South western federal taxation 2014 taxation of business entities 17th edition smith test bank

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Chapter 7 - Property Transactions: Basis, Gain and Loss, and Nontaxable Exchange Student: ___________________________________________________________________________ 1. 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.

True False

2. 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.

True False

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

True False

4. 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.

True False

5. 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.

True False

6. 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.

True False

7. 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.

True False

8. 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).

True False

9. 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.

True False

10. 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.

True False

11. 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.

True False

12. 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.

True False

13. 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.

True False

14. 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.

True False

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.

True False

16. 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).

True False

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

True False

18. 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.

True False

19. 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).

True False

20. 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.

True False

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

True False

22. 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.

True False

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

True False

24. In 2013, Fran receives a birthday gift of stock worth $75,000 from her aunt. The aunt has owned the stock (adjusted basis $50,000) for 10 years and pays 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.

True False

25. 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.

True False

26. 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.

True False

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

True False

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

True False

29. 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.

True False

30. If the alternate valuation date is elected by the executor in 2013, 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.

True False

31. 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.

True False

32. Parker bought a brand new Ferrari on January 1, 2013, for $125,000. Parker was fatally injured in an auto accident on June 23, 2013, 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, 2013.

True False

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

True False

34. 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).

True False

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

True False

36. 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).

True False

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

True False

38. 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.

True False

39. 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.

True False

40. If property that has been converted from personal use to business use has appreciated in value, its basis for gain will be the same as the basis for loss.

True False

41. The basis for gain and loss of personal use property converted to business use is the lower of the adjusted basis or the fair market value on the date of conversion.

True False

42. Stuart owns land with an adjusted basis of $190,000 and a fair market value of $500,000. If the property is going to be given to Stuart’s nephew, Alex, it is preferable for the transfer to be by inheritance rather than by gift.

True False

43. The taxpayer owns stock with an adjusted basis of $15,000 and a fair market value of $8,000. If the stock or cash is going to be given to her niece, it is preferable for the taxpayer to sell the stock and give the $8,000 of cash to her niece. The same preference would exist if the recipient were a qualified charitable organization.

True False

44. Broker’s commissions, legal fees, and points paid by the seller reduce the seller’s amount realized.

True False

45. Since wash sales do not apply to gains, it may be desirable to engage in this type of transaction before the end of the tax year.

True False

46. Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that nontaxable exchanges result in a change in the substance but not the form of the taxpayer’s relative economic position.

True False

47. Abby exchanges an SUV that she has held for personal use plus $24,000 for a new SUV which she will use exclusively in her sole proprietorship business. This exchange qualifies for nontaxable exchange treatment.

True False

48. In a nontaxable exchange, recognition is postponed. In a tax-free transaction, nonrecognition is permanent.

True False

49. In a nontaxable exchange, the replacement property is assigned a carryover basis if there is a realized gain, but receives a new basis if there is a realized loss.

True False

50. The nonrecognition of gains and losses under § 1031 is mandatory for gains and elective for losses.

True False

51. Leonore exchanges 5,000 shares of Pelican, Inc., stock for 2,000 shares of Blue Heron, Inc., stock.

Leonore’s adjusted basis for the Pelican stock is $300,000 and the fair market value of the Blue Heron stock is $350,000. Leonore’s recognized gain is $0 and her adjusted basis for the Blue Heron stock is $300,000.

True False

52. Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held for over 24 months.

True False

53. To qualify as a like-kind exchange, real property must be exchanged either for other real property or for personal property with a statutory life of at least 39 years.

True False

54. The exchange of unimproved real property located in Topeka (KS) for improved real property located in Atlanta (GA) does not qualify as a like-kind exchange.

True False

55. Lola owns land as an investor. She exchanges the land for a warehouse which she leases to a tenant who uses it to store his business inventory. The exchange doesqualify for like-kind exchange treatment.

True False

56. A building located in Virginia (used in business) exchanged for a building located in France (used in business) cannot qualify for like-kind exchange treatment.

True False

57. Pat owns a 1965 Mustang car which he uses for personal use. He purchased it four years ago for $22,000, and it currently is worth $27,000. He exchanges it for a 1979 Triumph Spitfire convertible worth $27,000. Pat’s recognized gain is $0 and his adjusted basis for the convertible is $22,000.

True False

58. Kate exchanges land held as an investment for land and a building owned by Clark, to be used in her business. If Clark is Kate’s father, her realized gain of $150,000 must be recognized because they are related parties.

True False

59. An exchange of two items of personal property (personalty) that belong to different general business asset classes qualifies for nonrecognition under § 1031 as long as both properties are used in the taxpayer’s trade or business.

True False

60. If boot is received in a § 1031 like-kind exchange, the recognized gain cannot exceed the realized gain.

True False

61. Shari exchanges an office building in New Orleans (adjusted basis of $700,000) for an apartment building in Baton Rouge (fair market value of $900,000). In addition, she receives $100,000 of cash. Shari’s recognized gain is $100,000 and her basis for the apartment building is $800,000 ($700,000 adjusted basis + $100,000 recognized gain).

True False

62. When boot in the form of cash is received in a like-kind exchange, recognized gain is the greater of the boot received or the realized gain.

True False

63. The surrender of depreciated boot (fair market value is less than adjusted basis) in a like-kind exchange can result in the recognition of loss.

True False

64. Cole exchanges an asset (adjusted basis of $15,000; fair market value of $25,000) for another asset (fair market value of $19,000). In addition, he receives cash of $6,000. If the exchange qualifies as a like-kind exchange, his recognized gain is $6,000 and his adjusted basis for the property received is $21,000 ($15,000 + $6,000 recognized gain).

True False

65. The basis of boot received in a like-kind exchange is its fair market value, unless the realized gain is a smaller amount.

True False

66. Terry exchanges real estate (acquired on August 25, 2007) held for investment for other real estate to be held for investment on September 1, 2013. None of the realized gain of $10,000 is recognized, and Terry’s adjusted basis for the new real estate is a carryover basis of $80,000. Consequently, Terry’s holding period for the new real estate begins on August 25, 2007.

True False

67. If boot is received in a § 1031 like-kind exchange that results in some of the realized gain being recognized, the holding period for both the like-kind property and the boot received begins on the date of the exchange.

True False

68. If a taxpayer exchanges like-kind property under § 1031 and assumes a liability associated with the property received, the taxpayer is considered to have received boot in the transaction.

True False

69. An involuntary conversion results from the destruction (complete or partial), theft, seizure, requisition or condemnation, or the sale or exchange under threat or imminence of requisition or condemnation of the taxpayer’s property.

True False

70. Section 1033 (nonrecognition of gain from an involuntary conversion) applies to both gains and losses.

True False

71. The amount realized does not include any amount received by the taxpayer that is designated as severance damages by both the government and the taxpayer.

True False

72. Under the taxpayer-use test for a § 1033 involuntary conversion, the taxpayer has less flexibility in qualifying replacement property than under the functional-use test.

True False

73. Milt’s building which houses his retail sporting goods store is destroyed by a flood. Sandra’s warehouse which she is leasing to Milt to store the inventory of his business also is destroyed in the same flood. Both Milt and Sandra receive insurance proceeds that result in a realized gain. Sandra will have less flexibility than Milt in the type of building in which she can invest the proceeds and qualify for postponement treatment under § 1033 (nonrecognition of gain from an involuntary conversion).

