Question 1

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 2

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 does not result in the recovery of more than the taxpayer's cost or other basis; it merely delays the recognition of the loss for tax purposes, not allowing for any recovery beyond the original investment.

Question 3

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

This statement is true. When the amount of a corporate distribution is less than the amount of corporate earnings and profits, the distribution is treated as a dividend to the extent of the earnings and profits, and any remaining portion is treated as a return of capital. However, if the distribution is less than the earnings and profits, and there is no return of capital, then the shareholders' adjusted basis for the stock remains unchanged.

Question 4

A realized gain whose recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis.

Accepted Answer

A realized gain whose recognition is postponed, such as a gain from a like-kind exchange or a gain from a qualified opportunity fund investment, can result in the temporary recovery of more than the taxpayer's cost or other basis. This is because the gain is not currently recognized and therefore the taxpayer is not currently required to pay taxes on it, so the taxpayer has more cash on hand than they would if they had to pay taxes immediately. However, when the gain is eventually recognized, the taxpayer will owe taxes on the full amount of the gain, including any appreciation that occurred between the time of the original investment and the time of the eventual recognition of the gain.

Question 5

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...

Question 6

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 statement accurately describes the calculation of realized gain or loss.

Question 7

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

This is correct. When an amortization election is made for a taxable bond purchased at a premium, the adjusted basis of the bond is reduced by the amount of the amortized premium. This amortized premium is treated as an interest deduction, which reduces the bondholder's taxable income.

Question 8

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

Expenditures made for ordinary repairs and maintenance of property are considered as deductible expenses and are not added to the original basis in the determination of the property's adjusted basis. On the other hand, capital expenditures, which are expenses that add value to the property or extend its useful life, are added to the original basis.

Question 9

In a deductible 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

In a deductible casualty or theft, the basis of property involved is reduced by the amount of insurance proceeds received and by any resulting recognized loss. This is because the taxpayer cannot claim a loss deduction for the portion of the loss that was reimbursed by insurance.

Question 10

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 correct according to the tax code. When determining the amount realized in a transaction where the fair market value of the property received cannot be determined, the fair market value of the property surrendered may be used instead. This is stated in IRS Publication 523, "Selling Your Home."

Question 11

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 true according to the formula for adjusted basis: adjusted basis = original cost - accumulated depreciation (or cost recovery in this case). So, $200,000 - $4,922 = $195,078.

Question 12

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 in the stock investment is considered a capital gain. This excess amount is taxed at the applicable capital gains tax rate.

Question 13

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 14

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 the tax rules, a realized gain on the sale or exchange of a personal use asset is recognized and subject to capital gains tax, but a realized loss on the sale, exchange, or condemnation of a personal use asset is not recognized and cannot be used to offset other taxable income.

Question 15

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 the amount of insurance proceeds received compared to the adjusted basis of the damaged property. If the insurance proceeds exceed the adjusted basis, a recognized gain may result. If the insurance proceeds are less than the adjusted basis, a recognized loss may result.

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 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 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

The adjusted basis of the delivery truck after the accident is not $21,000. The adjusted basis is reduced by the insurance proceeds received, and since Monroe recognizes a gain of $1,000, the adjusted basis would be $0 after the accident.

Question 18

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 definition of fair market value is accurate according to the IRS definition.

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

The answer of If a seller assumes the buyer's liability...

Question 20

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

When a bond is sold, any remaining unamortized premium or discount must be recognized as a gain or loss. In this case, Helen had amortized $300 of the $1,000 premium, so she still had $700 of unamortized premium. This $700 must be recognized as a gain in addition to the $800 gain from the sale price exceeding the adjusted basis ($10,800 - $10,000 = $800). Therefore, the recognized gain is actually $1,500 ($800 + $700), not just $800.

Quiz 13: Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges