Assignment 2: Case Study

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Section 1231(a)(3)(A)(ii) states that recognized gains on money or property that result from involuntary conversions are included as Section 1231 gains. However, because the recognized gain resulted because Mame depreciated the property for tax purposes more than she should have, the gain is subject to depreciation recapture rules to determine whether the recognized gain will be treated as capital or ordinary. The property had a fair market value at the time of the fire of $1,000,000, but Mame’s adjusted basis in the property was only $100,000, which means that she depreciated the furniture by $900,000 too much. Section 1245(b)(4) states that the amount of the capital gain that will be recaptured as ordinary income is limited to the gain recognized, $150,000. Therefore,…show more content…
b. If it takes Mame 2 ½ years to construct the hotel, will she still be able to defer the gain given that the Code provides a 2 year period? In order to qualify for this exception under Section 1033(a)(2)(b), the property must be purchased within two years of the end of the tax year that the gain is recognized in. According to this rule, Mame would only be able to defer the gain if she is able to accelerate the construction of the hotel. However, the taxpayer can seek an extension from the IRS if construction will not be completed within the two year time period. Rev. Rul. 60-69 states that in order to receive an extension, the taxpayer must “show reasonable cause for not being able to complete the replacement of the converted property within one year after the close of the first

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