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Chapter 10 Property Transactions: Determination of Basis and Gains and Losses

TRUE-FALSE QUESTIONSCHAPTER 10
*Some of the true-false questions have been adapted from the IRS Examinations. 1. Terry Trumbull purchased a tract of land. In order to have city water, he had to pay the water company $5,000 to extend the water line to his property. The $5,000 cost is an addition to the basis of the land. 2. When property that is subject to an existing debt is purchased, the basis of the property is the amount of cash paid initially plus the unpaid debt to which the property is subject. 3. The basis for nonbusiness property changed to business use is the greater of the adjusted basis of the property or its fair market value on the date it is converted to business use. 4. During 2009, Carl Crofts received a gift of property having a fair market value of $25,000 at the time of the gift. The donors adjusted basis in the property at the time of the gift was $21,000. The donor paid a gift tax of $700 on the property. Carls basis in the property is $21,700. 5. In 2009, Tom Turner received a gift of property that had a fair market value of $10,000 at the time of the gift. The donors adjusted basis in the property at the time of the gift was $12,000. Toms basis for computing depreciation is $12,000. 6. When new stock received as a dividend is identical to the old stock on which the dividend is declared, the adjusted basis of the old stock must be apportioned among the shares of old stock and the shares of new stock received as a dividend. 7. David Dawson owned two shares of a corporations common stock. He paid $60 for one share and $30 for the other share. The corporation declared a stock dividend which gave stockholders two new shares of common stock for each share they held. After the distribution, David owns six shares of stock with an adjusted basis of $15 each. 8. If nontaxable stock rights are allowed to expire, they have no basis. 9. In a gain situation, the holding period of gift property begins on the date of the gift. 10. Richard Rhodes sold his warehouse at a loss to his brother. The loss is deductible by Richard. 11. If a wife sells depreciable property to her husband, the gain on the sale is treated as ordinary income. 12. The adjusted basis of property is its cost plus capital recoveries less capital expenditures. 13. To determine the initial basis of purchased property, cost is used unless it is a bargain transaction in which case its fair market value is used. 14. The basis of property acquired by inheritance is the lower of the decedents adjusted basis or the fair market value on the date of the death of the decedent. 15. The holding period of property acquired from a decedent is considered to be long term regardless of when the property was acquired or disposed of. 16. Gains are recognized on sales involving property used for business or income-producing purposes or for personal purposes. 17. Increases in basis decrease the amount of gain realized or increase the amount of realized loss. 18. Depreciation, depletion, amortization, and acquisition costs are all capital returns. 19. Recognition of a gain or loss always occurs at the time of sale or exchange. 20. The fair market value of taxable stock rights at the date of distribution represents both the amount of income and the basis of the rights. 21. The basis of property acquired from a decedent is the fair market value of the property at the date of receipt of the property. 22. There is a basis adjustment for estate taxes paid on property acquired from a decedent that is similar to the gift tax adjustment of gifted property. 23. Unless the taxpayer can specically identify the shares of stock that are sold or transferred, the FIFO rule comes into play (i.e., the stock sold is charged against the earliest of the stock purchases).

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24. Gains and losses resulting from mere appreciation or decline in value are unrealized gains and losses, and are not included in the calculation of taxable income. 25. All costs necessary to get depreciable property in place and ready for use are deductible in the year in which they are paid or incurred. 26. For purposes of the related party rules, the taxpayers parents are related persons, but the taxpayers siblings (brothers and sisters) are not. 27. The wash sale rules merely postpone the loss until the taxpayer sells the securities in a nonwash sale transaction. 28. Elizabeth Eason constructed an asset to be used in her businessa sole proprietorship. The basis she used for the nished asset should include the employee compensation for the work attributable to the construction of the asset. 29. Dan Danielson bought 100 shares of stock on October 20, 2009. On December 23, 2009, Dan died and his son David inherited the stock. Davids basis in the stock is the fair market value at the time of Dans death. 30. Property converted to business use is sold. The adjusted basis of the property at the time of conversion is used to determine the gain. 31. Stanley Summers purchased a personal residence for $185,000 and spent $5,000 for the cost of obtaining a mortgage. Stanleys basis in the home is $190,000. 32. Isabella Iverson bought a new car for $17,500. She received a rebate from the manufacturer in the amount of $1,000. Her basis in the car is $17,500. 33. John Johnson sold his hot dog stand at a loss to his brother. The loss is deductible by John. 34. Marcia Marks received as a wedding present from an old friend a gold necklace worth $22,000. The necklace had been purchased by the friend for $25,000. The friend did not pay any gift tax. Marcia ran into some nancial difculty and sold the necklace for $23,000. Marcia must recognize a gain of $1,000. 35. 500 shares of the Yellow Brick Construction Company were sold for $10,000, its fair market value, by Esmeralda Emerson to her sister, Topaz, for $8,500. Esmeralda has a nondeductible loss of $1,500.

