Deck 13: A: Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges-Part 1

Question 1

Reggie owns all the stock of Amethyst, Inc.(adjusted basis of $80,000).If he receives a distribution from Amethyst of $70,000 and corporate earnings and profits are $18,000, Reggie has a capital gain of $8,000 and an adjusted basis for his Amethyst stock of $0.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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.

Question 5

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

Question 6

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

Question 7

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.

Question 8

If the amount of a corporate distribution is less than the amount of the corporate earnings and profits, the return of capital concept does not apply and the shareholders' adjusted basis for the stock remains unchanged.

Question 9

The adjusted basis for a taxable bond purchased at a premium is reduced if the amortization election is made.The amount of the amortized premium is treated as an interest deduction.

Question 10

Jesse purchases land and an office building for his business for $200,000 with $50,000 being allocated to the land.During the first year, Jesse deducts cost recovery of $3,050.Jesse's adjusted basis for the building at the end of the first year is $146,950 ($150,000 - $3,050).

Question 11

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

Question 12

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.

Question 13

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.

Question 14

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

Question 15

Molanda sells a parcel of land for $25,000 in cash and the buyer assumes Molanda's mortgage of $20,000 on the land.Molanda's amount realized is $45,000.

Question 16

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.

Question 17

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.

Question 18

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

Question 19

Helen purchases a $10,000 corporate bond at a premium of $1,000 and elects to amortize the premium.On the later sale of the bond for $10,800, she has amortized $300 of the premium.Helen has a recognized gain of $800 ($10,800 amount realized - $10,000 adjusted basis).

Question 20

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.

Question 21

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.

Question 22

If losses are disallowed in a related party transaction, the holding period for the buyer includes the holding period of the seller.

Question 23

Cassie purchases a sole proprietorship for $145,000.The fair market value of the tangible assets is $110,000 and the agreed to value of goodwill is $10,000.Assuming there are no other intangible assets, Cassie's basis for the tangible assets is $132,917 ($110,000 + $22,917) and her basis for the goodwill is $12,083 ($10,000 + $2,083).

Question 24

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.

Question 25

Purchased goodwill is assigned a basis equal to cost, and developed or self-created goodwill is assigned a basis equal to one-fifteenth of the amount expended.

Question 26

When a taxpayer has purchased several lots of stock on different dates at different purchase prices and cannot identify the lot of stock that is being sold, he should use either a weighted average approach or a LIFO approach.

Question 27

Parker bought a brand new Ferrari on January 1, 2012, for $125,000. Parker was fatally injured in an auto accident on June 23, 2012, when the fair market value of the car was $105,000. Parker was driving a loaner car from the Ferrari dealership while his car was being serviced. In his will, Parker left the Ferrari to his best friend, Ryan. Ryan's holding period for the Ferrari begins on June 23, 2012.

Question 28

On the sale of property between related parties, realized gains are recognized whereas realized losses are disallowed.

Question 29

The amount of the loss basis of a gift will differ from the amount of the gain basis only if at the date of the gift the adjusted basis of the property exceeds the property's fair market value.

Question 30

If the alternate valuation date is elected by the executor in 2012, the total basis of inherited property will be more than what it would have been if the primary valuation date and amount had been used.

Question 31

If the fair market value of the property on the date of death is greater than on the alternate valuation date, the use of the alternate valuation amount is mandatory.

Question 32

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.

Question 33

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.

Question 34

The basis of inherited property usually is its fair market value on the date of the decedent's death.

Question 35

The basis of property acquired in a bargain purchase is the cost of the asset. The bargain amount (fair market value - cost) is recognized when the asset is sold.

Question 36

Nontaxable stock dividends result in no change to the total basis of the old and new stock, but the basis per share decreases.

Question 37

The basis of property received by gift is always a carryover basis.

Question 38

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).

Question 39

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

Question 40

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

Question 41

The exchange of unimproved real property located in Topeka (KS) for improved real property located in Atlanta (GA) does not qualify as a like-kind exchange.

Question 42

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

Question 43

In a nontaxable exchange, the replacement property is assigned a carryover basis.

Question 44

Jena owns land as an investor.She exchanges the land for a warehouse in which she will store the inventory of her business.The exchange doesqualify for like-kind exchange treatment.

Question 45

Broker's commissions, legal fees, and points paid by the seller reduce the seller's amount realized.

Question 46

Ben sells stock (adjusted basis of $25,000) to his son, Ray, for its fair market value of $15,000.Ray gives the stock to his daughter, Trish, who subsequently sells it for $26,000.Ben's recognized loss is $0 and Trish's recognized gain is $1,000 ($26,000 - $15,000 - $10,000).

Question 47

Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that nontaxable exchanges result in a change in the substance but not the form of the taxpayer's relative economic position.

Question 48

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.

Question 49

Eva exchanges a pick-up truck that she has held for personal use plus $19,000 for a new pick-up truck which she will use exclusively in her sole proprietorship business.This exchange qualifies for nontaxable exchange treatment.

Question 50

To qualify as a like-kind exchange, real property must be exchanged either for other real property or for personal property with a statutory life of at least 39 years.

Question 51

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.

