[Operation_CPA]

Can someone explain to me if this is correct? There has been some discussion about this in the FAR group and having some clarification would be great.

For exchanges that LACK commercial substance, and the boot is PAID:

The Becker text states, Boot is paid = no gain (<25% rule). HOWEVER, the explanation below it says “If the transaction lacks commercial substance and boot is paid, no gain is recognized.” (But does NOT mention the 25% rule) So how does this 25% rule come into play??

Is this correct? OR is no gain recognized period?

Boot is paid = No gain (if under 25%) –> If over 25% recognized all of the gain
………..To get percentage –> Boot paid / FV given (Consideration) = %

Thanks in advance.

[vodrldnr]

If there is No commercial substance

Then you have to think about the 25% rule

Whether boot is given or paid is the one coming after the 25% rule.

If the book talks about whether the boot is given or paid, it talks about the step coming nest to 25% cash rule, assuming that there cash involvement is less than 25%.

[Operation_CPA]

@vodrldnr

Right, so we take into account the 25% rule if the boot is paid is the gist I'm getting. Thank you for clarifying that. That being said, I'm having a hard time understanding your explanation…

Boot paid = no gain (under 25%) <— does this imply that we recognize no gain at all if the % is less than 25% ?

Boot paid, but it is over 25% –> Is the entire gain recognized or only a proportion of it?

[Nutcracker2016]

Ok, I am also going to take FAR in another 4-5 days. Non monetary exchange is very confusing to everybody. But, finally I think I got it. If I am going wrong somewhere scholars please correct me. From what I have understood and applied in problems( and the answers are right)

1) In all non-monetary exchanges whether it has commercial substance or it lacks it new asset is a PLUG. Do your journal entries first before arriving at the value . Don’t record it with any number given in the problem.

2) In all non-monetary problems, record with only Book values. Fair values are used to compute gains and losses.

3) In exchanges lacking commercial substance, person receiving the money ONLY will record the GAIN. if it is >25% recognize all gains. If It is less than that recognize proportionate amount only for example if it is 10% recognize ONLY 10%. Person giving the money WON’T recognize any gain

4) Gain formula is nothing but cash received /FMV of the asset . For example if the FMV of the asset given by the person who is receiving cash is 50000 and FMV of the product he is giving is 500000 then it is 50000/500000= 10%.

5) For example, If the seller is receiving cash $50,000 and FMV 500000 and giving away old land CV in his books for 350000 entry is Dr.New land (PLUG) 315000
Dr. Cash 50000
Cr. Old land 350000
Cr. Gain on exchange 15000
6) Receivers books
NEW(PLUG)
Cr. Cash
Cr Old land

[vodrldnr]

@Operation_CPA, Do not even think about the boot before you consider the cash involvement

Only think about the boot paid or received after the 25% rule.

<Your question>
Boot paid = no gain (under 25%) <— does this imply that we recognize no gain at all if the % is less than 25% ?Boot paid, but it is over 25% –> Is the entire gain recognized or only a proportion of it?

BUT instead of thinking like this. You have to “FIRST” thank about the 25% rule.

If it is over 25%, then you are not supposed to consider any further because it is not the non monetary transaction anymore.

Cash involvement over 25% is Monterey transaction. Therefore, you recognize full gain whether or not the boot is received or paid.

[Author]

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