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MULTIPLE CHOICE QUESTIONSCHAPTER 10

*Questions 36, 3844, 52, 53, and 6062 have been adapted from the IRS Examinations. 36. Leonard Lamberts commercial building, which had an adjusted basis of $500,000, was partially destroyed by re. The fair market value was $800,000 just before the re and $600,000 immediately after. Leonard received $150,000 insurance proceeds and deducted a $50,000 casualty loss. What is Leonards basis in the building before any repairs are made? a. $300,000 b. $350,000 c. $450,000 d. $500,000 e. $600,000 37. Lem Lumberjack sells 100 shares (basis of $5,000) of Redwood Corporation common stock on March 8, 2009, for $4,000. On March 29, 2009, Lem purchases 50 shares of Redwood Corporation common stock for $2,500. Lems recognized loss on the sale is: a. $1,000 b. $500 c. $1,500 d. $0 38. In 2009, Allen Anders sold an asset which cost $70,000. Allen incorrectly claimed $40,000 depreciation over a veyear period. He should have claimed $50,000 depreciation. What was the adjusted basis when sold? a. $0 b. $20,000 c. $30,000 d. $50,000 e. $70,000 39. Which of the following items is not a reduction to the basis of an asset? a. Depreciation b. Assessments for maintenance of sidewalks c. Cash rebate from manufacturer d. Casualty losses 40. In 2009, Bob Browns aunt Barbara gave him a house. At the time of the gift, the house had a fair market value of $193,000, the taxable gift was $180,000, and his aunts adjusted basis was $73,000. His aunt paid a gift tax of $30,000 on the house. What is Bobs basis in the house for purposes of determining gain? a. $73,000 b. $93,000 c. $180,000 d. $193,000 41. In May 2009, Automatic, Inc. sold land with a basis to Automatic of $100,000, to Jack Jones, its 60% shareholder, for $80,000. In July, Jack sold the land to an unrelated party for $110,000. What is the amount of Jacks recognized gain? a. $0 b. $10,000 c. $20,000 d. $30,000

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42. Brian Brewster sold property to a buyer who paid him $400,000 cash and assumed an existing mortgage of $150,000. The property had cost $250,000 and he had made improvements of $50,000. Depreciation of $100,000 has been claimed and selling expenses were $20,000. What is the amount of gain? a. $100,000 b. $200,000 c. $250,000 d. $280,000 e. $330,000 43. Brenda Baines sells land to Carla Chandler for $15,000 cash and a piece of equipment with an adjusted basis of $15,000 and a fair market value of $20,000. The land was subject to a $25,000 mortgage which Carla assumed. Brenda incurred $2,500 in selling expenses. What is the amount realized by Brenda? a. $55,000 b. $60,000 c. $52,500 d. $57,500 44. Bill Burns purchases furniture from his employer for $5,000 during 2009. The fair market value of the furniture is $8,500. What is Bills basis in the furniture? a. $5,000 b. $8,500 c. $12,500 d. $2,500 45. Bill Burns purchases furniture from his employer for $5,000 during 2009. The fair market value of the furniture is $8,500. What amount, if any, must Bill include as income for 2009? a. $0 b. $5,000 c. $7,500 d. $3,500 46. Doug Doolittle receives a nontaxable stock dividend of 20 shares of Edwards Corporation common stock with a fair market value at distribution of $800. Doug previously owned 100 shares of Edwards Corporation common stock which he purchased three years ago for $6,000. The basis per share of the 20 shares of Edwards Corporation stock is: a. $0 b. $40 c. $50 d. $60 47. Freda Freemont receives a nontaxable stock dividend of 30 shares of preferred stock on her Georgia Corporation common stock. Freda purchased the 200 shares of common stock two years ago for $12,000. On the date of distribution, the fair market value of the common stock was $75 per share and the fair market value of the preferred was $100 per share. What is the new basis, per share, of the common stock? a. $75.00 b. $50.00 c. $100.00 d. $66.67 48. Freda Freemont receives a nontaxable stock dividend of 30 shares of preferred stock on her Georgia Corporation common stock. Freda purchased the 200 shares of common stock two years ago for $12,000. On the date of distribution, the fair market value of the common stock was $75 per share and the fair market value of the preferred was $100 per share. What is the new basis, per share, of the preferred stock? a. $75.00 b. $50.00 c. $100.00 d. $66.67

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49. George Greco gave Harold Hudson property which George acquired ve years ago for $15,000. At the time of the gift, the propertys fair market value was $35,000. Harold subsequently sold the property for $40,000. What amount of gain did Harold realize? a. $20,000 b. $25,000 c. $5,000 d. $40,000 50. Kurt Kramer purchased stock ve years ago for $12,000 which he gave to Jim Jensen when its fair market value was $9,000. Subsequently, Jim sold the stock for $7,500. What is the amount of Jims loss on the sale? a. $3,000 b. $1,500 c. $4,500 d. $2,000 51. Kent Knobe gave Larry Lawson a gift having a fair market value of $133,000 on February 14, 2009. Kent had purchased the gift property in 2001 for $93,000, the taxable gift was $120,000, and paid a gift tax of $15,000. What is Larrys basis in the property? a. $93,000 b. $120,000 c. $98,000 d. $108,000 e. $133,000 52. On January 6, 2009, Sally Strom purchased 300 shares of common stock in Corporation XYZ for $120 per share. Four months later she purchased 100 additional shares at $180 per share. On December 13, 2009, Sally received a 20 percent nontaxable stock dividend. What is Sallys basis in each share of stock after the stock dividend? a. 480 shares at $112.50 per share b. 360 shares at $120 per share and 120 shares at $180 per share c. 360 shares at $120 per share and 120 shares at $150 per share d. 360 shares at $100 per share and 120 shares at $150 per share 53. Bob Bixby gave his daughter, Jane, his personal residence with an adjusted basis to him of $260,000 and a fair market value of $250,000. Jane lived in the house for two years and then sold it for $240,000. As a result of the sale, Jane will: a. Report no gain or loss b. Report a $10,000 loss c. Report a $20,000 loss d. Have her father report a $20,000 loss 54. Martha Meyers, an employee of Ace, Inc., purchased an asset with a fair market value of $8,000 from her employer for $5,000. What amount should Martha report as income and what should her basis in the asset be? a. $0 and $5,000 b. $3,000 and $5,000 c. $0 and $8,000 d. $3,000 and $8,000 55. On September 24, 2009, Walter Whistler gave property with a fair market value of $63,000 to Jim Jacobs. Walters adjusted basis in the property was $48,000. The taxable gift was $50,000 and gift taxes paid on the property were $10,000. What is Jims basis in the property? a. $48,000 b. $50,000 c. $51,000 d. $55,000 e. $63,000

