Basis Flashcards
1
Q
Mary bought land with a building on it that she planned to use in her business. Her costs in connection with this purchase were as follows: Cash down payment $ 20,000 Mortgage on property 150,000 Survey costs 1,000 Transfer taxes 900 Charges for installation of gas lines 1,500 Back taxes owed by seller and paid by Mary 600 What is Mary’s basis in this property? A. $173,400 B. $171,500 C. $174,000 D. $172,500
A
$174,000 Answer (C) is correct. The basis of property is its original cost (Sec. 1012), plus certain fees and expenditures. These fees and expenditures include survey costs, transfer fee, and charges for the installation of utility services. The cost of property includes debt to which the property is subject (Crane, 331 U.S. 1, 1947). Consequently, the basis of the property includes the cash paid, any notes to the seller, and the liability to which the property was subject. Taxes paid by a buyer that were not the legal responsibility of the buyer are also allocated to the purchase price (they are not deductible under Sec. 164). Mary’s basis in the property is Cash $ 20,000 Mortgage 150,000 Survey costs 1,000 Transfer taxes 900 Charges for installation of gas lines 1,500 Seller’s taxes 600 $174,000
2
Q
Mr. Lemon had purchased 300 shares of ABC stock in 2000 for $7 a share. In 2010, he gave 200 shares to his son Robert. At the time of this gift, the stock had a fair market value of $5 a share. In 2019, Robert sold 100 shares for $4 a share. What is Robert’s basis in the stock sold in 2019? A. $600 B. $400 C. $700 D. $500
A
$500
Answer (D) is correct.
Normally, when a gift is received, the donee takes the donor’s basis in the property. However, if the property’s FMV on the date of transfer is less than the donor’s basis in the property, the donee has a dual basis in the property. Since the property is resold at less than the FMV on the date of the gift, a loss results. Therefore, the donee uses the FMV at the date of the gift as his or her basis.
3
Q
Mrs. N inherited property from a decedent where an estate tax return was not required to be filed. The decedent’s adjusted basis in the property at the time of death was $75,000. A local real estate agent, qualified as an appraiser, placed a valuation of $100,000 on the property at the date of death. The appraised value for state inheritance tax purposes was $90,000. What is Mrs. N’s basis in the property? A. $90,000 B. $100,000 C. $0 D. $75,000
A
$90,000
Answer (A) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. The value of the property for basis purposes is normally the value as appraised for the federal estate tax return, but if no federal estate tax return is required to be filed, the value as appraised for state inheritance tax purposes is used [Reg. 1.1014-3(a)]. Therefore, the basis is $90,000.
4
Q
In March 2019, Jesse traded in a 2016 van for a new 2019 model. He used both the old van and the new van 75% for business. Jesse has claimed actual expenses for the business use of the old van since 2016. He did not claim a Sec. 179 deduction of the old or new van. Jesse paid $12,800 for the old van in June 2016. Depreciation claimed on the 2016 van was $7,388, which included 6 months for 2019. Jesse paid $9,800 cash in addition to a trade-in allowance of $2,200 to acquire the new van. What is Jesse’s depreciable basis in the new van? A. $9,562 B. $9,000 C. $9,009 D. $11,409
A
$9,562
Answer (A) is correct.
The basis of property is generally its cost (Sec. 1012). In the case of a taxable exchange of property, the cost is the value of the property given up plus any additional cash paid. The basis for figuring depreciation for the new van is the adjusted basis of the old van, $5,412 ($12,800 – $7,388), plus any additional cash paid, $9,800, minus the excess of the total amount of depreciation that would have been allowable before the trade if the old van had been used 100% for business. The depreciation under 100% business assumption, $9,850 ($7,388 ÷ .75), is reduced by the actual depreciation, $7,388, to obtain the excess total of $2,462. The total depreciable basis for the new van is $12,750 ($5,412 + $9,800 – $2,462). This total must be reduced by the amount of personal use (25%) to determine the new depreciable basis of $9,562.
5
Q
In Year 1, Chim purchased 100 shares of preferred stock of Donald Corporation for $5,000. In Year 3, she received a stock dividend of 20 additional shares of preferred stock in Donald. On the date of the distribution, the preferred stock had a fair market value of $40 per share. What is Chim’s basis in the new stock she received as a result of the stock dividend? A. $1,000 B. $800 C. $0 D. $833
A
$800
Answer (B) is correct.
When a tax-free distribution of stock is received by a shareholder, the basis in the new stock is determined by allocating the basis in the old stock between the new stock and the old stock. However, a distribution of preferred stock made with respect to preferred stock is included in gross income [Sec. 305(b)(4)]. Chim’s basis in the new stock received from Donald Corporation is $800 (20 shares × $40 FMV per share). This is the amount that Chim will have to include in gross income and for which she will receive a basis under Sec. 301(d).
6
Q
Which of the following is the depreciable basis in rental property that is placed in service immediately upon receiving it as a gift if the donor’s basis was more than the fair market value of the property?
A. The donor’s basis of the property plus or minus any required adjustments to basis.
B. The fair market value on the date of the gift plus or minus any required adjustments to basis.
C. The fair market value of the property on the date of conversion to rental property.
D. All of the answers are correct.
A
The donor’s basis of the property plus or minus any required adjustments to basis.
Answer (A) is correct.
If gift property is immediately used as business property, the basis for depreciation is the donor’s AB (plus or minus any required adjustments).
7
Q
The cost basis of rental property includes
A. Fees paid to the settlement attorney.
B. All of the answer choices.
C. Real estate taxes paid to the seller without reimbursement.
D. Recording fees and transfer taxes.
A
All of the answer choices.
Answer (B) is correct.
When a taxpayer purchases property, his or her basis in the property is initially the cost of the property. Cost basis is the sum of capitalized acquisition costs. Initial basis in purchased property is the cost of acquiring it. Only capital costs are included. One component of capital costs is closing costs, which includes brokerage commissions, pre-purchase taxes, sales tax on purchase, title transfer taxes, title insurance, recording fees, attorney fees, and document review preparation. Expenses not properly chargeable to a capital account include costs of maintaining and operating the property (e.g., interest on credit related to the property), insurance (e.g., casualty), ordinary maintenance or repairs (e.g., painting). Thus, the fees paid to the settlement attorney, the recording fees and transfer taxes, and the real estate taxes paid to the seller without reimbursement are all included in the cost basis of rental property.
8
Q
Juan purchased two shares of common stock in 2019 in a company that markets biotech products. Juan paid $90 for one share and paid $110 for the next share. Later that year, the company declared a 2-for-1 common stock split. Juan’s new basis in the stock shares is
A. Two shares at $90 a share and two shares at $110 a share.
B. Four shares at $200 a share.
C. Two shares at $45 a share and two shares at $55 a share.
D. Average of the four shares at $50 a share.
A
Two shares at $45 a share and two shares at $55 a share.
Answer (C) is correct.
Juan purchased two shares of common stock in 2019. The first share had a basis of $90. The second share had a basis of $110. After the stock split, the first share has basis of $45 ($90 ÷ 2) and the second share has a basis of $55 ($110 ÷ 2).
9
Q
You incurred the following expenditures in connection with your rental property. Which of them should be capitalized? A. New roof. B. Pave driveway. C. All of the answers are correct. D. Install new cabinets.
A
All of the answers are correct.
Answer (C) is correct.
Generally, expenses that add to the value of the property, substantially prolong the useful life of the property, or adapt the property to a new or different use are considered capital expenditures and are not currently deductible. Thus, capital expenditures include the cost of acquiring or constructing buildings, machinery, equipment, furniture, and any similar property that has a useful life that extends substantially beyond the end of the tax year. Maintenance and repair expenditures that only keep an asset in a normal operating condition are deductible if they do not increase the value or prolong the useful life of the asset. Installing a new roof, installing new cabinets, and paving a driveway are all major improvements that add to the value of the property.
10
Q
Mr. Pine purchased a small office building during the year. Included in his costs were the following: Cash down payment $ 50,000 Mortgage on property assumed 300,000 Title insurance 2,000 Fire insurance premiums 2,000 Attorney fees 1,000 Rent to former owner to allow Mr. Pine to occupy the office building prior to closing 4,000 What is Mr. Pine’s basis in the property? A. $353,000 B. $350,000 C. $359,000 D. $355,000
A
$353,000
Answer (A) is correct.
The basis of property is its original cost (Sec. 1012). The cost of property includes debt to which the property is subject (Crane, 331 U.S. 1, 1947). Further, the cost of property includes necessary expenses paid in connection with the acquisition of the property. The attorney fees and title insurance are included in the cost of the property. The fire insurance premiums and rent expense, however, are not paid in connection with the acquisition of the property. Thus, the basis is $353,000 ($50,000 cash payment + $300,000 mortgage assumed + $2,000 title insurance + $1,000 attorney fees).
11
Q
Lucky received a gift of stock having an adjusted basis of $12,000 and a fair market value of $7,200 at the time of the gift. Lucky sold the stock for $13,000. What is the amount of Lucky’s capital gain or loss? A. $1,000 B. $13,000 C. $0 D. $5,800
A
$1,000
Answer (A) is correct.
For determining gain on the sale of property acquired by gift, the basis is the donor’s adjusted basis. Lucky’s sale results in a $1,000 gain ($13,000 sales price – $12,000 adjusted basis). For determining loss on the sale of property acquired by gift, the basis may not exceed the fair market value of property at the date of the gift. Hence, there is no loss ($13,000 sales price – $7,200 basis).
12
Q
The basis in property inherited from a decedent may be determined as follows:
A. The decedent’s basis plus any inheritance tax paid on the increased value.
B. The fair market value at the date of death or the fair market value at an alternative valuation date.
C. The fair market value at an alternate valuation date.
D. The fair market value at the date of death.
A
The fair market value at the date of death or the fair market value at an alternative valuation date.
Answer (B) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. If the executor elects the alternate valuation date for the estate tax return, the basis of the assets is their fair market value 6 months after death or the date of sale or distribution, if earlier.
13
Q
When would the capitalization of interest payments on credit for a building be permissible? A. In years with a net operating loss. B. During major improvements. C. Never. D. During building construction.
A
During building construction.
Answer (D) is correct.
Interest and taxes must be capitalized as part of building costs during the construction period.
14
Q
In 2019, Christian received a gift of property from his mother that had a fair market value of $50,000. Her adjusted basis was $20,000. She paid a gift tax of $6,300. What is Christian’s basis in the property? A. $56,300 B. $25,400 C. $26,300 D. $50,000
A
$25,400 Answer (B) is correct. The basis of property acquired by gift is generally the donor’s adjusted basis [Sec. 1015(a)], increased by a gift tax paid applicable to appreciation [Sec. 1015(d)]. The gift tax applicable to appreciation is the appreciation divided by the taxable gift times the gift tax. Donor’s adjusted basis $20,000 Gift tax* 5,400 Donee’s basis $25,400
*$50,000 - $20,000 / $50,000 - $15,000 * $6,300 = $5,400
15
Q
Donna received land as a gift from her grandfather. At the time of the gift, the land had a fair market value of $80,000 and an adjusted basis of $100,000 to Donna’s grandfather. One year later, Donna sold the land for $105,000. What was her gain or loss on this transaction? A. $5,000. B. $20,000. C. No gain or loss. D. $15,000.
