Question 1

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

False

Question 2

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

Accepted Answer

False

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

According to the Internal Revenue Service (IRS) regulations, when the fair market value of property received cannot be determined, the fair market value of the property surrendered may be used to compute the amount realized. This is outlined in IRS Publication 544, Sales and Other Dispositions of Assets, under the section "Amount Realized".

Question 4

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 the fair market value as per the Internal Revenue Service (IRS) and is used for tax purposes.

Question 5

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 distribution is less than the earnings and profits, it is considered a non-taxable return of capital, and the shareholder's adjusted basis for the stock remains the same.

Question 6

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 7

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 recognized gain or loss, depending on whether the amount of insurance proceeds received exceeds the adjusted basis of the damaged or destroyed property.

Question 8

Wade is a salesman for a real estate development company.Because he is the "salesperson of the year," he is permitted to purchase a lot from the developer for $90,000.The fair market value of the lot is $150,000 and the developer's adjusted basis is $100,000.Wade must recognize a gain of $10,000 ($100,000 developer's adjusted basis - $90,000 cost to Wade),and his adjusted basis for the lot is $100,000 ($90,000 cost + $10,000 recognized gain).

Accepted Answer

Wade must recognize a gain of $60,000, which is the difference between the fair market value ($150,000) and his purchase price ($90,000). His adjusted basis for the lot would be the cost to him, $90,000, not adjusted by the gain recognized.

Question 9

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

If an amortization election is made for a taxable bond purchased at a premium, the adjusted basis is reduced, and the amount of the amortized premium is treated as an interest deduction. This reduces the amount of taxable income and can result in tax savings for the investor.

Question 10

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 the general rule under US tax laws. However, there are certain exceptions and limitations to this rule, such as if the personal use asset was previously used for business purposes or if it was converted from a rental property.

Question 11

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

This statement is true because the adjusted basis of the building is the original cost of $200,000 minus the cost recovery deduction of $4,922, which results in an adjusted basis of $195,078 at the end of the first year.

Question 12

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 for ordinary repairs and maintenance are considered a deductible expense and are not added to the original basis of the property. Capital expenditures, on the other hand, are considered an investment in the property and are added to the original basis.

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

When a taxpayer has purchased several lots of stock on different dates at different purchase prices and cannot identify the lot of stock that is being sold,he should use either a weighted average approach or a LIFO approach.

Accepted Answer

The answer of When a taxpayer has purchased several lots...

Question 15

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 16

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 an insured property is damaged or stolen, the insurance company will pay out a certain amount of insurance proceeds. The basis of the property involved in the casualty or theft is reduced by this amount. Additionally, if the insurance proceeds received are less than the adjusted basis of the property, the recognized loss can be claimed as a deduction on the taxpayer's tax return.

Question 17

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 according to the tax code. When a corporate distribution (such as a dividend) is received by a shareholder, any portion of the distribution that exceeds the shareholder's basis in their investment is considered a capital gain.

Question 18

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.

Question 19

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

The recognized gain would actually be $500 ($10,800 amount realized - $10,300 adjusted basis), as the $300 premium that was amortized would have reduced the adjusted basis of the bond.

Question 20

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

The answer of Monroe's delivery truck is damaged in an...

Quiz 7: Property Transactions: Basis, gain and Loss, and Nontaxable Exchange