Question 1

Nat is a salesman for a real estate developer. His employer permits him to purchase a lot for $75,000. The employer's adjusted basis for the lot is $45,000, and its normal selling price is $90,000. What is Nat's recognized gain and his basis for the lot? $\begin{array}{lr}\text { Recognized Gain }&\text { Basis }\
\text { a. } \$ 0 & \$ 75,000 \
\text { b. } \$ 0 & \$ 90,000 \
\text { c. } \$ 15,000 & \$ 75,000 \
\text { d. } \$ 15,000 & \$ 90,000 \
\text { e. } \$ 30,000 & \$ 105,000
\end{array}$

Accepted Answer

The answer of Nat is a salesman for a real...

Question 2

Ralph gives his daughter, Angela, stock (basis of $8,000; fair market value of $6,000). No gift tax results. If Angela subsequently sells the stock for $10,000, what is her recognized gain or loss?
A) $0
B) $2,000
C) $4,000
D) $10,000

Accepted Answer

Angela's basis in the stock is the same as her father's basis, which is $8,000. Since she sold the stock for $10,000, her recognized gain is $2,000 ($10,000 selling price - $8,000 basis).

Question 3

Jason owns Blue Corporation bonds (face value of $10,000), purchased on January 1, 2019, for $11,000. The bonds have an annual interest rate of 3% and a maturity date of December 31, 2028. If Jason elects to amortize the bond premium, what are his taxable interest income for 2019 and the adjusted basis for the bonds at the end of 2019 (assuming straight-line amortization is appropriate)?
A) $300 and $11,000
B) $300 and $10,900
C) $200 and $11,000
D) $200 and $10,900

Accepted Answer

The taxable interest income for 2019 is $200, calculated by subtracting the annual amortization of the bond premium ($100) from the actual interest received ($300). The adjusted basis for the bonds at the end of 2019 is $10,900, reflecting the original purchase price minus one year's amortization of the premium.

Question 4

Mary sells her personal use automobile for $20,000. She purchased the car two years ago for $17,000. What is Mary's recognized gain or loss? It increased in value due to its excellent mileage plus a safe design.
A) $0
B) $3,000
C) $17,000
D) $20,000

Accepted Answer

To calculate recognized gain or loss, we need to subtract the selling price (also known as the amount realized) from the basis (purchase price).

Recognized Gain/Loss = Amount Realized - Basis

Amount realized = $20,000
Basis = $17,000

Recognized Gain/Loss = $20,000 - $17,000 = $3,000

Therefore, Mary's recognized gain is $3,000. Option B is correct.

Question 5

Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share. Two years later, he receives a 5% common stock dividend. At that time, the common stock of Purple Corporation had a fair market value of $12.50 per share. What is the basis of the Purple stock, the per share basis, and gain recognized upon receipt of the common stock dividend?
A) $50,000 basis in stock, $10 basis per share for the original stock and $0 basis per share for the dividend shares, $0 recognized gain.
B) $50,000 basis in stock, $9.52 basis per share, $0 recognized gain.
C) $53,125 basis in stock, $10 basis per share for the original stock and $12.50 basis per share for the dividend shares, $3,125 recognized gain.
D) $53,125 basis in stock, $10.12 basis per share, $3,125 recognized gain.

Accepted Answer

The correct answer is B because when Kevin receives a 5% stock dividend, the total basis of his investment remains the same ($50,000), but it is now spread over more shares (5,250 shares), resulting in a lower per share basis ($50,000 / 5,250 = $9.52). There is no recognized gain upon receipt of a stock dividend as it is essentially a reallocation of the basis among a greater number of shares.

Question 6

Nontaxable stock dividends result in:
A) A higher cost per share for all shares than before the stock dividend.
B) A lower cost per share for all shares than before the stock dividend.
C) An increase in the total cost of the old and new stock combined.
D) A decrease in the total cost of the old and new stock combined.

Accepted Answer

Nontaxable stock dividends result in a lower cost per share for all shares than before the stock dividend. This is because the total value of the company is divided among a larger number of shares, leading to a decrease in the price per share. However, the total value of the investor's holdings remains the same.

Question 7

Noelle received dining room furniture as a gift from her friend, Jane. Jane's adjusted basis was $9,200 and the fair market value on the date of the gift was $7,000. Noelle decided she did not need the furniture and sold it to a neighbor six months later for $6,500. What is her recognized gain or loss?
A) $0
B) ($500)
C) ($2,700)
D) $6,500

Accepted Answer

Noelle's basis for determining loss is the fair market value on the date of the gift ($7,000), since it's lower than Jane's adjusted basis. Since she sold the furniture for $6,500, less than the basis, she has no recognized gain. However, the correct calculation for loss would be $7,000 (basis) - $6,500 (selling price) = $500 loss, not recognized for tax purposes in this context, hence the answer is $0 recognized gain or loss.