True False

74. Sidney, a calendar year taxpayer, owns a building in Columbus, OH, in which he conducts his retail computer sales business. The building is destroyed by fire on December 12, 2013, and two weeks later he receives insurance proceeds of $600,000. Due to family ties, Sidney decides to move to Columbia, SC. He reinvests all of the insurance proceeds in a building in Columbia where he opens a retail computer sales business on April 2, 2014. By electing § 1033, Sidney has no recognized gain and a basis in the new building of $450,000 ($600,000 cost – $150,000 postponed gain).

True False

75. Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) which is destroyed by a tornado in October 2013. He receives insurance proceeds of $250,000 in January 2014. If before 2017, Dennis replaces the warehouse with another warehouse costing at least $250,000, he can elect to postpone the recognition of any realized gain.

True False

76. If a taxpayer reinvests the net proceeds (amount received – related expenses) received in an involuntary conversion in qualifying replacement property within the statutory time period, it is possible to defer the recognition of the realized gain.

True False

77. The holding period of replacement property where the election to postpone gain is made includes the holding period of the involuntarily converted property.

True False

78. Gil’s office building (basis of $225,000 and fair market value $275,000) is destroyed by a hurricane. Due to a 30% co-insurance clause, Gil receives insurance proceeds of $192,500 two months after the date of the loss.

One month later, Gil uses the insurance proceeds to purchase a new office building for $275,000. His adjusted basis for the new building is $307,500 ($275,000 cost + $32,500 postponed loss).

True False

79. If the recognized gain on an involuntary conversion equals the realized gain because of a reinvestment deficiency, the basis of the replacement property will be more than its cost (cost plus realized gain).

True False

80. To qualify for the § 121 exclusion, the property must have been used by the taxpayer for the 5 years preceding the date of sale and owned by the taxpayer as the principal residence for the last 2 of those years.

True False

81. A taxpayer who sells his or her principal residence at a realized loss can elect to recognize the loss even if a qualified residence is acquired during the statutory time period.

True False

82. Wyatt sells his principal residence in December 2013 and qualifies for the § 121 exclusion. He sells another principal residence in November 2014. Under no circumstance can Wyatt qualify for the § 121 exclusion on the sale of the second residence.

True False

83. The maximum amount of the § 121 gain exclusion on sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple.

True False

84. Owen and Polly have been married for five years. Owen sells investment property to Polly for a realized gain of $140,000. Owen’s gain of $140,000 is not recognized and Polly’s basis for the property she purchased is her cost.

True False

85. Albert purchased a tract of land for $140,000 in 2010 when he heard that a new highway was going to be constructed through the property and that the land would soon be worth $200,000. Highway engineers surveyed the property and indicated that he would probably get $180,000. The highway project was abandoned in 2013 and the value of the land fell to $100,000. What is the amount of loss Albert can claim in 2013?

A. $40,000.

B. $60,000.

C. $80,000.

D. $100,000.

E. None of the above.

86. Abby sells real property for $300,000. The buyer pays $5,000 in property taxes that had accrued during the year while the property was still legally owned by Abby. In addition, Abby pays $15,000 in commissions and $3,000 in legal fees in connection with the sale. How much does Abby realize (the amount realized) from the sale of her property?

A. $277,000.

B. $282,000.

C. $287,000.

D. $300,000.

E. None of the above.

87. Alice owns land with an adjusted basis of $610,000, subject to a mortgage of $350,000. Real estate taxes are $9,000 per calendar year and are payable on December 31. On April 1, 2013, Alice sells her land subject to the mortgage for $650,000 in cash, a note for $600,000, and property with a fair market value of $120,000. What is the amount realized?

A. $1,370,000.

B. $1,372,219.

C. $1,720,000.

D. $1,722,219.

E. None of the above.

88. Pedro borrowed $250,000 to purchase a machine costing $300,000. He later borrowed an additional $25,000 using the machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $145,000 and $18,000. Pedro sells the machine subject to the two liabilities for $45,000. What is his realized gain or loss?

A. $0.

B. $45,000.

C. $163,000.

D. $208,000.

E. None of the above.

89. Carlton purchases land for $550,000. He incurs legal fees of $10,000 and broker’s commission of $28,000 associated with the purchase. He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $800,000.

What is Carlton’s basis for the land and the improvements?

A. $1,350,000.

B. $1,378,000.

C. $1,385,000.

D. $1,413,000.

E. None of the above.

90. Jamie bought her house in 2008 for $395,000. Since then, she has deducted $70,000 in depreciation associated with her home office and has spent $45,000 replacing all the old pipes and plumbing. She sells the house on July 1, 2013. Her realtor charged $34,700 in commissions. Prior to listing the house with the realtor, she spent $300 advertising in the local newspaper. Sammy buys the house for $500,000 in cash, assumes her mortgage of $194,000, and pays property taxes of $4,200 for the entire year on December 1, 2013. What is Jamie’s adjusted basis at the date of the sale and the amount realized?

A. $370,000 adjusted basis; $661,400 amount realized.

B. $370,000 adjusted basis; $661,100 amount realized.

C. $370,000 adjusted basis; $665,200 amount realized.

D. $325,000 adjusted basis; $663,200 amount realized.

E. $325,000 adjusted basis; $694,000 amount realized.

91. Yolanda buys a house in the mountains for $450,000 which she uses as her personal vacation home. She builds an additional room on the house for $40,000. She sells the property for $560,000 and pays $28,000 in commissions and $4,000 in legal fees in connection with the sale. What is the recognized gain or loss on the sale of the house?

A. $0.

B. $38,000.

C. $70,000.

D. $110,000.

E. None of the above.

92. Capital recoveries include: A. The cost of capital improvements.

B. Ordinary repair and maintenance expenditures.

C. Payments made on the principal of a mortgage on taxpayer’s building.

D. Amortization of bond premium.

E. All of the above.

93. Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public accounting practice in his home. For this business, he uses one room exclusively and regularly as a home office. In Year 1, $3,042 of depreciation expense on the home office was deducted on his income tax return. In Year 2, Steve sustained losses in his business; therefore, no depreciation was taken on the home office. Had he been allowed to deduct depreciation expense, his depreciation expense would have been $3,175. What is the adjusted basis in the home?

A. $493,783.

B. $496,825.

C. $496,958.

D. $500,000.

E. None of the above.

94. Sandra’s automobile, which is used exclusively in her trade or business, was damaged in an accident. The adjusted basis prior to the accident was $11,000. The fair market value before the accident was $10,000 and the fair market value after the accident is $6,000. Insurance proceeds of $3,200 are received. What is Sandra’s adjusted basis for the automobile after the casualty?

A. $0.

B. $7,000.

C. $7,800.

D. $10,200.

E. None of the above.

95. Joyce’s office building was destroyed in a fire (adjusted basis of $350,000; fair market value of $400,000). Of the insurance proceeds of $360,000 she receives, Joyce uses $310,000 to purchase additional inventory and invests the remaining $50,000 in short-term certificates of deposit. She received only $360,000 because of a co-insurance clause in her insurance policy. What is Joyce’s recognized gain or loss?

A. $0.

B. $10,000 loss.

C. $10,000 gain.

D. $40,000 gain.

E. None of the above.

96. Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1, 2013, for $11,000. The maturity date is December 31, 2022. The annual interest rate is 8%. What is the amount of taxable interest income that Karen should report for 2013, and the adjusted basis for the bonds at the end of 2013, assuming straight-line amortization is appropriate?

