Exam 9: Nontaxable Exchanges

Lorch Company exchanged an old asset with a $120,700 tax basis and a $155,000 FMV for a new asset with a $142,250 FMV and $12,750 cash. a.If the old asset and the new asset are like-kind properties,compute Lorch's realized and recognized gain and Lorch's tax basis in the new asset. b.How would your answers change if the new asset is worth only $116,000,and Lorch received $39,000 cash in the exchange?

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.

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

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.

Mrs.Cooley exchanged 400 shares of stock for corporate bonds.If the stock and bonds were issued by the same corporation,they are like-kind properties,and the exchange is nontaxable.

Toffel Inc.exchanged investment land subject to a $240,000 mortgage for unencumbered farmland.If Toffel realized a $168,000 gain on the exchange,it must recognize the entire gain.

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

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?

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?

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

The substituted basis rule results in permanent nonrecognition of gains and losses realized in a nontaxable exchange.

Yelano Inc.exchanged an old forklift used in its business for a new forklift.This like-kind exchange is nontaxable.

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

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?

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.

If a taxpayer elected to defer a $13,000 gain realized on an involuntary conversion,the tax basis of the taxpayer's replacement property equals the cost of the property less $13,000.

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.Determine Loonis and Rhea's tax basis in their LooNR stock and LooNR's aggregate tax basis in the transferred assets.

Vandals destroyed a business asset owned by L&L Company.L&L's adjusted tax basis in the asset was $60,800,and the reimbursement from its property insurance company was $90,000.L&L must pay at least $60,800 for a replacement asset in order to defer gain recognition on the involuntary conversion.

In June,a fire completely destroyed office furniture owned by W&S Inc.W&S's adjusted tax basis in the furniture was $17,040.W&S received a $15,000 reimbursement from its property insurance company,and on August 8,it paid $16,000 to replace the furniture.Compute W&S's recognized gain on loss on the involuntary conversion and its tax basis in the new furniture.

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.