Accounting

Offshore Fishing Corporation, a calendar year taxpayer, is going to sell real estate DECISION MAKING that it no longer needs. The real estate is located in Corpus Christi, Texas, and has an adjusted basis of $540,000($900,000 $360,000 MACRS straight-line depreciation) and a fair market value of $840,000. (ADS straight-line depreciation would have been $312,000.) The buyer of the real estate would like to close the transaction prior to the end of the calendar year. Offshore Fishing, however, is uncertain whether the tax consequences would be better if it sold the real estate this year or next year. It is considering the following options. l $840,000 in cash payable on December 31, 2010. l The sale will be closed on December 31, 2010, for consideration of an $840,000 note issued by the buyer. The maturity date of the note is January 2, 2011, with the real estate being pledged as security. Offshore projects its taxable income for 2010 and 2011 to be $900,000 (gross receipts of about $10 million) without the sale of the real estate.

Determine the tax consequences to Offshore under each option and recommend the one that should be selected. Consider both the regular income tax and the AMT in making your recommendation.

Solution:

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