This problem is worth 20 points.

11. John was having problems making payments on his debt. As a result, his creditors offered him a deal without going to court. He was relieved of $30,000 of debt. In return he offered additional assets as security against future default. Before the debt relief his total debt was $100,000 and the fair value of his assets was $80,000.

a. How much, if any, income must John recognize? Explain.

b. Assume for this part, and without relation to your prior answer, that John recognized $15,000 of income from the $30,000 of debt relief. You are to help John decide how to reduce his tax benefits. Assume that John is in the 35% tax bracket for this part.

(1) Assuming that he has sufficient basis to do either, should John reduce his basis in his inventory, which turns over every six months, or his basis in three year depreciable assets? Be certain to describe completely why you make the recommendation that you do.

(2) Without regard to your answer above in (1) above, and assuming that he has sufficient basis and business credits to do either, should John reduce basis in his inventory, or reduce his business credits.

This problem is worth 25 points.

12. John is transferring some vacant land he owns outside of town to Jane in exchange for her rental house in mid-town. His land has a fmv of $145,000 and is subject to a mortgage of $20,000. John's basis in the land is $70,000. Her house has a fmv of $115,000 and her basis in it is $45,000. John is also going to transfer to Jane a business car he keeps on the property, as part of this exchange. His basis in the car is $15,000 and it has an fmv of $18,000. In return she is adding an additional $15,000 to her part of this exchange, and transferring the furniture in the house which has a fmv of $13,000 and a basis to her of $8,000. John's car cost $45,000. Jane's rental house (depreciated under ACRS, placed in service in 1985) cost her $90,000. Straight-line depreciation on her property would have been $40,000. The furniture cost her $12,000.

Required: (1) Compute for each party their: realized gain, recognized gain, and basis in all assets received (be certain to compute this two ways for the qualified like-kind properties.). (2) Determine for each party the amounts of income (and loss) that would be taxed as: 1231 gain/loss, 25% gain, and ordinary gain due to depreciation recapture. Do not provide any planning suggestions. Be very complete and clear in your answers.