Income Tax Final

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.

ANSWER: a RATIONALE: A realized gain that is never recognized results in the permanent recovery of more than the taxpayer's cost or other basis for tax purposes.

Over the past 20 years, Alfred has purchased 380 shares of Green, Inc., common stock. His first purchase was in 1995 when he acquired 30 shares for $20 a share. In 2002, Alfred bought 150 shares at $10 a share. In 2017, Alfred acquired 200 shares at $50 a share. Alfred intends to sell 125 shares at $60 per share in the current year (2018). If Alfred's objective is to minimize gain and assuming he can adequately identify the shares to be sold, what is his recognized gain? a. $1,250 b. $3,520 c. $5,950 d. $6,250 e. None of the above

ANSWER: a RATIONALE: Alfred can minimize his recognized gain by selling the 125 shares from the lot acquired in 2017 (the specific identification method). Amount realized $7,500 Adjusted basis (6,250) Realized gain $1,250 Recognized gain $1,250

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

ANSWER: a RATIONALE: Amount realized $750,000 Adjusted basis (480,000) Realized gain $270,000 Recognized gain $270,000 The amount realized includes the amount of the nonrecourse mortgage.

Maud exchanges a rental house at the beach with an adjusted basis of $225,000 and a fair market value of $200,000 for a rental house at the mountains with a fair market value of $180,000 and cash of $20,000. What is the recognized gain or loss? a. $0 b. $20,000 c. ($20,000) d. ($25,000) e. None of the above

ANSWER: a RATIONALE: Amount realized ($180,000 + $20,000) $200,000 Adjusted basis (225,000) Realized loss ($25,000) Recognized loss $ -0- The receipt of boot generally does not result in recognition if there is a realized loss.

On October 1, Paula exchanged an apartment building (adjusted basis of $375,000 and subject to a mortgage of $125,000) for another apartment building owned by Nick (fair market value of $550,000 and subject to a mortgage of $125,000). The property transfers were made subject to the mortgages. What amount of gain should Paula recognize? a. $0 b. $25,000 c. $125,000 d. $175,000 e. None of the above

ANSWER: a RATIONALE: Amount realized: Apartment building (FMV) $550,000 Mortgage of transferor (Paula) 125,000 $675,000 Adjusted basis: Apartment building Mortgage of transferee (Nick) $375,000 125,000 (500,000) Realized gain $175,000 Recognized gain (net boot received equals net boot given)

Arthur owns a tract of undeveloped land (adjusted basis of $145,000) which he sells to his son, Ned, for its fair market value of $105,000. What is Arthur's recognized gain or loss and Ned's basis in the land? a. $0 and $105,000. b. $0 and $145,000. c. ($40,000) and $105,000. d. ($40,000) and $145,000. e. None of the above.

ANSWER: a RATIONALE: Arthur's realized loss of $40,000 ($105,000 - $145,000) is disallowed as a relatedparty transaction under § 267. Ned's basis for the land is his purchase price of $105,000.

Katie sells her personal use automobile for $12,000. She purchased the car three years ago for $25,000. What is Katie's recognized gain or loss? a. $0 b. $12,000 c. ($13,000) d. ($25,000) e. None of the above

ANSWER: a RATIONALE: Because the automobile is a personal use asset, none of the realized loss of $13,000 ($12,000 - $25,000) is recognized.

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion), makes the appropriate election, and the amount reinvested in replacement property is less than the amount realized, realized gain is: a. Recognized to the extent of the deficiency (amount realized not reinvested). b. Recognized to the extent of realized gain. c. Recognized to the extent of the amount reinvested in excess of the adjusted basis. d. Permanently not subject to taxation. e. None of the above.

ANSWER: a RATIONALE: If the taxpayer elects § 1033 treatment, the realized gain is postponed (i.e., temporary nonrecognition rather than permanent nonrecognition) except to the extent of the deficiency.

Kelly inherits land which had a basis to the decedent of $95,000 and a fair market value of $50,000 on August 4, 2018, the date of the decedent's death. The executor distributes the land to Kelly on November 12, 2018, at which time the fair market value is $49,000. The fair market value on February 4, 2019, is $45,000. In filing the estate tax return, the executor elects the alternate valuation date. Kelly sells the land on June 10, 2019, 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

ANSWER: a RATIONALE: Kelly's basis for the inherited property is $49,000 (i.e., the fair market value on the date of distribution) because the alternate valuation date was elected by the executor. Thus, the recognized loss is calculated as follows: Amount realized $48,000 Basis (49,000) Recognized loss ($1,000)

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

ANSWER: a RATIONALE: Noelle has a loss basis of $7,000 (the lower of the adjusted basis of $9,200 or the fair market value of $7,000 on the date of the gift) for the furniture. Therefore, sale proceeds of $6,500 result in a realized loss of $500 ($6,500 amount realized - $7,000 adjusted basis). This is a loss on a personal asset and is not recognized.

Terry owns Lakeside, Inc. stock (adjusted basis of $80,000), which she sells to her brother, Jake, for $64,000 (its fair market value). Eighteen months later, Jake sells the stock to Pamela, a friend, for $78,000 (its fair market value). What is Terry's recognized loss, Jake's recognized gain or loss, and Pamela's adjusted basis for the stock? Terry's Recognized Loss Jake's Recognized Gain(Loss) Pamela's Basis a. $ -0- $ -0- $78,000 b. $ -0- $14,000 $64,000 c. $ -0- $14,000 $78,000 d. $16,000 $14,000 $78,000 e. None of the above.

ANSWER: a RATIONALE: Terry's realized loss of $16,000 is disallowed because Jake is a related party. Jake has no recognized gain, calculated as follows: Amount realized $78,000 Less: Adjusted basis (64,000) Realized gain $14,000 Less: Terry's disallowed loss allowed to reduce Jake's gain to zero (maximum of $16,000) (14,000) Recognized gain $ -0- Pamela's basis for the stock is her cost of $78,000.

Valarie purchases a rental house and land for $180,000 during a depressed real estate market. Appraisals place the value of the house at $140,000 and the land at $60,000 (a total of $200,000). What is Valarie's basis in the house? a. $126,000. b. $140,000. c. $180,000. d. $200,000. e. None of the above.

ANSWER: a RATIONALE: The $180,000 total cost must be allocated to the land and building on the basis of the fair market values. The house basis is $126,000; ($140,000 ÷ $200,000) × $180,000.

Betty owns a horse farm with 500 acres of land (adjusted basis of $600,000). Fifty acres of the land are condemned by the state for $400,000 in order to build a municipal stadium. Since the fair market value of Betty's farm is significantly decreased by the proximity to the future stadium, the state awards Betty $300,000 in severance damages. Betty does not use the $300,000 to restore the usefulness of the farm and all of the $700,000 ($400,000 + $300,000) proceeds are invested in the stock market. What is her recognized gain or loss associated with the receipt of the severance damages? a. $0 b. $100,000 c. $300,000 d. $340,000 e. None of the above

ANSWER: a RATIONALE: The $300,000 severance damage award received by Betty reduces the basis of her land by $300,000. There is a recognized gain, but it is associated with the condemnation award and not with the severance damages. Amount realized for condemned land $400,000 Basis ($600,000/500 acres × 50 acres) (60,000) Realized gain $340,000 Recognized gain $340,000 The realized gain is recognized since Betty does not acquire qualifying property.

