Exam Number: ________

GEORGETOWN UNIVERSITY LAW CENTER

TAXATION OF PROPERTY TRANSACTIONS
COURSE ASSIGNMENT
November 15, 2012
INSTRUCTIONS:
1.

This is an OPEN BOOK, TAKE HOME assignment. You may use computers,
calculators, publicly available research materials, and study aids prepared by you
or by a study group of which you are a member. ONCE THIS ASSIGNMENT
IS MADE AVAILABLE TO YOU, HOWEVER, YOU MAY NOT
CONSULT WITH ANY STUDENT IN THE CLASS OR WITH ANY
OTHER PERSON ABOUT THE SUBJECT MATTER OF THE
ASSIGNMENT.

2.

The assignment consists of one question with multiple parts. The primary
component of your answer MUST take the form of the spreadsheet template that
has been posted on the Courseware site for this course. In addition to your
spreadsheet, you MAY submit a word processing document containing textual
notes or explanatory statements relating to entries on the spreadsheet, but the text
of all explanatory materials may not exceed 5,000 characters (including spaces).
Your spreadsheet and a single word processing document containing the text
of all explanatory materials must be submitted to Professor Smiley by email
directly to his Georgetown Law Center email address.
PLEASE BE SURE TO PLACE YOUR EXAMINATION NUMBER
CLEARLY ON EACH ELECTRONIC FILE THAT YOU SUBMIT.

3.

Please state clearly in your explanatory notes any factual assumptions on which
you rely. Please provide in your explanatory notes any legal authorities for any
legal interpretations you are making that you consider open to question.

4.

There is no need to discuss areas of tax law on which this course did not focus
(e.g., partnership tax law). You may make any necessary assumptions as to the
applicable law but please state them clearly.

5.

This assignment will be distributed by email by Professor Smiley at

approximately 9:00 AM on Thursday, November 15. PLEASE REMEMBER
THAT YOU MUST SUBMIT YOUR ANSWER TO PROFESSOR SMILEY BY
EMAIL BY 5:00 PM ON FRIDAY, DECEMBER 7.

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Course Assignment November 2012

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6.

This assignment is final. There will be no clarifications or changes. If you

believe there is an error, inconsistency, or omission in the assignment, please state
your assumptions about the issue within your discussion of that issue.

7.

This assignment consists of seven (7) pages (including the two cover pages).
Please be sure that your assignment is complete.
Good Luck!

BY SUBMITTING THIS ASSIGNMENT TO PROFESSOR SMILEY BY EMAIL, I AFFIRM

ON MY HONOR THAT I AM AWARE OF THE STUDENT DISCIPLINARY CODE, AND
THAT I:
(I)

HAVE NOT GIVEN NOR RECIEVEDANY UNAUTHORIZED AID

TO/FROM ANY OTHER PERSON OR PERSONS; AND

(II)

HAVE NOT USED ANY UNAUTHORIZED MATERIALS IN WRITING

MY ANSWERS TO THIS ASSIGNMENT.

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Tax Facts
Mr. and Mrs. A report all of their income and deductions, including all of their business
income and deductions, on their joint personal return.
Mr. and Mrs. A use the cash method of accounting with respect to all of their activities.
Mr. and Mrs. A use straight-line depreciation for buildings, computed monthly. The
depreciable life of commercial real estate is 39.0 years (468 months) and the depreciable life of
residential rental property is 27.5 years (330 months).
Mr. and Mrs. A use MACRS depreciation for other tangible assets. Assume that all of
their other tangible assets constitute 5-year property and are subject to the following MACRS
depreciation schedule:
Year
1
2
3
4
5
6

Percent of Basis Deducted

20%
32%
19%
12%
12%
5%

Please assume that Mr. and Mrs. A received and paid all rent on leases and interest on
loans outstanding at the end of 2011 before the end of 2011 and will report or deduct all such
rent and interest on their 2011 return. Due to complexities in computation, please ignore rent
and interest becoming due in 2012 on leases and loans outstanding on January 1, 2012.
Marginal Federal income tax rate for ordinary income: 35.0%
Marginal Federal long-term capital gains rate: 15.0%, except for unrecaptured
depreciation on real estate (taxed at 25.0%) and gain from collectibles (taxed at 28.0%).
Applicable Adjusted Federal Rate: 2% per annum.

Your Task
Please estimate Mr. and Mrs. As tax bill for 2012. In making your estimate, please
assume that Mr. and Mrs. A will make use of all available opportunities to defer the tax on their
transactions into years after 2012. In addition, please compute the amounts of income and
deduction that Mr. and Mrs. A will have to report in years after 2012 with respect to the
transactions closed in 2012.

