Deck 9: Tax-Deferred Exchanges

Question 1

Internal Revenue Code Section 351, relating to transfers to a controlled corporation, can apply to transfers to both a new and an existing corporation.

Answer 1

True

Question 2

A business airplane exchanged for a fleet of trucks, all used for the delivery of manufactured goods, is a qualifying like-kind exchange.

Answer 2

False

Question 3

The holding period for boot in a like-kind exchange begins on the date of the exchange.

Answer 3

True

Question 4

Boot received in a like-kind exchange never causes loss to be recognized.

Question 5

The loss on the total destruction of business property is always its adjusted basis regardless of fair market value.

Question 6

A taxpayer must transfer a minimum required amount of property, along with any services performed, to include the stock received in meeting the control requirement for a corporate formation.

Question 7

A theft loss of $10,000 cash by an individual results in a $10,000 casualty loss deduction.

Question 8

What is the difference between a carryover basis and a substituted basis?

Question 9

Both gain and loss are deferred in a wash sale.

Question 10

Liabilities assumed by either a partnership or corporation have identical effects on the owners' bases in their ownership interests.

Question 11

A condemnation is one type of involuntary conversion.

Question 12

Expected insurance settlements have no effect on the timing of the deduction for a casualty loss.

Question 13

The holding period for property received in a qualifying like-kind exchange begins on the date the new property is received.

Question 14

For a nonsimultaneous exchange to qualify for like-kind provisions, the taxpayer must identify the property to be acquired within 90 days and actually close the transactions within 180 days.

Question 15

By what mechanism is a deferral of gain normally accomplished?

Question 16

The taxpayer-use test for deferral of gain on an involuntary conversion requires the taxpayer to acquire property that has the same function or use as the involuntarily converted property that he or she used prior to the conversion.

Question 17

If a taxpayer's personal residence is involuntarily converted, the taxpayer can only defer gain by acquiring a new residence in the required time period using IRC §1033.

Question 18

Both gain and loss are deferred in a like-kind exchange.

Question 19

To defer gain recognition on an involuntary conversion, qualifying property must be obtained
within a specified time period.

Question 20

When is gain recognized in a like-kind exchange?

Question 21

In what year is a theft loss reported for tax purposes?

Question 22

The Bogtown Corporation owns a 20-year old factory building that it wants to exchange for land to build a new factory. The building has a fair market value of $2,200,000 and has a basis of $800,000. Dundee Corporation is willing to exchange some land it has held for expansion for the building.

A) If the land has a fair market value of $2,200,000, what is Bogtown's realized and recognized gain and its basis in the land?
B) How would your answers to (a) change if Dundee's land is only valued at $1,900,000 and it gives Bogtown $300,000 cash on the exchange?
C) How would your answers to (a) change if the land is valued at $3,000,000 and Bogtown assumes an $800,000 mortgage on the land?

Question 23

Billy Bob, who is single, owns a mountain estate in North Carolina with a basis of $900,000 that he used as his principal residence for the previous five years. On December 6, 2018 a major earthquake hit the area and the home was completely destroyed. Billy Bob received $1,450,000 from his insurance to rebuild or replace the home. Billy Bob decides to build a home in Charlotte near his brother. How much gain must he recognize if he (a) invests only $1,100,000 in the new home? (b) invests only $800,000 in the new home?

Question 24

Parker exchanges an apartment building in Wisconsin for Cassidy's apartment building in Florida. Parker's building has a fair market value of $500,000, is encumbered by a $200,000 mortgage, and has a basis of $275,000. Cassidy's building has a fair market value of $350,000, is encumbered by a $50,000 mortgage, and has a basis of $175,000. They each assume the mortgages on the properties received. What are Parker's and Cassidy's amounts realized, their realized gain or loss, and their recognized gain or loss on the buildings exchanged?

Question 25

What is the functional-use test in an involuntary conversion?

Question 26

What is a wash sale?

Question 27

What is the limit of the gain that can be recognized on a like-kind exchange?

Question 28

Sean inherited a farm his grandfather had purchased 50 years ago for $40,000. It was valued at $1,000,000 when his grandfather died but has a current value of $1,100,000. Sean did not like farming so he traded the farm for an apartment building valued at $950,000 owned by Jean that has a basis of $700,000. In addition, Sean received $150,000 in cash from Jean to finalize the exchange.

A) What are the amounts realized by Sean and Jean on the exchange?
B) What are the gains or losses realized by Sean and Jean on the exchange?
C) What are the gains or losses recognized by Sean and Jean on the exchange?
D) What are the bases of the properties received by Sean and Jean?

