ANSWER: When the cost is equal to or greater than the fair market value as at March 1, 1913, and the selling price exceeds the cost, the taxable profit is the excess of the selling price over the cost. This profit is therefore computed as follows: Amount received at date of sale, 10,000 shares at $100.00 per share Less: Cost 10,000 shares at $90.00 per $1,000,000 share Taxable profit 900,000 $ 100,000 REFERENCES: Sec. 202 (b) (1). (Quoted under Problem 19.) Art. 1561, Regulations 62: "... Where the cost is equal to or greater than the fair market value as at March 1, 1913, and the selling price exceeds the cost, the gain to be included in gross income is the excess of the selling price over the cost. PROBLEM 24 Illustrating Method of Determining Gain from Sale of Property Acquired by Purchase Prior to March 1, 1913, in Case the Fair Market Value of the Property on March 1, 1913, is Greater than Cost but Lower than Selling Price FACTS: William Hewitt, on May 1, 1900, purchased a certain lot for $10,000. The appraised value of this lot on March 1, 1913, was $15,000. On July 6, 1921, Mr. Hewitt sold this lot for $25,000. QUESTION: How much taxable profit did Mr. Hewitt derive from the sale? ANSWER: As the lot in question was acquired prior to March 1, 1913, and its value on that date was in excess of cost, such value is under the law used as the basis for determining the profit which is computed as follows: Sec. 202 (b): "The basis for ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, shall be the same as that provided by subdivision (a); but (1) If its fair market price or value as of March 1, 1913, is in excess of such basis, the gain to be included in the gross income shall be the excess of the amount realized therefor over such fair market price or value; For quotation of section 202 (a) see Problems 15, 16, 17 and 18. PROBLEM 25 Illustrating the Basis for Determining Gain or Loss When Property is Exchanged for Property not Having a FACTS: Readily Realizable Market Value Mr. William Howe purchased 160 acres of farm land located near Springfield, Mass., for $4,000 on May 1, 1918. He exchanged the above farm land October 1, 1921, for one thousand acres of uncleared land located in Northern Minnesota. Uncleared land in the same locality in Minnesota as the above had been sold two years previous for $5 per acre, but there were no subsequent sales of such property, although real estate dealers carried large blocks of this kind of property on their books for sale. QUESTION: Did Mr. Howe derive a taxable profit or sustain a deductible loss from the above transaction? ANSWER: Mr. Howe's taxable status remains the same as if the above exchange had not taken place, since the uncleared land did not have a readily realizable market value at the date of exchange. No gain or loss is recognized unless the property received in exchange has a readily realizable market value. REFERENCE: Sec. 202 (c) : "For the purposes of this title,1 on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value. 1 Refers to Title II, covering income tax. PROBLEM 26 Illustrating the Basis for Determining Gain or Loss When Property Is Exchanged for Property of a Like Kind or Use FACTS: On August 6, 1918, the Wagner Furniture Company, a wholesale furniture house located in New York City, paid $15,000 for a storage warehouse in Jersey City. The furniture stored in this warehouse was used to supply the demands of New Jersey customers. In the early part of 1921, the New Jersey Glass Company desired to extend its factory which was located on the lot adjacent to the above-mentioned warehouse so as to take in the warehouse and offered either to pay $20,000 cash or to exchange one of its warehouses in Hoboken, N. J. for the Jersey City warehouse. The Wagner Furniture Company decided to accept the second offer. Deeds to the properties in question were exchanged May 9, 1921. QUESTION: Did the Wagner Furniture Company derive a taxable profit from the above transaction? ANSWER: No taxable profit resulted from the above transaction even though the property received in exchange had a readily realizable market value, because property was exchanged for property of a like kind or use. REFERENCE: Sec. 202 (c): "For the purposes of this title,1 on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized "(1) When any such property held for investment, or for productive use in trade or business (not including stock-in-trade or other property held primarily for sale), is exchanged for property of a like kind or use; . . ." PROBLEM 27 Illustrating Basis for Determining Gain or Loss, When in a Reorganization Stock of One Corporation is Exchanged for Stock of Another Corporation a Party to the FACTS: Reorganization The Corby Steel Company was consolidated June 10, 1921, with the Northwestern Steel Company. Mr. Hiram H. Corby was the owner of eight thousand shares, or 80 per cent of the total outstanding capital stock (all of one class) of the Corby Steel Company stock on June 10, 1921. He had acquired this stock for $50 per share on April 1, 1912. As the result of the consolidation of the two companies above mentioned, Mr. Corby received in exchange for his eight thousand shares of Corby Steel Company stock an equal number of shares of Northwestern Steel Company stock. This exchange took place June 10, 1921, on which date the stock of the Northwestern Steel Company received by Mr. Corby had a market value of $110 per share. QUESTION: Did Mr. Corby derive a taxable profit from the above transaction? If so, how much? ANSWER: Mr. Corby derived no taxable profit whatsoever from the above exchange of stock as no gain or loss is recognized for tax purposes when in the reorganization of one or more corporations a person receives in place of stock owned by him, stock in a corporation a party to such reorganization. REFERENCE: Sec. 202 (c): "For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized. ... (2) When in the reorganization of one or more corporations a person receives in place of any stock or securities owned by him, stock or securities in a corporation a party to or resulting from such reorganization. The word 'reorganization' as used in this paragraph, includes a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or of substantially all the properties of another corporation), recapitalization, or mere change in identity, form, or place of organization of a corporation, (however effected); PROBLEM 28 Illustrating Result of Exchanging Property for Stock in a Corporation whose Stock is closely Held FACTS: Mr. Wm. Kelly, sole owner of a glove factory which had a value on January 1, 1921, of $50,000, formed a corporation with an authorized capital stock of $100,000, (all of one class) and known as the Kelly Manufacturing Company. He received 800 shares of par value of $100 per share for the glove factory and his goodwill. Herbert Jones and Morris Cohn each paid in $10,000 for 100 shares of stock, apiece, in the new corporation. QUESTION: How much taxable profit did Mr. Kelly receive from the sale of his factory? |