Question 1

The loss on the total destruction of business property is always its adjusted basis regardless of fair market value.

Accepted Answer

The loss on the total destruction of business property is always its adjusted basis regardless of fair market value because the adjusted basis is the cost of the property minus any depreciation that has been taken. This is the amount that the taxpayer has invested in the property, and it is the amount that they will lose if the property is destroyed. The fair market value of the property is not relevant to the calculation of the loss.

Question 2

A condemnation is one type of involuntary conversion.

Accepted Answer

A condemnation, where property is taken by a government authority for public use, often with compensation to the owner, is considered a form of involuntary conversion because the owner is forced to relinquish the property.

Question 3

To defer gain recognition on an involuntary conversion, qualifying property must be obtained
within a specified time period.

Accepted Answer

To defer gain recognition on an involuntary conversion (such as property destroyed, stolen, or condemned), the IRS requires that the replacement property be acquired within a specific time period, generally within two years after the close of the first tax year in which any part of the gain is realized.

Question 4

A theft loss of $10,000 cash by an individual results in a $10,000 casualty loss deduction.

Accepted Answer

Theft losses of personal property by individuals are deductible only to the extent that they exceed 10% of the individual's adjusted gross income (AGI), and only if the individual itemizes deductions. Additionally, the Tax Cuts and Jobs Act of 2017 suspended the deduction for personal casualty and theft losses for tax years 2018 through 2025, except for those losses attributable to a federally declared disaster.

Question 5

Internal Revenue Code Section 351, relating to transfers to a controlled corporation, can apply to transfers to both a new and an existing corporation.

Accepted Answer

Section 351 applies to transfers of property to a corporation by one or more persons in exchange for stock in that corporation, as long as the transferors are in control of the corporation immediately after the exchange, and this applies to both new and existing corporations.

Question 6

If a taxpayer's personal residence is involuntarily converted, the taxpayer can only defer gain by acquiring a new residence in the required time period using IRC §1033.

Accepted Answer

The answer of If a taxpayer's personal residence is involuntarily...

Question 7

For a nonsimultaneous exchange to qualify for like-kind provisions, the taxpayer must identify the property to be acquired within 90 days and actually close the transactions within 180 days.

Accepted Answer

The taxpayer must identify the property within 45 days and complete the exchange within 180 days for it to qualify for like-kind exchange provisions.

Question 8

Boot received in a like-kind exchange never causes loss to be recognized.

Accepted Answer

In a like-kind exchange, boot received (additional value in the form of cash, liabilities assumed, or other property received that is not like-kind) does not trigger the recognition of a loss; it can only trigger the recognition of gain if there is a gain realized in the transaction. Losses are not recognized due to receiving boot.

Question 9

Liabilities assumed by either a partnership or corporation have identical effects on the owners' bases in their ownership interests.

Accepted Answer

In a partnership, liabilities assumed by the partnership increase the basis of each partner's interest in the partnership, as they share in the liability. In contrast, for a corporation, shareholders' bases in their stock are not affected by liabilities assumed by the corporation, as shareholders are not personally liable for the corporation's debts.

Question 10

The holding period for boot in a like-kind exchange begins on the date of the exchange.

Accepted Answer

In a like-kind exchange, the holding period for the boot (additional property or cash added to even out the exchange) begins on the date of the exchange, as it becomes part of the overall transaction and its holding period is considered to have started at the same time as the exchanged property.

Question 11

Sean inherited a farm his grandfather had purchased 50 years ago for $40,000.It was valued at $1,000,000 when his grandfather died but has a current value of $1,100,000.Sean did not like farming so he traded the farm land and buildings for an apartment building valued at $950,000 owned by Jean that has a basis of $700,000.In addition, Sean received $150,000 in cash from Jean to finalize the exchange.

Accepted Answer

B  C  D  Sean's amount realized is $1,100,000 ($950,000 apartment + $150,000 cash). Jean's amount realized is $1,100,000 (farm value). Sean's realized gain is $100,000 ($1,100,000 - $1,000,000 basis). Jean's realized gain is $400,000 ($1,100,000 - $700,000 basis). Sean recognizes a gain of $150,000 (cash received). Jean recognizes no gain as it is a like-kind exchange. Sean's basis in the apartment is $1,000,000 ($950,000 + $150,000 gain recognized - $100,000 deferred gain). Jean's basis in the farm is $700,000 (carryover basis).

Question 12

Both gain and loss are deferred in a like-kind exchange.

Accepted Answer

In a like-kind exchange under U.S. tax law, both gain and loss are deferred if the exchange meets the requirements set forth by the IRS, allowing taxpayers to postpone recognizing any gain or loss on the exchange.

Question 13

The holding period for property received in a qualifying like-kind exchange begins on the date the new property is received.

Accepted Answer

The holding period for property received in a like-kind exchange includes the period the relinquished property was held, not just from the date the new property is received.

Question 14

A taxpayer must transfer a minimum required amount of property, along with any services performed, to include the stock received in meeting the control requirement for a corporate formation.

Accepted Answer

The control requirement for a corporate formation requires the taxpayer to transfer a minimum amount of property, along with any services performed, to include the stock received.

Question 15

Both gain and loss are deferred in a wash sale.

Accepted Answer

In a wash sale, only the loss is deferred, not the gain.

Question 16

Willow Corporation exchanged land valued at $250,000 (adjusted basis = $175,000) for a building owned by Tree Corporation valued at $350,000 (adjusted basis = $200,000) and $50,000 cash.In addition, Willow assumed the $150,000 mortgage on Tree's building.What are Willow and Tree's realized gains or losses on the properties exchanged, respectively?

Accepted Answer

The answer of Willow Corporation exchanged land valued at $250,000...

Question 17

The taxpayer-use test for deferral of gain on an involuntary conversion requires the taxpayer to acquire property that has the same function or use as the involuntarily converted property that he or she used prior to the conversion.

Accepted Answer

The answer of The taxpayer-use test for deferral of gain...

Question 18

A business airplane exchanged for a fleet of trucks, all used for the delivery of manufactured goods, is a qualifying like-kind exchange.

Accepted Answer

A like-kind exchange requires that the exchanged properties be of the same nature or character, such as real estate for real estate. A business airplane and a fleet of trucks do not qualify as like-kind property.

Question 19

Expected insurance settlements have no effect on the timing of the deduction for a casualty loss.

Accepted Answer

Expected insurance settlements must be subtracted from the casualty loss when determining the deductible amount, affecting the timing and amount of the deduction.

Question 20

Willow Corporation exchanged land valued at $250,000 (adjusted basis = $175,000) for a building owned by Tree Corporation valued at $350,000 (adjusted basis = $200,000) and $50,000 cash.In addition, Willow assumed the $150,000 mortgage on Tree's building.What are Willow's and Tree's recognized gain or loss, respectively?

Accepted Answer

Willow's recognized gain is $50,000 ($350,000 - $250,000 - $50,000). Tree's recognized gain is $150,000 ($350,000 - $200,000).

Quiz 9: Tax-Deferred Exchanges