A. $0 and $11,000.

B. $0 and $10,900.

C. $100 and $11,000.

D. $100 and $10,900.

E. None of the above.

97. Jason owns Blue Corporation bonds (face value of $10,000), purchased on January 1, 2013, for $11,000.

The bonds have an annual interest rate of 8% and a maturity date of December 31, 2022. If Jason elects to amortize the bond premium, what is his taxable interest income for 2013 and the adjusted basis for the bonds at the end of 2013 (assuming straight-line amortization is appropriate)?

A. $800 and $11,000.

B. $800 and $10,900.

C. $700 and $11,000.

D. $700 and $10,900.

E. None of the above.

98. A strip along the boundary of Joy’s land is condemned for a utility easement. She receives a payment of $7,500 from the utility company. Her basis in the land is $80,000. Which of the following is correct?

A. Joy must include the $7,500 in gross income.

B. Joy must reduce the basis of the land by $7,500.

C. Joy must include the $7,500 in the gross income and increase the basis of the land by $7,500.

D. Only a. and c. are correct.

E. a., b., and c. are correct.

99. Katie sells her personal use automobile for $12,000. She purchased the car three years ago for $25,000. What is Katie’s recognized gain or loss?

A. $0.

B. $12,000.

C. ($13,000).

D. ($25,000).

E. None of the above.

100. Noelle owns an automobile which she uses for personal use. Her adjusted basis is $45,000 (i.e., the original cost). The car is worth $22,000. Which of the following statements is correct?

A. If Noelle sells the car for $22,000, her realized loss of $23,000 is not recognized.

B. If Noelle exchanges the car for another car worth $22,000, her realized loss of $23,000 is not recognized.

C. If the car is stolen and it is uninsured, Noelle may be able to recognize part of her realized loss of $23,000.

D. Only a. and b. are correct.

E. a., b., and c. are correct.

101. Mary sells her personal use automobile for $20,000. She purchased the car two years ago for $17,000.

What is Mary’s recognized gain or loss? It increased in value due to its excellent mileage, yet safe design.

A. $0.

B. $3,000.

C. $17,000.

D. $20,000.

E. None of the above.

102. Nat is a salesman for a real estate developer. His employer permits him to purchase a lot for $75,000. The employer’s adjusted basis for the lot is $45,000, and its normal selling price is $90,000.

What is Nat’s recognized gain and his basis for the lot?

Recognized gain Basis A. $0 $ 75,000 B. $0 $ 90,000 C. $15,000 $ 75,000 D. $15,000 $ 90,000 E. $30,000 $105,000

103. Over the past 20 years, Alfred has purchased 380 shares of Green, Inc., common stock. His first purchase was in 1992 when he acquired 30 shares for $20 a share. In 1997, Alfred bought 150 shares at $10 a share. In 2012, Alfred acquired 200 shares at $50 a share. Alfred intends to sell 125 shares at $60 per share in the current year (2013). If Alfred’s objective is to minimize gain, what is his recognized gain?

A. $1,250.

B. $3,520.

C. $5,950.

D. $6,250.

E. None of the above.

104. Mona purchased a business from Judah for $1,000,000. Judah’s records and an appraiser provided her with the following information regarding the assets purchased:

Land Building Equipment

Adjusted Basis $195,000 310,000 95,000

FMV $270,000 450,000 180,000

What is Mona’s adjusted basis for the land, building, and equipment?

A. Land $270,000, building $450,000, equipment $180,000.

B. Land $195,000, building $575,000, equipment $230,000.

C. Land $195,000, building $310,000, equipment $95,000.

D. Land $270,000, building $521,429, equipment $208,571.

E. None of the above.

105. Nontaxable stock dividends result in: A. A higher cost per share for all shares than before the stock dividend.

B. A lower cost per share for all shares than before the stock dividend.

C. An increase in the total cost of the old and new stock combined.

D. A decrease in the total cost of the old and new stock combined.

E. None of the above.

106. Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share. Two years later, he receives a 5% common stock dividend. At that time, the common stock of Purple Corporation had a fair market value of $12.50 per share. What is the basis of the Purple Corporation stock, the per share basis, and gain recognized upon receipt of the common stock dividend?

A. $50,000 basis in stock, $10 basis per share for the original stock and $0 basis per share for the dividend shares, $0 recognized gain.

B. $50,000 basis in stock, $9.52 basis per share, $0 recognized gain.

C. $53,125 basis in stock, $10 basis per share for the original stock and $12.50 basis per share for the dividend shares, $3,125 recognized gain.

D. $53,125 basis in stock, $10.12 basis per share, $3,125 recognized gain.

E. None of the above.

107. In 2009, Harold purchased a classic car that he planned to restore for $12,000. However, Harold is too busy to work on the car and he gives it to his daughter Julia in 2013. At this time, the fair market value of the car has declined to $10,000. Harold paid no gift tax on the transaction. Julia completes some of the restoration herself with out-of-pocket costs of $5,000. She later sells the car for $30,000. What is Julia’s recognized gain or loss on the sale of the car?

A. $0.

B. $13,000.

C. $15,000.

D. $18,000.

E. None of the above.

108. Ralph gives his daughter, Angela, stock (basis of $8,000; fair market value of $6,000). No gift tax results. If Angela subsequently sells the stock for $10,000, what is her recognized gain or loss?

A. $0.

B. $2,000.

C. $4,000.

D. $10,000.

E. None of the above.

109. Gift property (disregarding any adjustment for gift tax paid by the donor): A. Has no basis to the donee because he or she did not pay anything for the property.

B. Has the same basis to the donee as the donor’s adjusted basis if the donee disposes of the property at a gain.

C. Has the same basis to the donee as the donor’s adjusted basis if the donee disposes of the property at a loss, and the fair market value on the date of gift was less than the donor’s adjusted basis.

D. Has no basis to the donee if the fair market value on the date of gift is less than the donor’s adjusted basis.

E. None of the above.

110. Shontelle received a gift of income-producing property with an adjusted basis of $49,000 to the donor and fair market value of $35,000 on the date of gift. Gift tax of $6,000 was paid by the donor. Shontelle subsequently sold the property for $31,000. What is the recognized gain or loss?

A. $0.

B. ($4,000).

C. ($10,000).

D. ($18,000).

E. None of the above.

111. Rob was given a residence in 2013. At the time of the gift, the residence had a fair market value of $201,000, and its adjusted basis to the donor was $141,000. The donor paid a gift tax of $10,000 on the taxable gift of $187,000. What is Rob’s basis for gain?

A. $140,000.

B. $144,200.

C. $150,000.

D. $200,000.

E. None of the above.

112. In addition to other gifts, Megan made a gift of stock to Jeri in 1976. Megan had purchased the stock in 1974 for $7,500. At the time of the gift, the stock was worth $20,000. If Megan paid $850 of gift tax on the transaction in 1976, what is Jeri’s gain basis for the stock?

A. $7,500.

B. $8,350.

C. $9,017.

D. $20,000.

E. None of the above.

113. Noelle received dining room furniture as a gift from her friend, Jane. Jane’s adjusted basis was $9,200 and the fair market value on the date of the gift was $7,000. Noelle decided she did not need the furniture and sold it to a neighbor six months later for $6,500. What is her recognized gain or loss?

