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chapter 14
fred is an investor in vacant land. when he thinks he has identified property that would be a good investment, he approaches the landowner, pays the landowner for a “right of first refusal” to purchase the land, records this right in the property records, and then waits to see if the land increases in value. the right of first refusal is valid for four years. fourteen months ago, fred paid a landowner $9,000 for a right of first refusal. the land was selected as the site of a new shopping center, and the landowner was offered $1 million for the land. in its title search on the land, the buyer discovered fred’s right of first refusal and involved him in the purchase negotiations. ultimately, the landowner paid fred $220,000 to give up his right of first refusal; the landowner then sold the land to the buyer for $4,220,000. fred has a marginal tax rate of 35%.
a. what difference does it make whether fred treats the right of first refusal as an option to purchase the land?”
b. what difference does it make whether fred is a “dealer” in land?

carla was the owner of vacant land that she was holding for investment. she paid $1 million for the land in 2011. raymond was an investor in vacant land. he thought carla’s land might be the site of an exit ramp from a new freeway. raymond gave carla $836,000 for an option on her land in 2012. the option was goof for two years and gave raymond the ability to purchase carla’s land for $4,765,000. the freeway was not approved by the government, and raymond’s option expired in 2013. does carla have $836,000 of long term capital gain upon the expiration of the option? explain.
hilde purchased all of the rights to a patent on a new garden tool developed by a friend of hers who is an amateur inventor. the inventor obtained the patent rights set up a manufacturing company to produce and sell the garden tool and produced substantial quantities of the tool, but he then became discouraged when no large garden company would agree to distribute the tool for him. hilde purchased the patent rights (but not the manufacturing company) for $120,000 on october 24, 2012. hilde had never engaged in such a transaction before, but she is a salesperson in the garden industry and thought she could succeed where her friend failed. on june 27, 2013 she sold all patent rights to garden tool company for $1,233,000. garden tool will manufacture the tool in its own factory and sell it to its customers. what is the nature of hilde’s gain from this transaction?

chapter 15

38. lorenzo owns two apartment buildings. he acquired forsythia acres on february 21, 1998, for $300,000 ($90,000 allocated to the land) and square one on november 12, 2013 for $800,000 ($100,000 allocated to the land). neither apartment complex qualifies for low income housing. if lorenzo elects to write off the cost of each building as quickly as possible, what is the effect of depreciation (cost recovery) on his amti for
a. 1998
b. 2013
39. helen carlton acquired used equipment for her business at a cost of $300,000. the equipment is five year class property for regular income tax purposes and for amt purposes. helen does not claim any additional first year depreciation.
a. if helen depreciated the equipment using the method that will produce the greatest current deduction for regular income tax purposes, what is the amount of the amt adjustment? helen does not elect §179 limiting expensing.
b. how can helen reduce the amt adjustment to $0? what circumstances would motivate her to do so?
c. draft a letter regarding the choice of depreciation methods. helens address is 500 monticello avenue, glendale az 85306.
45 freda acquired a passive activity this year for $870,000. gross income from operations of the activity was $160,000. operating expenses, not including depreciation were $122,000. regular income tax depreciation of $49,750 was computed under macrs. amt depreciation, computed under ads, was $41,000. compute freda’s passive loss deduction and passive low suspended for regular income tax purposes and for amt purposes.

47wolfgang is age 33. his agi is $125,000. he reports the following itemized deductions for 2013:
medical expenses [$15,000 – (10% x $125,000)] $2,500
state income taxes $4,200
charitable contributions $5,000
home mortgage interest on his person residence $6,000
casualty loss (after $100 and 10% reductions) $1,800
miscellaneous itemized deductions [$3,500 – (2% x $125,000)] $1,000
a. calculate wolfgang’s itemized deductions for amt purposes.
b. what is the amount of the amt adjustment?
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