Taxation

Parkview, Inc.’s warehouse, which has an adjusted basis of $380,000 and a fair market value of $450,000, is condemned by an agency of the Federal government to make way for a highway interchange. The initial condemnation offer is $410,000. After substantial negotiations, the agency agrees to transfer to Parkview a surplus warehouse that it believes is worth $450,000. Parkview is a calendar year taxpayer. The condemnation and related asset transfer occurred during September 2010.

a. What are the recognized gain or loss and the basis of the replacement warehouse if Parkview’s objective is to recognize as much gain as possible?

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b. Advise Parkview regarding what it needs to do by what date in order to achieve its objective.

Lark Corporation’s office building is destroyed by a hurricane in September. The adjusted basis is $210,000. Lark receives insurance proceeds of $390,000 in October.

a. Calculate Lark’s realized gain or loss, recognized gain or loss, and basis for the replacement property if it acquires an office building for $390,000 in October.

b. Calculate Lark’s realized gain or loss, recognized gain or loss, and basis for the replacement property if it acquires a warehouse for $350,000 in October.

c. Calculate Lark’s realized gain or loss and recognized gain or loss if it does not acquire replacement property.

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