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Long-Term Contract. King Construction Company is engaged in
a road construction contract ro build a highway over a three-year period. King
will receive $11,200,000 for building five miles of highway . King estimates
char it will incur $10,000,000 of costs before the contract is comp leted. As
of the end of the first year King incurred $3,000,000 of costs allocated to the
contract.
a. How much income from the contract must King report during
the first year?
b. Assume King incurs an add itiona l $5,000,000 of coses
during the second year. How much income is reported during that year?
c. Assume that King incurs an additional $2,500,000 of costs
in the third and final year of the contract. How much does King report during
the third year?
d. Will King receive or pay look -back interest? Explain.

Eagle and Hill Corporations discuss the terms of a land
sale, and they agree to a price of
$230,000 . Eagle wants to use the installment sale method,
but is not sure Hill is a reliab le
borrower . As a result, Eagle requ ires Hill to place the
entire purchase price in escrow to be
released in five yearly installments by the escrow agent. Is
the insta llment method available to Eagle?
A partial list of research sources is:
• Rev. Ru!. 77-294, 1977 -2 C.B. 173
• Rev. Ru!. 79-91, 1979 -1 C.B. 179
• H. 0. Williams v. U.S., 46 AITR 1725, 55-1 USTC 19220 (5th
Cir., 1955)

Apple Corpora tion has never been aud ited before the
current year. An audit is now needed from a CPA because the company is expan
ding rapid ly and plans to issue stock to the public in a secondary offering. A
CPA firm has been doing preliminary evaluations of the Apple Corpora tion’s
accounts and records. One major problem involves the valuation of inventory
under GAAP. Apple Corporatio n has been valuing its inventory under the cost
method and no write -downs have been made for obso lescence. A review of the
inventory indicates char obsolescence and excess spare parts in the inventory
are two major problems. The CPA stares that for GAAP the company will be
required to write down its inventory by 25% of its stated amount, or $100,000,
and charge chis amount against net income from operations for the current
period. Otherwise, a “clean opinion” will not be rendered. The
company controller asks your advice regarding the tax consequences from the
obsolescence and spare parts inventory write-downs for the current year and the
procedures for changing to the LCM method for tax purposes. Apple Corporation
is on a calendar year, and the date of your contact with the company is
December 1 of the current year.
A partial list of research sources is:
• Secs. 446 and 471
• Reg. Secs. 1.446 -1(e)(3), 1.471 -2 and 1.471 -4
• American Liberty Pipe Line Co. v. CIR, 32 AITR 1099, 44-2
USTC ‘l[9408 {5th Cir.,
1944)
• Thor Power Tool Co. v. CIR, 43 AITR 2d 79-362,79 -1 USTC
‘l[9139 (USSC, 1979)

Debbie owns a building with a basis of $300,000
and a holding period starting on May 10, 2007.
Debbie exchanges the building for a building
owned by Doug on July 23, 2019. Doug’s build –
ing has a FMV of $500,000. Both Debbie and
Doug use the building in their businesses.
a. What is Debbie’s basis for the building received
in the exchange and when does the holding period start for
chat building?
b. If Debbie and Doug are related taxpayers,
explain what action could occur that would
cause the exchange not to qualify as a like-kind
exchange.

Kay owns real property used in her business and
exchanges the property for ocher like-kind real
property and marketable securities.
a. Will Kay’s recognized gain ever exceed the realized gain?
b. Will Kay’s recognized gain ever exceed the
FMV of the marketable securities?
c. What is the basis of the marketable securities
received?
d. When does the holding period of the market –
able securities begin?

1.When may a sale of real property and a subsequent purchase
of real property be created as a like-kind exchange?
2. When determining whether property qualifies as like-kind
property, is the quality or grade of the property considered?
3. When does a nonsimulcaneous exchange qualify as a
like-kind exchange?

Steve maintains that the cost of wallpaper ing his three
-bedroom house is a capita l expenditure wh ile Martha maintains that the cost
of wallpa – pering her three-bedroom house is an expense. Steve uses his house
as his persona l residence wh ile Martha’s house is renta l property. Explain
why Steve and Martha view the cost of wallpa – pering differently.