Property Transactions

Question 1

A calendar-year taxpayer purchases a new business on July 1. The contract provides the following price allocation: customer list, $100,000; trade name, $50,000; goodwill, $90,000. What is the amortization deduction for the current year?

Answer 1

$8,000
This answer is correct.
Intangible assets make up the majority of amortizable assets and are recovered over the asset’s useful life or, in the case of Sec. 197 intangibles, 15 years. The intangibles are worth a total of $240,000 ($100,000 customer list + $50,000 trade name + $90,000 goodwill). The yearly amortization expense is $16,000 ($240,000 ÷ 15 years). Because the assets were purchased on July 1, only 6 months worth of amortization should be taken this year. The amortization deduction for the current year equals $8,000 [$16,000 × (6 months ÷ 12 months)].

Question 2

Cheryl sold a boat, which had cost her $3,600, for $6,000. The boat was not used in a trade or business or held for rent. Cheryl accepted a $1,800 down payment and an installment obligation calling for 30 monthly payments of $140, plus interest. After receiving 8 months’ payments, Cheryl sold the installment obligation for $2,500. What was Cheryl’s gain or loss on the disposition of the installment obligation?

Answer 2

$652
This answer is correct.
Section 453B provides that, when an installment obligation is disposed of, gain or loss is recognized to the extent of the difference between the basis of the obligation and the amount realized (or the fair market value of the obligation if disposed of other than by sale or exchange). The adjusted basis of the obligation is equal to the face amount of the obligation reduced by the gross profit that would be realized if the holder collected the face amount [Sec. 453B(b)]. The face amount is $3,080 [$6,000 sale price – $1,800 down payment – ($140 monthly payments × 8 months)]. The basis is $1,848 [$3,080 face amount × (100% – 40% gross profit percentage)].
Since Cheryl sold the installment obligation, the excess of the amount realized over Cheryl’s basis in the obligation is recognized as income on the transfer. This amount of income is $652 ($2,500 amount realized – $1,848 basis). The gain is treated as resulting from the sale or exchange of the property in respect of which the installment obligation was originally held.

Question 3

A beneficiary acquired property from a decedent. The fair market value at the date of the decedent’s death was $100,000. The decedent had paid $130,000 for the property. Estate taxes attributed to the property were $2,000. The beneficiary sold the property 2 years after receipt from the estate. What is the basis of the property for the beneficiary?

Answer 3

$100,000
This answer is correct.
Basis is the FMV on the date of death or 6 months after if the executor elects the alternate valuation date for the estate tax return.

Question 4

Oliver, a widower who does not live in a community property state, sold 50 acres of land he and his wife had paid $10,000 for in 1999. She died in 2009. As of the date of her death, the land was valued at $50,000 for estate tax purposes. Oliver sold the land for $100,000 on an installment basis. What is his gross profit percentage?

Answer 4

“A qualified joint interest is any interest in property held by husband and wife as either of the following:

Tenants by the entirety.
Joint tenants with right of survivorship if husband and wife are the only joint tenants.
As the surviving spouse, your basis in property you owned with your spouse as qualified joint interest is the cost of your half of the property with certain adjustments. Decrease the cost by any deductions allowed to you for depreciation and depletion. Increase the reduced cost by your basis in the half you inherited.” Thus, Oliver’s adjusted basis at the time of sale is $30,000 [$5,000 + .50 ($50,000)]. His gross profit percentage, then, is 70% [($100,000 – $30,000) ÷ $100,000].