Question
50. Albert purchased a tract of land for $140,000 in 2006 when he heard that a new highway was going to be constructed through the property and that the land would soon be worth $200,000. Highway engineers surveyed the property and indicated that he would probably get $180,000. The highway project was abandoned in 2010 and the value of the land fell to $100,000. What is the amount of loss Albert can claim in 2010?

A. $40,000.

B. $60,000.

C. $80,000.

D. $100,000.

E. None of the above.

51. Kate sells property for $120,000. The buyer pays $2,000 in property taxes that had accrued during the year while the property was still legally owned by Kate. In addition, Kate pays $6,000 in commissions and $2,000 in legal fees in connection with the sale. How much does Kate realize from the sale of her property?

A. $112,000.

B. $114,000.

C. $116,000.

D. $120,000.

E. None of the above.

52. Alice owns land with an adjusted basis of $610,000, subject to a mortgage of $350,000. Real estate taxes are $9,000 per calendar year and are payable on December 31. On April 1, 2010, Alice sells her land subject to the mortgage for $650,000 in cash, a note for $600,000, and property with a fair market value of $120,000. What is the amount realized?

A. $1,370,000.

B. $1,372,219.

C. $1,720,000.

D. $1,722,219.

E. None of the above.

53. Pedro borrowed $45,000 to purchase a machine. He later borrowed $15,000 using the machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $30,000 and $6,000. Pedro sells the machine subject to the two liabilities for $21,000. What is his realized gain or loss?

A. $0.

B. $21,000.

C. $51,000.

D. $57,000.

E. None of the above.

54. The bank forecloses on Lisa’s apartment complex. The property had been pledged as security on a nonrecourse mortgage, whose principal amount at the date of foreclosure is $750,000. The adjusted basis of the property is $480,000, and the fair market value is $750,000. What is Lisa’s recognized gain or loss?

A. $270,000.

B. ($750,000).

C. $0.

D. ($480,000).

E. None of the above.

55. Carlton purchases land for $300,000. He incurs legal fees of $5,000 associated with the purchase. He subsequently incurs additional legal fees of $20,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $600,000. What is Carlton’s basis for the land and the improvements?

A. $300,000.

B. $900,000.

C. $905,000.

D. $925,000.

E. None of the above.

56. Jamie bought her house in 2001 for $395,000. Since then, she has deducted $70,000 in depreciation associated with her home office and has spent $45,000 replacing all the old pipes and plumbing. She sells the house on July 1, 2010. Her realtor charged $34,700 in commissions. Prior to listing the house with the realtor, she spent $300 advertising in the local newspaper. Sammy buys the house for $500,000 in cash, assumes her mortgage of $194,000, and pays property taxes of $4,200 for the entire year on December 1, 2010. What is Jamie’s adjusted basis at the date of the sale and the amount realized?

A. $370,000 adjusted basis; $661,400 amount realized.

B. $370,000 adjusted basis; $661,100 amount realized.

C. $370,000 adjusted basis; $665,200 amount realized.

D. $325,000 adjusted basis; $663,200 amount realized.

E. $325,000 adjusted basis; $694,000 amount realized.

57. Alicia buys a beach house for $325,000 which she uses as her personal vacation home. She builds an additional room on the house for $45,000. She sells the property for $450,000 and pays $22,000 in commissions and $4,000 in legal fees in connection with the sale. What is the recognized gain or loss on the sale of the house?

A. $0.

B. $54,000.

C. $80,000.

D. $99,000.

E. None of the above.

58. Which of the following decreases adjusted basis?

A. Amortization of bond premium.

B. A corporate distribution to a shareholder treated as a return of capital in which gain is recognized to the shareholder.

C. Depreciation.

D. Only a. and b.

E. a., b., and c.

59. Capital recoveries include:

A. The cost of capital improvements.

B. Ordinary repair and maintenance expenditures.

C. Payments made on the principal of a mortgage on taxpayer’s building.

D. Amortization of bond premium.

E. All of the above.

60. Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public accounting practice in his home. For this business, he uses one room exclusively and regularly as a home office. In Year 1, $3,042 of depreciation expense on the home office was deducted on his income tax return. In Year 2, Steve sustained losses in his business; therefore, no depreciation was taken on the home office. Had he been allowed to deduct depreciation expense, his depreciation expense would have been $3,175. What is the adjusted basis in the home?

A. $493,783.

B. $496,825.

C. $496,958.

D. $500,000.

E. None of the above.

61. Sandra’s automobile, which is used exclusively in her trade or business, was damaged in an accident. The adjusted basis prior to the accident was $11,000. The fair market value before the accident was $10,000 and the fair market value after the accident is $6,000. Insurance proceeds of $3,200 are received. What is Sandra’s adjusted basis for the automobile after the casualty?

