In 1998, Bob's personal residence, a single-family dwelling, is heavily damaged by an explosion, for which Bob was completely uninsured. The explosion was touched off by lightning; human conduct or negligence was not a factor. The fair market value of the house before the explosion was $250,000; after the explosion, $90,000. Bob's adjusted basis in the house before the explosion was $125,000.

Bob has been a radio disc jockey for many years. In 1998, his employer informs him that he is eligible for a promotion to a much higher-paid position, that of program director of his radio station. The new position entails substantial management duties that Bob has not performed in the past. In order for him to obtain the promotion, Bob must enroll, at his own expense, in management classes at a local private college. In 1998, Bob takes the classes and pays the $5,000 tuition out of his own pocket.

As part of his radio duties, Bob is required to serve as master of ceremonies at various concerts and dance parties sponsored by the station. At one of these events, a party for high school students, Bob gets drunk and begins making outrageous, politically incorrect jokes over the public address system. Incensed parents sue Bob for intentional infliction of emotional distress. Rather than lose his job and have his professional goodwill ruined, Bob pays the parents a settlement of $5,000 in 1998, and the lawsuit is quietly dropped.

Bob's adjusted gross income for 1998 is $100,000.

What are the federal income tax consequences to Bob in 1998 of the transactions just discussed? Be sure to deduct the amount, timing and character (ordinary of capital) of each item of income, deduction, loss and credit, and Bob's basis in the various assets he owns, at each stage of the transactions.

Discuss.

Thelma owns a parcel of real estate, Blackacre, an apartment complex which she uses in her rental business. Thelma inherited Blackacre from her mother in 1995, at a time when its fair market value was $500,000. At the time of her mother's death, the property was subject to a mortgage of $480,000, and Thelma took the property subject to the mortgage. The mother's basis immediately before her death was $465,000.

Over the last three years, Thelma has taken $50,000 of depreciation deductions on the building. Assume that this is the appropriate amount of depreciation allowable under the Code. She has made no improvements to Blackacre, nor has she made any other capital expenditures during that time.

In 1998, when the principal balance on the Blackacre mortgage is $470,000, Thelma gives Blackacre to her son, Scott. Scott takes the property subject to the mortgage.

Thelma also owns a parcel of rural real estate, Whiteacre, which she has been renting to a large agricultural company. On June 15, 1998, a local government condemns the land. The move is completely unexpected. Thelma's adjusted basis in Whiteacre immediately before the condemnation is $30,000. The government pays Thelma $100,000 for the land.

In September of 2000, for the purpose of replacing Whiteacre, Thelma purchases a 35-year leasehold interest in a theater in town. Thelma pays the existing tenant $40,000 for the leasehold interest. She then subleases the building to a different theater operator. Thelma makes no further replacement of Whiteacre.

What are the federal income tax consequences to Thelma in 1998 of the transactions just discussed? Be sure to deduct the amount, timing and character (ordinary of capital) of each item of income, deduction, loss and credit, and Thelma's basis in the various assets she owns, at each stage of the transactions.

Explain.

Created by: bojack@lclark.edu
Update: 02 Nov 00
Expires: 31 Aug 03