Chapter 10 Property Dispositions

48. Two years ago, Bethesda Corporation bought a delivery truck for $30,000 (not subject to the luxury auto depreciation limits). Bethesda used MACRS 200 percent declining balance and the half-year convention to recover the cost of the truck, but it did not elect §179 expensing or eligible bonus depreciation. Answer the questions for the following alternative scenarios.

a. Assuming Bethesda used the truck until March of year 3, what depreciation expense can it claim on the truck for years 1 through 3?

b. Assume that Bethesda claimed $18,500 of depreciation expense on the truck before it sold it in year 3. What is the amount and character of the gain or loss if Bethesda sold the truck in year 3 for $17,000, and incurred $2,000 of selling expenses on the sale?

c. Assume that Bethesda claimed $18,500 of depreciation expense on the truck before it sold it in year 3. What is the amount and character of the gain or loss if Bethesda sold the truck in year 3 for $35,000, and incurred $3,000 of selling expenses on the sale?

49. Hauswirth Corporation sold (or exchanged) some manufacturing equipment in year 0. Hauswirth bought the machinery several years ago for $65,000 and it has claimed $23,000 of depreciation expense against the equipment.

a. Assuming that Hauswirth receives $50,000 in cash for the equipment, compute the amount and character of Hauswirth’s recognized gain or loss on the sale.

b. Assuming that Hauswirth receives like-kind equipment with a fair market value of $50,000 in exchange for its equipment, compute Hauswirth’s gain realized, gain recognized, deferred gain, and basis in the new equipment.

c. Assuming that Hauswirth receives $20,000 in cash in year 0 and a $50,000 note receivable that is payable in year 1, compute the amount and character of Hauswirth’s gain in year 0 and in year 1.

50. {Research} Fontenot Corporation sold some machinery to its majority owner Gray (an individual who owns 60 percent of Fontenot). Fontenot purchased the machinery for $100,000 and has claimed a total of $40,000 of depreciation expense deductions against the property. Gray will provide Fontenot with $10,000 of cash today and provide a $100,000 note that will pay Fontenot $50,000 one year from now and $50,000 two years from now.

d. What gain does Fontenot’s realize on the sale?

e. What is the amount and character of the gain that Fontenot must recognize in the year of sale (if any) and each of the two subsequent years? (Hint: use the Internal Revenue Code and start with §453, please give appropriate citations.)

51. Moab, Inc. manufactures and distributes high-tech biking gadgets. It has decided to streamline some of its operations so that it will be able to be more productive and efficient. Because of this decision it has entered into several transactions during the year.

Part (1) Determine the gain/loss realized and recognized in the current year for each of these events. Also determine whether the gain/loss recognized is §1231, capital, or ordinary.

a. Moab Inc. sold a machine that it used to make computerized gadgets for $27,300 cash. It originally bought the machine for $19,200 three years ago and has taken $8,000 depreciation.

b. Moab Inc. held stock in ABC Corp. which had a value of $12,000 at the beginning of the year. That same stock had a value of $15,230 at the end of the year.

c. Moab Inc. sold some of its inventory for $7,000 cash. This inventory had a basis of $5,000.

d. Moab Inc. disposed of an office building with a fair market value of $75,000 for another office building with a fair market value of $55,000 and $20,000 in cash. It originally bought the office building seven years ago for $62,000 and has taken $15,000 in depreciation.

e. Moab Inc. sold land it held for investment for $28,000. It originally bought the land for $32,000 two years ago.

f. Moab Inc. sold another machine for a note receivable in four annual installments of $12,000. The first payment was received in the current year. It originally bought the machine two years ago for $32,000 and had claimed $9,000 in depreciation expense against the machine.

g. Moab Inc. sold stock it held for eight years for $2,750. It originally purchased the stock for $2,100.

h. Moab Inc. sold another machine for $7,300. It originally purchased this machine six months ago for $9,000 and has claimed $830 in depreciation expense against the asset.

Part (2) From the recognized gains/losses determined in part 1, determine the net §1231 gain/loss and the net ordinary gain/loss Moab will recognize on its tax return. Moab, Inc. also has $2,000 of nonrecaptured §1231 losses from previous years.

Part (3) (Forms) Complete Moab, Inc.’s Form 4797 for the year

52. {Research} Vertovec Inc., a large local consulting firm in Utah, hired several new consultants from out of state last year to help service their expanding list of clients. To aide in relocating the consultants, Vertovec Inc. purchased the consultants’ homes in their prior location if the consultants were unable to sell their homes within 30 days of listing them for sale. Vertovec Inc. bought the homes from the consultants for 5 percent less than the list price and then continued to list the homes for sale. Each home Vertovec Inc. purchased was sold at a loss. By the end of last year, Vertovec had suffered a loss totaling $250,000 from the homes. How should Vertovec treat the loss for tax purposes? Write a memo to Vertovec Inc. explaining your findings and any planning suggestions that you may have if Vertovec Inc. continues to offer this type of relocation benefit to newly hired consultants.