Question 1

Gene purchased for $45,000 an SUV that he uses 100% for personal purposes.When the SUV is worth $30,000, he contributes it to his business.The gain basis is $45,000, the loss basis is $30,000, and the basis for cost recovery is
$45,000.

Accepted Answer

When Gene contributes the SUV to his business, the basis for cost recovery is the lower of the asset's fair market value at the time of contribution ($30,000) or its original cost ($45,000). Therefore, the basis for cost recovery is $30,000, not $45,000.

Question 2

The amount of the loss basis of a gift will differ from the amount of the gain basis only if at the date of the gift the adjusted basis of the property exceeds the property's fair market value.

Accepted Answer

If the adjusted basis of the property is higher than its fair market value at the time of the gift, the loss basis will be the fair market value, while the gain basis will be the adjusted basis.

Question 3

The basis for depreciation on depreciable gift property received is the donor's adjusted basis of the property at the date of the gift (assuming no gift taxes are paid).The rule applies regardless of whether the fair market value at the date of the gift is greater than or less than the donor's adjusted basis.

Accepted Answer

This statement is true. The basis for depreciation on depreciable gift property is determined by the donor's adjusted basis at the date of the gift, regardless of the fair market value. This is outlined in IRS Publication 551.

Question 4

The basis of inherited property usually is its fair market value on the date of the decedent's death.

Accepted Answer

This is generally known as the "step-up in basis" rule, which means that the basis of inherited property is equal to its fair market value at the time of the decedent's death, rather than the original basis of the property.

Question 5

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 6

Ben sells stock (adjusted basis of $25,000) to his son, Ray, for its fair market value of $15,000.Ray gives the stock
to his daughter, Trish, who subsequently sells it for $26,000.Ben's recognized loss is $0 and Trish's recognized gain is
$1,000 ($26,000 - $15,000 - $10,000).

Accepted Answer

Ben's recognized loss would actually be $10,000 ($25,000 - $15,000) as he sold the stock for less than his adjusted basis. Trish's recognized gain would still be $1,000, but the statement incorrectly states that Ben has no recognized loss.

Question 7

If losses are disallowed in a related-party transaction, the holding period for the buyer includes the holding period of the seller.

Accepted Answer

In a related-party transaction where losses are disallowed, the holding period for the buyer does not include the holding period of the seller. The holding period starts anew with the buyer.

Question 8

The holding period for nontaxable stock dividends that are the same type (i.e., common on common) includes the holding period of the original shares, but the holding period for nontaxable stock dividends that are not the same type (i.e., preferred on common) is new and begins on the date the dividend is received.

Accepted Answer

The answer of The holding period for nontaxable stock dividends...

Question 9

Realized losses from the sale or exchange of stock are disallowed if within 30 days before or 30 days after the sale or exchange, the taxpayer acquires substantially identical stock.

Accepted Answer

This is known as the "wash sale" rule and is designed to prevent taxpayers from claiming an artificial loss by selling stock at a loss and then immediately buying back similar stock.

Question 10

Parker bought a brand new Ferrari on January 1, 2019, for $125,000.Parker was fatally injured in an auto accident on June 23, 2019, when the fair market value of the car was $105,000.Parker was driving a loaner car from the Ferrari dealership while his car was being serviced.In his will, Parker left the Ferrari to his best friend, Ryan.Ryan's holding period for the Ferrari begins on January 1, 2019.

Accepted Answer

Ryan's holding period for the Ferrari begins on the date of Parker's death, June 23, 2019, not when Parker originally purchased the car.

Question 11

Transactions between related parties that result in disallowed losses might later provide a tax benefit to the related party buyer.

Accepted Answer

When transactions between related parties result in disallowed losses, those losses cannot be deducted by the seller. However, in some cases, the buyer may be able to use those losses to offset their own taxable income in the future, providing a tax benefit to the related party buyer.

Question 12

The carryover basis to a donee for property received by gift can be an amount greater than the donor's adjusted basis.

Accepted Answer

When a person gifts property to a donee, the donee's basis in the gifted property is usually the same as the donor's adjusted basis. However, under certain circumstances, the donee's basis can be higher than the donor's adjusted basis. This is referred to as a "carryover basis" and can occur when the fair market value of the gifted property at the time of the gift is greater than the donor's adjusted basis. In such a case, the donee's basis is equal to the fair market value of the property at the time of the gift.

Question 13

The basis of property acquired in a wash sale is its cost plus the loss not recognized on the wash sale.

Accepted Answer

The basis of property acquired in a wash sale is its cost plus the loss not recognized on the wash sale. This is because the loss on the original sale is not recognized for tax purposes, so it is added to the cost basis of the replacement property.

Question 14

Purchased goodwill is assigned a basis equal to cost, which is calculated using the residual method associated with the purchase of a business.

Accepted Answer

This statement is true. Purchased goodwill is assigned a basis equal to cost, which is calculated using the residual method associated with the purchase of a business.

Question 15

For nontaxable stock rights where the fair market value of the rights is 15% or more of the fair market value of the stock, the taxpayer is required to allocate a portion of the stock basis to the stock rights.

Accepted Answer

According to IRS guidelines, if the fair market value of the nontaxable stock rights is 15% or more of the fair market value of the stock, the taxpayer is required to allocate a portion of the stock basis to the stock rights. This allocation is made to determine the basis of the stock rights and any gain or loss realized upon their disposition.

Question 16

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

Accepted Answer

The IRS generally requires the use of the FIFO (First In, First Out) method unless the taxpayer can specifically identify which lot of stock is being sold.

Question 17

If the fair market value of the property on the date of death is greater than on the alternate valuation date, the use of the alternate valuation amount is mandatory.

Accepted Answer

The use of the alternate valuation date is optional and can only be used if it results in a lower estate tax liability.

Question 18

Lump-sum purchases of land and a building are allocated on the basis of the relative fair market values of the individual assets acquired.

Accepted Answer

This statement is true. When making a lump-sum purchase of land and a building, the allocation of the cost between the two assets is based on their relative fair market values. This is known as the cost allocation method.

Question 19

The holding period for property acquired by gift is automatically long term.

Accepted Answer

The holding period for property acquired by gift includes the time the property was held by the donor, not automatically making it long-term. It depends on the combined holding period of the donor and the recipient.

Question 20

If a husband inherits his deceased wife's share of jointly owned property in a common law state, both the husband's original share and the share inherited from the deceased wife are stepped-up or down to the fair market value at the date of the wife's death.

Accepted Answer

In a common law state, only the deceased's share of the property receives a step-up (or down) in basis to the fair market value at the date of death. The surviving spouse's original share retains its original basis.

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

Gene purchased for $45,000 an SUV that he uses 100% for personal purposes.When the SUV is worth $30,000, he contributes it to his business.The gain basis is $45,000, the loss basis is $30,000, and the basis for cost recovery is $45,000.