South Western Federal Taxation 2017 Essentials of Taxation Individuals and Business Entities 20Th Edition Raabe Solutions Manual Full Chapter PDF

South-Western Federal Taxation 2017
Essentials of Taxation Individuals and

Business Entities 20th Edition Raabe
Solutions Manual
Visit to download the full and correct content document: https://testbankdeal.com/dow
nload/south-western-federal-taxation-2017-essentials-of-taxation-individuals-and-busi
ness-entities-20th-edition-raabe-solutions-manual/
CHAPTER 7
PROPERTY TRANSACTIONS: BASIS, GAIN AND LOSS,

AND NONTAXABLE EXCHANGES
SOLUTIONS TO PROBLEM MATERIALS
COMPUTATIONAL EXERCISES
1. (LO 3) The basis of property is generally the property’s cost. A bargain purchase of property is an
exception to the general rule for determining basis. A bargain purchase may result when an employer
transfers property to an employee at less than the property’s fair market value (as compensation for
services) or when a corporation transfers property to a shareholder at less than the property’s fair
market value (a dividend). The amount included in income either as compensation for services or
dividend income is the difference between the bargain purchase price and the property’s fair market
value.
The basis of property acquired in a bargain purchase is the property’s fair market value. If the basis of
the property were not increased by the bargain amount, the taxpayer would be taxed on this amount
again at disposition.
Luciana must include the $35,000 ($120,000 − $85,000) difference between the cost and the fair
market value of the land in gross income for the taxable year. The bargain element represents
additional compensation to Luciana. Her basis for the land is $120,000, the land’s fair market value.
2. (LO 3) The lump-sum cost is allocated on the basis of the fair market values of the individual assets
acquired.
Sebastian’s basis for the first piece of equipment is $40,000 [$72,000/($72,000 + $108,000) ×
$100,000], and his basis for the second piece of equipment is $60,000 [$108,000/($72,000 +
$108,000) × $100,000].
3. (LO 2, 4)
a. Section 267 provides that realized losses from sales or exchanges of property, directly or
indirectly, between certain related parties are not recognized. This loss disallowance
provision applies to several types of related-party transactions. The most common involve (1)
members of a family and (2) an individual and a corporation in which the individual owns,
directly or indirectly, more than 50% in value of the corporation’s outstanding stock.
As Lisa sold the property to a related party (her son), Lisa’s realized loss of $30,000 is not
recognized.
b. If income-producing or business property is transferred to a related taxpayer and a loss is

disallowed, the basis of the property to the recipient is the property’s cost to the transferee.
However, if a subsequent sale or other disposition of the property by the original transferee
results in a realized gain, the amount of gain is reduced by the loss that was previously
7-1
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
7-2 2017 Essentials of Taxation/Solutions Manual
disallowed. This right of offset is not applicable if the original sale involved the sale of a
personal use asset (e.g., the sale of a personal residence between related taxpayers).
Furthermore, the right of offset is available only to the original transferee (the related-party
buyer).
Alfred recognizes an $8,000 gain ($38,000 gain less $30,000 previously disallowed loss). His
realized gain is $38,000 ($138,000 less his basis of $100,000). However, he can offset Lisa’s
$30,000 loss against the gain.
Alfred recognizes a $20,000 loss, the same as his realized loss ($80,000 less $100,000 basis).
Lisa’s loss does not increase Alfred’s loss. His loss can be offset only against a gain. Because
Alfred has no realized gain, Lisa’s loss cannot be used and is never recognized.
4. (LO 4) The original basis for loss on personal use assets converted to business or income-producing
use is the lower of the property’s adjusted basis or fair market value on the date of conversion. The
gain basis for converted property is the property’s adjusted basis on the date of conversion.
Arianna’s basis for loss is $210,000 (lower of $230,000 adjusted basis and fair market value of
$210,000). The $20,000 decline in value is a personal loss and can never be recognized for tax
purposes. Arianna’s basis for gain is $230,000 (adjusted basis).
5. (LO 1, 4) The amount realized from a sale or other disposition of property is the sum of any money
received plus the fair market value of other property received. The amount realized also includes any
real property taxes treated as imposed on the seller that are actually paid by the buyer. The amount
realized also includes any liability on the property disposed of, such as a mortgage debt, if the buyer
assumes the mortgage or the property is sold subject to the mortgage.
Selling price
Cash $1,600,000
Mortgage assumed by purchaser 950,000
Seller’s property taxes paid by purchaser ($24,000 × 4/12) 8,000 $2,558,000
Less:
Broker’s commission ($ 75,000)
Points paid by seller (9,000) (84,000)
Equals amount realized $2,474,000
6. (LO 2, 5)
a. If Johnathan’s land is worth $80,000, Logan’s recognized gain is $15,000, the lesser of the
realized gain ($100,000 amount realized − $85,000 adjusted basis = $15,000) or the fair
market value of the boot received ($20,000).
b. If Johnathan’s land is worth $90,000, Logan’s recognized gain is $10,000, the lesser of the
realized gain ($100,000 amount realized − $85,000 adjusted basis = $15,000) or the fair
market value of the boot received ($10,000).
7. (LO 2, 6)
a. Because the nonrecognition of realized gain is mandatory for direct conversions, Camilo’s
realized gain of $25,000 ($180,000 − $155,000) is not recognized.
b. The basis of the replacement property is $155,000 (adjusted basis of the condemned property).
Property Transactions: Basis, Gain and Loss, and Nontaxable Exchanges 7-3
8. (LO 2, 7) Constanza’s realized and recognized gain are computed as follows:

Amount realized ($450,000 − $22,500) $427,500
Less: Adjusted basis ($165,000)
Equals: Realized gain $262,500
Less: § 121 exclusion ($250,000)
Equals: Recognized gain $ 12,500
PROBLEMS
9. (LO 1)
a. Whether the property is sold for cash or on credit is not relevant for this purpose. The amount
realized includes both the cash received at the time of sale and the cash to be received in the
future (i.e., the payments made by the debtor).
b. The mortgage assumption increases the amount realized by the seller.
c. The assumption by the seller of the buyer’s mortgage decreases the amount realized by the
seller.
d. The buyer’s acquisition of the property subject to the mortgage of the seller increases the
amount realized by the seller.
e. The receipt of the stock worth $10,000 by the seller increases the amount realized by $10,000.
10. (LO 1, 2)
a. Amount realized $35,000
Less: Adjusted basis (45,000)
Realized loss ($10,000)
Recognized loss $ –0–
Realized losses on the sale or exchange of personal use assets are not deductible.
b. Same result as in part a. above. There is no difference in the outcome if a personal use asset is
sold or exchanged at a loss.
c. Pam’s realized loss is $0. Because the form of the transaction is a theft, the realized loss is the
lesser of the adjusted basis or the fair market value of the asset, reduced by the insurance
proceeds that she received (see Chapter 6). Therefore, the opportunity for the theft loss
deduction on personal use property is not present in this case because the insurance proceeds
received of $35,000 equal the fair market value of $35,000.
d. Pam’s realized and recognized gain is $3,000 ($48,000 amount realized − $45,000 adjusted
basis). Even though the boat is a personal use asset, the realized gain is recognized.
11. (LO 1, 2)
Realized loss ($ 20,000)
A realized loss on the condemnation of a personal use asset is not recognized.
b. Amount realized $505,000

Realized gain $ 25,000
Recognized gain $ 25,000
A realized gain on the condemnation of a personal use asset is recognized if similar property
is not acquired. However, as discussed in this chapter under the section for Sale of a Principal
Residence—§ 121, the recognized gain of $25,000 can be avoided if the § 121 requirements
are satisfied.
c. If the house were income-producing property, the realized loss of $20,000 would be
recognized.
12. (LO 1, 2, 3)
a. Finch’s adjusted basis for Bluebird Corporation stock on December 31, 2016, is $510,000
($300,000 + $210,000).

