FEDERAL INCOME TAXATION OF INDIVIDUALS

Problem (10 points).

Murray owns a boat rental business. During the current year, a tidal wave sweeps through the

harbor where he keeps his boats anchored. Four boats are totally destroyed, but the rest of the rental

fleet escapes serious damage. Murray replaces the 4 boats within 6 months of the tidal wave. The

details for each boat destroyed and the cost of its replacement are provided below.

MURRAYS BOAT RENTAL BUSINESS

INFORMATION FOR BOATS LOST IN TIDAL WAVE

Boat Insurance Proceeds Adjusted Basis Replacement Cost

Sailboat $ 50,000 $ 18,000 $ 48,000

Yacht 136,000 75,000 150,000

Speedboat 82,000 102,000 95,000

Fishing Boat 142,000 112,000 80,000

REQUIRED: (1) Calculate the realized gain or loss on each of the boats. Show appropriate

supporting calculations.

(2) What is the minimum amount of gain or loss that must be recognized on each

of the boats? Provide an explanation for the amount you chose.

(3) Assuming that Murray elects to recognize the minimum amount of gain or

loss on each boat, what is the basis he will have in each replacement boat?

Show appropriate supporting calculations.