In October 2018, Ben and Jerry exchange investment realty in a § 1031 like-kind exchange. Ben bought his real estate in 2007 while Jerry purchased his in 2010. In addition to the realty, Ben receives Pearl, Inc. stock worth $10,000 from Jerry. Ben's realized gain is $30,000. On what date does the holding period for Ben's realty received from Jerry begin? When does the holding period for the stock he receives begin? a. 2007, 2018. b. 2007, 2007. c. 2010, 2010. d. 2010, 2018. e. None of the above.

ANSWER: a RATIONALE: The holding period for the like-kind property received (i.e., investment realty) by Ben includes his holding period for the investment realty transferred (i.e., begins in 2007). His holding period for the boot received (i.e., stock) begins with the date of the exchange (i.e., October 2018).

Under the Internal Revenue Code, the holding period for property acquired by inheritance is always: a. Long-term. b. Short-term. c. Determined by the date acquired by the individual who died. d. Determined by the date of death. e. None of the above.

ANSWER: a RATIONALE: The holding period is deemed to be long-term. There is no need to determine when the property was acquired

Fran was transferred from Phoenix to Atlanta. She sold her Phoenix residence (adjusted basis of $250,000) for a realized loss of $50,000 and purchased a new residence in Atlanta for $375,000. Fran had owned and lived in the Phoenix residence for 6 years. What is Fran's recognized gain or loss on the sale of the Phoenix residence and her basis for the residence in Atlanta? a. $0 and $375,000. b. $0 and $425,000. c. ($50,000) and $325,000. d. ($50,000) and $375,000. e. None of the above.

ANSWER: a RATIONALE: The realized loss of $50,000 on the sale of the Phoenix residence is disallowed. The basis for the new Atlanta residence is the purchase price of $375,000.

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.

ANSWER: a RATIONALE: When the assets of a business are acquired in a lump-sum purchase, the purchase price is allocated in accordance with the fair market values of the assets on the date of acquisition. Any excess is assigned to goodwill. Mona's Adjusted Basis Land $ 270,000 Building 450,000 Equipment 180,000 Goodwill 100,000 $1,000,000

Myrna's personal residence (adjusted basis of $100,000) was condemned, and she received a condemnation award of $80,000. Myrna used the condemnation proceeds to purchase a new residence for $90,000. What is her recognized gain or loss and her basis in the new residence? a. $0; $70,000. b. $0; $90,000. c. ($20,000); $90,000. d. ($20,000); $70,000. e. None of the above.

ANSWER: b RATIONALE: Amount realized $ 80,000 Adjusted basis (100,000) Realized loss ($20,000) Recognized loss $ -0- The loss on the condemnation of a personal residence is not recognized. The basis for Myrna's new residence is the cost of $90,000.

Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30, 2018. Sam is a calendar year taxpayer. He receives a condemnation award of $875,000 on March 1, 2019. He builds a new office building at a cost of $845,000 which is completed and paid for on December 31, 2021. What is Sam's recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition? a. $0; $720,000. b. $30,000; $750,000. c. $30,000; $845,000. d. $150,000; $750,000. e. None of the above

ANSWER: b RATIONALE: Amount realized $875,000 Adjusted basis (750,000) Realized gain $125,000 Amount realized $875,000 Less: Reinvestment (845,000) Deficiency $ 30,000 Since the form of the involuntary conversion is a condemnation, Sam has until December 31, 2022 to reinvest the proceeds from the condemned office building in like-kind property. So Sam qualifies to elect § 1033 postponement treatment. Since the amount of the deficiency is less than the realized gain, the recognized gain is $30,000. The basis for the new office building is $750,000 ($845,000 - $95,000 postponed gain).

Bud exchanges land with an adjusted basis of $22,000 and a fair market value of $30,000 for another parcel of land with a fair market value of $28,000 and $2,000 cash. What is Bud's recognized gain or loss? a. $0 b. $2,000 c. $6,000 d. $8,000 e. None of the above

ANSWER: b RATIONALE: Amount realized ($28,000 + $2,000) $30,000 Adjusted basis (22,000) Realized gain $ 8,000 Recognized gain $ 2,000 On the receipt of boot, the recognized gain is the lesser of the boot received or the realized gain.

Moss exchanges a warehouse for a building he will use as an office building. The adjusted basis of the warehouse is $600,000 and the fair market value of the office building is $350,000. In addition, Moss receives cash of $150,000. What is the recognized gain or loss and the basis of the office building? a. $0 and $350,000. b. $0 and $450,000. c. ($150,000) and $300,000. d. ($200,000) and $350,000. e. None of the above.

ANSWER: b RATIONALE: Amount realized ($350,000 + $150,000) $500,000 Adjusted basis (600,000) Realized loss ($100,000) Recognized loss $ -0- The receipt of boot in a like-kind exchange does not trigger the recognition of realized loss. The basis of the office building is calculated as follows: FMV $350,000 Plus: Postponed loss 100,000 Basis $450,000

Yolanda buys a house in the mountains for $450,000 which she uses as her personal vacation home. She builds an additional room on the house for $40,000. She sells the property for $560,000 and pays $28,000 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. $38,000 c. $70,000 d. $110,000 e. None of the above

ANSWER: b RATIONALE: Amount realized ($560,000 - $28,000 - $4,000) $528,000 Adjusted basis ($450,000 + $40,000) (490,000) Realized gain $ 38,000 Recognized gain $ 38,000

Paula inherits a home on July 1, 2018 that had a basis in the hands of the decedent at death of $290,000 and a fair market value of $500,000 at the date of the decedent's death. She decides to sell her old principal residence, which she has owned and occupied for 9 years, with an adjusted basis of $125,000 and move into the inherited home. On September 16, 2018, she sells the old residence for $600,000. Paula incurs selling expenses of $30,000 and legal fees of $2,000. She decides to add a pool, deck, pool house, and recreation room to the inherited home at a cost of $100,000. These additions are completed and paid for on November 1, 2018. What is her recognized gain on the sale of her old principal residence and her basis in the inherited home? a. $0; $500,000. b. $193,000; $600,000. c. $443,000; $600,000. d. $475,000; $600,000. e. None of the above.

ANSWER: b RATIONALE: Amount realized ($600,000 - $30,000 - $2,000) $568,000 Adjusted basis (125,000) Realized gain $443,000 § 121 exclusion (250,000) Recognized gain $193,000 The adjusted basis of the inherited residence is the fair market value at the date of the decedent's death, $500,000, increased by the capital expenditures of $100,000 for a total of $600,000.

During 2018, Zeke and Alice, a married couple, decided to sell their residence, which had a basis of $200,000. They had owned and occupied the residence for 20 years. To make it more attractive to prospective buyers, they had the inside painted in April at a cost of $5,000 and paid for the work immediately. They sold the house in May for $800,000. Broker's commissions and other selling expenses amounted to $50,000. They purchased a new residence in July for $400,000. What is the recognized gain and the adjusted basis of the new residence? a. $45,000 and $400,000. b. $50,000 and $400,000. c. $100,000 and $600,000. d. $550,000 and $800,000. e. None of the above.

ANSWER: b RATIONALE: Amount realized ($800,000 - $50,000) $750,000 Adjusted basis (200,000) Realized gain $550,000 § 121 exclusion (500,000) Recognized gain $ 50,000 The cost of repairs cannot be deducted and does not affect the adjusted basis of the new residence. Therefore, the adjusted basis of the new residence is its cost of $400,000.

Dena owns 500 acres of farm land in southeastern Maryland. Her adjusted basis for the land is $480,000 and there is a $400,000 mortgage on the land. She exchanges the land for an office building owned by Chris in Newark, New Jersey. The building has a fair market value of $900,000. Chris assumes Dena's mortgage on the land. What is the amount of Dena's recognized gain or loss on the exchange? a. $0 b. $400,000 c. $500,000 d. $820,000 e. None of the above

ANSWER: b RATIONALE: Amount realized: Office building (FMV) $900,000 Mortgage on land 400,000 $1,300,000 Adjusted basis (480,000) Realized gain $ 820,000 Recognized gain $ 400,000 The mortgage is treated as boot. The recognized gain is the lesser of the realized gain ($820,000) or the boot received of $400,000.

Ralph gives his daughter, Angela, stock (basis of $8,000; fair market value of $6,000). No gift tax results. If Angela subsequently sells the stock for $10,000, what is her recognized gain or loss? a. $0 b. $2,000 c. $4,000 d. $10,000 e. None of the above

ANSWER: b RATIONALE: As Angela's gain basis is $8,000, she has a recognized gain of $2,000 calculated as follows: Amount realized $10,000 Basis for stock (8,000) Realized gain $ 2,000 Recognized gain $2,000 Because the property was sold at a gain, Angela's loss basis of $6,000 is not relevant.

A strip along the boundary of Joy's land is condemned for a utility easement. She receives a payment of $7,500 from the utility company. Her basis in the land is $80,000. Which of the following is correct? a. Joy must include the $7,500 in gross income. b. Joy must reduce the basis of the land by $7,500. c. Joy must include the $7,500 in the gross income and increase the basis of the land by $7,500. d. Only a. and c. are correct. e. a., b., and c. are correct.

ANSWER: b RATIONALE: As Joy reduces the basis of her land by $7,500, she does not include anything in gross income.

In addition to other gifts, Megan made a gift of stock to Jeri in 1976. Megan had purchased the stock in 1974 for $7,500. At the time of the gift, the stock was worth $20,000. If Megan paid $850 of gift tax on the transaction in 1976, what is Jeri's gain basis for the stock? a. $7,500 b. $8,350 c. $9,017 d. $20,000 e. None of the above

ANSWER: b RATIONALE: Because the gift occurred prior to 1977, all of the gift tax paid of $850 is added to Megan's adjusted basis of $7,500. Thus, Jeri's adjusted basis is $8,350 ($7,500 + $850).

Molly exchanges land (adjusted basis of $85,000; fair market value of $78,000) used in her business and common stock held for investment (adjusted basis of $10,000; fair market value of $15,000) for a single parcel of land (fair market value of $93,000) to be used in her business in a like-kind exchange. What is Molly's recognized gain or loss? a. $0 b. $5,000 c. ($2,000) d. ($7,000) e. None of the above

ANSWER: b RATIONALE: Business Common Land Stock Amount realized $78,000 $15,000 Adjusted basis (85,000) (10,000) Realized gain (loss) ($7,000) $ 5,000 Recognized gain (loss) $ -0- $ 5,000 The realized loss on the like-kind exchange part of the transaction (i.e., the business land) is not recognized. The realized gain on the boot (i.e., common stock) is recognized

Janice bought her house in 2009 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, 2018. Her realtor charged $34,700 in commissions. Prior to listing the house with the realtor, she spent $300 advertising in the local newspaper. Don buys the house for $500,000 in cash and assumes her mortgage of $194,000. What is Janice'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; $659,000 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.

ANSWER: b RATIONALE: Cost $395,000 Depreciation (70,000) Capital additions 45,000 Adjusted basis $370,000 Cash received $500,000 Mortgage assumed by Don 194,000 Commission to Realtor (34,700) Advertising (300) Amount realized $659,000

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.

ANSWER: b RATIONALE: Disregarding any adjustment for gift tax paid by the donor, the donee's gain basis for the property received is the same as that of the donor. The donee's loss basis is the lower of the donor's adjusted basis or fair market value on the date of the gift.

n 2014, 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 2018. 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

ANSWER: b RATIONALE: Julia's recognized gain on the sale of the car is calculated as follows: Amount realized $30,000 Less: Adjusted basis ($12,000 + $5,000) (17,000) Realized gain $13,000 Recognized gain $13,000 Julia's gain basis for the gift is $12,000. She increases her adjusted basis by the outof-pocket costs of $5,000 she incurs in the restoration.

Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1, 2018, for $11,000. The maturity date is December 31, 2027. The annual interest rate is 4%. What is the amount of taxable interest income that Karen should report for 2018, and the adjusted basis for the bonds at the end of 2018, 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

ANSWER: b RATIONALE: One-tenth of the bond premium is amortized each year under the straight-line method. This reduces the adjusted basis of the bond to $10,900 ($11,000 - $100). Because the bond is tax-exempt, the bond premium amortization is not deductible from gross income

Mary sells her personal use automobile for $20,000. She purchased the car two years ago for $17,000. What is Mary's recognized gain or loss? It increased in value due to its excellent mileage, yet safe design. a. $0 b. $3,000 c. $17,000 d. $20,000 e. None of the above

ANSWER: b RATIONALE: Realized gains on the sale of personal use assets are recognized. Therefore, the $3,000 ($20,000 - $17,000) realized gain is recognized.

Robert and Diane, husband and wife, live in Pennsylvania, a common law state. They purchased land as joint tenants in 2014 for $300,000. In 2018, Diane dies and bequeaths her share of the land to Robert. The land has a fair market value of $450,000. What is Robert's adjusted basis for the land? a. $300,000 b. $375,000 c. $450,000 d. $750,000 e. None of the above

ANSWER: b RATIONALE: Robert's adjusted basis for the land is calculated as follows: Robert's original basis ($300,000 × 50%) $150,000 Basis for inherited share ($450,000 × 50%) 225,000 Robert's adjusted basis Robert's adjusted basis $375,000

Taylor inherited 100 acres of land on the death of his father in 2018. 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 1972 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.

ANSWER: b RATIONALE: Section 1223(9) provides that the holding period for inherited property is automatically long-term regardless of whether the property is disposed of at a gain or a loss.

On February 1, Karin purchases real estate for $375,000. The annual property taxes of $5,040 are payable on December 31. Realizing that she will pay the property taxes for the entire year, Karin remits $374,580 to the seller at closing. Karin's adjusted basis for the real estate is: a. $374,580. b. $375,000. c. $375,420. d. $379,620. e. None of the above.

ANSWER: b RATIONALE: The $420 reduction in the payment Karin made to the seller represents the seller's portion of the property taxes that Karin will pay that are allocated to the seller. Selling Price $375,000 Property taxes allocated to seller ($5,040 × 1/12) (420) Remittance to seller $374,580 Karin's adjusted basis is her cost of $375,000

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.

ANSWER: b RATIONALE: The $50,000 cost of the original shares must be allocated to the total shares owned after the stock dividend (5,000 + 250 = 5,250). Therefore, the basis per share is $9.52 ($50,000/5,250). No gain is recognized on the receipt of the stock dividend.

