Question 1

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.

Accepted Answer

The seller's amount realized is increased by the amount of the liability assumed by the buyer, as it effectively adds to the total consideration received for the property.

Question 2

The amount of a corporate distribution qualifying for capital recovery treatment that exceeds the shareholder- recipient's basis in the stock investment is treated as a capital gain.

Accepted Answer

If a corporate distribution qualifies for capital recovery treatment and exceeds the shareholder-recipient's basis in the stock investment, the excess is treated as a capital gain.

Question 3

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).

Accepted Answer

Helen's recognized gain would be $100, not $800. The adjusted basis of the bond would be $10,700 ($10,000 purchase price + $1,000 premium - $300 amortized premium), making the gain $100 ($10,800 sale price - $10,700 adjusted basis).

Question 4

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.

Accepted Answer

This is true. If the distribution is less than the earnings and profits, it is considered a partial liquidation and the return of capital concept does not apply. Therefore, the shareholders' adjusted basis for the stock remains unchanged.

Question 5

In a deductible casualty or theft, the basis of property involved is reduced by the amount of insurance proceeds received and by any resulting recognized loss.

Accepted Answer

This is because when insurance proceeds are received for a casualty or theft, they are meant to reimburse the taxpayer for a portion of their loss. Therefore, the taxpayer's basis in the property is reduced by the amount of insurance proceeds received. Any resulting recognized loss is also subtracted from the basis.

Question 6

In computing the amount realized when the fair market value of the property received cannot be determined, the fair market value of the property surrendered may be used.

Accepted Answer

This statement is true. When the fair market value of the property received cannot be determined, the fair market value of the property surrendered may be used to compute the amount realized.

Question 7

If Wal-Mart stock increases in value during the tax year by $6,000, the amount realized is a positive $6,000.

Accepted Answer

The amount realized refers to the total amount received from a sale transaction. If Wal-Mart stock increases in value but is not sold, there is no transaction, and thus no amount realized. The $6,000 increase is an unrealized gain, not an amount realized.

Question 8

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

Accepted Answer

The answer of The amount received for a utility easement...

Question 9

Monroe's delivery truck is damaged in an accident.His 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.

Accepted Answer

Monroe's adjusted basis for the delivery truck after the accident would be $0 because the insurance proceeds of $21,000, which exceed his adjusted basis of $20,000, fully compensate him for the loss, and the excess $1,000 is recognized as a gain.

Question 10

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.

Accepted Answer

This statement is true. When an amortization election is made for a taxable bond purchased at a premium, the adjusted basis of the bond is reduced by the amount of the premium that is amortized. This amortized premium is treated as an interest deduction for tax purposes.

Question 11

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.

Accepted Answer

This statement is true. According to the IRS, a loss from the sale, exchange, or condemnation of a personal use asset is not deductible. However, a gain from the sale or exchange of a personal use asset is taxable.

Question 12

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

Accepted Answer

When a realized gain's recognition is postponed, it means that the taxpayer has not yet declared it on their tax returns, resulting in the temporary recovery of more than their cost or other basis. This is because the gain has not yet been included in their taxable income, so they have not yet paid taxes on it.

Question 13

Reggie owns all the stock of Amethyst, Inc.(adjusted basis of $100,000).If he receives a distribution from Amethyst of $90,000 and corporate earnings and profits are $15,000, Reggie has a capital gain of $5,000 and an adjusted basis for his Amethyst stock of $0.

Accepted Answer

The distribution of $90,000 to Reggie is first applied against the earnings and profits of Amethyst, Inc., which are $15,000. This portion is treated as a dividend. The remaining $75,000 reduces Reggie's basis in the stock. Since his original basis was $100,000, after the distribution, his adjusted basis in the Amethyst stock would be $25,000 ($100,000 - $75,000), not $0. There is no capital gain because the distribution does not exceed his basis in the stock.

Question 14

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.

Accepted Answer

Expenditures made for ordinary repairs and maintenance of property are not considered in the determination of the property's adjusted basis. Capital expenditures, on the other hand, are added to the original basis.

Question 15

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.

Accepted Answer

This is the generally accepted definition of fair market value as defined by the Internal Revenue Service (IRS).

Question 16

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.

Accepted Answer

The buyer's adjusted basis is increased by the amount of the liability assumed, not decreased.

Question 17

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

Accepted Answer

A realized loss whose recognition is postponed does not result in the recovery of more than the taxpayer's cost or other basis; it merely delays the recognition of the loss for tax purposes, not allowing for any recovery beyond the original investment.

Question 18

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.

Accepted Answer

This statement correctly defines the calculation for realized gain or loss.

Question 19

If insurance proceeds are received for property used in a trade or business, a casualty transaction can result in recognized gain but cannot result in a recognized loss.

Accepted Answer

If insurance proceeds are received for property used in a trade or business, the amount of recognized loss can be limited to the adjusted basis of the property. Therefore, it is possible for a recognized loss to result from a casualty transaction in this situation.

Question 20

Milton purchases land and a factory building for his business for $300,000 with $100,000 being allocated to the land.
During the first year, Milton deducts cost recovery of $4,922.Milton's adjusted basis for the building at the end of the first year is $195,078 ($200,000 - $4,922).

Accepted Answer

Milton's adjusted basis for the building at the end of the first year is calculated by subtracting the cost recovery of $4,922 from the original building cost of $200,000, resulting in an adjusted basis of $195,078.

Quiz 14: Property Transactions: Determination of Gain or Loss and Basic Considerations