1) $150,000 realized gain
2) $25,000 recognized gain ($125,000 deferred gain)
3) $500,000 basis in new factory ($625,000 cost - $125,000 deferred gain)
When a taxpayer transfers property to a corporation solely exchange for stock, when is no gain / loss recognized?
If the transferor is in control of the corporation immediately after the exchange.
For corporate formations, how is CONTROL defined?
As ownership of 80% or more of the corporation's outstanding stock by the transferors in the aggregate.
For corporate formations, what is included under the term "property"?
What isn't included?
2) Tangible assets
3) Intangible assets
***Personal services are NOT property
TRUE or FALSE - A corporation must recognize a gain or loss in the exchange of its stock for property.
FALSE - A corporation NEVER recognizes a gain / loss on the exchange of its stock for property.
In corporate formations, the basis of stock received in the exchange depends on if the transfer is __________________________ or not.
On a nontaxable transfer, the basis of the stock received equals...
The basis of the transferred property (substituted basis)
On a taxable transfer, the basis of the stock received equals...
The FMV of the transferred property
(Basis of transferred property + gain recognized)
For corporate formations, the basis of transferred property to the corporation depends on if the transfer was ____________________ to the ________________________________ or not.
On a nontaxable transfer, the corporation's basis in the transferred property equals...
its basis in the hands of the transferor (carryover basis)
On a taxable transfer, the corporation's basis in the transferred property equals...
The FMV of the stock it issued
Andy and Bill form a corporation, AB Co. Andy contributes $10,000 cash and Bill contributes a building with $10,000 FMV and $3,000 adjusted basis. The corporation issues 500 shares of stock each to Andy and Bill. Each share has a $20 FMV.
1) What is Andy's realized gain, recognized gain, and basis?
2) What is Bill's realized gain, recognized gain, and basis?
3) What is AB Co.'s realized gain, recognized gain, and basis?
1) $0 realized gain; $0 recognized gain; $10,000 basis in the stock
2) $7,000 realized gain; $0 recognized gain; $3,000 basis in the stock
3) $0 realized gain; $0 recognized gain; $10,000 basis in the cash and $3,000 basis in the building
For partnership formations, how much gain / loss is recognized by the partner or partnership on the exchange of property for an interest in the partnership?
TRUE or FALSE - Partnerships have a control requirement.
FALSE - No control requirement, which is different from corporate rules
The rules regarding partnerships apply to what situations?
1) Initial formation of partnerships
2) Subsequent contributions to an already existing partnership
For partnership formations, a partner's basis in the partnership interest equals....
The partner's basis in the transferred property (substituted basis).
For partnership formations, the partnership's basis in the transferred property equals....
The property's basis in the hands of the partner (carryover basis).
There is a special rule that prohibits loss recognition but not gain recognition on a ______________ ________________.
If a taxpayer sells a security at a loss but repurchases substantially the same security within _______________ days before or after the sale, what happens to the loss?
30; the loss is disallowed
For wash sales, the basis in the repurchased security equals....
cost + (the disallowed loss)
On 9/13, Abby sold Nike stock with a $4,000 basis for $3,750 cash. On 10/4, Abby paid $3,800 to repurchase the same Nike stock.
1) What is Abby's realized gain / loss?
2) What is her recognized gain / loss?
3) What is her basis in the repurchased Nike stock?
1) $250 realized loss
2) $0 - Because the repurchase occurred within 30 days of the sale, Abby cannot recognize her $250 loss.
3) $4,050 ($3,800 cost + $250 deferred loss).
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