A
$5,000.
Answer (A) is correct.
The FMV of the land was less than the donor’s basis in the land ($100,000) at the date of transfer. Therefore, Donna (the donee) has a dual basis in the land. The grandfather’s (donor’s) basis is used since the property is subsequently sold at a gain. Donna’s sale results in a $5,000 gain ($105,000 sales price – $100,000 basis).
16
Q
Derrick received several acres of land from his father as a gift. At the time of the gift, the land had a fair market value of $85,000. The father’s adjusted basis in the land was $105,000. Two years later, Derrick sold the land for $90,000. No events occurred that increased or decreased Derrick’s basis in the land. What was Derrick’s gain or loss on the sale of the land? A. $5,000 B. $0 C. $(15,000) D. $20,000
A
$0
Answer (B) is correct.
For determining gain on the sale of property acquired by gift, the basis is the donor’s adjusted basis. Derrick’s sale results in no gain ($90,000 sales price – $105,000 basis). For determining loss on the sale of property acquired by gift, the basis may not exceed the fair market value of the property at the date of the gift. Hence, there is no loss ($90,000 sales price – $85,000 basis).
17
Q
In 2017, Melanie Tyson bought 100 shares of XYZ stock for $1,000, or $10 a share. In 2018, she bought 100 shares of XYZ stock for $1,600, or $16 a share. In 2019, XYZ declared a 2-for-1 stock split. Which of the following is true?
A. Melanie now has 200 shares with a basis of $5 per share and 200 shares with a basis of $8 per share.
B. Melanie now has 200 shares with a basis of $5 per share.
C. Melanie now has 200 shares with a basis of $8 per share.
D. Melanie now has 400 shares with a basis of $6.50 per share.
A
Melanie now has 200 shares with a basis of $5 per share and 200 shares with a basis of $8 per share.
Answer (A) is correct.
A distribution of common stock as a stock split is generally a tax-free distribution. The basis of the original stock is allocated between it and the new stock based on their relative fair market values. The 100 shares purchased in 2017 have a basis of $1,000 (100 shares × $10 per share), which must be allocated to the additional 100 shares from the stock split. The basis for the 2017 stocks will be $5 per share ($1,000 ÷ 200). The 100 shares purchased in 2018 have a basis of $1,600 (100 shares × $16), which must be allocated to the additional 100 shares from the stock split. The basis for the 2018 stocks will be $8 per share ($1,600 ÷ 200).
18
Q
In 2018, Tony received a gift of 200 shares of mutual funds stock. The stock was worth $20,000 when Tony received it. The donor had originally paid $10,000 for the stock when he bought it in 2014. Tony sold the stock for $15,000 in 2019. What is Tony’s basis in the stock, disregarding gift tax? A. $20,000 B. $15,000 C. $10,000 D. $0
A
$10,000
Answer (C) is correct.
The basis of the gift Tony received equals $10,000. The FMV at the date of the gift equals $20,000. Since the FMV exceeds the donor’s basis in the stock, Tony must use the basis of the donor, $10,000.
19
Q
On February 15 of the current year, Gary purchased 150 shares of common stock in T Corporation for $60 per share. Three months later he purchased 50 more shares at $90 per share. On December 15 of the current year, Gary received a 20% nontaxable stock dividend. The new and the old stock are identical. What is the amount of Gary’s basis in each share of stock?
A. 180 shares at $60 per share and 60 shares at $75 per share.
B. 180 shares at $50 per share and 60 shares at $75 per share.
C. 240 shares at $56.25 per share.
D. 180 shares at $60 per share and 60 shares at $90 per share.
A
180 shares at $50 per share and 60 shares at $75 per share.
Answer (B) is correct.
The stock dividend made by T Corporation is a tax-free distribution under Sec. 305(a). The basis of the new stock is determined by allocating the basis of the old stock between the new stock and the old stock [Sec. 307(a)]. This allocation of basis in the stock is made based on the relative fair market values on the date of distribution for each of the two different blocks of stock, rather than by averaging them. Gary owns 180 (150 + 30) shares with a basis of $9,000, or $50 per share and 60 (50 + 10) shares with a basis of $4,500, or $75 per share.
20
Q
Mr. Back received land as a gift from his uncle. At the time of the gift, the land had a fair market value of $7,000 and an adjusted basis of $9,500 to Mr. Back’s uncle. One year later, Mr. Back sold the land for $8,000. What was his gain or loss on this transaction? A. $1,500 loss. B. No gain or loss. C. $1,000 gain. D. $2,000 gain.
A
No gain or loss.
Answer (B) is correct.
For determining gain on the sale of property acquired by gift, the basis is the donor’s adjusted basis. Mr. Back’s sale results in no gain ($8,000 sales price – $9,500 basis = no gain).
For determining loss on the sale of property acquired by gift, the basis may not exceed the fair market value of the property at the date of the gift. Hence, there is no loss ($8,000 sales price – $7,000 basis = no loss).
21
Q
In 2017, Paul received a boat as a gift from his father. At the time of the gift, the boat had a fair market value of $60,000 and an adjusted basis of $80,000 to Paul’s father. After Paul received the boat, nothing occurred affecting Paul’s basis in the boat. In 2019, Paul sold the boat for $75,000. What is the amount and character of Paul’s gain? A. Long-term capital loss of $5,000. B. Neither a gain nor a loss. C. Long-term capital gain of $15,000. D. Ordinary income of $15,000.
A
Neither a gain nor a loss.
Answer (B) is correct.
For determining gain on the sale of property acquired by gift, the basis is the donor’s adjusted basis. Paul’s sale results in no gain ($75,000 sales price – $80,000 basis). For determining loss on the sale of property acquired by gift, the basis may not exceed the fair market value of the property at the date of the gift. Hence, there is no loss ($75,000 sales price – $60,000 basis).
22
Q
Harry purchased one share of common stock in a computer company for $90. Shortly after he purchased it, the corporation distributed two new shares of common stock for each share held. What is his basis for each of the three shares of common stock? A. $30 B. $90 C. $0 D. $180
A
$30
Answer (A) is correct.
A proportionate distribution of stock issued by the corporation is generally not gross income to the shareholders. A shareholder allocates the aggregate adjusted basis (AB) in the old stock to the old and new stock in proportion to the FMV of the old and new stock. Basis is apportioned by relative FMV to different classes of stock if applicable. Since the distribution occurred shortly after Harry’s purchase of the stock, it can be assumed that the FMV of his one stock is equal to the FMV of the distribution. Since he owns three shares after the distribution, his original basis must be divided by three shares to arrive at his basis per share of common stock. Thus, his basis in each of his three shares is equal to $30 ($90 ÷ 3 shares).
23
Q
Alex bought four shares of common stock for $200. Later the corporation distributed a share of preferred stock for every two shares of common. At the date of distribution, the common stock had a FMV of $60 and preferred stock had a FMV of $40. What is Alex’s basis in the common stock and the preferred stock after the nontaxable stock dividend? A. $200 common; $80 preferred. B. $150 common; $50 preferred. C. $240 common; $80 preferred. D. $60 common; $40 preferred.
A
$150 common; $50 preferred.
Answer (B) is correct.
Since the preferred stock dividend was nontaxable, the original basis of the common stock would be allocated between the common stock and the preferred stock based on the relative fair market values of each on the date of the stock dividend (Reg. 1.307-1). The market values of Alex’s common and preferred stock on the date of the dividend were $240 and $80, respectively. Alex’s tax basis in the common stock after the receipt of the dividend is $150 [($240 ÷ $320) × $200]. Alex’s tax basis in the preferred stock is $50 [($80 ÷ $320) × $200].
24
Q
Rick, an electrician, needed a new service van. He was a frequent customer of Eldon’s Grill. Eldon wanted to remodel his kitchen. Eldon offered to sell his catering van, fair market value $10,000, to Rick for $8,000 and pay $1,000 cash in return for Rick’s rewiring his kitchen. If Rick agrees to do the work under these terms, what will be his basis in the van received? A. $9,000 B. $11,000 C. $8,000 D. $10,000
A
$10,000
Answer (D) is correct.
When property or services are exchanged between parties it is considered bartering. Bartered services or goods are included in gross income at the fair market value of the item(s) received in exchange for the services. If the parties have agreed prior to the exchange what the value of the services is, that value will be considered the fair value. Rick has traded $7,000 plus his services for a $10,000 van. The basis of the van is $10,000 to Rick and he reports $3,000 of income for his services provided.
25
```
Linda received land as a gift from her grandmother. At the time of the gift, the land had a fair market value of $60,000 and an adjusted basis of $70,000 to Linda’s grandmother. One year later, Linda sold the land for $85,000. What is the amount of Linda’s gain on this transaction?
A. $25,000
B. $15,000
C. $85,000
D. $10,000
```
$15,000
Answer (B) is correct.
The basis of property acquired by gift is generally the donor’s adjusted basis, plus any gift tax attributable to appreciation (Sec. 1015). This rule applies when the donee determines any gain on a sale of the property. Since no gift tax was paid attributable to appreciation, Linda’s basis is the same as her grandmother’s, or $70,000. Therefore, she must recognize a $15,000 gain ($85,000 sales price – $70,000 basis).
26
```
Mr. Apple and Ms. Melon purchased a small apartment house at the beginning of 2012 for $400,000, which they held for investment. Each furnished one-half of the purchase price, and each had a half interest in the income from the property. They held the apartment in joint tenancy with the right of survivorship (i.e., a tenancy in which the interest of the first tenant to die passes to the survivor on the death of the first tenant to die). They depreciated the apartment house at the rate of $10,000 per year. On December 31, 2019, Mr. Apple died. At the date of Mr. Apple’s death, the apartment house had an adjusted basis (cost minus depreciation) of $320,000 and a fair market value of $550,000. What is Ms. Melon’s basis as of the date of Mr. Apple’s death?
A. $400,000
B. $500,000
C. $435,000
D. $320,000
```
$435,000
Answer (C) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. Under Sec. 2040, the general rule is that the gross estate of a decedent includes the entire value of property held jointly at the time of death except that portion of the property that was acquired by the other joint owner for adequate and full consideration. In this question, each investor contributed one-half of the purchase price. Therefore, when Mr. Apple died, his gross estate included only one-half of the apartment house. Accordingly, Ms. Melon will receive only a step-up in basis for that one-half of property included in Mr. Apple’s estate. Ms. Melon’s basis in the apartment house is $435,000 [$275,000 (1/2 of $550,000 FMV that represents Mr. Apple’s portion) + $160,000 (Ms. Melon’s original one-half basis in the property of $200,000 minus her share of depreciation of $40,000)].
27
```
In 2019, Ivana received a vacant parcel of land from her uncle as a gift. Ivana’s uncle purchased the land in 2004 for $15,000, and at the time of the gift, the land had a fair market value of $13,000. Ivana did not have any other events that increased or decreased her basis in the gift after she received it. What is her gain if she sold her property for $17,000?
A. $2,000 gain.
B. $4,000 gain.
C. $3,000 gain.
D. $0 gain.
```
$2,000 gain.
Answer (A) is correct.
