Question
CHAPTER 14–PROPERTY TRANSACTIONS: DETERMINATION OF GAIN OR LOSS AND BASIS CONSIDERATIONS
1. Realized gain or loss is measured by the difference between the amount realized from the sale or other disposition of property and the property’s adjusted basis at the date of disposition.

2. Molanda sells a parcel of land for $18,000 in cash and the buyer assumes Molanda’s mortgage of $12,000 on the land. Molanda’s amount realized is $30,000.

3. If Wal-Mart stock increases in value during the tax year by $4,500, the amount realized is a positive $4,500.

4. If the buyer assumes the seller’s liability on the property acquired, the seller’s amount realized is decreased by the amount of the liability assumed.

5. The fair market value of property received in a sale or other disposition is the price at which property will change hands between a willing seller and a willing buyer when neither is compelled to sell or buy.

6. If a seller assumes the buyer’s liability on the property acquired, the buyer’s adjusted basis for the property is increased by the amount of the liability assumed.

7. Expenditures made for ordinary repairs and maintenance of property are not added to the original basis in the determination of the property’s adjusted basis whereas capital expenditures are added to the original basis.

8. Deductions taken for depreciation or cost recovery on business or income-producing property reduce the adjusted basis of the property.

9. The adjusted basis of property that is stolen is reduced by the amount of insurance proceeds received and by any recognized loss.

10. Monroe’s delivery truck is damaged in an accident. Monroe’s adjusted basis for the delivery truck prior to the accident is $20,000. If Monroe receives insurance proceeds of $21,000 and recognizes a casualty gain of $1,000, his adjusted basis for the delivery truck after the accident is $21,000.

11. If insurance proceeds are received for property used in a trade or business, a casualty transaction can result in recognized gain or recognized loss.

12. If a distribution by a corporation to a shareholder exceeds the corporation’s earnings and profits, the excess first reduces the shareholder’s stock basis to zero and any remaining excess is classified as capital gain or ordinary income depending on the shareholder’s holding period for the stock.

13. Ricky owns all the stock of Amethyst, Inc. (adjusted basis of $100,000). If he receives a distribution from Amethyst of $94,000 and corporate earnings and profits are $10,000, Ricky has a capital gain of $6,000.

14. The amount of a corporate distribution qualifying for capital recovery treatment which exceeds the recipient’s stock basis is treated as an ordinary gain.

15. Bond premium on tax-exempt bonds must be amortized. The annual amortization reduces the ower’s taxable income and decreases the adjusted basis for the bond.

16. The amortization of bond premium decreases the basis of the bond and the amortization of bond discount increases the basis of the bond.

17. The amount received for a utility easement on land is included in the gross income of the taxpayer.

18. A realized gain on the sale or exchange of a personal use asset is recognized, but a realized loss on the sale, exchange, or condemnation of a personal use asset is not recognized.

19. A realized gain whose recognition is postponed results in the temporary recovery of less than the taxpayer’s cost or other basis.

20. A realized loss whose recognition is postponed results in the temporary recovery of more than the taxpayer’s cost or other basis.

21. In the case of a bargain purchase, the adjusted basis of an asset can exceed the cost of the asset to the purchaser.

22. When a taxpayer has purchased several lots of stock on different dates at different purchase prices and cannotidentify the lot of stock that is being sold, he may choose which lot of stock is deemed to besold.

23. Cassie purchases a sole proprietorship for $125,000. The fair market value of the tangible assets is $100,000 and the agreed to value of goodwill is $15,000. Assuming there are no other intangible assets, Cassie’s basis for the tangible assets is $108,696 ($100,000 + $8,696) and her basis for the goodwill is $16,304 ($15,000 + $1,304).

24. Purchased goodwill is assigned a basis, but developed or self-created goodwill is not assigned a basis.

25. Nontaxable stock dividends result in no change to the total basis of the old and new stock.

26. The holding period of nontaxable stock rights includes the holding period of the stock on which the rights were distributed.