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

ANSWER: b RATIONALE: The adjusted basis after the casualty is calculated as follows: Adjusted basis before $11,000 Casualty loss deduction* (800) Insurance proceeds (3,200) Adjusted basis after $ 7,000 *Lesser of: Adjusted basis $11,000 Value decline 4,000 $4,000 Insurance proceeds (3,200) Casualty loss deduction $ 800 There is no $100 floor or 10% of AGI floor in computing a business casualty loss.

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.

ANSWER: b RATIONALE: The basis for the stock is allocated among the original shares and the shares received as a nontaxable stock dividend. Thus, while the total basis does not change, the basis per share decreases.

Which of the following is incorrect? a. The deferral of realized gain on a § 1031 like-kind exchange is mandatory. b. The deferral of realized gain on an indirect (into cash and then into qualified property) § 1033 involuntary conversion is mandatory. c. The taxpayer can elect to forgo the exclusion of realized gain on a § 121 sale of residence. d. Both b. and c. are incorrect. e. a., b., and c. are incorrect

ANSWER: b RATIONALE: The deferral of realized gain on an indirect § 1033 involuntary conversion is elective rather than mandatory.

Shontelle received a gift of income-producing property with an adjusted basis of $49,000 to the donor and fair market value of $35,000 on the date of gift. No gift tax was paid by the donor. Shontelle subsequently sold the property for $31,000. What is the recognized gain or loss? a. $0 b. ($4,000) c. ($10,000) d. ($18,000) e. None of the above

ANSWER: b RATIONALE: The gain basis for Shontelle is $49,000 and the loss basis is $35,000. Because the amount realized (sales price) of $31,000 is less than the loss basis of $35,000, the realized loss of $4,000 ($31,000 - $35,000) is recognized.

In order to qualify for like-kind exchange treatment under § 1031, which of the following requirements must be satisfied? a. The form of the transaction is a sale or exchange. b. Both the property transferred and the property received are held either for productive use in a trade or business or for investment. c. The exchange must be completed by the end of the second tax year following the tax year in which the taxpayer relinquishes his or her like-kind property. d. Only a. and b. e. a., b., and c

ANSWER: b RATIONALE: The time period for a nonsimultaneous like-kind exchange includes a 45-day period and an 180-day period, but does not include the period mentioned in choice c. The form of the transaction must be an exchange (sale as in a. is not permitted).

On January 2, 2018, Todd converts his house into a rental property. Todd's basis in the house is $400,000 and its fair market value on the date of conversion is $376,000. What is Todd's basis for purposes of MACRS cost recovery? a. $0; because it was converted from personal use, it cannot be depreciated. b. $376,000. c. $388,000. d. $400,000. e. None of the above.

ANSWER: b RATIONALE: Todd's basis for MACRS cost recovery is the lesser of the adjusted basis or fair market value on the date of conversion.

Karen purchased 100 shares of Gold Corporation stock for $11,500 on January 1, 2015. In the current tax year (2018), she sells 25 shares of the 100 shares purchased on January 1, 2015, 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.

ANSWER: c RATIONALE: Amount realized $2,500 Adjusted basis (25 × $115) (2,875) Realized loss ($375) Recognized loss $ -0- Since the transaction qualifies as a wash sale, the realized loss of $375 is disallowed. This amount is added to the adjusted basis of the shares purchased 25 days earlier. Therefore, the adjusted basis for these shares is $3,375 ($3,000 + $375).

Karen purchased 100 shares of Gold Corporation stock for $11,500 on January 2, 2018. During 2018, she sells 25 shares of the 100 shares purchased on January 2, 2018, 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.

ANSWER: c RATIONALE: Amount realized $2,500 Less: Adjusted basis (25 × $115) (2,875) Realized loss $ 375 Recognized loss $ -0- Since the transaction qualifies as a wash sale, the realized loss of $375 is disallowed. This amount is added to the adjusted basis of the shares purchased 25 day days earlier. Therefore, the adjusted basis for these shares is $3,375 ($3,000 + $375).

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2018. On January 11, 2019, the insurance company paid the owner $450,000. The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the loss. The owner reinvested $410,000 in a new office building on February 12, 2019, that was smaller than the original office building. What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected? a. $0 and $320,000. b. $0 and $410,000. c. $40,000 and $320,000. d. $130,000 and 410,000. e. None of the above.

ANSWER: c RATIONALE: Amount realized $450,000 Adjusted basis (320,000) Realized gain $130,000 Amount realized $450,000 Less: Reinvestment (410,000) Deficiency $ 40,000 Since the amount of the deficiency of $40,000 is less than the realized gain of $130,000, the recognized gain is $40,000. The basis of the new building is calculated as follows: FMV $410,000 Less: Postponed gain (realized gain - recognized gain) (90,000) Adjusted basis $320,000

Paul sells property with an adjusted basis of $45,000 to his daughter Dean, for $38,000. Dean subsequently sells the property to her brother, Preston, for $38,000. Three years later, Preston sells the property to Hun, an unrelated party, for $50,000. What is Preston's recognized gain or loss on the sale of the property to Hun? a. $0 b. $5,000 c. $12,000 d. ($5,000) e. None of the above

ANSWER: c RATIONALE: Amount realized $50,000 Adjusted basis (38,000) Realized gain $12,000 Recognized gain $12,000 The right of offset under § 267 is available only to the original transferee (i.e., daughter in this case).

Lenny and Beverly have been married and living together in Lenny's home for 6 years. He lived in the home alone for 20 years prior to their marriage. They sell the home, which has an adjusted basis of $120,000, for $700,000. Lenny and Beverly plan to use the § 121 exclusion (exclusion of gain on sale of principal residence). In Beverly's prior marriage to Dan, Dan sold his principal residence and used the § 121 exclusion. Beverly and Dan filed joint returns during their seven years of marriage. They had lived in Dan's house throughout their marriage. Dan's sale had occurred one year prior to the divorce. Lenny and Beverly purchase a replacement residence for $650,000 one month after the sale. What is the recognized gain and basis for the new home? a. $0; $80,000. b. $80,000; $150,000. c. $80,000; $650,000. d. $330,000; $650,000. e. None of the above.

ANSWER: c RATIONALE: Amount realized $700,000 Adjusted basis (120,000) Realized gain $580,000 § 121 exclusion (500,000) Recognized gain $ 80,000 For a married couple, the maximum § 121 exclusion is $500,000. To increase the $250,000 amount to $500,000 the following requirements must be satisfied: ∙ The couple files a joint return. ∙ Either spouse meets the at-least-two-year ownership requirement. ∙ Both spouses meet the at-least-two-year use requirement. ∙ Neither spouse is ineligible for § 121 exclusion treatment as the result of a prior § 121 exclusion during the two year period preceding the sale. Since Lenny and Beverly satisfy all of these requirements, the maximum amount of the § 121 exclusion available to them on the sale of Lenny's house is $500,000. The basis for the replacement residence is the cost of $650,000.

Eric and Faye, who are married, jointly own a house in which they have resided for the past 17 years. They sell the house for $375,000 with realtor's fees of $10,000. Their adjusted basis for the house is $80,000. Since they are in their retirement years, they plan on moving around the country and renting. What is their recognized gain on the sale of the residence if they use the § 121 exclusion (exclusion of gain on sale of principal residence) and if they elect to forgo the § 121 exclusion? With exclusion Elect to forgo a. $0 $0 b. $35,000 $35,000 c. $0 $285,000 d. $35,000 $285,000 e. $285,000 $225,000

ANSWER: c RATIONALE: Amount realized ($375,000 - $10,000) $365,000 Adjusted basis (80,000) Realized gain $285,000 § 121 exclusion (285,000) Recognized gain $ -0- The § 121 exclusion reduces the recognized gain by $285,000 to $0. Without the § 121 exclusion, the recognized gain is $285,000.

Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a fair market value of $700,000. In addition, Pam receives $100,000 in cash. What is the recognized gain or loss and the basis of the investment land? a. $0 and $420,000. b. $100,000 and $420,000. c. $100,000 and $520,000. d. $280,000 and $700,000. e. None of the above.

ANSWER: c RATIONALE: Amount realized ($700,000 + $100,000) $800,000 Adjusted basis (520,000) Realized gain $280,000 Recognized gain $100,000 The receipt of boot in a like-kind exchange triggers the recognition of realized gain, with the ceiling on recognition being the realized gain. Because the boot received of $100,000 is less than the ceiling, gain up to the amount of the boot received is recognized. The basis of the land is calculated as follows: FMV $700,000 Less: Postponed gain (180,000) Basis $520,000

During 2018, Ted and Judy, a married couple, decided to sell their residence, which had a basis of $300,000. They had owned and occupied the residence for 20 years. To make it more attractive to prospective buyers, they had the outside painted in April at a cost of $6,000 and paid for the work immediately. They sold the house in May for $880,000. Broker's commissions and other selling expenses amounted to $53,000. Since they both are age 68, they decide to rent an apartment. They purchase an annuity with the net proceeds from the sale. What is the recognized gain? a. $0 b. $17,000 c. $27,000 d. $527,000 e. None of the above

ANSWER: c RATIONALE: Amount realized ($880,000 - $53,000) $827,000 Adjusted basis (300,000) Realized gain $527,000 § 121 exclusion (500,000) Recognized gain $ 27,000 The $6,000 of painting expenses affect neither the seller's amount realized nor adjusted basis.

Nancy and Tonya exchanged assets. Nancy gave Tonya her personal residence with an adjusted basis of $280,000 and a fair market value of $560,000. The house has a mortgage of $200,000 which is assumed by Tonya. Tonya gave Nancy a yacht used in her business with an adjusted basis of $250,000 and a fair market value of $360,000. What is Tonya's realized and recognized gain? a. $310,000 realized and $310,000 recognized gain. b. $310,000 realized and $0 recognized gain. c. $110,000 realized and $110,000 recognized gain. d. $110,000 realized and $0 recognized gain. e. None of the above

ANSWER: c RATIONALE: Amount realized by Tonya: Residence (FMV) $560,000 Amount given by Tonya: Yacht: adjusted basis $250,000 Assumption of Nancy's mortgage 200,000 (450,000) Realized gain $110,000 Recognized gain $110,000 This exchange does not qualify as a nontaxable exchange under § 1031.

Weston sells his residence to Joanne on October 15, 2018. Indicate which of the following statements is correctly associated with § 121 (exclusion of gain on sale of principal residence). a. Selling expenses decrease the seller's amount realized and increase the buyer's adjusted basis. b. Repair expenses of the seller decrease the seller's amount realized and have no effect on the buyer's adjusted basis. c. Capital expenditures made by the seller prior to the sale increase the seller's adjusted basis and have no effect on the buyer's adjusted basis. d. Only a. and c. e. a., b., and c.

ANSWER: c RATIONALE: Choice a. is incorrect because selling expenses do not affect the buyer's adjusted basis. Choice b. is incorrect because repair expenses do not affect the buyer's adjusted basis or the seller's amount realized.

Which of the following statements is correct? a. In a nontaxable exchange in which gain is realized, the transaction results in a permanent recovery of more than the taxpayer's cost or other basis for tax purposes. b. In a nontaxable exchange in which loss is realized, the transaction results in a permanent recovery of less than the taxpayer's cost or other basis for tax purposes. c. In a tax-free transaction in which gain is realized, the transaction results in the permanent recovery of more than the taxpayer's cost or other basis for tax purposes. d. All of the above. e. None of the above.

ANSWER: c RATIONALE: Choices a. and b. result in temporary recoveries rather than permanent recoveries

Joyce, a farmer, has the following events occur during the tax year. Which of the events qualify as an involuntary conversion under § 1033 (nonrecognition of gain from an involuntary conversion)? a. Her farm tractor is hauled to the city dump because it is worn out. b. She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd in preparation for her retirement. c. Her personal residence, adjusted basis of $100,000, is condemned to make way for an interstate highway. She recovers condemnation proceeds of $175,000. d. She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd due to a reduction in milk prices. e. None of the above.

ANSWER: c RATIONALE: Choices a., b., and d. do not satisfy the definition of an involuntary conversion.

Lily exchanges a building she uses in her rental business for a building owned by Kendall, which she will use in her rental business. The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000. Which of the following statements is correct? a. Lily's recognized gain is $50,000 and her basis for the building received is $120,000. b. Lily's recognized gain is $50,000 and her basis for the building received is $170,000. c. Lily's recognized gain is $0 and her basis for the building received is $120,000. d. Lily's recognized gain is $0 and her basis for the building received is $170,000. e. None of the above is correct.

ANSWER: c RATIONALE: Lily's realized gain is $50,000 ($170,000 - $120,000), but her recognized gain is $0. The exchange qualifies as a like-kind exchange. Lily's basis for the building received is a carryover basis of $120,000.

Which of the following statements is correct with respect to qualified replacement property in a § 1033 involuntary conversion? a. If the functional use test applies, a warehouse used to store inventory can be replaced with a smaller building to be used to sell inventory. b. If the taxpayer use test applies, an office building rented to tenants can be replaced with an office building to be used in the taxpayer's business. c. If the like-kind exchange test applies, a building used by the taxpayer for manufacturing can be replaced with an office building to be used in the taxpayer's business. d. Only b. and c. e. a., b., and c.

ANSWER: c RATIONALE: Storing inventory and selling inventory as in a. are not the same functional use. For b. to qualify, the taxpayer would need to replace the rental office building with realty rented to tenants.

Alice owns land with an adjusted basis of $610,000, subject to a mortgage of $350,000. On April 1, 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. $1,250,000 b. $1,370,000 c. $1,720,000 d. $1,820,000 e. None of the above

ANSWER: c RATIONALE: The amount realized includes the following: Cash $ 650,000 Note 600,000 Property 120,000 Mortgage assumed by buyer 350,000 Amount realized $1,720,000

Abby sells real property for $300,000. The buyer pays $5,000 in property taxes that had accrued during the year while the property was still legally owned by Abby. In addition, Abby pays $15,000 in commissions and $3,000 in legal fees in connection with the sale. How much does Abby realize (the amount realized) from the sale of her property? a. $277,000 b. $282,000 c. $287,000 d. $300,000 e. None of the above

ANSWER: c RATIONALE: The amount realized is calculated as follows: Sales price $300,000 Taxes paid by buyer on behalf of seller 5,000 Less: Commissions (15,000) Legal fees (3,000) Amount realized $287,000

Evelyn, a calendar year taxpayer, lists her principal residence with a realtor on February 7, 2018, enters into a contract to sell on July 12, 2018, and sells (i.e., the closing date) the residence on August 1, 2018. The realized gain on the sale is $225,000. Which date is the appropriate ending date in determining if the residence has been owned and used by the Evelyn as the principal residence for at least two years during the prior five-year period? a. February 7, 2018. b. July 12, 2018. c. August 1, 2018. d. December 31, 2018. e. None of the above.