The donee’s basis in property acquired by gift is the donor’s basis, increased for any gift tax paid attributable to appreciation. If the FMV on the date of the gift is less than the donor’s basis, the donee has a dual basis for the property. The donor’s basis is used if the property is later transferred at a gain. Since the FMV on the date of transfer was less than the basis, Ivana has a dual basis in the property. Because she subsequently recognizes a gain, Ivana’s basis equals the donor’s basis on the date of transfer. Thus, Ivana recognizes a $2,000 gain ($17,000 – $15,000).
28
```
During the year, Billy’s father deeded him 400 acres of land. The fair market value (FMV) on the date of the transfer was $350,000. His father had paid $40,000 for the land. No gift tax was paid on the transfer. When Billy’s father died six months later, the fair market value of the land was $400,000. What is Billy’s basis in the 400 acres?
A. $350,000
B. $40,000
C. $400,000
D. $310,000
```
$40,000
Answer (B) is correct.
The donee’s basis in property acquired by gift is the donor’s basis, increased for any gift tax paid attributable to appreciation. The donor’s basis is increased by
Gift Tax Paid * FMV (at time of gift) - Donor's basis / FMV (at time of gift) - Annual exclusion
The donor’s basis in the property is $40,000 and no gift tax was paid on the transfer.
29
```
During the current year, Joey received a gift of property from his uncle. At the time of the gift, the property had a fair market value of $120,000 and an adjusted basis to his uncle of $80,000. Joey’s uncle paid a gift tax on the property of $21,000. What is the amount of Joey’s basis in the property?
A. $80,000
B. $128,000
C. $101,000
D. $88,000
```
```
$88,000
Answer (D) is correct.
The basis of property acquired by gift is generally the donor’s adjusted basis [Sec. 1015(a)], increased by a gift tax paid applicable to appreciation [Sec. 1015(d)]. The gift tax applicable to appreciation is the appreciation divided by the taxable gift times the gift tax.
Donor’s adjusted basis
$80,000
Gift tax*
8,000
Donee’s basis
$88,000
```
* $120,000 - $80,000 / $120,000 - $15,000 * $21,000 = $8,000
30
```
During 2019, Marnie received a gift of property from her aunt. At the time of the gift, the property had a fair market value of $150,000 and an adjusted basis to her aunt of $90,000. Marnie’s aunt paid a gift tax on the property of $20,250. What is the amount of Marnie’s basis in the property?
A. $99,000
B. $110,250
C. $90,000
D. $159,000
```
```
$99,000
Answer (A) is correct.
The basis of property acquired by gift is generally the donor’s adjusted basis [Sec. 1015(a)], increased by any gift tax paid applicable to appreciation [Sec. 1015(d)]. The gift tax applicable to appreciation is the appreciation divided by the taxable gift times the gift tax.
Donor’s adjusted basis
$90,000
Gift tax*
9,000
Donee’s basis
$99,000
```
*$150,000 - $90,000 / $150,000 - $15,000 * $20,250 = $9,000
31
```
Charles gave his daughter, Jane, a residential house. He had purchased the house for $250,000 in 2004. The fair market value on the date of the gift was $300,000. Charles had added a $25,000 roof the year before he gave it to Jane. Jane converts the house to a residential rental property within 1 year of the gift when the FMV was $320,000. Jane’s basis in the property is
A. $250,000
B. $300,000
C. $275,000
D. $225,000
```
$275,000
Answer (C) is correct.
Real property that is converted to residential rental property has a basis that is the adjusted basis of the donor, plus the cost for any improvements or additions, minus any deductions for casualty or loss (Publication 551). The adjusted basis of the property is $275,000 ($250,000 + $25,000).
32
With regard to stock dividends, all of the following statements are correct EXCEPT
A. If a stock dividend is taxable, the basis of the old stock does not change.
B. In computing basis for new stock received as a result of nontaxable dividend, it is immaterial whether the stock received is identical or not to the old stock.
C. If a stock dividend is not taxable, a division must be made in the basis between the old and new stock.
D. Stock dividends are distributions made by a corporation of its own stock.
In computing basis for new stock received as a result of nontaxable dividend, it is immaterial whether the stock received is identical or not to the old stock.
Answer (B) is correct.
If stock is received that is a different class of stock, the basis is apportioned to the new stock according to its respective fair market value rather than its original basis.
33
```
Eric owns several buildings throughout his state of residence. Costs related to these buildings include insurance and interest on credit used to secure the buildings. Eric recently performed maintenance on one of the buildings and installed rain gutters on another. The collective basis of the buildings will include the cost of the
A. Installation.
B. Maintenance.
C. Interest on credit.
D. Insurance and installation.
```
Installation.
Answer (A) is correct.
Major improvements, such as installing new gutters, are capitalized and included in the basis of property.
34
```
Mr. More inherited 2,000 shares of Corporation Zero stock from his father, who died on March 4, 2019. His father paid $10 per share for the stock on September 4, 1992. The fair market value of the stock on the date of death was $50 per share. On September 4, 2019, the fair market value of the stock was $60 per share. Mr. More sold the stock for $75 per share on July 3, 2019. The estate qualified for, and the executor elected, the alternate valuation date. An estate tax return was filed. What was Mr. More’s basis in the stock on the date of the sale?
A. $120,000
B. $100,000
C. $150,000
D. $130,000
```
$150,000
Answer (C) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. If the executor elects the alternate valuation date for the estate tax return, the basis of the assets is their fair market value 6 months after death or the date of sale or distribution if earlier. Mr. More’s basis in the stock is $150,000, the fair market value on the date of sale (2,000 shares × $75 per share).
35
```
Mr. King inherited 100 shares of Corporation LX stock from his father, who died on March 4, 2019. His father paid $17 per share for the stock on May 3, 1994. The fair market value of the stock on the date of death was $63 per share. On September 4, 2019, the fair market value of the stock was $55 per share. Mr. King sold the stock for $68 per share on December 3, 2019. The executor of the estate did not elect the alternate valuation date for valuing the father’s estate. An estate tax return was filed. What was Mr. King’s basis in the stock on the date of the sale?
A. $1,700
B. $4,600
C. $5,500
D. $6,300
```
$6,300
Answer (D) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. If the alternate valuation date for the estate tax return is elected by the executor, the basis of the assets is their fair market value 6 months after death. Mr. King’s basis in the stock is the $6,300 fair market value on March 4 (the date of his father’s death).
36
```
Mr. T purchased an apartment building on December 15 of the current year. Mr. T’s costs in connection with the purchase were as follows:
Cash paid to seller
$25,000
Secured notes to seller
55,000
Assumed an existing mortgage on the property
15,000
Sales commission paid to broker
3,000
Transfer taxes
600
Paid back taxes owed by seller
700
Paid interest on mortgage from date of purchase to end of December
100
What is the amount of Mr. T’s basis in the building?
A. $80,000
B. $99,300
C. $99,400
D. $95,600
```
```
$99,300
Answer (B) is correct.
The basis of property is its original cost (Sec. 1012), reduced by allowable depreciation [Sec. 1016(a)(2)]. The cost of property includes debt to which the property is subject (Crane, 331 U.S. 1, 1947). Consequently, the basis of the property includes the cash paid, any notes to the seller, and the liability to which the property was subject. Closing costs such as commissions paid to a broker are also included as part of the purchase cost. Taxes paid by a buyer that were not the legal responsibility of the buyer are also allocated to the purchase price (they are not deductible under Sec. 164). Mortgage interest paid is deductible under Sec. 163 (not included in cost). Mr. T’s basis in the building is
Cash
$25,000
Secured notes
55,000
Mortgage
15,000
Sales commission
3,000
Transfer taxes
600
Seller’s taxes
700
$99,300
```
37
```
Jerry received 2 acres of land valued at $10,000 as a gift. The donor’s adjusted basis was $12,000. Jerry subsequently sold the land for $20,000. For purposes of computing his gain, what is Jerry’s basis in the land?
A. $2,000
B. $8,000
C. $10,000
D. $12,000
```
$12,000
Answer (D) is correct.
If the FMV on the date of the gift is less than the donor’s basis, the donee has a dual basis for the property. The FMV at the date of the gift is used if the property is later transferred at a loss. The donor’s basis is used if the property is later transferred at a gain. Since the land was sold at a gain, Jerry’s basis in the land is the same as the donor’s basis, or $12,000.
38
During 2003, John purchased 50 shares of common stock in Corporation D for $4,500. In 2014, D declared a stock dividend of 20%. The new stock received by John in the stock dividend was identical to the old stock. In 2019, D’s stock split 3-for-1 at a time when the fair market value was $120 per share. What is John’s basis in each of his shares of D’s stock if both distributions were nontaxable?
A. $120 per share.
B. $25 per share.
C. $75 for 60 shares and $142.50 for 120 shares.
D. $90 for 50 shares and $0 for all additional shares.
$25 per share.
Answer (B) is correct.
A distribution of common stock as a stock dividend on common stock is generally a tax-free distribution. The same is true for a stock split. Under Sec. 307(a), the basis of the original stock is allocated between it and the distributed stock based on their relative fair market values. Here, all the stock has the same fair market value, so the basis per share is calculated as total basis divided by total number of shares. John’s total number of shares is 180 [(50 + 10) × 3]. His basis per share is $25 ($4,500 ÷ 180 shares).
39
```
Ms. Willow operated a small manufacturing plant. During the year, she took delivery on a new plastic mold stamping machine. Her cost included the following:
Cost of machine
$88,000
Sales tax
4,000
Freight charges to deliver property to her
1,500
Excise taxes
2,000
What is Ms. Willow’s basis in the machine?
A. $95,500
B. $89,500
C. $93,500
D. $88,000
```
```
$95,500
Answer (A) is correct.
Under Sec. 1012, the basis of property is the cost of the property. Sales and excise taxes paid in connection with the acquisition of property are treated as a cost of the property [Sec. 164(a)]. Delivery, installation, and freight charges are also included as part of the cost of the property. Basis is computed as follows:
Purchase price
$88,000
Sales tax
4,000
Freight charges
1,500
Excise taxes
2,000
Basis in equipment
$95,500
```
40
A taxpayer purchases real estate rental property for $150,000. She pays $25,000 cash and obtains a mortgage for $125,000. She pays closing costs of $8,000, which includes $4,000 in points on the mortgage and $4,000 for bank fees and title costs. The basis in the property is
A. $150,000 depreciation, $8,000 amortization.
B. $158,000, depreciation only.
C. $33,000 depreciation, $125,000 amortization.
D. $154,000 depreciation, $4,000 amortization.
$154,000 depreciation, $4,000 amortization.
Answer (D) is correct.
A taxpayer may include the costs from settlement at closing when buying real property. The following may be included in the basis:
Abstract fees
Charges for installing utility services
Legal fees
Recording fees
Surveys
Transfer fees
Owner’s title insurance
Any amounts the seller owes that the taxpayer agrees to pay
However, the following are not included in settlement costs and thus are not a part of the depreciable basis:
```
Fire insurance premiums
Rent for occupancy of property before closing
Any bills incurred for utilities or other services related to occupancy of property before closing
Charges connected with getting the loan
a.
Points
b.
Mortgage insurance premiums
c.
Loan assumption fees
d.
Cost of a credit report
e.