A. $0.

B. $7,000.

C. $7,800.

D. $10,200.

E. None of the above.

62. Tony’s factory building was destroyed in a fire (adjusted basis of $90,000; fair market value of $140,000). Of the insurance proceeds of $128,000 he receives, Tony uses $88,000 to purchase additional inventory and invests the remaining $40,000 in short-term certificates of deposit. What is Tony’s recognized gain or loss?

A. $0.

B. $12,000 loss.

C. $38,000 gain.

D. $40,000 gain.

E. None of the above.

63. Elvis owns all of the stock of Shadow Corporation. The accumulated earnings and profits of Shadow Corporation at the end of the year are a deficit of $110,000. The current earnings and profits are $0. Elvis’ basis for his stock is $295,000. He receives a distribution of $300,000 on the last day of the tax year. How much gain should Elvis report?

A. $0.

B. $5,000.

C. $295,000.

D. $300,000.

E. None of the above.

64. Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1, 2010, for $11,000. The maturity date is December 31, 2019. The annual interest rate is 8%. What is the amount of taxable interest income that Karen should report for 2010, and the adjusted basis for the bonds at the end of 2010, assuming straight-line amortization is appropriate?

A. $0 and $11,000.

B. $0 and $10,900.

C. $100 and $11,000.

D. $100 and $10,900.

E. None of the above.

65. Milton owns a bond (face value of $25,000) for which he paid $28,000. Which of the following statements is correct?

A. If the bond is taxable, Milton must amortize the $3,000 premium over its remaining life.

B. The adjusted basis of the taxable bond remains at $28,000, as the amortized amount is deducted as interest.

C. If the bond is tax-exempt, Milton can elect to amortize the $3,000 premium over the remaining life of the bond.

D. The adjusted basis of the tax-exempt bond remains at $28,000, as the amortized amount cannot be deducted as interest.

E. None of the above is correct.

66. Which of the following is correct?

A. Realized gains are always recognized and realized losses are never recognized.

B. Realized gains and realized losses on the sale of personal use assets are not recognized.

C. Realized gains and realized losses on the sale of personal use assets are recognized.

D. Only a. and b. are correct.

E. None of the above.

67. Kimmy sells her personal use automobile for $19,000. She purchased the car three years ago for $35,000. What is Kimmy’s recognized gain or loss?

A. $0.

B. $19,000.

C. ($16,000).

D. ($35,000).

E. None of the above.

68. Noelle owns an automobile which she uses for personal use. Her adjusted basis is $40,000 (i.e., the original cost). The car is worth $24,000. Which of the following statements is correct?

A. If Noelle sells the car for $24,000, her realized loss of $16,000 is not recognized.

B. If Noelle exchanges the car for another car worth $24,000, her realized loss of $16,000 is not recognized.

C. If the car is stolen and it is uninsured, Noelle may be able to recognize part of her realized loss of $24,000.

D. Only a. and b. are correct.

E. a., b., and c. are correct.

69. Which of the following statements is correct?

A. Realized gains on the sale of personal use assets are taxable.

B. Realized losses on the sale of personal use assets are disallowed.

C. If a personal use asset is sold at a realized gain and another personal use asset is sold at a realized loss, the gain is taxable and the loss is disallowed.

D. Only a. and b. are correct

E. a., b., and c. are correct.

70. Which of the following statements is false?

A. A realized gain that is never recognized results in the temporary recovery of more than the taxpayer’s cost or other basis for tax purposes.

B. A realized gain on which recognition is postponed results in the temporary recovery of more than the taxpayer’s cost or other basis for tax purposes.

C. A realized loss that is never recognized results in the permanent recovery of less than the taxpayer’s cost or other basis for tax purposes.

D. A realized loss on which recognition is postponed results in the temporary recovery of less than the taxpayer’s cost or other basis for tax purposes.

E. All of the above.

71. Sarah is an executive at Robin Yogurt. Because she loves the yogurt so much, in the current year she decides to buy a yogurt machine from Robin for $9,300. The machine cost the company $9,000 (the wholesale price), and it has a fair market value of $12,500 (price at which sold at retail). Only executives are permitted to buy yogurt machines at a discount. What is Sarah’s adjusted basis for the yogurt machine and how much must she include in her gross income?

