Question 1

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 a recognized loss if the proceeds are less than the adjusted basis of the property. However, if the proceeds exceed the adjusted basis, it can result in recognized gain.

Question 2

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 correct according to the straight-line method of depreciation. The building's depreciable basis would be $200,000 - $100,000 (land allocation) = $100,000. Using the straight-line method with a recovery period of 39 years, the first year depreciation would be $100,000 / 39 = $2,564. Therefore, Milton's adjusted basis for the building at the end of the first year would be $200,000 - $2,564 = $197,436. However, since Milton deducted $4,922 in cost recovery (depreciation), his adjusted basis for the building would be $197,436 - $4,922 = $195,078.

Question 3

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

Accepted Answer

False

Question 4

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 5

Wade is a salesman for a real estate development company. Because he is the "salesperson of the year," he is permitted to purchase a lot from the developer for $90,000. The fair market value of the lot is $150,000 and the developer's adjusted basis is $100,000. Wade must recognize a gain of $10,000 ($100,000 developer's adjusted basis - $90,000 cost to Wade), and his adjusted basis for the lot is $100,000 ($90,000 cost + $10,000 recognized gain).

Accepted Answer

Wade must recognize a gain of $60,000, which is the difference between the fair market value ($150,000) and his purchase price ($90,000). His adjusted basis for the lot would be the cost to him, $90,000, not adjusted by the gain recognized.

Question 6

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 7

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 is true, as per the IRS definition of realized gain or loss.

Question 8

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

When the distribution is less than the earnings and profits, it is considered a return of capital only if the shareholder's basis in the stock is reduced. If the basis remains unchanged, it is not considered a return of capital.

Question 9

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

Question 10

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 11

When a taxpayer has purchased several lots of stock on different dates at different purchase prices and cannot identify the lot of stock that is being sold, he should use either a weighted average approach or a LIFO approach.

Accepted Answer

The answer of When a taxpayer has purchased several lots...

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's recognized gain would be $100, not $800. The adjusted basis of the bond would be $10,700 ($10,000 purchase price + $1,000 premium - $300 amortized premium), making the gain $100 ($10,800 sale price - $10,700 adjusted basis).

Question 13

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 is correct according to the IRS rules for personal use assets.

Question 14

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 answer of Monroe's delivery truck is damaged in an...

Question 15

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 is true according to the Internal Revenue Code. Any distribution over the basis of the shareholder's investment is treated as a capital gain for tax purposes.

Question 16

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 are considered as deductible expenses and are not added to the original basis while determining the adjusted basis of the property. On the other hand, capital expenditures are considered as investments in the property and are added to the original basis.

Question 17

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 is the commonly accepted definition of fair market value.

Question 18

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 true according to the IRS guidelines for determining the amount realized in a transaction. If the fair market value of the property received cannot be determined, the fair market value of the property surrendered can be used instead.

Question 19

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 is true as insurance proceeds are considered a recovery of the property's value and any resulting recognized loss must also be accounted for.

Question 20

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.

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