Fees for an appraisal required by a lender
Fees for refinancing a mortgage
When these costs are incurred in a trade or business, 1.-3. from the list above are classified as business expenses and 4.-5. from the list above must be capitalized as a cost of obtaining the loan and amortized over the life of the loan (Pub. 551). Thus, the depreciable basis is $154,000 ($25,000 cash + $125,000 mortgage + $4,000 bank fees and title costs), and the $4,000 for points is the basis for amortization over the life of the mortgage.
```
41
On January 3, 2019, Irene purchased 300 shares of common stock in Corporation Y for $120 per share. Four months later, she purchased 100 additional shares at $180 per share. On December 10, 2019, Irene received a 20% nontaxable stock dividend. The new and the old stock are identical. What is the amount of Irene’s basis in each share of stock after the stock dividend?
A. 360 shares at $100 per share and 120 shares at $150 per share.
B. 480 shares at $112.50 per share.
C. 360 shares at $120 per share and 120 shares at $150 per share.
D. 360 shares at $120 per share and 120 shares at $180 per share.
360 shares at $100 per share and 120 shares at $150 per share.
Answer (A) is correct.
A distribution of common stock as a stock dividend on common stock is generally a tax-free distribution. The basis of the original stock is allocated between it and the distributed stock based on their relative fair market values. Here, all the stock has the same fair market value, so the basis per share should be calculated as total basis divided by total number of shares. Because there are two sets of identical stocks with different bases, the basis calculation is done on a pro rata basis. The stock dividend is equal to 80 shares (400 × 20%). Thus, 360 shares [300 + .75(80)] will have a basis equal to $100 per share ($36,000 ÷ 360), and 120 shares [$100 + .25(80)] will have a basis equal to $150 per share ($18,000 ÷ 120).
42
The basis of property acquired by purchase includes all of the following EXCEPT
A. Freight, installation, and testing charges.
B. Sales tax charged on the purchase.
C. Unstated interest on any time-payment plan.
D. Amount paid in notes to the seller.
Unstated interest on any time-payment plan.
Answer (C) is correct.
The basis of purchased property does not include unstated interest on time-payment plans. Interest is deductible as an expense.
43
```
On June 1, 2019, Kirk received a gift of income-producing real estate having a donor’s adjusted basis of $50,000 at the date of the gift. The fair market value of the property at the date of the gift was $40,000. Kirk sold the property for $46,000 on August 1, 2019. How much gain or loss should Kirk report for 2019?
A. $4,000 short-term capital loss.
B. $4,000 ordinary loss.
C. No gain or loss.
D. $6,000 short-term capital gain.
```
No gain or loss.
Answer (C) is correct.
Normally, when a gift is received, the donee takes the donor’s basis in the property. However, if the property’s FMV on the date of transfer is less than the donor’s basis in the property, the donee has a dual basis in the property. Since the property is resold at more than the FMV on the date of the gift but less than the donor’s basis on the date of the gift, no gain or loss is recognized.
44
Your basis in property you inherit from a decedent is generally one of the following:
A. The FMV of the property at the date of the individual’s death.
B. The decedent’s adjusted basis in land to the extent of the value that is excluded from the decedent’s taxable estate as a qualified conservation easement.
C. All of the answers are correct.
D. The FMV on the alternate valuation date, if the personal representative for the estate chooses to use alternate valuation.
All of the answers are correct.
Answer (C) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. If the executor elects the alternate valuation date for the estate tax return, the basis of the assets is their fair market value 6 months after death or the date of sale or distribution, if earlier. Finally, if land is inherited from a decedent, basis may be the decedent’s adjusted basis in the land to the extent of the value not included in the decedent’s taxable estate due to a qualified conservation easement.
45
Cost basis of property includes
A. Real estate taxes paid for seller without reimbursement.
B. Certain settlement fees and other costs.
C. Sales taxes charged on the purchase.
D. All of the answers are correct.
All of the answers are correct.
Answer (D) is correct.
Under Sec. 1012, the basis of property is the cost of the property. The cost of property includes necessary expenses paid in connection with the acquisition of the property. Settlement fees are generally considered necessary expenses in connection with the acquisition of property. Sales tax paid in connection with the acquisition of property is also treated as a cost of the property [Sec. 164(a)]. Finally, property taxes paid on behalf of the seller are considered a cost in acquiring the property.
46
```
Mr. P developed a patent on a machine that could be used in his trade or business. Mr. P made no election to currently deduct any of his developmental expenses. Which of the following expenditures may NOT be included in the basis of Mr. P’s patent?
A. Value of Mr. P’s time.
B. Drawing fees.
C. Research expenditures.
D. Governmental fees.
```
Value of Mr. P’s time.
Answer (A) is correct.
If no election is made to either expense in the current year or to defer and amortize research and experimental expenses, then these expenses are capitalized. Sec. 1012 defines the basis of property as its cost, and cost is the amount paid for the property in cash or other property. Since Mr. P did not pay for his time in cash or other property, he may not include it in the basis of the patent.
47
```
Jane acquired an acre of land as a gift. At the time of the gift, the acre had a fair market value (FMV) of $20,000. The donor’s adjusted basis in the land was $15,000. No gift tax was paid on the gift. No events occurred to increase or decrease her basis in the property. Jane later sold the acre for $10,000. What is Jane’s gain or loss on the sale?
A. $10,000 loss.
B. $10,000 gain.
C. $5,000 loss.
D. $0 (no gain or loss).
```
$5,000 loss.
Answer (C) is correct.
The basis of property acquired by gift is generally the donor’s adjusted basis [Sec. 1015(a)]. When computing a loss, the donee assumes the lesser of the FMV at the date of transfer or the donor’s adjusted basis. Therefore, Jane assumes the lesser adjusted basis of $15,000 and subtracts her $10,000 amount realized to yield a $5,000 loss.
48
Which of the following is the depreciable basis in rental property that is placed in service after receiving it as a gift and treating it as personal property, if on the date of conversion the basis was more than the fair market value of the property?
A. The donor’s basis of the property plus or minus any required adjustments to basis.
B. The fair market value on the date of the gift plus or minus any required adjustments to basis.
C. The fair market value of the property on the date of conversion to rental property.
D. All of the answers are correct.
The fair market value of the property on the date of conversion to rental property.
Answer (C) is correct.
If converted from personal to business use after receiving it as a gift, basis is the lesser of FMV and AB on the date of conversion (plus or minus any required adjustments to basis). Since FMV is less than AB, FMV is used.
49
On January 3, Year 1, Susan purchased 300 shares of common stock in Corporation Z for $180 per share. Four months later, she purchased 100 additional shares at $120 per share. On December 10, Year 1, Susan received a 20% nontaxable stock dividend. The new and the old stock are identical. What is the amount of Susan’s basis in each share of Corporation Z stock after the stock dividend?
A. 360 shares at $180 a share and 120 shares at $120 a share.
B. 360 shares at $150 a share and 120 shares at $100 a share.
C. 480 shares at $112.50 a share.
D. 360 shares at $150 a share and 120 shares at $120 a share.
360 shares at $150 a share and 120 shares at $100 a share.
Answer (B) is correct.
A distribution of common stock as a stock dividend on common stock is generally a tax-free distribution. The basis of the original stock is allocated between it and the distributed stock based on their relative fair market values. Here, all the stock has the same fair market values, so the basis per share should be calculated as total basis divided by total number of shares. Because there are two sets of identical stocks with different bases, the basis calculation is done on a pro rata basis. The stock dividend is equal to 80 shares (400 × 20%), 360 [300 + 75%(80)] shares will have a basis equal to $150 per share ($54,000 ÷ 360), and 120 shares [$100 + 25%(80)] will have a basis equal to $100 per share ($12,000 ÷ 120).
50
```
Beth and Donnie purchased a house to use as rental property. They paid the following amounts: $100,000 cash, assumption of an existing $25,000 mortgage, $500 title search, recording fees of $100, points for their new loan of $1,000, and the seller’s part of the property taxes of $1,500. The seller did not reimburse them for the property taxes. What is their cost basis in the house?
A. $125,000
B. $100,000
C. $128,100
D. $127,100
```
```
$127,100
Answer (D) is correct.
When a taxpayer acquires property, his or her basis in the property is initially cost, substituted, transferred, or exchanged basis. Cost basis is the sum of capitalized acquisition costs or the costs of acquiring the property. Only capital costs are included with some of the more common capital costs being recording fees, title search costs, cash, and the assumption of a mortgage. Property taxes paid on behalf of the seller are also considered a cost in acquiring the property. Points paid by the borrower with respect to a home mortgage are prepaid interest and are typically deductible over the term of the loan.
Basis:
Cash
$100,000
Assumption of mortgage
25,000
Title search
500
Recording fees
100
Property taxes - sellers
1,500
Cost basis in house
$127,100
```
51
```
On July 15, 2019, Carl received 50 shares of stock as an inheritance from his father, who died April 15, 2019. His father’s adjusted basis in the stock was $50,000. The stock’s fair market value on April 15, 2019, was $65,000. On July 15, 2019, its value was $70,000, and on October 15, 2019, it was $80,000. The alternate valuation date was not elected on the federal estate tax return. Carl’s basis in the inherited stock is
A. $50,000
B. $65,000
C. $80,000
D. $70,000
```
$65,000
Answer (B) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. If the alternate valuation date for the estate tax return is elected by the executor, the basis of the assets is their fair market value 6 months after death. Carl’s basis in the stock is the $65,000 fair market value on April 15 (the date of his father’s death).
52
```
Mr. R received bonds as a gift from his mother. At the time of the gift the bonds had a fair market value of $5,000 and an adjusted basis to R’s mother of $6,000. No gift tax was paid. Six months later R sold the bonds for $6,500. What was R’s basis in the bonds for computing gain?
A. $0
B. $6,500
C. $6,000
D. $5,000
```
$6,000
Answer (C) is correct.
The basis of property acquired by gift is generally the donor’s adjusted basis [Sec. 1015(a)]. Since the property had a basis in the mother’s hands of $6,000, Mr. R’s basis in the property is the same. No basis adjustment is required for gift taxes since none were paid on the transfer [Sec. 1015(d)]. The basis of the property for loss purposes is its fair market value on the date of the gift, or $5,000.
53
On January 3, Year 1, Wilson purchased 300 shares of common stock in Corporation Why for $120 per share. Four months later he purchased 100 additional shares at $180 per share. On December 10, Year 1, Wilson received a 10% nontaxable stock dividend. The new and the old stock are identical. What is the amount of Wilson’s basis in each share of stock of Corporation Why stock after the stock dividend?
A. 330 shares at $120 a share and 110 shares at $164 a share.
B. 330 shares at $109 a share and 110 shares at $164 a share.
C. 330 shares at $120 a share and 110 shares at $180 a share.
D. 440 shares at $123 a share.
330 shares at $109 a share and 110 shares at $164 a share.
Answer (B) is correct.
The stock dividend made by Corporation Why is a tax-free distribution under Sec. 305(a). The basis of the new stock is determined by allocating the basis of the old stock between the new stock and the old stock [Sec. 307(a)]. This allocation of basis in the stock is made based on the relative fair market values on the date of distribution for each of the two different blocks of stock, rather than by averaging them. Wilson owns 330 (300 + 30) shares with a basis of $36,000, or $109 per share and 110 (100 + 10) shares with a basis of $18,000, or $164 per shar
54
```
Wanda purchased a manuscript in 1937 for $10. In 2017, the year before her death, Wanda gave the manuscript to her granddaughter Ruth. At the time of the gift, the manuscript had an appraised value of $510. In 2019, Ruth sells the manuscript for $1,010. What is the amount and character of Ruth’s gain from the sale of this manuscript?
