Ty Webb wrote:Someone help a dude understand a tax concept. Plz. Just one.
This is from my prof's exam from last year. Somehow I just can't really figure out exactly what he is asking or what the rule is.
Two has previously invested a significant amount in a new vessel which was designed to transport foreign sourced liquified natural gas (LNG) into the US Market. The vessel is actually owned through a 100 % owned entity, a Texas LLC, which is "disregarded" for US income tax purposes (Two LNG, LLC). Two LNG, LLC has purchased this vessel for the amount of 100x, financing the acquisition of this vessel with a nonrecourse loan in the amount of 90x. Two and Lender thought the interest expens and the principal of the 90x loan could be amortized with the charter revenue anticipated to be received for the vessel, but the worldwide market for LNG has become very depressed and the vessel is now idle. Accumulated tax depreciation for the vessel is 40x. The market value of the vessel has declined to 70x because of the market conditions. The principal balance on the loan remains at 90x. Two has indicated to Lender that it is abandoning its (indirect) ownership of the vessel (or its interest in Two LNG, LLC).
Provide appropriate advice to Two on the federal income tax effects.
I'll take a stab at it. Better than studying for BA, which I know NOTHING about!
Definitely have a Crane/Tufts problem in here. Abandoning the vessel is a realization event. Two's initial basis in the vessel would be 100x, reduced by the 40x of depreciation deductions, assuming they were properly taken, so Two's adjusted basis would be 60x. Two has negative equity now, since the FMV is below the outstanding loan balance, so we're in Tufts land. Unfortunately for Two, because the debt is nonrecourse, we don't bifurcate the transaction and the whole shebang (90x loan balance) goes into amount realized, so Two has a 30x
gain (90-60 = 30. I'm bad at math). Because the vessel is depreciable personal property used in a trade/biz, it gets kicked out of 1221(a)(2) and heads to 1231. 1245 applies because the amount realized is a gain, not a loss, so the 30k gain is treated as conclusively ordinary, since all 1245 gains NOT IN EXCESS of the prior deductions taken are treated that way.
Should also note that including the 90x loan balance for purposes of amount realized is the majority rule. A minority rule is that instead the amount realized should be limited to the FMV of the property at the time of the realization event, so in that case Two would only have a 10x gain, but again, that is the minority rule.
We didn't cover special rules for taxation of corporations other than the carryback/carryforward of capital losses, so I can't comment on how else the LLC thing would affect this problem.
Hope this helps, and if anyone sees problems with this analysis, plz comment.
Also, srsly can someone teach me Business Associations?
(Edited to clarify.) (And to get 9-6=3 correct. Jesus)