Question 8

Mona purchased a business from Judah for $1,000,000. Judah's records and an appraiser provided her with the following information regarding the assets purchased: $\begin{array}{lrr}&\text { Adjusted Basis } & \text { FMV }\
\text { Land } & \$ 195,000 & \$ 270,000 \
\text { Building } & 310,000 & 450,000 \
\text { Equipment } & 95,000 & 180,000
\end{array}$ What is Mona's adjusted basis for the land, building, and equipment?
A) Land $270,000, building $450,000, equipment $180,000.
B) Land $195,000, building $575,000, equipment $230,000.
C) Land $195,000, building $310,000, equipment $95,000.
D) Land $270,000, building $521,429, equipment $208,571.

Accepted Answer

When assets are purchased, the buyer's basis in the assets is generally the cost to acquire them. In this case, Mona purchased the business for $1,000,000, and the fair market values (FMV) of the assets are provided. Since the purchase price would typically be allocated based on the FMV of the assets acquired, Mona's adjusted basis for the land, building, and equipment would be their respective FMVs: land $270,000, building $450,000, equipment $180,000.

Question 9

Sandra's automobile, which is used exclusively in her trade or business, was damaged in an accident. The adjusted basis prior to the accident was $11,000. The fair market value before the accident was $10,000 and the fair market value after the accident is $6,000. Insurance proceeds of $3,200 are received. What is Sandra's adjusted basis for the automobile after the casualty?
A) $0
B) $7,000
C) $7,800
D) $10,200

Accepted Answer

The adjusted basis after the casualty is calculated by taking the adjusted basis prior to the accident ($11,000) and subtracting the insurance proceeds ($3,200), which gives $7,800. However, to find the adjusted basis after the casualty, we also need to consider the decrease in fair market value due to the accident, which is $4,000 ($10,000 - $6,000). Since the insurance proceeds are less than the decrease in fair market value, the adjusted basis is reduced by the amount of insurance proceeds. Therefore, the adjusted basis after the casualty is $11,000 - $3,200 = $7,800. My explanation contains an error in the final step; the correct calculation for the adjusted basis after the casualty should indeed consider the decrease in fair market value and the insurance proceeds, but the correct approach is to subtract the insurance recovery from the adjusted basis before the accident, leading to the correct answer of $7,800. However, the explanation mistakenly concludes with a different final step. The correct calculation is: Adjusted basis before the accident ($11,000) - Insurance proceeds ($3,200) = $7,800. This error in explanation led to an incorrect indication of the final answer. The correct answer, based on the proper calculation, should reflect the adjusted basis after accounting for the insurance proceeds received.

Question 10

Which of the following statements is false?
A) A realized gain that is never recognized results in the temporary recovery of more than the taxpayer's cost or other basis for tax purposes.
B) A realized gain on which recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis for tax purposes.
C) A realized loss that is never recognized results in the permanent recovery of less than the taxpayer's cost or other basis for tax purposes.
D) A realized loss on which recognition is postponed results in the temporary recovery of less than the taxpayer's cost or other basis for tax purposes.

Accepted Answer

A realized gain that is never recognized cannot result in the temporary recovery of more than the taxpayer's cost or other basis for tax purposes because the gain has not been recognized and therefore, no tax has been paid on it. The rest of the statements are true.

Question 11

Katie sells her personal use automobile for $12,000. She purchased the car three years ago for $25,000. What is Katie's recognized gain or loss?
A) $0
B) $12,000
C) ($13,000)
D) ($25,000)

Accepted Answer

The sale of a personal use asset, such as a personal automobile, does not result in a recognized gain or loss for tax purposes.

Question 12

Over the past 20 years, Alfred has purchased 380 shares of Green, Inc., common stock. His first purchase was in 1996 when he acquired 30 shares for $20 a share. In 2003, Alfred bought 150 shares at $10 a share. In 2018, Alfred acquired 200 shares at $50 a share. He intends to sell 125 shares at $60 per share in the current year (2019). If Alfred's objective is to minimize gain and assuming he can adequately identify the shares to be sold, what is his recognized gain?
A) $1,250
B) $3,520
C) $5,950
D) $6,250

Accepted Answer

The answer of Over the past 20 years, Alfred has...

Question 13

Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1, 2019, for $11,000. The maturity date is December 31, 2028. The annual interest rate is 4%. What is the amount of taxable interest income that Karen should report for 2019, and the adjusted basis for the bonds at the end of 2019, assuming straight-line amortization is appropriate?
A) $0 and $11,000
B) $0 and $10,900
C) $100 and $11,000
D) $100 and $10,900

Accepted Answer

The answer of Karen owns City of Richmond bonds with...

Question 14

Capital recoveries include:
A) The cost of capital improvements.
B) Ordinary repair and maintenance expenditures.
C) Payments made on the principal of a mortgage on taxpayer's building.
D) Amortization of bond premium.
E) All of these.

Accepted Answer

The answer of Capital recoveries include:
A) The cost of capital...

