[jeff]

Welcome to the Q2 2015 CPA Exam Study Group for REG.

“Death and Taxes” – Individual Tax for the CPA Exam

Posted by Another71 on Monday, November 24, 2014

Free NINJA: https://www.another71.com/cpa-exam-study-plan/

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[RTCPA]

HI ANNA

base is 60,000+4000gain recognized (cash because can not be offset by liability)-6000 liability given up, +15000 liability assumed – 4000cash received (boot) =69000

[Anonymous]

@anjanja, thank you

[Anonymous]

so boot = cash received + net debt relief, but not cash received + (- net debt relief), it's just cash

thanks RTCPA!

[Anonymous]

@dpd I agree because I originally picked zero. But I think it usually says x corp. commenced as an S corp then you assume it was an S corp from day One. But that question didn't say that. So I guess it's safe to assume that it converted from a C corp to an S corp that year.

[Anonymous]

Could somebody please explain what's happening here? I guess an example would help

Baxter Inc. and Globe entered into a contract. After receiving valuable consideration from Clay, Baxter assigned its rights under the contract to Clay. In which of the following circumstances would Baxter not be liable to Clay?

a

Clay released Globe.

b

Globe paid Baxter.

c

Baxter released Globe.

d

Baxter breached the contract.

[Anonymous]

Is the answer a? It is similar to a question from Becker, and this is the explanation: “In an assignment for consideration, the assignor (Baxter) and obligor (Globe) are both liable to the assignee (Clay, in this case). However, if the assignee releases the obligor, it will serve to release the assignor as well. Thus, if Clay releases Globe, Barton will be released as well.

This was a tricky one for me as well.

[Anonymous]

Yes, it's A

I don't even see why would Baxter be liable to Clay at all. I would think that Globe would have to release Baxter? Assignor (Baxter) is liable to the other party (Globe), right?

[Anonymous]

Baxter and Globe are both parties to a contract; thus, they are each exchanging consideration/owe a duty to the other party. Each has a 1) duty to perform and a 2) right to receive from other party. Baxter assigns his rights (to receive value from Globe) to Clay. Globe now owes Clay instead of Baxter; BUT, Baxter is still liable to Globe (the original parties to the contract) if Clay never gets paid. Does that make sense? In simpler terms, an assignor always remains liable on a contract.

[Anonymous]

@dpd and @anj how is studying going for you guys today?

[Anonymous]

No! If Baxter is the one liable, why is Globe being released? I guess I don't really understand what it means to be released in this context. Is Globe released by paying Clay? Is there a paper saying “I, Clay, release you Globe…”

Let's say Globe never pays to either of them, who has the ability to enforce? Is Clay a creditor beneficiary?

I am not feeling particularly smart right now, btw

[Anonymous]

idk cpa8488, honestly blaw questions are insufferable, I don't like words words words

how are you doing today?

[Anonymous]

Globe has to perform. The assignment is occurring between Baxter and Clay (a third party). Baxter says to Clay, “Hey, I have contracted with Globe to buy a couch, but I don't want it anymore. Do you want to buy this contract from me?” Clay says, “Yeah, sure, I really want a new couch, I'll pay you $X for your contract with Globe.”

At this point, Baxter = assignor, Clay = assignee, and Globe = obligor (he is OBLIGATED to perform/to sell his couch to Clay). Baxter is off the hook! He sold the contract to Clay, Clay paid him consideration. However, if Globe leaves the country and never gives the couch to Clay, Baxter is liable. That is the only way Baxter would still be liable. Therefore, the only way he would NOT be liable anymore is if Clay released Globe.

You asked “If Baxter is the one liable, why is Globe being released?” The answer is because the contract is now between Clay and Globe. Baxter is only liable if Globe does not perform. Thus, if Clay lets Globe off the hook (“releases” him), then Baxter is off the hook too. A release is when one party relinquishes his right.

That may have just confused you more, but that's the best I've got!

[Anonymous]

@cpa8488, it's going alright! Just reviewing while I can, before 1,000,000 graduation parties this weekend!

[Anonymous]

Thanks! I was thinking that Globe hired Baxter to paint something for $100, Baxter assigned Clay to do it for $10, so now Clay paints and Globe owns him $100. If Clay paints, but Globe doesn't pay (leaves the country), Baxter must pay to Clay his $100. But if Globe paid Clay = Clay released Globe? Right?

Even if this is right, I am not sure I'll have enough time for this during the test

[Anonymous]

Yes! I think everything you said is correct. Main point to know is that assignor is still liable to the assignee if the obligor fails to perform.

[Author]

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