ANSWER: c RATIONALE: The appropriate ending date in testing for the at least two-out-of-five-years ownership and occupancy requirements is the date of sale (i.e., August 1, 2018)

Alvin is employed by an automobile dealership as its manager. As such, he purchased an SUV for $32,000 (fair market value is $48,000). No other employees are permitted a discount. What is Alvin's basis in the SUV? a. $16,000. b. $32,000. c. $48,000. d. $80,000. e. None of the above.

ANSWER: c RATIONALE: The bargain purchase results in a $16,000 increase in Alvin's gross income. Therefore, his basis for the SUV is the fair market value of $48,000 ($32,000 + $16,000)

Tobin inherited 100 acres of land on the death of his father in 2018. A Federal estate tax return was filed and the land was valued at $300,000 (its fair market value at the date of the death). The father had originally acquired the land in 1975 for $19,000 and prior to his death had made permanent improvements of $6,000. What is Tobin's basis in the land? a. $19,000 b. $25,000 c. $300,000 d. $325,000 e. None of the above

ANSWER: c RATIONALE: The basis of the property is its fair market value at the date of the death.

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. The last day of the tax year in which the property was originally acquired by the donor. e. None of the above.

ANSWER: c RATIONALE: The holding period associated with the gain basis rule includes the holding period of the donor. The holding period associated with the loss basis rule begins on the date of the gift.

Joyce's office building was destroyed in a fire (adjusted basis of $350,000; fair market value of $400,000). Of the insurance proceeds of $360,000 she receives, Joyce uses $310,000 to purchase additional inventory and invests the remaining $50,000 in short-term certificates of deposit. She received only $360,000 because of a co-insurance clause in her insurance policy. What is Joyce's recognized gain or loss? a. $0 b. $10,000 loss c. $10,000 gain d. $40,000 gain e. None of the above

ANSWER: c RATIONALE: The receipt of insurance proceeds in excess of Joyce's adjusted basis for the office building creates a casualty gain to Joyce of $10,000 ($360,000 insurance proceeds - $350,000 adjusted basis).

Ahmad is considering making a $10,000 investment in a venture which its promoter promises will generate immediate tax benefits for him. Ahmad, who normally itemizes his deductions, is in the 28% marginal tax bracket. If the investment is of a type where the taxpayer may claim either a tax credit of 25% of the amount of the expenditure or an itemized deduction for the amount of the investment, what treatment normally would be most beneficial to Ahmad and by how much will Ahmad's tax liability decline because of the investment? a. $0, take neither the itemized deduction nor the tax credit. b. $2,500, take the tax credit. c. $2,800, take the itemized deduction. d. Both options produce the same benefit. e. None of the above.

ANSWER: c RATIONALE: The tax deduction will produce a benefit of $2,800 ($10,000 × 28%), which is greater than the amount resulting from claiming a tax credit, $2,500 ($10,000 × 25%). Therefore, Ahmad should claim the itemized deduction because it produces the greater benefit.

Carlton purchases land for $550,000. He incurs legal fees of $10,000 and broker's commission of $28,000 associated with the purchase. He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $800,000. What is Carlton's basis for the land and the improvements? a. $1,350,000 b. $1,378,000 c. $1,385,000 d. $1,413,000 e. None of the above

ANSWER: d RATIONALE: All of the costs incurred by Carlton are capital expenditures. Thus, his adjusted basis for the land and the improvements is: Cost $ 550,000 Legal fees ($10,000 + $25,000) 35,000 Broker's commission 28,000 Streets and sewers 800,000 Basis $1,413,000

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

ANSWER: d RATIONALE: Amount realized $120,000 Adjusted basis ($52,000 - $1,130) (50,870) Realized gain $69,130 Recognized gain $69,130

A factory building owned by Amber, Inc. is destroyed by a hurricane. The adjusted basis of the building was $400,000 and the appraised value was $425,000. Amber receives insurance proceeds of $390,000. A factory building is constructed during the nine-month period after the hurricane at a cost of $450,000. What is the recognized gain or loss and what is the basis of the new factory building? a. $0 and $450,000. b. $0 and $460,000. c. ($10,000) and $440,000. d. ($10,000) and $450,000. e. None of the above

ANSWER: d RATIONALE: Amount realized $390,000 Adjusted basis (400,000) Realized loss ($10,000) Recognized loss ($10,000) Section 1033 does not modify the normal rules for loss recognition. The basis of the replacement factory building is its cost of $450,000.

Carl sells his principal residence, which has an adjusted basis of $150,000 for $200,000. He incurs selling expenses of $20,000 and legal fees of $2,000. He had purchased another residence one month prior to the sale for $380,000. What is the recognized gain or loss and the basis of the replacement residence if the taxpayer elects to forgo the § 121 exclusion (exclusion of gain on sale of principal residence)? a. $0 and $380,000. b. $0 and $408,000. c. $28,000 and $352,000. d. $28,000 and $380,000. e. None of the above.

ANSWER: d RATIONALE: Amount realized ($200,000 - $20,000 - $2,000) $178,000 Adjusted basis (150,000) Realized gain $ 28,000 Recognized gain $ 28,000 Since Carl elected to forgo the § 121 exclusion, the realized gain of $28,000 is recognized. The basis of the residence purchased one month prior to the sale is the cost of $380,000.

Pedro borrowed $250,000 to purchase a machine costing $300,000. He later borrowed an additional $25,000 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 $145,000 and $18,000. Pedro sells the machine subject to the two liabilities for $45,000. What is his realized gain or loss? a. $0 b. $45,000 c. $163,000 d. $208,000 e. None of the above

ANSWER: d RATIONALE: Amount realized ($45,000 + $145,000 + $18,000) $208,000 Adjusted basis (-0-) Realized gain $208,000 The amount realized includes the two nonrecourse notes.

Neal and his wife Faye reside in Texas, a community property state. Their community property consists of real estate (adjusted basis of $800,000; fair market value of $6 million) and personal property (adjusted basis of $390,000; fair market value of $295,000). Neal dies first and leaves his estate to Faye. What is Faye's basis in the property after Neal's death? a. $800,000 real estate and $295,000 personal property. b. $800,000 real estate and $390,000 personal property. c. $3,400,000 real estate and $295,000 personal property. d. $6,000,000 real estate and $295,000 personal property. e. None of the above.

ANSWER: d RATIONALE: As the survivor's share of the community takes on a basis equal to the fair market value of the decedent's share, Faye's basis for the real estate is $6 million and $295,000 for the personal property.

Which, if any, of the following exchanges qualifies for nonrecognition treatment as a § 1031 like-kind exchange? a. Partnership interest for a partnership interest. b. Inventory for inventory. c. Securities for personalty. d. Business realty for investment realty. e. None of the above.

ANSWER: d RATIONALE: Business realty that is exchanged for investment realty qualifies for the like-kind exchange treatment (choice d.). Partnership interests (choice a.), inventory (choice b.), and securities (choice c.) do not qualify as like-kind property.

Jared, a fiscal year taxpayer with a August 31st year-end, owns an office building (adjusted basis of $800,000) that was destroyed by fire on December 24, 2018. If the insurance settlement was $950,000 (received March 1, 2019), what is the latest date that Jared can replace the office building in order to qualify for § 1033 nonrecognition of gain? a. December 31, 2018. b. August 31, 2019. c. December 31, 2020. d. August 31, 2021. e. None of the above

ANSWER: d RATIONALE: Gain of $150,000 ($950,000 amount received - $800,000 adjusted basis) is realized on March 1, 2019. As Jared has two years from the close of that tax year (August 31, 2019) to replace the property, the latest replacement date is August 31, 2021.

