Question 1

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

False

Question 2

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 tax regulations. Personal use assets are not considered investments and therefore any losses incurred on their sale or exchange cannot be recognized for tax purposes.

Question 3

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 4

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 distribution from a corporation, any amount that exceeds the shareholder's basis is treated as capital gain. This is because the excess amount is considered a return of capital and is taxed as such.

Question 5

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 should be calculated as follows:
Amount realized: $10,800
Adjusted basis: $10,000 + $1,000 premium - $300 amortization = $10,700
Recognized gain: $10,800 - $10,700 = $100
Therefore, the statement in the question is false.

Question 6

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 7

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 correct definition of fair market value according to the IRS. It is based on a hypothetical transaction between a willing seller and a willing buyer, both of whom are knowledgeable about the property and under no compulsion to buy or sell.

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

The statement is true. Making an amortization election for a taxable bond purchased at a premium will reduce the adjusted basis and the amount of the amortized premium can be treated as an interest deduction.

Question 9

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

This statement is true. When property is lost or stolen, insurance proceeds received and any recognized loss are subtracted from the basis of the property involved. This reduced basis is used to calculate any potential capital gains or losses.

Question 10

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, then it is considered a non-taxable return of capital and the shareholders' adjusted basis remains unchanged.

Question 11

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 12

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 whether the amount of the insurance proceeds exceeds or is less than the adjusted basis of the property.

Question 13

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 a true statement according to the Internal Revenue Service (IRS) guidelines for calculating realized gain or loss.

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

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 the calculation $300,000 - $100,000 (allocated to land) - $4,922 (cost recovery) = $195,078.

Question 16

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 are considered to be part of the ongoing cost of owning a property, and therefore are not added to the original basis. Capital expenditures, on the other hand, improve the value or extend the useful life of the property and are added to the original basis.

Question 17

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 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

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 19

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 the Internal Revenue Code, if the fair market value of property received cannot be determined, the fair market value of the property surrendered can be used to compute the amount realized. This is outlined in Section 1001 of the Code.

Question 20

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...

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