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56. Joe Jimson died in 2009. Property with an adjusted basis of $60,000 and a fair market value of $120,000 went to Joes beneciary. The executor chose the alternate valuation date when the value was $112,000. The property was distributed four months after Joes death when the fair market value was $115,000. What is the basis of the property to the beneciary? a. $60,000 b. $112,000 c. $115,000 d. $120,000 57. February 20, 2009: Lee Ranger purchased 100 shares of Pine Corp. stock for $30 a share. April 7, 2009: Lee sold 50 shares of Pine Corp. stock for $20 a share. April 24, 2009: Lee purchased 25 shares of Pine Corp. stock for $25 a share. What is the basis of the 25 shares purchased on April 24, 2009? a. $625 b. $875 c. $1,125 d. $750 58. Ralph Rugby wanted to sell 100 shares of a stock that had suffered a serious decline in value. Several members of his family were interested in purchasing the stock. In order to preserve the loss deduction, which of the following family members should Ralph sell his stock to? a. Grandfather b. Half-sister c. Ralph, Inc. (Ralphs 51% owned corporation) d. Cousin 59. Which of the following statements is not true concerning installment reporting? a. At least one payment is to be received after the close of the year in which a sale of property is made. b. The installment method allows gain to be spread over more than one year. c. The gross prot rate is used to determine the portion of the payment received that is reported as income. d. An advantage of the installment method is that the dollar amount of income recognized from each payment never varies from year to year. 60. On January 1, 2009, Daniel Durrow owned rental property which had an adjusted basis to him of $250,000. Daniel made the following expenditures during 2009: Ordinary painting of building $ 5,000 Repair of roof section (useful life not appreciably extended) 2,500 Legal fees paid to defend title 10,000 Property taxes 6,000 Assessment for local street improvement (value of property increased greatly) 15,000 Not considering depreciation, what is Daniels basis in the property at year-end? a. $225,000 b. $240,000 c. $260,000 d. $275,000 e. None of the above 61. On October 7, 2009, Grace Gems purchased a going business for the lump-sum price of $200,000. The fair market values of the assets Grace purchased were as follows: U.S. government securities $10,000 Land 36,000 Building 90,000 Equipment 15,000 Furniture 9,000

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62.

63.

64.

65.

66.

67.

68.

What is Graces basis in the building? a. $90,000 b. $95,000 c. $100,000 d. $102,500 e. None of the above In 2009, Leon Longrove sold a piece of business equipment that had an adjusted basis to him of $50,000 for $75,000 cash plus artwork that had a fair market value of $25,000. The buyer assumed Leons $20,000 loan on the equipment. Leon paid $5,000 in selling expenses. What is the amount of Leons gain on the sale? a. $25,000 b. $45,000 c. $65,000 d. $75,000 e. None of the above Recognized gain or loss is the term used to describe: a. a taxpayers amount of true economic gain or loss when property is disposed. b. the amount of realized gain or loss taxpayers report on their tax returns. c. an amount that does not affect the taxpayers tax liability. d. none of the above. An example of a basket purchase is: a. the purchase of real property with one or more items of personal property. b. the purchase of land and a building for a single, lump-sum amount. c. two separate property purchases completed one right after another. d. both a and b. e. all of the above. Losses between related parties are: a. always realized, but never recognized. b. always recognized, but never realized. c. always realized and recognized. d. never realized and recognized. Under the rules of constructive ownership: a. if a partnership with two equal partners owns 10 percent of the stock in a corporation, each partner is treated as owning 5 percent of the stock in that corporation. b. stock owned by the taxpayers spouse, descendants, ancestors, or siblings is treated as owned by the taxpayer. c. a taxpayer may be treated as owning stock that is actually owned by another person or entity in which the taxpayer has an ownership interest. d. both a and c. e. all of the above. When a taxpayer realizes a loss on the sale of securities and purchases the same or substantially identical securities within 61 days surrounding the date of the sale, this is known as: a. a related-party transaction. b. a wash sale. c. a basket purchase. d. none of the above. When taxpayers sell property in an installment sale and realize gain, they generally recognize the gain: a. in the rst year in which an installment payment is received. b. over the tax years in which they collect the proceeds from the sale. c. at the time of the sale. d. none of the above.