A. $0.

B. ($500).

C. ($2,700).

D. $6,500.

E. None of the above.

114. The holding period of property acquired by gift may begin on: A. The date the property was acquired by the donor only.

B. The date of gift only.

C. Either the date the property was acquired by the donor or the date of gift.

D. The last day of the tax year in which the property was originally acquired by the donor.

E. None of the above.

115. Nancy gives her niece a crane to use in her business with a fair market value of $61,000 and a basis in Nancy’s hands of $80,000. No gift tax was paid. What is the niece’s basis for depreciation (cost recovery)?

A. $0.

B. $19,000.

C. $61,000.

D. $80,000.

E. None of the above.

116. Which of the following is correct?

A. The gain basis for property received by gift is the lesser of the donor’s adjusted basis or the fair market value on the date of the gift.

B. The loss basis for property received by gift is the same as the donor’s basis.

C. The gain basis for inherited property is the same as the decedent’s basis.

D. The loss basis for inherited property is the lesser of the decedent’s basis or the fair market value on the date of the decedent’s death.

E. None of the above.

117. Tobin inherited 100 acres of land on the death of his father in 2013. A Federal estate tax return was filed and the land was valued at $300,000 (its fair market value at the date of the death). The father had originally acquired the land in 1970 for $19,000 and prior to his death had made permanent improvements of $6,000. What is Tobin’s basis in the land?

A. $19,000.

B. $25,000.

C. $300,000.

D. $325,000.

E. None of the above.

118. Al owns stock with an adjusted basis of $100,000 and a fair market value of $300,000. He gives the stock to Jane on July 1, 2012. When Jane dies, the fair market value of the stock is $900,000. Jane’s will provides that Al is to receive the stock. Which of the following is false?

A. If Jane dies on June 1, 2013, Al’s basis for the stock is $100,000.

B. If Jane dies on August 1, 2013, Al’s basis for the stock is $900,000.

C. If Jane dies on June 15, 2013, Al’s basis is $300,000.

D. If Jane dies on July 1, 2013, Al’s basis is $100,000.

E. All of the above are true.

119. Emma gives 1,000 shares of Green, Inc. stock to her niece, Margaret. Emma’s adjusted basis for the stock is $200,000 and the fair market value is $300,000. Seven months after the gift, Margaret is killed in an airplane accident. Emma inherits the stock which then is worth $350,000. What is the adjusted basis of the inherited stock to Emma?

A. $0.

B. $200,000.

C. $300,000.

D. $350,000.

E. None of the above.

120. Taylor inherited 100 acres of land on the death of his father in 2013. A Federal estate tax return was filed and this land was valued therein at $650,000, its fair market value at the date of the father’s death. The father had originally acquired the land in 1967 for $112,000 and prior to his death he had expended $20,000 on permanent improvements. Determine Taylor’s holding period for the land.

A. Will begin with the date his father acquired the property.

B. Will automatically be long-term.

C. Will begin with the date of his father’s death.

D. Will begin with the date the property is distributed to him.

E. None of the above.

121. Kelly inherits land which had a basis to the decedent of $95,000 and a fair market value of $50,000 on August 4, 2013, the date of the decedent’s death. The executor distributes the land to Kelly on November 12, 2013, at which time the fair market value is $49,000. The fair market value on February 4, 2014, is $45,000. In filing the estate tax return, the executor elects the alternate valuation date. Kelly sells the land on June 10, 2014, for $48,000. What is her recognized gain or loss?

A. ($1,000).

B. ($2,000).

C. ($47,000).

D. $1,000.

E. None of the above.

122. Arthur owns a tract of undeveloped land (adjusted basis of $145,000) which he sells to his son, Ned, for its fair market value of $105,000. What is Arthur’s recognized gain or loss and Ned’s basis in the land?

A. $0 and $105,000.

B. $0 and $145,000.

C. ($40,000) and $105,000.

D. ($40,000) and $145,000.

E. None of the above.

123. Paul sells property with an adjusted basis of $45,000 to his daughter Dean, for $38,000. Dean subsequently sells the property to her brother, Preston, for $38,000. Three years later, Preston sells the property to Hun, an unrelated party, for $50,000. What is Preston’s recognized gain or loss on the sale of the property to Hun? A. $0.

B. $5,000.

C. $12,000.

D. ($5,000).

E. None of the above.

124. Karen purchased 100 shares of Gold Corporation stock for $11,500 on January 1, 2010. In the current tax year (2013), she sells 25 shares of the 100 shares purchased on January 1, 2010, for $2,500. Twenty-five days earlier, she had purchased 30 shares for $3,000. What is Karen’s recognized gain or loss on the sale of the stock, and what is her basis in the 30 shares purchased 25 days earlier?

A. $375 recognized loss, $3,000 basis in new stock.

B. $0 recognized loss, $3,000 basis in new stock.

C. $0 recognized loss, $3,375 basis in new stock.

D. $0 recognized loss, $3,450 basis in new stock.

E. None of the above.

125. Andrew acquires 2,000 shares of Eagle Corporation stock for $100,000 on March 31, 2009. On January 1, 2013, he sells 125 shares for $5,000. On January 22, 2013, he purchases 135 shares of Eagle Corporation stock for $6,075. When does Andrew’s holding period begin for the 135 shares?

A. January 22, 2013.

B. January 1, 2013.

C. March 31, 2009.

D. March 31, 2009, for 125 shares and January 22, 2013, for 10 shares.

E. None of the above.

126. The basis of personal use property converted to business use is: A. Always the lower of its adjusted basis or fair market value on the date of conversion.

B. Always its adjusted basis on the date of conversion.

C. Always its fair market value on the date of conversion.

D. Always the higher of its adjusted basis or fair market value on the date of conversion.

E. None of the above.

127. Lynn purchases a house for $52,000. She converts the property to rental property when the fair market value is $115,000. After deducting depreciation (cost recovery) expense of $1,130, she sells the house for $120,000. What is her recognized gain or loss?

A. $0.

B. $6,130.

C. $37,630.

D. $69,130.

E. None of the above.

128. In order to qualify for like-kind exchange treatment under § 1031, which of the following requirements must be satisfied?

A. The form of the transaction is a sale or exchange.

B. Both the property transferred and the property received are held either for productive use in a trade or business or for investment.

C. Investment property cannot be exchanged for business property.

D. Only a. and b.

E. a., b., and c.

129. Which, if any, of the following exchanges qualifies for nonrecognition treatment as a § 1031 like-kind exchange?

A. Partnership interest for a partnership interest.

B. Inventory for inventory.

C. Securities for personalty.

D. Business realty for investment realty.

E. None of the above.

130. Brett owns investment land located in Tucson, Arizona. He exchanges it for other investment land. In which of the following locations may the other investment land be located and enable Brett to qualify for § 1031 like-kind exchange treatment?

A. Mexico City, Mexico.

B. Toronto, Canada.

C. Paris, France.

D. Only a. and b.

E. None of the above.

131. Lily exchanges a building she uses in her rental business for a building owned by Kendall, her brother, which she will use in her rental business. The adjusted basis of Lily’s building is $120,000 and the fair market value is $170,000. Which of the following statements is correct?

A. Lily’s recognized gain is $50,000 and her basis for the building received is $120,000.

B. Lily’s recognized gain is $50,000 and her basis for the building received is $170,000.

C. Lily’s recognized gain is $0 and her basis for the building received is $120,000.

D. Lily’s recognized gain is $0 and her basis for the building received is $170,000.

E. None of the above is correct.

132. Latisha owns a warehouse with an adjusted basis of $200,000. She exchanges it for a strip mall building worth $225,000. Which of the following statements is correct?

