Section 3A Flashcards
(113 cards)
1
Q
two corporations that are members of a controlled group are related parties
Aunts & Uncles are related parties
A
True
False
2
Q
there is a disallowance of the recognition of any ___ from the sale or exchange of property, directly or indirectly, between related parties.
A
losses
3
Q
In January Year 3, Brown sold land he had owned for many years on the installment basis. Installments are to be made semi-annually on the first day of March and September. $30,000 of each installment represents Brown’s profit. Brown is in the 33% bracket for Year 15. How much capital gains tax must Brown pay on the two installments he receives in Year 15?
A
$9K
Since the property sold was held more than 12 months, both installments are taxed at the 15% capital gains rate; thus, the capital gains tax is $9,000 ($60,000 × 0.15).
4
Q
The maximum rate of __% capital gain tax applies to individuals in the 37% tax bracket.
A
20%
5
Q
Regular capital gain tax rates are _% for individuals earning up to $38,600, __% for individuals earning up to $425,800
A
0, 15%
6
Q
Baker, an unmarried individual, sold a personal residence, which has an adjusted basis of $70,000, for $165,000. Baker owned and lived in the residence for seven years. Selling expenses were $10,000. Four weeks prior to the sale, Baker paid a handyman $1,000 to paint and fix up the residence. What is the amount of Baker’s recognized gain?
A
$0
If a taxpayer has owned and occupied a personal residence for at least two out of the last five years, $250,000 of a gain may be excluded from income for a single taxpayer. As Baker’s gain does not exceed this amount, the amount of selling expenses and fixing-up costs is irrelevant. Baker’s recognized gain is zer
7
Q
What is the basis of property received as compensation?
A
FMV at time of receipt
8
Q
WHAT IS THE BASIS? Standard Purchase Group Purchase Bargain Purchase Inherited Property
A
Standard Purchase - Cost
Group Purchase - Cost is allocated to individuals assets in proportion to their FMV
Bargain Purchase - Cost + Bargain
Inherited Property - FMV at date of death
9
Q
Generally, a taxpayer is required to recognize the gain or loss from the sale or exchange of property at the time of the sale or exchange. T/F
The installment method generally applies to sales in which the taxpayer has a gain if at least one payment will be received after the tax year in which the sale occurs. T/F
A
True
True
10
Q
Under the ___, a taxpayer elects to report the gain from an installment sale over the period during which payments are received.
A
Installment sales method
11
Q
When can the installment sales method NOT be used?
- ) Report gains on property held for sale in the ____(inventory),
- ) gain that must be ___as ordinary income under IRC Section 1245 or 1250, or
- ) any gain on stocks or securities that are traded on an established ___
A
ordinary course of business
recaptured
securities market.
12
Q
Mel purchased 100 shares of common stock in X Corporation for $1,000. X distributed a nontaxable stock dividend and Mel received 20 shares of preferred stock as a result. On the date of the dividend, the common stock had a value of $19 per share and the preferred had a value of $5 per share. After the distribution of the preferred stock, Mel’s bases for the stock held in X Corporation are:
A
$950 common and $50 preferred. //////////////Because the stock dividend was nontaxable, the $1,000 original basis of Mel's common stock must be allocated between the common and preferred shares based on their relative fair market value. Common stock has a value of $1,900 (100 × $19) and preferred has a value of $100 (20 × $5).
$1,000 × (1,900 ÷ 2,000) = $950 basis of the common stock. $1,000 × (100 ÷ 2,000) = $50 basis of the preferred stock.
13
Q
Patty Cake owned real estate that was condemned by the state. Patty had purchased the property for $30,000 and received $50,000 from the state as a result of the condemnation. Patty purchased replacement real estate for $52,000. Patty’s basis in the new real estate is:
A
$32K
New basis = New property cost – Deferred gain – Recognized gain
Patty’s basis is the cost of the replacement property less the deferred gain ($52,000 - $20,000 - 0 = $32,000).
14
Q
How do you calc. new basis?
A
New basis = New property cost – Deferred gain – Recognized gain
15
Q
Alex Barbone inherited his mother’s house when she died in Year 4. The value of the house was $450,000 at the time of death, based on actual sales in the city. Her original basis in the house was $26,000 and she had lived there for 44 years. Alex had not lived in the house except for short visits. Alex paid $6,000 for taxes, insurance, and utilities for the next year. He also was advised by his real estate agent to spend $18,000 on maintenance and repairs, which he did. Unfortunately, the local market suffered a loss of 12% in the average sales price of houses. Alex was finally able to sell the house in Year 5 for $396,000, net of commissions and sales costs. What is the capital loss or gain on the sale of the house?
A
$78K Loss
Since he did not live there, the house was the same as a property held for sale or rent. All of the expenses paid by Alex are deductible against the sale of the house.
16
Q
Property may be sold by a father to a daughter at any price. When is the transaction not allowed to be recognized for tax purposes?
A
When the father loses money
Related parties are not allowed to recognize losses
17
Q
Short-term gains or losses result when a capital asset is sold after being held ___
Long Term?
A
12 months or less.
13 months or more
18
Q
Allen owns 100 shares of Prime Corp., a publicly traded company, which Allen purchased on January 1, Year 1, for $10,000. On January 1, Year 6, Prime declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Prime stock was $62 per share. On February 1, Year 6, Allen had his broker specifically sell the 100 shares of Prime stock received in the split when the FMV of the stock was $65 per share. What amount should Allen recognize as long-term capital gain income on his Form 1040, U.S. Individual Income Tax Return, for Year 6?