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69. In 2005, Jane Jones pays $2,500 for 1,000 shares of ABC common stock. On August 27, 2009, Jane purchases an additional 250 shares of ABC common stock for $600. On September 5, 2009, she sells the 1,000 shares purchased in 2005 for $1,800. Janes recognized loss on the sale is: a. $0. b. $175. c. $350. d. $525. e. $700. 70. In 2005, Jane Jones pays $2,500 for 1,000 shares of ABC common stock. On August 27, 2009, Jane purchases an additional 250 shares of ABC common stock for $600. On September 5, 2009, she sells the 1,000 shares purchased in 2005 for $1,800. Janes basis in the shares of stock purchased on August 27, 2009 is: a. $75. b. $425. c. $600. d. $775. e. $1,125. 71. Becky Bell owned common stock in a corporation that she purchased two years ago for $25,000. On June 6, 2009, Becky sold the stock for its $11,000 fair market value to her son, Max Monroe. On December 19, 2009, Max sells the stock to an unrelated party for its $13,000 fair market value. How much gain or loss will Becky and Max recognize on their respective income tax returns for 2009? a. $0 and $0, respectively. b. ($14,000) and $0, respectively. c. ($14,000) and $2,000, respectively. d. $0 and $2,000, respectively. e. None of the above. 72. North Enterprises sells land for $15,000 cash and machinery worth $20,000. The other partys adjusted basis in the machinery is $8,000. The land was subject to a $25,000 mortgage, which the other party assumes. North incurs $2,000 of selling expenses on the sale. What is Norths amount realized from the sale? a. $58,000. b. $60,000. c. $23,000. d. $33,000. e. $35,000. 73. Nancy Nelson pays $200,000 for land and a building in a single transaction. At the time of the purchase, the land and building were appraised at $120,000 and $180,000, respectively. Nancys depreciable basis in the building is: a. $0. b. $100,000. c. $80,000. d. $120,000. e. $180,000. 74. Jay Jamison sold property to Joan Jacobs. Joan paid $100,000 in cash and $20,000 in other property (fair market value). The property sold by Jay was subject to an $80,000 mortgage, which Joan assumed. Jay paid a $7,200 sales commission and $5,000 in property taxes. Jay had purchased the property three years before for $120,000$20,000 in cash and a $100,000 mortgage. Jay had added $20,000 in improvements during the period of time in which he held the property. What is Jays realized gain or loss on this transaction? a. ($32,200) loss b. ($27,200) loss c. $47,800 gain d. $52,800 gain e. $112,000 gain

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75. Douglas Duke received a summer home from his father as a gift in 2009. The fair market value at the time of the gift was $90,000 (this was also the taxable gift), and it had an adjusted basis to the father of $50,000. The father paid $9,000 in gift tax. What is Douglass basis in the property? a. $41,000 b. $50,000 c. $54,000 d. $59,000 e. $90,000 76. Albert Arnetts personal residence cost him $70,000, and it had a fair market value of $64,000 when it was converted to rental use. Albert claimed $4,000 depreciation during the time it was rented. The rental building was sold for $62,000. What is his gain or loss? a. ($8,000) loss b. ($4,000) loss c. ($2,000) loss d. no gain or loss e. $2,000 gain 77. Leonard London sold a building used in his business to Michelle Martinson. He had purchased the property several years previously for $340,000, $300,000 of which was the mortgage. Major improvements in the amount of $240,000 had been made. At the time of the sale, Leonard had taken $220,000 in straight-line depreciation. Leonard paid $104,000 in selling expenses. Michelle gave Leonard $400,000 in cash and unlike property with a fair market value of $240,000, assumed a delinquent real estate bill of $105,000 and assumed Leonards mortgage on the property in the amount of $234,000. What is Leonards gain on the sale? a. $191,000 b. $385,000 c. $410,000 d. $503,000 e. $515,000 78. Wilma Waters purchased land from Carl Carmichael for $32,000 cash, the assumption of an existing mortgage of $43,000, and payment of delinquent back taxes of $8,300. Carls adjusted basis in the land that he had purchased as an investment was $85,000. Carl also incurred $9,330 in selling costs. What is Carls recognized gain or loss? a. ($19,330) b. ($11,030) c. ($1,700) d. $7,630 e. $11, 030 79. As a graduation present Barbara Brooks received 1,000 shares of stock from her aunt. The stock has a fair market value of $25,000 at the time of the gift. The aunts adjusted basis in the stock at the time of the gift was $30,000. A gift tax of $2,800 was paid by the aunt. Barbara sold the stock in the following year for $29,000. What is Barbaras gain or loss on the sale? a. ($1,000) b. no gain or loss c. $1,200 d. $1,667 e. $4,000