Nat is a salesman for a real estate developer. His employer permits him to purchase a lot for $75,000. The employer's adjusted basis for the lot is $45,000, and its normal selling price is $90,000. What is Nat's recognized gain and his basis for the lot? Recognized gain Basis a. $0 $ 75,000 b. $0 $ 90,000 c. $15,000 $ 75,000 d. $15,000 $ 90,000 e. $30,000 $105,000

ANSWER: d RATIONALE: Nat's recognized gain on the bargain purchase is $15,000 ($90,000 - $75,000) and his basis for the lot is $90,000 ($75,000 cost + $15,000 recognized gain).

If boot is received in a § 1031 like-kind exchange and gain is recognized, which formula correctly calculates the basis for the like-kind property received? a. Adjusted basis of like-kind property surrendered + gain recognized - fair market value of boot received. b. Fair market value of like-kind property surrendered + gain recognized + fair market value of boot received. c. Fair market value of like-kind property received - postponed gain. d. Only a. and c. e. None of the above.

ANSWER: d RATIONALE: Only the formulas in a. and c. produce the correct amount for the basis of the likekind property received in a § 1031 exchange.

Jason owns Blue Corporation bonds (face value of $10,000), purchased on January 1, 2018, for $11,000. The bonds have an annual interest rate of 3% and a maturity date of December 31, 2027. If Jason elects to amortize the bond premium, what is his taxable interest income for 2018 and the adjusted basis for the bonds at the end of 2018 (assuming straight-line amortization is appropriate)? a. $300 and $11,000 b. $300 and $10,900 c. $200 and $11,000 d. $200 and $10,900 e. None of the above

ANSWER: d RATIONALE: Stated interest ($10,000 × 3%) $300 Less: Bond premium amortization (100) Included interest income $200 The adjusted basis of the bond is reduced to $10,900 ($11,000 - $100).

Alice owns land with an adjusted basis of $305,000, subject to a mortgage of $175,000. On April 1, 2018, Alice sells her land subject to the mortgage for $325,000 in cash, a note for $300,000, and property with a fair market value of $60,000. What is Alice's amount realized on this sale? a. $685,000. b. $800,000. c. $840,000. d. $860,000. e. None of the above.

ANSWER: d RATIONALE: The amount realized includes the following: Cash $325,000 Note 300,000 Property (FMV) 60,000 Mortgage assumed by buyer 175,000 Amount realized $860,000

Nancy gives her niece a crane to use in her business with a fair market value of $61,000 and a basis in Nancy's hands of $80,000. No gift tax was paid. What is the niece's basis for depreciation (cost recovery)? a. $0 b. $19,000 c. $61,000 d. $80,000 e. None of the above

ANSWER: d RATIONALE: The basis for depreciation (cost recovery) for gift property is the gain basis of $80,000.

Andrew acquires 2,000 shares of Eagle Corporation stock for $100,000 on March 31, 2014. On January 1, 2018, he sells 125 shares for $5,000. On January 22, 2018, 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, 2018. b. January 22, 2018 for 125 shares and March 31, 2014 for 10 shares. c. March 31, 2014. d. March 31, 2014, for 125 shares and January 22, 2018, for 10 shares. e. None of the above.

ANSWER: d RATIONALE: The sale of the 125 shares at a loss and the purchase of 135 shares within 30 days results in the loss being disallowed under the wash sales provisions. Therefore, for 125 of the 135 shares, there is a carryover basis and a carryover holding period.

Roger is considering making a $6,000 investment in a venture that its promoter promises will generate immediate tax benefits for him. Roger, who does not anticipate itemizing his deductions, is in the 30% marginal income tax bracket. If the investment is of a type that produces a tax credit of 40% of the amount of the expenditure, by how much will Roger's tax liability decline because of the investment? a. $0 b. $1,800 c. $2,200 d. $2,400 e. None of the above

ANSWER: d RATIONALE: The tax credit reduces Roger's tax liability by $2,400 ($6,000 × 40%)

Latisha owns a warehouse with an adjusted basis of $200,000. She exchanges it for a strip mall building worth $225,000. Which of the following statements is correct? a. If the warehouse was used in Latisha's business to store inventory and the strip mall building is to be rented to tenants, her recognized gain is $25,000 and her basis for the strip mall building is $225,000. b. If the warehouse was used in Latisha's business to store inventory and the strip mall building is to be used as a retail outlet for her business, her recognized gain is $0 and her basis for the strip mall building is $200,000. c. If the warehouse is used by Latisha to store personal use items such as excess furniture and the strip mall building is to be rented to tenants, her recognized gain is $25,000 and her basis for the strip mall building is $225,000. d. Only b. and c. are correct. e. a., b., and c. are correct.

ANSWER: d RATIONALE: a. is a like kind exchange and thus no gain is recognized. b. is a like-kind exchange. c. is not a like-kind exchange and thus the gain is recognized.

Ross lives in a house he received as a gift from his father. His father had lived in the house for 12 years. The adjusted basis of the house to his father was $160,000 and the fair market value at the time of the gift was $140,000. Ross sells this residence after living in it for 18 months for $150,000 and purchases a new home for $125,000. He incurs selling expenses of $7,000. What is Ross' recognized gain or loss and basis for the new residence? a. ($17,000); $125,000. b. ($17,000); $142,000. c. $3,000; $125,000. d. $3,000; $128,000. e. None of the above

ANSWER: e RATIONALE: Amount realized ($150,000 - $7,000) $143,000 Adjusted basis (gain basis) (160,000) Realized loss ($17,000) Amount realized ($150,000 - $7,000) $143,000 Adjusted basis (loss basis) (140,000) Realized gain $ 3,000 The use of the gain basis produces a $17,000 realized loss and the use of the loss basis produces a $3,000 realized gain. The amount realized is between Ross's gain basis and loss basis; thus the recognized gain or loss is $0. The basis for the new residence is the cost of $125,000.

Which of the following satisfy the time period requirement for postponement of gain as a § 1033 (nonrecognition of gain from an involuntary conversion) involuntary conversion? a. Al's business warehouse is destroyed by a tornado on October 31, 2018. Al is a calendar year taxpayer. He receives insurance proceeds on December 5, 2018. He reinvests the proceeds in another warehouse to be used in his business on December 29, 2020. b. Heather's personal residence is destroyed by fire on October 31, 2018. She is a calendar year taxpayer. She receives insurance proceeds on December 5, 2018. She purchases another principal residence with the proceeds on October 31, 2020. c. Mack's office building is condemned by the city as part of a road construction project. The date of the condemnation is October 31, 2018. He is a calendar year taxpayer. He receives condemnation proceeds from the city on that date. He purchases another office building with the proceeds on December 5, 2021. d. Lizzy's business automobile is destroyed in an accident on October 31, 2018. Lizzy is a fiscal year taxpayer with the fiscal year ending on June 30th. She receives insurance proceeds on December 5, 2018. She purchases another business automobile with the proceeds on June 1, 2021. e. All of the above.