A
The basis in the original stock must be allocated between the original shares and the new shares received in a stock split. The new shares have the same holding period as the original shares
Sales price $65 × 100 shares $6,500
Basis in new 100 shares 5,000
Long-term capital gain $1,500
======
19
Q
Relatives by marriage, or in-laws, are not considered related parties for tax purposes. T.F
Grandfather and granddaughter Are related parties
Ancestors, lineal descendants, Are related parties
A
True
False - no they aint
Truuuu
20
Q
. These brackets are not tied to ordinary-income tax brackets; rather, these rates have their own brackets which are applied to maximum taxable income levels:
0% for net capital gain up to $38,600 for single taxpayers;
15% for gain between $38,601
$425,800, and 20% for gain over $425,800
A
MEMORIZE
21
Q
When dealing with small corporations, how much stock must a shareholder own for them (shareholder and corporation) to be considered related parties?
A
More than 50%
22
Q
A corporation and a shareholder are related parties if the shareholder owns more than __% by value of the outstanding stock of the corporation.
A
50
23
Q
In determining the amount realized, what is included?
Cash
FMV of property & Services received
Amount of mortgage assumed by the buyer
A
Memorize
24
Q
Prime Corporation’s building was destroyed by a tornado. The fair market value of the building at the time of the tornado was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows:
$400,000 for the building
$100,000 for lost profits during rebuilding
Prime does not defer any gain under the involuntary conversion provisions of IRC Section 1033.
What amount of the insurance proceeds is taxable to Prime?
A
150K
Insurance proceeds that are not fully reinvested into replacement property will be subject to taxation
Proceeds received of $400,000 minus adjusted basis of $350,000 leaves a $50,000 gain. The additional $100,000 of insurance proceeds was to replace lost business during the rebuilding phase. By the nature of being a replacement of earnings, the full $100,000 is taxable. The gain of $50,000 plus the lost earnings of $100,000 totals $150,000.
25
Insurance proceeds that are not ___into replacement property will be subject to taxation
Fully reinvested
26
Which of the following transactions would qualify for tax-deferred exchanges?
An exchange of real property for personal property
Swap of livestock of different sexes
Transfer of property to a controlled corporation
Exchange of interests in a partnership
Transfer of property to a controlled corporation
27
A ____includes an exchange of property held for productive use in a trade or business, or for investment, for like-kind property. In a like-kind exchange, no gain is recognized in the year of the transaction, thus there is no tax liability from the exchange until the property is later relinquished in a non-tax-deferred transaction.
tax-deferred exchange
28
Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common stock for $15,000 on December 15, Year 1, and an additional 100 shares for $13,000 on December 30, Year 1. On January 3, Year 2, Smith sold the shares purchased on December 15, Year 1, for $13,000. What amount of loss from the sale of Core's stock is deductible on Smith's Year 1 and Year 2 income tax returns?
$0 FOR BOTH YEARS
Since Smith bought and sold (at a loss) 100 shares of Core Co. common stock within 30 days, the wash sale rules apply. This means the loss is not allowed in Year 1 or Year 2. A loss sustained when stock or securities are sold is not allowed if, within a period beginning 30 days before the date of the sale and ending 30 days after the date of the sale, the taxpayer acquires substantially identical stock or securities. The “wash sale rules” do not apply to gains—only losses.
29
Aaron Beckett purchased a watch at a retail store for personal use. The watch is classified as a:
capital asset.
Section 1231 asset.
Section 1245 asset.
Section 1250 asset.
Cap Asset
Incorrect
Capital assets are investment property and personal-use property. Section 1231, 1245, and 1250 assets are business-use assets.
30
Capital Asset?
```
Any Hedging Transaction
US Gov Publication
AR / Note rec. in normal course of biz
Copyright
Derivative Financial Instrument
```
No to all
31
The basis of property for loss purposes converted from personal use to Business use is the lower of ___at conversion less allowable depreciatio
adjusted basis less allowable deprecation or fair market value
32
To determine adjusted basis, begin with original basis, add ___, and subtract ___such as depreciation.
capital improvements
| capital recoveries
33
In Year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing and $100,000 plus accrued interest at the prime rate in the next year. The buyer also assumed a $50,000 mortgage on the property. The taxpayer's adjusted basis was $75,000, and the taxpayer incurred $10,000 of selling expenses. If this transaction qualifies for installment sale treatment, what is the gross profit on the sale?
165K
The installment method allows for a taxpayer to spread the recognition of gain over the years of receipt of payment. The gross profit is determined by total payments received ($200,000 payments received and $50,000 mortgage assumed by the buyer) less the taxpayers basis ($75,000) and selling expenses incurred ($10,000):
$200,000 + $50,000 - $75,000 - $10,000 = $165,000
34
Daven inherited property from a parent. The property had an adjusted basis to the parent of $1,600,000. It was valued at $2,000,000 at the date of death and valued at $1,800,000 six months after the date of death. The executor elected the alternative valuation date. What is Daven's basis in the property?
1.8M
The basis of inherited property is generally the fair market value of the property at the date of death. However, when the alternate valuation date is elected, the basis is the fair market value at that alternate valuation date as long as the valuation is lower than the value at death.
35
Summer, a single individual, had a net operating loss of $20,000 three years ago. A Section 1244 stock loss made up 3/4ths of that loss. Summer had no taxable income from that year until the current year. In the current year, Summer has gross income of $80,000 and sustains another loss of $50,000 on Section 1244 stock. Assuming that Summer can carry the entire $20,000 net operating loss to the current year, what is the amount and character of the Section 1244 loss that Summer can deduct for the current year?