A. $500 ordinary gain.
B. $1,000 ordinary gain.
C. $1,000 long-term capital gain.
D. $500 long-term capital gain.
```
$1,000 long-term capital gain.
Answer (C) is correct.
The donee’s basis in property acquired by gift is the donor’s basis, increased by any gift tax paid attributable to appreciation. The basis of the property given is $10. Ruth sells the manuscript 2 years later for $1,010. The recognized gain from the sale is $1,000 ($1,010 – $10) and the character is long-term.
55
```
Charles, the landlord, made several repairs and improvements to his rental house. He spent $1,500 to add carpeting in the hallway, $550 for a stove, $750 for a refrigerator, $170 to replace the broken faucet in the bathroom, and $590 to replace damaged shingles on the roof. How much of these costs must he depreciate?
A. $3,560
B. $2,800
C. $3,390
D. $1,300
```
$2,800
Answer (B) is correct.
Generally, expenses that add to the value of the property, substantially prolong the useful life of the property, or adapt the property to a new or different use are considered capital expenditures and are not currently deductible. Thus, capital expenditures include the cost of acquiring or constructing buildings, machinery, equipment, furniture, and any similar property that has a useful life that extends substantially beyond the end of the tax year. Maintenance and repair expenditures that only keep an asset in a normal operating condition are deductible if they do not increase the value or prolong the useful life of the asset. Distinguishing between a currently deductible expenditure and a capital expenditure can be difficult because expenditures for normal maintenance and repair can cost more than a capital improvement. Normal maintenance and repair may also increase the value of an asset.
56
```
John and Fred owned, as joint tenants with right of survivorship, business property that they purchased for $40,000. John furnished one-fourth of the purchase price, and Fred furnished three-fourths of the purchase price. Depreciation deductions allowed before Fred’s death were $8,000. Under local law, each had a one-half interest in the income from the property. At the time of Fred’s death, the fair market value of the property was $80,000, three-fourths of which is includible in Fred’s estate. What is John’s basis in the property at the date of Fred’s death?
A. $56,000
B. $80,000
C. $60,000
D. $66,000
```
$66,000
Answer (D) is correct.
John’s basis immediately after the property was purchased was $10,000 (1/4 of $40,000). He was permitted half of the depreciation, which decreased his basis to $6,000. After Fred’s death, when John acquires the property in its entirety, the FMV (due to the step-up in basis) of the portion owned by Fred is included to have a final basis to John of $66,000 ($6,000 + $60,000) (Publication 551).
57
```
Esther gave an old truck to Lamont for use in his business. Esther’s basis in the truck was $20,000 and its fair market value on the date of the gift was $5,000. Esther paid $90 of gift tax on the transaction. What is Lamont’s basis for depreciation?
A. $5,090
B. $20,000
C. $5,000
D. $20,090
```
$20,000
Answer (B) is correct.
Under Sec. 1015, the basis of property received as a gift is the donor’s basis prior to the gift. However, if the fair market value is less than the donor’s basis, the donee has a dual basis for the property. If the property is later sold for a loss, the FMV at the date of the gift is used. If the property is later sold for a gain, the donor’s basis is used. If the property is transferred at an amount greater than the FMV, but less than the donor’s basis, no gain/loss is recognized. However, the basis used to calculate depreciation is the same as the donor’s adjusted basis. Thus, Lamont’s basis for depreciation should be $20,000 (Publication 551).
58
```
Mr. Taylor, sole proprietor of Taylor Company, purchased a machine for use in his business. Mr. Taylor’s costs in connection with this purchase were as follows:
Note to seller
$90,000
Cash paid to seller
7,500
State sales tax
4,875
Freight charges to place of business
1,500
Wages paid to install machine
6,000
What is the amount of Mr. Taylor’s basis in the machine?
A. $108,375
B. $109,875
C. $105,000
D. $103,875
```
```
$109,875
Answer (B) is correct.
Under Sec. 1012, the basis of property is the cost of the property. Sales tax paid in connection with the acquisition of property is treated as a cost of the property [Sec. 164(a)]. Delivery, installation, and testing charges are also included as part of the cost of the property. Basis is computed as follows:
Purchase price
$ 97,500
Sales tax
4,875
Delivery charges
1,500
Installation and testing charges
6,000
Basis in equipment
$109,875
```
59
```
Ten years ago, Edwin Ryan bought 100 shares of a listed stock for $5,000. In June of the current year, when the stock’s fair market value was $7,000, Edwin gave it to his sister, Lynn. No gift tax was paid. Lynn died in October of the same year, bequeathing the stock to Edwin, when the stock’s fair market value was $9,000. Lynn’s executor did not elect the alternate valuation date. What is Edwin’s basis for this stock after he inherits it from Lynn’s estate?
A. $9,000
B. $0
C. $5,000
D. $7,000
```
$5,000
Answer (C) is correct.
Section 1014(a) provides that a person who acquires property from a decedent is generally entitled to a basis equal to the fair market value of the property on the date of death. If, however, appreciated property is acquired by the decedent by gift within 1 year of death and passes back to the donor by reason of the decedent’s death, the beneficiary’s basis in the property is its adjusted basis immediately prior to the decedent’s death [Sec. 1014(e)]. Since Lynn received the stock as a gift from Edwin within 1 year of her death, Edwin assumes Lynn’s basis ($5,000), which was Edwin’s basis when he made the gift. If someone other than Edwin had received the stock following Lynn’s death, its adjusted basis would be $9,000.
60
Ed purchased a house on an acre of land from Ruth on June 30, 2019. Prior to the purchase, Ed had been renting the house from Ruth for $500 per month. Ed paid the following amounts:
$100,000 in loan proceeds to Ruth
$2,000 in points to the bank
$1,000 in real estate taxes Ruth owed to the town
$1,000 in past-due rent to Ruth
$1,000 in closing costs to the bank for legal, recording, title insurance, and survey fees
$1,000 in escrowed real estate taxes to the bank
What is Ed’s basis in the house and land purchased from Ruth?
A. $102,000
B. $100,000
C. $106,000
D. $104,000
$102,000
Answer (A) is correct.
Initial basis in purchased property is the cost of acquiring it. Only capital costs are included, i.e., those for acquisition, title acquisition, and major improvements. Ed would include the loan proceeds to Ruth; the amount paid for real estate taxes Ruth owed to the town; and closing costs to the bank for legal, recording, title insurance, and survey fees. Thus, Ed’s basis in the house would equal $102,000 ($100,000 loan proceeds + $1,000 real estate taxes owed by Ruth + $1,000 closing costs).
61
```
John decided to open a new business. As a necessary step in his business, he purchased land with a building on it. John incurred the following costs in connection with the purchase:
Cash down payment
$ 40,000
Appraisal fees
2,000
Title insurance
1,800
Mortgage on property
300,000
Charges for installation of gas lines
3,000
Back taxes owed by seller and paid by John
1,200
Which of the following is John’s basis in the property?
A. $345,000
B. $343,000
C. $346,800
D. $348,000
```
```
$348,000
Answer (D) is correct.
The basis of property is its original cost (Sec. 1012), plus certain fees and expenditures. These fees and expenditures include appraisal fees, title insurance, and charges for the installation of utility services. The cost of property includes debt to which the property is subject (Crane, 331 U.S. 1, 1947). Consequently, the basis of the property includes the cash paid, any notes to the seller, and the liability to which the property was subject. Taxes paid by a buyer that were not the legal responsibility of the buyer are also allocated to the purchase price (they are not deductible under Sec. 164). John’s basis in the property is
Cash
$ 40,000
Mortgage
300,000
Appraisal fees
2,000
Title insurance
1,800
Charges for installation of gas lines
3,000
Seller’s taxes
1,200
$348,000
```
62
```
Juan received a gift of property from his uncle. When the gift was made in 2019, the property had a fair market value of $100,000 and an adjusted basis to his uncle of $40,000. Gift tax on the transfer, completely paid by Juan’s uncle, was $14,500. What is Juan’s basis in the property?
A. $40,000
B. $110,235
C. $60,000
D. $50,235
```
```
$50,235
Answer (D) is correct.
The basis of property acquired by gift is generally the donor’s adjusted basis [Sec. 1015(a)], increased by a gift tax paid applicable to appreciation [Sec. 1015(d)]. The gift tax applicable to appreciation is the appreciation divided by the taxable gift times the gift tax.
Donor’s adjusted basis
$40,000
Gift tax*
10,235
Donee’s basis
$50,235
```
*$100,000 - $40,000 / $100,000 - $15,000 * $14,500 = $10,235
63
```
Mr. Rabbitt purchased a home for $200,000. He incurred the following additional expenses:
$200 fire insurance premiums
$500 mortgage insurance premiums
$400 recording fees
$250 owner’s title insurance
Compute his basis in the property.
```
A. $200,000
B. $200,650
C. $201,350
D. $201,150
$200,650
Answer (B) is correct.
When a taxpayer purchases property, his or her basis in the property is initially cost. Cost basis is the sum of capitalized acquisition costs. Initial basis in purchased property is the cost of acquiring it. Only capital costs are included. One component of capital costs is closing costs, which include brokerage commissions, prepurchase taxes, sales tax on purchase, title transfer taxes, title insurance, recording fees, attorney fees, and document review preparation. Expenses not properly chargeable to a capital account include costs of maintaining and operating the property (e.g., interest on credit related to the property), insurance (e.g., casualty), and ordinary maintenance or repairs (e.g., painting). Mr. Rabbitt should include the cost of the home ($200,000), the recording fees ($400), and the cost of the owner’s title insurance ($250) in the basis of his new home. Thus, his basis in his new home is $200,650.
64
```
On August 15 of the current year, Harold received 100 shares of stock as an inheritance from his mother Mona, who died on January 20. Mona’s adjusted basis in the stock was $45,000. The stock had a fair market value of $50,000 on January 20. On July 20, its value was $65,000 and on the date Harold received it, its value was $48,000. The alternative valuation date was not selected. Harold’s basis in the inherited stock is
A. $50,000
B. $48,000
C. $65,000
D. $45,000
```
$50,000
Answer (A) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. If the alternate valuation date for the estate tax return is elected by the executor, the basis of the assets is their fair market value 6 months after death. Harold’s basis in the stock is the $50,000 fair market value on January 20 (the date of Mona’s death).
65
```
Joan purchased 100 shares of preferred stock in Donald Corporation for $3,000 in 2010. In 2019, she received a stock dividend of 20 additional shares of preferred stock in Donald. On the date of the distribution, the preferred stock had a fair market value of $50 per share. What is Joan’s basis in the new stock she received as a result of the stock dividend?
A. $0
B. $600
C. $1,000
D. $500
```
$1,000
Answer (C) is correct.
When a tax-free distribution of stock is received by a shareholder, the basis in the new stock is determined by allocating the basis in the old stock between the new stock and the old stock. However, a distribution of preferred stock made with respect to preferred stock is included in gross income [Sec. 305(b)(4)]. Joan’s basis in the new stock received from Donald Corporation is $1,000 (20 shares × $50 per share). This amount will also have to be included in Joan’s gross income.
