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Looking a Gift Horse in the Eye, a S 1031 exchange.

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Looking a Gift Horse in the Eye.

Walter rarely sees his uncle George because George is a devoted world traveler. On January 15,2011, Walter received an envelope that George had mailed to him from Singapore on December 13,2010. The envelope contained a Christmas card from George and 1,000 shares of stock of lavender, inc. in October 2011 Walter decides to pay off credit card debt and buy a new car so he sells the stock for 45,000. In early April 2012, the accountant who is preparing Walter's tax return tells him that he needs to know his uncle's adjusted basis for the stock and the amount of any gift tax paid. Since Walter is unable to contact his uncle by April 15,2012, he requests a filling extension on form 4868. He sends a letter to uncle George requesting this information and thanking him for the gift. Walter is able to ascertain from a stock service that during the past 10 years the stock price has ranged from $10 to $50 per share. On August 10,2012, uncle George unexpectedly calls from Florence. He says he has not filed any type of federal tax return in years. He thinks he won the stock in a poker game in Monaco about 15 years ago when another player used it to cover a $15,000 bet. Walter wants to file his tax return by the October 15,2012 due date. He does not think is a good idea to tell the return preparer how his uncle acquired the stock or about his uncle not filling income returns. Consequently, he tells the accountant that his uncle's basis for the stock is 15,000 and that that no gift taxes were paid. The return is completed and filed with a schedule D reporting a long-term capital gain of $30,000 from the sale of the lavender stock.

Discuss the key factors that should be considered when determining gains and loss on the sale of stock.

Evaluate Walter's actions in terms of ethics.

Discuss the consequences (positive and negative) of Walter's actions.

A Delayed S 1031 Link-Kind Exchange.

Roy owns an office building (adjusted basis of $250,000) that he has been renting to a group of physicians. Due to conflicts over repairs, maintenance, and rent increases, the physicians offer to purchase the building for $700,000. Roy accepts the offer with the stipulation that the sale be structured in part as paid to a qualified third-party intermediary on the closing date of September 30,2011. On October 2,2011,Roy properly identifies as office building that he would like to acquire. Unfortunately, on November,10,2011, the property selected is withdrawn from the market. On the same day, however, Roy identifies another office building. The purchase of this properly closes on December 15, 2011, and the title is transferred to Roy. Roy treats the transaction as 1031 like-kind exchange. Acquired, Roy concludes that in substance he has satisfied the 45-day rule. He identified the acquired office building as soon as the negotiations ceased on his first choice.

- Discuss the key factors that should be considered when determining like-kind exchanges.

- Assess the merits of Roy's decision.

- Discuss the consequences (positive and negative) of Roy's actions.

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Solution Preview

-Discuss the key factors that should be considered when determining gains and loss on the sale of stock.

There are a few things we need to look at, and they're pretty cut and dry as far as the tax laws are concerned. When a taxpayer determines the basis of the stock, it's based on what was paid for the shares less any expenses to maintain the shares. The sale price is then listed as the sale price and the gain/loss is the difference between the adjusted basis (cost) minus the sale price. There typically are no fees to sell stock so this wouldn't be an issue, however if there are, they're usually taken on Schedule A as investment expenses and they do not come off the sale price of the stock. Here is a good IRS publication for determining the basis/cost of assets, including stocks: http://www.irs.gov/publications/p551/ar02.html

-Evaluate Walter's actions in terms of ethics.

His actions aren't ethical or legal. He can't legally do what he's doing. The basis is completely incorrect. His uncle did not have a $15,000 basis. The fair market value of the stocks was $15,000. You can't just turn that into a basis when there isn't a basis. His uncle's basis is zero. His uncle gave him the stocks and as such, this would be ...

Solution Summary

This solution discusses each question in the following case: Looking a Gift Horse in the Eye, a Section 1031 exchange.