Question 52

In a nontaxable exchange, recognition is postponed.In a tax-free transaction, nonrecognition is permanent.

Question 53

Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held for over one year.

Question 54

Since wash sales do not apply to gains, it may be desirable to engage in this type of transaction before the end of the tax year.

Question 55

If property that has been converted from personal use to business use has appreciated in value, its basis for gain will be the same as the basis for loss.

Question 56

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.

Question 57

Gene purchased an SUV for $42,000 which he uses 100% for personal purposes.When the SUV is worth $29,000, he contributes it to his business.The gain basis is $42,000, the loss basis is $29,000, and the basis for cost recovery is $29,000.

Question 58

Abby exchanges 3,000 shares of Osprey, Inc., stock for 1,500 shares of Blue Heron, Inc., stock.Abby's adjusted basis for the Osprey stock is $270,000 and the fair market value of the Blue Heron stock is $300,000.Abby's recognized gain is $0 and her adjusted basis for the Blue Heron stock is $270,000.

Question 59

The nonrecognition of gains and losses under § 1031 is mandatory for gains and elective for losses.

Question 60

Stuart owns land with an adjusted basis of $190,000 and a fair market value of $500,000.If the property is going to be given to Stuart's nephew, Alex, it is preferable for the transfer to be by inheritance rather than by gift.

Question 61

If a taxpayer exchanges like-kind property under § 1031 and assumes a liability associated with the property received, the taxpayer is considered to have given boot in the transaction.

Question 62

A condemned office building owned and used in the business by a taxpayer can be replaced by land and qualify for nonrecognition treatment.

Question 63

The amount realized does not include any amount received by the taxpayer that is designated as severance damages by both the government and the taxpayer.

Question 64

Section 1033 (nonrecognition of gain from an involuntary conversion) applies to both gains and losses.

Question 65

The surrender of depreciated boot (fair market value is less than adjusted basis) in a like-kind exchange can result in the recognition of loss.

Question 66

The basis of boot received in a like-kind exchange is its fair market value, unless the realized gain is a smaller amount.

Question 67

If boot in the form of cash is given in a § 1031 like-kind exchange, the realized gain may be recognized.

Question 68

An exchange of business or investment property for like-kind property with a § 267 related party cannot qualify as a § 1031 like-kind exchange.

Question 69

If boot is received in a § 1031 like-kind exchange, the recognized gain cannot exceed the realized gain.

Question 70

Leta has a fiscal tax year which ends on June 30th. Her factory building is destroyed by a fire on October 12, 2012. Two months later, she receives insurance proceeds large enough to produce a realized gain. In order to elect § 1033 postponement, Leta must acquire qualified replacement property by December 31, 2014.

Question 71

An involuntary conversion results from the destruction (complete or partial), theft, seizure, requisition or condemnation, or the sale or exchange under threat or imminence of requisition or condemnation of the taxpayer's property.

Question 72

Under the taxpayer-use test for a § 1033 involuntary conversion, the taxpayer has less flexibility in qualifying replacement property than under the functional-use test.

Question 73

A building located in Virginia (used in business) exchanged for a building located in France (used in business) cannot qualify for like-kind exchange treatment.

Question 74

Milt's building which houses his retail sporting goods store is destroyed by a flood. Sandra's warehouse which she is leasing to Milt to store the inventory of his business also is destroyed in the same flood. Both Milt and Sandra receive insurance proceeds that result in a realized gain. Sandra will have less flexibility than Milt in the type of building in which she can invest the proceeds and qualify for postponement treatment under § 1033 (nonrecognition of gain from an involuntary conversion).

Question 75

An exchange of two items of personal property (personalty) that belong to different general business asset classes qualifies for nonrecognition under § 1031 as long as both properties are used in the taxpayer's trade or business.

Question 76

If boot is received in a § 1031 like-kind exchange that results in some of the realized gain being recognized, the holding period for both the like-kind property and the boot received begins on the date of the exchange.

Question 77

Terry exchanges real estate (acquired on August 25, 2006) held for investment for other real estate to be held for investment on September 1, 2012.None of the realized gain of $10,000 is recognized, and Terry's adjusted basis for the new real estate is a carryover basis of $80,000.Consequently, Terry's holding period for the new real estate begins on August 25, 2006.

Question 78

Pat owns a 1965 Mustang car which he uses for personal use.He purchased it four years ago for $22,000, and it currently is worth $27,000.He exchanges it for a 1979 Triumph Spitfire convertible worth $27,000.Pat's recognized gain is $0 and his adjusted basis for the convertible is $22,000.

Question 79

Pierce exchanges an asset (adjusted basis of $14,000; fair market value of $18,000) for another asset (fair market value of $15,000).In addition, he receives cash of $3,000.If the exchange qualifies as a like-kind exchange, his recognized gain is $3,000 and his adjusted basis for the property received is $17,000 ($14,000 + $3,000 recognized gain).

Question 80

Shari exchanges an office building in New Orleans (adjusted basis of $700,000) for an apartment building in Baton Rouge (fair market value of $900,000).In addition, she receives $100,000 of cash.Shari's recognized gain is $100,000 and her basis for the apartment building is $800,000 ($700,000 adjusted basis + $100,000 recognized gain).