Less: Adjusted basis (500 shares × $280 per share) (140,000)
c. If Finch cannot adequately identify the shares sold, a FIFO presumption is made. Thus, the
500 shares sold are presumed to come from the 1,000 shares purchased on October 3, 2016,
for $300,000 (i.e., $300 per share). Therefore, Finch has a recognized gain of $12,500 as
calculated below.
Amount realized $162,500

Less: Adjusted basis (500 shares × $300 per share) (150,000)
13. (LO 2, 3)
a. Agnes’s overall realized and recognized gain on the sale of her business is calculated as
follows:

Realized and recognized gain $370,000
Agnes will have to report gains and/or losses for each asset sold to Rod (following the
procedures of IRC § 1060). The realized and recognized gains (and their related character)
depend on the specific assets sold. So, for example, Agnes will realize and recognize a
$10,000 ordinary gain on the sale of inventory and a $50,000 § 1231 gain on the land. The
character of the gains on the equipment, furniture and fixtures, and building (all of which are
§ 1231 assets) will depend on any depreciation recapture potential (so some of the gains
could be ordinary). The $205,000 that Agnes received for goodwill (the difference between
the purchase price and fair market value of the assets; $990,000 − $785,000) will result in a
capital gain [see Butler v. Commissioner (46 TC 280)].
b. The purchase price of $990,000 is allocated to assets based on their fair market values (using
the categories established by IRC § 1060). The $205,000 excess of the purchase price of
$990,000 over the fair market value of the listed assets of $785,000 is assigned to goodwill
(under IRC § 1060). Thus, the basis of each of the assets of Rod’s business is as follows:
Accounts receivable $ 70,000

Inventory 100,000
Equipment 160,000
Furniture and fixtures 130,000
Building 250,000
Land 75,000
Goodwill 205,000
$990,000
Under IRC § 197, the goodwill will be amortized on a straight-line basis over 15 years. Form
8594 (Asset Acquisition Statement Under Section 1060) must be completed and filed with
Rod’s 2016 tax return.
c. Raabe, Maloney, Young, & Nellen, CPAs

5191 Natorp Boulevard
Mason, OH 45040
August 1, 2016
Rod Clooney
300 Riverview Drive
Delaware, OH 43015
Dear Mr. Clooney:
This letter is in response to the inquiry regarding your proposed purchase of the assets of
Agnes Mitchell’s sole proprietorship. The $990,000 purchase price should be allocated
among the assets to produce the following adjusted basis for each asset.
Accounts receivable $ 70,000
Inventory 100,000
Equipment 160,000
Furniture and fixtures 130,000
Building 250,000
Land 75,000
Goodwill 205,000
$990,000
The goodwill of $205,000 represents the difference between the $990,000 proposed purchase
price and the total fair market value of each of the other assets of $835,000. Under IRC § 197,
the goodwill will be amortized on a straight-line basis over 15 years. Form 8594 (Asset
Acquisition Statement Under Section 1060) will also need to be filed with your 2016 tax return.
If I can be of further assistance, please let me know.
Sincerely,
Jarvis Robins, CPA
Tax Partner
14. (LO 1, 2, 3)
a. Basis for gain = $35,000; $95,000 (amount realized) − $35,000 (adjusted basis) = $60,000
(recognized gain).
b. Basis for gain = $19,000; $40,000 (amount realized) − $19,000 (adjusted basis) = $21,000
(recognized gain).
c. Basis for loss = $15,000; $9,000 (amount realized) − $15,000 (adjusted basis) = $6,000
(recognized loss).
d. $0. The proceeds of $38,000 are between the gain basis of $42,000 and the loss basis of
$30,000. Therefore, neither gain nor loss is recognized.
15. (LO 1, 2, 3)
a. The basis for depreciation is the donee’s gain basis of $38,000 ($48,000 cost − $10,000
accumulated depreciation). The donee’s loss basis is the fair market value at the date of the
gift of $33,000.

Adjusted basis (gain basis = $38,000 − $6,500) (31,500)
c. Amount realized $20,000

Adjusted basis (loss basis = $33,000 − $6,500) (26,500)
Recognized loss ($ 6,500)
16. (LO 3) On the surface, it appears that Simon should give the stock to Fred and let Fred sell it, because
Fred is in the higher tax bracket (i.e., 25% versus Simon’s 15%; the loss in Fred’s hands would
generate more tax savings). However, for gift property, the loss basis to the donee is the lower of (1)
the donor’s adjusted basis or (2) the fair market value on the date of the gift. Therefore, because Fred
cannot take advantage of the loss, Simon should sell the stock, deduct the realized loss, and give the
sales proceeds to Fred.
17. (LO 3)
a. Gerald’s total basis for the assets received from Frank is $180,000 ($100,000 + $80,000).
The basis is allocated to the land and building as follows:
Land: ($212,000/$312,000) × $180,000 = $122,308
Building: ($100,000/$312,000) × $180,000 = $57,692
b. Because the land and building have declined in value, Gerald will have a gain basis and a loss
basis. Gerald’s basis for gain is:
Land $100,000
Building 80,000
Gerald’s basis for loss, which is the lower of Frank’s adjusted basis or the FMV at the date of
the gift, is:
Land $87,000
Building 65,000
18. (LO 3)
a. $2,800,000. The basis of property that is acquired from a decedent is its fair market value at
the date of death. Dan’s adjusted basis is not relevant. The alternate valuation date (six
months after death) and amount ($2,850,000) cannot be used in this case as a Form 706 is not
required to be filed.
b. If the estate was large enough to require the filing of a Form 706 and the alternate valuation
date can be elected by the executor, Ed’s basis for the hotel is $2,500,000. However, the
alternate valuation date cannot be elected by the executor if this amount exceeds the primary
valuation amount or if the election does not reduce the estate tax liability. A key unresolved
issue is whether the election would reduce the amount of the estate tax liability.
19. (LO 4)
a. Sale by Sheila
Adjusted basis (24,000)
Realized gain $16,000
Recognized gain $16,000
Sale by Jacob
Jacob’s gain basis of $40,000 is the same as Elane’s adjusted basis.
b. Sale by Sheila
Realized loss ($20,000)
Because Sheila and Elane are related parties, the realized loss of $20,000 is disallowed by
§ 267.
Sale by Jacob
Jacob is not eligible to use any of Sheila’s disallowed loss of $20,000 under the right of
offset, because he is not the original transferee (i.e., Elane is the original transferee).
20. (LO 1, 2, 3, 4)
a. Tyneka receives a stepped-up basis of $45,000 for the stock received on July 15, 2016.
Selling the stock for $33,000 on July 30, 2017, creates a realized loss of $12,000 ($33,000
amount realized − $45,000 adjusted basis). Because she purchases 1,000 shares of Aqua
within 30 days of the sale, the transaction is a wash sale and the realized loss is disallowed.
Her basis for the 1,000 shares of stock purchased on August 20, 2017, is $42,000 ($30,000
cost + $12,000 disallowed loss).
b. The tax consequences would have been the same. Tyneka has a wash sale to the extent of the
1,000 shares purchased. To avoid the limitations of the wash sale, Tyneka should not
purchase substantially identical stock within the 60-day window (30 days before and 30 days
after the sale date) for a wash sale.
21. (LO 4) Unfortunately, Sam’s plan will not work. As you might expect, the IRS has already thought
about this. In Rev.Rul. 2008–5 (2008–1 C.B. 271), the IRS indicated that § 1091 disallows a deduction
for the loss recognized by the individual on the sale. Further, the IRS ruled that the individual’s basis
in the IRA is not increased by reason of § 1091(d). So Sam has effectively lost (wasted) his $28,000
loss.
The ruling relies on Security First National Bank of Los Angeles, 28 BTA 289 (1933), which
considered a wash sale involving a grantor trust controlled by the taxpayer. The IRS reasoned that
even though the IRA is a tax-exempt trust, the individual should be treated as having acquired the
newly purchased securities to prevent “easy evasion” of § 1091. Thus, the ruling constitutes a
significant extension of the holding in Security First.
Although the ruling speaks only to IRAs, one can assume that the logic would also apply to a § 401(k)
plan.
Another Twist: At the end of the ruling, the IRS says that its ruling does not address issues under
§ 4975. The reference to the prohibited transaction rules is worth noting. If an IRA engages in a
§ 4975 prohibited transaction, it loses qualification under § 408(e)(2). That makes everything in the
IRA, not just the transaction amount, immediately taxable. However, it is likely that the IRS is merely
deferring to the Department of Labor, which has jurisdiction over the § 4975 rules that apply to IRAs.
On the other hand, it is just one more reason taxpayers should not engage in wash sales with an IRA
as purchaser of replacement securities.
22. (LO 1, 2, 4)
a. Abby’s basis for gain, loss, and cost recovery for the business use portion (70%) of the house
is as follows:
House Land
Gain basis $140,000 ($200,000 × 70%) $112,000 ($160,000 × 70%)
Loss basis $129,500 ($185,000 × 70%) $108,500 ($155,000 × 70%)
Cost recovery basis $129,500 (same as loss basis)
b. The cost recovery for the four-year period is calculated as follows:
Year 1 $129,500 × 2.461% = $ 3,187

Year 2 $129,500 × 2.564% = 3,320
Year 3 $129,500 × 2.564% = 3,320
Year 4 $129,500 × 2.564% × (11.5/12) = 3,182
Total $13,009
The bed-and-breakfast is 39-year nonresidential real property.
c. The recognized gain on the sale of the business use portion of the house and land is:
House (70%) Land (70%)
Amount realized $234,500 $115,500
Less: Adjusted basis* (126,991) (112,000)
Realized gain $107,509 $ 3,500
Recognized gain $107,509 $ 3,500
*Original basis for gain $140,000