Question 29

When may a taxpayer deduct a casualty loss in a year other than the year in which the loss occurred?

Question 30

Sarah's building is condemned by the state on October 19, 2017. The building has a basis of $400,000 and Sarah receives $600,000 from the state on February 10, 2018. On January 20, 2019, Sarah purchases qualifying replacement property for $565,000. What is Sarah's realized and recognized gain or loss on the condemnation?

Question 31

How is a new partner's basis in a partnership interest determined if the partnership has no liabilities?

Question 32

How is the basis of stock received for appreciated property in a Section 351 transfer determined?

Question 33

What effect do liabilities assumed by the partnership have on a partner's basis?

Question 34

If a shareholder contributes property to a corporation, but receives nothing in exchange for the property, what are the tax consequences to the shareholder and the corporation?

Question 35

What are the time limits imposed on a nonsimultaneous exchange to qualify as like kind?

Question 36

What effect does the assumption of liabilities by the corporation normally have on gain or loss recognition and stock basis determination by a transferring shareholder in a Section 351 transfer?

Question 37

How long does a taxpayer who realizes gain have to replace real property that has been condemned?

Question 38

What is the taxpayer-use test in an involuntary conversion?

Question 39

On August 20, 2018, the offices of Cobb Company, a calendar-year taxpayer, were destroyed by a tornado. The building had a fair market value before the tornado of $1,200,000 and a basis of $675,000. Cobb Company received $1,200,000 from its insurance company on December 10, 2018 to make repairs or replace the building. On January 2, 2021, Cobb Company finally invests $1,100,000 in a qualifying replacement building. What is Cobb's realized and recognized gain or loss on this involuntary conversion.

Question 40

What is the control requirement to qualify a gain on transfer to a corporation for tax deferral?

Question 41

Which of the following is not a characteristic of a like-kind exchange?

A) The holding period for like-kind property includes the holding period of the property surrendered.
B) Receipt of boot can cause gain recognition up to the gain realized.
C) Business realty can be exchanged for business personalty.
D) Personal-use assets do not qualify for like-kind exchanges.

Question 42

What is the amount of the casualty loss on a business truck that had a fair market value of $14,000 before an accident and $4,000 after an accident, if its adjusted basis is zero?

A) $14,000
B) $10,000
C) $4,000
D) 0

Question 43

Willow Corporation exchanged land valued at $250,000 (adjusted basis = $175,000) for a building owned by Tree Corporation valued at $350,000 (adjusted basis = $200,000) and $50,000 cash. In addition, Willow assumed the $150,000 mortgage on Tree's building. What are Willow and Tree's realized gains or losses on the properties exchanged, respectively?

A) $75,000, 0
B) $75,000, $150,000
C) $225,000, $150,000
D) $225,000, $200,000

Question 44

Cal exchanges an apartment building (including land) with an adjusted basis of $55,000 (and fair market value of $90,000) for a piece of undeveloped land valued at $80,000 and $10,000 cash. As a result of the exchange, Carl paid $14,000 of fees. What is Carl's recognized gain on the exchange?

A) 0
B) $10,000
C) $35,000
D) $21,000

Question 45

1. Identify the following provisions as deferral (D) or exclusion (E) provisions.
Wash sale
b. Sale of personal residence
c. Involuntary conversion
d. Transfers to a partnership by a partner
e. Sale of qualifying small business stock
f. Loss on personal auto sale
g. Like-kind exchange
h. Corporate reorganization

Question 46

Elizabeth exchanges an office building valued at $400,000 with a $75,000 mortgage and adjusted basis of $180,000 for land valued at $275,000. What is Elizabeth's realized gain on the exchange?

A) zero
B) $95,000
C) $75,000
D) $170,000

Question 47

Which of the following would not be considered an involuntary conversion?

A) The theft of jewelry
B) Sale of property in a flood zone
C) Condemnation of a building for a highway
D) Destruction of a home by a tornado

Question 48

Mary and Doris form MD general partnership. Mary transfers a building with a fair market value of $800,000 and a basis of $400,000 that is encumbered by a $100,000 mortgage that the partnership assumes in exchange for a 50 percent interest in the general partnership. Doris contributes equipment valued at $900,000 with a basis of $500,000 that is encumbered by a $200,000 liability that the partnership assumes in exchange for the other 50 percent general partnership interest. What are Mary and Doris's realized and recognized gains and their bases in their partnership interests. What is the partnership's basis in the contributed assets?

