Problem 1. Worth 25% of total exam grade:
Jack L. Hyde owns several small office buildings in which he rents space to doctors, dentists,
lawyers, and other professionals. Last year he sold two of his rental buildings. Hyde sold one of
building, Doctors’ Park, in which his basis was $400,000, for $450,000. Hyde sold the second
building, Lawyers’ Tower, for $470,000. Hyde’s basis in Lawyers’ Tower was $540,000. He had
owned both buildings for several years. Depreciation claimed by Jack was not accelerated or
otherwise subject to any recapture rules. In addition, Jack sold some of the valuable Eames
furniture used in the buildings. Jack’s original cost in the furniture was $100,000. Depreciation
of $70,000 was claimed over the years. The furniture was sold for $120,000. Hyde had no other
property transactions during the year.
(a) What was the character of Hyde’s gain and loss on the transactions described above?
1) List of authorities relied upon:
2) Response:
(b) How does the answer change if Hyde’s basis in Lawyers’ Tower, which he sold for $470,000,
was $490,000?
1) List of authorities relied upon:
2) Response:
(c) How does the answer to part (a) change if Hyde’s basis in Doctors’ Park was $490,000?
1) List of authorities relied upon:
2) Response:
(d) What would have been the character of the gain and loss in (a) if Doctors’ Park had been
held for only 11 months?
1) Authorities relied upon:
2) Response:
Problem 2 Worth 25% of total exam grade:
J.P., a wealthy investment banker, purchased an office building and underlying land (the property) for $2 million,
borrowing the entire purchase price from the Last Texas Savings and Loan. The loan is nonrecourse, secured by the
property, and constitutes “qualified nonrecourse financing” under § 465(b)(6). Principal and interest on the note are
payable over 20 years. J.P. did not invest any of his own money and did not devote any of his time to managing the
office building (he hired a management company to take care of the business).
In the first year of operations, the results for J.P. are as follows:
Rental income
Interest paid
Operating expenses
Depreciation
$270, 000
$210, 000
$50,000
$60,000
In addition to the interest payment, J.P. made a $20,000 principal payment on the note. J.P. has $800,000 of salary
income from his investment banking job and $80,000 of dividend income from the portfolio investments. J.P.’s
depreciation was not accelerated or otherwise subject to any recapture rules.
(a) To what extent may J.P. deduct his net $50,000 loss from the office building?
1) List of authorities relied upon:
2) Response:
(b) On the first day of the second year, J.P. sold the property. Because the value of the property exactly equaled the
$1,980,000 mortgage on the property, the buyer simply took the property subject to the mortgage, and J.P. received
no other consideration. What are the tax consequences of the sale to J.P. in Year 2?
1) List of authorities relied upon:
2) Response:
(c) Assume that instead of selling the property, J.P. receives in the second year $320,000 of rental income net all
expenses except for interest and depreciation. J.P. pays $22,000 loan principal, $200,000 of interest on the loan, and
depreciation is again $60,000. J.P.’s salary and dividend income are the same as in the first year. What are the tax
consequences of J.P.’s investment in the property in Year 2?
1) List of authorities relied upon:
2) Response:
(d) In part (a), what would be the tax consequence in Year 1 if J.P. also owned a second rental property that
produced $40,000 of income net of all expenses, including interest and depreciation?
1) List of authorities relied upon:
2) Response:
Problem 3 Worth 25% of total exam grade:
Barb owns Williams Tower, an apartment building. Barb’s adjusted basis in Williams is
$400,000 and it is subject to a mortgage of $260,000. Dan owns Portland Arms, a commercial
office building. It is worth $800,000 and is subject to a mortgage of $350,000. Dan’s adjusted
basis in Portland is $400,000.
Both Barb and Dan acquired their properties 5 years ago and depreciation was straight-line.
Barb and Dan exchange properties and, in addition, Barb transfers antique jewelry, worth
$10,000 in which she had a basis of $2,000 to Dan. Barb inherited the jewelry from her mother
many years ago. Each assumes the others mortgage (with the consent of the lenders).
a) What are the tax consequences of this exchange to Barb?
1) List of authorities relied upon:
2) Response:
b) What are the tax consequences of this exchange to Dan?
1) List of authorities relied upon:
2) Response:
Problem 4 Worth 15% of total exam grade:
As has been covered throughout this course, there are numerous provisions in the Code that treat
transactions between related parties differently than transactions between unrelated parties. Note
three provisions that would alter the tax consequences of transactions based on relationships.
Provide a brief description of how each provision works and what parties are affected.
Discuss the authorities within the body of the response itself.
a) Provision 1 Response:
b) Provision 2 Response:
c) Provision 3 Response:
Problem 5. Worth 15% of total exam grade:
The Clean Car is a sole proprietorship owned by Neil Perry. It operates out the parking lot of a
commercial property owned by Neil. This year, Neil made a number of expenditures as follows:
Wages to employees
$25,000
Waxes, soaps, etc.
$ 6,000
Licenses
$ 500
Parking fines
$ 600
Advertising
$10,000
Payments made to psychic to contact deceased father for business advice
$ 3,000
Legal fees to settle dispute with customer
$ 5,000
Legal fees to settle ownership dispute involving the parking lot
$15,000
New van
$35,000
Which of these expenditures may Neil deduct? Why are they deductible? If not deductible, how
should they be treated?
For each class of expenditure (you can group like expenditures together - just designate them),
provide:
1) List of authorities relied upon:
2) Response: