Taxes R Us, an accounting firm, bought furniture from Sears for $70,000, paying with a $70,000 promissory
Question:
Taxes R Us, an accounting firm, bought furniture from Sears for $70,000, paying with a $70,000 promissory note. Unfortunately, Taxes R Us lost several large tax clients and notified Sears that they would have trouble paying the total amount on the promissory note. Because Sears wanted to maintain a strong business relationship with Taxes R Us, Sears decided to accept $40,000 in cash and discharge the remaining $30,000 debt.
Taxes R Us' balance sheet immediately before the discharge and payment of the $40,000 was as follows:
| Adjusted Basis | FMV |
Cash | 45,000 | 45,000 |
Fixed Assets (Including furniture) | 105,000 | 95,000 |
Liabilities | - | 175,000 |
Taxes R Us also has a $7,000 Capital Loss carryforward and a $1,000 General Business Credit carryforward to the current year.
a) How much income should Taxes R Us include related to the $30,000 discharge of debt?
b) Comment about any effect on tax attributes assuming Taxes R Us does NOT make a Sec. 108(b)(5) election. Show all calculations.
c) Comment about any effect on tax attributes assuming Taxes R Us does make a Sec. 108(b)(5) election. Show all calculations.
d) Same as (a), but suppose that Taxes R Us' balance sheet showed liabilities of only $70,000 (rather than $175,000) immediately before the discharge. Then, what would have been the tax consequences to Taxes R Us?)
e) Same as (a), except that the Sears agreed to discharge the $30,000 debt in exchange for Taxes R Us preparing Sears' tax return. The fair market value of Taxes R Us's services to complete the return is $30,000. What is the tax impact to Taxes R Us?