The total loss for the current year equals $70,000, which is the $20,000 loss carryover plus the current-year loss of $50,000. However, Section 1244 has a limit of $50,000 per year. Therefore, of the total loss of $70,000, $50,000 will be allowed Section 1244 status and will be treated as an ordinary loss.
36
For losses, Section 1244 has a limit of $__per year
50,000 (100k MFJ)
37
A beneficiary acquired property from a decedent. The fair market value at the date of the decedent's death was $100,000. The decedent had paid $130,000 for the property. Estate taxes attributed to the property were $2,000. The beneficiary sold the property two years after receipt from the estate. What is the basis of the property for the beneficiary?
$100k
The basis in inherited property is usually the fair market value (FMV) at the date of death (DOD). If the alternative method is selected, the basis would be the FMV six months after the date of death. Since estate taxes do not affect the beneficiary’s basis, the basis is $100,000, FMV at DOD.
38
INVOLUNTARY CONVERSION
TP can elect to ___ the gain
TP can elect to postpone gain
TP must recognize gains to the extent that there are proceeds left over after __ of asset
recognize
Postpone
Replacement
39
INVOLUNTARY CONVERSION - LOSSES
If income-producing, the loss is ___
If non-income producing prop, loss is recognized to extent of casualty or theft exceeds $__
The basis of any replacement property is equal to the cost of the property reduced by any ___.
Recognized
$100
unrecognized gain
40
Gibson purchased stock with a fair market value of $14,000 from Gibson's adult child for $12,000. The child's cost basis in the stock at the date of sale was $16,000. Gibson sold the same stock to an unrelated party for $18,000. What is Gibson's recognized gain from the sale?
When Gibson's adult child sold stock valued at $14,000 to a parent for $12,000, the child made a $2,000 gift to the parent as well. Where a transfer of property is in part a sale and in part a gift, the basis to the purchaser is the sum of:
the greater of:
the amount paid for the property or
the seller's adjusted basis for the property at the time of the transfer, and
the amount of basis increase allowed for gift tax paid.
In this case, the seller's $16,000 adjusted basis in the property at the time of the transfer was greater than the $12,000 paid for the property, so this is Gibson's basis in the stock. His gain is recognized as follows:
Sale price $18,000
Basis (16,000)
Recognized gain $ 2,000
41
For a cash-basis taxpayer, gain or loss on a year-end sale of listed stock arises on the:
trade date.
settlement date.
date of receipt of cash proceeds.
date of delivery of stock certificate.
Trade date
Taxpayers who sell stock or securities traded on an established securities market (called “Listed Stock”) must recognize gains or losses on the trade date, not on the settlement date.
42
On March 1 of the previous year, a parent sold stock with a cost of $8,000 to their child, for $6,000, its fair market value. On September 30 of the current year, the child sold the same stock for $7,000 to Hancock, who is unrelated to the parent and child. What is the proper treatment for these transactions?
In this problem, the parent cannot recognize the loss of $2,000 ($6,000 sales price − $8,000 basis) on the sale of the stock to the child. But when the child sells the stock to an unrelated party, Hancock, the child’s gain of $1,000 ($7,000 sales price − $6,000 basis) is reduced by the previous unrecognized loss of $2,000 down to zero, but NOT less than zero. The unused loss of $1,000 from the parent ($2,000 unrecognized loss − $1,000 loss used by the child) is lost forever.
43
Which of the following is considered capital assets for tax purposes?
Inventory
Land used in a business
Novel copyright held by the author
Mineral deposits sold in place
Mineral Deposit sold in Place
Mineral and similar natural resources deposits are considered to be capital assets when sold in place. The sale of mineral deposits, which are removed and sold in units, results in ordinary income. Copyrights held by the creator are not capital assets; however, purchased copyrights are capital assets. Inventory and land used in a business are specifically excluded from the definition of capital assets
44
Mike and Jane Lewis, a married couple, file a joint federal income tax return showing $80,000 in gross income without regard to the following capital transactions:
Capital Loss Carryover from Prior Years: $0
Current-Year Net Long-Term Capital Gain or Loss: $5,000 loss
Current-Year Net Short-Term Capital Gain or Loss: $1,000 gain
Mike and Jane's total income will be increased/decreased by what amount as a result of the listed capital gains and losses?
There is a limit of $3,000 that can be taken for capital losses in excess of capital gains. Capital losses are deductible only to the extent of any capital gain plus, in the case of noncorporate taxpayers, ordinary income of up to $3,000 in the current year. In this case, there is a $4,000 overall capital loss after the capital gain and loss are netted. Since only $3,000 is allowed for deduction of losses in excess of gains, the remaining $1,000 is carried over to future tax years.
45
If a security becomes worthless in the current taxable year, it is treated as sold or exchanged on the:
last day of the preceding taxable year.
last day of the current taxable year.
date it is deemed worthless.
first day of the current taxable year.
Last day of the current taxable year
Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became worthless during the tax year are treated as though they were sold on the last day of the tax yea
46
A taxpayer lived in an apartment building and had a 2-year lease that began 16 months ago. The taxpayer's landlord wanted to sell the building and offered the taxpayer $10,000 to vacate the apartment immediately. The taxpayer's lease on the apartment was a capital asset but had no tax basis. If the taxpayer accepted the landlord's offer, the gain or loss would be which of the following?
