77: STRIKES ME
AS A B+
GRADUATING SENIOR
Exam #2141
Question #1
Class Life = 7 years
Property = 5-year property per 168(e)(1)
Recovery Period = 5-years per 168(c)(1)
Depreciation Deduction
Year 1: $43,000
Year 2: $68,800
Year 3: $41,280
Year 4: $24,768
Year 5: $24,768
Year 6: $12,384
If Father purchased the machine and placed it into service by the end of this year, then a
mid-quarter convention replaces the mid-year convention, and the property is treated as it
was purchased on November 15, 2001
$43000 x ¼ = $10,750
2001 AGI = $150,000 - $10,750 = $139,250
2002 AGI = $150,000 - $68,800 =$81,200
However, if the aggregate bases of property placed in service during the last 3 months of
2001 does not exceed 40 percent of the aggregate bases of property placed in service
during 2001, then the half-year convention applies, and the property is treated as it was
purchased on Jul 1, 2001.
Then,
2001 AGI = $150,000 - $43,000 = $107,000
2002 AGI = $150,000 - $68,800 =$81,200
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Question #2
It depends on if an election is made or not in 2000.
2000 – No Election
In 2000 there would have been a deduction of $65,000 with a carry-over of $15,000
capital gain real property to a Public Charity. In 2001 there is a $9,000 deduction, and a
carry-over of $1,000 of real property to a Private Charity, as well as, the carry-over from
the previous year of $15,000 capital gain real property to a Public Charity.
2000 – Election
In 2000 there would have been a $25,000 deduction with no carry-over. In 2001 there is
a $9,000 deduction, and a carry-over of $1,000 of real property to a Private Charity.
Question #3
a. TP’s lawn furniture is a capital asset per 1221. However, because the disposition
of the lawn furniture was not a result of a sale or exchange, TP has an ordinary
loss of $3,000 per 165(c)(3) but limited by 165(h).
b. Stock is a capital asset per 1221. He held the stock for more than 1 year. TP has
a long-term capital gain of $13,000.
c. Stock is a capital asset per 1221. TP’s basis in the stock was the fair market value
at the date of his brother’s death per 1014, which equaled $100,000. He held the
stock for more than one year. Therefore, he sustained a long-term capital loss of
$100,000.
d. Assuming he does not use the lawnmower in a trade or business, there are no tax
consequences from this transaction. There is no depreciation calculation because
the property was not used in a trade or business nor was it held for the production
of income.
On the other hand, if the lawnmower was used in a trade or business, then we
need to know more facts. We need to know what his basis in the lawnmower was.
We need to know if he depreciated the lawnmower. If the lawnmower was
depreciated, we then need to know when the lawnmower was purchased, and its
recovery period to determine the depreciation. Furthermore, if the lawnmower
was depreciated, we need to know by how much to calculate a 1245 recapture of
depreciation. On the other hand, we need to know whether there was a 179
expense election. If the lawnmower was used in a trade or business, it would be a
1231 asset.
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e. If TP loans money as a trade or business, he is allowed an ordinary deduction of
$5,000 per 166(a)(1) and 165(c)(1). If the loan was a non-business loan, TP has a
$5,000 short-term capital loss, per 166(d)(1)(B) and 165(a).
f. I don’t know. We need to know more facts. We need to know what the
machine’s basis is. We need to know the recovery period of the machine in order
to calculate the depreciation, and to determine the 1245 recapture of depreciation.
I assume he was able to elect the maximum expense amount of $18,500 in 1998,
per 179 because he “took the maximum deductions allowable on the machine.”
The property is a 1231 trade or business property. Because he sold the machine
for more than what he paid, the machine is put into the Hotch Pot, and assuming
this is the only 1231 property that was disposed of the gain will be a capital gain
(assuming he did not dispose any other trade or business property in 2001).
However, if there is a 1245 recapture of depreciation, then the capital gains will
convert into ordinary gains.
Question #4
Husband’s Tax Consequences
The $100,000 cash payment will be treated as an excess alimony payment in year 1.
Husband is allowed a deduction in year 1 of $100,000. However, in the 3rd postseparation year the husband will have to include $85,000 as gross income per 71(f)(1).
Obviously, the $2,000 per month for 110 months are cash payments. The payments are
received by the wife pursuant a marriage settlement agreement. The payments are NOT
contingent on anything related to a child. The husband has no liability to make any such
payments for any period of time after the death of his wife. Therefore, the $2,000 per
month for 110 months will be treated as alimony per 71. Husband will be able to deduct
the payments per 215. I assume they will no longer live in the same household.
Because the $1,000 per month payment will be reduced on the happening of the child
reaching the age of nineteen, that amount will be treated as an amount fixed as payable
for the support of the child. Therefore, the husband cannot deduct the child support
payment per 215. Furthermore, although the payments are to cease on the death of his
wife, if his wife dies, he is still obligated to support his child until the age of nineteen.
Because husband is transferring the mineral rights in the 640 acres of land to his wife
incident to a divorce. The transfer is related to the cessation of marriage because it is
contemplated by the marriage settlement agreement. Per 1041, the husband does not
recognize any gain on the transfer.
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Wife’s Tax Consequences
The wife will have to include the excess alimony payment of $100,000 as gross income
for the first year. However, in the 3rd post-separation year the wife will be allowed a
deduction of $85,000 as gross income per 71(f)(1).
The wife will have to include the alimony payments in her gross income per 71(a).
The wife does not have to include in the child support in her gross income per 71(c).
Per 1041, the wife’s basis in the mineral rights is what the husband’s adjusted basis was
prior to the transfer (.40 of $50,000 = $20,000). Furthermore, the wife does not have to
recognize any income because the property is treated as a gift per 1041(b)(1).
Question #5
Your Tax Consequences
None
Mother-in-Law’s Tax Consequences
Because you are not considered a part of your mother-in-law’s family per 108(e)(4)(B),
by you purchasing her debt, and assuming your mother-in-law is solvent, $10,000 in
income is produced to your mother-in-law, per U.S. v. Kirby Lumber Co because she has
an accession to wealth due to a “freeing assets.” However, if your mother-in-law is
insolvent, the $10,000 will be excluded from her income per 108(a)(1)(B), limited to your
mother-in-law’s insolvency (her liabilities exceeding the fair market value of her assets)
per 108(a)(3).
The reduction of the interest rate from 15% to 6% will be treated as a gift per 102.
Because we are dealing with your mother-in-law, the primary purpose of dropping the
interest rate is assumed to be a detached and disinterested generosity (Commissioner v.
Duberstein). Therefore, the reduction of the interest rate will not produce any income to
your mother-in-law.
Neighbor’s Tax Consequences
The neighbor may be entitled to a deduction. If the neighbor loans money as a trade or
business, he is allowed an ordinary deduction of $10,000 per 166(a)(2) and 165(c)(1). If
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the loan was a non-business loan, TP has a $10,000 short-term capital loss, per
166(d)(1)(B) and 165(a).
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