ACCTG 310

Fall, 2016

Minor Case 1

Due September 16, 2016 by 2:45pm

Maxine owes PSU Bank $200,000. During the current year, she is unable to make the required payments

on the loan and negotiates the following terms to extinguish the debt. Maxine transfers to PSU Bank

ownership of an investment property with a value of $90,000 and basis of $55,000 (gain=$35,000), and

common stock with value of $50,000 and basis of $70,000 (loss=$20,000). Maxine also pays PSU Bank

$5,000 cash, and PSU Bank forgives the remaining amount of debt. Before the agreement, Maxines

assets totaled $290,000 and her liabilities totaled $440,000.

Read and analyze the following authorities. Determine how much gross income Maxine has from the

extinguishment of the debt.

IRC 108

Reg 1.61-12

Reg 1.1001-2

Julian S. Danenberg, 73 T.C. 370 (1979)

James J. Gehl, 50 F. 3d 12 (8th Cir., 1995) affg. 102 T.C. 784 (1994)

Write a memo to the file summarizing your findings. A memo to the file should include enough

information so, if you were hit by a bus after writing it, someone else in your firm could step in and

handle the issue without having to reconstruct your work. You should include this information in the

following format:

FACTS: You need to briefly restate the facts, to make sure the situation you researched is the

same as the situation your client asked about.

ISSUES: State the specific question(s) to be researched.

CONCLUSIONS: Answer the tax questions you identified.

AUTHORITY AND REASONING: Be sure to give complete citations for your authorities. Tie the

facts of the situation into your case and conclusions. Provide a detailed, logical analysis to

support each conclusion