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Statement of Facts
It is November 15, 2012, and your clients, Mr. and Mrs. A, have asked you to project
their Federal income tax bill for the year 2012. In order to permit you to estimate their tax, they
provide you with the following information.
Mr. and Mrs. A operate as a team in the real estate development business in City. Both
come from prominent families that have been active in the business affairs of City for many
decades.
Vacation Condo
Mr. and Mrs. A have owned a home in City for many years. On March 1, 1990, they
purchased a second home on a lake about an hours drive from City. They made a cash down
payment of $200,000 on this second home and financed the balance of the $1,500,000 purchase
price by taking out a mortgage loan from Bank that required interest at 8% per annum payable
monthly in arrears, plus a payment of principal in the amount of $5,000 each month, also in
arrears, until the loan was paid in full. Under applicable local law, mortgages on residences are
always nonrecourse, with the residence serving as the only collateral for the mortgage loan.
Since 1990, Mr. and Mrs. A have made all required monthly payments on this loan.
In late 2011, Mr. and Mrs. A decided that they were not using their lake house enough to
justify its costs and put it on the market. They quickly found a buyer and entered into a sales
contract under which the buyer agreed to pay them $250,000 in cash and give them a purchase
money note in the principal amount of $2,250,000, with interest at 4% per annum payable
monthly in arrears, but no principal payments until the note came due in full after 5 years. Mr.
and Mrs. A closed the sale of the lake house to this buyer according to its terms on March 1,
2012.
House Lots
Mrs. A purchased a tract of land in City measuring approximately 10 acres on June 1,
2008. She paid the seller $200,000 in cash. She held the land unimproved for 3 three years but,
on June 1, 2011, she arranged a 2-year line of credit with Bank enabling her to borrow up to
$1,800,000 from Bank to cover the costs of subdividing the tract of land into 20 home lots (1/2
acre each) and putting in basic services including water and sewer, power and roads. She
proceeded to draw down the letter of credit in full and completed the anticipated improvements
to the tract of land by June 1, 2012, at a total cost (including construction period interest) of
$1,800,000.
Mrs. A placed ads in local newspapers and made other marketing efforts that quickly
yielded results. By September 30, 2012, she had buyers for 10 of the lots. She expects to close
on the sale of these 10 lots on December 31, 2012, for a price of $265,000 per lot. The buyer of
each lot will be required to pay Mrs. A $25,000 in cash; to give Bank his or her full recourse note
in the principal amount of $90,000, which amount will be credited against the outstanding
principal balance of Mrs. As construction loan; and to give Mrs. A his or her nonrecourse note
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in the principal amount of $150,000, with interest at 4% per annum payable monthly in arrears,
but no principal payments due until the note comes due in full after 5 years.
Apartment
On June 15, 1995, Mr. A: first, acquired a long-term lease on a parcel of land, paying the
seller no cash consideration but undertaking the sellers obligations under the lease for the
balance of the 99-year lease term; and second, purchased the 10-unit rental apartment building
on the land for $3,000,0000, paying cash of $400,000 and giving his nonrecourse note in the
principal amount of $2,600,000, bearing interest at 6 percent, payable monthly in arrears, and
requiring a principal payment of $10,000 a month, also payable in arrears. Mr. As cash flow
from rents just about covered his out of pocket expenses, including interest.
On June 15, 2012, Mr. A transferred the lease and the building (subject to the outstanding
mortgage note) to another real estate developer in town in exchange for a 30-acre tract of land
that Mr. A planned to develop into a commercial rental project. The 30-acre tract had been on
the market for only a few weeks when Mr. A put in his offer, and had attracted a number of
offers that Mr. A believed were at or close to the asking price of $1,800,000. No cash changed
hands at the closing.
Office
On January 2, 2001, Mr. A acquired a long-term lease on a parcel of land in City by
assuming the prior lessees obligations under the lease. On the same day, he paid $350,000 to
purchase an old warehouse building that stood on the land and closed on a construction loan in
the amount of $1,650,000 to pay for the reconstruction of the warehouse into 5 rental offices.
Mr. A gave the construction lender his personal recourse note requiring monthly payments of
interest during construction but no payments of principal. Mr. A completed construction in early
September 2001, at which time he refinanced the construction loan with a nonrecourse
permanent mortgage loan in the principal amount of $1,650,000, bearing interest at 6 percent,
payable monthly in arrears, and requiring a principal payment of $10,000 a month, also payable
in arrears beginning on October 15, 2001. Mr. A executed his first lease of an office to a tenant
on September 15, 2001.
In 2011, City gave Mr. A notice that it proposed to take the land on which the apartment
building was located to facilitate the construction of a new highway. Mr. A negotiated with City
and eventually agreed to deed the property over to City in exchange for $330,000 in cash and
another block of offices worth approximately $2,170,000, subject to a 30-year mortgage in the
principal amount of $500,000, bearing interest at 5% per annum, payable monthly, but requiring
no payments of principal until 2016. The exchange closed on September 15, 2012.
Purchase Money Note
On October 31, 2001, Mrs. A. made a loan in the principal amount of $850,000 to her
brother to allow her brother to go into the business of developing computer peripherals. Her
brother invested the entire sum in the stock of a new corporation that he formed to engage in the
business (Newco). Her brother gave Mrs. A a full recourse note for $850,000, bearing interest at
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10 percent per annum, payable monthly in arrears, with principal payable at the rate of $2,500
per month, payable monthly in arrears. In addition, Mrs. As brother granted Mrs. A a first
priority lien on the stock of Newco as security for repayment of the loan.
Sadly, Mrs. As brother was killed in a car accident in April of 2012. He left nothing of
value except for the stock of Newco, which Mrs. A seized. Mrs. A eventually managed to sell
the stock to a publicly-owned computer manufacturer for $350,000, paid in cash on October 31,
2012.
Leased Airplane
On July 1, 2010, Mr. and Mrs. A purchased a commercial airplane which they planned to
lease through an airplane time-sharing service (the Time-Sharing Service). They paid
$150,000 in cash and paid the balance of the purchase price by borrowing $450,000 from the
Time-Sharing Service, giving the Time-Sharing Service their full recourse note in the principal
amount of $450,000, bearing interest at 9 percent, payable monthly in arrears, and requiring a
principal payment of $15,000 a month, also payable in arrears.
On July 1, 2012, the Federal Aviation Administration seized the airplane upon
discovering that it was being used to transport cocaine from Miami to destinations across the
United States. The Time-Sharing Service, which still held Mr. and Mrs. As note, agreed in
October 2012 not to make any effort to collect the outstanding balance of the note after Mr. and
Mrs. A threatened to sue the Time-Sharing Service for fraud on the grounds that it knew or
should have known the use to which the airplane would be put. Mr. and Mrs. A hired a lawyer to
sue the Federal Aviation Administration but soon gave up the effort because their lawyer advised
them their cause was hopeless.
Greek Bonds
On April 1, 2002, in a fit of national pride, Mr. A, who was of Greek descent, purchased
Greek government bonds with a principal amount of $250,000 for $250,000 in cash. Ten years
later, of course, the Greek government was in dire straights and the bonds were in deep jeopardy.
From April through November 2012, old Greek bonds with a face amount of $250,000 traded at
an average of $175,000 on the Greek stock exchange.
In November of 2012, the Greek government offered to issue new bonds for its
outstanding issue of old bonds, including Mr. As bond. Mr. A accepted the Greek governments
exchange offer and, accordingly, Mr. A will receive, on December 31, 2012, in exchange for his
outstanding bond, a new Greek government bond in the stated principal amount of $250,000,
with a single payment of the stated principal amount to be made on December 31, 2017.
Leased Power Boat
Mr. A purchased a power boat on August 1, 2007, with the intention of renting it through
his local marina on a daily or weekly basis. He paid $25,000 in cash and gave the seller his full

