Exam 9: Nontaxable Exchanges

Gain realized on a property exchange that is not recognized is actually deferred rather than nontaxable.

In a like-kind exchange in which both properties are subject to a mortgage, both parties to the exchange are treated as receiving boot equal to the relief of their respective mortgage.

Gem Company's manufacturing facility was destroyed by a flood. The facility's adjusted basis was $665,000, and Gem received an $850,000 insurance reimbursement. Within 18 months of the flood, Gem rebuilt the facility at a total cost of $975,000. Which is Gem's basis in the new facility?

Thirty years ago, Prescott Inc. realized a $16,200 gain on the exchange of an old building for a new building. Prescott included the gain in book income, but the exchange was nontaxable. This year, Prescott sold the new building for $250,000. At date of sale, the equipment's book basis and tax basis had both been depreciated to zero. Which of the following statements is true?

LiO Company transferred an old asset with a $13,600 adjusted tax basis in exchange for a new asset worth $11,000 and $1,500 cash. Which of the following statements is false?

The goodwill of one business is never of a like-kind to the goodwill of a different business.

A fire destroyed equipment used by BLP Inc. in its manufacturing business. BLP's adjusted tax basis in the equipment was $24,000. Three weeks after the fire, BLP paid $40,000 for replacement equipment. Which of the following statements is false?

Mr and Mrs Eyre own residential rental property that they would like to dispose of in a nontaxable exchange. Which of the following would not qualify as like-kind property?

Perry Inc. and Dally Company entered into an exchange of real property. Here is the information for the properties to be exchanged. Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally assumed the mortgage on the Perry property. -Compute Dally's gain recognized on the exchange and its tax basis in the property received from Perry.

Grantly Seafood is a calendar year taxpayer. In 2018, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2018, Grantly received a $1 million reimbursement from its insurance company. On May 19, 2019, Grantly purchased a new fishing boat for $750,000. Compute Grantly's recognized gain or loss on the involuntary conversion and its tax basis in the new boat.

Grantly Seafood is a calendar year taxpayer. In 2018, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2018, Grantly received a $1.2 million reimbursement from its insurance company. What is the latest date that Grantly can replace the boats to avoid gain recognition from the involuntary conversion?

Mr Jamail transferred business personalty (FMV $187,000; adjusted tax basis $29,900) to J&K Partnership in exchange for a partnership interest. Which of the following statements is true?

Luce Company exchanged investment land for a building to be used in its business. Luce's gain on the exchange was nontaxable (because the assets were like-kind) but was included in financial statement income. Which of the following statements is false?

Mr and Mrs Meredith own a sole proprietorship consisting of business assets with a $649,000 aggregated adjusted tax basis. According to an independent appraisal, the business is worth $2 million. The Merediths are planning to transfer the entire business to Molleri Inc. in exchange for 20,000 shares of Molleri stock. How much gain will the Merediths recognize on the exchange of business assets for stock and what basis will they take in the stock if: a. Molleri has 23,000 shares of outstanding stock immediately after the exchange? b. Molleri has 500,000 shares of outstanding stock immediately after the exchange?

The wash sale rule can result in the nonrecognition of both gains and losses.

Tarletto Inc.'s current year income statement includes a $229,000 gain realized on the exchange of an old business asset for a new business asset. If the exchange is nontaxable, Tarletto's book basis in the new asset is $229,000 greater than its tax basis.

Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged. Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. -Compute Johnson's gain recognized on the exchange and its tax basis in the property received from C&K.

Mrs Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W Inc. in exchange for a 36% interest in M&W Partnership. -Determine Mrs Brinkley's realized and recognized gain on the exchange and the tax basis in her partnership interest.

Loonis Inc. and Rhea Company formed LooNR Inc. by transferring business assets in exchange for 1,000 shares of LooNR common stock. Loonis transferred assets with a $820,000 FMV and a $444,000 adjusted tax basis and received 820 shares. Rhea transferred assets with a $180,000 FMV and a $75,000 adjusted tax basis and received 180 shares. -Compute Loonis and Rhea's realized and recognized gain on the exchange.

Bill contributed business realty ($375,000 FMV and $113,000 adjusted basis) to Zeta Inc. in exchange for Zeta common stock. Immediately after the exchange, Bill owned 53% of Zeta's outstanding stock. Compute gain recognized by Bill and by Zeta on this exchange.