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SUPPLEMENTARY PROBLEMSCHAPTER 10
80. On April 18, 2009, Jim Jenkins sold 300 shares of Redwood Corporation common stock for $8,400. Jim acquired the stock in 2005 at a cost of $10,000. On May 9, 2009, he repurchased 150 shares of Redwood Corporation common stock for $3,600 and held them until August 25, 2009, when he sold them for $6,000. How should Jim report the above transactions for 2009? 81. Norman Nelson owns 1,000 shares of Newton Corp. common stock which he purchased for $60,000 and later receives a nontaxable preferred stock dividend of 300 shares of Newton preferred stock when the FMV of the preferred was $100 per share and the FMV of the common was $90 per share. What is the basis of the common and preferred shares after the dividend? 82. Ronald Rankin owns 1,000 shares of Royal Corp. common stock with a basis of $30,000. He receives a 10 percent taxable stock dividend when the FMV of each share of stock is $15. How much income does he have? What is the basis in the new shares? When does the holding period of the new shares begin? What is the basis in the old stock? 83. Stanley Steamer purchased 1,000 shares of Patrick Corporation common stock at $6 per share in 2005. On September 26, 2009, he received 1,000 nontaxable stock rights entitling him to buy 200 additional shares of Patrick Corporation common stock at $10 per share. On the day that the rights were issued, the fair market value of the stock was $12.50 per share ex-rights and that of the rights was $2.50 each. Stanley sold 500 of the rights for $1,100 on October 24, 2009, and let the other 500 rights expire. (a.) What is the gain or loss that Stanley should report in 2009? (b.) What gain or loss should Stanley report if the value of the rights were $1.25 instead of $2.50? 84. Betty Bell owns 1000 shares of Banner Corp. stock purchased in January 2007 for $30,000. On January 11, 2009, she receives 300 taxable stock rights valued at $6 with the right to purchase additional shares at $32. (a.) How much income does Betty have? What is the basis in the rights? When does the holding period of the rights begin? (b.) On February 19, 2010, Brian exercises 150 rights and sells the remaining 150 rights for $8 each. What is the basis of each new share? When does the holding period begin? How much and what kind of gain does she have on the sale of the rights? 85. Joe Juggler sold some common stock to his brother Tim for $12,000, the current market price. He paid $15,000 for the stock two years ago. The stock market recovered rapidly and three months later Tim sold the stock to a business acquaintance for $16,000. How much gain or loss should Joe and Tim report? 86. Mike Morgan gives Paul Piers property worth $35,000. Mikes basis in the property is $30,000. (a.) If Paul sells the property for $37,000, what is his gain or loss on the sale? (b.) If Paul sells the property for $25,000, what is his gain or loss? (c.) If the fair market value on the date of the gift is $27,000 and Paul sells the property for $24,500, what is his gain or loss? (d.) If the fair market value equals $27,000 and Paul sells the property for $28,000, what is the gain or loss? 87. Brian Bradley purchased property for $50,000 in 2001. The property was valued at $200,000 on May 14, 2009, when Brian died. His daughter Anita inherited the property. Six months later, on November 14, 2009, the property was valued at $170,000. (a.) What is Anitas basis in the property? (b.) If the executor of Brians estate elected the alternate valuation date, what is Anitas basis? (c.) If the executor elected the alternate valuation date but distributed the property on August 18, 2009, what is Anitas basis? (d.) If the executor elected the alternate valuation date, but distributed the property on December 22, 2009, what is Anitas basis? (e.) If Anita sells the property on December 27, 2009, will she have short-term or long-term gain or loss? 88. On January 1, 2007, Jane Judge paid $12,000 for taxable bonds with a face value of $10,000 that mature on January 1, 2017. She sells them on December 31, 2009, for $11,000. What are the tax consequences for Jane? 89. Margo Manor has a Victorian style residence with an adjusted basis of $200,000 and a fair market value of $150,000. Because of the unique styling of the home, she decided to convert it to rental property. One year later, after taking depreciation of $15,000, she is considering selling the property. Determine the results if she sells the property for: (a.) $130,000 (b.) $165,000 (c.) $220,000

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90. In November 2009, Bill Barley sells property with an adjusted basis of $50,000 for $200,000. The buyer pays Bill $40,000 cash at the time of sale transaction with the remaining $160,000 to be paid in ve annual installments of $32,000 beginning in November 2010 with interest at 10 percent. (a.) What is the amount of income to be reported by Bill in 2009? (b.) What is the amount of income to be reported in later years? In both cases, ignore interest. 91. In 2009, Tina Turnips gave property with an adjusted basis of $63,000 to Sally when the fair market value was $163,000. Gift taxes paid on the property were $30,000, and the taxable gift was $150,000. (a.) What is the adjusted basis of the property to Sally? (b.) What is the adjusted basis of the property to Sally if adjusted basis of the property to Tina was $180,000 instead of $63,000? (c.) What is the answer to (a) if the gift had been made in 1975?

