1)
Peter
Piper purchased a parcel of land for $20,000 and constructed an apartment
building on it at a cost of $380,000 (total basis in land and building =
$400,000). He paid the entire purchase price and construction costs with
the proceeds of a nonrecourse loan that was secured by a mortgage on the
property. Two years later, when Peter’s basis in the land and apartment
building was $360,000 (due to $40,000 of depreciation on the building), the
fair market value of the land and building was $500,000 and the outstanding
balance on the mortgage was still $400,000, Peter sold the land and building,
subject to the mortgage, to Betty Boop for $100,000 in cash. As part of
the transaction, Betty assumed the mortgage.
a)
How much
gain or loss must Peter recognize? What is its character? What is Betty’s
basis in the property?
b)
What
would be the tax consequences (gain/loss and character) to Peter if instead of
selling the land and apartment building, he gave it to his daughter, Paula
(subject to the mortgage)? What would be Paula’s basis in the property?
2.
Individual A received $10,000 in cash from B. What is the federal income tax effect to A?
Hint:
Clearly, this is an open ended question. Not expected to address all possible scenarios. What are important are the thought process
and the ability to support any points that are raised.
Please see sample on how to answer question attached. Thank you!
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Harry Hinke is a TV cameraman for Earthwide Sports Presentations Nightly. While Harry was
covering a professional basketball game from courtside, the Cook Country Toro’s famous
basketball star, Denny Worm, ran out of bounds, tripped over a chair, knocked Harry down,
and stepped on him, severely injuring Harry. Harry retained well known plaintiff’s lawyer
Willie Gingrich to sue Toros, Inc., the team owner, for negligently placing the courtside
chair. After trial, a judgment for $1,000,000 was entered against Toros, Inc. What are the tax
consequences to Harry upon the payment of the judgment?
The tax consequences to Harry depend on what the payment represents. What is the “origin of the
claim?” We would want a breakdown as to whether the proceeds represented damages, lost wages,
punitive damages, etc.
The amount received is clearly realized income. That is, per Glenshaw Glass, the receipt is an accession
to wealth, clearly realized over which the taxpayer has dominion. Realized income is recognized (i.e.,
included in taxable income) unless there is some provision excluding it (or allowing for nonrecognition or
deferral). See Treas. Reg. section 1.61-1(a).
To the extent the judgment represents compensation for damages for the personal physical injuries
suffered by Harry, they qualify for exclusion under Code section 104(a)(2).
To the extent that the judgment relates to punitive damages or lost wages, the “origin of the claim” is not
in the personal physical injury and the Code section 104 exclusion does not apply. See, e.g., Treas. Reg.
section 1.61-14(a) [regarding punitive damages] and Code section 61(a)(1) [regarding wages]. Such
amounts would be recognized as ordinary income.
To the extent that the judgment relates to damage to capital, the receipt is treated as a return of capital
(which could result income recognition if in excess of basis – see the Raytheon case). However, the facts
do not set forth any injury to capital.
…
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