Income Taxation I
Spring
2005
Bogdanski
FINAL EXAMINATION
– PART TWO
(Two hours)
INSTRUCTIONS
This second part of the examination
consists of two essay questions, each of which will be given equal weight in
determining grades. Two hours will be
permitted for this part. At the end of
the two hours, you must turn in both this set of essay questions and your answers in the original
envelope in which this set came.
All answers must be entered in the
bluebooks you have been provided (or, for those operating computers, on
separate sheets of plain white paper or an approved type of computer floppy
disk). No credit will be given for
anything written on this set of questions.
Pay close attention to the final
portion, or “call,” of each question.
Failure to respond to the matters called for will result in a low score
for the question. On the other hand,
discussion of matters outside the scope of the call of the question will not
receive credit.
Be sure to explain as thoroughly as
possible your answers to the questions posed.
Your reasoning, discussion, and analysis are often as important as any
particular conclusion you reach.
The suggested time limit for each
question is one hour. Experience has
shown that failure to budget one's time according to this limit can result in a
drastic lowering of one's overall grade on this examination.
Unless otherwise expressly
instructed, assume that all taxpayers described in the questions are
individuals, and that they report their income on the cash method and the
calendar year for federal income tax purposes.
Any references to the “Code” mean the Internal Revenue Code of 1986, as
amended.
QUESTION
ONE
(One hour)
Terry owns Blackacre, a parcel of
commercial real estate that he rents out to several retail businesses. Terry purchased Blackacre several years ago,
at an original cost of $1,000,000. Over
the years, Terry has properly taken $100,000 of depreciation deductions with
respect to Blackacre. He has made no
improvements to the property.
Blackacre’s fair market value is now $1,200,000, but it is encumbered by
a first mortgage, securing the loan that Terry used to buy Blackacre. The current outstanding balance on the loan
is $400,000, so that Terry’s “equity” in the property is $800,000.
Terry is approached by Darlene, a
real estate dealer, who wants to acquire Blackacre. Terry and Darlene enter into an exchange,
wherein Terry receives Whiteacre from Darlene and Darlene takes Blackacre
subject to the mortgage. At the time of
the exchange, Whiteacre, a large parcel undeveloped land, has a fair market
value of $800,000; Terry takes it free and clear of any mortgages or
encumbrances. Terry plans to hold
Whiteacre for investment.
In the negotiations with Darlene
about the exchange, Terry is represented by a real estate agent, Andrea. Terry pays Andrea a fee of $25,000 for her
services in connection with the transaction.
A few days after he pays Andrea’s
fee, Terry receives from Andrea a new laptop computer, along with a note that
says, “It was a real pleasure working with you.
I appreciate our relationship, and I hope we will stay in touch as
friends.” Andrea bought the computer
from her cousin, a computer dealer, for $600; the cousin normally sells
identical computers to customers for $900.
What are the federal income tax
consequences to Terry of each of the transactions just described,
with and without all available
elections? Be sure to discuss the
amount, timing, and character (ordinary or capital) of each item of income, gain, deduction, loss, or credit, and Terry’s
basis in his assets, at each stage of
the transactions.
Discuss.
(End of Question 1)
QUESTION TWO
(One hour)
Wendy and her husband, Hollis, get a
divorce. Wendy gets custody of the
couple’s only child, Chris. Chris is a
toddler with no means of support other than Wendy and Hollis. Hollis gets the right to visit with the child
three weekends a month.
The divorce decree incorporates a
detailed settlement agreement that Wendy and Hollis signed, setting forth their
rights against each other. In
negotiating the agreement, the couple spent a great deal of time discussing the
level of “spousal support” that Hollis
must pay to Wendy. The agreement
contains the following terms:
1. Wendy
will receive $100,000 worth of Hollis's separate property, consisting of:
$30,000 cash; and an interest in a partnership in which Hollis is a silent
partner. The partnership interest has a
fair market value of $70,000; Hollis's adjusted basis in the partnership interest
is $15,000.
2. Hollis
will pay Wendy's tuition as she goes back to school to learn to become a
pharmacy technician.
3. Hollis
will pay $6,000 a year to Wendy for the support of Chris, until Chris reaches
the age of 18.
4. Hollis
will pay “spousal support” of $12,000 a year to Wendy for five years. If Wendy dies or remarries during the
five-year period, Hollis no longer has to make the “spousal support” payments. If Chris dies during the five-year period,
the “spousal support” payments will be reduced to $8,500 a year.
The
agreement says nothing about the tax consequences of any of the transactions
outlined in it.
Wendy pays her attorney a fee of
$3,000 for representing her in the divorce and advising her on the tax
consequences thereof.
What are the federal income tax
consequences to Wendy of each of the transactions just described,
with and without all available
elections? Be sure to discuss the
amount, timing, and character (ordinary or capital) of each item of income, gain, deduction, loss, or credit, and Wendy’s
basis in her assets, at each stage of
the transactions, including (without limitation) all of the transactions
described in the settlement agreement.
Explain.
(End of examination)
Created by: <bojack@lclark.edu>
Update: 01 Jun 05
Expires: 31 Aug 06