Question 1

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 2

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 3

A realized gain whose recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis.

Accepted Answer

If a realized gain is not recognized and is postponed, the taxpayer may receive more than their cost or other basis, which is why it is called a temporary recovery. However, eventually, the gain will need to be recognized and taxed.

Question 4

In a 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

When there is a casualty or theft of property and insurance proceeds are received, the basis of the property involved is reduced by the amount of insurance proceeds received and any recognized loss. This is because the insurance proceeds are considered a recovery of part of the property's cost, and the recognized loss represents the amount that is not covered by insurance.

Question 5

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 insurance proceeds received and the adjusted basis of the property. If the insurance proceeds exceed the adjusted basis, a recognized gain may result. If the insurance proceeds are less than the adjusted basis, a recognized loss may result.

Question 6

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

This is correct according to IRS rules on cost recovery for business property.

Question 7

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 8

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 an amortization election is made for taxable bonds purchased at a premium, the adjusted basis is reduced by the amortized premium amount each year. This amortized premium is treated as an interest deduction for tax purposes.

Question 9

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 10

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 the tax rules established by the IRS. Personal use assets, such as a personal residence or car, are generally not considered investments for tax purposes, and any losses incurred from their sale, exchange, or condemnation are not deductible. However, gains from their sale or exchange may be subject to tax.

Question 11

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 12

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. When a shareholder receives a corporate distribution such as a dividend or distribution from the sale of assets, any amount that exceeds their basis in the stock is considered a capital gain.

Question 13

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 14

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 made for ordinary repairs and maintenance do not increase the overall value of the property but instead keep it in good working condition. Therefore, they are not added to the original basis. On the other hand, capital expenditures such as renovations or improvements are added to the original basis because they increase the overall value of the property.

Question 15

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). The premium of $1,000 was being amortized over the life of the bond, so after the sale, the total amount of premium to be amortized would be $700 ($1,000 premium - $300 already amortized). This would decrease the adjusted basis of the bond to $10,300 ($10,000 original cost + $300 premium amortized). Therefore, the recognized gain would only be $500.

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 is the definition of realized gain or loss, as per IRS guidelines.

Question 17

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

When the distribution is less than the earnings and profits, it is treated as a dividend to the extent of earnings and profits, and any excess is treated as a return of capital which 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 treated as a return of capital, and the shareholder's adjusted basis remains unchanged.

Question 18

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 19

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 as stated by the IRS.

Question 20

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 Section 1001 of the Internal Revenue Code, if the fair market value of the property received cannot be determined, the amount realized is equal to the fair market value of the property surrendered.

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