An ordinary gain
A short-term capital loss
A long-term capital gain
A short-term capital gain
LTCG
47
Dunn received 100 shares of stock as a gift from Dunn's grandparent. The stock cost Dunn's grandparent $32,000 and it was worth $27,000 at the time of the transfer to Dunn. Dunn sold the stock for $29,000. What amount of gain or loss should Dunn report from the sale of the stock?
$0
Because of the special situation in this gift, neither a gain nor a loss can be computed on the sale of this stock received as a gift. In this situation, the selling price is less than the basis for gain and more than the basis for loss.
48
Dove Corp. began operating a hardware store in the current year after constructing a building at a total cost of $100,000 on land previously acquired for $50,000. In the current year, the land had a fair market value of $60,000. Dove paid real estate taxes of $5,000 in the current year. What is the total depreciable basis of Dove's business property?
$100K
Dove Corp. began operating a hardware store in the current year after constructing a building at a total cost of $100,000 on land previously acquired for $50,000. The current fair market value of the land is irrelevant. Clearly, the land is not depreciable.Dove Corp. also paid real estate taxes of $5,000. If they were paid during construction of the building, they would be capitalized as part of the construction cost for tax purpose
49
What happens to the losses disallowed by IRC Section 267?
They can never be taken.
They can be taken two years after the year of sale.
They can be taken when property is sold to a nonrelated party.
They can be taken three years after the year of sale.
They can be taken when property is sold to a nonrelated party.
IRC Section 267 disallows the recognition of any loss from the sale or exchange of property, directly or indirectly, between related parties. If the property on which loss is derived in a related party transaction is later sold to an unrelated party, any gain on that sale is reduced by the previously disallowed loss.
50
IRC Section 267 disallows the recognition of any loss from the sale or exchange of property, directly or indirectly, between related parties. T/F
If the property on which loss is derived in a related party transaction is later sold to an unrelated party, any gain on that sale is reduced by the previously disallowed loss. T/F
True to both
51
What kind of property is the like-kind provision limited to?
Real Property
To postpone a gain or loss, property held for productive use in a trade or business, or for investment, must be exchanged for property of like kind to be held for business or investment purposes
52
IRC Section 267 has a special rule for sales to a related party that are unpaid at the end of the year. In which of the following cases does the rule apply?
When a cash-basis seller sells to an accrual-basis buyer
The rule applies when the seller is on the cash basis and the buyer is on the accrual basis. The buyer may not deduct the expense until the seller has reported the income.
53
A sole proprietor owned an office building with a cost of $100,000 and accumulated depreciation of $28,000 using straight-line depreciation under the modified accelerated cost recovery system (MACRS). If the company sold the building for $110,000, what is the unrecaptured IRC Section 1250 gain from this transaction?
$28K
IRC Section 1250 requires that excess depreciation (actual depreciation in excess of straight-line depreciation) be recaptured as ordinary income. Since the property has sold for more than the adjusted basis, the initial gains are recaptured based on the original purchase price of $100,000. This makes the first $28,000 of the profit subject to the unrecaptured Section 1250 gain while the remaining $10,000 is considered regular long-term capital gains.
The journal entry is as follows:
Cash 110,000
Accumulated depreciation 28,000
Building 100,000
Gain on sale 38,000
54
IRC Section 1250 applies to ___—buildings and their structural components.
real property
55
Natalie inherited land from her Uncle Josh, who died January 3, Year 4. The basis to Josh was $1,000,000 and the value on January 3, Year 4, was $7,200,000. On July 3, Year 4, the value was $7,600,000. When the land was distributed to Natalie on June 3, Year 4, the value was $7,400,000. This land was Josh's entire estate. Natalie's basis for the estate is:
7.2M
In order to select the alternate valuation date of July 3, the valuation must be lower, resulting in reduced estate tax liability. Since the market value has risen, the value at time of death ($7,200,000) must be selected.
56
A married individual invested in IRC Section 1244 small business stock in year 1. In year 7, the individual sold the stock at a loss of $157,000. There were no other stock transactions during year 7. If the taxpayer files a joint return, how much loss can the taxpayer deduct in year 7?
an ordinary loss deduction up to $50,000 ($100,000 on a joint return) is allowed per year. Losses in excess of the maximum amount (i.e., $100,000) are then reported on Schedule D of IRS Form 1040; only $3,000 of capital loss can be deducted against earnings in a given year.
Capital loss, excess is Ordinary loss
57
Chevy Corp. distributed depreciable personal property having a fair market value of $9,500 to its shareholders. The property had an adjusted basis of $5,000 to the corporation. Chevy had correctly deducted $3,000 in depreciation on the property. What is the amount of Chevy's total recognized gain on the distribution and how much of this gain will be considered ordinary income?
Total recognized gain: $4,500; Ordinary income: $0
Total recognized gain: $4,500; Ordinary income: $3,000
Total recognized gain: $4,500; Ordinary income: $4,500
Total recognized gain: $9,500; Ordinary income: $0
Total recognized gain: $4,500; Ordinary income: $3,000
```
Fair market value $9,500
Less: Adjusted basis 5,000
------
Recognized gain $4,500
Depreciation recapture
(ordinary income) $3,000
```
When a corporation distributes property other than its own obligations to a shareholder and the property's FMV exceeds the corporation's adjusted basis of that property, the property is treated as sold at the time of distribution. Gain is recognized on the excess of the FMV over the adjusted basis of the property.