Less: Cost recovery (13,009)
Adjusted basis $126,991
23. (LO 4)
a. Surendra’s basis for loss is $320,000, the lower of the adjusted basis of $340,000 or the fair
market value at the date of the conversion of $320,000.
b. Surendra’s basis for depreciation is $320,000, the same as the basis for loss.
c. Surendra’s basis for gain is the adjusted basis of $340,000.
d. No. The realized loss of $20,000 ($320,000 − $340,000) on the sale of his personal residence
would be disallowed.
24. (LO 5) Apparently Sue has treated the transaction as a regular sale or exchange and has determined
the basis of the new property accordingly. The exchange qualifies for nontaxable exchange treatment
under § 1031, because sport-utility vehicles and pickup trucks are in the same general business asset
class (i.e., light general-purpose trucks). The use of § 1031 is not elective. Under § 1031, the
following occurs:
Amount realized ($17,500 + $2,000) $ 19,500
However, because Sue receives boot of $2,000, this amount of her realized gain is recognized. The
adjusted basis of the truck is calculated as follows:
Fair market value $17,500

Postponed gain ($3,500 − $2,000) (1,500)
Adjusted basis of truck $16,000
25. (LO 6)
a. M&S should defer (postpone) the realized gain on the disposition of the warehouse.
Therefore, it should structure the transaction such that it will qualify as an involuntary
conversion. Thus, the associated issues are whether the form of the disposition qualifies and
whether the replacement qualifies. The acquisition by the condemning authority would
qualify. Because the city is condemning the property, the sale to the real estate broker also
would qualify. Replacing the warehouse with the office building will qualify because the
form of the involuntary conversion is the condemnation of real property used in a trade or
business. Unless M&S, via the negotiation process, can get more from the city than the real
estate broker, it should sell the land to the real estate broker and replace it with the office
building within the qualified replacement period (i.e., three years from the end of the tax year
in which a proceeds inflow is received that is large enough to produce a realized gain).
b. The answer will be the same as in part a.
26. (LO 5)
a. The exchange by Tanya qualifies for § 1031 like-kind exchange treatment.
Amount realized ($89,000 + $3,000) $ 92,000

The boot received of $3,000 triggers the recognition of $3,000 of the realized gain. Tanya’s
adjusted basis for the West Coast land is calculated as follows:
Fair market value $89,000
Postponed gain ($12,000 − $3,000) (9,000)
Adjusted basis $80,000
b. The exchange by Martin also qualifies for § 1031 like-kind exchange treatment.
Amount realized $ 92,000
Adjusted basis ($72,000 + $3,000) (75,000)
Recognized gain $ –0–
The giving of boot normally does not trigger realized gain. Martin’s adjusted basis for the
East Coast land is calculated as follows:
Fair market value $ 92,000
Postponed gain ($17,000 − $0) (17,000)
Adjusted basis $ 75,000
c. Martin’s recognized gain is calculated as follows:

d. Martin’s sale of the East Coast land has no effect on Tanya (Martin and Tanya are unrelated).
e. Raabe, Maloney, Young, & Nellen, CPAs

Mason, OH 45040
January 14, 2016
Ms. Tanya Fletcher
The Corral
El Paso, TX 79968
Dear Ms. Fletcher:
You asked about the tax consequences of the January 4, 2016 land exchange with Martin.
Based on the data provided, the tax consequences are as follows:
Amount realized ($89,000 + $3,000) $ 92,000
Because the transaction qualifies as a nontaxable like-kind exchange, only $3,000 (the $3,000
cash received) of your potential gain of $12,000 is recognized. The adjusted basis for the land
received is $80,000 ($89,000 fair market value − $9,000 postponed gain).
Sincerely,
Margaret Adams, CPA
Tax Partner
27. (LO 5)
a. Amount realized ($11,000 + $4,000) $15,000
Starling qualifies for § 1031 like-kind exchange treatment. However, the receipt of boot (the
equipment) of $4,000 causes $4,000 of Starling’s realized gain to be recognized. Its adjusted
basis for the gray bus is $6,000 ($11,000 fair market value − $5,000 postponed gain), and its
adjusted basis for the equipment is its fair market value of $4,000.

Adjusted basis ($3,000 + $2,000) (5,000)
Realized gain $10,000
Robin Corporation also qualifies for § 1031 like-kind exchange treatment. The giving of boot
(the equipment) typically does not trigger the recognition of realized gain. However, because
the equipment is appreciated boot, the amount of the appreciation of $2,000 is recognized. Its
adjusted basis for the yellow bus is $7,000 ($15,000 fair market value − $8,000 postponed
gain).
28. (LO 5)
a. Amount realized ($100,000 + $25,000) $125,000
The recognized gain is the lesser of the realized gain of $35,000 or the boot received of
$25,000.
b. The basis of the new machine is $90,000 ($100,000 fair market value – $10,000 postponed
gain).
c. Its basis for the stock is the fair market value of $25,000.
29. (LO 5) The critical question is whether the transactions qualify for § 1031 deferral treatment. Tulip,
Inc.’s preference probably is to have the gain on the land deferred and the loss on the stock
recognized. Therefore, the key is to know whether the land and the stock to be received qualify as
like-kind property. Because only the land qualifies, Tulip can exchange the land (i.e., defer the
realized gain) and either sell or exchange the stock (i.e., recognize the realized loss). However, it may
want to sell the land to avoid § 1031 treatment and recognize the gain. This could be the case if Tulip
has no other recognized gains and current-year deductibility of the stock loss would otherwise be
limited to $3,000.
30. (LO 5)
a. Because the postponed gain is $80,000, the basis equals $145,000 ($225,000 – $80,000).
b. Because the postponed gain is $160,000, the basis equals $190,000 ($350,000 – $160,000).
c. The transaction does not qualify as a like-kind exchange. Therefore, the basis of the newly
acquired asset is equal to its fair market value, or $42,000.
d. The transaction does not qualify as a like-kind exchange. Therefore, the basis of the newly
acquired asset is equal to its fair market value, or $28,000.
e. The transaction does qualify as a like-kind exchange. Therefore, the basis of the rental use
mountain cabin is equal to its fair market value reduced by the postponed gain, or $90,000
($225,000 – $135,000).
f. The transaction does not qualify as a like-kind exchange. Therefore, the basis for the limited
partnership interest is its fair market value of $580,000.
31. (LO 1, 2, 5)
b. The basis for Machine B is its cost of $15,000.
c. Such an exchange would have resulted in the realized gain being postponed under § 1031.
However, this would have caused Rose Company’s basis in the machine received to be
$12,000 ($12,000 adjusted basis + $0 boot given or $15,000 fair market value − $3,000
postponed gain). Because the sale transaction is fully taxable, the recognition of gain lets
Rose Company have a higher basis for the new machine. In addition, Rose Company may
have some losses with which it can offset the $3,000 recognized gain.
d. Amount realized $ 12,000

The basis for Machine B is its cost of $12,000. Avoiding § 1031 treatment enables Rose
Company to recognize the $3,000 realized loss.
32. (LO 5)
a. Realized gain = $110,000 [$105,000 (gain on like-kind property) + $5,000 (gain on property
given up that is not like-kind)].
b. Recognized gain = $5,000 (on property given up that is not like-kind).
c. New basis = $135,000 [$240,000 (fair market value of new real estate) − $105,000
(postponed gain on the like-kind property)].
33. (LO 5)
a. The exchange qualifies as a like-kind exchange for both Tom and Frank.
Frank Tom
Amount realized $ 92,000 $ 92,000
Adjusted basis (64,000) (60,000)
Realized gain $ 28,000 $ 32,000
Recognized gain $ –0– $ 12,000
Frank’s adjusted basis of $64,000 consists of the $52,000 adjusted basis for the property
transferred increased by the $12,000 mortgage he assumed (boot given) on the property
received from Tom. Tom’s amount realized of $92,000 consists of the $80,000 fair market
value of the property received increased by his $12,000 mortgage assumed (boot received) by
Frank. The $12,000 boot received by Tom triggers the recognition of $12,000 of Tom’s
realized gain.
b. Frank Tom
Fair market value $ 92,000 $ 80,000
Less: Postponed gain (28,000) (20,000)
Adjusted basis $ 64,000 $ 60,000
c. The alternative would produce the following tax consequences for Tom:
Amount realized ($80,000 + $12,000) $ 92,000