ANSWER: e RATIONALE: All of the involuntary conversions satisfy the time period requirement for postponement of gain as a § 1033 involuntary conversion. The latest replacement date for each of the involuntary conversions is as follows: December 31, 2020 (choice a.); December 31, 2020 (choice b.); December 31, 2021 (choice c.); and, June 30, 2021 (choice d.).

Melvin receives stock as a gift from his uncle. No gift tax is paid. The adjusted basis of the stock is $30,000 and the fair market value is $38,000. Melvin trades the stock for bonds with a fair market value of $35,000 and $3,000 cash. What is his recognized gain and the basis for the bonds? a. $0, $30,000. b. $5,000, $33,000. c. $5,000, $30,000. d. $8,000, $33,000. e. None of the above.

ANSWER: e RATIONALE: Amount realized ($35,000 + $3,000) $38,000 Adjusted basis (30,000) Realized gain $ 8,000 Recognized gain $ 8,000 The property received by gift has a carryover basis of $30,000. Stocks and bonds do not qualify as like-kind property. Therefore, the realized gain of $8,000 is recognized. The bonds have a basis of $35,000, the fair market value.

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

ANSWER: e RATIONALE: For tax-exempt bonds, the premium must be amortized over the remaining life of the bond. The amortized amount cannot be deducted, but the adjusted basis of the bond is reduced accordingly. For taxable bonds, the taxpayer can elect to amortize the premium over the remaining life of the bond. If the election is made, the amortized amount is deducted as interest and the adjusted basis of the bond is reduced accordingly. If the election is not made, the adjusted basis of the bond remains at $28,000.

Which of the following statements is correct? a. The receipt of boot in a § 1031 like-kind exchange can result in the recognition of gain. b. The receipt of boot in a § 1031 like-kind exchange cannot result in the recognition of loss. c. The giving of boot in a § 1031 like-kind exchange can result in the recognition of gain. d. Only a. and b. e. a., b., and c.

ANSWER: e RATIONALE: If boot is received in a § 1031 like-kind exchange, the recognized gain is the lesser of the realized gain or the boot received. Realized loss, however, cannot be recognized. The giving of boot in a § 1031 like-kind exchange generally does not result in the recognition of gain, but it can if the fair market value of the boot exceeds its adjusted basis.

Albert purchased a tract of land for $140,000 in 2015 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 2018 and the value of the land fell to $100,000. What is the amount of loss Albert can claim in 2018? a. $40,000 b. $60,000 c. $80,000 d. $100,000 e. None of the above

ANSWER: e RATIONALE: Neither gain nor loss is recognized by Albert associated with the perceived fluctuations in the value of the land. The requisite realization event (i.e., sale or other disposition) has not occurred.

Noelle owns an automobile which she uses for personal use. Her adjusted basis is $45,000 (i.e., the original cost). The car is worth $22,000. Which of the following statements is correct? a. If Noelle sells the car for $22,000, her realized loss of $23,000 is not recognized. b. If Noelle exchanges the car for another car worth $22,000, her realized loss of $23,000 is not recognized. c. If the car is stolen and it is uninsured, Noelle will not be able to recognize part of her realized loss of $23,000. d. Only a. and b. are correct. e. a., b., and c. are correct.

ANSWER: e RATIONALE: Personal casualty losses (choice c.) can be deducted only if they occur in a Federally-declared disaster area (and then are subject to a $100 floor and a 10% of AGI floor).

Brett owns investment land located in Tucson, Arizona. He exchanges it for other investment land. In which of the following locations may the other investment land be located and enable Brett to qualify for § 1031 like-kind exchange treatment? a. Mexico City, Mexico. b. Toronto, Canada. c. Paris, France. d. Only a. and b. e. None of the above.

ANSWER: e RATIONALE: Real property located in the United States exchanged for foreign real property (and vice versa) does not qualify as like-kind property.

During 2018, Howard and Mabel, a married couple, decided to sell their residence. The residence has a basis of $162,000 and has been owned and occupied by them for 11 years. The house was sold in May for $395,000 with broker's commissions and other selling expenses being $24,000. They purchased a new residence in June for $400,000. What is the adjusted basis of the new residence? a. $0 b. $141,000 c. $162,000 d. $191,000 e. None of the above

ANSWER: e RATIONALE: Section 121 is an exclusion provision rather than a postponement provision. Thus, the adjusted basis of the new residence is the cost of $400,000

The basis of personal use property converted to business use is: a. Always the lower of its adjusted basis or fair market value on the date of conversion. b. Always its adjusted basis on the date of conversion. c. Always its fair market value on the date of conversion. d. Always the higher of its adjusted basis or fair market value on the date of conversion. e. None of the above.

ANSWER: e RATIONALE: The basis for loss and the basis for depreciation (cost recovery) is the lower of the adjusted basis or the fair market value on the date of conversion. Only the basis for gain is the adjusted basis on the date of conversion.

Which of the following is correct? a. The gain basis for property received by gift is the lesser of the donor's adjusted basis or the fair market value on the date of the gift. b. The loss basis for property received by gift is the same as the donor's basis. c. The gain basis for inherited property is the same as the decedent's basis. d. The loss basis for inherited property is the lesser of the decedent's basis or the fair market value on the date of the decedent's death. e. None of the above.

ANSWER: e RATIONALE: The gain basis for property received by gift is the same as the donor's basis (i.e., assuming no gift tax is paid). The loss basis for property received by gift is the lesser of the donor's adjusted basis or the fair market value on the date of the gift. The basis for inherited property usually is the fair market value on the date of the decedent's death (i.e., primary valuation date and amount).

Which of the following might motivate a taxpayer to try to avoid like-kind exchange treatment? a. Taxpayer has unused NOL carryovers. b. Taxpayer has unused general business credit carryovers. c. Taxpayer has suspended or current passive activity losses. d. Only a. and b. are correct. e. a., b., and c. are correct

ANSWER: e RATIONALE: a., b., and c. could motivate current recognition.

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion) and the amount reinvested in replacement property exceeds the amount realized, the basis of the replacement property is: a. The cost of the replacement property. b. The fair market value of the involuntarily converted property minus the postponed gain. c. The cost of the replacement property minus the postponed gain. d. The amount realized. e. None of the above.

c

In determining the basis of like-kind property received, postponed losses are: a. Added to the basis of the old property. b. Subtracted from the basis of the old property. c. Added to the fair market value of the like-kind property received. d. Subtracted from the fair market value of the like-kind property received. e. None of the above.

c

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.

d

Refundable tax credits include the: a. Foreign tax credit. b. Tax credit for rehabilitation expenses. c. Credit for certain retirement plan contributions. d. Earned income credit. e. None of the above is refundable

d

The components of the general business credit include all of the following except: a. Credit for employer-provided child care. b. Disabled access credit. c. Research activities credit. d. Tax credit for rehabilitation expenditures. e. All of the above are components of the general business credit

e

Which of the following statements is correct for a § 1033 involuntary conversion of an office building which is destroyed by fire? a. An election can be made to postpone gain on a § 1033 involuntary conversion only if the proceeds received are reinvested in qualifying property no later than two years after the end of the tax year in which a proceeds inflow is received that is large enough to produce a realized gain. b. The postponement of realized gain in a § 1033 involuntary conversion is elective. c. The functional use test is satisfied if a business warehouse is replaced with another business warehouse. d. The taxpayer use test is satisfied if a shopping mall rented to tenants is replaced with an office building to be rented to tenants. e. All of the above are correct.

e