Determine the income tax treatment

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Reference no: EM13991965

In 2009, Nuts & Seeds Inc., purchased a new ‘‘high-tech'' shelling machine from Soft-Core Corporation. Nuts and Seeds paid $1,000 in cash and gave Soft-Core a $29,000 note. The note is non-recourse and Soft-Core's only recourse in the event of default by Nuts & Seeds is to take back the shelling machine. The sales agreement allows Nuts & Seeds to transfer ownership of the machine back to Soft-Core at any time to satisfy payment of the remaining indebtedness on the note. Nuts & Seeds elects to expense the $30,000 cost of the machine in 2009. The shelling machine doesn't live up to expectations, and in 2010, Nuts & Seeds transfers ownership of the machine back to Soft-Core, thereby satisfying the indebtedness on the note. At the time of the transfer, the fair market value of the shelling machine is $16,000 and the remaining principal balance on the note is $28,000.

REQUIRED:

Determine the income tax treatment of Nuts & Seeds Inc.'s transfer of the ownership of the shelling machine in satisfaction of the outstanding debt on the machine. Use a tax research database and find the relevant authority(ies) that form the basis for your answer. Your answer should include the exact text of the authori- ty(ies) and an explanation of the application of the authority to Gloria's sale. If there is any uncertainty regarding the tax treatment of the sale, explain what is uncertain and what you need to know to resolve the uncertainty.

Reference no: EM13991965

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