Because the cash is treated as boot, the recognized gain of $12,000 is the same as in part a.
Tom’s adjusted basis for the realty received of $60,000 is the same as in part b. Therefore, the
tax consequences to Tom under the alternative proposal are the same as under the original
proposal.
34. (LO 5)
a. Realized gain = $9,000 [($12,000 fair market value of new asset + $4,000 boot received) −
$7,000 adjusted basis of old asset].
Recognized gain = $4,000.
Postponed gain = $5,000.
New basis = $7,000 ($12,000 fair market value of new asset − $5,000 postponed gain).
b. Realized loss = $1,000.
Recognized loss = $0.
Postponed loss = $1,000.
New basis = $16,000 ($15,000 fair market value of new asset + $1,000 postponed loss).
c. Realized loss = $1,500.
d. Realized gain = $14,000.
Recognized gain = $0.
New basis = $15,000 ($29,000 fair market value of new asset – $14,000 postponed gain).
e. Realized gain = $2,000.
Recognized gain = $1,000.
New basis = $10,000 ($11,000 fair market value of new asset – $1,000 postponed gain).
f. Realized loss = $3,000.
35. (LO 5)
a. Amount realized [$120,000 (cash) + $780,000 (office building) +
$192,000 (mortgage)] $1,092,000
Adjusted basis of apartment house given up (760,000)
b. Recognized gain = $312,000 [$120,000 (cash) + $192,000 (mortgage assumed by Dove is
treated as boot received); lower of boot received of $312,000 or realized gain of $332,000].
c. New basis = $760,000 [$780,000 (fair market value of office building received) − $20,000
(postponed gain)].
36. (LO 5) To qualify for § 1031 treatment, Randall must satisfy the following requirements:
 Qualified intermediary: The proceeds from the disposition of the office building must be held
by a third-party intermediary (e.g., a bank’s trust department).
 Identification period: The new property must be identified within 45 days of the date the old
property was transferred.
 Exchange period: The new property must be received by the earlier of the following:
o Within 180 days of the date the old property was transferred.
o The due date (including extensions) for the tax return covering the year of the
transfer.
Randall’s conclusion is correct, but not because of the “substance” of the transaction (in general,
“substance over form” is an argument that is used by the IRS and courts to prohibit a transaction). It
turns out that Treasury Department Regulations permit multiple properties to be initially identified.
Because Randall identified the acquired office building on November 12, 2016 (within the 45-day
identification period), he satisfies the 45-day rule. Because all of the other requirements are satisfied
as well, § 1031 deferral treatment is appropriate.
37. (LO 6)
Howard has a recognized loss of $35,000 on the involuntary conversion. A realized loss on the
involuntary conversion of business property is recognized. His adjusted basis for the new roadside
vegetable stand is his cost of $285,000 ($240,000 + $45,000).
38. (LO 6)
a. Because the taxpayer is an owner-investor (and not an owner-user), the taxpayer use test
applies. Replacing the warehouse that is rented to various tenants with a shopping mall that is
rented to various tenants in a different location qualifies as replacement property.
The basis for the replacement property is:
Cost $ 700,000
Postponed gain (230,000)
Basis $ 470,000
b. Because the taxpayer is an owner-user, the functional use test applies. Replacing the
warehouse used in his or her business with another warehouse in a different state that is to be
used in the business qualifies as replacement property under the functional use test.
Cost $ 400,000
Basis $ 300,000
c. Because Ridge is an owner-user, the functional use test applies. Purchasing another residence to
replace the condemned residence qualifies as replacement property under the functional use test.

Cost $200,000
Basis $170,000
d. Because Swallow Fashions, Inc., was an owner-user of the building, the functional use test
applies. Thus, Swallow’s use of the replacement property and of the involuntarily converted
property must be the same. Because its use of the four-unit apartment building is different
from the use of the building in its retail business, the apartment building does not qualify as
replacement property.
The basis for the apartment building is its cost of $300,000.
e. Because Susan and Rick are owner-users, the functional use test applies. The rental duplex
does not qualify as replacement property under this test.
The basis for the duplex is its cost of $200,000.
f. Because Ellen and Harry are owner-users, the functional use test applies. The personal
residence acquired qualifies as replacement property under the test.
Of the realized gain of $105,000, the amount not reinvested of $8,000 ($350,000 – $342,000)
is recognized. Note that Ellen and Harry do not qualify for the § 121 exclusion. The basis of
the new residence carries over from the old residence ($245,000).
39. (LO 6)
a. Amount realized $ 525,000
The transactions qualify for § 1033 involuntary conversion treatment. Because Edith
reinvested the $525,000 of insurance proceeds received in qualifying property, all of the
$75,000 realized gain is postponed.
Edith’s basis for the replacement warehouse building is $475,000 [$550,000 (cost) − $75,000
(postponed gain)].
The latest date for Edith to acquire qualifying replacement property is December 31, 2019
(i.e., December 31, 2017 + 2 years).
b. Amount realized $ 525,000

The transactions qualify for § 1033 involuntary conversion treatment. Edith reinvested part of
the insurance proceeds received in qualifying property. Because not all of the insurance
proceeds were reinvested, her recognized gain is calculated as follows:
Amount realized (required reinvestment) $ 525,000
Less: Reinvestment (500,000)
Deficiency $ 25,000
Edith’s basis for the replacement office building is $450,000 [$500,000 (cost) − $50,000
(postponed gain)].
c. Amount realized $ 525,000

None of the realized gain is postponed because Edith did not acquire qualifying replacement
property.
40. (LO 7)
a. Wesley’s amount realized is calculated as follows:
Selling price $ 363,000
Less selling expenses:
Real estate agent’s commission $21,780
Appraisal fee 600
Exterminator’s certificate 300
Recording fees 800 (23,480)
§ 121 exclusion (139,520)
Wesley qualifies for the § 121 exclusion.
b. Wesley’s basis for his new residence is its cost of $325,000.
c. Amount realized ($800,000 − $23,480) $ 776,520

§ 121 exclusion (250,000)
Because Wesley is single, his maximum § 121 exclusion is $250,000. Wesley’s basis for his
new residence is its cost of $325,000.
41. (LO 7)
a. Amount realized $ 180,000
Realized gains or losses on property transactions between spouses are not recognized.
b. James’s adjusted basis for the Plum stock is a carryover basis of $200,000 (i.e., for basis
purposes, the transaction is treated as a gift).
c. The tax consequences would be the same in parts a. and b. if, instead, Roby had made a gift
of the stock to James. Because the sale form and the gift form produce the same tax
consequences, the key issue is whether James and Roby want to transfer the $180,000 to
Roby.
BRIDGE DISCIPLINE PROBLEMS
1. a. Book depreciation [($100,000 – $12,000) ÷ 8 × 1/2] $5,500

The straight-line method is used for book purposes because the asset is expected to benefit
Blue evenly throughout its 8-year life.
Tax depreciation ($100,000 × .20)—see Exhibit 5.4 $20,000
b. The book-tax difference in the year of acquisition is $14,500 ($20,000 – $5,500). That is,
depreciation for tax purposes is $14,500 higher than depreciation expense for book purposes.
2. Book depreciation
Year 1 [($100,000 – $12,000) ÷ 8 × 1/2] $ 5,500
Year 2 [($100,000 – $12,000) ÷ 8] 11,000
Year 3 [($100,000 – $12,000) ÷ 8] 11,000
Year 4 [($100,000 – $12,000) ÷ 8] 11,000
Year 5 [($100,000 – $12,000) ÷ 8] 11,000
Year 6 [($100,000 – $12,000) ÷ 8] 11,000
Year 7 [($100,000 – $12,000) ÷ 8 × 1/2] 5,500
Total accumulated depreciation $ 66,000
Adjusted basis for book purposes ($100,000 – $66,000) (34,000)
Gain for book purposes $ 6,000
Tax depreciation—See Exhibit 5.4
Year 1 ($100,000 × .20) $ 20,000

Year 2 ($100,000 × .32) 32,000
Year 3 ($100,000 × .1920) 19,200
Year 4 ($100,000 × .1152) 11,520
Year 5 ($100,000 × .1152) 11,520
Year 6 ($100,000 × .0576) 5,760
Total accumulated depreciation $100,000
Adjusted basis for tax purposes ($100,000 – $100,000) –0–
Gain for tax purposes $ 40,000
Therefore, because the gain for book purposes is $6,000 and the gain for tax purposes is $40,000, the
book-tax difference is $34,000.
3. (LO 2)
a. Yes.
b. No. Inventory does not qualify as productive use or investment property.
c. No. An exchange of investment realty for a personal residence does not qualify.
d. No. Securities do not qualify as productive use or investment property.
e. Yes.
f. No. Although both the truck and computer are business personalty, they are not in the same
general business asset class.
g. Yes.
h. No. Stock does not qualify as like-kind property under § 1031.
i. Yes. Both the office furniture and office equipment are personalty, and they are in the same
general business asset class.
j. No. Real property located in the United States exchanged for foreign real property (and vice
versa) does not qualify as like-kind property.
k. No. The exchange of partnership interests do not qualify as a like-kind exchange.
RESEARCH PROBLEMS
1. a. CLIENT LETTER
Raabe, Maloney, Young, & Nellen, CPAs