A. If the warehouse was used in Latisha’s business to store inventory and the strip mall building is to be rented to tenants, her recognized gain is $25,000 and her basis for the strip mall building is $225,000.

B. If the warehouse was used in Latisha’s business to store inventory and the strip mall building is to be used as a retail outlet for her business, her recognized gain is $0 and her basis for the strip mall building is $200,000.

C. If the warehouse is used by Latisha to store personal use items such as excess furniture and the strip mall building is to be rented to tenants, her recognized gain is $25,000 and her basis for the strip mall building is $225,000.

D. Only b. and c. are correct.

E. a., b., and c. are correct.

133. Which of the following statements is correct?

A. The receipt of boot in a § 1031 like-kind exchange can result in the recognition of gain.

B. The receipt of boot in a § 1031 like-kind exchange cannot result in the recognition of loss.

C. The giving of boot in a § 1031 like-kind exchange can result in the recognition of gain.

D. Only a. and b.

E. a., b., and c.

134. Bud exchanges a business use machine with an adjusted basis of $22,000 and a fair market value of $30,000 for another business use machine with a fair market value of $28,000 and $2,000 cash. What is Bud’s recognized gain or loss?

A. $0.

B. $2,000.

C. $6,000.

D. $8,000.

E. None of the above.

135. Maud exchanges a rental house at the beach with an adjusted basis of $225,000 and a fair market value of $200,000 for a rental house at the mountains with a fair market value of $180,000 and cash of $20,000. What is the recognized gain or loss?

A. $0.

B. $20,000.

C. ($20,000).

D. ($25,000).

E. None of the above.

136. Melvin receives stock as a gift from his uncle. No gift tax is paid. The adjusted basis of the stock is $30,000 and the fair market value is $38,000. Melvin trades the stock for bonds with a fair market value of $35,000 and $3,000 cash. What is his recognized gain and the basis for the bonds?

A. $0, $30,000.

B. $5,000, $33,000.

C. $5,000, $30,000.

D. $8,000, $33,000.

E. None of the above.

137. Moss exchanges a warehouse for a building he will use as an office building. The adjusted basis of the warehouse is $600,000 and the fair market value of the office building is $350,000. In addition, Moss receives cash of $150,000. What is the recognized gain or loss and the basis of the office building?

A. $0 and $350,000.

B. $0 and $450,000.

C. ($150,000) and $300,000.

D. ($200,000) and $350,000.

E. None of the above.

138. Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a fair market value of $700,000. In addition, Pam receives $100,000 in cash. What is the recognized gain or loss and the basis of the investment land?

A. $0 and $420,000.

B. $100,000 and $420,000.

C. $100,000 and $520,000.

D. $280,000 and $700,000.

E. None of the above.

139. If boot is received in a § 1031 like-kind exchange and gain is recognized, which formula correctly calculates the basis for the like-kind property received?

A. Adjusted basis of like-kind property surrendered + gain recognized – fair market value of boot received.

B. Fair market value of like-kind property surrendered + gain recognized + fair market value of boot received.

C. Fair market value of like-kind property received – postponed gain.

D. Only a. and c.

E. None of the above.

140. In determining the basis of like-kind property received, postponed losses are: A. Added to the basis of the old property.

B. Subtracted from the basis of the old property.

C. Added to the fair market value of the like-kind property received.

D. Subtracted from the fair market value of the like-kind property received.

E. None of the above.

141. Molly exchanges a small machine (adjusted basis of $85,000; fair market value of $78,000) used in her business and investment land (adjusted basis of $10,000; fair market value of $15,000) for a large machine (fair market value of $93,000) to be used in her business in a like-kind exchange. What is Molly’s recognized gain or loss?

A. $0.

B. $5,000.

C. ($2,000).

D. ($7,000).

E. None of the above.

142. In October 2013, Ben and Jerry exchange investment realty in a § 1031 like-kind exchange. Ben bought his real estate in 2003 while Jerry purchased his in 2006. In addition to the realty, Ben receives Pearl, Inc. stock worth $10,000 from Jerry. Ben’s realized gain is $30,000. On what date does the holding period for Ben’s realty received from Jerry begin? When does the holding period for the stock he receives begin?

A. 2003, 2013.

B. 2003, 2003.

C. 2006, 2006.

D. 2006, 2013.

E. None of the above.

143. Dena owns 500 acres of farm land in southeastern Maryland. Her adjusted basis for the land is $480,000 and there is a $400,000 mortgage on the land. She exchanges the land for an office building owned by Chris in Newark, New Jersey. The building has a fair market value of $900,000. Chris assumes Dena’s mortgage on the land. What is the amount of Dena’s recognized gain or loss on the exchange?

A. $0.

B. $400,000.

C. $500,000.

D. $820,000.

E. None of the above.

144. On October 1, Paula exchanged an apartment building (adjusted basis of $375,000 and subject to a mortgage of $125,000) for another apartment building owned by Nick (fair market value of $550,000 and subject to a mortgage of $125,000). The property transfers were made subject to the mortgages. What amount of gain should Paula recognize?

A. $0.

B. $25,000.

C. $125,000.

D. $175,000.

E. None of the above.

145. Nancy and Tonya exchanged assets. Nancy gave Tonya her personal residence with an adjusted basis of $280,000 and a fair market value of $560,000. The house has a mortgage of $200,000 which is assumed by Tonya. Tonya gave Nancy a yacht used in her business with an adjusted basis of $250,000 and a fair market value of $360,000. What is Tonya’s realized and recognized gain?

A. $310,000 realized and $310,000 recognized gain.

B. $310,000 realized and $0 recognized gain.

C. $110,000 realized and $110,000 recognized gain.

D. $110,000 realized and $0 recognized gain.

E. None of the above.

146. If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion), makes the appropriate election, and the amount reinvested in replacement property is less than the amount realized, realized gain is: A. Recognized to the extent of the deficiency (amount realized not reinvested).

B. Recognized to the extent of realized gain.

C. Recognized to the extent of the amount reinvested in excess of the adjusted basis.

D. Permanently not subject to taxation.

E. None of the above.

147. Joyce, a farmer, has the following events occur during the tax year. Which of the events qualify as an involuntary conversion under § 1033 (nonrecognition of gain from an involuntary conversion)?

A. Her farm tractor is hauled to the city dump because it is worn out.

B. She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd in preparation for her retirement.

C. Her personal residence, adjusted basis of $100,000, is condemned to make way for an interstate highway.

She recovers condemnation proceeds of $175,000.

D. She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd due to a reduction in milk prices.

E. None of the above.

148. An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2013. On January 11, 2014, the insurance company paid the owner $450,000. The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the loss. The owner reinvested $410,000 in a new office building on February 12, 2014, that was smaller than the original office building. What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected?

A. $0 and $320,000.

B. $0 and $410,000.

C. $40,000 and $320,000.

D. $130,000 and 410,000.

E. None of the above.

149. Which of the following statements is correct with respect to qualified replacement property in a § 1033 involuntary conversion?

A. If the functional use test applies, a warehouse used to store inventory can be replaced with a smaller building to be used to sell inventory.

B. If the taxpayer use test applies, an office building rented to tenants can be replaced with an office building to be used in the taxpayer’s business.