66
In Year 1, Corey bought 200 shares of ABC stock at $10 a share. In Year 2, Corey bought an additional 100 shares of ABC stock at $20 a share. In Year 3, ABC declared a 2-for-1 stock split. How many shares of ABC stock does Corey own, and what is the basis of the stock?
A. 400 shares at $5 a share and 200 shares at $10 a share.
B. 200 shares at $20 a share and 100 shares at $40 a share.
C. 400 shares at $10 a share and 200 shares at $20 a share.
D. 600 shares at $6.67 a share.
400 shares at $5 a share and 200 shares at $10 a share.
Answer (A) is correct.
A distribution of common stock as a stock split is generally a tax-free distribution. The basis of the original stock is allocated between it and the new stock based on their relative fair market values. Here, all the stock has the same fair market value, so the basis per share should be calculated as total basis divided by total number of shares. The 200 shares purchased in Year 1 have a basis of $2,000 (200 shares × $10 per share), which must be allocated to the additional 200 shares from the stock split. The basis for the Year 1 stocks will be $5 per share ($2,000 ÷ 400). The 100 shares purchased in Year 2 have a basis of $2,000 (100 shares × $20), which must be allocated to the additional 100 shares from the stock split. The basis for the Year 2 stocks will be $10 per share ($2,000 ÷ 200).
67
Taxpayer E acquires property subject to a mortgage. The taxpayer’s basis in the property will
A. Include the liability.
B. Be net of the liability.
C. Be separate from the taxpayer’s basis in the liability.
D. Not be affected.
Include the liability.
Answer (A) is correct.
The taxpayer’s basis in the building will include the amount of the liability.
68
```
Sometimes, a taxpayer’s basis in an asset is computed by reference to basis in other property. The taxpayer’s basis in this scenario would be referred to as a(n)
A. Exchanged basis.
B. Substituted basis.
C. Converted basis.
D. Transferred basis.
```
Substituted basis.
Answer (B) is correct.
Substituted basis is computed by reference to basis in other property.
69
```
In 2017, Mary purchased 10 shares of Acorn Corporation common stock for $100 per share. In 2018, Mary purchased an additional 10 shares of Acorn Corporation common stock for $200 per share. At the end of 2019, Acorn Corporation declared a 2-for-1 common-stock split. What is Mary’s total basis in her Acorn Corporation common stock?
A. $5,000
B. $6,000
C. $4,000
D. $3,000
```
$3,000
Answer (D) is correct.
A stock split results in an increase in the number of shares held by the taxpayer but no change in the total basis. The basis can therefore be calculated as follows: (10 shares × $100) + (10 shares × $200) = $3,000.
70
In 2014, Mr. Chang purchased 50 shares of common stock in Corporation D for $1,000. In 2016, Corporation D declared a stock dividend of 2 shares of its common stock for each 10 shares held. In 2019, D’s common stock split 2-for-1 at a time when the fair market value was $20 a share. What is Mr. Chang’s basis in each of his shares of D’s stock (rounded to the nearest dollar) if both distributions were tax-free and all the stock received was identical to the stock purchased?
A. $20 per share.
B. $20 for 100 shares and $0 for all additional shares.
C. $8 per share.
D. $17 for 60 shares and $20 for 60 shares.
$8 per share.
Answer (C) is correct.
A distribution of common stock as a stock dividend on common stock is generally a tax-free distribution. The same is true for a stock split. Under Sec. 307(a), the basis of the original stock is allocated between it and the distributed stock based on their relative fair market values. Here, all the stock has the same fair market value, so the basis per share is calculated as total basis divided by total number of shares. Mr. Chang’s total number of shares is 120 [(50 original shares + 10 stock dividend) × 2 (2-1 stock split)]. His basis per share (rounded to the nearest dollar) is $8 ($1,000 purchase price ÷ 120 shares).
71
```
On January 1 of the current year, Joe purchased new car wash equipment for use in his service station business. Joe’s costs in connection with the purchase were as follows:
Cost of the equipment
$43,000
Sales tax on the equipment
3,000
Delivery charges
800
Installation and testing charges
2,000
Current year personal property taxes
1,100
What is the amount of Joe’s basis in the car wash equipment?
A. $45,800
B. $49,900
C. $48,800
D. $46,100
```
```
$48,800
Answer (C) is correct.
Under Sec. 1012, the basis of property is the cost of the property. Sales tax paid in connection with the acquisition of property is treated as a cost of the property [Sec. 164(a)]. Delivery, installation, and testing charges are also included as part of the cost of the property. Basis is computed as follows:
Purchase price
$43,000
Sales tax
3,000
Delivery charges
800
Installation and testing charges
2,000
Basis in equipment
$48,800
```
72
```
Mr. West decided to form West Company. As the sole proprietor, Mr. West purchased a machine for West Company. Mr. West incurred the following costs in connection with the purchase of the machine:
Note to seller
$60,000
Cash paid to seller
5,000
Wages paid to install machine
4,000
State sales tax
3,250
Freight charges to place of business
1,000
What is the amount of Mr. West’s basis in the property?
A. $73,250
B. $70,000
C. $72,250
D. $69,250
```
```
$73,250
Answer (A) is correct.
Under Sec. 1012, the basis of property is the cost of the property. Sales tax paid in connection with the acquisition of property is treated as a cost of the property [Sec. 164(a)]. Delivery, installation, and testing charges are also included as part of the cost of the property. Basis is computed as follows:
Purchase price
$65,000
Sales tax
3,250
Delivery charges
1,000
Installation and testing charges
4,000
Basis in equipment
$73,250
```
73
```
Tony purchased a truck to be used in his excavation business. The truck’s cost was $22,000. In addition, Tony paid sales tax of $1,100 and $900 freight to have the truck delivered immediately from another dealer. What is the depreciable basis of the truck?
A. $24,000
B. $22,000
C. $23,100
D. $22,900
```
```
$24,000
Answer (A) is correct.
Under Sec. 1012, the basis of property is the cost of the property. Sales tax paid in connection with the acquisition of property is treated as a cost of the property [Sec. 164(a)]. Delivery, installation, and testing charges are also included as part of the cost of the property. Basis is computed as follows:
Purchase price
$22,000
Sales tax
1,100
Delivery charges
900
Basis in equipment
$24,000
```
74
```
Chester received a gift of stock in the current year. Chester later sold this stock for $8,280. When Chester received the stock, the stock had a fair market value of $7,200 and an adjusted basis of $12,000. What is the amount of Chester’s capital gain or loss?
A. $1,080
B. $8,280
C. $0
D. $(3,720)
```
$0
Answer (C) is correct.
If the fair market value (FMV) on the date of the gift is less than the donor’s basis, the donee has a dual basis for the property. For determining gain on the sale of property acquired by gift, the basis is the donor’s adjusted basis. Chester’s sale results in no gain because the $8,280 sales price is less than the $12,000 adjusted basis at the time of the gift. For determining loss on the sale of property acquired by gift, the basis may not exceed the FMV of the property at the date of the gift. Therefore, there also is no loss because the $8,280 sales price exceeds the $7,200 FMV at the time of the gift.
75
```
Darryl received several acres of land from his mother as a gift. At the time of the gift, the land had a fair market value of $95,000. The mother’s adjusted basis in the land was $105,000. Two years later, Darryl sold the land for $90,000. No events occurred that increased or decreased Darryl’s basis in the land. What was Darryl’s gain or loss on the sale of the land?
A. $(5,000)
B. $10,000
C. $5,000
D. $(15,000)
```
$(5,000)
Answer (A) is correct.
For determining gain on the sale of property acquired by gift, the basis is the donor’s adjusted basis. Darryl’s sale results in no gain ($90,000 sales price – $105,000 basis). For determining loss on the sale of property acquired by gift, the basis may not exceed the fair market value of the property at the date of the gift. Hence, there is a $5,000 loss ($90,000 sales price – $95,000 basis).
76
```
In 2018, your father gave you a gift of property with a fair market value (FMV) of $75,000. His adjusted basis was $50,000. The gift tax paid was $7,440. What is your basis in the property?
A. $57,440
B. $75,000
C. $50,000
D. $53,100
```
```
$53,100
Answer (D) is correct.
The basis of property acquired by gift is generally the donor’s adjusted basis [Sec. 1015(a)], increased by a gift tax paid applicable to appreciation [Sec. 1015(d)]. The gift tax applicable to appreciation is the appreciation divided by the taxable gift times the gift tax.
Donor’s adjusted basis
$50,000
Gift tax*
3,100
Donee’s basis
$53,100
```
*$75,000 - $50,000 / $75,000 - $15,000 * $7,440 = $3,100
77
```
Ms. Pear owned 1,000 shares of XYZ Corporation which she had purchased in Year 1 at a cost of $12 per share. In Year 3, she received a nontaxable 20% stock dividend. The shares were identical to those she already held. She ended the year owning 1,200 shares. In Year 5, the stock split 2 for 1, which increased her holdings to 2,400 shares at the end of the year. In Year 8, she sold 400 shares. What was her basis in the 400 shares of stock sold?
A. $4,000
B. $2,400
C. $4,800
D. $2,000
```
$2,000
Answer (D) is correct.
A distribution of common stock as a stock dividend on common stock is generally a tax-free distribution. The same is true for a stock split. Under Sec. 307(a), the basis of the original stock is allocated between it and the distributed stock based on their relative fair market values. Here, all the stock has the same fair market value, so the basis per share is calculated as total basis divided by total number of shares. Ms. Pear’s total number of shares is 2,400. Her basis per share is $5 ($12,000 ÷ 2,400 shares = $5). Therefore, her basis in stock sold is $2,000 ($400 shares × $5 per share).
78
```
Taxpayer J purchased a business building with a fair market value of $60,000 and a business auto with a fair market value of $10,000. Both were acquired in a bargain purchase for a total cost of $49,000. What is the basis of the auto?
A. $5,000
B. $10,000
C. $7,000
D. $49,000
```
$7,000
Answer (C) is correct.
The basis of property is defined in Sec. 1012 as its cost. When several assets are purchased for a lump sum, the basis of each asset is determined by allocating the total cost based on the relative fair market value of each asset. The basis of the auto is computed as the fair market value of the individual asset over the fair market value of all the assets times the total cost.
$10,000 / $70,000 * $49,000 = $7,000
79
In 2017, Sam bought 200 shares of stock at $9 per share for a total cost of $1,800. In 2018, he bought 300 shares at $12 per share for a total of $3,600. In 2019, the stock split 3-for-1. What is the basis per share in the stock after the split?
A. 600 shares at $3 and 900 shares at $4.
B. 600 shares at $9 and 900 shares at $12.
C. 200 shares at $3 and 300 shares at $4.
D. 200 shares at $9 and 300 shares at $12.
600 shares at $3 and 900 shares at $4.
Answer (A) is correct.
A distribution of common stock as a stock split is generally a tax-free distribution. The basis of the original stock is allocated between it and the new stock based on their relative fair market values. Here, all the stock has the same fair market value, so the basis per share should be calculated as total basis divided by total number of shares. The 200 shares purchased in 2017 have a basis of $1,800 (200 shares × $9 per share), which must be allocated to the additional 400 shares from the stock split. The basis for the 2017 stocks will be $3 per share ($1,800 ÷ 600). The 300 shares purchased in 2018 have a basis of $3,600 (300 shares × $12), which must be allocated to the additional 600 shares from the stock split. The basis for the 2018 stocks will be $4 per share ($3,600 ÷ 900).
