QuestionQuestion

Instructions: For each of the four following research questions, please identify the tax issue, list the primary resources that you consulted and explain your analysis and conclusion.

1. Mitchell Communications Inc. owns and operates radio and television stations that broadcast throughthe northwestern United States. This year, Mitchell entered into an agreement with another broadcasting company under which Mitchell surrendered one AM and two FM radio station licenses in Washington for one television station and license in Arizona. Mitchell realized a $3.9 million gain on the exchange. Must it recognize this gain for tax purposes?

2. Mr. Dan Prentice owned an indoor roller-skating rink as a sole proprietorship. On April 9, a flood completely destroyed the rink. Mr. Prentice’s adjusted basis in the rink was $833,400. On May 15, he received a check for $1.1 million from his insurance company in complete settlement of his damage claim. Mr. Prentice is planning to use the entire insurance settlement to purchase 100 percent of the outstanding stock of IceDreams Inc., a corporation that owns an indoor ice-skating rink. Can he defer the
recognition of gain on the involuntary conversion of his roller-skating rink by purchasing the IceDreams stock?

3. Dana purchased 500 shares of Google common stock on October 10, 2014 for $600 per share. On December 31, 2014 she sold the shares for $540 per share. On January 3, 2015 Dana purchased call options giving her the right to purchase 250 shares of Google common stock at $540 per share on or before April 3, 2015. She exercises the options on March 10, 2015. What is the tax treatment of the sale on December 31, and what is her basis in the newly acquired shares of stock?

4. Frank and Patrice have been living in their current home in Austin for four years. Four months ago (December 2014) they decided to build a second home in Rockport to use for family vacations. The couple identified a lot on the water and paid $250,000 for it, with a $50,000 down payment and a mortgage for the remainder of the purchase price. Frank and Patrice plan to start construction on the home within the next few months and hope to have it completed by the summer of 2016. They would like to know how to treat the interest expense associated with the mortgage on the land since it is not considered a residence until construction is complete.

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QUESTION 1:

Facts: Mitchell Communications Inc. received a television station and license in Arizona from another broadcaster in exchange for radio station licenses in Washington. The television station and license is valued at $39 million above the radio station licenses.
Issues: Whether Mitchell Communications Inc. must recognize the gain of $39 million that it realized on the exchange of licenses for tax purposes.
Law: IRC Sec. 1031 (a)(1), IRC Sec. 1031(a)(3)
Analysis and conclusion: The exchange between the two companies did not involve a cash transaction, but rather a swap of broadcasting licenses in different states. The licenses are properties of like kind. Consequently, the gain is from an exchange solely in kind, and for tax purposes falls under IRC § 1031 since the licenses were held for productive use in business. Because Mitchell Communications Inc. received the TV license in kind, and gave the other party radio licenses the company should not recognize the gain for tax purposes....
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