Falcon Corporation, a calendar year taxpayer, is a deepwater offshore drilling c
ID: 2518647 • Letter: F
Question
Falcon Corporation, a calendar year taxpayer, is a deepwater offshore drilling company that is planning to sell drilling equipment that it no longer needs. The drilling equipment has an adjusted basis of $400,000 ($700,000 – $300,000 depreciation) and a fair market value of $500,000. The AMT adjusted basis of the equipment is $425,000.
The buyer of the drilling equipment would like to close the transaction prior to the end of the calendar year. Falcon is uncertain whether the tax consequences would be better if the sale took place this year or next year and is considering the following options.
• $500,000 in cash payable on December 31, 2014.
• The sale is closed on December 31, 2014; the consideration is a $500,000 note issued by the buyer. The maturity date of the note is January 2, 2015, with the equipment pledged as security.
Falcon projects that its taxable income for 2014 and 2015 will be $400,000 (gross receipts of about $9.5 million) without the sale. Falcon has other AMT adjustments and tax preferences of $425,000 in 2014, which will not recur in 2015. Determine the tax con sequences to Falcon under both options, and recommend the option that is preferable.
Explanation / Answer
Option 1) cash $500000 is received on Dec 31 2014
AMT negative adjustment = 425000- 400000 = $ 25000
Gain on the sale is 500000-400000= $100000
Taxable income = 400000 + 100000 = $ 500000
His AMT taxable income = $500000 + $425000 (AMT adjustments and preferences)- $25000 (negative adjustment) = $900000
Option 2) The sale is reported in 2015
Taxable income = 500000 – 25000 (AMT negative adjustment) = $475000
Option 1 is preferable because his AMT income is already high in 2014 and the negative adjustment will help to reduce it.
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