REG Study Group – Q1 2018 - Page 13

Just in case anyone needs motivation to refocus and buckle down on their studies..
Q4 pass rates, and yearly totals still confirm REG to still be the 2nd hardest exam of the 4, with only FAR having a lower pass rate.
https://www.aicpa.org/content/dam/aicpa/becomeacpa/cpaexam/psychometricsandscoring/passingrates/downloadabledocuments/pass-rates-2017.pdf

Stay Focused, stay alive.

Section 291. If C corp sells 1250 (real estate) they have an additional 20% of the depreciation recapture classified as ordinary income.
In the above example, it tells you straight line was used, so normally there would be no Depr Recap on 1250 real estate as there is no accelerated deprecation.
Well, to be more correct. There IS depreciation recapture, but none of it is considered ordinary income since none of it is accelerated.
The 30k depreciation recapture would just be 1231 gain, BUT Sec 291, C corp 20% is ordinary income.

So the 30k x 20% = 6000 ordinary income, the additional is 1231 rules resulting in 44k LTCG, which is also subject to the ordinary income tax rate for a corp.

Sort of a loaded question.

What did you think the answer was?

I also dispute their depreciation calculation. It should be 200k/27.5 years, using mid month convention, so half month in Jan 2014, and half month in Dec 2017.
4 full years would only be 29090.91, less the 303.03 for Jan and 303.03 for Dec.
They could not have 30k in depreciation using the straight line method, but I think I am over analyzing the problem.

let me know if you need further clarification on the above.
I knew 291 was 20% rule, but was not arriving at the correct answer either if that makes you feel any better.

@recked

“In the above example, it tells you straight line was used, so normally there would be no Depr Recap on 1250 real estate as there is no accelerated deprecation. Well, to be more correct. There IS depreciation recapture, but none of it is considered ordinary income since none of it is accelerated.” <—I had this same logic in my head.

I thought the answer was $50K of section 1231 gain. I didn't know about section 291 and if a C corp. sells real estate. Is the computation always equal to the original basis – adjusted basis (net of straight-line depreciation)*20%?

@Katie

I saw that too! Thanks. I tried my best to line-up the Becker SIMs to the “analysis” blueprint topics for REG. However, I'm not able to align the Becker REG SIMs against the topics as well as I did for FAR (with Ana's help). I am actually using other resources like GLEIM and Wiley CPA to fill those holes.

In the course of your studies, if you find a Becker SIM that I didn't mention or that one exists which is better at explaining an analysis topic that I already linked, please share it. Thanks.

@ Lentil and Chitown87 – Thank you for your response for my earlier question.

@ Lentile

I had to deep-dig in my office's tax research software for sec 291 and come up with the following result.

“Code Sec. 291 contains additional depreciation recapture rules applicable solely to corporations which dispose of depreciable real estate. This recapture is in addition to any recapture first calculated under Sec 1250. In order to calculate sec 291 recapture, it is first necessary to compute the difference between the amount of recapture under sec 1250, and the amount of that would ( hypothetically) be recaptured under Sec 1245. The amount of additional recapture under Sec 291 is 20% of that difference.

Wiley also reinforced this concept.

For me it is kind of weird. Sec 1250 depreciation could be 30,000 (200,000 – 170,000). How could one hypothetically depreciate real property (which is 1250 assets), as if it is 1245 asset? at what rate? 5 years or 7 years? CONFUSED! Hope you add up on this and come up with an idea. Or else, the following is my conclusion, (though not convinced). As the asset is 1250 asset and it is not practical to depreciate as 1245 assets, then 1245 is Zero. Hence, difference between the two is $ 30,000 @ 20% = 6,000 ordinary and the remaining gain of $ 44,000 is Sec 1231 LTCG.

This is crazy. @ lentile , by the way, from where is the question?

@Gugu

Thanks. The question is from Wiley.

@Katie

Thanks. I understand section 1245 recapture and thought I understood section 1250 recapture until this section 291 rule popped up.

@aquafairy

assignment for the benefit of creditors = a contract where an insolvent entity (assignor) transfers legal and equitable title as well as custody and control of its property to a third party (assignee) in trust. The assignee applies the proceeds of the sale to the assignor's creditors in accord with priorities established by law

So, you can eliminate choice (A) and choice (D) just doesn't seem right. Then, it's between (B) and (C).

I did some digging around on the internet and found this answer as to why it is (C). See below.

If one person owes a sum of money to another and agrees to pay part of this in full settlement, then that part-payment of a debt is not good consideration for a promise to forgo the balance. Thus, if A owes B $50 and B accepts $25 in full satisfaction on the due date, there is nothing to prevent B from claiming the balance at a later date, since there is no consideration proceeding from A to enforce the promise of B to accept part-payment. This is because he is already bound to pay the full amount.

https://accordandsatisfaction.uslegal.com/consideration/

I have not started with any SIMs or research.
I think if you have a valid NTS your 6 months for AL access is still valid, but from what I recall the AL did not have IRC.
I am curious to see the Roger course recommendation of where to look for AL for IRC research questions.
I was not anticipating the IRC code research to be very challenging as its something I do at work, but some recent posts have me concerned so I might look into it.
I do have Gleim TB as well, and their research, although limited to the section you would actually find the answer, seemed accurate and reliable.

Katie,

Yes I agree but this is a topic I struggle with also so I am not 100%. @Recked or anyone else, what do you think?

This is an important concept because it is one of the “analysis” REG blueprint topics.

“Compare the tax implications of liquidating distributions from different business entities.”

It would be great if we could make a chart.

Thanks.