Question 1

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

When the amortization election is made for a taxable bond purchased at a premium, the adjusted basis is reduced by the amortized premium, which is treated as an interest deduction.

Question 2

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 known as the "excess distribution rule" and is true for U.S. federal tax laws. Any corporate distribution (such as dividends or stock buybacks) that exceeds the shareholder's basis in the stock is treated as a capital gain for tax purposes. This rule is in place to prevent shareholders from receiving tax-free distributions that exceed their initial investment in the company.

Question 3

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

Milton's adjusted basis for the building at the end of the first year is calculated as follows: 
$300,000 - $100,000 (land allocation) - $4,922 (cost recovery) = $195,078.

Question 4

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 statement is true. Realized gain or loss is calculated by subtracting the adjusted basis of the property from the amount received from its sale or disposition.

Question 5

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 6

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

This is true as the return of capital concept only applies when the corporate distribution exceeds the corporate earnings and profits. When the distribution is less than the earnings and profits, the remaining amount is considered a dividend and the shareholders' adjusted basis for the stock remains unchanged.

Question 7

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 8

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

This is true according to IRS regulations for calculating the amount realized in certain transactions, such as non-monetary exchanges or involuntary conversions.

Question 9

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 statement is correct and reflects the definition of fair market value as stated in the Internal Revenue Code.

Question 10

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 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

When a realized gain is postponed, it means that the taxpayer has not yet recognized the gain for tax purposes. As a result, the taxpayer's basis in the asset remains the same and the tax on the gain is not yet due. This can temporarily result in the taxpayer having more value in the asset than their original cost or basis.

Question 12

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 13

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 the amount of the insurance proceeds received and the adjusted basis of the property.

Question 14

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 15

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 16

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...

Question 17

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 part of the cost of maintaining the property's value, but do not increase the property's value or appreciable life. As such, they are not added to the original basis in the determination of adjusted basis. Capital expenditures, on the other hand, increase the property's value or extend its useful life and are added to the original basis for the determination of adjusted basis.

Question 18

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 rules.

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

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 20

In a deductible 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

In a deductible casualty or theft, the basis of property involved is reduced by the amount of insurance proceeds received and by any resulting recognized loss. This is because the insurance proceeds offset the loss suffered by the taxpayer, resulting in a lower basis for the damaged or stolen property.

Quiz 14: Property Transactions: Determination of Gain or Loss and Basis Considerations