80
```
Rich received 50 shares of stock as an inheritance on July 15 of the current year from his father, who died April 25 of the current year. His father’s adjusted basis in the stock was $80,000. The stock’s fair market value on April 25 of the current year was $84,000. On October 15 of the current year its value was $90,000, and on the date Rich received the stock, it was $82,000. The alternative valuation date was not selected for filing a federal estate tax return. Rich’s basis in the inherited stock is
A. $84,000
B. $90,000
C. $80,000
D. $82,000
```
$84,000
Answer (A) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. If the alternate valuation date for the estate tax return is elected by the executor, the basis of the assets is their fair market value 6 months after death. Rich’s basis is the stock’s $84,000 FMV on April 25 (the date of his father’s death).
81
```
Sue gave Jennifer a rental house. Sue had purchased the property 10 years ago for $60,000 and has taken $17,000 in depreciation. Just before the transfer, she paid $5,000 for a room addition. Gift tax of $18,200, attributed to the increased value, was paid. The fair market value of the rental house on the day of transfer was $90,000. Jennifer’s basis in the property will be
A. $66,200
B. $90,000
C. $60,000
D. $42,000
```
```
$66,200
Answer (A) is correct.
A gift held as business property has a basis equal to the donor’s adjusted basis plus or minus any required adjustments to the basis. The donor’s adjusted basis consists of the cost of the asset plus any permanent improvements or additions, minus any casualty, loss, or depreciation that is claimed on the donor’s tax return. Jennifer would increase this basis by the amount of gift tax paid that was attributable to the increased value ($18,200). Jennifer’s basis in the property is
Original cost
$60,000
Depreciation
(17,000)
$43,000
Additional room
5,000
Donor’s adjusted basis
$48,000
Gift tax
18,200
Jennifer’s basis
$66,200
```
82
Which of the following statements is true?
A. In computing basis for new stock received as a result of nontaxable dividend, it is immaterial whether the stock received is identical or not to the old stock.
B. Stock dividends are distributions made by a corporation of another corporation’s stock.
C. If a stock dividend is taxable, the basis of the old stock does not change.
D. If you receive nontaxable stock rights and allow them to expire, you have a loss equal to the fair market value of the rights.
If a stock dividend is taxable, the basis of the old stock does not change.
Answer (C) is correct.
In general, a taxable stock dividend is included in gross income, and the basis of the new stock is its fair market value at the date of receipt. The basis of the original stock is not affected.
83
```
Richard collected baseball cards as a hobby. Richard had shared his interest in this hobby with his niece Susan, who was also an avid card collector. At the time of his death in 2019, Richard’s collection had a fair market value of $10,000 and an adjusted basis of $2,000, while Susan’s collection had a fair market value of $5,000 and an adjusted basis of $1,000. Upon his death, Richard’s entire card collection went to Susan. With the death of her uncle, Susan lost interest in the hobby and sold all of the cards for $20,000. What is Susan’s gain on the sale of these baseball cards?
A. $17,000
B. $13,000
C. $9,000
D. $5,000
```
$9,000
Answer (C) is correct.
The basis of inherited property is FMV at date of death. Susan’s basis in the cards she inherited from Richard is $10,000. Susan cannot adjust her basis in the cards she owns to FMV. Her basis in the cards she owns remains at $1,000. Susan must realize a gain of $9,000 [$20,000 – ($10,000 + $1,000)].
84
```
Mr. Hill inherited 1,000 shares of Pro Corporation stock from his father, who died on March 8, 2019. His father paid $10 per share for the stock on September 1, 1997. The fair market value of the stock on the date of death was $50 per share. On September 8, 2019, the fair market value of the stock was $60 per share. Mr. Hill sold the stock for $75 a share on December 5, 2019. The estate qualified for, and the executor elected, the alternate valuation date. A federal estate tax return was filed. What was Mr. Hill’s basis in the stock on the date of the sale?
A. $60,000
B. $50,000
C. $75,000
D. $150,000
```
$60,000
Answer (A) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. If the executor elects the alternate valuation date for the estate tax return, the basis of the assets is their fair market value 6 months after death or the date of sale or distribution, if earlier. Mr. Hill’s basis in the stock is the $60,000 fair market value 6 months after his father’s death (1,000 shares × $60 per share).
85
On January 3, 2019, Sally purchased 200 shares of common stock in Corporation X for $100 per share. Four months later, she purchased 50 extra shares at $140 per share. On December 10, 2019, Sally received a 20% nontaxable stock dividend. The new and the old stock are identical. What is the amount of Sally’s basis in each share of stock after the stock dividend?
A. 300 shares at $90 per share.
B. 218 shares at $83 per share and 60 shares at $140 per share.
C. 218 shares at $100 per share and 60 shares at $117 per share.
D. 240 shares at $83 per share and 60 shares at $117 per share.
240 shares at $83 per share and 60 shares at $117 per share.
Answer (D) is correct.
A distribution of common stock as a stock dividend on common stock is generally a tax-free distribution. The basis of the original stock is allocated between it and the distributed stock based on their relative fair market values. Here, all the stock has the same fair market value, so the basis per share should be calculated as total basis divided by total number of shares. Because there are two sets of identical stocks with different bases, the basis calculation is done on a pro rata basis. The stock dividend is equal to 50 shares (250 × 20%). Thus, 240 shares [200 + .8(50)] will have a basis equal to $83 per share ($20,000 ÷ 240), and 60 shares [$50 + .2(50)] will have a basis equal to $117 per share ($7,000 ÷ 60).
86
```
Charlie died and left his daughter Sue a commercial rental property. He purchased the property for $150,000 and had taken $45,000 in depreciation. The fair market value (FMV) on his death was $200,000. Six months after his death, the property was retitled into Sue’s name by the estate’s representative. There was no alternative valuation done on the transfer. The FMV on that day was $210,000. Sue’s basis in the property is
A. $150,000
B. $125,000
C. $210,000
D. $200,000
```
$200,000
Answer (D) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. If the executor elects the alternate valuation date for the estate tax return, the basis of the assets is their fair market value 6 months after death or the date of sale or distribution, if earlier. No alternative valuation was done on the transfer. Thus, Sue’s basis in the property is $200,000, the FMV of the property on Charlie’s date of death.
87
```
In Year 1, Mr. Green received a gift of rental property from Mr. Blue. Mr. Blue retained the power to transfer this property to his son in his will. At the time of the gift, Mr. Blue’s adjusted basis in the property was $18,000, and the property’s fair market value was $24,000. No gift tax was paid. In Year 1 and Year 2, Mr. Green deducted a total of $2,000 of depreciation. In Year 3, Mr. Blue died but did not exercise his power to transfer the property. The rental property given to Mr. Green was included in the gross estate as a revocable transfer. The value of the rental property for estate tax purposes was the fair market value at Mr. Blue’s death, $28,000. What is Mr. Green’s basis in the property after Mr. Blue’s death?
A. $18,000
B. $28,000
C. $26,000
D. $22,000
```
```
$26,000
Answer (C) is correct.
The basis of property acquired from a decedent is the fair market value of the property at the date of the decedent’s death [Sec. 1014(a)]. If the property is acquired before the death of the decedent, the basis is reduced by the depreciation deduction allowed the donee. Mr. Green’s basis in the property is
Fair market value at Mr. Blue’s death
$28,000
Less: Depreciation deducted by donee
(2,000)
Basis in the property
$26,000
The property was included in Mr. Blue’s taxable estate under Sec. 2038 because he retained the right to revoke the transfer to Mr. Green.
```
88
Nature Corporation declared and distributed a stock dividend of 1 share for each 10 shares held by shareholders. Donna had 100 shares ($5.50 per share basis) and received 10 additional shares with a fair market value of $6.00 per share. Which of the following is most applicable to the stock dividend?
A. 110 shares at $5 per share basis and $55 taxable income.
B. 100 shares at $5.50 per share basis and 10 shares at zero basis per share.
C. 110 shares at $5 per share.
D. 100 shares at $5 per share basis and 10 shares at $6 per share basis.
110 shares at $5 per share.
Answer (C) is correct.
The amount of money invested in the stock remains the total basis for all stock. A stock dividend means that the same basis is split between more shares of stock. In addition, stock dividends are not generally taxed (unless specified otherwise in a specific code section). The total basis in the stock is $550 (100 shares × $5.50/share). With the addition of 10 more shares of stock, the per share basis is $5 ($550 ÷ 110 shares).
89
In Year 1, Mr. Smith purchased 50 shares of common stock in Corporation D for $2,000. In Year 5, Corporation D declared a stock dividend of three shares of its common stock for each 10 shares held. In Year 6, D’s common stock split 2 for 1 at a time when the fair market value was $30 a share. What is Mr. Smith’s basis in each of his shares of D’s stock (rounded to the nearest dollar) if both distributions were tax-free and all the stock received was identical to the stock purchased?
A. $30 for 100 shares and $0 for all additional shares.
B. $15 per share.
C. $30 per share.
D. $31 for 65 shares and $30 for 65 shares.
$15 per share.
Answer (B) is correct.
A distribution of common stock as a stock dividend on common stock is generally a tax-free distribution. The same is true for a stock split. Under Sec. 307(a), the basis of the original stock is allocated between it and the distributed stock based on their relative fair market values. Here, all the stock has the same fair market value, so the basis per share is calculated as total basis divided by total number of shares. Mr. Smith’s total number of shares is 130 [(50 original shares + 15 stock dividend) × 2 (2-1 stock split)]. His basis per share (rounded to the nearest dollar) is $15 ($2,000 purchase price ÷ 130 shares = $15.385).
90
```
Jack received 50 shares of stock as an inheritance on July 15, 2019, from his father, who died April 25, 2019. His father’s adjusted basis in the stock was $65,000. The stock’s fair market value on April 25, 2019, was $75,000. On October 15, 2019, its value was $85,000, and on the date Jack received the stock, it was $70,000. The alternative valuation date was not selected for filing a federal estate tax return. Jack’s basis in the inherited stock is
A. $65,000
B. $70,000
C. $85,000
D. $75,000
```
$75,000
Answer (D) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. If the alternate valuation date for the estate tax return is elected by the executor, the basis of the assets is their fair market value 6 months after death. Jack’s basis is the stock’s $75,000 FMV on April 25 (the date of his father’s death).
91
```
Jeff bought land with a building on it that he planned to use in his business. His costs in connection with this purchase were as follows:
Cash down payment
$ 30,000
Mortgage on property
125,000
Survey costs
2,500
Transfer taxes
1,200
Charges for installation of gas lines
3,000
Back taxes owed by seller and paid by Jeff
1,600
What is Jeff’s basis in this property?
A. $160,300
B. $163,300
C. $162,100
D. $157,800
```
```
$163,300
Answer (B) is correct.
