INTEGRATIVE PROBLEM
Emelio and Charita are married taxpayers with 2 dependent children. Emelio starts a computer consulting business in 2013. Charita works as a real estate broker. During 2013, they have the following property transactions:
a. Emelio purchases an office building on March 15, 2013, to use in his computer consulting business. The price of the property is $120,000. He pays $15,000 in cash and signs a 30-year, 10% mortgage for the remainder. For property tax purposes, the land is assessed at $10,000 and the building at $30,000. Emelio pays $3,000 for a new roof for the building.
b. Emelio was employed by Computer Corporation as a consultant before starting his own business. Computer Corporation lets Emelio purchase the computer equipment in his office for use in his business. He makes the purchase on April 3, 2013. The fair market value of the equipment is $20,000, but Emelio pays $16,000 to Computer Corporation. Computer Corporation's original basis in the equipment was $36,000, and its adjusted basis at the time of the transfer to Emelio is $8,000.
c. Emelio takes the color printer that the children have been using at home to use in the office in his consulting business. The original price of the printer was $8,000, but it is worth $4,000 when converted to business use on April 1, 2013.
d. On March 30, 2013, Emelio buys office furniture to use in his business for $2,200.
e. In January, Charita purchases a new car to use in her real estate business. She pays $19,500 for the car and $1,500 to have a sunroof installed in it. During the year, she drives the car 6,800 miles for business and 3,200 for personal use.
f. Charita uses a room in their home exclusively and regularly as an office. The room is 12 feet by 12 feet. The total area in the home is 2,400 square feet.
Charita purchased office furniture for $800 when she started using the office in the home in June 2008. She and Emelio paid $140,000 for the property in 2003, of which $20,000 is allocated to the land.
g. Emelio and Charita own a rental house. Charita acquired the house from her former husband in 2004 as part of their divorce settlement. Charita and her former husband paid $50,000 for the house (which is her basis in the property) in 1997. Charita estimates that the property increased in value to $80,000 ($70,000 for the house, $10,000 for the land) when it was converted to rental property in October 2005.
h. Charita inherits 200 shares of stock in Desmond, Inc., from her uncle, who paid $700 for it in 1981. At the date of the uncle's death, the stock is worth $14,000. The executor of the estate elects to use the alternate valuation date, at which time the stock is worth $13,300. Charita receives the stock 2 months later when it is worth $14,500.
i. Emelio and Charita own stock in Software Corporation. They purchased 1,000 shares for $20 per share in July 2006. They paid $400 in brokerage commissions. On July 21, 2013, Software Corporation distributed a 2-for-1 stock split. The fair market value at the time of the split was $100 per share.
j. On July 21, 2008, Emelio's father gave him 100 shares of stock in Flex Corporation. His father paid $35 per share in June 1999. The fair market value at the date of the gift was $45 per share.
Based on the information provided, determine the initial basis of each of Emelio and Charita's assets. If more than one basis is possible, list the alternatives and explain when each basis would apply.
INTEGRATIVE PROBLEMS
74. In problem 89 of Chapter 9, you were asked to determine the initial basis of Emelio and Charita's business, investment, and personal use assets. In this problem, you are to determine the adjusted basis of the assets as of December 31, 2013. You should disclose all calculations made to arrive at the December 31, 2013, basis values. For depreciable assets and amortizable assets, present the basis in the following form:
Asset: _________________________________
Date acquired: _________________________
Initial basis: _________________________
Depreciation/Amortization life: ________
Depreciation/Amortization deducted to December 31, 2013: __________
(per the schedule here)
Basis on December 31, 2013:_____________
Depreciation/Amortization Schedule:
Year Depreciable Basis Depreciation Percentage Depreciation
Assume that Emelio and Charita have always deducted the maximum depreciation allowable. However, in 2013, because their income is less as a result of the opening of Charita's new business, they do not wish to expense any eligible amounts or claim bonus depreciation.
INTEGRATIVE PROBLEMS
89. In problem 89 in Chapter 9 and problem 74 in Chapter 10, the initial basis and the adjusted basis of Emelio and Charita's assets were determined as of December 31, 2013. During 2014, they have the following transactions related to the assets:
a. In June, an electrical connection shorts out and starts a fire in Emelio's building. The cost of repairing the damage caused by the fire is $11,500. Emelio's insurance policy reimburses him $5,500 for the fire damage.
b. The real estate market begins to deteriorate in 2014. Emelio and Charita decide to sell their rental house before it loses any more value. They sell the house for $76,000 on October 16, 2014. They pay $325 to advertise the property for sale. In addition, they pay $5,200 in brokerage commissions and $1,045 in legal fees on the sale. Because their renters had a one-year rental agreement, Emelio and Charita have to pay the renters $900 to vacate the lease.
c. Emelio's office building is next to a new industrial park development project. The developer needs to run utility lines through Emelio's property. The developer agrees to pay Emelio $2,000 for an easement to run the utility lines along one side of Emelio's property.
d. While assessing the damage caused by the fire, the contractor Emelio hired to repair the damage finds an antique chair that had been sealed behind one wall. Emelio sells the chair to a local dealer for $1,200.
e. Emelio raises the additional cash he needs to complete the building repairs by selling 100 shares of Software Corporation stock for $24 per share. (He pays brokerage commissions of $140.) He also sells 100 shares of Flex Corporation stock for $40 per share. (Brokerage commissions are $200.)
f. Charita decides to upgrade her home office by purchasing new furniture costing $1,300. She gives the old office furniture to her gardener, who agrees to exchange 8 weeks of gardening services for the furniture. The gardener normally charges $50 per week.
g. In addition to these transactions, Charita tells you that a company in which she and Emelio had invested went bankrupt in 2012. They had purchased the stock from Charita's father for $24,000 in 2007. The company was dissolved in 2012, and the shareholders received nothing from the bankruptcy proceeding.
Emelio and Charita had no other capital asset transactions in 2012 and 2013. For each of these transactions, determine the realized and recognized gain or loss and the character of the gain or loss. Do the appropriate year-end netting procedures and determine the effect of the transactions on Emelio and Charita's 2014 adjusted gross income and their income tax liability. Assume that Emelio and Charita's adjusted gross income before considering these transactions is $120,000.