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ANSWERS TO TRUE-FALSE QUESTIONSCHAPTER 10

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. True. Expenditures chargeable to the capital account are additions to the basis. True. Cost includes cash paid and any debt to which the property is subject. False. When nonbusiness property is converted to business use, the basis for determining gains is the adjusted basis, but the basis for determining loss or depreciation is the lesser of the adjusted basis of the property or its fair market value at the date of conversion. False. The donors adjusted basis is increased by the proportion of the gift tax paid which is attributable to the appreciation in the value of the gift. The appreciation in the gift is $4,000 and the increase in the basis for the gift tax is $112 ($700 gift tax x $4,000 divided by $25,000). True. True. False. David owns three shares with an adjusted basis of $20 each and three shares with an adjusted basis of $10 each. True. Allocation of basis to stock rights can occur only if the rights are sold or exercised. False. The holding period begins on the date the property was acquired by the donor. False. A loss incurred on the sale or exchange of property between related persons is not deductible. Brothers are considered to be related persons. True. Under Code Sec. 1239, gain recognized on the sale of property between related persons is ordinary income if the property is depreciable property in the hands of the transferee. False. Adjusted basis is cost plus capital expenditures minus capital recoveries. True. False. The basis of inherited property is the fair market value at the date of death unless the alternate valuation date was elected. True. True. True. False. Acquisition costs are not capital returns but are additions to the asset accounts. False. Events such as nontaxable exchanges, sales of residences, and involuntary conversions do not necessarily result in recognition of gain or loss. True. False. The general rule for the basis of property acquired from a decedent is that it is the fair market value of the property at the date of death of the decedent. False. There is no basis adjustment for any estate tax paid on the property. True. FIFO is used unless the stock is specically identied. True. Gains and losses from appreciation or decline in value are not realized gains and losses. False. Such costs must be capitalized as part of the initial basis in the property. False. Ancestors, descendants, and siblings are all considered related persons. True. The loss not recognized in a wash sale is added on to the basis of the new stock so that the loss is merely postponed until the taxpayer sells the stock in a nonwash sale transaction. True. The basis of the asset should include costs attributable to the construction of the asset. True. The basis to the heir is the fair market value of the property at the date of death of the decedent. True. The adjusted basis of the property at the time of conversion is used to determine the gain. True. The cost of obtaining the mortgage should increase the basis in the home. False. The rebate of $1,000 should reduce the basis to $16,500. False. The loss is not deductible since it was sold to his brother, a related party. False. Neither gain nor loss would be reported since the selling price was between the basis in the hands of the donor and a lesser fair market value. True. This is a nondeductible loss since it was a sale to a related party (her sister).

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ANSWERS TO MULTIPLE CHOICE QUESTIONSCHAPTER 10

36. a. The $50,000 unreimbursed loss is a reduction in basis and the $150,000 receipt of insurance proceeds is also a reduction in basis. Leonards basis in the building before repairs is $300,000 ($500,000 - $50,000 - $150,000). 37. b. The sale and subsequent purchase of 50 shares is a wash sale since March 8 to March 29 is 21 days. However, the loss on the other 50 shares may be recognized. 38. b. An adjustment is to be made to the basis of an asset for the amount of depreciation allowed in previous years, but the adjustment cannot be less than the amount allowable. Therefore, the adjusted basis of the asset when sold was $20,000 ($70,000 - $50,000). 39. b. Assessments for the maintenance of sidewalks are ordinary expenses of operation. Depreciation is incorrect because basis must be reduced by depreciation. Cash rebates are a reduction in purchase price and casualty losses also reduce basis. 40. b. Bob would add $20,000 of the gift tax on to the aunts basis of $73,000 to get $93,000. The $20,000 is computed by multiplying the $30,000 gift tax by a fraction the numerator of which is the $120,000 appreciation and the denominator is the $180,000 taxable gift. 41. b. Automatic would have a realized loss of $20,000, which is $80,000 less the basis of $100,000. However, the recognized loss for Automatic would be $0 because this was a sale to a related party, in that Jack owned more than 50% of the stock of Automatic. When Jack sells the property to an unrelated party for $110,000, he has a realized gain of $30,000 ($110,000 less $80,000), which can be reduced by Automatics disallowed loss of $20,000 to give a recognized gain of $10,000. 42. d. The amount realized after selling expenses is $530,000 ($400,000 + $150,000 - $20,000) and the adjusted basis is $200,000 ($250,000 + $50,000 - $100,000). Therefore, the gain is $330,000 ($530,000 - $200,000). 43. d. The amount realized is $57,500 ($15,000 cash + $20,000 fair market value of the equipment + $25,000 mortgage assumed by Carla - $2,500 selling expenses). 44. b. The basis of property purchased under a bargain purchase is its fair market value or $8,500. 45. d. The $3,500 difference between fair market value and cost is taxable income for 2009. 46. c. $6,000 divided by 120 shares = $50 per share. This was a nontaxable stock dividend of identical shares. 47. b. The basis of $12,000 is allocated between the common stock and the preferred stock according to the relative fair market value. $15,000/$18,000 x $12,000 = $10,000 divided by 200 = $50 per share 48. d. $3,000/$18,000 x $12,000 = $2,000 divided by 30 shares = $66.67 per share. 49. b. The basis for both gain and loss in this case is $15,000. Therefore, the gain is $25,000 ($40,000 - $15,000). 50. b. The basis for determining a loss for property received through a gift is the lesser of the fair market value or basis at the time of the gift. Therefore, there is a $1,500 loss ($7,500 - $9,000). 51. c. A portion of the gift tax is added to the $93,000 basis as follows: $93,000 + ($15,000) x ($133,000 - $93,000) = $98,000 $120,000 d. Sally has 360 shares (300 + 60) from the rst batch purchased for a total of $36,000, which gives a basis of $100 per share. She has 120 shares (100 + 20) from the second batch purchased for a total of $18,000, which gives a basis of $150 per share. a. The basis for determining loss is the lesser fair market value of $250,000. Therefore, although Jane realized a $10,000 loss ($240,000 less $250,000), this is not recognized because losses on the sale of personal-use assets are not recognized. d. There is income of $3,000 equal to the difference between the fair market value and the purchase price, and the fair market value of $8,000 then becomes the basis. c. $15,000 appreciation divided by $50,000 taxable gifts is multiplied by $10,000 to give $3,000, which is added to $48,000 to give $51,000. c. If the alternate valuation date is elected and property is distributed before the alternate valuation date, the basis is the value on the date of distribution. b. There is a $500 loss on the April 7 sale, but $250 is disallowed and the other $250 is short-term loss. Basis of 25 shares = $625 + $250, or $875. d. A cousin is not a related party. d. The amount of income can vary from year to year depending on the amount received. d. Daniels basis in the rental property must be adjusted to take into account the cost of improvements and other charges such as legal expenses. Thus, $250,000 adjusted basis + $10,000 legal fees + $15,000 assessment for local