58
Individual Lark's Year 2 brokerage account statement listed the following capital gains and losses from the sale of stock investments:
```
Short-term capital gain $ 6,000
Long-term capital gain 14,000
Short-term capital loss 4,000
Long-term capital loss 8,000
In addition, two stock investments became worthless in Year 2. Public Company X stock was purchased in December of Year 1 for $5,000, and formal notification was received by Lark in July of Year 2 that it was worthless. Private-company Section 1244 stock was issued to Lark for $10,000 in January of Year 1 and was determined to be worthless in December of Year 2. What is Lark's Year 2 net capital gain or loss before any capital loss limitation?
```
All long-term gains (losses) are netted together, then all short-term gains (losses) are netted. Then the two are netted together for the net capital gain. In this example:
Long-term capital gain $14,000
Long-term capital loss (8,000)
Long-term capital loss--Company X (5,000)
--------
Net long-term capital gain $ 1,000
Short-term capital gain $ 6,000
Short-term capital loss (4,000)
--------
Net short-term capital gain $ 2,000
Combined long-term and short-term $ 3,000
59
IRC Section 1244 stock is corporate stock (either common or preferred) that qualifies under IRC Section 1244. If an individual taxpayer generates a loss by sale, exchange, or the stock becoming worthless, such loss can be treated as an ___rather than a capital loss. Section 1244 stock is also known as small business stock.
ordinary loss
60
IRC Section 1231 assets are depreciable assets and real estate used in a trade or business and held for ___
more than a year
61
How is the net gain from short-term sales or exchanges treated?
Taxed at ordinary income rates, in a taxpayer’s given bracket
62
For small biz stock to qualify, its 1 of hte following:
1. ) C Corp with $__ or less in capital
2. ) Stock must be ___ from original issuance from C Corp (or via gift)
3. ) Stock held more than __ yrs from acquired date
4. ) __% of value of corp. asset must be used in active biz
5. ) Company must provide services in ___
```
$50M
Directly Acquired
5 yrs
80%
eligible sector
```
63
Jim Nix gave a parcel of land to his niece, Jane. Jim had paid $15,000 for the land and the value on the date of the gift was $12,000. Jim paid a gift tax of $1,000 on the transfer to Jane. Subsequently, Jane sold the land for $10,000. Jane's basis for computing the loss is:
$12K
The basis of property acquired by gift when it is subsequently sold at a loss is the lesser of (i) the donor's basis or (ii) value at the time of the gift.
64
The basis of property acquired by gift when it is subsequently sold at a loss is the lesser of (i) the ___or (ii) ___at the time of the gift.
donor's basis
| value
65
Which of the following would be considered a tax-deferred transaction?
A tract of U.S. real property for a piece of foreign real property
An airplane for a Hummer
A statutory merger or consolidation (Type A)
An automobile for a light truck
Merger
66
The following Tax-Free (tax deferred) exchanges include the following
statutory ___OR consolidation (type A)
Exchange of ___for voting stock
Exchange of ___for Voting Stock
Divisive ___
merger
Stock
Assets
Reorganization
67
Jack and Jill purchased a vacation home in Year 3 for $150,000. In Year 10, they sold the home for $600,000 and received a down payment in the amount of $200,000. The rest was mortgaged in the amount of $400,000. What is Jack and Jill's gross profit percentage on this sale?
450k/600k = 75%
Answer is 75%
68
Dawson, Inc.'s warehouse (with an adjusted tax basis of $75,000) was destroyed by fire. The following year, Dawson received insurance proceeds of $195,000 and acquired a new warehouse for $167,000. Dawson elected to recognize the minimum gain possible. What is Dawson's basis in the new warehouse?
$75K
Dawson realized a gain of $120,000 ($75,000 − $195,000).
The basis in the replacement property is the basis of the destroyed property, or $75,000 (the old basis is substituted into the new property).
69
Which of the following sales should be reported as a capital gain?
Sale of equipment
Real property subdivided and sold by a dealer
Sale of inventory
Government bonds sold by an individual investor
Government Bonds Sold by an individual investor
Government bonds sold by an individual investor are capital assets, so the sale would be reported as a capital gain.
The equipment sold is presumed to be business equipment subject to depreciation and therefore classified as Section 1231 assets subject to Section 1245 recapture.
70
Constructive ownership rules apply in determining if two taxpayers are related. Under these rules, a taxpayer is considered to own stock owned by:
Family Member
Proportionate share of any stock owned by an entity of which the TP is a member of
Partners of the TP (if TP is a partner in a partnership)
Memorize
71
A married couple abandoned their principal residence in May. They had purchased the house five years ago for $350,000. The house had a current fair market value of $300,000. What is the maximum loss, if any, that they are allowed to deduct on the current year's tax return for the abandoned property?
When a property is abandoned or foreclosed upon there is no contractual sale but the property is, in effect, sold to its creditors. Although abandonment is a form of voluntary disposition, it is not treated as a sale or exchange of the property. If the amount you realize (if any) is more than your adjusted basis, then you have a gain. If your adjusted basis is more than the amount you realize (if any), then you have a loss; however, losses on the sale, exchange, or condemnation of personal use assets, such as a principal residence, are not recognized.
72
Upon her grandfather's death, Jordan inherited 10 shares of Universal Corp. stock that had a fair market value of $5,000. Her grandfather acquired the shares in 1995 for $2,500. Four months after her grandfather's death, Jordan sold all her shares of Universal for $7,500. What was Jordan's recognized gain in the year of sale?
$2500 LTCG
Basis in inherited property is generally based upon the fair market value (FMV) at time of death. In this case:
```
Sales price $7,500
FMV--New basis 5,000
------
Gain $2,500
The gain is long term as the time held by Jordan's grandfather is tacked onto her holding time.
