Boris Becker is a retired professional tennis player and a long standing client of your law firm. When Boris retired from playing tennis professionally, he started a tennis training academy located in south Florida. He also started a consulting business whereby he would advise and provide financial assistance to other professional players. When he was hired to consult with other players he insisted that he would receive 20% of their winnings, which were required to be paid on an annual basis. The tennis academy which Boris built in Florida cost $40 million dollars to build 10 years ago and had been depreciated on the straight line method according to the tax Code. Boris borrowed $38 million from the bank on a non-recourse basis in order to build the academy. During the course of the 10-year loan Boris only paid $4 million of principal on the loan. Unfortunately for Boris, many of the players he chose to assist did not have any earnings and Boris was forced to incur approximately $1 million of his own expenses in order to travel and coach the players. As a result, Boris starts an unlicensed sports book in a separate building located on the premises of his training academy. He incurs various expenses running the sports book but he is much more successful in earning money there because of his inside knowledge of the tennis world. He hires 5 full time employees to run the sports book and after expenses he earns $300,000. When the local organized crime bosses in south Florida learn of the sports book, Boris is forced to pay them $400,000 to ignore his operation, and another $100,00 to the local police to "look the other way". Eventually, the Bank gets fed up with Boris as a customer and decides to call the loan. Boris gets his organized crime "friends" to get the bank to take $20 million in full satisfaction of the loan. One week after the payment to the bank, the academy has an "accident" and the indoor tennis court building burns to the ground. Boris's company collects $40 million from the insurance company, nut reserves the right to have the proceeds returned after they complete their arson investigation.Boris takes the money from the insurance settlement and builds new courts on a separate parcel the academy at a cost of $25 million and uses the remaining $15 million to enhance the sports book operation.

 

Explain to Boris, in writing, the tax consequences of the above transactions.