52. 53. 54. 55. 56. 57. 58. 59. 60.

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street improvements that increased the value of the property = $275,000. The ordinary painting and the roof repair were not improvements to the property. a. The purchaser of a business for a lump-sum price must divide the basis among the assets acquired by allocating to each asset an amount of the purchase price proportionate to, but not in excess, of its fair market value, which is $90,000. The excess of the purchase price over the fair market value of the assets is goodwill. c. The gain on Leons sale is the amount realized reduced by the adjusted basis and the selling expenses. The amount realized is $120,000 ($75,000 cash plus the $25,000 of artwork received and the $20,000 loan assumed by the buyer). $120,000 less (the adjusted basis of $50,000 + the selling expenses of $5,000) = $65,000. b. Recognized gain or loss is the term used to describe the amount of realized gain or loss that taxpayers report on their tax return. d. A basket purchase is the purchase of real property with one or more items of personal property or the purchase of land and a building for a single, lump-sum amount. a. Losses between related parties are always realized, but never recognized. e. All of the answers are included. b. When a taxpayer realizes a loss on the sale of securities and purchases the same or substantially identical securities within 61 days surrounding the date of the sale, this is known as a wash sale. b. When taxpayers sell property in an installment sale and realize gain, they generally recognize the gain over the tax years in which they collect the proceeds from the sale. d. Of the $700 realized loss, $175 is disallowed (250/1000 = 25% x ($1,800 - $2,500). d. Of the $700 realized loss, $175 is disallowed (250/1000 = 25% x ($1,800 - $2,500). The disallowed loss increases the taxpayers basis in the 250 shares to $775 ($600 plus $175). a. Becky has a $14,000 realized loss which is not recognized because the sale is to a related party. Maxs $2,000 gain is reduced by the disallowed loss. So neither party recognizes gain or loss. a. The amount realized is the FMV of the property received ($35,000) plus the $25,000 release from debt minus the $2,000 selling expenses. d. $200,000 x ($180,000/$300,000) = $120,000. d. $52,800 gain. [$192,800 amount realized ($100,000 + $20,000 + $80,000 mortgage assumed by Joan less $7,200 sales commission)] less $140,000 basis = $52,800 c. $54,000. [($90,000-$50,000)/$90,000] X $9,000 = $4,000 which is added to $50,000 to equal $54,000. d. No gain or loss. The basis for gain is $66,000 ($70,000 - $4,000); the basis for loss is $60,000 ($64,000 - $4,000). With a selling price of $62,000, there is no gain or loss because the selling price is between the basis for gain and the basis for loss. e. $515,000. $875,000 amount realized [($979,000 ($400,000 + $240,000 + $105,000 + $234,000) - $104,000 selling expenses] less $360,000 adjusted basis. b. ($11,030). $73,970 amount realized ($32,000 + $43,000 + $8,300 - $9,330 selling expenses) less $85,000 adjusted basis gives a loss of ($11,030). b. no gain or loss. There is no gain when the gain basis is used ($29,000 - $30,000); there is no loss when the loss basis is used ($29,000 - $25,000). No gift tax adjustment is considered because the property was not appreciated.

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79.