```
73
Grayson Nolan purchased a duplex and lives in one part and uses the other part as a retail store. Grayson purchased bedroom furniture for $4,000 for the residential part and office furniture for $5,000 for the retail store. What is the total amount of capital assets?
$4K
| Only the personal use property is a capital asset. Business use property is not a capital asset
74
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THESE ARE WHAT
Any work of art
Any rug or antique
Any metal or gem
Any stamp
Any alcoholic beverage
Most coins
Any historical objects (documents, clothes, etc.)
```
These are taxed at what rate?
collectibles
28%
75
How is the basis of inherited property determined?
Fair market value 6 months after death if this produces a higher basis
Fair market value at date of death
FMV DOD
76
Taylor owns 1,000 shares of Media Corporation common stock with a basis of $22,000 and a fair market value of $33,000. Media paid a nontaxable 10% common stock dividend. What is the basis for each share of Media common stock owned by Taylor after receipt of the dividend?
$20/Share
When a taxpayer receives additional stock due to a nontaxable stock dividend, the basis in the original stock must be allocated between the old and new shares.
Taylor owned 1,000 shares of Media Corporation with a basis of $22,000. A 10% nontaxable stock dividend gave Taylor an additional 100 shares of stock for a total of 1,100 shares with a basis of $22,000 and a basis per share of $20 ($22,000 ÷ 1,100 = $20)
77
1244 Stock. True Statements
The corporation's aggregate capital must not have exceeded $___when the stock was issued.
The corporation must not derive more than __% of its income from passive investments.
The shareholder must have paid for the stock and not received it as __
Only individual shareholders who purchase the stock directly from the company qualify for the ___
Losses in excess of the maximum can then be deducted as a ___on Schedule D (IRS Form 1040).
```
1 million
50
compensation.
special tax treatment.
capital loss
```
78
Jim Horn, single, purchased a residence on January 5, Year 3, for $50,000. On January 5, Year 4, Jim sold the residence for $300,000 and purchased a new residence on January 15, Year 4, for $320,000 due to a change in place of employment. Jim has a taxable gain on the sale of the residence of:
$125,000
Generally, single taxpayers may exclude $250,000 of gain on the sale of a principal residence. If the residence which was sold has not been occupied for at least two years, the $250,000 exclusion is prorated if the sale is due to a change in place of employment, health, or unforeseen circumstances as provided in the regulations. Jim can exclude only $125,000 of the gain since he lived in the residence only one year. Jim has a taxable gain of $125,000 ($300,000 − $50,000 − $125,000).
79
Capital assets include which of the following items?
Real property used to store business assets
Land held for personal use
Land held for personal Use
Land held for personal use is the only item listed that is a capital asset. For tax purposes, capital assets are nonbusiness items that are owned and used for personal purposes or as an investment.
80
Which of the following is correct concerning payments received on an inherited installment obligation?
It is taxable to the beneficiary at the same ___used by the decedent.
gross profit percentage
81
Bank Corp.'s voting stock is owned by the following individuals: Farber, 25%; Farber's mother, 15%; Farber's father, 40%; and Grosset, an unrelated person, 20%. Farber's sister sold equipment to Bank at a loss. For the purposes of determining whether the sister's loss is deductible under the related party rules, what percentage of Bank's stock, if any, does the sister constructively own?
80%
Constructive ownership is the assignment of stock ownership from one taxpayer to another by virtue of their relationship. The only person listed in this question who is not considered a related party under these rules would be Grosset, who holds a 20% interest
82
When discussing controlled groups of corporations able to file consolidated returns, how much of the stock of a corporation must be held by members of the group for the corporation to be affiliated?
80%
83
In the current year, Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered by a $70,000 mortgage. Each party assumed the other's mortgage. What is the amount of Tatum's recognized gain?
Gain is recognized to the extent of boot (cash, other assets, or mortgages given up) received, but not to exceed the gain realized
Fair value of assets received--Building $350,000
Mortgage given up 120,000
Mortgage assumed (70,000)
Net value received $400,000
Adjusted basis of farmland 250,000
Realized gain $150,000
Boot given: Mortgage assumed $(70,000)
Boot received: Mortgage given up 120,000
Net boot $ 50,000
84
To postpone a gain or loss, property held for productive use in a trade or business, or for investment, must be exchanged for property of ___to be held for business or investment purposes.
Under the Tax Cuts and Jobs Act of 2017, the tax-free exchange provision applies only to ___and no longer applies to personal property.
like kind
real estate
85
ohn Evert exchanged land held as an investment for other land to be held as an investment. Relevant data is:
Property Given by John
Basis $60,000
Value 90,000
Mortgage on land 10,000
Property Received by John
Value $65,000
Cash 15,000
What is John's recognized gain or loss on the exchange?
```
Value received $65,000
Mortgage relief 10,000
Cash received 15,000
Amount realized $90,000
Less: Basis given 60,000
Realized gain $30,000
The realized gain is recognized to the extent of the boot (mortgage relief and cash received) of $25,000.
```
In a like-kind exchange, the basis of property received is the basis of the property given up plus any gain recognized, plus boot (cash or property not of a like kind, including mortgage relief) paid, less any loss recognized, less boot received.
86
Tax Cuts and Jobs Act (TCJA), like-kind exchanges are applicable only to ___ real estate; like-kind exchanges of personal property are no longer eligible for deferment of gains
business and investment
87
When property is repossessed after an installment sale, the taxpayer must figure the ___on the repossession and the basis of the repossessed property
gain or loss
88
A married couple purchased their principal residence for $300,000. They spent $40,000 on improvements. After living in it for 10 years, the couple sold the home for $650,000 and paid $36,000 in real estate commissions. What gain should the couple recognize on their joint return?