27. Angela receives stock (worth $11,000) as a gift from her aunt. Her aunt’s adjusted basis is $7,000 and the transfer did not result in a gift tax. Angela’s basis in the stock is $11,000.

28. This year, Fran receives a birthday gift of stock worth $75,000 from her aunt. The aunt has owned the stock (adjusted basis $50,000) for 10 years and pays gift tax of $27,000 on the transfer. Fran’s basis in the stock is $75,000—the lesser of $77,000 ($50,000 + $27,000) or $75,000.

29. Todd gives Sam stock (adjusted basis of $72,000; fair market value of $69,000). Sam later sells the stock for $71,000. Sam’s recognized loss is $1,000 ($71,000 amount realized – $72,000 adjusted basis).

30. A donee receives depreciable property worth $85,000 (basis to donor of $150,000) with no gift tax being paid on the transfer. The donee’s basis for depreciation purposes is $85,000.

31. The holding period for property acquired by gift is automatically long term.

32. The basis of property received by inheritance is a carryover basis.

33. The alternate valuation date amount cannot be elected if the property in the estate appreciates in value during the six-month period after death.

34. If the alternate valuation date is elected by the executor, the total basis of inherited property will be less than what it would have been if the primary valuation date and amount had been used.

35. If the alternate valuation date is elected by the executor of the estate, the basis of all of the property included in the decedent’s estate becomes the fair market value 6 months after the decedent’s death.

36. If a husband inherits his deceased wife’s share of jointly owned property in a common law state, both the husband’s original share and the share inherited from the deceased wife are stepped-up or down to the fair market value at the date of the wife’s death.

37. Parker bought a brand new Ferrari on January 1, 2010, for $125,000. Parker was fatally injured in an auto accident on June 23, 2010, when the fair market value of the car was $98,000. In his will, Parker left the Ferrari to his best friend, Ryan. Ryan’s holding period for the Ferrari begins on January 1, 2010.

38. Section 267 provides that realized losses and realized gains from related party transactions are not recognized.

39. For the loss disallowance provision under § 267, related parties include certain family members, a shareholder and his or her controlled corporation (i.e., greater than 50% in value of the corporation’s outstanding stock), and a partner and his or her controlled partnership (i.e., greater than 50% of the capital interests or profits interest in the partnership).

40. A related party purchaser includes in the basis of the property acquired the seller’s disallowed loss.

41. Ben sells stock (adjusted basis of $14,000) to his son, Ray, for its fair market value of $9,500. Ray gives the stock to his daughter, Trish, who subsequently sells it for $13,500. Ben’s recognized loss is $0 and Trish’s recognized gain is $0 ($13,500 – $9,500 – $4,000).

42. The basis of property acquired in a wash sale is its cost plus the loss recognized on the wash sale.

43. Realized losses from the sale or exchange of stock are disallowed if within 30 days before or 30 days after the sale or exchange, the taxpayer acquires substantially identical stock.

44. A loss from the sale of a personal use asset that would be disallowed can be recognized if the taxpayer converts the asset to business use prior to its sale.

45. Property that has been converted from personal use to business or income-producing use will be dual basis property if the adjusted basis exceeds the fair market value at the date of conversion.

46. The basis for gain and loss of personal use property converted to business use is the lower of the adjusted basis or the fair market value on the date of conversion.

47. The taxpayer owns land with an adjusted basis of $20,000 and a fair market value of $50,000. If the property is going to be given to the taxpayer’s nephew, it is preferable for the transfer to be by inheritance rather than by gift.

48. The taxpayer owns stock with an adjusted basis of $15,000 and a fair market value of $8,000. If the stock or cash is going to be given to her niece, it is preferable for the taxpayer to sell the stock and give the $8,000 of cash to her niece. The same preference would exist if the recipient were a qualified charitable organization.

49. Broker’s commissions and points paid by the seller reduce the seller’s amount realized.

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.

