Question 1

Monroe's delivery truck is damaged in an accident. Monroe's adjusted basis for the delivery truck prior to the accident is $20,000. If Monroe receives insurance proceeds of $21,000 and recognizes a casualty gain of $1,000, his adjusted basis for the delivery truck after the accident is $21,000.

Accepted Answer

False

Question 2

The fair market value of property received in a sale or other disposition is the price at which property will change hands between a willing seller and a willing buyer when neither is compelled to sell or buy.

Accepted Answer

This is the definition of fair market value, as defined by the IRS.

Question 3

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

Accepted Answer

When the fair market value of the property received cannot be determined, the fair market value of the property surrendered may be used to compute the amount realized. This is stated in the Internal Revenue Code Section 1001 and Treasury Regulation Section 1.1001-2.

Question 4

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

Accepted Answer

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

Question 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

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

Question 7

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

Accepted Answer

This statement is true. When there is a casualty or theft and the property is insured, the basis of the property is reduced by the amount of insurance proceeds received and any recognized loss. This is because the insurance proceeds compensate for the loss, reducing the owner's basis in the property.

Question 8

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

Accepted Answer

If insurance proceeds are received for property used in a trade or business, a casualty transaction can result in both recognized gain or loss. The amount of recognized gain or loss is determined by comparing the insurance proceeds with the adjusted tax basis of the damaged or destroyed property.

Question 9

If a seller assumes the buyer's liability on the property acquired, the buyer's adjusted basis for the property is increased by the amount of the liability assumed.

Accepted Answer

The answer of If a seller assumes the buyer's liability...

Question 10

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

Accepted Answer

The calculation is correct. Milton's adjusted basis for the building is equal to the original cost ($200,000) minus the cost recovery deduction ($4,922), which equals $195,078.

Question 11

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

Accepted Answer

If a realized gain is recognized later than the time of sale, it may result in the temporary recovery of more than the taxpayer's cost or basis. This is because the gain may have appreciated in value during the postponement period.

Question 12

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

Accepted Answer

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

Question 13

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

Accepted Answer

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

Question 14

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

Accepted Answer

This is true. If the distribution exceeds the shareholder's basis in their stock investment, it is treated as a capital gain.

Question 15

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

Accepted Answer

If the amount of distribution is less than the corporate earnings and profits, it is considered a partial liquidation and the shareholder's adjusted basis for the stock remains unchanged. Return of capital concept only applies when the distribution exceeds the shareholder's basis in the stock.

Question 16

Realized gain or loss is measured by the difference between the amount realized from the sale or other disposition of property and the property's adjusted basis at the date of disposition.

Accepted Answer

This is the correct definition of realized gain or loss.

Question 17

A realized gain on the sale or exchange of a personal use asset is recognized, but a realized loss on the sale, exchange, or condemnation of a personal use asset is not recognized.

Accepted Answer

This is true according to IRS regulations. Personal use assets, such as a primary residence or a personal car, are not subject to capital gains tax if they are sold at a profit. However, if they are sold at a loss, that loss cannot be recognized for tax purposes.

Question 18

Expenditures made for ordinary repairs and maintenance of property are not added to the original basis in the determination of the property's adjusted basis whereas capital expenditures are added to the original basis.

Accepted Answer

Expenditures made for ordinary repairs and maintenance of property are considered "currently deductible expenses" and are not added to the original basis of the property. They are expensed in the year they are incurred. Capital expenditures, on the other hand, are added to the original basis and increase the property's adjusted basis.

Question 19

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

Accepted Answer

This is true according to the tax code. When making an amortization election on a taxable bond purchased at a premium, the adjusted basis is reduced and the amortized premium is treated as an interest deduction.

Question 20

If the buyer assumes the seller's liability on the property acquired, the seller's amount realized is decreased by the amount of the liability assumed.

Accepted Answer

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

Quiz 13: Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges