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**THIS IS FOR A TAX CLASS** 5) Pablo purchased a business machine from Sal at a price of $100,000.
**THIS IS FOR A TAX CLASS**
5) Pablo purchased a business machine from Sal at a price of $100,000. Pablo paid S $10,000 cash and agreed to pay $90,000 balance in nine equal annual installments beginning in the following year. The deferred payments were secured by a security interest in the machine. Two years later, Pablo had reduced the principal balance of the debt to $70,000, but the machine had fallen in value to $50,000. At that point, Sal agreed to accept $50,000 in full satisfaction of the debt principal. What result to Pablo if:
(a) Pablo was insolvent immediately after Sal reduced the debt?
(b) Alternatively, Pablo was solvent at all times?
9) Thomas purchased a building for $500 (000 omitted throughout). Thomas paid $100 cash down and gave a non-recourse note (secured by a mortgage on the property) for the $400 balance. Thomas held the property as an investment. In answering the following question, ignore the land, as if only the building were purchased and sold.
(a) What is Thomas’s basis for depreciation?
(b) Over the next several years, Thomas properly deducts $300 of depreciation, pays $100 on the mortgage principal, and makes all required interest payments. Thomas then sells the building to Paula, who takes the property subject to the remaining $300 mortgage and pays Thomas $250 cash. What is the amount of Thomas’s realized gain or loss?
(c) Suppose instead that after Thomas had properly deducted the $300 of depreciation and reduced the mortgage principal to $300, the building declined in value to $275, at which point Thomas surrendered the property to the mortgagee. What result to Thomas?
(d) Same as (c), except that the building was worth only $150 when it was surrendered to the mortgagee.
(e) How would your answers in (c) differ if Thomas had been personally liable on the indebtedness, but the mortgagee had accepted the property in full satisfaction of the indebtedness? Assume here that Thomas is insolvent immediately after the debt discharge.
(f) How would your answers to (d) differ if Thomas had been personally liable on the indebtedness, but the mortgagee had accepted the property in full satisfaction of the indebtedness? Assume here the Thomas is insolvent immediately after the debt discharge.
