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

This is true. If a taxpayer elects to amortize the premium on a taxable bond, then the adjusted basis of the bond is reduced by the amount of the amortized premium. The amount of the amortized premium is treated as an interest deduction, which can lower the taxpayer's taxable income.

Question 2

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 3

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 4

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 5

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 statement is true according to IRS regulations. A realized gain on the sale or exchange of a personal use asset is taxable, but a realized loss on the sale, exchange, or condemnation of a personal use asset is not deductible.

Question 6

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 7

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 statement is true. The excess amount of the distribution is treated as a capital gain, and the shareholder must report it as such on their tax return.

Question 8

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 9

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 10

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 11

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 guidance. When the fair market value of the property received is unknown, the fair market value of the property surrendered may be used to determine the amount realized for tax purposes. However, it is important to note that this may not always be an accurate reflection of the actual value of the property received.

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

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 14

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, the amount of recognized loss can be limited to the adjusted basis of the property. Therefore, it is possible for a recognized loss to result from a casualty transaction in this situation.

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

This statement is true. If the amount of the distribution is less than the earnings and profits, it is considered a non-taxable return of capital and does not affect the shareholder's adjusted basis in the stock.

Question 16

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 according to the IRS.

Question 17

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

This is true. When a casualty or theft occurs and the property owner receives insurance proceeds, the basis of the property is reduced by the amount received. Any resulting recognized loss is also subtracted from the basis.

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

This statement is true. Ordinary repairs and maintenance expenses are deductible in the year they are incurred and do not increase the property's basis, whereas capital expenditures are added to the original basis and increase the property's adjusted basis.

Question 19

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 adjusted basis for the building is the original cost ($200,000) minus the accumulated depreciation ($4,922), which equals $195,078.

Question 20

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 other disposition.

Quiz 7: Property Transactions: Basis, Gain and Loss, and Nontaxable Exchanges