Question 15

Gift property (disregarding any adjustment for gift tax paid by the donor):
A) Has no basis to the donee because he or she did not pay anything for the property.
B) Has the same basis to the donee as the donor's adjusted basis if the donee disposes of the property at a gain.
C) Has the same basis to the donee as the donor's adjusted basis if the donee disposes of the property at a loss, and the fair market value on the date of gift was less than the donor's adjusted basis.
D) Has a zero basis to the donee if the fair market value on the date of gift is less than the donor's adjusted basis.

Accepted Answer

Gift property has the same basis to the donee as the donor's adjusted basis if the donee disposes of the property at a gain. This is known as carryover basis.

Question 16

Joyce's office building was destroyed in a fire (adjusted basis of $350,000; fair market value of $400,000). Of the insurance proceeds of $360,000 she receives, Joyce uses $310,000 to purchase additional inventory and invests the remaining $50,000 in short-term certificates of deposit. She received only $360,000 because of a co-insurance clause in her insurance policy. What is Joyce's recognized gain or loss?
A) $0
B) $10,000 loss
C) $10,000 gain
D) $40,000 gain

Accepted Answer

Joyce's adjusted basis of the office building was $350,000, and she received $360,000 in insurance proceeds. Since she only received 95% of the building's fair market value due to the co-insurance clause in her policy, the insurance proceeds are not enough to cover the adjusted basis of the building. Therefore, Joyce has a $10,000 gain that she must recognize. She used $310,000 of the insurance proceeds to purchase additional inventory and invested $50,000 in short-term certificates of deposit, which does not affect the recognized gain or loss.

Question 17

Nancy gives her niece a crane to use in her business with a fair market value of $61,000 and a basis in Nancy's hands of $80,000. No gift tax was paid. What is the niece's basis for depreciation (cost recovery)?
A) $0
B) $19,000
C) $61,000
D) $80,000

Accepted Answer

The answer of Nancy gives her niece a crane to...

Question 18

In 2015, Harold purchased a classic car that he planned to restore for $12,000. However, Harold is too busy to work on the car and he gives it to his daughter Julia in 2019. At that time, the fair market value of the car had declined to $10,000. Harold paid no gift tax on the transaction. Julia completes some of the restoration herself with out-of-pocket costs of $5,000. She later sells the car for $30,000. What is Julia's recognized gain or loss on the sale of the car?
A) $0
B) $13,000
C) $15,000
D) $18,000

Accepted Answer

Julia's basis in the car is the fair market value at the time of the gift, which was $10,000, since it was lower than Harold's basis. Adding her restoration costs of $5,000 gives her a total adjusted basis of $15,000. Selling the car for $30,000 results in a recognized gain of $15,000 - $15,000 = $13,000.

Question 19

The holding period of property acquired by gift may begin on:
A) The date the property was acquired by the donor only.
B) The date of gift only.
C) Either the date the property was acquired by the donor or the date of gift.
D) The last day of the tax year in which the property was originally acquired by the donor.

Accepted Answer

The holding period for property acquired by gift may begin on either the date the property was acquired by the donor or the date of gift. This allows for a fair and consistent treatment of gifted property in terms of calculating capital gains or losses.

Question 20

Shontelle received a gift of income-producing property with an adjusted basis of $49,000 to the donor and fair market value of $35,000 on the date of gift. No gift tax was paid by the donor. Shontelle subsequently sold the property for $31,000. What is the recognized gain or loss?
A) $0
B) ($4,000)
C) ($10,000)
D) ($18,000)

Accepted Answer

The recognized loss is calculated based on the difference between the selling price ($31,000) and the fair market value on the date of the gift ($35,000), since the property was sold for less than the fair market value at the time of the gift. This results in a recognized loss of $4,000.

Quiz 13: Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges

Ralph gives his daughter, Angela, stock (basis of $8,000; fair market value of $6,000) . No gift tax results. If Angela subsequently sells the stock for $10,000, what is her recognized gain or loss?

Mary sells her personal use automobile for $20,000. She purchased the car two years ago for $17,000. What is Mary's recognized gain or loss? It increased in value due to its excellent mileage plus a safe design.

Nontaxable stock dividends result in:

Which of the following statements is false?

Katie sells her personal use automobile for $12,000. She purchased the car three years ago for $25,000. What is Katie's recognized gain or loss?

Capital recoveries include:

Gift property (disregarding any adjustment for gift tax paid by the donor) :

Nancy gives her niece a crane to use in her business with a fair market value of $61,000 and a basis in Nancy's hands of $80,000. No gift tax was paid. What is the niece's basis for depreciation (cost recovery) ?

The holding period of property acquired by gift may begin on:

Shontelle received a gift of income-producing property with an adjusted basis of $49,000 to the donor and fair market value of $35,000 on the date of gift. No gift tax was paid by the donor. Shontelle subsequently sold the property for $31,000. What is the recognized gain or loss?