Exam 9: Nontaxable Exchanges

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

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.

A partnership always takes a carryover basis in property received from a partner in exchange for an equity interest in the partnership.

In March, a flood completely destroyed three delivery vans owned by Totle Inc. Totle's adjusted tax basis in the vans was $48,900. Totle received a $90,000 reimbursement from its property insurance company, and on September 8, it purchased one new delivery van for $70,000. Compute Totle's recognized gain or loss on the involuntary conversion and its tax basis in the new van.

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.

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?

A taxpayer who realizes a loss on the exchange of like-kind property can elect to recognize the loss.

Grantly Seafood is a calendar year taxpayer. In 2015, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2015, Grantly received a $1 million reimbursement from its insurance company. On May 19, 2016, 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.

Tanner Inc. owns a fleet of passenger automobiles that it would like to dispose of in a nontaxable exchange. Which of the following would qualify as like-kind property?

Acme Inc. and Beamer Company exchanged like-kind production assets. Acme's asset had a $240,000 FMV and $117,300 adjusted tax basis, and Beamer's asset had a $225,000 FMV and a $168,200 adjusted tax basis. Beamer paid $15,000 cash to Acme as part of the exchange. Which of the following statements is true?

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

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 or loss on the involuntary conversion and its tax basis in the new furniture.

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

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?

On January 21, 2005, Andy purchased 350 shares of Baker common stock for $24,500. On November 13, 2015, he sold the 350 shares for $7,250. On December 1, 2015, Andy purchased 350 shares of Baker common stock for $8,000. What is Andy's basis in these shares?

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

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.

Mr. Jamail transferred business personality (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?

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.