Question 1

Donald sells stock with an adjusted basis of $38,000 to his son,Kiefer,for its fair market value of $30,000.Kiefer sells the stock three years later for $32,000.Kiefer will recognize a gain on the subsequent sale of

Accepted Answer

Kiefer's basis in the stock is $30,000, the same as its fair market value when he acquired it. When he sells the stock for $32,000, he recognizes a gain of $2,000.

Question 2

For the years 2015 through 2019 (inclusive)Mary,a best-selling author,has been involved in operating an antique store.In 2015,2016 and 2017 her revenue exceeded the expenses from the activity.In 2018 and 2019,the antique store generated a loss.Which statement is correct?

Accepted Answer

According to the IRS, if an activity generates a profit in at least three out of five consecutive years (or two out of seven consecutive years for horse racing), it is presumed to be a business. In this case, Mary's antique store generated a profit in three consecutive years (2015-2017) and a loss in the following two years (2018-2019). Therefore, the activity is presumed to be a business. However, the IRS may still prove that it is a hobby if there is evidence to support that Mary did not have a profit motive.

Question 3

Vanessa owns a houseboat on Lake Las Vegas that she personally uses for 25 days out of the year and rents for 280 days.For tax purposes,the houseboat is classified as

Accepted Answer

The houseboat is classified as rental property since it is rented for more than the owner's personal use. This means that expenses in excess of income may be deducted, but net income or loss is subject to the passive activity rules.

Question 4

Riva works at a full-time job,but also restores her antique doll collection and sells them on eBay.She received $10,000 of sales revenue and paid $12,000 of supplies expense.A number of factors must be weighed to determine the appropriate classification of the activity.Depending on that classification,the net effect on her taxable income will be

Accepted Answer

The answer of Riva works at a full-time job,but also...

Question 5

Nikki is a single taxpayer who owns a vacation cottage on the lake.During the year,she rented it for $2,000 for 14 days,lived in it for 56 days,and left it vacant the remainder of the year.The year's expenses amounted to $5,000 interest expense,$800 property taxes,$1,500 utilities and maintenance,and $2,400 depreciation.Using the IRS method of allocating expenses,how much of the property-related expenses will be deductible for AGI?

Accepted Answer

Since Nikki rented the property for less than 15 days, the rental income is not taxable, and the expenses related to the rental use are not deductible for AGI.

Question 6

Dana purchased an asset from her brother for $15,000.Her brother's basis was $20,000.If Dana sells the asset to an unrelated party for $12,000,she will recognize

Accepted Answer

Dana's basis in the asset is her brother's basis of $20,000. If she sells it for $12,000, she will recognize a loss of $8,000 ($12,000 - $20,000 = -$8,000). However, since she purchased the asset from a related party (her brother), the loss is limited to the lesser of her basis or the fair market value of the asset at the time of the sale. Since the fair market value is $12,000, the loss is limited to $15,000 - $12,000 = $3,000. Thus, she will recognize a ($3,000) loss on the sale.

Question 7

Abby owns a condominium in the Great Smokey Mountains.During the year,Abby uses the condo a total of 21 days.The condo is also rented to tourists for a total of 79 days and generates rental income of $12,500.Abby incurs the following expenses: $$\begin{array} { | l | r | } 
\hline \text { Expense } & \text { Amount } \
\hline \text { Mortgage interest } & \$ 4,100 \
\hline \text { Property taxes } & 1,900 \
\hline \text { Utilities } & 2,200 \
\hline \text { Insurance } & 1,200 \
\hline \text { Depreciation } & 10,000 \
\hline
\end{array}$$ Using the IRS method of allocating expenses,the amount of depreciation that Abby may take with respect to the rental property will be

Accepted Answer

IRS method of allocating expenses allocates expenses based on the ratio of rental days to total days of use. In this case, the condo was rented for 79 days and Abby used it for 21 days, for a total of 100 days. Therefore, the portion of depreciation that Abby may take with respect to the rental property is 79/100 * $10,000 = $7,900.

Question 8

The Super Bowl is played in Tasha's home town.Tasha moves out of her house for 10 days and stays with her parents.She rents her house for a very high fee to a crew from ESPN.With respect to this rental activity,Tasha will

Accepted Answer

If a taxpayer rents out their personal residence for fewer than 15 days during the year, the rental income is not reportable, and they can still deduct mortgage interest and property taxes as usual.

Question 9

Bart owns 100% of the stock of Octo Corporation,which uses the accrual method.Bart's sister Samantha,a cash method taxpayer,did some advertising work for Octo in November 2019.In December,Octo received a billing statement from Samantha for $5,000 and paid Samantha the $5,000 in January 2020.Samantha is a calendar-year taxpayer.When may Octo deduct the $5,000?

Accepted Answer

Octo Corporation uses the accrual method of accounting, which means that expenses are recorded when they are incurred, not when they are paid. Since Samantha performed the advertising work in November 2019, the expense was incurred in 2019, but the payment was made in January 2020. Therefore, the $5,000 can be deducted by Octo in 2020, the year in which it was paid. The fact that Samantha is Bart's sister has no impact on the deductibility of the expense.