Question 49

Elizabeth exchanges an office building valued at $400,000 with a $75,000 mortgage and adjusted basis of $180,000 for land valued at $275,000. What is Elizabeth's recognized gain on the exchange?

A) zero
B) $95,000
C) $75,000
D) $170,000

Question 50

Georgia's home was damaged by flood. Its fair market value before and after the flood are $125,000 and $75,000, respectively. Its adjusted basis was $90,000. Georgia received $50,000 from her insurance company and she was able to have the house repaired for $40,000. What is the amount of Georgia's basis in the house after the repairs?

A) $ 40,000
B) $ 80,000
C) $ 90,000
D) $125,000

Question 51

James corporation exchanges a building (fair market value = $800,000, adjusted basis = $600,000) that has a $100,000 mortgage for another building owned by Pete Corporation (fair market value = $1,100,000, adjusted basis = $600,000) that is encumbered by a $400,000 mortgage. Each party assumes the mortgage on the building received. What are James's and Pete's realized gains on this exchange, respectively?

A) $200,000, $500,000
B) $200,000, $600,000
C) $500,000, $600,000
D) $500,000, $500,000

Question 52

Zandu Corporation exchanged a building (fair market value = $1,000,000, adjusted basis = $700,000) and two semi-tractor-trailers (fair market value = $300,000; adjusted basis = $225,000), all five years old, for land to build a new facility valued at $1,300,000. What is Zandu's realized and recognized gain and its basis in the land? Realized gain Recognized gain Basis of land

A) 0 0 $ 925,000
B) $75,000 $75,000 $1,000,000
C) $300,000 $300,000 $1,300,000
D) $375,000 $75,000 $1,000,000

Question 53

James corporation exchanges a building (fair market value = $800,000, adjusted basis = $600,000) that has a $100,000 mortgage for another building owned by Pete Corporation (fair market value = $1,100,000, adjusted basis = $600,000) that is encumbered by a $400,000 mortgage. Each party assumed the mortgage on the building received. What are James's and Pete's recognized gains on the exchange, respectively?

A) 0, 0
B) 0, $300,000
C) $100,000, 0
D) $100,000, $400,000

Question 54

Stan and Billie have decided to divorce. As part of the divorce settlement, Billie received stock valued at $200,000 that had a basis of $120,000; Stan received their home that had a basis of $240,000 but a fair market value at the time of the divorce of $400,000. Two years after the divorce, Billie sells the stock for $300,000 and a year later Stan sells the home for $600,000 after the twins leave for college.
a. How much is Billie's realized and recognized gain or loss on the sale of the stock?
b. How much is Stan's realized and recognized gain or loss on the sale of the home.

Question 55

On November 4, 2017, Tom purchased 2,000 shares of DDD stock for $20,000. On June 2, 2018, Tom sold the 2,000 shares for $14,000. On June 30, 2018, he purchased 1,000 shares of DDD stock for $5,000. What is Tom's realized and recognized gain or loss on the June 2, 2018 sale and his basis in the stock from the June 30 purchase?

Question 56

Willow Corporation exchanged land valued at $250,000 (adjusted basis = $175,000) for a building owned by Tree Corporation valued at $350,000 (adjusted basis = $200,000) and $50,000 cash. In addition, Willow assumed the $150,000 mortgage on Tree's building. What are Willow's and Tree's recognized gain or loss, respectively?

A) 0, 0
B) $50,000, $100,000
C) $50,000, $150,000
D) $75,000, $150,000

Question 57

Molly and Dolly form MD Corporation. Molly transfers a building with a fair market value of $800,000 and a basis of $400,000 that is encumbered by a $100,000 mortgage that the corporation assumes in exchange for 50 percent of MD's stock (fair market value = $700,000). Dolly contributes equipment valued at $900,000 with a basis of $500,000 that is encumbered by a $200,000 liability that the corporation assumes in exchange for the other 50 percent of MD's stock. What are Molly and Dolly's realized and recognized gains and their bases in the stock received. What is the corporation's basis in the contributed assets?

Question 58

Elizabeth exchanges an office building valued at $400,000 with a $75,000 mortgage and adjusted basis of $180,000 for land valued at $275,000. What is Elizabeth's basis in the land received in the exchange?

A) $400,000
B) $275,000
C) $180,000
D) $75,000

Question 59

Twining Corporation has some land it wants to trade for a building owned by Clopp Corporation. Clopp does not want to exchange the building because it wants to recognize its loss on the building. Twining, however, does not want to recognize its gain. What alternative(s) does Twining have that will allow it to avoid recognizing gain?