Mason, OH 45040
January 13, 2017
Mr. Melvin Sims

100 Center Lane
Miami, FL 33124
Dear Mr. Sims:
I am responding to your inquiry about the estate tax treatment and the related income tax basis
treatment of $30,000 bequeathed to Annette Rust by Ruth Ames that you as executor invested in
1,000 shares of Orange prior to distribution to the beneficiary.
Ruth Ames died on January 10, 2016. Shares of Orange stock were purchased for $30,000 ($30 per
share) by you on March 12, 2016, and distributed to Annette Rust on June 1, 2016, when the fair
market value was $33 per share ($33,000).
Because you elected the primary valuation date for Ruth’s estate, the assets are valued at the fair
market value on January 10, 2016. The cash of $30,000 used to purchase the Orange stock is included
in Ruth’s gross estate rather than the Orange shares that were not owned on that date. The basis of the
Orange stock to Annette Rust is the purchase price of $30 per share.
Sincerely,
Betty Williams, CPA
b. TAX FILE MEMORANDUM
DATE: January 10, 2017
FROM: Betty Williams
SUBJECT: Valuation in Ruth Ames Estate of Property Bequeathed to Annette Rust
Ruth Ames died on January 10, 2016. The executor, Melvin Sims, elected the primary valuation date
for the estate. Cash of $30,000 was bequeathed to Annette Rust. The executor purchased on March 12,
2016, 1,000 shares of Orange, Inc. stock with the $30,000 from Ruth Ames’s money market account.
The shares were distributed to Annette Rust on June 1, 2016, when the fair market value was $33 per
share ($33,000).
Under § 2031(a), property is included in the gross estate based on the fair market value at the date of
the decedent’s death (primary valuation date and amount). Section 2032(a) provides for the alternate
valuation date and amount (i.e., the fair market value six months after the date of the decedent’s
death). Because the executor did not elect the alternate valuation date and amount, the primary
valuation date (January 10, 2016) and amount are used.
Section 1014(a) provides that a beneficiary will assign a basis to inherited property based on the fair
market value at the date of the decedent’s death unless the executor of the estate elects the alternate
valuation date and amount. Because the executor did not make the alternate valuation election for
Ruth’s estate, the fair market value on January 10, 2016, should be used.
Based on the previous analysis, it appears that the cash of $30,000, rather than the Orange stock,
should be included in Ruth’s gross estate. Because the stock was purchased by the executor, rather
than being acquired by Ruth, it was not owned by Ruth on January 10, 2016. Regulation § 1.1014–3(c)
clarifies this point by specifying that the $30 per share purchase price is the appropriate amount for
Annette Rust’s basis.
2. a. The amount realized includes the amount of the liability from which Terry is relieved. The
principal issue is whether the fair market value of the real estate serves as a ceiling on the
liability effect. According to Rev.Rul. 76–111, 1976–1 C.B. 214, it does not. Thus, according
to the position of the IRS, the realized and recognized gain to Terry is $1,900,000
($2,500,000 amount realized − $600,000 adjusted basis).
Footnote 37 of the Crane decision (footnote 5 in the text) raised the possibility that the fair
market value might serve as such a ceiling. Thus, the taxpayer’s position was that the realized
and recognized gain is $500,000 ($1,100,000 amount realized − $600,000 adjusted basis).
The Tufts decision resolved this conflict by agreeing with the IRS position that the entire
$2,500,000 should be included in the amount realized by Terry. [Tufts v. U.S., 83–1 USTC
¶ 9328, 51 AFTR 2d 83–1132, 103 S.Ct. 1826 (USSC, 1983), rev’g. CA–5.]
b. Applying the Tufts decision, the realized and recognized gain is $1,925,000 ($2,525,000
amount realized − $600,000 adjusted basis).
3. There was no dispute regarding the sale of Marvin’s principal residence. The use of the § 121
exclusion to reduce his realized gain was proper.
For § 1031 deferral treatment to apply for Marvin’s sale of the apartment building, there must be an
exchange of productive use or investment property for like-kind property to be held for productive
use or investment. The key issue raised by the IRS was that the replacement lake house, based on the
facts, was acquired for personal use rather than investment use.
In a similar fact situation, Patrick A. Reesink [103 TCM 1647, T.C.Memo. 2012–118], the Tax Court
held for the taxpayer. The court concluded that the taxpayer did intend to hold the lake house for
investment purposes. The lake house was converted to personal use (i.e., as Marvin’s new personal
residence) when it could not be rented and Marvin’s financial position deteriorated. Therefore,
Marvin’s reporting of the exchange as a § 1031 like-kind exchange that is eligible for deferral
treatment is correct.
Research Problems 4 and 5
The Internet Activity research problems require that students utilize online resources to research and answer
the questions. As a result, solutions may vary among students and courses. You should determine the skill
and experience levels of the students before assigning these problems, coaching where necessary. Encourage
students to explore all parts of the Web in this research process, including tax research databases, as well as
the websites of the IRS, newspapers, magazines, businesses, tax professionals, other government agencies,
and political outlets. Students should also work with resources such as blogs, Twitter feeds, and other
interest-oriented technologies to research their answers.
4. A recent OMB report suggests that the revenue loss due to the step-up in basis provision was $63.4
billion in 2015.
 www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/spec.pdf
In Canada, the assets in the estate of the person who died are taxed as if they were sold a minute
before the person died. Thus, the heirs receive a step-up in basis to the fair market value of the asset
as a result of this tax treatment.
 www.dummies.com/how-to/content/the-fundamentals-of-canadian-estate-tax.seriesId-
341867.html
 www.serbinski.com/taxation-in-usa/estate-taxes.shtml
5. Rev.Proc. 2007−56, 2007–2 C.B. 388, suggests that any number of factors could extend these time
periods, but not beyond the due date for the filing of the return. For example:
a. The relinquished property or the replacement property is located in a covered disaster area.
b. The principal place of business of any party to the transaction (e.g., a qualified intermediary, an
exchange accommodation titleholder, a transferee, a settlement attorney, a lender, a financial
institution, or a title insurance company) is located in the covered disaster area.
c. Any party to the transaction is killed, injured, or missing as a result of the presidentially declared
disaster.
d. A document prepared in connection with the exchange (e.g., the agreement between the
transferor and the qualified intermediary or the deed to the relinquished property or replacement
property) or a relevant land record is destroyed, damaged, or lost as a result of the presidentially
declared disaster.
e. A lender decides not to fund either permanently or temporarily a real estate closing due to the
presidentially declared disaster or refuses to fund a loan to the taxpayer because flood, disaster,
or other hazard insurance is not available due to the presidentially declared disaster.
f. A title insurance company is not able to provide the required title insurance policy necessary to
settle or close a real estate transaction due to the presidentially declared disaster.
SOLUTIONS TO ROGER CPA REVIEW QUESTIONS
Detailed answer feedback for Roger CPA Review questions is available on the instructor companion site
(www.cengage.com/login).
1. d 5. a
2. c 6. b
3. a 7. c
4. b 8. b
Another random document with
no related content on Scribd:
[I thought of these words many a time after that short and
merry life had come to its miserable close, and that fair
head, with the crown it coveted and wrought for, lay
together on the scaffold. I did never believe the shameful
charges brought against her, by which her death was
compassed, but 'tis impossible to acquit her of great
lightness of conduct, and want of womanly delicacy, or of
the worse faults of lawless ambition and treachery against
her kind mistress, than whom no one need wish a better.
Though I am and have long been of the reformed religion,
my feelings have ever been on the side of Queen
Catherine.]
The next day we went across the moor, to see the woman,
Magdalen Jewell, of whom Dame Lee had told us. Mistress
Anne was not with us, pleading a headache as an excuse,
and I was not sorry to miss her company, but we had
Master Griffith instead, and a serving man, who led the
Queen's donkey. The rest of us walked; and oh, what joy it
was to me to feel the springy turf under foot, and smell the
fresh odors of the moorland once more! How beautiful the
world is! I can't think why God hath made it so fair, and
then set it before us as our highest duty to shut ourselves
from it between stone walls. "The earth is the Lord's and
the fulness thereof," we sing in the Venite, and all the
Psalms are full of such thoughts. But this is beside the
matter.
We had a charming walk over the high, breezy moor, and