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recourse note for $125,000, bearing interest at 9 percent, payable monthly in arrears, and
requiring a principal payment of $2,000 a month, also payable in arrears.
Mr. As local marina decided to stop arranging boat rentals at the beginning of the
summer season in the spring of 2012, and Mr. A had neither the knowledge nor the inclination
to continue renting the boat on his own. He placed an ad in the marinas monthly newsletter and
received one offer for the boat. He accepted the offer and sold the boat, for $75,000 in cash on
August 1, 2012.
Painting
On June 1, 2005, Mrs. As grandfather died, leaving Mrs. A a painting that he had
purchased in 1950 for $50,000, but that was appraised in his estate at $250,000. Mrs. A was not
at all fond of the painting but, in deference to her grandmother, exhibited the painting in a study
of her house. After her grandmother died on June 1, 2012, Mrs. A immediately sold the painting
through a New York auction house for $450,000 in cash
.
Sculpture
On June 1, 2006, Mrs. As grandmother gave Mrs. A a piece of sculpture that she had
inherited at her husbands death. Mrs. As grandfather had purchased the sculpture in 1998 for
$95,000; it was appraised in Mrs. As grandfathers estate at $125,000 and was estimated to have
risen in value to $150,000 by the time that Mrs. As grandmother gave it to Mrs. A. Less than a
month after her grandmothers death in 2012, Mrs. A exchanged the piece of sculpture for a coin
collection that had been offered for sale by a coin dealer for $160,000.
Book Collection
Mrs. A also inherited from her grandfather a modest collection of antique books that her
grandfather had purchased over the years for an aggregate purchase price of $15,000. The book
collection was valued at $25,000 in Mrs. As grandfathers estate. After her grandmothers
death, Mrs. A offered to sell the book collection to a book dealer in New York. The book dealer
declined to purchase the collection outright but on December 1, 2012, paid Mrs. A $5,000 for an
option to purchase the collection for $40,000 if it found a buyer within 180 days.
Commercial Van
Mr. and Mrs. A purchased a delivery van for use in their real estate business on January
2, 2009, for a cash purchase price of $45,000. The van was destroyed in the collision that killed
Mrs. As brother in April of 2012. In September of 2012, Mr. and Mrs. A accepted $6,500 from
their insurance carrier in complete settlement of their claim for the loss of the van.

END OF ASSIGNMENT

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