On 7-1-2022, Mr. Kupka acquired a warehouse in the Silver Terrace district ofSan Francisco for $4,333,000. He financed this by paying $1,083,250 andfinancing the remainder with a conventional commercial loan. The purchaseagreement provided that the seller would retain possession of all or a portion ofthe premises rent-free on an as-needed basis over the 12-month periodcommencing 7-1-2022, at the end of which the seller would completely abandonthe warehouse. Once any portion of the premises was abandoned during this 12-month period, the seller forfeited any further right to its possession. (I.e., Mr.Kupka would be able to take possession of the abandoned portion to use as hesaw fit.) As portions of the building were abandoned, Mr. Kupka becameobligated to pay the seller an amount equal to $1.50 per square foot per monthmultiplied by the number of months remaining in the 12-month period at the timeof abandonment.
To the extent the seller remains in possession of the property, he is responsible for all expenses of operation - e.g., utilities, maintenance and insurance. As owner, it is Mr.Kupka responsibility to pay for taxes and debt service. Mr. Kupka bear the risk of loss in the case of a casualty. If the seller is involuntarily forced to abandon the premises, I'm still obligated to pay the abandonment refund. Further, Mr.Kupka collect any insurance proceeds in case of loss.

During the period from 7-1-2022 through 12-31-2022, Mr.Kupka didn't receive any income from the property because the seller hadn't yet vacated any portion of the warehouse. During that time, the seller paid for the following expenses:

 

                Utilities                                    9,500
                Insurance                                7,500
                Maintenance                           4,000
                Misc.                                         1,000

                Total Operating Expenses          22,000

 

 

(The seller paid for the utilities and maintenance costs directly, and reimbursed me for the remaining expenses in accordance with the net lease.) Mr.Kupka paid for interest on the mortgage, ($72,800) and property taxes, ($29,200). Of these amounts, all but the utilities and maintenance are expenses for which Mr. Kupka directly liable. (The maintenance was routine in nature, something the seller was responsible for under the terms of the lease.)

 

The warehouse comprises 36,500 square feet, and $1.50 per square foot is fair market rent in the area. (This amount contemplates a net lease of the property.)

 

Mr. Kupka acquired title to the warehouse at the time of closing.

 

2. SALES OF SECURITIES

 

During the year, Mr. Kupka sold publicly traded securities on the open market inthe number of shares, on the dates and for the amounts set forth in the followingtable:

 

Description Date                                Sold                                                    Net Sales

Proceeds

10,000 com shs ABC, Inc                9-25-2022                                                  $322,500

20,000 com shs JKL, Inc                 8-26-2022                                                  $240,000

15,000 com shs XYZ, Inc                11-14-2022                                                  $274,000

 

The shares were acquired by Mr. Kupka in the following manner:

 

• the ABC shares were purchased by Mr. Kupka, and were sold in two 5,000-share lots. One of the lots was used to cover a "short sale" of 5,000 shares ofABC stock that Mr. Kupka entered into on 8-28-2022, giving him 30 days toclose.

• the JKL shares were purchased by Mr. Kupka on 6-16-2022 for $80,000 plusconvertible debentures.

• the XYZ shares were received from Mr. Kupka's grandmother as a result ofher death on 12-30-2021. She originally purchased the shares for $305,000on 12-17-2021.

 Notice :( Mr.Kupka is the taxpayer.)

 

ABC: With respect to the ABC stock, I shorted 5,000 shares of ABC @ $30/share on 8-28-2022, and covered the short on 9/25/2022 with 5,000 shares of ABC that I acquired on 9/25/2022 at $35 per share. The other lot consisted of 5,000 shares of ABC acquired on 7/10/2020 at $20 per share. They were also sold on 9/25/2022 for $34.50 per share. (Each lot was specifically identified in this manner.) I did not reacquire any ABC shares after the completion of these sales.

 

JKL: With respect to JKL stock, I purchased four original issue $10,000 JKL debentures on 7-18-2021 for $40,000. The conversion feature allowed me to convert each bond into 5,000 shares of JKL upon surrender of the bond accompanied by a $20,000 payment. On 6-16-2022, I surrendered each bond and paid $20,000 per bond (or a total of $80,000) in return for 20,000 shares of JKL stock - 5,000 shares attributable to each bond. At the time of conversion, the 20,000 shares were worth $200,000. I then sold them on 8/26/2022 for $240,000.

 

XYZ: I received the XYZ shares from Grandma in the form of a testamentary gift. Grandma originally acquired the shares by purchase on 12-17-2021 for a price of $305,000. The shares were left to me through her living trust, and I received them from the trustee on 8/16/2022. The FMV of the XYZ shares on the date of death (12-30-2021) was $255,000. Neither an election under §2032 nor one under §2032A was made in Grandma's estate.

 

I have a STCL carryover of $5,000 and a LTCL carryover of $16,000.I like to think of myself as a dealer. I'm not licensed or anything, but I do trade on my own account. I have an active portfolio and I ordinarily make a few trades each year

Requirement:

 

Analyze each individual transaction. As part of your analysis, you should performeach of the following tasks for each transaction:

 

a) Where appropriate, (hint: the lease to Mr. Ty and the warehouse purchase), determine the true classification of the transaction (i.e., its economic substance) for income tax purposes.

 

b) Calculate the amount of realized gain or loss respecting each transaction. (That necessarily means you must determine Mr. Kupka's amount realized for each disposition and his adjusted basis in the asset being disposed of. Be sure to calculate depreciation as necessary, and to adjust your basis accordingly.)

 

c) Determine the amount of recognized gain or loss on

 

c) Determine the amount of recognized gain or loss on each transaction.(Remember the golden rule: generally realized gain or loss must be recognized unless there is a rule of nonrecognition that applies. The only transaction where nonrecognition comes into play is the exchange between

Mr. Kupka and Ms. Smart. (Don't assume that Mr. Kupka qualifies for nonrecognition treatment. You must explain why he does or doesn't!)

 

d) Determine the amount of ordinary income generated by the operation of Mimi's Furniture & Appliance and the amount of Mr. Kupka's rental income from the warehouse and the lease with Mr. Ty for 2022.

 

e) Determine the character of recognized gain or loss from each transaction (as (i) ordinary income, (ii) §1231, (iii) STCG/L, (iv) LTCG/L).

 

f) With respect to any assets Mr. Kupka has acquired in these transactions, determine Mr. Kupka's basis and holding period in the acquired property