A) Twining can sell its land to a third party and take the money and purchase the building.
B) Twining can have a third party purchase the building and have the third party trade for the land.
C) Twining can complete a nonsimulataneous exchange within one year of identifying the desired property.
D) All of the above are acceptable alternatives.

Question 60

Trudo Corporation has a building that it needs to sell or exchange because of growth in its business. If Trudo sells the building, it will have a gain of $450,000. What is the amount of taxes that Trudi will avoid paying if it can exchange the building? The corporation has $1,000,000 of taxable income from operations for the current year.

A) $94,500
B) $153,000
C) $175,500
D) $450,000

Question 61

Juan owned a small rental property, which was condemned by the county to expand a local park. His adjusted basis in the property was $40,000 and he received a payment of $75,000 from the county. A year later he purchased a similar piece of real estate for $70,000.What is Juan's recognized gain on the involuntary conversion of his rental property?

A) $5,000
B) $10,000
C) $30,000
D) $35,000

Question 62

Marvin sold his sister, Sue, some stock for $20,000 purchased two years ago for $25,000. Nine months later, Sue sold the stock for $27,000. How much gain does Sue recognize on the sale?

A) $7,000
B) $3,000
C) $2,000
D) 0

Question 63

Sid's home was destroyed by fire. He had purchased the home 18 months ago for $950,000. He received $1,300,000 from his insurance company to replace the home. If he fails to rebuild the home or acquire a replacement home in the required time, how much gain must he recognize on this conversion?

A) $350,000
B) $162,500
C) $100,000
D) $0

Question 64

Which of the following is not a required characteristic of a qualifying Section 351 transaction?

A) If more than 20 percent of the stock is transferred for services, property must also be transferred by the service provider.
B) Gain may be recognized if the transferor receives something other than stock.
C) The transferors must control the corporation after the transfer.
D) Control requires shareholders owning only 80 percent of the voting stock if nonvoting stock is outstanding.

Question 65

Wally's investment real estate was condemned on November 14, 2018. On February 14, 2019, he received $250,000 for the property that had a basis of $210,000. What is the last date that Wally can acquire replacement property to avoid gain recognition?

A) November 14, 2021
B) February 14, 2022
C) December 31, 2021
D) December 31, 2022

Question 66

In early 2018, Conrad Corporation discovered their bookkeeper had embezzled $30,000 over the last three years at a rate of approximately $10,000 per year. Conrad also suffered uninsured hurricane damage of $40,000 late in 2018 in a presidentially declared disaster area. If Conrad wants to deduct its losses at the earliest time possible, what are the amounts (before any limitations) and year(s) of its loss deduction?

A) 2018 = $70,000
B) 2017 = $30,000, 2018 = $40,000
C) 2017 = $40,000, 2018 = $30,000
D) 2016 = $10,000, 2017 = $10,000; 2016 = $50,000

Question 67

All of the following are deferral provisions except:

A) Sale of a personal residence
B) Like-kind exchange
C) Exchange of a life insurance contract for an annuity contract
D) Property transfers pursuant to divorce proceedings

Question 68

The taxpayer-use test for qualifying replacement property

A) applies only to personalty
B) requires replacement property used by the taxpayer to be used in the same business as the converted property
C) only requires leased realty to be replaced with other leased realty
D) Is more restrictive than the functional-use test

Question 69

Which of the following is not a characteristic of involuntary conversions?

A) Gain only is deferred
B) The taxpayer can receive cash to invest in qualifying replacement property
C) The provision applies to both realty and personalty
D) All of these are characteristics

Question 70

Simon purchased 1,000 shares of ABC stock for $8,000 on April 4. On March 1 he had sold 1,500 shares of ABC stock for $9,000 that he had purchased three months earlier for $15,000. What is Simon's realized and recognized loss, respectively, on the March 1 stock sale?

A) $6,000, $6000
B) $6,000, 0
C) $6,000, $4,000
D) $4,000, $6,000

Question 71

As part of a divorce decree, Janet must give her ex-spouse Herman her half-interest in stock with a total value of $120,000 (total basis = $70,000) in exchange for his half-interest in their home with a total value of $150,000 and a basis of $130,000. What are Janet and Herman's realized and recognized gains or losses on this exchange? Janet: Realized Recognized Herman: Realized Recognized

A) $30,000 $30,000 ($20,000) ($20,000)
B) $30,000 0 $20,000 0
C) $40,000 0 ($5,000) 0
D) $40,000 $10,000 ($5,000) ($5,000)

Question 72

Lucas transfers investment land to a corporation as part of a Section 351 transaction. The land has a fair market value of $75,000, an adjusted basis of $30,000, and is encumbered by a mortgage (from its original purchase five years ago by Lucas) of $40,000 that the corporation assumes. In exchange for the land, the corporation issues stock to Lucas worth $35,000. How much gain does Lucas recognize, what is Lucas's stock basis, and what is the basis of the land to the corporation, respectively?