A. $9,300 basis, $3,500 gross income.

B. $9,300 basis, $3,200 gross income.

C. $12,500 basis, $3,500 gross income.

D. $12,500 basis, $3,200 gross income.

E. None of the above.

72. Over the past 25 years, Alfred has purchased 380 shares of Green, Inc., common stock. His first purchase was in 1987 when he acquired 30 shares for $20 a share. In 1989, Alfred bought 150 shares at $10 a share. In 2008, Alfred acquired 200 shares at $50 a share. Alfred intends to sell 125 shares at $60 per share in the current year. If Alfred’s objective is to minimize gain, what is his recognized gain?

A. $1,250.

B. $3,520.

C. $5,950.

D. $6,250.

E. None of the above.

73. Mona purchased a business from Judah for $1,000,000. Judah’s records and an appraiser provided her with the following information regarding the assets purchased:

Adjusted Basis

FMV

Land

$195,000

$270,000

Building

310,000

450,000

Equipment

95,000

180,000

What is Mona’s adjusted basis for the land, building, and equipment?

A. Land $270,000, building $450,000, equipment $180,000.

B. Land $195,000, building $575,000, equipment $230,000.

C. Land $195,000, building $310,000, equipment $95,000.

D. Land $270,000, building $521,429, equipment $208,571.

E. None of the above.

74. Nontaxable stock dividends result in:

A. A higher cost per share for all shares than before the stock dividend.

B. A lower cost per share for all shares than before the stock dividend.

C. An increase in the total cost of the old and new stock combined.

D. A decrease in the total cost of the old and new stock combined.

E. None of the above.

75. Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share. Two years later, he receives a 5% common stock dividend. At that time, the common stock of Purple Corporation had a fair market value of $12.50 per share. What is the basis of the Purple Corporation stock, the per share basis, and gain recognized upon receipt of the common stock dividend?

A. $50,000 basis in stock, $10 basis per share for the original stock and $0 basis per share for the dividend shares, $0 recognized gain.

B. $50,000 basis in stock, $9.52 basis per share, $0 recognized gain.

C. $53,125 basis in stock, $10 basis per share for the original stock and $12.50 basis per share for the dividend shares, $3,125 recognized gain.

D. $53,125 basis in stock, $10.12 basis per share, $3,125 recognized gain.

E. None of the above.

76. Amy received nontaxable stock rights on February 3, 2010. She allocated $8,000 of the $30,000 basis for the associated stock to the stock rights. The stock rights are exercised on October 2, 2010. The exercise price for the stock is $25,000. What is the taxpayer’s basis for the acquired stock?

A. $0.

B. $25,000.

C. $33,000.

D. $55,000.

E. None of the above.

77. On July 7, 2010, Brad received nontaxable stock rights with a fair market value of $4,000. His adjusted basis in the stock is $20,000. Which of the following is correct?

A. If the fair market value of the stock is $25,000, Brad must allocate part of the stock basis to the stock rights.

B. If the fair market value of the stock is $30,000, Brad does not have to allocate part of the stock basis to the stock rights.

C. If the fair market value of the stock is $27,000, Brad does not have to allocate part of the stock basis to the stock rights, but he may elect to do so.

D. Only a. and b. are correct.

E. a., b., and c. are correct.

78. Carol received nontaxable stock rights on May 14, 2010. She allocated $6,000 of the $40,000 basis of the associated stock to the stock rights. The stock rights expire on September 14, 2010. What is Carol’s recognized loss on the expiration of the stock rights?

A. $0.

B. $6,000.

C. $34,000.

D. $40,000.

E. None of the above.

79. In 2006, Harold purchased a classic car that he planned to restore for $12,000. However, Harold is too busy to work on the car and he gives it to his daughter Julia in 2010. At this time, the fair market value of the car has declined to $10,000. Harold paid no gift tax on the transaction. Julia completes some of the restoration herself with out-of-pocket costs of $5,000. She later sells the car for $30,000. What is Julia’s recognized gain or loss on the sale of the car?

A. $0.

B. $13,000.

C. $15,000.

D. $18,000.

E. None of the above.

80. Abner gives his daughter, Melissa, stock (basis of $50,000; fair market value of $44,000). No gift tax is paid. If Melissa subsequently sells the stock for $53,000, what is her recognized gain or loss?

A. $0.

B. $3,000.

C. $9,000.

D. $53,000.

E. None of the above.

81. Gift property (disregarding any adjustment for gift tax paid by the donor):

A. Has no basis to the donee because he or she did not pay anything for the property.

B. Has the same basis to the donee as the donor’s adjusted basis if the donee disposes of the property at a gain.

C. Has the same basis to the donee as the donor’s adjusted basis if the donee disposes of the property at a loss, and the fair market value on the date of gift was less than the donor’s adjusted basis.