The basis of property is its original cost (Sec. 1012), plus certain fees and expenditures. These fees and expenditures include survey costs, transfer fees, and charges for the installation of utility services. The cost of property includes debt to which the property is subject (Crane, 331 U.S. 1, 1947). Consequently, the basis of the property includes the cash paid, any notes to the seller, and the liability to which the property was subject. Taxes paid by a buyer that were not the legal responsibility of the buyer are also allocated to the purchase price (they are not deductible under Sec. 164). Jeff’s basis in the property is
Cash
$ 30,000
Mortgage
125,000
Survey costs
2,500
Transfer taxes
1,200
Charges for installation of gas lines
3,000
Seller’s taxes
1,600
```
$163,300
92
```
Tom gave Fred a rental house. Tom had purchased the property in 2011 for $80,000 and has taken $9,000 in depreciation. Tom’s adjusted basis was $71,000. The fair market value of the rental house on the day of transfer was $90,000. If Fred sells the house at a gain, his basis in the property will be
A. $90,000
B. $71,000
C. $81,000
D. $80,000
```
$71,000
Answer (B) is correct.
When property is received as a gift, the donee’s basis in property acquired by gift is the donor’s basis, increased by any gift tax paid attributable to appreciation. If the FMV on the date of the gift is less than the donor’s basis, the donee has a dual basis for the property. Since the FMV on the date of the gift was greater than the donor’s basis and no gift tax was paid, Fred’s basis in the property will be the same as Tom’s adjusted basis of $71,000.
93
```
A taxpayer purchases rental property for $160,000. She uses $25,000 cash and obtains a mortgage for $135,000. She pays closing costs of $10,000, which include $5,000 in points on the mortgage and $5,000 for bank fees and title costs. Her initial basis in the property is
A. $35,000
B. $160,000
C. $170,000
D. $165,000
```
$165,000
Answer (D) is correct.
When a taxpayer purchases property, his or her basis in the property is initially cost. Cost basis is the sum of capitalized acquisition costs. Initial basis in purchased property is the cost of acquiring it. Only capital costs are included, i.e., those for acquisition, title acquisition, and major improvements. Expenses not properly chargeable to a capital account include costs of maintaining and operating the property (e.g., interest on credit related to the property), insurance (e.g., casualty), and ordinary maintenance or repairs (e.g., painting). Thus, the cost of the property and the bank fees and title costs should be included in the basis of the property, resulting in a basis of $165,000 ($160,000 + $5,000).
94
```
In 2017, Fred purchased 100 shares of Oak Company common stock for $100 per share. In June of 2019, Oak Company declared a 2-for-1 common stock split. Fred sells 50% of his Oak Company common stock shares for $200 per share immediately after he receives his stock split shares. He sells his remaining Oak Company shares at the end of 2019 for $100 per share. What is Fred’s total 2019 gain from the sale of his Oak Company shares?
A. $25,000
B. $20,000
C. $30,000
D. $15,000
```
$20,000
Answer (B) is correct.
A stock split is not a taxable distribution. The original basis in the stock is allocated between the old stock and the new stock based on their relative fair market values. Fred’s basis in the stock before the split was $100 per share. After the 2-for-1 split, his basis is $50 per share, and he now owns 200 shares of stock. Fred realized a gain of $15,000 [100 shares × ($200 – $50)] on the sale immediately after the split. He also realized a gain of $5,000 [100 shares × ($100 – $50)] at the end of the year.
95
```
Mr. Ng, sole proprietor of Wu Company, purchased a machine for use in his business. Mr. Ng’s costs in connection with its purchase were as follows:
Cash paid to seller
$ 4,000
Note to seller
48,000
State sales tax
2,600
Machine repairs
800
Wage expense to install machine
3,200
What is the amount of Mr. Ng’s basis in the machine?
A. $55,200
B. $57,800
C. $54,600
D. $58,600
```
```
$57,800
Answer (B) is correct.
Under Sec. 1012, the basis of property is the cost of the property. Sales tax paid in connection with the acquisition of property is treated as a cost of the property [Sec. 164(a)]. Installation and testing charges are also included as part of the cost of the property. However, the ordinary maintenance and repair costs are expensed instead of capitalized to basis. Basis is computed as follows:
Purchase price
$52,000
Sales tax
2,600
Installation and testing charges
3,200
Basis in equipment
$57,800
```
96
```
Jane purchased 300 shares of stock 5 years ago for $20 a share. The directors voted a 3 for 1 stock split. After the split, Jane had 900 shares. What is Jane’s basis per share after the split?
A. $5.00
B. $60.00
C. $6.67
D. $20.00
```
```
$6.67
Answer (C) is correct.
The basis of the original stock is allocated between it and the new stock based on their relative fair market values. Here, all the stock has the same fair market value, so the basis per share should be calculated as total basis divided by total number of shares.
Total basis (300 shares × $20)
$6,000
÷ Total number of shares
900
New basis per share
$ 6.67
```
97
The basis of property received in exchange for service is determined by which of the following?
A. None of the answers are correct.
B. The fair market value of the property received.
C. The value of the services rendered.
D. The basis of the property received.
The fair market value of the property received.
Answer (B) is correct.
Section 83(a) provides that the receipt of property for services provided is a taxable transaction. Accordingly, the fair market value of the property must be included in gross income as compensation, and the basis of the property will be its fair market value.
98
```
Jennifer works for Joyce and received a parcel of land as payment for her services. Joyce’s basis in the land was $6,000 and the land had a FMV of $10,000. Jennifer’s basis in the land is
A. $6,000
B. $10,000
C. $0
D. $4,000
```
$10,000
Answer (B) is correct.
Regulation 1.61-2(d)(1) provides that if property or services are paid for with property, the fair market value of the property must be included in gross income as compensation. The basis in the property is the amount included in gross income. Accordingly, Jennifer’s basis in the land is $10,000.
99
Mr. Ratchet, a plumber, usually charges $40 per hour for his services. One of his customers gave him a painting in exchange for 4 hours of labor plus materials. The painting originally cost the customer $90 and had a current established fair market value of $250. There was no agreed-upon price before the work was done. What is the amount that Mr. Ratchet must include in income and what is his basis in the painting?
Income
Basis
```
A.
$250
$90
B.
$160
$90
C.
$160
$250
D.
$250
$250
```
$250
$250
Answer (D) is correct.
Section 83 provides that the receipt of property for services provided is a taxable transaction. Reg. 1.61-2(d)(1) provides that if property or services are paid for with property, the fair market value of the property must be included in gross income as compensation. Accordingly, Mr. Ratchet would include $250 in gross income and take an adjusted basis in the property equal to its fair market value of $250.
100
Mr. Pipe, a plumber, usually charges $20 per hour for his services. One of his customers gave him a painting in exchange for 6 hours of labor plus materials. The painting originally cost the customer $180 and had a current established fair market value of $220. There was no agreed-upon price before the work was done. What is the amount that Mr. Pipe must include in income and what is his basis in the painting?
Income
Basis
```
A.
$120
$180
B.
$220
$220
C.
$120
$220
D.
$220
$180
```
$220
$220
Answer (B) is correct.
Section 83 provides that the receipt of property for services provided is a taxable transaction. Regulation 1.61-2(d)(1) provides that if property or services are paid for with property, the fair market value of the property must be included in gross income as compensation. Accordingly, Mr. Pipe would include $220 in gross income and take an adjusted basis in the property equal to its fair market value of $220.
101
All of the following statements concerning the basis of property received for services are true EXCEPT
A. If you receive property for services and the property is subject to restrictions, your basis in the property is its fair market value when it becomes substantially vested.
B. If your employer allows you to purchase property at less than fair market value, include the fair market value of the property in income.
C. If your employer allows you to purchase property at less than fair market value, your basis in the property is its fair market value.
D. If you receive property for services, your basis is equal to the fair market value of the property received.
If your employer allows you to purchase property at less than fair market value, include the fair market value of the property in income.
Answer (B) is correct.
In general, the basis for property received for services is its fair market value. However, the basis used by an employee who received property from an employer at less than its fair market value is the purchase price plus the amount included in the employee’s income. The amount included in the employee’s income is the difference between the fair market value and the price paid. Thus, even in such a case, the basis is the property’s fair market value.
102
Ms. G performed interior decorating services for Mr. K and accepted property as payment in lieu of cash. Ms. G and Mr. K originally agreed upon a price of $4,500 for Ms. G’s services. At the time of the exchange, the property had an estimated fair market value of $5,000, based on sales of similar property and an adjusted basis to Mr. K of $2,000. What is the amount Ms. G must include in her income, and what is her basis in the property received?
Income
Basis
```
A.
$4,500
$2,000
B.
$4,500
$4,500
C.
$5,000
$2,000
D.
$5,000
$5,000
```
$5,000
$5,000
Answer (D) is correct.
Section 83 provides that the receipt of property for services provided is a taxable transaction. Regulation 1.61-2(d)(1) provides that if property or services are paid for with property, the fair market value of the property must be included in gross income as compensation. Accordingly, Ms. G would include $5,000 in gross income and take an adjusted basis in the property equal to its fair market value of $5,000.
103
The basis of property received for services performed is equal to the
A. Cost of the services provided.
B. Fair market value of the property.
C. Cost of the property.
D. Lower-of-cost-or-market price of the property.
Fair market value of the property.
Answer (B) is correct.
Section 83(a) provides that the receipt of property for services provided is a taxable transaction. Accordingly, the fair market value of the property must be included in gross income as compensation, and the basis of the property will be its fair market value.
104
During the current year, Bruce, a self-employed attorney, performed legal services for Zoom Corporation. Bruce received 10 shares of Zoom’s stock for his services. Which of the following statements concerning this transaction is true?
A. Bruce’s basis in the stock is the same as Zoom’s basis and he should include this amount on Schedule C (Form 1040) in the current year.
B. Bruce’s basis in the stock is zero and he does not report any income until he sells the stock.
C. Bruce should include in income the fair market value of the stock on Schedule C (Form 1040) in the current year and this becomes his basis for the stock.
D. Bruce’s basis in Zoom’s stock is the amount he usually charges for his services but he does not report any income until he sells the stock.
Bruce should include in income the fair market value of the stock on Schedule C (Form 1040) in the current year and this becomes his basis for the stock.
Answer (C) is correct.
Under Sec. 83(a), Bruce is required to recognize income equal to the fair market value of property received (less any amount paid) for the performance of his services. The income is reported in the year the property is received if it is not subject to a substantial risk of forfeiture and there are no restrictions on Bruce’s ability to transfer it. Here, Bruce would include in the current year’s income the fair market value of the 10 shares of Zoom stock he received for services performed. Schedule C (Form 1040) is used to report profit or loss from business conducted as a sole proprietor. Bruce has a basis in the stock equal to its fair market value on the date received.
105
In the current year, Jim paid Roger $8,000 cash and built a boat dock for him in exchange for a boat whose fair market value at the time of the exchange was $11,000. What is the amount, if any, Jim should include in his income and what is his basis in the boat?
Income
Basis in Boat
```
A.
$3,000
$11,000
B.
$0
$8,000
C.
$3,000
$8,000
D.
$0
$11,000
```
$3,000
$11,000
Answer (A) is correct.
Under Sec. 83(a), Jim is required to recognize income equal to the fair market value of property received (less any amount paid) for the performance of his services. Jim will recognize income of $3,000 ($11,000 FMV – $8,000 cash paid to Roger). Jim has a basis in the boat equal to the amount paid ($8,000) plus the amount of income he recognized on its receipt ($3,000). Jim’s total basis in the boat is $11,000.