Question 10

Which of the following individuals is not considered a relative for purposes of the related parties loss disallowance rules under Sec.267?

Accepted Answer

Under Sec. 267, a sister-in-law is not considered a related party for the purposes of loss disallowance rules.

Question 11

Efrain owns 1,000 shares of RJ Inc.common stock which he purchased three years ago for $36,000.Efrain sells the 1,000 shares on October 15,2019,for $10,000.On November 12,he purchases 400 shares of RJ Inc.preferred stock for $8,000.Efrain's recognized loss on the sale of the 1,000 shares will be

Accepted Answer

Efrain's recognized loss is calculated by subtracting the sale price from the purchase price: $36,000 - $10,000 = $26,000. The purchase of preferred stock does not affect the recognition of the loss on the common stock.

Question 12

Which of the following factors is not used to determine whether an activity is a hobby or a business?

Accepted Answer

The business success of the taxpayer in other dissimilar businesses is not a factor used to determine if an activity is a hobby or a business. The focus is on the activity in question, not unrelated business ventures.

Question 13

For the years 2015 through 2019 (inclusive)Max,a surgeon,has been involved in bowling competitions.Only in 2018 and 2019 did his revenue exceed the expenses from the activity.Which statement is correct?

Accepted Answer

The IRS presumes an activity is a hobby if it does not make a profit in at least three of the last five years. Max's activity only made a profit in two years, so it is presumed to be a hobby, but he can provide evidence to prove it is a business.

Question 14

Erin,Sarah,and Timmy are equal partners in EST Partnership.Sarah also owns 40% of Elton Corporation.The remaining shareholders of Elton Corporation are: Erin (24%)and Sarah's uncle (36%).What percent ownership does Sarah directly or constructively own in Elton Corporation?

Accepted Answer

Sarah directly owns 40% of Elton Corporation.
Sarah also indirectly owns 24% of Elton Corporation through her 1/3 ownership in EST Partnership (which owns 100% of Erin's 24% ownership).
Therefore, Sarah's total ownership in Elton Corporation is 40% + 24% = 64%.

Question 15

Jason sells stock with an adjusted basis of $66,000 to JJ Inc.,his 60% owned corporation,for its fair market value of $60,000.JJ Inc.sells the stock three years later for $67,000.JJ Inc.'s recognized gain or loss on the sale will be

Accepted Answer

JJ Inc. initially recognizes a $0 gain or loss due to the related party loss disallowance rule. However, when JJ Inc. sells the stock for $67,000, it can recognize a gain of $1,000, which is the excess of the sale price over Jason's original basis of $66,000.

Question 16

Sheila sells stock,which has a basis of $12,000,to her daughter for $7,000,the stock's fair market value.Subsequently,the daughter sells the stock to an unrelated party for $5,000.Which of the following is true for Sheila and her daughter?

Accepted Answer

Sheila cannot recognize a loss on the sale to her daughter due to related party rules. The daughter can recognize a $2,000 loss when she sells the stock for $5,000, which is $2,000 less than her purchase price of $7,000.

Question 17

Kelsey enjoys making cupcakes as a hobby and occasionally sells them for parties.Kelsey receives $1,000 in revenues from cupcake sales this year and pays $1,300 for supplies.Kelsey takes the standard deduction each year.The net effect of the cupcake activity on Kelsey's taxable income is

Accepted Answer

The answer of Kelsey enjoys making cupcakes as a hobby...

Question 18

Juanita knits blankets as a hobby and occasionally sells them.In the current year,she earns $5,000 from her blanket sales and incurs expenses of $600.On her tax return,she should

Accepted Answer

Hobby income must be reported, but hobby expenses are not deductible.

Question 19

Rob sells stock with a cost of $3,000 to his daughter for $2,200,which is its fair market value.Later the daughter sells the stock for $3,200 to an unrelated party.Which of the following describes the tax treatment to Rob and Daughter?

Accepted Answer

The answer of Rob sells stock with a cost of...

Question 20

Mackensie owns a condominium in the Rocky Mountains.During the year,Mackensie uses the condo a total of 23 days.The condo is also rented to tourists for a total of 77 days and generates rental income of $10,900.Mackensie incurs the following expenses in the condo: $$\begin{array} { | l | r | } 
\hline \text { Expense } & \text { Amount } \
\hline \text { Mortgage interest } & \$ 5,000 \
\hline \text { Property taxes } & 3,500 \
\hline \text { Utilities } & 2,500 \
\hline \text { Insurance } & 1,800 \
\hline \text { Depreciation } & 11,000 \
\hline
\end{array}$$ Using the court's method of allocating expenses and assuming a 365-day year,the amount of depreciation that Mackensie may take with respect to the rental property will be

Accepted Answer

The court's method allocates expenses based on the ratio of rental days to total days used. Depreciation is allocated as (77 rental days / 100 total days) * $11,000 = $5,796.

Quiz 22: Deductions and Losses