A) $0 gain; $30,000 stock basis; $30,000 land basis
B) $10,000 gain; $0 stock basis; $40,000 land basis
C) $10,000 gain; $10,000 stock basis; $30,000 land basis
D) $0 gain; $0 stock basis; $30,000 land basis

Question 73

Juan owned a small rental property, which was condemned by the county to expand a local park. His adjusted basis in the property was $40,000 and he received a payment of $75,000 from the county. A year later he purchased a similar piece of real estate for $70,000. What is Juan's basis in the replacement property?

A) $40,000
B) $45,000
C) $50,000
D) $70,000

Question 74

Kaitlin purchased 100 shares of Norton Corporation stock for $11,500 on January 1, 2015. March 1, 2018, she purchased 30 additional shares of Norton Corporation for $3,000. On March 20, 2018, she sold 25 shares of the 100 shares she had purchased in 2015, for $2,500. What is Kaitlin's recognized gain or loss on the sale of the stock?

A) $500 recognized loss
B) $375 recognized loss
C) $375 recognized gain
D) $0 recognized gain or loss

Question 75

In 2017, Larry's car, which he purchased six years ago for $6,000, was demolished in a traffic accident. As a result of the delay caused by this accident, Larry missed a business meeting and lost out on an important sale on which he could have earned a $1,200 commission. When he arrived home, he found his house had been broken into and his personal video equipment currently worth $3,200 (original cost = $5,000) had been stolen, along with his baseball card collection valued at $2,000 (basis = $1,500). Larry's homeowner's policy covered only $3,000 of this theft loss. He had dropped the collision coverage on his auto insurance policy because that portion was too expensive, so he had no insurance coverage for his auto accident. His adjusted gross income is $82,000 and the fair market value of the car at the time of the accident was $8,000. How much can Larry deduct as an itemized deduction for his casualty and theft losses? If this occurred in 2018 (instead of 2017), what amount is deductible?

A) zero in 2017 and 2018
B) $2,100; $3,700
C) $2,700; $2,100
D) $3,700; $2,700

Question 76

A transfers machines valued at $170,000 (basis = $150,000) along with $30,000 cash to AB Corporation and B transfers real property valued at $320,000 (basis = $310,000) to the corporation. A receives 40 percent of the outstanding stock and B receives 60 percent. B also receives $20,000 from the corporation. What are A's and B's recognized gains, respectively, on these transfers?

A) $20,000, 0
B) 0, $20,000
C) 0, $10,000
D) 0, 0

Question 77

On January 31, year 6, Roy sold investment property he purchased five years ago for $10,000 to Hal for $18,000 Hal made a $8,000 down payment on the date of sale, a $6,000 payment on January 31 of year 2 and the balance on January 31, year 3. In addition, the Hal paid 6 percent interest on the unpaid balance. How much income should Roy recognize in years 1, 2, and 3 assuming he used the installment method?

A) $8,000 in year 1
B) $7,778 in year 2
C) $4,444 in year 1
D) $4,000 in year 2

Question 78

Sam's land was condemned for a sewage treatment plant. He received $600,000 for the land that had a basis of $650,000. What is his realized and recognized gain or loss, respectively, on this involuntary conversion?

A) ($50,000), ($50,000)
B) ($50,000), 0
C) $50,000, $50,000
D) 0, 0

Question 79

A transfers machines valued at $170,000 (basis = $150,000) along with $30,000 cash to AB Corporation and B transfers real property valued at $320,000 (basis = $310,000) to the corporation. A receives 40 percent of the outstanding stock and B receives 60 percent. B also receives $20,000 from the corporation. What is A's basis for his AB stock?

A) $180,000 b $170,000
C) $160,000
D) $150,000

Question 80

Conrad corporation's warehouse was destroyed by a hurricane in September 2018. The estimated fair market value before the hurricane was $750,000 and Conrad's adjusted basis in the warehouse was $450,000. Insurance paid $725,000 as a result of this event. Conrad purchased a new Warehouse in December of 2018 for $700,000. What is Conrad's deductible loss or recognized gain?

A) zero deductible loss or recognized gain
B) $25,000 recognized gain
C) $450,000 deductible loss
D) $750,000 deductible loss