(2) In 1994, Eustacia partly sold and partly gave 1,000shares of X stock to Columbia University, her favorite charity.The stock was worth $25,000, but Eustacia sold it to Columbia foronly $15,000, which was exactly what she had paid for it someyears earlier. Eustacia properly took a deduction of $10,000($25,000 - $15,000) for her charitable contribution, but alsoreported $6,000 of capital gain on the sale element. A briefnote from her accountant informed Eustacia that the $6,000taxable gain was mandated by Code § 1011(b) and Regs. § 1.1011-2(c), Example (1).(3) In 1995, Eustacia partly sold and partly gave 1,000shares of Y stock to her adult nephew, Clym. The Y stock wasalso worth $25,000 and had also been purchased by Eustacia for$15,000 at an earlier time. Clym paid Eustacia $15,000 for thestock. Eustacia reported no gain or loss from the transactionwith Clym. Once more, a note from her accountant advisedEustacia that Regs. § 1.1001-1(e), Example (3), provided therelevant legal authority.Assured that the returns were correctly prepared (indeed,each return was audited by the IRS and found to be correct),Eustacia asks you to explain why the three outcomes differ fromone another and to say whether you regard the differences asjustified given the present structure of our tax system. What'syour answer?
Henchard bought a movie theatre in the suburban Town of Zsome years ago at a cost of $1,000,000, paying the seller allcash for the property. He properly deducted depreciation of$300,000 during the period of his ownership. Last year the Townamended its code of fire-safety regulations to require that movietheatres widen their aisles by 3 feet and attach floor-illuminating lights to the aisle seats. Henchard figured hewould need $150,000 to cover the cost of these changes andborrowed that amount from a local bank. The loan, payable ininstallments over a period of years, was secured by a nonrecoursemortgage on the theater. Henchard then entered into an agreementwith a contractor to tear out seats and put in lights in order tomeet the new fire code requirements. To Henchard's greatsatisfaction, the entire cost of the work, which was completed indue course, came to only $95,000.Instead of paying the contractor's bill, however, Henchardpromptly sold the movie theatre to Farfrae, an up-and-comingbusinessman, receiving $965,000 in cash. The bank mortgage -- towhich the property remained subject -- had been reduced to$145,000 at the time of the sale. Finally, Farfrae assumed, and