Question 1

The basis for depreciation on depreciable gift property received is the donor's adjusted basis of the property at the date of the gift (assuming no gift taxes are paid).The rule applies regardless of whether the fair market value at the date of the gift is greater than or less than the donor's adjusted basis.

Accepted Answer

The basis for depreciation on depreciable gift property is indeed the donor's adjusted basis of the property at the date of the gift, regardless of the fair market value at the date of the gift. This rule applies assuming no gift taxes are paid.

Question 2

Realized losses from the sale or exchange of stock are disallowed if within 30 days before or 30 days after the sale or exchange, the taxpayer acquires substantially identical stock.

Accepted Answer

This is known as the wash sale rule and is a provision under the Internal Revenue Code. It is designed to prevent taxpayers from recognizing artificial losses by selling stock at a loss and then immediately buying it back in order to maintain their position in the stock.

Question 3

The holding period for property acquired by gift is automatically long term.

Accepted Answer

The holding period for property acquired by gift includes the donor's holding period, which means it could be either short-term or long-term depending on how long the donor held the property before gifting it.

Question 4

If the fair market value of the property on the date of death is greater than on the alternate valuation date, the use of the alternate valuation amount is mandatory.

Accepted Answer

The use of alternate valuation date is optional for estate tax purposes, and the executor can choose to use it only if it results in a lower estate tax liability. If the fair market value on the date of death is higher than on the alternate valuation date, the executor can choose not to use it.

Question 5

Transactions between related parties that result in disallowed losses might later provide a tax benefit to the related party buyer.

Accepted Answer

If a related party transaction results in disallowed losses, the related party buyer might be able to use those losses to offset future taxable income, thus providing a tax benefit. However, the IRS closely scrutinizes related party transactions to prevent abuse of this rule.

Question 6

If losses are disallowed in a related party transaction, the holding period for the buyer includes the holding period of the seller.

Accepted Answer

In a related-party transaction where losses are disallowed, the holding period for the buyer does not include the holding period of the seller. The holding period starts anew with the buyer.

Question 7

In 1973, Fran received a birthday gift of stock worth $75,000 from her aunt.The aunt had owned the stock (adjusted basis $50,000) for 10 years and paid gift tax of $27,000 on the transfer.Fran's basis in the stock is $75,000-the lesser of $77,000 ($50,000 + $27,000) or $75,000.

Accepted Answer

Fran's basis in the stock is the lesser of the fair market value at the time of the gift ($75,000) or the donor's adjusted basis ($50,000 + gift tax paid of $27,000 = $77,000), which is $75,000.

Question 8

The holding period for nontaxable stock dividends that are the same type (i.e., common on common) includes the holding period of the original shares, but the holding period for nontaxable stock dividends that are not the same type (i.e., preferred on common) is new and begins on the date the dividend is received.

Accepted Answer

The answer of The holding period for nontaxable stock dividends...

Question 9

Gene purchased an SUV for $45,000 which he uses 100% for personal purposes.When the SUV is worth $30,000, he contributes it to his business.The gain basis is $45,000, the loss basis is $30,000, and the basis for cost recovery is $45,000.

Accepted Answer

When Gene contributes the SUV to his business, the basis for gain, loss, and cost recovery is the lower of his adjusted basis at the time of contribution ($45,000) or the fair market value at the time of contribution ($30,000). Therefore, all should be $30,000, not mixed as initially stated.

Question 10

If a husband inherits his deceased wife's share of jointly owned property in a common law state, both the husband's original share and the share inherited from the deceased wife are stepped-up or down to the fair market value at the date of the wife's death.

Accepted Answer

In a common law state, only the deceased's share of the property receives a step-up (or down) in basis to the fair market value at the date of death. The surviving spouse's original share retains its original basis.

Question 11

The carryover basis to a donee for property received by gift can be an amount greater than the donor's adjusted basis.

Accepted Answer

The carryover basis to a donee for property received by gift can be an amount greater than the donor's adjusted basis if the fair market value of the property at the time of the gift is higher than the donor's adjusted basis. This is known as a "step-up" in basis.

Question 12

Parker bought a brand new Ferrari on January 1, 2017, for $125,000.Parker was fatally injured in an auto accident on June 23, 2017, when the fair market value of the car was $105,000.Parker was driving a loaner car from the Ferrari dealership while his car was being serviced.In his will, Parker left the Ferrari to his best friend, Ryan.Ryan's holding period for the Ferrari begins on January 1, 2017.

Accepted Answer

Ryan's holding period for the Ferrari begins on June 23, 2017, the date of Parker's death, not when Parker originally purchased the car.

Question 13

If the alternate valuation date is elected by the executor in 2017, the total basis of inherited property will be more than what it would have been if the primary valuation date and amount had been used.

Accepted Answer

The alternate valuation date, which is six months after the date of death, may result in a lower or higher total basis of inherited property compared to the primary valuation date (date of death), depending on whether the property's value has increased or decreased in that time. It does not guarantee a higher total basis.

Question 14

The basis of inherited property usually is its fair market value on the date of the decedent's death.

Accepted Answer

This is generally true, as the fair market value on the date of the decedent's death is used to determine the basis of inherited property for tax purposes. However, there are some exceptions and nuances to this rule depending on the type of assets and circumstances involved.

Question 15

The amount of the loss basis of a gift will differ from the amount of the gain basis only if at the date of the gift the adjusted basis of the property exceeds the property's fair market value.

Accepted Answer

If the adjusted basis of the property is greater than its fair market value at the time of the gift, the loss basis will be the fair market value at the time of the gift, while the gain basis will be the adjusted basis at the time of the gift.

Question 16

If the alternate valuation date is elected by the executor of the estate, the basis of all of the property included in the decedent's estate becomes the fair market value 6 months after the decedent's death.

Accepted Answer

The answer of If the alternate valuation date is elected...

Question 17

For the loss disallowance provision under § 267, related parties include certain family members, a shareholder and his or her controlled corporation (i.e., greater than 50% in value of the corporation's outstanding stock), and a partner and his or her controlled partnership (i.e., greater than 50% of the capital interests or profits interest in the partnership).

Accepted Answer

This statement is true. Under § 267, related parties include family members, a shareholder and their controlled corporation, and a partner and their controlled partnership.

Question 18

Ben sells stock (adjusted basis of $25,000) to his son, Ray, for its fair market value of $15,000.Ray gives the stock to his daughter, Trish, who subsequently sells it for $26,000.Ben's recognized loss is $0 and Trish's recognized gain is $1,000 ($26,000 - $15,000 - $10,000).

Accepted Answer

Ben's recognized loss would be $10,000 ($25,000 - $15,000) if the sale were to an unrelated third party. However, since the sale was to his son, it is considered a related party transaction and the loss is disallowed. Trish's recognized gain is correct at $1,000.

Question 19

Lump-sum purchases of land and a building are allocated on the basis of the relative fair market values of the individual assets acquired.

Accepted Answer

Lump-sum purchases are allocated based on the relative fair market values of the individual assets acquired. This is in accordance with generally accepted accounting principles (GAAP).

Question 20

The basis of property acquired in a wash sale is its cost plus the loss not recognized on the wash sale.

Accepted Answer

According to IRS rules, if an investor sells a security at a loss and then buys it back within 30 days before or after the sale, it is considered a "wash sale." In this case, the basis of the property acquired in the wash sale is its cost plus the loss not recognized on the wash sale. This means that the basis of the property is increased by the amount of the disallowed loss, resulting in a higher cost basis and potentially reducing gains and increasing losses upon future sale of the security.

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