Question 1

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 results in the temporary recovery of less than the taxpayer's cost or other basis.

Question 2

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

Only expenditures that are capitalized are added to a property's adjusted basis.Expenditures for ordinary repairs and maintenance may be deductible in the current tax year if they are for business or income- producing property.

Question 3

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 statement defines the fair market value in accordance with IRS guidelines.

Question 4

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

Realized gain or loss is the difference between the amount realized and the property's adjusted basis.

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

A recognized gain will result if the insurance proceeds exceed the adjusted basis of the property.A recognized loss can result if the insurance proceeds are less than the adjusted basis of the property.

Question 6

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 due to a casualty or theft and insurance proceeds are received, the basis of the property is reduced by the amount of insurance received and any resulting recognized loss. This is because the taxpayer has been compensated for their loss and should not have an inflated basis in the property.

Question 7

The amount received for a utility easement on land is included in the gross income of the taxpayer.

Accepted Answer

The amount received for a utility easement reduces the basis of the land.

Question 8

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 statement is true. According to IRS guidelines, only realized gains on the sale or exchange of a personal use asset are recognized for tax purposes. Realized losses on the sale, exchange, or condemnation of a personal use asset are not recognized.

Question 9

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

The gain is treated as a capital gain.Ordinary gain treatment would result only if the recipient were a dealer (i.e. ,the stock is inventory).

Question 10

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 (not decreased)by the amount of the seller's liabilities assumed by the buyer.

Question 11

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's recognition is postponed, the taxpayer will temporarily recover more than their cost or basis. This is because the gain is still there, but they have deferred paying taxes on it. However, if and when the gain is eventually recognized, the taxpayer will have to pay taxes on it and the temporary recovery will be reduced.

Question 12

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

Helen has a recognized gain of $100 [$10,800 amount realized - ($11,000 - $300)adjusted basis].

Question 13

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

This is known as the "substitution rule" and is allowed by the IRS when determining the amount realized in certain situations, such as in like-kind exchanges.

Question 14

If Wal-Mart stock increases in value during the tax year by $6,000,the amount realized is a positive $6,000.

Accepted Answer

Increases or decreases in the value of an asset during the tax year do not affect the amount realized.The amount realized can only be determined following sale,exchange,or other disposition of the property.

Question 15

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 a taxable bond purchased at a premium, the adjusted basis is reduced and the amount of the amortized premium is treated as an interest deduction.

Question 16

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 to Reggie is treated as a dividend to the extent of earnings and profits ($15,000).The return of capital concept applies to any excess of the amount of the distribution over the corporation's earnings and profits.As Amethyst's earnings and profits are $15,000,the return of capital concept applies to $75,000 of the $90,000 distribution.The return of capital part of the distribution of $75,000 ($90,000 - $15,000)is less than Reggie's adjusted basis of $100,000.Consequently,his recognized gain is $0 and his adjusted basis for the stock is reduced to $25,000 ($100,000 - $75,000).There is no capital gain because the portion of the distribution which represented a return of capital did not exceed Reggie's basis in the Amethyst stock.

Question 17

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

Initially,Monroe does increase the adjusted basis of the delivery truck by the casualty gain of $1,000 ($20,000 + $1,000 = $21,000).However,Monroe must then reduce the adjusted basis of the delivery truck by the amount of the insurance proceeds received ($21,000 - $21,000 = $0).Thus,Monroe now has two assets;cash of $21,000 and a delivery truck with an adjusted basis of $0.Note that if Monroe uses some or all of the cash to repair the delivery truck,the adjusted basis of the delivery truck is increased by this amount.

Question 18

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

Cost recovery reduces the adjusted basis of the building.

Question 19

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

In this situation,the buyer's adjusted basis is decreased (not increased)by the amount of liability assumed.

Question 20

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

The distribution to a shareholder in this situation is classified as dividend income.Therefore,there is no effect on the shareholder's stock basis.

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