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ANSWERS TO SUPPLEMENTARY PROBLEMSCHAPTER 10

80. The realized loss to Jim is $1,600 ($8,400 - $10,000); however, only one-half of that loss or $800 is allowed. There was a wash sale for 150 shares because identical shares were purchased within 30 days of sale. The basis of the 150 new shares is $4,400 ($3,600 + $800 disallowed loss). Therefore, Jims gain on the August 25 sale is $1,600 ($6,000 $4,400), and it is long- term gain since the holding period of the old stock is included. 81. The basis of the preferred is $30,000 x $60,000 = $15,000 $30,000 + $90,000 The basis of the common is $90,000 x $60,000 = $45,000 $30,000 + $90,000 82. Ronald has $1,500 income (100 shares x $15). The basis in the new shares is $15 per share. The holding period begins on the date of receipt of the stock dividend. The basis in the old stock remains the same or $30,000. 83. (a.) Allocation of part of the basis to the rights is required because the value of the rights is greater than 15 percent of the value of the stock ($2.50 is 20% of $12.50). The amount allocated to the rights is as follows: $2,500 x $6,000 = $1,000 $12,500 + $2,500 (b.)This gives a basis of $1 per right. If 500 rights are sold for $1,100, there is a $600 gain and it would be long-term capital gain. There is no gain or loss on the expiration of the remaining 500 rights since no basis is allocated to rights unless the rights are exercised or sold. (c.) Since the value of the rights is only 10 percent of the value of the stock, nothing needs to be allocated to the rights. All of the $1,100 in sales proceeds is long-term capital gain. If the taxpayer made the election to allocate an amount to the rights, then $545 would be allocated to the rights as follows: $1,250 x $6,000 = $545 $12,500 + $1,250 84. (a.) Betty has $1,800 income (300 x $6). The basis in the rights is $1,800 of $6 per right. The holding period begins on January 11, 2009. (b.) The basis of each new share is $38 ($32 exercise price plus the basis of each right of $6). The holding period begins on the date of exercise, February 19, 2010. On sale of the rights, she has long-term capital gain of $300 ($1,200 less $900 basis) since the rights were held longer than 12 months. 85. Although Joe has a realized loss of $3,000, it is not recognized because he sold it to his brother, a related party. When Tim sells it for $16,000, Tims realized gain is $4,000, but he reduces that by the $3,000 disallowed loss to give $1,000 recognized gain. 86. (a.) $7,000 gain ($37,000 - $30,000). (b.) ($5,000) loss ($25,000 - $30,000). (c.) ($2,500) loss ($24,500 - $27,000). (d.) No gain or loss is recognized if the selling price is between the basis in the hands of the donor and a lesser fair market value at the date of the gift. 87. (a.) $200,000, the fair market value at the date of death. (b.) $170,000, the fair market value six months after Brians death. (c.) Fair market value at the date of distribution. (d.) $170,000, the fair market value at November 14, 2009. (e.) There is long-term gain on property from a decedent regardless of how long it is held. 88. There is a $200 reduction in interest income per year ($2,000 divided by 10 years). By the end of 2009 when the bonds are sold, the basis is $11,400. Thus, Jane has a loss of $400 ($11,000 - $11,400). If Jane had not elected to amortize the premium, she would have had a loss of $1,000 at the time of sale ($11,000 - $12,000). 89. (a.) Sale for $130,000: Loss = $5,000 $130,000 Sale price - 135,000 ($150,000 basis for loss - $15,000 depreciation) ($5,000) Loss (b.) Sale for $165,000: (c.) No gain or loss; the amount realized is between the basis for determining gain and the basis for determining loss.

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(d.) Basis for loss = $135,000 (e.) Basis for gain = $185,000 (f.) Sale for $220,000: $220,000 Sale price - 185,000 ($200,000 basis for gain - $15,000 depreciation) $ 35,000 Gain 90. (a.) During 2009, Bill reports $30,000 ($40,000 x 75%). The gross prot rate is 75%, or $150,000 prot divided by $200,000. (b.) In 2010, 2011, 2012, 2013, and 2014, Bill reports $24,000 ($32,000 x 75%). 91. (a.) Sallys basis is $83,000. The basis increase is $20,000, which is added on to Tinas basis of $63,000. Basis increase = $100,000 x $30,000 = $20,000 $150,000 (b.) If the adjusted basis to Tina was $180,000, Sallys gain basis would be $180,000. The basis for determining loss is $163,000, the fair market value at the time of the gift. (c.) If the gift in (a) had been given in 1975, the total amount of the gift taxes of $30,000 would be added to $63,000, resulting in a basis to Sally of $93,000.

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DIFFICULTY LEVEL RATINGSCHAPTER 10

The following table denotes the relative difculty level of each question. Teachers may wish to organize test questions based on the difculty level of the particular class.
True-False Question Ratings 1. Moderate 2. Moderate 3. Moderate 4. Moderate 5. Moderate 6. Moderate 7. Moderate 8. Moderate 9. Moderate 10. Easy 11. Easy 12. Easy 13. Easy 14. Easy 15. Easy 16. Easy 17. Easy 18. Easy 19. Easy 20. Moderate 21. Moderate 22. Moderate 23. Moderate 24. Easy 25. Easy 26. Moderate 27. Moderate 28. Easy 29. Easy 30. Moderate 31. Easy 32. Moderate 33. Moderate 34. Difcult 35. Moderate Multiple Choice Question Ratings 36. Moderate 37. Moderate 38. Moderate 39. Easy 40. Moderate 41. Moderate 42. Moderate 43. Moderate 44. Moderate 45. Moderate 46. Moderate 47. Difcult 48. Difcult 49. Moderate 50. Easy 51. Difcult 52. Difcult 53. Moderate 54. Moderate 55. Moderate 56. Moderate 57. Moderate 58. Easy 59. Moderate 60. Moderate 61. Moderate 62. Moderate 63. Easy 64. Moderate 65. Easy 66. Difcult 67. Easy 68. Easy 69. Moderate 70. Moderate 71. Difcult 72. Moderate 73. Easy 74. Difcult 75. Difcult 76. Difcult 77. Difcult 78. Difcult 79. Moderate Supplementary Problem Ratings 80. Moderate 81. Easy 82. Easy 83. Difcult 84. Easy 85. Easy 86. Easy 87. Easy 88. Easy 89. Moderate 90. Easy 91. Moderate

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