C. If the like-kind exchange test applies, a building used by the taxpayer for manufacturing can be replaced with an office building to be used in the taxpayer’s business.

D. Only b. and c.

E. a., b., and c.

150. Jared, a fiscal year taxpayer with a August 31st year-end, owns an office building (adjusted basis of $800,000) that was destroyed by fire on December 24, 2013. If the insurance settlement was $950,000 (received March 1, 2014), what is the latest date that Jared can replace the office building in order to qualify for § 1033 nonrecognition of gain?

A. December 31, 2013.

B. August 31, 2014.

C. December 31, 2015.

D. August 31, 2016.

E. None of the above.

151. Which of the following statements is correct for a § 1033 involuntary conversion of an office building which is destroyed by fire?

A. An election can be made to postpone gain on a § 1033 involuntary conversion only if the proceeds received are reinvested in qualifying property no later than two years after the end of the tax year in which a proceeds inflow is received that is large enough to produce a realized gain.

B. The postponement of realized gain in a § 1033 involuntary conversion is elective.

C. The functional use test is satisfied if a business warehouse is replaced with another business warehouse.

D. The taxpayer use test is satisfied if a shopping mall rented to tenants is replaced with an office building to be rented to tenants.

E. All of the above are correct.

152. Which of the following satisfy the time period requirement for postponement of gain as a § 1033 (nonrecognition of gain from an involuntary conversion) involuntary conversion?

A. Al’s business warehouse is destroyed by a tornado on October 31, 2013. Al is a calendar year taxpayer. He receives insurance proceeds on December 5, 2013. He reinvests the proceeds in another warehouse to be used in his business on December 29, 2015.

B. Heather’s personal residence is destroyed by fire on October 31, 2013. She is a calendar year taxpayer. She receives insurance proceeds on December 5, 2013. She purchases another principal residence with the proceeds on October 31, 2015.

C. Mack’s office building is condemned by the city as part of a road construction project. The date of the condemnation is October 31, 2013. He is a calendar year taxpayer. He receives condemnation proceeds from the city on that date. He purchases another office building with the proceeds on December 5, 2016.

D. Lizzy’s business automobile is destroyed in an accident on October 31, 2013. Lizzy is a fiscal year taxpayer with the fiscal year ending on June 30th. She receives insurance proceeds on December 5, 2013. She purchases another business automobile with the proceeds on June 1, 2016.

E. All of the above.

153. Sam’s office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30, 2013. Sam is a calendar year taxpayer. He receives a condemnation award of $875,000 on March 1, 2014. He builds a new office building at a cost of $845,000 which is completed and paid for on December 31, 2016. What is Sam’s recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition?

A. $0; $720,000.

B. $30,000; $750,000.

C. $30,000; $845,000.

D. $150,000; $750,000.

E. None of the above.

154. A factory building owned by Amber, Inc. is destroyed by a hurricane. The adjusted basis of the building was $400,000 and the appraised value was $425,000. Amber receives insurance proceeds of $390,000. A factory building is constructed during the nine-month period after the hurricane at a cost of $450,000. What is the recognized gain or loss and what is the basis of the new factory building?

A. $0 and $450,000.

B. $0 and $460,000.

C. ($10,000) and $440,000.

D. ($10,000) and $450,000.

E. None of the above.

155. If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion) and the amount reinvested in replacement property exceeds the amount realized, the basis of the replacement property is: A. The cost of the replacement property.

B. The fair market value of the involuntarily converted property minus the postponed gain.

C. The cost of the replacement property minus the postponed gain.

D. The amount realized.

E. None of the above.

156. Fran was transferred from Phoenix to Atlanta. She sold her Phoenix residence (adjusted basis of $250,000) for a realized loss of $50,000 and purchased a new residence in Atlanta for $375,000. Fran had owned and lived in the Phoenix residence for 6 years. What is Fran’s recognized gain or loss on the sale of the Phoenix residence and her basis for the residence in Atlanta?

A. $0 and $375,000.

B. $0 and $425,000.

C. ($50,000) and $325,000.

D. ($50,000) and $375,000.

E. None of the above.

157. During 2013, Howard and Mabel, a married couple, decided to sell their residence. The residence has a basis of $162,000 and has been owned and occupied by them for 11 years. The house was sold in May for $395,000 with broker’s commissions and other selling expenses being $24,000. They purchased a new residence in June for $400,000. What is the adjusted basis of the new residence?

A. $0.

B. $141,000.

C. $162,000.

D. $191,000.

E. None of the above.

158. During 2013, Ted and Judy, a married couple, decided to sell their residence, which had a basis of $300,000. They had owned and occupied the residence for 20 years. To make it more attractive to prospective buyers, they had the outside painted in April at a cost of $6,000 and paid for the work immediately. They sold the house in May for $880,000. Broker’s commissions and other selling expenses amounted to $53,000. Since they both are age 68, they decide to rent an apartment. They purchase an annuity with the net proceeds from the sale. What is the recognized gain?

A. $0.

B. $17,000.

C. $27,000.

D. $527,000.

E. None of the above.

159. Ross lives in a house he received as a gift from his father. His father had lived in the house for 12 years.

The adjusted basis of the house to his father was $160,000 and the fair market value at the time of the gift was $140,000. Ross sells this residence after living in it for 18 months for $150,000 and purchases a new home for $125,000. He incurs selling expenses of $7,000. What is Ross’ recognized gain or loss and basis for the new residence?

A. ($17,000); $125,000.

B. ($17,000); $142,000.

C. $3,000; $125,000.

D. $3,000; $128,000.

E. None of the above.

160. Paula inherits a home on July 1, 2013, that had a basis in the hands of the decedent at death of $290,000 and a fair market value of $500,000 at the date of the decedent’s death. She decides to sell her old principal residence, which she has owned and occupied for 9 years, with an adjusted basis of $125,000 and move into the inherited home. On September 16, 2013, she sells the old residence for $600,000. Paula incurs selling expenses of $30,000 and legal fees of $2,000. She decides to add a pool, deck, pool house, and recreation room to the inherited home at a cost of $100,000. These additions are completed and paid for on November 1, 2013. What is her recognized gain on the sale of her old principal residence and her basis in the inherited home?

A. $0; $500,000.

B. $193,000; $600,000.

C. $443,000; $600,000.

D. $475,000; $600,000.

E. None of the above.

161. Which of the following types of exchanges of insurance contracts qualify for nonrecognition treatment under § 1035?

A. Exchange of life insurance contracts.

B. Exchange of a life insurance contract for an endowment or annuity contract.

C. Exchange of an endowment contract for an annuity contract.

D. Only a. and b.

E. a., b., and c.

162. As part of the divorce agreement, Tyler transfers his ownership interest in their personal residence to Lupe.

The house had been jointly owned by Tyler and Lupe and the adjusted basis is $520,000. At the time of the transfer to Lupe, the fair market value is $800,000. What is the recognized gain to Tyler, and what is Lupe’s basis for the house?

A. $0 and $520,000.

B. $0 and $800,000.

C. $140,000 and $520,000.

D. $280,000 and $800,000.

E. None of the above.

163. Which of the following statements is correct with respect to § 1044 (rollover of publicly traded securities gain into specialized small business investment companies)?