Master Griffith entertained us with remembrances of his
own country of Wales, where he says the people speak a
language of their own, as they do in some parts of Cornwall.
The Queen riding before us, would now and then put in a
word to keep him going.
Presently the path dipped into a little hollow, and there we
saw the cottage at the foot of the Tor which had been our
landmark all the way. 'Twas to my mind more like a nest
than a cottage, so small was it, and so covered (where the
vine gave the stones leave to show themselves) with gray
and yellow lichens. A humble porch well shaded with a great
standard pear, and fragrant with honeysuckle and
sweetbriar, held the good woman's chair, wherein lay a
spindle and distaff.
Magdalen herself was at work in her garden, gathering of

herbs to dry, and attended by quite a retinue. There was a
very old dog lying blinking in the sunshine, and a motherly
cat with two or three mischievous kitlings, and also a lame
and tame goose, which attended her mistress' footsteps,
and now and then with hisses and outspread wings chased
away the kitlings, when they made too free. A more
important member of the party was the little orphan maid,
a child of some five years, who with grave and womanly
industry, was carrying away the cut herbs, and spreading
them in the shade to dry. A row of beehives reached all the
length of the garden wall, and before them a bed of sweet
flowers and herbs, such as bees love. On one side was a
field in which fed a cow and an ass, while on the other was
a small and old, but well-tended orchard, and at the bottom
of this a still, glassy pool. Behind all, rose the gray, steep
Tor, like a protecting fortress. It was a lovely picture, and
one on which I could have gazed an hour; but presently, the
woman catching sight of us, laid aside her industry, and
came forward to give us welcome, which she did I must say
somewhat stiffly at the first. But she presently thawed into
more cordiality under the charm of her Grace's manner, and
remarking that we had had a long walk, she busied herself
to provide refreshment.
"Pray do not incommode yourself, my good woman," said
the Queen: "we have come but from the convent yonder,
where I am at present abiding, and this is one of the young
pupils, whom I dare say you have seen."
"Not I, madam!" she answered, somewhat bluntly. "I have

no errand to take me to the convent since I desire no alms
at the hands of the ladies, and I have naught to sell but
that which their own gardens supply."
"You might go thither for purposes of devotion," said the

Queen: "'tis a great privilege to worship in a church
possessed of so many holy relics."
A strange look, methought, passed over the woman's face,

as her Grace spoke, but she made no answer to the Queen,
only to press us to eat and drink.
"And you live here quite alone, save this child?" said the
Queen, after she had asked and heard an account of the
little maiden.
"Aye, madam, ever since my old father died, some ten

years since, till this child was sent me, as it were."
"But had you no brother, or other relative?" Again the

strange look crossed Magdalen's face, as she answered: "I
had a brother once, and for aught I know he may be living
now; but 'tis long since I have seen or heard from him. Our
paths went different ways."
"How so?" asked the Queen.
"Because I chose to maintain my old father in his

helplessness, and he chose to bestow himself in yonder
abbey of Glastonbury, with his portion of my gaffer's
goods."
"Doubtless he chose wisely!" she added, with a scorn which
I cannot describe. "'Twas an easier life than tilling barren
land, and bearing with the many humors of a childish, testy
old man."
"You should not speak so of your brother," said the Queen,

somewhat severely.
"You are right, Madam;" answered Magdalen, softening.

"Scorn becomes not any sinner, whose own transgressions
have been many. Nevertheless, under your favor, I believe
my brother did mistake his duty in this thing."
"Yet you yourself have chosen a single life, it seems!" said

the Queen. "Why was that?"
"I did not choose it," she said quietly, but yet her face was
moved. "'Twas so ordered for me, and I make the best of it.
I doubt not many married women are happier than I; but
yourself must see, Madam, that no single woman, so she be
good and virtuous, can possibly be as miserable as is many
a good and virtuous wife, through no fault of her own; aye
—and while she hath nothing of which she may complain
before the world."
"'Tis even so!" said her Grace; and again saw the cloud
upon her brow. I wonder if she is unhappy with her
husband? After a little silence, the Queen fell to talking of
the child, and after some discourse, she offered to leave
with the parish priest such a sum of money as should be a
dower for the girl, whether she should marry or enter a
convent. Magdalen colored and hesitated.
"I thank you much for your kindness," said she, at last. "I
have never yet received an alms, but the child is an orphan,
and hath no earthly protection but myself; and should I die
before my brother, he, or the men with whom he has placed
himself, would take that small portion of goods which
belongs to me, and little Catherine would be left wholly
destitute. I believe Sir John, the village priest, to be a good
man, so far as his lights go, and anything you may be
pleased to place in his hands will be safe. I therefore accept
your offer and thank you with all my heart; and may the
blessing of the God of the fatherless abide upon you."
"That seems like a good woman," remarked Master Griffith

to Mistress Patience, after we had left the cottage.
"Yet I liked not her saying about the priest," returned Mrs.
Patience, austerely. "What did she mean by her limitation
—'A good man, so far as his lights go,' forsooth! What is
she, to judge of his lights? Methinks the saying savored
somewhat too much of Lollardie, or Lutheranism."
"Then, if I thought so, I would not say so," said Master

Griffith, in a low tone. "You would not like to cast a
suspicion on the poor creature, which might bring her to the
stake at last."
Whereat Mistress Patience murmured something under her

breath about soft-heartedness toward heretics being
treason to the Church; but she added no more. I think
Master Griffith hath great influence over her, and if I may
venture to say so, over his mistress as well; and I wonder
not at it, for he hath a calm, wise way with him, and a
considerate manner of speaking, which seems to carry
much weight. It was odd, certainly, what Magdalen Jewell
said about the priest, and also about her brother. It does
seem hard that he should have gone away and left her to
bear the whole burden of nursing and maintaining her
father, and yet, as we are taught to believe, it is he who
hath chosen the better part. Another thing which struck me
about this same Magdalen was, that she was so wonderful
well spoken, for a woman in her state of life. Even her
accent was purer than that of the women about here, and
she used marvellous good phrases, as though she were
conversant with well-educated people.
This was the last of our walks. To-morrow the Queen goes,
and then I shall fall back into my old way of life again, I
suppose—writing, and working, and walking in the garden
for recreation. Well, I must needs be content, since there is
no other prospect before me for my whole life. It will not be
quite so monotonous as that of the poor lady who lived for
twenty years in the Queen's room, and never looked out.
I ought to say, that when we returned from visiting

Magdalen Jewell, we found that a post had arrived with
letters for the Queen, and also a packet for Mistress Anne,
who seemed wonderful pleased with her news, and with a
fine ring which she said her brother had sent her.
"Your brother is very generous," said her Grace, (and I saw

her face flush and her eyes flash.) "Methinks I have seen
that same ring before. 'Tis not very becoming for your
brother to make so light of his Majesty's gifts, as to bestow
them, even on his sister."
"I trust your Grace will be so good as not to betray my poor

brother's carelessness to his Majesty," answered Mrs.
Bullen, with an air and tone of meekness, which seemed to
me to have much of mocking therein. "It might prove the
ruin of us both."
To my great terror and amazement, the Queen turned

absolutely pale as ashes, and put out her hand for support.
Both Mrs. Anne and myself sprang forward, but she
recovered herself in a moment, and her color came back
again.
"'Tis nothing," said she, quietly. "I think the heat was too
much for me. Patience, your arm; I will lie down awhile."
The glance which Patience cast on Mrs. Bullen in passing,

was such as one might give to a viper or other loathsome
reptile. Mrs. Bullen, on her part, returned it, with a mocking
smile. Presently I saw her in the garden in close conference
with Amice, as indeed I have done several times before. I
cannot guess what they should have in common, and it is
all the more odd that I know Amice does not like her.
CHAPTER XIV.
August 14.
HER Grace left us yesterday, and to-day Amice and I have
been helping Mother Gertrude to put her rooms to rights,
and close them once more.
"How lonely they look," said I, as we were going round

closing the shutters. "I suppose they will always be called,
'The Queen's Chambers,' after this; and will be looked on as
a kind of hallowed ground."
"They will always be hallowed ground to me, I am sure,"

said Amice, so warmly, that I looked at her in surprise.
"Well, well, I am not sorry they are empty once more," said
Mother Gertrude. "I trust now we shall go back to our old
quiet ways, and at least we shall have no more singing of
love songs and receiving of love tokens, within these holy
walls. Yonder fair Bullen is no inmate for such a place as
this."
"Why should you think of love tokens, dear Mother?" I

asked, feeling my checks burn, and wondering whether she
referred to me, though indeed I might have known she did
not. 'Tis not her way to hint at anything.
"Because Mistress Anne must needs show me her fine

diamond ring, and tell me in a whisper how it was a token
from a gallant gentleman, as great as any in this realm."
"She said it came from her brother," said I, unguardedly,

and then I all at once remembered what she had said in the
presence, and the Queen's answer. Can it be that her Grace
was jealous, and that she had cause for jealousy? However,
that is no business for me.
Mrs. Bullen must needs watch her chance and ask me

whether I had no message or token for my cousin? I told
her no—that in my position, it did not become me to be
sending messages or tokens: but I did not add what I
thought—that if I had any such message, she would be the
last person I should trust therewith.
"Well, well, I meant you naught but kindness," said she. "I
dare say our squire wont break his heart."
To which I made no answer.
Mother Superior gave me leave to write to my father by