D. Has no basis to the donee if the fair market value on the date of gift is less than the donor’s adjusted basis.

E. None of the above.

82. Shontelle received a gift of income-producing property with an adjusted basis of $50,000 to the donor and fair market value of $40,000 on the date of gift. Gift tax of $6,000 was paid by the donor. Shontelle subsequently sold the property for $45,000. What is the recognized gain or loss?

A. $5,000.

B. $4,000.

C. ($5,000).

D. ($11,000).

E. None of the above.

83. Rob was given a residence in 2010. At the time of the gift, the residence had a fair market value of $200,000, and its adjusted basis to the donor was $140,000. The donor paid a gift tax of $10,000 on the taxable gift of $188,000. What is Rob’s basis for gain?

A. $140,000.

B. $143,209.

C. $150,000.

D. $200,000.

E. None of the above.

84. In addition to other gifts, Megan made a gift of stock to Jeri in 1975. Megan had purchased the stock in 1973 for $5,000. At the time of the gift, the stock was worth $7,500. If Megan paid $360 of gift tax on the transaction in 1975, what is Jeri’s gain basis for the stock?

A. $5,000.

B. $5,120.

C. $5,360.

D. $7,860.

E. None of the above.

85. Noelle received dining room furniture as a gift from her friend, Jane. Jane’s adjusted basis was $9,200 and the fair market value on the date of the gift was $7,000. Noelle decided she did not need the furniture and sold it to a neighbor six months later for $6,500. What is her recognized gain or loss?

A. $0.

B. ($500).

C. ($2,700).

D. $6,500.

E. None of the above.

86. The holding period of property acquired by gift may begin on:

A. The date the property was acquired by the donor only.

B. The date of gift only.

C. Either the date the property was acquired by the donor or the date of gift.

D. Only a. and c. are correct.

E. a., b., and c. are correct.

87. Melba gives her niece a drill press to use in her business with a fair market value of $36,000 and a basis in Melba’s hands of $41,000. What is the niece’s basis for depreciation (cost recovery)?

A. $0.

B. $5,000.

C. $36,000.

D. $41,000.

E. None of the above.

88. Abner, age 80 and in poor health, owns investment land with an adjusted basis of $50,000. He is considering transferring it to Stella, his niece. Regarding Stella’s income tax position, should the transfer to her be by gift or by inheritance? (Assume neither gift tax nor estate tax would be due, and that the property is not expected to change in value.)

A. If the fair market value of the land is $200,000, the transfer should be by inheritance.

B. If the fair market value of the land is $10,000, the transfer should be by gift.

C. If the fair market value of the land is $50,000, the transfer can be either by gift or by inheritance (i.e., the tax consequences are the same).

D. Only a. and c. are correct.

E. a., b., and c. are correct.

89. Which of the following statements correctly reflects the rules regarding inherited property?

A. The beneficiary’s basis can be greater than, equal to, or less than the decedent’s basis.

B. The beneficiary’s holding period includes the donor’s holding period.

C. The alternate valuation date election only applies to those assets which have declined in value (i.e., does not cover assets that have increased in value).

D. Only a. and b. are correct.

E. a., b., and c. are correct.

90. Al owns stock with an adjusted basis of $100,000 and a fair market value of $300,000. He gives the stock to Jane on July 1, 2009. When Jane dies, the fair market value of the stock is $900,000. Jane’s will provides that Al is to receive the stock. Which of the following is false?

A. If Jane dies on June 1, 2010, Al’s basis for the stock is $100,000.

B. If Jane dies on August 1, 2010, Al’s basis for the stock is $900,000.

C. If Jane dies on June 15, 2010, Al’s basis is $300,000.

D. If Jane dies on July 1, 2010, Al’s basis is $100,000.

E. All of the above are true.

91. Martha gives 100 shares of Green, Inc. stock to her niece, Jennifer. Martha’s adjusted basis for the stock is $20,000 and the fair market value is $30,000. Four months after the gift, Jennifer is killed in an automobile accident. Martha inherits the stock which then is worth $35,000. What is the adjusted basis of the inherited stock to Martha?

A. $0.

B. $20,000.

C. $30,000.

D. $35,000.

E. None of the above.

92. Henrietta and Hollis have been married for 10 years when Hollis dies in a sky-diving accident. Their assets are summarized below.

Asset

Basis

Fair market value

Car

$ 20,000

$ 15,000

House

150,000

200,000

Life insurance (on Hollis’ life)

10,000

100,000

Henrietta and Hollis reside in Wisconsin, a community property state. All of the assets were acquired with community funds and pass to Henrietta. Her basis for each of the assets becomes:

Car

House

Cash from life insurance proceeds

A. $20,000

$150,000

$

10,000

B. $17,500

$175,000

$

10,000

C. $17,500

$175,000

$

100,000

D. $15,000

$200,000

$

100,000

E. None of the above.

93. Robert and Diane, husband and wife, live in Pennsylvania, a common law state. They purchased land as joint tenants in 2006 for $60,000. In 2010, Diane dies and bequeaths her share of the land to Robert. The land has a fair market value of $88,000. What is Robert’s adjusted basis for the land?

A. $88,000.

B. $74,000.

C. $60,000.

D. $30,000.

E. None of the above.

94. Taylor inherited 100 acres of land on the death of his father in 2010. A Federal estate tax return was filed and this land was valued therein at $650,000, its fair market value at the date of the father’s death. The father had originally acquired the land in 1965 for $112,000 and prior to his death he had expended $20,000 on permanent improvements. Determine Taylor’s holding period for the land.

A. Will begin with the date his father acquired the property.

B. Will automatically be long-term.

C. Will begin with the date of his father’s death.

D. Will begin with the date the property is distributed to him.

E. None of the above.

95. Kelly inherits land which had a basis to the decedent of $95,000 and a fair market value of $50,000 on August 4, 2010, the date of the decedent’s death. The executor distributes the land to Kelly on November 12, 2010, at which time the fair market value is $49,000. The fair market value on February 4, 2011, is $45,000. In filing the estate tax return, the executor elects the alternate valuation date. Kelly sells the land on June 10, 2011, for $48,000. What is her recognized gain or loss?

A. ($1,000).

B. ($2,000).

C. ($47,000).

D. $1,000.

E. None of the above.

96. Iva owns Mauve, Inc. stock (adjusted basis of $40,000) which she sells to Joshua, her brother, for its fair

market value of $32,000. Fifteen months later, he sells it to Faye, a friend, for its fair market value of $39,000. Determine Iva’s recognized loss, Joshua’s recognized gain or loss, and Faye’s adjusted basis for the stock.

Iva’s recognized loss

Joshua’s recognized gain or loss

Faye’s basis

A.

$

–0–

$

–0–

$39,000

B.

$

–0–

$

7,000

$32,000

C.

$

–0–

$

7,000

$39,000

D.

$

8,000

$

7,000

$39,000

E. None of the above.

97. Jay sells property with an adjusted basis of $19,000 to his daughter for $12,000. Daughter subsequently sells the property to her brother for $12,000. Two years later, brother sells the property to Hun, an unrelated party, for $21,000. What is brother’s recognized gain or loss on the sale of the property?

A. $0.

B. $2,000.

C. $4,000.

D. ($2,000).

E. None of the above.

98. Karen purchased 100 shares of Gold Corporation stock for $11,500 on January 1, 2002. In the current tax year, she sells 25 shares of the 100 shares purchased on January 1, 2002, for $2,500. Twenty-five days earlier, she had purchased 30 shares for $3,000. What is Karen’s recognized gain or loss on the sale of the stock, and what is her basis in the 30 shares purchased 25 days earlier?

A. $375 recognized loss, $3,000 basis in new stock.

B. $0 recognized loss, $3,000 basis in new stock.

C. $0 recognized loss, $3,375 basis in new stock.

D. $0 recognized loss, $3,450 basis in new stock.

E. None of the above.

99. Andrew acquires 2,000 shares of Eagle Corporation stock for $100,000 on March 31, 2003. On January 1, 2010, he sells 125 shares for $5,000. On January 22, 2010, he purchases 135 shares of Eagle Corporation stock for $6,075. When does Andrew’s holding period begin for the 135 shares?

A. January 22, 2010.

B. January 1, 2010.

C. March 31, 2003.

D. March 31, 2003, for 125 shares and January 22, 2010, for 10 shares.

E. None of the above.

100.If personal use property is converted to business use:

A. Gain is recognized on the date of conversion to the extent of the excess of the fair market value over the adjusted basis.

B. Loss is recognized on the date of conversion to the extent of the excess of the adjusted basis over the fair market value.

C. The basis for gain is the lower of the taxpayer’s adjusted basis or the fair market value at the date of conversion.

D. The basis for loss is the taxpayer’s adjusted basis on the date of conversion.

E. None of the above is correct.

101.Lynn purchases a house for $52,000. She converts the property to rental property when the fair market value is $115,000. After deducting depreciation (cost recovery) expense of $1,130, she sells the house for $120,000. What is her recognized gain or loss?

A. $0.

B. $6,130.

C. $37,630.

D. $69,130.

E. None of the above.