A. Section 1044 provides for permanent exclusion of gain.

B. To qualify under § 1044, the proceeds must be reinvested within one year of the sale.

C. The statutory ceilings on § 1044 treatment are the same for individual and corporate taxpayers.

D. Only b. and c. are correct.

E. None of the above.

164. Which of the following might motivate a taxpayer to try to avoid like-kind exchange treatment?

A. Taxpayer has unused NOL carryovers.

B. Taxpayer has unused general business credit carryovers.

C. Taxpayer has suspended or current passive activity losses.

D. Only a. and b. are correct.

E. a., b., and c. are correct.

165. Robert sold his ranch which was his principal residence during the current taxable year. At the date of the sale, the ranch had an adjusted basis of $460,000 and was encumbered by a mortgage of $200,000. The buyer paid him $500,000 in cash, agreed to take the title subject to the $200,000 mortgage, and agreed to pay him $100,000 with interest at 6 percent one year from the date of sale. How much is Robert’s recognized gain on the sale?

166. Ken is considering two options for selling land for which he has an adjusted basis of $100,000 and on which there is a mortgage of $80,000. Under the first option, Ken will sell the land for $225,000 with a stipulation in the sales contract that he liquidate the mortgage before the sale is complete. Under the second option, Ken will sell the land for $145,000 and the buyer will assume the mortgage. Calculate Ken’s recognized gain under both options.

167. Annette purchased stock on March 1, 2013, for $200,000. At December 31, 2013, it was worth $210,000.

She also purchased a bond on September 1, 2013, for $20,000. At year end, it was worth $15,000. Determine Annette’s realized and recognized gain or loss.

168. Nigel purchased a blending machine for $125,000 for use in his business. As to the machine, he has deducted MACRS cost recovery of $31,024, maintenance costs of $5,200, and repair costs of $4,000. Calculate Nigel’s adjusted basis for the machine.

169. Peggy uses a delivery van in her business. The adjusted basis is $39,000, and the fair market value is $34,000. The delivery van is stolen and Peggy receives insurance proceeds of $34,000. Determine Peggy’s realized and recognized gain or loss.

170. Jan purchases taxable bonds with a face value of $250,000 for $265,000. The annual interest paid on the bonds is $10,000. Assume Jan elects to amortize the bond premium. The total premium amortization for the first year is $1,600.

a. b. c.

What is Jan’s interest income for the first year?

What is Jan’s interest deduction for the first year?

What is Jan’s adjusted basis for the bonds at the end of the first year?

171. Boyd acquired tax-exempt bonds for $430,000 in December 2013. The bonds, which mature in December 2018, have a maturity value of $400,000. Boyd does not make any elections regarding the amortization of the bond premium. Determine the tax consequences to Boyd when he redeems the bonds in December 2018.

172. Marilyn owns 100% of the stock of Lilac, Inc., with an adjusted basis of $45,000. She receives a cash distribution of $160,000 from Lilac when its earnings and profits are $90,000.

a. b. c.

What is Marilyn’s dividend income?

What is Marilyn’s recognized gain or loss?

What is Marilyn’s adjusted basis for her stock after the distribution?

173. Hilary receives $10,000 for a 7-foot wide utility easement along one of the boundaries to her property. The easement provides that no structure can be built on that portion of the property. Her adjusted basis for the property is $200,000 and the easement covers 15% of the total acreage. Determine the effect of the $10,000 payment on Hilary’s gross income and her basis for the property.

174. Ollie owns a personal use car for which he originally paid $48,000. He trades the car in on a sports utility vehicle (SUV) paying the automobile dealer cash of $30,000. If the negotiated price of the SUV is $49,000, what is Ollie’s recognized gain or loss and his adjusted basis for the SUV?

175. Omar has the following stock transactions during 2013:

Date purchased 1/2011 6/2011 4/2012 2/2013 3/2013 7/2013 11/2013

Stock Orange Blue Yellow Blue Yellow Blue Yellow

a. b.

Number of shares sold

Number of shares 100 200 50 150 175

Basis $1,000 3,000 1,250 1,800 5,250

250 200

Selling price

$3,500 7,200

What is Omar’s recognized gain or loss on the stock sales if his objective is to minimize the recognized gain and to maximize the recognized loss?

What is Omar’s recognized gain or loss if he does not identify the shares sold?

176. Hubert purchases Fran’s jewelry store for $950,000. The identifiable assets of the business are as follows: Inventory Accounts receivable Building Land

Basis $ 90,000 55,000 100,000 280,000

FMV $ 97,000 50,000 225,000 300,000

Hubert and Fran agree to assign $110,000 to a 7-year covenant not to compete. How should Hubert allocate the $950,000 purchase price to the assets?

177. Marge purchases the Kentwood Krackers, a AAA level baseball team, for $1.5 million. The appraised values of the identified assets are as follows:

Prepaid season tickets Stadium lease Player contracts Equipment

$150,000 400,000 500,000 100,000

The Krackers have won the pennant for the past two years. Determine Marge’s adjusted basis for the assets of the Kentwood Krackers.

178. Melody’s adjusted basis for 10,000 shares of Cardinal, Inc. common stock is $1,000,000. During the year, she receives a 5% stock dividend that is a nontaxable stock dividend.

a. b. c.

What is the amount of Melody’s gross income?

What is Melody’s total basis for the stock?

What is Melody’s basis per share?

179. In 2013, Felix gives 10,000 shares of stock to his daughter, Monica. The stock was acquired in 2004 for $200,000, and at the time of the gift, it had a fair market value of $600,000. Felix paid a gift tax of $240,000.

[Assume the gift tax exclusion has been used by Felix—see Chapter 1.]

a. b.

Does the receipt of the stock result in gross income to Monica?

What is Monica’s basis in the stock?

180. On September 18, 2013, Jerry received land and a building from Ted as a gift. Ted had purchased the land and building on March 5, 2010, and his adjusted basis and the fair market value at the date of the gift were as follows:

Asset Land Building

Adjusted Basis $150,000 90,000

FMV $200,000 100,000

Ted paid gift tax on the transfer to Jerry of $100,000. a. b.

Determine Jerry’s adjusted basis and holding period for the land and building.

Assume instead that the FMV of the land was $89,000 and the FMV of the building was $60,000. Determine Jerry’s adjusted basis and holding period for the land and building.

181. Emma gives her personal use automobile (cost of $32,000; fair market value of $12,000) to her son, Louis, on July 3, 2013. She has owned the automobile since July 1, 2010.

a. b.

What is Louis’ basis for the car?

When does his holding period begin?

182. Faith inherits an undivided interest in a parcel of land from her father on February 15, 2013. Her father purchased the land on August 25, 1986 and his basis for the land was $325,000. The fair market value of the land is $12,500,000 on the date of her father’s death and is $11,000,000 six months later. The executor elects the alternate valuation date. Faith has nine brothers and sisters and each inherited a one-tenth interest.

a. b.

What is Faith’s adjusted basis for her one-tenth undivided interest in the land?

What is her holding period for the land?

183. Elbert gives stock worth $28,000 (no gift tax resulted) to his friend, Jeff, on June 8, 2013. Elbert purchased the stock on September 1, 2006, and his adjusted basis is $22,000. Jeff dies on December 8, 2014, and bequeaths the stock to Elbert. At that date, the fair market value of the stock is $31,000.

a. b.

What is Jeff’s basis and holding period for the stock?

What is Elbert’s basis and holding period for the stock?