Master Griffith, who kindly offered to carry a letter. When I
had finished, I carried it to her, as in duty bound. She just
glanced at it, and then opening a drawer, she took
therefrom poor Richard's packet and enclosed all together,
sealing them securely, and said she would give the parcel
into Master Griffith's hands, together with certain letters of
her own. My heart gave a great leap at sight of the packet,
and I must confess a great ache when I saw it sealed up
again, because I knew how sadly Richard would feel at
having his poor little letter and token returned on his
hands; and I am quite sure he meant no harm in sending
them, though it was ill considered.
The Queen gave magnificently to the Church and house on

leaving, and also bestowed presents on those members of
the family who have waited on her, mostly books of
devotion, beads, and sacred pictures. She hath also
provided for an annual dole of bread and clothing on her
birthday to all the poor of the village.
CHAPTER XV.
August 25.
WE have begun the general reformation which Mother

Superior promised us. I suppose, like other storms, it will
clear the air when all is done, but at present it raises a good
deal of dust, and makes every body uncomfortable.
Mother Gabrielle and Mother Gertrude still keep their old

places, the one as sacristine, the other as mistress of the
novices and pupils. But Sister Catherine is discharged of the
care of the wardrobe, and Sister Bridget, of all people, set
in her place. Sister Bonaventure takes Sister Bridget's place
in the laundry, and Sister Mary Paula is in charge of the
kitchen, which I fancy she does not like over well, though
she says nothing. Sister Mary Agnes has the accounts, and
Sister Placida the alms. As to Sister Catherine, she is
nowhere and nobody, which I suppose will give her all the
more time to meddle with everybody. She has been in
retreat for a week, and is still very mum and keeps quiet. I
have still charge of the library, to my great joy, and Amice is
by special favor appointed to help Mother Gabrielle in the
sacristy.
Our rules are to be more strictly enforced in future. No

more exclusive friendships are to be permitted. Silence is to
be rigidly enforced, and in short we are to turn over a new
leaf entirely. A great deal of needlework is to be put in hand
directly, including new altar covers for the shrine of Saint
Ethelburga in the garden, for which her Grace hath given
very rich materials. Besides we are to make many garments
for the poor against winter.
A good many wry faces have been made over all these
changes. For my own part I like them well enough. I think
people are always more comfortable when each one knows
his own place and his own work. Perhaps I should feel
differently if I had been put out of office, like Sister
Catherine, or set to work I did not like, as was Sister Mary
Paula. Poor Sister Catherine! She little thought how it was
to end when she used to talk about the enforcement of
discipline. I must say, that as far as the wardrobe goes, she
had no right to complain, for she did keep everything at
sixes and sevens, so that two whole pieces of nice black
serge were spoiled by her negligence, and many of the
spare napkins were moulded through and through. I
ventured to ask Mother Gertrude how she thought Sister
Bridget would succeed.
"Why, well enough, child," she answered. "Sister Bridget's

mind is not very bright, but she always gives the whole of it
to whatever she does."
"I have noticed that," said I. "If she is folding a napkin, or

ironing an apron, you may ask her as many questions as
you will, and you will get no answer from her till she has
done folding or ironing, as the case may be."
"Just so; and she hath another good quality, in that she will
take advice. When she does not know what to do she will
ask, which is to my mind a greater argument of humility
than any kissings of the floor, or such like performances."
Amice and I do not see as much of each other as we used,

but she is always loving when we meet. She appears to me,
somehow, very greatly changed. At times she seems to
have an almost heavenly calmness and serenity in her face;
at others she seems sad and anxious, but she is always kind
and gentle. She is much in prayer, and reads diligently in
the Psalter, which the Queen gave her. Sister Gabrielle has
grown very fond of her, though she was vexed at first that
Amice was assigned to her instead of myself; but she says
Amice is so gentle and humble, so anxious to please, and to
improve herself in those points wherein she is deficient, that
she cannot but love the child. I have, at Amice's own
request, taught her all the lace and darning stitches I know,
and she practises them diligently, though she used to
despise them. I am teaching her to knit stockings, an art I
learned of Mistress Patience, and we mean to have a pair
made for the Bishop against his next visit.
CHAPTER XVI.
St. Michael's Eve, Sept. 28.
IT is a long time since I have touched this book, and many

things have happened. Ours is now a sad household. Out of
the twenty-three professed Sisters and novices who used to
meet in the choir, but fifteen remain. The rest lie under the
turf in our cemetery. Mother Gabrielle is gone, and poor
Sister Bridget, and of the novices, Sisters Mary Frances and
Agatha. Mother Gertrude had the disease, but was spared.
Three others recovered. The rest were not attacked. The
disease was the dreadful Sweating sickness. It began first in
the village, in the household of that same Roger Smith, but
broke out in three or four other cottages the same day. The
news was brought to the convent gates the next morning by
some who came for alms, as they use to do on Wednesdays
and Fridays, and produced great consternation.
"What are we to do now?" said Sister Catherine, while the

elders were in conference by themselves.
"We shall do as we are told, I suppose," answered Sister

Bridget, with her wonted simplicity.
"But don't you suppose Mother Superior will order the gates
to be shut, and no communication held with the villagers?"
said Sister Mary Paula.
"I should certainly suppose not;" answered Sister Placida.

"Think what you are saying, dear Sister! Would you deprive
the poor souls of their alms, just when they are most
wanted? Methinks it would ill become religious women to
show such cowardly fears."
"Beside that I don't believe it would make any difference,"

said I. "Master Ellenwood, who has studied medicine, told
my father the disease was not so much infectious, as in the
air. I wish we might go out among the poor folk, to see
what they need, and help to nurse the sick, as my mother
and her women used to do."
"Rosamond is always ready for any chance to break her

enclosure," said Sister Catherine, charitable as usual. "She
would even welcome the pestilence, if it gave her a pretext
to get outside her convent walls."
"Sister Catherine," said Sister Placida, reprovingly, "you are

wrong to speak so to the child. Why should you be so ready
to put a wrong construction on her words? I am sure the
wish is natural enough. I had thought of the same thing
myself."
"O yes, I dare say," retorted Sister Catherine. And then,

with one of her sudden changes, "but I am wrong to answer
you so, Sister. It is my part to accept even undeserved
reproof with humility, and be thankful that I am despised."
"Nonsense," returned Sister Placida, who is by no means so

placid as her name, "I think you would show more humility
by considering whether the reproof was not deserved. As to
being thankful for being despised, that is to my mind a little
too much like being thankful for another's sin."
"How so?" I asked.
"Why, in order to being despised, there must needs be

some one to despise you, child, and is not contempt a sin?"
I do like Sister Placida, though she is just as often sharp

with me as Sister Catherine, but it is in such a different
way.
"Anyhow, I hope they wont shut out the poor folk," said
Sister Bridget.
"Who is talking about shutting out the poor folk?" asked

Mother Gertrude's voice, coming in sharp and clear as
usual, (by the way I ought to call her Mother Assistant now,
but I never can remember to do so.) "Children, why are you
all loitering here, instead of being about your business in
the house? Let every one set about her duty just as usual,
and at obedience, you will hear what has been decided."
[Obedience is that hour in a convent when the nuns

assemble with the Superior to give an account of their
labors, to receive special charges, and not seldom special
reproofs as well. In our house this gathering took place just
after morning recreation. Amice and I, not being even
regular postulants, had no business there, and since the
reformation in the house, we have never attended, but we
were called in to-day, and took our places at the lower end
of the line, and therefore next the Superior, who addressed
us in few but weighty words, which I will set down as well
as I can remember them.]
There was no doubt, she said, that the pestilence known as

the sweating sickness had broken out in the village, and we
might with reason expect its appearance among ourselves,
at any time. She said she had heard with sorrow that some
of her children had desired to have the gates closed against
the poor folk who used to come for alms. Such cowardliness
as this was unbecoming to any well-born lady, and above all
to religious, who were doubly bound to set a good example
of courage and resignation: but she was willing to think this
only a momentary failing, which a second thought would
correct; and she bade us consider that there would be no
use in shutting the gates now, since they were opened
yesterday, as usual.
Then she told us what she, with the advice of our confessor
and the other elders, had decided upon. The doles were to
be given out at the outer gate, by the proper officers, only
they were to be given every day, instead of Wednesdays
and Fridays. The two distributing Sisters were to be helped
by two others, taken in turn from the professed, to hand
the things as they were wanted. All embroidery, with other
unnecessary work of every kind, was to be laid aside, and
all were to employ themselves under the direction of the
Mother Assistant and herself in making linen and in
preparing food, cordials, and drinks for the poor. If any
Sister felt herself ill in any way, she was at once to repair to
the infirmary, and report herself to Sister Placida. Finally,
we were all to have good courage, to give ourselves as
much as possible to prayer, and such religious meditation as
should keep us in a calm, cheerful, and recollected frame of
mind, observing our hours of recreation as usual; and she
added that nobody was to presume to take on herself any
extra penances or exercises without express permission
from her superior or confessor.
"We are all under sentence of death, dear children, as you

