Concepts Federal Income Tax

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Concepts Federal Income tax

Q1. The income tax consequences to Courtney

A. According to Code section 61(a) (12), the bank will purchase the building that is the

collateral and income tax will be charged for its purchase. The gross income that will be

derived from selling the apartment will be charged a federal income tax because it may

cost more than the principle that the bank intends to recover. The amount that the bank

should target to recover is the $100000 from the taxpayer because the machinery is worth

$50000. The $25000 that was adjusted from the current value of the machinery will be

taxed by the federal income tax code 61 (2)(12) The canceled debt will be $50000 because

the principal was not paid. Courtney’s net worth will be low when she loses the apartment

while the bank will be charged more for making a gain from the sale of the apartment.

B. The Code section 1245 of the federal income tax deals with personal assets either tangible

or intangible that is subject to depreciation. Courtney bought her machinery at $100000,

and after using it, its value dropped to $75000. When the adjusted basis is applied for its

recapture, it was worth $50000 loss when sold. In such cases, the federal income tax will

not be used since the gain from selling the asset is $0. If the machinery is sold at a higher

price, income tax under the code section 1245 will be applied and a taxed as a capital gain.

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C. Code section 108 applies when a debt is purchased for less than the debt owed to a debtor

or a bank, and it can be discharged. Under code section 108 Title 11, indebtedness of the

taxpayer is granted if taxpayers hold the property but are bankrupt. Insolvency acts when

the assets are sold to the market at a fair value whether or not the taxpayer is insolvent. In

title 11 of the section code 108 (a)(1)(A), exclusion takes precedence when the client is

bankrupt. A taxpayer must be subject to the jurisdiction of bankruptcy in a court. If the

cancelation is done before a bankruptcy filling in the court, the exclusion will fail, and the

cancelation of debt income (COD) will be taxed. The debtor will be considered to have a

debt cancelation of $100000 without considering the interest that was paid to the bank

because they should have made some gain from the loan before going bankrupt.

Under code section 108(a)(1)(B), relief from indebtedness denies the debtor from

acquiring an asset in exchange for what they previously possessed. A discharged

insolvency will not be satisfied if the debt exceeds the value of the assets surrendered. In

the publication 4681, the taxpayer will test and prove their bankruptcy and insolvency, the

cancelation date will be provided. Courtney’s should have a value less than $100000 for

the debt to be cancelled. Courtney’s assets are worth less than $100000 principal as her

machinery will be sold at $50000 in the market. The assets including collateral will get fair

market value, and they will be repossessed to compensate the debt.

Q2. Character of the gain realized

Code sections 1221: the code deals with taxation of capital assets owned by a taxpayer

whether used or not in business. The code, however, excludes stock that is not included in the

inventory, property used in the business that depreciates and are provided in section 167, other

assets like patents, designs, art, and letters of a memorandum. The code applies if there was an

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exchange of the assets and gain was realized, the taxpayer will be taxed. Let’s assume individual

A made a gain or a loss of $250000, he will pay a percentage of the gain made as stipulated by the

constitution.

Code section 1231: the federal income tax under this section deals with assets that

individuals have possessed for over one year. The income tax applies when the person sells the

assets within the first nine months of a taxable year after 1977 or six months before 1977. The sale

and disposition of assets by a taxpayer that has been in their possession for more than six months

are considered long-term gains. When the assets are disposed of, the taxpayer can make losses or

profits which are treated as ordinary gains and losses. Some noncapital assets under section

1231(b) are business real estate and depreciable business property which do not include artistic

property, stock in trade and some copyrights. When the gains exceed the losses, chapter I of code

1231 treats them as long-term capital gains while if the losses exceed the losses, they are treated

and taxed as ordinary gains and losses under chapter II of code section 1231. The code section

1231 section will impose a percentage taxation of the profits or loss of the gain realized.

Code section 1245: it deals with exchange or sale of goods that are subject to depreciation.

When the assets are sold, they have a recalculated price that takes care of the reduction. Land and

permanent structures are not included in this sector as they do not depreciate. The taxpayer comes

up with a fair market price following a recomputed basis and is taxed on the gin attained. Under

the code 1250: the taxpayers are taxed for selling depreciating assets and the tax is charged as per

the number of months they possessed them. Individual A made an ordinary gain under this code

and was taxed at ordinary income tax rates.

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Code section 197(f) (9), the taxpayer selling assets is entitled to amortization where they

get tax deduction relative to the number of years they possess them in 15 years. This code mainly

applies to tangible assets owned in partnership. Individual A sold the assets after some years and

will be taxed for the number of years he possessed the building.

Under the code section 127, the income tax applies to assets that are sold during a taxable

year where the income tax is charged relative to the value and type of asset. Individual A sold the

furniture in his office and was charged income tax for the capital gain realized. The taxpayer has

to provide a record of the gain or loss made, and if it is $250000, the code section 127 will apply

an allowable percentage tax on the gain.

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