US Tax Code

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Q1 - Individual A sells a rental building, its office equipment, furniture and fixtures, and its

land to Individual B. Individual A realizes gain on the sale of the building, equipment,

furniture and fixtures and land. Individual A rented the building to commercial tenants.

What is the character of the gain realized?

Solution

Individual A is the seller of the property while individual B is the purchaser. this transaction

involves the sale of property, which in this case is specified as a rental building, its office

equipment, furniture and its fixtures, and its land. Code 1001 on the determination of the amount

of and recognition of gain or loss applies in this case. Code 1001 (a) states that the calculation of

the gain or loss from a sale of property will be the surplus of the amount earned in that

transaction over the adjusted basis as specified in section 1011 for establishing gain as well as

the loss shall be the excess of the adjusted basis provided in such section for determining loss

over the amount earned. Character: since the building was a rental property for individual A

before the sale to individual B. The adjustments for such a property as outlined in section 1016

(a) touch on depreciation, depletion, amortization, expenditures, and receipts among other items

that affect the value of the property. Further, section 1001 (b) indicates that the amount earned

from the sale of the property is going to be the sum of any money received including the fair

market value of the property earned. In finding out the amount earned; the following are

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considered, reimbursement of real property taxes is not considered if they are to be settled.

Section 1001 (e) (3) states that other than as indicated above, the total amount of the gain or loss

ascertained under this section, on the disposal of the property will be recognized.

Q2. - 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?

The tax consequences of this exchange to

1) List of authorities relied upon:

Section 1031 outlines the rules and regulations outlined in the exchange of the property held for

productive use or investment. If the buyer gets property for cash, it is deemed that the property’s

basis is equivalent to the cash used to purchase it. Where the buyer gets property in a taxable

exchange involving non-cash property, the gained property’s basis is equivalent to its fair market

price.

2) Response:

Section 1031(a) (1) indicates that no gain or loss will be acknowledged where there is a swap or

interchange of property taken for productive use in a business or for purposes of investment

provided that such property is interchanged wholly for property of like kind that is to be for

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productive use in a business or for purposes of investment. Williams Tower is owned by Barb, an

apartment building. His corrected basis in Williams is $400,000 and is conditional a mortgage of

$ 260,000. In addition to the exchanged property, Barb shifts antique Jewelry worth $10,000. He

had a basis of $2,000 to Dan. Hence Jewelry to Dan will cover $8,000. Dan owns Portland Arms,

a commercial office building and is worth $800,000; the adjusted basis is $400,000 and is subject

to a mortgage of $350,000.

Tax consequences

The application of section 1031 leads to a tax deferment since the exchange is not a taxable

event. Barbs will not pay any tax at the time it is transferred to Dan under the provisions of

Section 1031. If an exchange is carried out as per the requirements of section 1031, the tax

consequences to Barb are as follows. The mortgage item during the exchange is agreed by the

providers. For Barb, he will incur an increase in mortgage (from $ 260,000 to $ 350,000) a loss

by $90,000. It is as if during the exchange Barb lost $90,000 and that must be recognized as a

loss in kind under section 1031(c), however since there was an exchange of jewelry it is

considered as other property, then no loss from this exchange will be recognized.

b) What are the tax consequences of this exchange to Dan?

1) List of authorities relied upon:

Where the buyer gets property in a taxable exchange involving non-cash property, the gained

property’s basis is equivalent to its fair market price. Where there is another property involved

other than the one specified in the provisions of Section 1031, a gain or loss that to be

recognized, and tax applies.

2) Response:

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Section 1031 (b) provides that if an exchange is done as per the requirements of section 1035 (a),

1031 (a) and 1036 (a) as well as 1037 (1), if there is another property involved other than that

permitted by such requirements, then the gain, if any to the receiver must be acknowledged,

however in an amount not beyond the sum of such gain and the fair market value of such

additional property. Barb shifts antique Jewelry worth $10,000 to Dan. Barb had a basis of

$2,000 to Dan. Technically, under the provisions of section 1031, this is treated as a cash receipt

and it is taxable upon receipt. The application of section 1031 leads to a tax deferment since the

exchange is not a taxable event. Dan will not pay any tax on the transfer of property at the time it

is transferred to Dan under the provisions of Section 1031.

Question 3

There are numerous provisions in the Code that treat transactions between related parties

differently than transactions between unrelated parties. Note two 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.

Solution

Any transactions either between related parties or different parties is usually subject to a

lot of scrutiny because of the internal revenue code due to complexities that may arise due to

legalities in such transactions. Swaps, be it business or property, are not a usual thing in the

United States, and people point out to code 1031, even though in this code there is no limitation

of such transactions in section (f) of this code. In this regard most transactions tend to be of

unrelated parties.

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With regards to the related and unrelated parties’ transactions, there are provisions that

govern such transactions. These codes are provided in code 1031 (f)(1) and code (f)(2), and they

are as stated below:

a. As per the related party swap pact and the partitions therein.

b. The recognitive nature of the transaction(s) involved based on the gain or loss expected to be

incurred by the taxpayer.

In this provision, there is a constrain for any dickering between a tax payer and the other parties

involved. Also, the aspect of tax avoidance is captured in code 1031 based on the type of

nonrecognition transactions involved by the tax payer and the other party, either related or not.

c. If the transaction(s) involves shift of any footing of the property involved in the

transaction(s).

In this provision, what is highlighted is the party involved in purchase or sell of a property and

how it aims at paying minimal or low taxes on the bases of shifting of property. Due to code,

section 121, the is a constrain of avoidance of paying tax. Time is critical in this provision.

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Works Cited

U.S. Tax Law: Internal Revenue Code . (2015, July Friday). US Federal Income Tax Law

(Section Code). Retrieved June Tuesday, 2018, from www.cpaclass.com:

http://cpaclass.com/tax-accounting/tax-law/internal-revenue-code/section-index/tax-code-

index.htm

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