Amount realized:
Sales price $650,000
Less: Commissions (36,000)
---------
Amount realized $614,000
Less: Adjusted basis
Purchase price $300,000
Add: Improvements 40,000
---------
Adjusted basis (340,000)
---------
Realized gain $274,000
89
An individual had the following capital gains and losses for the year:
Short-term capital loss $70,000
Long-term gain (unrecaptured Section 1250 at 25%) 56,000
Collectibles gain (28% rate) 10,000
Long-term gain (15% rate) 20,000
What will be the net gain (loss) reported by the individual and at what applicable tax rate(s)?
Long-term gain of $16,000 at the 15% rate
The net short-term capital loss is used to offset the net long-term capital gain in the following order: 28% gains, 25% gains, and 15% gains. In this case, the $70,000 net short-term capital loss offsets the long-term capital gains as follows:
28% long-term capital gain offset $10,000
25% long-term capital gain offset 56,000
15% long-term capital gain offset 4,000
The remaining $16,000 of long-term capital gains would be taxable at the 15% rate.
90
Capital assets are investment property and personal-use property. Capital assets do not include the following:
Property held for resale (inventory)
Real or depreciable property used in a trade or business
Accounts or notes receivable acquired in normal business operations
f
91
Benson exchanged a van, used exclusively for business and with an adjusted basis of $100,000, for a new van with a fair market value of $120,000 and received $5,000 in cash. What amount of gain did Benson recognize from the transaction?
Under the Tax Cuts and Jobs Act of 2017 (TCJA), like-kind exchanges are limited to real property; gains related to like-kind exchanges of personal property can no longer be deferred. Benson must recognize a $25,000 gain:
FMV of new van received $120,000
Boot/cash received 5,000
Total value received $125,000
Less adjusted basis given up (100,000)
Gain realized and recognized $ 25,000
92
Tom Lewis, an individual taxpayer, sold his personal automobile (never used for business purposes) for $5,000 in the current year. He purchased the automobile five years earlier for $10,000. Which of the following is the correct treatment of this transaction on Tom's current-year tax return (assuming that Tom's only other source of income was from wages)?
Show neither income nor loss from this transaction on his tax return.
93
Losses on the sale, exchange, or condemnation of personal use assets are ___
The installment method cannot be used to report __
not recognized.
losses.
94
If the alternate value is chosen and the property is disposed of before the 6-month period has expired, that property shall be valued at the ____at the date of disposition, the sale price.
fair market value
95
Hall was bequeathed 500 shares of common stock under his father’s will. Hall’s father had paid $2,500 for the stock 10 years ago. Fair market value of the stock on February 1, Year 1, the date of his father’s death, was $4,000 and had increased to $5,500 six months later. The executor of the estate elected the alternate valuation date for estate tax purposes. Hall sold the stock for $4,500 on June 1, Year 1, the date that the executor distributed the stock to him. How much income should Hall include in his individual income tax return for the inheritance of the 500 shares of stock that he received from his father’s estate?
$0
If the alternate value is chosen and the property is disposed of before the 6-month period has expired, that property shall be valued at the fair market value at the date of disposition, the sale price. Since Hall sold the stock before the 6-month period ended, his basis equals his sale price of $4,500, and no gain or loss exists.
96
Good, a C corporation, sells an automobile to its sole shareholder for $4,500. Good's adjusted basis in the automobile is $12,000, and the fair market value is $5,000. What is the amount of loss that is recognized by Good?
Good cannot recognize a loss on the related party transaction. IRC Section 267 places certain restrictions on related party transactions, one of which is a disallowance of the recognition of any loss from the sale or exchange of property between related parties.
97
If the property on which loss is derived in a related party transaction is later sold to an unrelated party, any gain on that sale is reduced by the previously ___
disallowed loss.
98
Four years ago, a self-employed taxpayer purchased office furniture for $30,000. During the current tax year, the taxpayer sold the furniture for $37,000. At the time of the sale, the taxpayer's depreciation deductions totaled $20,700. What part of the gain is taxed as long-term capital gain?
$7k
Since the facts show that the taxpayer had taken $20,700 in depreciation, the $30,000 in office furniture had been reduced to a basis of $9,300. The sale of the furniture at $37,000 produced a gain of $27,700 ($37,000 - $9,300).
All of the depreciation taken of $20,700 must be recovered as an ordinary gain. This results in a long-term capital gain of $7,000 ($27,700 - $20,700).
99
Four years ago, a self-employed taxpayer purchased office furniture for $30,000. During the current tax year, the taxpayer sold the furniture for $37,000. At the time of the sale, the taxpayer's depreciation deductions totaled $20,700.
What is the ORDINARY GAIN
$20,700
100
Fred Berk bought a plot of land with a cash payment of $40,000 and a purchase money mortgage of $50,000. In addition, Berk paid $200 for a title insurance policy. Berk’s basis in this land is:
$90,200
Acquisition of any asset requires capitalization of all costs incurred in order to ready the asset for its intended use. In this case, the cash, mortgage, and title insurance were all required steps for this taxpayer in order to obtain the land.
Cash payment $40,000
Mortgage 50,000
Title insurance 200
Total basis $90,200
101
Section 1244 stock allows an ordinary loss rather than a capital loss up to what maximum in an individual tax return?