know!" concluded Mother, "And it matters little how our
dismissal comes, so we are ready. Let us all confess
ourselves, so that the weight, at least, of mortal sin may
not rest on our consciences here, or go with us into the
other world. If we are called to suffer, let us accept those
sufferings as an atonement for our sins, considering that
the more we have to endure here, the less we may believe
will be the pains of purgatory hereafter. As for these
children," she added, turning to Amice and myself, who
stood next her, "what shall I say to them?"
"Say, dear Mother, that we may take our full share of work
and risk with the Sisters!" exclaimed Amice, kneeling before
her. "I am sure I speak for Rosamond as well as myself,
when I say that is what we desire most of all, is it not,
Rosamond?"
"Surely," I answered, as I knelt by her side: "I ask nothing

more than that."
"And what becomes of the Latin and Music lessons, and the
embroidery, and our learned librarian's translations?" asked
Mother Superior, smiling on us.
"They can wait," I answered.
"And surely, dearest Mother, the lessons we shall learn will

be far more valuable than any Latin or music," added
Amice.
"Well, well, be it as you will!" said dear Mother, laying her

hands on our heads as we knelt before her. "Surely, dear
children, none of us will show any fear or reluctance, since
these babes set us such a good example. Well, hold
yourselves ready, my little ones, and wherever you are
wanted, there shall you be sent."
That afternoon there was a great bustle in the wardrobe;

taking down of linen, and cutting out of shifts and bed-
gowns, and the like, and in the still-room and kitchen as
well, with preparing of medicines, chiefly cordial and
restoratives, and mild drinks, such as barley and apple
waters, and the infusion of lime blossoms, balm and mint.
This was by the advice of Mother Mary Monica, who has
seen the disease before, and understands its right
treatment. She says that those who on the first sign of the
disorder took to their beds and remained there for twenty-
four hours, moderately covered, and perfectly quiet, and
drinking of mild drinks, neither very hot, nor stimulating,
nor yet cold, almost all recovered; but that purges,
exercise, hot or cold drinks and stimulants, were equally
fatal. The dear old Mother has seemed failing of late, but
this alarm has roused her up and made her like a young
woman again.
Thus things went on for more than a week. We heard of

great suffering among the villagers for lack of nurses who
knew how to treat the disease, and also because from
selfish fear of taking the pestilence, people refused to go
near the sick and dying. One day Mother Superior was
called to the grate, and presently sent for me to the parlor,
where I found her talking through the grate to a woman
whom I at once knew as Magdalen Jewell of Torfoot. Hers is
not a face to be forgotten.
"This good woman says she believes you were at her house
with her Grace," says Mother.
I answered that I was so, and added that her Grace did
much commend the neatness of the place and the kindness
of Magdalen in taking the little one. I saw Magdalen's face
work.
"The babe hath been taken home!" said she, almost sternly.
"God's will be done! I have been telling these ladies that
there are divers orphan maids in the village (left so by this
sickness), who are running wild, and are like either to die
for lack of care, or worse, to fall into the hands of gypsies
and other lawless persons, whom this pestilence seems to
have let loose to roam about this wretched land."
"Are there so many dead in the village?" asked Mother

Gertrude.
"There is not a house where there is or hath not been one

dead!" answered Magdalen; "And the terror is worse than
the pestilence; children are deserted by parents, and they
in their turn by children, and 'tis the same with all other
relations. 'Tis a woeful spectacle!"
"Could not you yourself take these poor babes to your

home, since you have one?" asked Mother Gertrude.
"I cannot be spared, madam," answered Magdalen: "I must

nurse the sick."
"That is very good in you, and you must take comfort in the
thought that you are thereby laying up merit for yourself!"
said Mother Superior.
I saw an odd expression pass over Magdalen's face, but she

made no reply.
"And you think we might take these babes and care for
them, at least till the present emergency is passed?" said
Mother.
"Nay, madam, I did but state the case to you," answered

Magdalen; "'tis not for me to presume to offer advice."
"But what to do with them, if we took them?" said Mother

Superior, in a musing tone. Then catching my eye, which I
suppose ought to have been on the floor instead of on her
face: "Here is Rosamond, with a ready-made plan, as usual.
Well, child, you have permission to speak. What is brewing
under that eager face?"
"I was thinking, dear Mother, that I am used to young

children," said I. "Why could I not take these little maids
into one of the rooms called the Queen's room, and tend
them there? I suppose there are not many of them."
"I know of but five utterly friendless maids," answered

Magdalen.
"Then I am sure I could care for them, with some help and
advice," said I. "They would be away from the rest of the
family, and would disturb no one; and if we were kept in
health, I might teach them as well."
"'Tis a good thought, but we must do nothing hastily," said

Mother Superior. "We ought to have the permission of our
visitor, the Bishop, but he is now in Bristol, and some days
must elapse before we could hear from him, and this seems
a case for instant action."
"I am sure you would say so, madam, could you see the
state of these poor babes!" returned Magdalen.
"Well, well, come to-morrow, and we will see," said Mother.

"Meantime the holy relics are exposed in the church for the
comfort of the faithful in this trying time. You had better
visit them, and then go to the buttery and obtain some
refreshment."
However, she did neither—I suppose from want of time. The

next day she came again, and to my great joy, Mother
consented, the need being so great, to receive the five little
maidens, who were placed under my care in the Queen's

South Western Federal Taxation 2017 Essentials of Taxation Individuals and Business Entities 20Th Edition Raabe Solutions Manual Full Chapter PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

South Western Federal Taxation 2017 Essentials of Taxation Individuals and Business Entities 20Th Edition Raabe Solutions Manual Full Chapter PDF

Uploaded by

Copyright:

Available Formats

South-Western Federal Taxation 2017

Essentials of Taxation Individuals and

PROPERTY TRANSACTIONS: BASIS, GAIN AND LOSS,

SOLUTIONS TO PROBLEM MATERIALS

b. If income-producing or business property is transferred to a related taxpayer and a loss is

8. (LO 2, 7) Constanza’s realized and recognized gain are computed as follows:

b. Amount realized $505,000

b. Amount realized $162,500

Amount realized $162,500

Amount realized $990,000

Accounts receivable $ 70,000

c. Raabe, Maloney, Young, & Nellen, CPAs

b. Amount realized $32,500

c. Amount realized $20,000

b. The cost recovery for the four-year period is calculated as follows:

Year 1 $129,500 × 2.461% = $ 3,187

The bed-and-breakfast is 39-year nonresidential real property.

Recognized gain $107,509 $ 3,500

*Original basis for gain $140,000

c. Surendra’s basis for gain is the adjusted basis of $340,000.

Recognized gain $ 2,000

Fair market value $17,500

b. The answer will be the same as in part a.

Amount realized ($89,000 + $3,000) $ 92,000

c. Martin’s recognized gain is calculated as follows:

Amount realized $120,000

Recognized gain $ 45,000

e. Raabe, Maloney, Young, & Nellen, CPAs

b. Amount realized $15,000

Recognized gain $ 3,000

b. The basis for Machine B is its cost of $15,000.

d. Amount realized $ 12,000

Recognized loss ($ 3,000)

b. Recognized gain = $5,000 (on property given up that is not like-kind).

Recognized gain $ –0– $ 12,000

Amount realized ($80,000 + $12,000) $ 92,000

Recognized gain $ 12,000

The basis for the replacement property is:

b. Amount realized $ 525,000

c. Amount realized $ 525,000

b. Wesley’s basis for his new residence is its cost of $325,000.

c. Amount realized ($800,000 − $23,480) $ 776,520

BRIDGE DISCIPLINE PROBLEMS

1. a. Book depreciation [($100,000 – $12,000) ÷ 8 × 1/2] $5,500

Year 1 ($100,000 × .20) $ 20,000

b. No. Inventory does not qualify as productive use or investment property.

d. No. Securities do not qualify as productive use or investment property.

h. No. Stock does not qualify as like-kind property under § 1031.

k. No. The exchange of partnership interests do not qualify as a like-kind exchange.

Raabe, Maloney, Young, & Nellen, CPAs

January 13, 2017

Mr. Melvin Sims

Dear Mr. Sims:

If I can be of further assistance, please let me know.

Betty Williams, CPA

b. TAX FILE MEMORANDUM

DATE: January 10, 2017

FROM: Betty Williams

SUBJECT: Valuation in Ruth Ames Estate of Property Bequeathed to Annette Rust

Research Problems 4 and 5

SOLUTIONS TO ROGER CPA REVIEW QUESTIONS

We had a charming walk over the high, breezy moor, and

Magdalen herself was at work in her garden, gathering of