Taxes R Us, an accounting firm, bought furniture from Sears for $70,000, paying with a $70,000 promissory note.  Unfortunately, Taxes R Us lost several large tax clients and notified Sears that they would have trouble paying the total amount on the promissory note.  Because Sears wanted to maintain a strong business relationship with Taxes R Us, Sears decided to accept $40,000 in cash and discharge the remaining $30,000 debt. 

 

Taxes R Us' balance sheet immediately before the discharge and payment of the $40,000 was as follows:

	Adjusted Basis	FMV
Cash	45,000	45,000
Fixed Assets (Including furniture)	105,000	95,000
Liabilities	-	175,000

 

Taxes R Us also has a $7,000 Capital Loss carryforward and a $1,000 General Business Credit carryforward to the current year.

a) How much income should Taxes R Us include related to the $30,000 discharge of debt?

b) Comment about any effect on tax attributes assuming Taxes R Us does NOT make a Sec. 108(b)(5) election.  Show all calculations.  

c) Comment about any effect on tax attributes assuming Taxes R Us does make a Sec. 108(b)(5) election.  Show all calculations.  

d) Same as (a), but suppose that Taxes R Us' balance sheet showed liabilities of only $70,000 (rather than $175,000) immediately before the discharge.  Then, what would have been the tax consequences to Taxes R Us?)  

e) Same as (a), except that the Sears agreed to discharge the $30,000 debt in exchange for Taxes R Us preparing Sears' tax return.  The fair market value of Taxes R Us's services to complete the return is $30,000.  What is the tax impact to Taxes R Us?