$50k
102
Greller owns 100 shares of Arden Corp., a publicly traded company, which Greller purchased on January 1, Year 2, for $10,000. On January 1, Year 9, Arden declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Arden stock was $62 per share. On February 1, Year 9, Greller had his broker specifically sell the 100 shares of Arden stock received in the split when the FMV of the stock was $65 per share. What is the basis of the 100 shares of Arden sold?
$5k
$10,000 original basis ÷ 200 shares total × 100 shares sold = $5,000 basis in 100 shares sold
IRC Section 305
103
Aviary Corp. sold a building for $600,000. Aviary received a down payment of $120,000 as well as annual principal payments of $120,000 for each of the subsequent four years. Aviary purchased the building for $500,000 and claimed depreciation of $80,000. What amount of gain should Aviary report in the year of sale using the installment method?
The standard procedure for installment sales is to calculate the net profit on the transaction:
Gross proceeds of sale: $600,000 (5 × $120,000)
Basis of building: $420,000 ($500,000 - $80,000 depreciation)
Profit amount: $180,000 ($600,000 - $420,000)
Profit ratio: $180,000 ÷ $600,000 = 0.30 (30%)
When each payment is received under the installment agreement, 30% should be booked as capital gain on $36,000.
0.30 × $120,000 = $36,000
104
In the current year, Essex sold land with a basis of $80,000 to Yarrow for $100,000. Yarrow paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next 5 years, beginning in the 2nd year. Under the installment method, what gain should Essex include in gross income for the year of sale?
$5k
The gain of $20,000 divided by the sale price of $100,000 results in a 20% profit margin. In the first year, $25,000 was received; $25,000 × 0.20 profit margin = $5,000 in gain for the first year.
105
Conner purchased 300 shares of Zinco stock for $30,000 in Year 1. On May 23, Year 10, Conner sold all the stock to his daughter, Alice, for $20,000, its then fair market value. Conner realized no other gain or loss during Year 10. On July 26, Year 10, Alice sold the 300 shares of Zinco for $25,000.
What was Alice's recognized gain or loss on her sale?
$0
When Alice bought Zinco stock from her father (Conner) she paid him $20,000. Conner had a disallowed loss of $10,000 ($30,000 cost − $20,000 paid) when he sold it to his daughter, Alice. When Alice resold the stock for $25,000, she is allowed to reduce her gain by any amount of the loss that her father could not deduct ($25,000 − $20,000 = $5,000 gain − $5,000 loss disallowed = $0). She is allowed to use $5,000 of his disallowed loss to offset her $5,000 gain on a sale to a third party.
106
Capital assets include:
a corporation's accounts receivable from the sale of its inventory.
7-year MACRS property used in a corporation's trade or business.
a manufacturing company's investment in U.S. Treasury bonds.
a corporate real estate developer's unimproved land that is to be subdivided to build homes, which will be sold to customers.
a manufacturing company's investment in U.S. Treasury bonds.
Note: IRC Section 1221 explains what a capital asset does not include. For example, it does not include:
Real or depreciable property used in a trade or business (e.g., operational or fixed assets) (see IRC Sections 1231, 1245, and 1250
107
The basis for calculating depreciation is the lower of (a) the ___of the asset at conversion or (b) ___at conversion.
adjusted basis , fair market value
108
An individual sold equipment used in a trade or business for $60,000. The equipment was acquired three years ago for $50,000, and $25,000 of allowable depreciation was claimed. How should the sale be reported on the income tax return?
Ordinary income of $25,000 and IRC Section 1231 (Property Used in the Trade or Business and Involuntary Conversions) gain of $10,000
The equipment has a net book value of $25,000 ($50,000 – $25,000). Total gain on the sale was $35,000 ($60,000 – $25,000). Section 1231 gains in excess of Section 1231 losses (i.e., depreciation expense) will be treated as ordinary income. Any remaining gain will receive long-term capital gain treatment. Therefore, $25,000 of the gain will be ordinary income and the remaining $10,000 gain will be a capital gain (Section 1231 gain).
109
Section 1231 of the Internal Revenue Code provides long-term capital gain treatment for certain transactions involving noncapital assets (generally land, buildings, and equipment used in business). If there is a loss, the loss is treated as an ___versus a capital loss.
ordinary
110
In a like-kind exchange, the basis of property received is the basis of the property given up plus any ___recognized, plus __
gain , boot
The basis of the land received is $40,000 ($40,000 + $6,000 gain − $6,000 boot received).
111
Land held as an investment is a capital asset
true
112
Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to the equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for business use. At the time the gift was made, the equipment had a fair market value of $32,000. Ignoring gift tax consequences, what is Russett's basis in the equipment?
Russett received the equipment as a gift from Bluff. Russett will receive the same basis in the property that was held by the giver, Bluff. The basis received by Russett is $31,000:
```
Original purchase $35,000
Improvements to equipment 1,000
-------
Basis $36,000
Less: Depreciation 5,000
-------
Adjusted basis $31,000
=======
```
113
A corporate taxpayer's capital gains and losses are as follows:
Short-term capital gain $ 7,000
Short-term capital loss 43,000
Long-term capital gain 9,000
Long-term capital loss 21,000
What amount of capital loss deduction is the taxpayer entitled to use to offset against ordinary income?
$0
For this corporate taxpayer, the short-term capital items net to $36,000 capital loss. The long-term items net to $12,000 capital loss...... As the taxpayer does not have any capital gains to offset against the capital losses, none of the capital losses may be used to reduce business ordinary income per tax law. The capital losses may be carried back to offset capital gains for three years and forward five years.
