John purchased a boat for $100,000 using $10,000 of his own funds and $90,000 that he borrowed from a bank on a recourse basis. John used the boat solely for personal purposes. John was unable to make the loan payments and therefore transferred the boat to the bank. In return, the bank released John from all liability on the loan. Assume that, immediately before John transferred the boat to the bank:

(1) the loan still had a balance due of $90,000, (2) the boats fair market value was $80,000, (3) Johns liabilities included only the $90,000 debt to the bank and $35,000 of recourse indebtedness to other parties, and (4) other than the boat, Johns only other asset was stock in XYZ Corporation with a fair market value of $40,000 and an adjusted basis in Johns hands of $38,000.

Please discuss all of the following questions:

Question 1 (worth 20% of available points): Discuss the tax consequences to John of obtaining the $90,000 loan and purchasing the boat.

Question 2 (worth 70% of available points): Discuss the tax consequences to John of transferring the boat to the bank. Question 3 (worth 10% of available points): Briefly discuss what effect Johns transfer of the boat to the bank might have on his basis in his XYZ Corporation stock. (Respond briefly: you need not discuss Code section 1017.)