R2, M3 Cost Recovery

Question 1

Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to the equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for business use. At the time the gift was made, the equipment had a fair market value of $32,000. Ignoring gift tax consequences, what is Russett’s basis in the equipment?

Answer 1

$31,000

The first step is to determine the donor’s basis in the asset at the gift date. In this case, the basis is $31,000 ($35,000 + $1,000 − $5,000). The fair market value of the asset is $32,000 at the date of gift, which is greater than the donor’s basis. Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift. Thus, Russett’s basis in the equipment is $31,000.

Question 2

Gem Corp. purchased all the assets of a sole proprietorship, including the following intangible assets:

Goodwill 50,000

Covenant not to compete
13,000

For federal income tax purposes, what amount of these purchased intangible assets should Gem amortize over the specific statutory cost recovery periods?

Answer 2

$63,000

Acquisitions of goodwill, covenants not-to-compete, franchises, trademarks, and trade names must be amortized on a straight-line basis over a 15-year period (180 months) beginning with the month of acquisition. So, both the $50,000 acquisition of the goodwill and the $13,000 acquisition of the covenant not-to-compete—for a total cost of $63,000—are amortized over the 15-year period statutory cost recovery period.