Corgill Corporation sold some property that it had used for storing old equipment. Corgill owned the property for seven years and it had a basis of $234,000. Corgill received $50,000 cash and a note for $100,000 and the purchaser assumed Corgill’s $150,000 mortgage on the property. Corgill also paid a realtor’s fee of $15,000 and other selling expenses of $2,000.

a. What is Corgill’s gain or loss on the sale and what is its character?

b. If the property had been land that Corgill held as an investment, how would your answer change?

The Angel Corporation acquired an office building for $600,000 12 years ago. The corporation claimed $80,000 of cost recovery deductions before it sold the building for $700,000.

a. What is the amount and type of gain or loss that Angel Corporation must recognize on the sale of the building?

b. Would your answer change if Angel were a sole proprietorship?

c. Would your answer change if Angel Corporation incurred $43,000 of Section 1231 losses in the prior year?

An individual taxpayer has the following gains and losses from property transactions. What is the effect on the taxpayer’s taxable income?

$ 4,000 Long-term capital gain
7,000 Long-term capital loss
10,000 Section 1231 gain
6,000 Section 1231 loss
3,000 Short-term capital gain
6,000 Short-term capital loss

Juno Corporation had ordinary taxable income of $127,000 in the current year before consideration of any of the following property transactions. It sold two blocks of stock held for investment. One yielded a short-term capital gain of $8,000 and the other a long-term capital loss of $14,000. In addition, Juno sold four pieces of machinery for $30,000. It purchased the machines three years ago for $80,000 and claimed $35,000 of depreciation deductions. Juno also sold a building for $400,000 that it had purchased in 1990 for $390,000. The depreciation deductions up to the date of sale for the building were $108,000. Determine Juno Corporation’s taxable income for the current year.

The Gallagher Farms has been in business for a number of years. During the peak planting and harvesting season, it hired a number of temporary workers. To house the temporary workers, it built three buildings that were essentially dormitories that had bathing and sleeping facilities. It provided meals in a central kitchen with an attached dining area. The dormitories were built in 1983 and depreciated under ACRS accelerated methods. Recently, the state declared that the buildings were inadequate for the workers. Gallagher Farms has decided to sell the buildings and the portion of the land on which they sit. It expects to have a $100,000 gain on the land and a $75,000 gain on the sale of the buildings. What is the issues or problems suggested by this situation?

Locate at least one article that comments on the problems confronted by tax planners when there is uncertainty regarding the future of capital gain tax rates and/or individual regular tax rates. Summarize the comments and provide a citation for your article.

Cash Flows ($)
Project C0 C1 C2 C3
A -100 +60 +60 0
B -100 0 0 +140

a. Calculate the NPV of each project for discount raes of 0, 10, and 20%. Plot these on a graph with NPV on the vertical axis and discount rate on the horizontal axis

b. What is the approximate IRR for each project?

c. In what circumstances should the company accept project A?

After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straight-line over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at each date must be maintained at 10% of next year’s forecasted sales. Production costs are estimated at $1.50 per trap and the traps will be sold for $4 each. (There are no marketing expenses.) Sales forecasts are given in the following table. The firm pays tax at 35% and the required return on the project is 12%. What is the NPV?