Question 1

Donald sells stock with an adjusted basis of $38,000 to his son, Kiefer, for its fair market value of $30,000. Kiefer sells the stock three years later for $32,000. Kiefer will recognize a gain on the subsequent sale of

Accepted Answer

The answer of Donald sells stock with an adjusted basis...

Question 2

Victor, a calendar year taxpayer, owns 100 shares of AB Corporation stock, which was purchased three years ago for $5,000. Victor sells all 100 shares on December 27, of the current year, for $4,000 and on January 5, of the following year, purchases 60 shares of AB Corporation stock. Victor's recognized loss will be

Accepted Answer

The answer of Victor, a calendar year taxpayer, owns 100...

Question 3

Expenses related to a hobby are deductible only to the extent of the gross income from the hobby.

Accepted Answer

According to IRS rules, hobby expenses are deductible only up to the amount of hobby income earned. Any excess expenses cannot be claimed as a deduction.

Question 4

Which of the following factors is not used to determine whether an activity is a hobby or a business?

Accepted Answer

D)Success in dissimilar activities would not be relevant.

Question 5

If property that qualifies as a taxpayer's residence is rented for less than 15 days per year, the taxpayer includes no rental income in gross income and similarly may claim no expenses related to the property other than interest and taxes.

Accepted Answer

If a taxpayer rents their residence for less than 15 days per year, they are not required to report rental income or claim expenses related to the property other than interest and taxes. This is provided for in the IRS rules under the "Masters" rule.

Question 6

Chana purchased 400 shares of Tronco Corporation stock for $40,000 in 2014. On December 27, 2016, Chana sells the 400 shares for $24,000. Chana purchases 300 shares of Tronco Corporation stock on January 16, 2017 for $8,000. Chana's recognized loss on sale of the 400 shares in 2016 and her basis in her 300 new shares are

Accepted Answer

The answer of Chana purchased 400 shares of Tronco Corporation...

Question 7

Efrain owns 1,000 shares of RJ Inc. common stock which he purchased three years ago for $36,000. Efrain sells the 1,000 shares on October 15, 2016 for $10,000. On November 12, he purchases 400 shares of RJ Inc. preferred stock for $8,000. Efrain's recognized loss on the sale of the 1,000 shares will be

Accepted Answer

The answer of Efrain owns 1,000 shares of RJ Inc....

Question 8

For the years 2012 through 2016 (inclusive) Mary, a best-selling author, has been involved in operating an antique store. In 2012, 2013 and 2014 her revenue exceeded the expenses from the activity. In 2015 and 2016, the antique store generated a loss. Which statement is correct?

Accepted Answer

The fact that Mary generated revenue exceeding expenses for three years (2012-2014) indicates that the activity is presumed to be a business. However, the fact that she generated losses for the following two years (2015-2016) opens the possibility that the IRS may challenge this presumption and argue that it is a hobby. Therefore, while the activity is presumed to be a business, the IRS may still try to prove otherwise.

Question 9

Rob sells stock with a cost of $3,000 to his daughter for $2,200, which is its fair market value. Later the daughter sells the stock for $3,200 to an unrelated party. Which of the following describes the tax treatment to Rob and Daughter?

Accepted Answer

The answer of Rob sells stock with a cost of...

Question 10

Sheila sells stock, which has a basis of $12,000, to her daughter for $7,000, the stock's fair market value. Subsequently, the daughter sells the stock to an unrelated party for $5,000. Which of the following is true for the Sheila and the Daughter?

Accepted Answer

Sheila cannot recognize a loss on the sale to her daughter due to the related party rules. The daughter can recognize a loss of $2,000, which is the difference between her selling price ($5,000) and her purchase price ($7,000).

Question 11

Erin, Sarah, and Timmy are equal partners in EST Partnership. Sarah also owns 40% of Elton Corporation. The remaining shareholders of Elton Corporation are: Erin (24%) and Sarah's uncle (36%). What percent ownership does Sarah directly or constructively own in Elton Corporation?

Accepted Answer

Sarah directly owns 40% of Elton Corporation.
Sarah also indirectly owns 24% of Elton Corporation through her 1/3 ownership in EST Partnership (which owns 100% of Erin's 24% ownership).
Therefore, Sarah's total ownership in Elton Corporation is 40% + 24% = 64%.

Question 12

The term "principal place of business" includes a home office used by a taxpayer for administrative or management activities of the business if no fixed location exists where the taxpayer conducts these activities.

Accepted Answer

The definition of "principal place of business" according to the IRS includes a home office used for administrative or management activities if no other fixed location exists for these activities.

Question 13

Jason sells stock with an adjusted basis of $66,000 to JJ Inc., his 60% owned corporation, for its fair market value of $60,000. JJ Inc. sells the stock three years later for $67,000. JJ Inc.'s recognized gain or loss on the sale will be

Accepted Answer

The answer of Jason sells stock with an adjusted basis...

Question 14

Dana purchased an asset from her brother for $15,000. Her brother's basis was $20,000. If Dana sells the asset to an unrelated party for $12,000, she will recognize

Accepted Answer

When Dana purchased the asset from her brother for $15,000, her basis in the asset became $15,000 (the amount she paid for it). Because her brother's basis was $20,000, she cannot use his basis to calculate any gain or loss on the sale. Since she sells the asset for $12,000, this results in a ($3,000) loss.

Question 15

The vacation home limitations of Section 280A may also apply to boats and mobile homes.

Accepted Answer

Section 280A applies to any dwelling unit that is rented out for personal use for more than 14 days in a year. This includes vacation homes, but it can also include boats or mobile homes that are used as vacation homes. Therefore, the limitations of Section 280A may also apply to these types of properties.

Question 16

Expenses attributable to the rental use of a taxpayer's personal residence are limited to the gross income generated by the property.

Accepted Answer

This is known as the "gross income limitation" and is stated in IRS Publication 527. It means that if the expenses exceed the gross rental income, the excess expenses cannot be deducted in the current year but may be carried forward to future years.

Question 17

For the years 2012 through 2016 (inclusive) Max, a surgeon, has been involved in bowling competitions. Only in 2015 and 2016 did his revenue exceed the expenses from the activity. Which statement is correct?

Accepted Answer

The answer of For the years 2012 through 2016 (inclusive)...

Question 18

Kelsey enjoys making cupcakes as a hobby and occasionally sells them for parties. Kelsey receives $1,000 in revenues from cupcake sales this year and pays $1,300 for supplies. Kelsey takes the standard deduction each year. The net effect of the cupcake activity on Kelsey's taxable income is

Accepted Answer

B)Hobby expenses,limited to hobby revenue,are itemized deductions.Kelsey takes the standard deduction so her taxable income will include the full $1,000 revenue,but the hobby expenses will not be deducted at all.

Question 19

Which of the following individuals is not considered a relative for purposes of the related parties loss disallowance rules under Sec. 267?

Accepted Answer

The answer of Which of the following individuals is not...

Question 20

Bart owns 100% of the stock of Octo Corporation, which uses the accrual method. Bart's sister Samantha, a cash method taxpayer, did some advertising work for Octo in November 2016. In December, Octo received a billing statement from Samantha for $5,000 and paid Samantha the $5,000 in January 2017. Samantha is a calendar year taxpayer. When may Octo deduct the $5,000?

Accepted Answer

Octo Corporation can only deduct the expense of $5,000 in the year in which it was paid, which is 2017. The fact that Bart owns 100% of Octo Corporation and Samantha is his sister has no effect on the deductibility of the advertising expense.

Quiz 21: Deductions and Losses