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Tax Research Problem 5-73
Web Baker was hired three years ago by the Berry Corporation to serve as a CEO for the company. As part of his employment contract, the corporation agreed to purchase his residence at fair market value in the event the company decided to fire him. Unfortunately, last year Berry fired Web, due to him not being satisfied with Web’s performance. With firing Web, the contract came into affect where the company purchased his residence for $350,000. With buying the property, Berry immediately listed the house with a real estate agency. Due to serious decline in the real estate market, he ended up selling the house for $270,000 and paying selling expenses of $12,000. With the loss of $92,000, I am trying to figure out how Berry Corporation should treat this loss. In order for me to find this out I will be looking at Azar Nut Co. v. Commissioner of Internal Revenue, which is very similar to my problem above, and Sec. 1221.

In the case of Azar Nut Co. v. Commissioner, Azar Nut Company was a business that processed, packaged, and marketed nuts in El Paso, Texas. The owners Edward and Phillip Azar were looking for a high level executive, in which they found Thomas L. Frankovic. During the contract negotiations, Frankovic insisted that he would not accept employment with Azar unless Azar agreed to purchase his residence for its fair market value upon termination of his employment. Azar brothers reluctantly agreed and incorporated that agreement into Frankovic’s contract. After two years, Azar fired Frankovic and purchased his house for $285,000, which was agreed in the contract. Similar to the scenario strategy above, Azar immediately listed the house on the market, but it did not sale for almost two years. They finally sold the house for $185,000, but incurred a loss of $111,366.

Azar deducted the realized amount of $111,366 as ordinary and necessary business expense on its 1984 tax return. The Commissioner disallowed the deduction and...
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