Question

You are working for a local accountant during tax season and the accountant has asked you to help with the tax preparation needs of Palo Alto, Inc. Palo Alto is a newly formed hi-tech company that specializes in manufacturing security chips for credit cards. The controller of Palo Alto, Michael Smith, would like your help with the following:

An article in the local newspaper stated that the county government had decided to condemn Palo Alto, Inc.’s distribution warehouse. Therefore, Palo Alto decided to sale its warehouse to obtain what it believed would be a better price. The sales price was $350,000, and the company’s adjusted basis in the warehouse was $75,000. A month later, the company reinvested all the proceeds received in a new distribution warehouse. Michael Smith would like you to prepare a memo explaining whether Palo Alto will have to recognize any of the gain it realized from the sale of its distribution warehouse.

Write a 1-2 page tax memo outlining the facts, issue, conclusion, and analysis of the question posed

Answer 1

This is a case of Capital Gain. Considering the fact that the company doesn't establish in a special economic zone, it has to pay tax on the proceedings.

The gross amount was $3,50,000 but warehouse expenditure is amounting to $75,000. The taxable amount comes to $2,75,000.  

This is because the company reinvested it in another warehouse within 1 month. Had it been more than 6 months, then there would have been some tax rebates as per US tax rules.

Hence, I would suggest that the company should not reinvest the money immediately and should wait for at least 6 months to get the tax benefit.