Exam 9: Nontaxable Exchanges

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

Nixon Inc. transferred Asset A to an unrelated party in exchange for Asset Z and $15,750 cash. Nixon's tax basis in Asset A was $400,000, and Asset Z had a $510,000 appraised FMV. Which of the following statements is true?

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?

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. 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?

Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W Inc. in exchange for 4,200 shares of M&W stock. Immediately after the exchange, M&W had 7,800 shares of outstanding stock. Compute M&W's recognized gain on its exchange of stock for property and determine M&W's tax basis in the property received from Mrs. Brinkley.

A taxpayer who exchanges property for an interest in a partnership never recognizes gain or loss on the exchange.

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.

Teco Inc. and MW Company exchanged like-kind production assets. Teco's asset had an $80,000 FMV and $53,900 adjusted tax basis, and MW's asset had an $87,500 FMV and a $28,100 adjusted tax basis. Teco paid $7,500 cash to MW as part of the exchange. Which of the following statements is false?

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.

Which of the following statements about the inclusion of boot in a nontaxable exchange is false?

Texark Inc., a calendar year taxpayer, reported $5,210,300 net income before tax on its financial statements prepared in accordance with GAAP. The corporation's records reveal the following information. Depreciation expense per books was $713,700, and MACRS depreciation was $662,000. Texark exchanged old equipment (-0- tax basis; $44,200 book basis) for new equipment (FMV $50,000). Book gain was included in book income, although the exchange was nontaxable for tax purposes. Texark received a $100,000 insurance reimbursement for the destruction of machinery with a $29,000 tax basis and a $70,000 book basis. Texark spent $110,000 to replace the machinery before year-end. Compute Texark's taxable income.

On May 13, 2010, a flood destroyed the building in which SDF Inc. manufactured its product. SDF's adjusted tax basis in the building was $984,000. On November 29, 2010, SDF received a $1.2 million reimbursement from its casualty insurance company. In each of the following cases, compute SDF's recognized gain on this involuntary conversion and its initial basis in the replacement property. a. On June 2, 2011, SDF completed construction of a replacement building for $1.3 million. b. On February 18, 2013, SDF paid $1.3 million to purchase a replacement building. c. On August 30, 2012, SDF paid $1.1 million to purchase a replacement building.

In April, vandals completely destroyed outdoor signage owned by Renfru Inc. Renfru's adjusted tax basis in the signage was $31,300. Renfru received a $50,000 reimbursement from its property insurance company, and on August 8, it paid $60,000 to replace the signage. Compute Renfru's recognized gain on loss on the involuntary conversion and its tax basis in the new signage.

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?

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?

Three individuals transferred property to newly formed Triple Inc. in exchange for 1,000 shares of common stock. Mr. Albert transferred assets with a $50,000 tax basis in exchange for 820 shares, Mrs. Billig transferred assets with a $9,000 tax basis in exchange for 148 shares, and Mrs. Crisp transferred $4,000 cash for 32 shares. Based on the FMV of the transferred assets, each Triple share is worth $125. Which of the following is false?

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?

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

Grantly Seafood is a calendar year taxpayer. In 2010, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2010, 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?