Exam 9: Nontaxable Exchanges

A taxpayer who pays boot in a nontaxable exchange includes the value of the boot in the basis of the qualifying property received.

A taxpayer who receives boot in a nontaxable exchange must recognize gain equal to the lesser of the FMV of the boot or the gain realized.

Which of the following statements about the transfer of debt in a like-kind exchange is false?

Tibco Inc. exchanged an equity interest in ABM Partnership for an equity interest in Jolla Partnership. This exchange is taxable.

Qualifying property received in a nontaxable exchange has a cost basis for tax purposes.

Muro Inc. exchanged an old inventory item for a new asset. If the new asset is also an inventory item, the exchange is nontaxable.

On July 2, 2018, a tornado destroyed an asset owned by Leigh Inc., a calendar year taxpayer. Leigh's adjusted tax basis in the asset was $22,700, and the reimbursement from its property insurance company was $35,000. If Leigh wants to defer recognizing its $12,300 realized gain, it must replace the asset no later than December 31, 2019.

Which of the following statements about nontaxable exchanges is true?

V&P Company exchanged unencumbered investment land for farmland subject to a $200,000 mortgage. If V&P realized a $168,000 gain on the exchange, it must recognize the entire gain.

IPM Inc. and Zeta Company formed IPeta Inc. by transferring business assets in exchange for 1,000 shares of IPeta common stock. IPM transferred assets with a $675,000 FMV and a $283,000 adjusted tax basis and received 600 shares. Zeta transferred assets with a $450,000 FMV and a $98,000 adjusted tax basis and received 400 shares. -Compute IPM and Zeta's realized and recognized gain on the exchange.

Tax neutrality for asset exchanges is the exception rather than the rule.

A taxpayer who receives or pays boot in a nontaxable exchange must recognize gain to the extent of the FMV of the boot.

A flood destroyed a business asset owned by Boochi Company. Boochi's adjusted tax basis in the asset was $87,100. Six months after the flood, Boochi used its $100,000 insurance settlement to replace the asset. Boochi can recognize a $12,900 gain or it can elect to defer gain recognition.

The tax basis in property received in a like-kind exchange in which no gain or loss is recognized is a:

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. -Compute M&W's recognized gain on its exchange of an equity interest for property and determine M&W's tax basis in the property received from Mrs Brinkley.

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. -Which of the following statements is true?

A corporation's tax basis in property received in exchange for corporate stock depends on whether the exchange was taxable or nontaxable to the transferors of the property.

Thieves stole computer equipment used by Ms. James in her small business. Ms. James' tax basis in the equipment was zero. One month after the theft, she received a $17,600 reimbursement from her casualty insurance company and used $14,850 to replace the computer equipment. She used the $2,750 remaining reimbursement to purchase a new desk for her office. Which of the following statements is false?

Mr Slake sold 1,580 shares of publicly traded DDL stock (tax basis $49,240) for $40,000 cash on February 13. He paid $43,000 cash to purchase 1,600 DDL shares on March 2. Compute Mr Slake's loss recognized on the February 13 sale and determine his tax basis in the 1,600 shares.

A fire destroyed furniture and fixtures used in Jock's business. Jock's adjusted basis in the furniture and fixtures was $81,300. Jock received a $100,000 reimbursement from his insurance company and immediately spent $93,000 to purchase new furniture and fixtures. How much gain or loss must Jock recognize on this involuntary conversion?