184. On January 15 of the current taxable year, Merle sold stock with a cost of $40,000 to his brother Ned for $25,000, its fair market value. On June 21, Ned sold the stock to a friend for $26,000.

a. b.

What are the tax consequences to Merle and Ned? Would Ned recognize any gain if he sold the stock for $41,000?

185. Monica sells a parcel of land to her son, Elbert, for $90,000. Monica’s adjusted basis is $100,000. Three years later, Elbert gives the land to his fiancée, Karen. At that date, the land is worth $104,000. No gift tax is paid. Since Elbert is going to be stationed in the U.S. Army in Germany for 3 years, they do not plan on being married until his tour is completed. Six months after receiving the land, Karen sells it for $110,000. At the same time, Karen sends Elbert a “Dear John” email. Calculate Karen’s realized and recognized gain or loss.

186. Mitch owns 1,000 shares of Oriole Corporation common stock (adjusted basis of $15,000). On April 27, 2013, he sells 400 shares for $5,200, while on May 5, 2013, he purchases 200 shares for $3,600.

a. b. c.

What is Mitch’s recognized gain or loss resulting from these transactions?

What is Mitch’s basis for the stock acquired on May 5, 2013?

Could Mitch have obtained different tax consequences in a. and b. if he had sold the 400 shares on December 27, 2013, and purchased the 200 shares on January 5, 2014?

187. Marsha transfers her personal use automobile to her business (a sole proprietorship). The car’s adjusted basis is $30,000 and the fair market value is $16,000. No cost recovery had been deducted by Marsha, since she held the car for personal use. Determine the adjusted basis of the car to Marsha’s sole proprietorship including the basis for cost recovery.

188. For the following exchanges, indicate which qualify as like-kind property.

a. b. c. d. e.

Inventory of a sporting goods store in Charleston for inventory of an appliance store in Savannah.

Inventory of a ladies dress shop in Cleveland for inventory of a ladies dress shop in Richmond.

Investment land in Virginia Beach for office building in Williamsburg.

Used automobile used in a business for a new automobile to be used in the business.

Investment land in Paris for investment land in San Francisco.

f.

Shares of Texaco stock for shares of Exxon Mobil stock.

189. Chaney exchanges a truck used in her business for making deliveries for a smaller more fuel-efficient truck to be used in her business for making deliveries. The adjusted basis for her truck is $32,000. The smaller truck has a fair market value of $33,000. In addition, Chaney receives cash of $4,000.

a. b.

Calculate Chaney’s realized and recognized gain or loss.

Calculate Chaney’s basis for the assets she received.

190. Sammy exchanges equipment used in his business in a like-kind exchange. The property exchanged is as follows:

Equipment Cash Liability on equipment

Property Surrendered Adj. Basis $44,000

Property Received FMV $60,000

$12,000

$12,000

The other party assumes the liability. a. b.

What is Sammy’s recognized gain or loss?

What is Sammy’s basis for the assets he received?

Adj. Basis $50,000 $ 5,000

FMV $43,000 $ 5,000

191. Jake exchanges an airplane used in his business for a smaller airplane to be used in his business. His adjusted basis for the airplane is $325,000 and the fair market value is $310,000. The fair market value of the smaller airplane is $300,000. In addition, Jake receives cash of $10,000.

a. b.

Calculate Jake’s realized and recognized gain or loss and his adjusted basis for the assets received.

Assume that the exchange is between Jake and Jake’s son. Calculate Jake’s realized and recognized gain or loss and his adjusted basis for the assets received if his son’s intention is to use the airplane in his trade or business.

192. a. Orange Corporation exchanges a warehouse located in Michigan (adjusted basis of $560,000) for a warehouse located in Ohio (adjusted basis of $450,000; fair market value of $525,000). Indicate the amount of gain or loss that is recognized by Orange Corporation on the exchange, and the basis of the warehouse acquired.

b.

Assume that in addition to the warehouse Orange Corporation also received $100,000 in cash. Indicate the amount of gain or loss that is recognized by Orange Corporation on the exchange, and the basis of the warehouse acquired.

c.

How would your answer in b. change if instead of receiving $100,000 in cash, the other party assumed Orange’s $100,000 mortgage on the Michigan warehouse?

193. Eunice Jean exchanges land held for investment located in Rolla, Missouri, for land to be held for investment located near Madrid, Spain. Her basis for the land given up is $450,000 and the fair market value of the land received is $500,000. Eunice Jean also receives cash of $45,000.

a. b.

What is Eunice Jean’s recognized gain?

What is her basis for the land received?

194. For each of the following involuntary conversions, determine if the property qualifies as replacement property.

a. b. c. d. e.

Chuck’s restaurant building is destroyed by fire. He clears the site and builds another restaurant building.

Diane’s warehouse which she used for storing inventory is destroyed by a tornado. She purchases another warehouse in which she will store inventory.

Part of Andrew’s dairy farm land is condemned to make way for an interstate highway. He uses the condemnation proceeds to construct a barn to be used for storing cattle feed.

Liz owns a shopping mall which is destroyed by a flood. Since the tenant occupancy rate was down, she uses the insurance proceeds to purchase an office building which she will rent to tenants.

Eleanor’s Maserati Gran Turismo is stolen. The original cost was $125,000, and she had used it exclusively for personal use. Due to the limited supply of this model, it had appreciated in value. Eleanor received insurance proceeds of $130,000 and uses the proceeds to purchase a replacement Gran Turismo.

195. Patty’s factory building, which has an adjusted basis of $475,000, is destroyed by fire on April 8, 2013.

Insurance proceeds of $500,000 are received on June 1, 2013. She has a new factory building constructed for $490,000, which she occupies on October 1, 2013. Assuming Patty’s objective is to minimize the tax liability, calculate her recognized gain or loss and the basis of the new factory building.

196. Evelyn’s office building is destroyed by fire on July 12, 2013. The adjusted basis is $315,000. She receives insurance proceeds of $350,000 on August 31, 2013. Calculate the amount that Evelyn must reinvest in qualifying property in order that her recognized gain be $20,000. Assume she elects § 1033 (nonrecognition of gain from an involuntary conversion) postponement treatment.

197. Mandy and Greta form Tan, Inc., by transferring the following assets to the corporation in exchange for 5,000 shares of stock each.

Mandy: Cash of $450,000 Greta: Land (worth $450,000; adjusted basis of $90,000).

How much gain must Tan recognize on the receipt of these assets?

198. Beth sells investment land (adjusted basis of $225,000) that she has owned for 6 years to her husband, Richard, for its fair market value of $195,000.

a.

Calculate Beth’s recognized gain or loss.

b.

Calculate Richard’s basis for the land.

c.

How would your answers in a. and b. change if Beth and Richard were not married (i.e., merely good friends)?

d.

Would the answer in a. and b. change if the selling price was $270,000?

199. After 5 years of marriage, Dave and Janet decided to get a divorce. As part of the divorce settlement, Janet transfers to Dave the house she purchased prior to their marriage. Janet’s adjusted basis for the house is $230,000 and the fair market value is $410,000 on the date of the transfer. What are the tax consequences to Janet and to Dave as a result of the transfer?

200. Walter owns stock in Target, Inc. (adjusted basis of $50,000) which he sells for $70,000 on March 21, 2013. On May 1, 2013, he uses the $70,000 to acquire stock in Lime, Inc., a specialized small business investment company. Calculate Walter’s recognized gain on the sale of the Target stock and his basis in the stock acquired.