Question 1

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, the excess amount is considered a return of capital and reduces the shareholder's adjusted basis for the stock. However, if the distribution is less than the earnings and profits, there is no excess to be considered a return of capital, and therefore the adjusted basis remains unchanged.

Question 2

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 IRS rules, when the fair market value of the property received cannot be determined, the fair market value of the property surrendered may be used to compute the amount realized for tax purposes.

Question 3

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 4

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

Ordinary repairs and maintenance do not increase the value of the property, whereas capital expenditures, such as major renovations, do increase the value and should be added to the original basis.

Question 5

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 the stock has increased in value but has not been sold, there is no "amount realized" because no transaction has taken place.

Question 6

Monroe's delivery truck is damaged in an accident.His 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

Monroe's adjusted basis for the delivery truck after the accident would be $0 because the insurance proceeds of $21,000 fully compensate for the truck's adjusted basis of $20,000, and the excess $1,000 is recognized as a casualty gain, indicating the truck is no longer an asset in use.

Question 7

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 indeed reduced by the amount of insurance proceeds received and by any resulting recognized loss.

Question 8

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 9

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 correct according to the tax rules, as losses on personal use assets are generally not deductible.

Question 10

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 a correct statement. When an investor purchases a taxable bond at a premium, they may elect to amortize the premium over the life of the bond. This reduces the adjusted basis of the bond each year and creates a corresponding interest deduction to offset the bond's interest income.

Question 11

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 requires the use of the FIFO (First In, First Out) method if the taxpayer cannot specifically identify which lot of stock is being sold.

Question 12

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 be $500 ($10,800 amount realized - $10,300 adjusted basis), since she has amortized $700 of the premium ($1,000 premium divided by 10 years, multiplied by 7 years held).

Question 13

The amount of a corporate distribution qualifying for capital recovery treatment that exceeds the shareholder- recipient's basis in the stock investment is treated as a capital gain.

Accepted Answer

This statement is true. If a corporate distribution (such as a dividend or liquidation payment) is greater than the shareholder's basis in their stock investment, the excess amount is considered a capital gain.

Question 14

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 15

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 either recognized gain or recognized loss, depending on the amount of insurance proceeds received and the adjusted basis of the damaged property.

Question 16

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 property's adjusted basis at the time of disposition from the amount realized from the sale or disposal of the property.

Question 17

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 the definition of fair market value as defined by the IRS.

Question 18

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

Reggie's distribution of $90,000 first applies against the earnings and profits of $15,000, which is treated as a dividend. The remaining $75,000 reduces his 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 19

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 by the seller for the property.

Question 20

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 calculation is correct: $200,000 (original building cost) - $4,922 (cost recovery) = $195,078 (adjusted basis).

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