102.Louis sold his farm during the current taxable year. At the date of the sale, the farm had an adjusted basis of $212,000 and was encumbered by a mortgage of $190,000. The buyer paid him $110,000 in cash, agreed to take the title subject to the $190,000 mortgage, and agreed to pay him $80,000 with interest at 9 percent one year from the date of sale. How much is Louis’ recognized gain on the sale?

103.Albert is considering two options for selling land for which he has an adjusted basis of $70,000 and on which there is a mortgage of $100,000. Under the first option, Albert will sell the land for $150,000 with a stipulation in the sales contract that he liquidate the mortgage before the sale is complete. Under the second option, Albert will sell the land for $50,000 and the buyer will assume the mortgage. Calculate Albert’s recognized gain under both options.

104.Annette purchased stock on March 1, 2010, for $32,000. At December 31, 2010, it was worth $29,000. She also purchased a bond on September 1, 2010, for $9,000. At year end, it was worth $12,000. Determine Annette’s realized and recognized gain or loss.

105.Nigel purchased a blending machine for $125,000 for use in his business. As to the machine, he has deducted MACRS cost recovery of $31,024, maintenance costs of $5,200, and repair costs of $4,000. Calculate Nigel’s adjusted basis for the machine.

106.Amanda uses a delivery van in her business. The adjusted basis is $21,000, and the fair market value is $18,000. The delivery van is stolen and Amanda receives insurance proceeds of $18,000. Determine Amanda’s realized and recognized gain or loss.

107.Renee purchases taxable bonds with a face value of $200,000 for $212,000. The annual interest paid on the bonds is $10,000. Assume Renee elects to amortize the bond premium. The total premium amortization for the first year is $1,600.

a. What is Renee’s interest income for the first year?

b. What is Renee’s interest deduction for the first year?

c. What is Renee’s adjusted basis for the bonds at the end of the first year?

108.Walter acquired tax-exempt bonds for $330,000 in December 2010. The bonds, which mature in December 2015, have a maturity value of $300,000. Walter does not make any elections regarding the amortization of the bond premium. Determine the tax consequences to Walter when he redeems the bonds in December 2015.

109.Misty owns stock in Violet, Inc., for which her adjusted basis is $75,000. She receives a cash distribution of $52,000 from Violet.

a. What is Misty’s adjusted basis for the stock if the distribution is a taxable dividend?

b. What is Misty’s adjusted basis for the stock if the distribution is a return of capital?

110.Hilary receives $10,000 for a 15-foot wide utility easement along one of the boundaries to her property. The easement provides that no structure can be built on that portion of the property. Her adjusted basis for the property is $200,000 and the easement covers 15% of the total acreage. Determine the effect of the $10,000 payment on Hilary’s gross income and her basis for the property.

111.Ollie owns a personal use car for which he originally paid $42,000. He trades the car in on a sports utility vehicle (SUV) paying the automobile dealer cash of $24,000. If the negotiated price of the SUV is $45,000, what is Ollie’s recognized gain or loss and his adjusted basis for the SUV?

112.Omar has the following stock transactions during 2010:

Date

Number of

Number

Selling

Stock

purchased

shares sold

of shares

Basis

price

Orange

1/2008

100

$1,000

Blue

6/2008

200

3,000

Yellow

4/2009

50

1,250

Blue

2/2010

150

1,800

Yellow

3/2010

175

5,250

Blue

7/2010

250

$3,500

Yellow

11/2010

200

7,200

a. What is Omar’s recognized gain or loss on the stock sales if his objective is to minimize the recognized gain and to maximize the recognized loss?

b. What is Omar’s recognized gain or loss if he does not identify the shares sold?

113.Hubert purchases Fran’s jewelry store for $950,000. The identifiable assets of the business are as follows:

Basis

FMV

Inventory

$ 90,000

$ 97,000

Accounts receivable

55,000

50,000

Building

100,000

225,000

Land

280,000

300,000

Hubert and Fran agree to assign $110,000 to a 7-year covenant not to compete. How should Hubert allocate the $950,000 purchase price to the assets?

114.Marge purchases the Kentwood Krackers, a AAA level baseball team, for $1.5 million. The appraised values of the identified assets are as follows:

Prepaid season tickets

$150,000

Stadium lease

400,000

Player contracts

500,000

Equipment

100,000

The Krackers have won the pennant for the past two years. Determine Marge’s adjusted basis for the assets of the Kentwood Krackers.

115.Inez’s adjusted basis for 6,000 shares of Cardinal, Inc. common stock is $600,000. During the year, she receives a 5% stock dividend.

a. What is the amount of Inez’s gross income?

b. What is Inez’s total basis for the stock?

c. What is Inez’s basis per share?

116.Felix gives 100 shares of stock to his daughter, Monica. The stock was acquired in 2001 for $20,000, and at the time of the gift, it had a fair market value of $60,000. Felix paid a gift tax of $6,000.

a. Does the receipt of the stock result in gross income to Monica?

b. What is Monica’s basis in the stock?

117.On September 18, 2010, Jerry received land and a building from Ted as a gift. Ted had purchased the land and building on March 5, 2007, and his adjusted basis and the fair market value at the date of the gift were as follows:

Asset

Adjusted Basis

FMV

Land

$150,000

$200,000

Building

90,000

100,000

Ted paid gift tax on the transfer to Jerry of $96,000.

a. Determine Jerry’s adjusted basis and holding period for the land and building.

b. Assume instead that the FMV of the land was $89,000 and the FMV of the building was $60,000. Determine Jerry’s adjusted basis and holding period for the land and building.

118.Mel gives a parcel of land to his son, Scott. He had purchased the land in 1997 for $140,000 and its fair market value on the date of the gift is $125,000. No gift tax is paid. Scott subsequently sells the land for $131,000.

a. What is Scott’s basis for the land?

b. What is Scott’s realized and recognized gain or loss from the sale of the land?

119.Jessica inherits land from her uncle. His adjusted basis in the land (purchased in November 2004) was $110,000 and it was included in his estate at a value of $225,000.

a. Determine Jessica’s basis and holding period for the land.

b. Determine Jessica’s basis and holding period for the land if it was included in her uncle’s estate at a value of $90,000.

120.Elbert gives stock worth $28,000 (no gift tax resulted) to his friend, Jeff, on June 8, 2010. Elbert purchased the stock on September 1, 2003, and his adjusted basis is $22,000. Jeff dies on December 8, 2011, and bequeaths the stock to Elbert. At that date, the fair market value of the stock is $31,000.

a. What is Jeff’s basis and holding period for the stock?

b. What is Elbert’s basis and holding period for the stock?

121.Ed and Cheryl have been married for 27 years. They own land jointly with a basis of $140,000. Ed dies in 2010, when the fair market value of the land is $220,000. Under the joint ownership arrangement, the land passed to Cheryl.

a. If Ed and Cheryl reside in a community property state, what is Cheryl’s basis in the land?

b. If Ed and Cheryl reside in a common law state, what is Cheryl’s basis in the land?

122.On January 15 of the current taxable year, Merle sold stock with a cost of $40,000 to his brother Ned for $25,000, its fair market value. On June 21, Ned sold the stock to a friend for $26,000.

a. What are the tax consequences to Merle and Ned?

b. Would Ned recognize any gain if he sold the stock for $41,000?

123.Vicki sells a parcel of land to her son, Dan, for $40,000. Vicki’s adjusted basis is $45,000. Two years later Dan gives the land to his fiancée, Karen. At that date, the land is worth $47,000. No gift tax is paid. Since Dan is going to be stationed in the U.S. Army in Germany for 3 years, they do not plan on being married until his tour is completed. Six months after receiving the land, Karen sells it for $48,000. Calculate Karen’s realized and recognized gain or loss.

124.Justin owns 1,000 shares of Oriole Corporation common stock (adjusted basis of $9,800). On April 27, 2010, he sells 300 shares for $2,800, while on May 5, 2010, he purchases 200 shares for $2,500.

a. What is Justin’s recognized gain or loss resulting from these transactions?

b. What is Justin’s basis for the stock acquired on May 5, 2010?

c. Could Justin have obtained different tax consequences in a. and b. if he had sold the 300 shares on December 27, 2010, and purchased the 200 shares on January 5, 2011?

125.Laura transfers her personal use automobile to her business. The car’s adjusted basis is $20,000 and the fair market value is $15,000. Determine the adjusted basis of the car to Laura’s sole proprietorship including the basis for cost recovery.

126.What is the general formula for calculating the amount realized on the sale or other disposition of property?

127.Discuss the effect of a liability assumption on the seller’s amount realized and the buyer’s adjusted basis.

128.What is the general formula for calculating the adjusted basis of property?

129.What is the difference between the depreciation (or cost recovery) allowed and the depreciation (or cost recovery) allowable and what effect does each have on the adjusted basis of property?

130.What effect does a deductible casualty loss have on the adjusted basis of property?

131.Can dividend treatment result to a shareholder on a distribution from a corporation that has no E & P?

132.If a taxpayer purchases taxable bonds at a premium, the amortization of the premium is elective. However, if a taxpayer purchases tax-exempt bonds at a premium, the amortization of the premium is mandatory. Explain this difference in the treatment.

133.Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?

134.Describe the relationship between the recovery of capital doctrine and the realized and recognized gain and loss concepts.

135.If a taxpayer purchases a business and the price exceeds the fair market value of the listed assets, how is the excess allocated among the purchased assets?

136.Lois received nontaxable stock rights with a fair market value of $4,000. The fair market value of the stock on which the rights were received is $24,000 (cost $14,000). Assume the rights are exercised by paying $31,000 plus the rights. Discuss how to calculate the basis of the old stock and the basis of the new stock.

137.For gifts made after 1976, when will part of the gift tax paid by the donor be added to the donee’s basis?

138.Joseph converts a building (adjusted basis of $50,000 and fair market value of $40,000) from personal use to business use. Justin receives a building with a $40,000 fair market value ($50,000 donor’s adjusted basis) from his mother as a gift. Discuss the tax consequences with respect to Joseph’s and Justin’s adjusted basis.

139.Discuss the application of holding period rules to property acquired by gift and inheritance.

140.Seth and Cheryl, husband and wife, own property jointly. The property has an adjusted basis of $25,000 and a fair market value of $30,000.

a. Discuss the rules for the calculation of the adjusted basis of the property to Seth if he inherits his wife’s share of the property and Seth and Cheryl live in a community property state.

b. If they live in a common law state?

141.Explain how the sale of investment property at a loss to a brother is treated differently from a sale to a nephew.

142.For disallowed losses on related-party transactions, who has the right of offset?

143.What is the easiest way for a taxpayer who is going to sell property that has declined in value to avoid the § 267 loss disallowance provision?

144.Tariq sold certain U.S. Government bonds and State of Oregon bonds at a loss to offset short-term capital gain from a previous transaction. He felt that the U.S. Government and State of Oregon bonds were “good” investments, so he repurchased identical securities within one week. Do these transactions constitute wash sales?

If the bond sales resulted in the recognition of gain (rather than loss), would the wash sale provisions prevent the gains from being recognized?

145.Mitchell owned an SUV that he had purchased two years ago for $48,000 and which he transfers to his sole proprietorship. How is the sole proprietorship’s basis for the SUV calculated? What additional information does Mitchell need?

146.Alice is terminally ill and does not expect to live much longer. Pondering the consequences of her estate, she decides how to allocate her property to her nieces. She makes a gift of depreciated property (i.e., adjusted basis exceeds fair market value) to Marsha, a gift of appreciated property (i.e., fair market value exceeds adjusted basis) to Jan, and leaves appreciated property to Cindy in her will. Each of the properties has the same fair market value. From an income tax perspective, which niece is her favorite?

147.Why is it generally undesirable to pass property by death when its fair market value is less than basis?

148.Identify two tax planning techniques that can be used to avoid the wash sale disallowance of loss.