ACC/307 ACC307 ACC 307 WEEK 8 HOMEWORK 2

Hannah Tywin owns 100 shares of MM Inc. stock. She sells the stock on December 11 for $25 per share. She received the stock as a gift from her Aunt Pam on March 20 of this year when the fair market value of the stock was $18 per share. Aunt Pam originally purchased the stock seven years ago at a price of $12 per share. What is the amount and character of Hannah’s recognized gain or loss on the stock?

Identify each of White Corporation’s following assets as an ordinary, capital, or §1231 asset.

a.

Two years ago, White used its excess cash to purchase a piece of land as an investment.

b.

Two years ago, White purchased land and a warehouse. It uses these assets in its business.

c.

Manufacturing machinery White purchased earlier this year.

d.

Inventory White purchased 13 months ago but is ready to be shipped to a customer.

e.

Office equipment White has used in its business for the past three years.

f.

1,000 shares of stock in Black corporation that White purchased two years ago because it was a good investment.

g.

Account receivable from a customer with terms 2/10 net 30.

h.

Machinery White held for three years and then sold at a loss of $10,000.

Hart, an individual, bought an asset for $500,000 and has claimed $100,000 of depreciation deductions against the asset. Hart has a marginal tax rate of 30 percent.

Answer the questions presented in the following alternative scenarios (assume Hart had no property transactions other than those described in the problem): (Loss amounts should be indicated by a minus sign.)

a-1.

What is the amount and character of Hart’s recognized gain if the asset is tangible personal property sold for $450,000? (Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable.)

a-2.

What effect does the sale have on Hart’s tax liability for the year?

b-1.

What is the amount and character of Hart’s recognized gain if the asset is tangible personal property sold for $550,000? (Enter NA if a situation is not applicable.)

b-2.

What effect does the sale have on Hart’s tax liability for the year?

c-1.

What is the amount and character of Hart’s recognized gain if the asset is tangible personal property sold for $350,000? (Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable.)

c-2.

What effect does the sale have on Hart’s tax liability for the year?

d-1.

What is the amount and character of Hart’s recognized gain if the asset is a nonresidential building sold for $450,000? (Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable.)

d-2.

What effect does the sale have on Hart’s tax liability for the year?

e-1.

Now assume that Hart is a corporation. What is the amount and character of its recognized gain if the asset is a nonresidential building sold for $450,000? (Enter NA if a situation is not applicable.)

e-2.

What effect does the sale have on Hart’s tax liability for the year (assume the same 30 percent marginal tax rate)?

f.

Now assuming that the asset is real property, which entity type should be used to minimize the taxes paid on real estate gains?

$50,000 ordinary income and a $15,000 tax liability on income, computed as follows:

Hart has $100,000 ordinary income and $50,000 of §1231 gain. Hart’s tax liability is $37,500, calculated as follows:

Hart has a §1231 loss of $50,000 and receives tax savings of $15,000 for the loss:

Hart has a §1231 gain of $50,000 taxed at a maximum 25% rate. Hart’s tax liability is $12,500, calculated as follows:

Hart recognizes $10,000 ordinary income and $40,000 §1231 gain. Hart’s tax liability is $15,000, calculated as follows:

As can be seen from parts (d) and (e), any noncorporate form will result in a lower tax on sales of real property. This is because unrecaptured §1250 gain is taxed at a maximum rate of 25 percent for noncorporate taxpayers while corporate taxpayers recognize ordinary gains.

Deirdre sold 100 shares of stock to her brother, James, for $2,400. Deirdre purchased the stock several years ago for $3,000. (Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)

a.

What gain or loss does Deirdre recognize on the sale?

b.
 

What amount of gain or loss does James recognize if he sells the stock for $3,200?

c.

What amount of gain or loss does James recognize if he sells the stock for $2,600?

d.

What amount of gain or loss does James recognize if he sells the stock for $2,000?

Though Deirdre realizes a $600 loss, she is not allowed to recognize any of the loss because she sold the stock to a related party (her brother). See the following computation:

$200 gain (see calculations below)

$0 (see calculations below)

($400) loss (see calculations below)

Moran owns a building he bought during year 0 for $150,000. He sold the building in year 6. During the time he held the building he depreciated it by $32,000.

What is the amount and character of the gain or loss Moran will recognize on the sale in each of the following alternative situations? (Loss amounts should be indicated by a minus sign. Enter NA if a situation is not applicable.)

a.

Moran received $145,000. (Leave no answer blank. Enter zero if applicable.)

b.

Moran received $170,000.

c.

Moran received $110,000. (Leave no answer blank. Enter zero if applicable.)