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CPA - REG > Transactions in Property > Flashcards

Transactions in Property Flashcards

1
Q

Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1.

Boone gave 100 shares of the stock to another of Carter’s relatives, Dixon, on June 1 that same year, when the market value of the stock was $150 per share.

What was Dixon’s basis in the 100 shares of stock when acquired on June 1?

  1. $5,000
  2. $5,100
  3. $10,000
  4. $15,000
A

$5,000

When the shares are bequeathed to Boone, his basis in the shares is the fair market value at the date of death, which is $100 per share. When the stock splits 2 for 1, Boone then owns 200 shares of stock with a basis of $50 each. When the shares are gifted to Dixon, she takes the basis in the stock that Boone had, or $50. Therefore, Boone’s total basis is $5,000 (100 shares x $50 per share).

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2
Q

In June 2015, Hall’s mother gifted her 100 shares of a listed stock. The donor’s basis for this stock, which she bought in 1985, was $4,000, and market value on the date of the gift was $3,000. Hall sold his stock in July 2015 for $3,500. The donor paid no gift tax.

What was Hall’s reportable gain or loss in 2015 on the sale of the 100 shares of stock gifted to her?

A

$0

A donee basis in property acquired by gift usually equals the donor’s basis in the property plus the gift tax paid. However, if the fair market value of the gifted property at the time of the gift is less than the donor’s basis in the property, the donee assumes the fair market value of the property at the time of the gift as its basis for computing losses. The donee still uses the donor’s basis in the property plus the gift tax paid in computing gains.

When Hall received the stock as a gift from her mother, the fair market value of the stock ($3,000) was less than her mother’s basis in the property ($4,000). Thus, Hall assumed the stock’s fair market value at the time of the gift of $3,000 as her basis in the stock for computing losses and her mother’s basis of $4,000 as her basis in the stock for computing gains. Hall sold the stock for $3,500. Using Hall’s basis in the stock for computing losses of $3,000 indicates that she realized a gain of $500. However, using Hall’s basis in the stock for computing gains of $4,000 indicates that she realized a loss of $500. Therefore, Hall would not recognize any gain or loss from the sale of the gifted stock.

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3
Q

Simmons gives her child a gift of publicly-traded stock with a basis of $40,000 and a fair market value of $30,000. No gift tax is paid. The child subsequently sells the stock for $36,000. What is the child’s recognized gain or loss, if any?

  • $4,000 loss.
  • No gain or loss.
  • $6,000 gain.
  • $36,000 gain.
A

No gain or loss.

The recipient of a gift has a gain basis and a loss basis in the asset received. The gain basis is the donor’s adjusted basis ($40,000) and the loss basis is the lower of the fair market value or the adjusted basis ($30,000). If the asset is later sold for an amount in-between the gain and loss basis ($36,000 is in-between $40,000 and $30,000), no gain or loss is recognized.

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4
Q

Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Code Sec. 1245?

  1. $0
  2. $ 40,000
  3. $ 60,000
  4. $100,000
A

$ 60,000

The gain recognized from the sale is:

  • Amount realized $200,000
  • Adjusted basis ($160,000 - $60,000) 100,000
  • Recognized gain $100,000

Personalty is subject to the Section 1245 depreciation recapture rules which indicate that gain will be taxed as ordinary income up to the amount of depreciation claimed on the property. Since there was $60,000 of depreciation on the equipment, $60,000 of the gain is taxed as ordinary income and the remaining $40,000 is taxed as Section 1231 gain.

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5
Q

Lobster, Inc. incurs the following losses on disposition of business assets during the year:

  1. Loss on the abandonment of office equipment $25,000
  2. Loss on the sale of a building (straight-line depreciation taken in prior years of $200,000) $250,000
  3. Loss on the sale of delivery trucks $15,000

What is the amount and character of the losses to be reported on Lobster’s tax return?

A

$290,000 Section 1231 loss. All of the assets sold are assets that have been used in a business and are therefore Section 1231 losses. Thus, all of the losses are Section 1231 losses and total $290,000.

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6
Q

On January 2, 2010, Bates Corp. purchases and places into service seven-year MACRS tangible property costing $100,000. On December 31, 2015, Bates sells the property for $102,000, after having taken $47,525 in MACRS depreciation deductions.

What amount of the gain should Bates recapture as ordinary income?

  1. $0
  2. $2,000
  3. $47,525
  4. $49,525
A

$47,525

The property sold by Bates Corp. is Section 1245 property and, as such, is subject to 1245 recapture. Section 1245 property includes all depreciable personal property (for example, equipment and machinery). Under Section 1245 recapture, gains are treated as ordinary income to the extent of depreciation or amortization taken on the property. The basis of Bates Corp.’s property at the time of the sale is $52,475 - $100,000 purchase price, less $47,525 in depreciation. Hence, the corporation had a gain of $49,525. However, owing to Section 1245 recapture, the amount of depreciation allowed, $47,525, will be considered ordinary income and only $2,000 will be considered a gain.

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7
Q

Jared purchases an apartment building on January 1, 2005 for $500,000. The building is depreciated using Modified Accelerated Cost-Recovery System (MACRS) straight-line depreciation. The apartment building is sold on December 31, 2015 for $620,000, when its adjusted tax basis is $320,000 (assume that $180,000 of depreciation has been claimed). How much gain from the sale of the building is subject to the 25% rate?

  1. $0
  2. $180,000
  3. $300,000
  4. $320,000
A

$180,000

Total gain on the sale is $300,000 ($620,000 - $320,000). Gain on the sale of realty is taxed at a 25% rate to the extent of the straight-line depreciation claimed on the asset. (Note that there is no Section 1250 recapture since straight-line depreciation was used for the asset.) The straight-line depreciation was $180,000 so the first $180,000 of gain is taxed at 25%. The remaining gain of $120,000 is taxed as Section 1231 gain.

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8
Q

The results of UNA Corporation’s first six years of operations are presented below.

YearResults of Operations.

  1. Section 1231 losses of $50,000.
  2. Section 1231 losses of $30,000.
  3. Section 1231 gains of $75,000
  4. Section 1231 losses of $20,000
  5. Section 1231 losses of $30,000
  6. Section 1231 gain of $80,000

UNA corporation’s year-six Section 1231 gain can best be characterized as?

  1. $80,000 Section 1231 gain.
  2. $50,000 ordinary income; $30,000 Section 1231 gain.
  3. $80,000 ordinary income.
  4. $55,000 ordinary income; $25,000 Sec. 1231 gain.
A

$55,000 ordinary income; $25,000 Sec. 1231 gain.

The lookback provision states that the net Section 1231 gains must be offset by net Section 1231 losses from the five preceding tax years that have not previously been recaptured. To the extent of these losses, the net Section 1231 gain is treated as ordinary income. The $75,000 gain in Year 3 was recaptured as ordinary income by $50,000 of the Year 1 loss and $25,000 of the Year 2 loss. Note that $5,000 of the Year 2 loss remains unrecaptured. The $80,000 gain is recaptured as ordinary income to the extent of the $5,000 remaining Year 2 loss, $20,000 Year 4 loss, and $30,000 Year 5 loss for a total of $55,000. The remaining $25,000 gain is treated as a Sec. 1231 gain.

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9
Q

On August 22, 2015 Martha purchases a computer to use in her childcare business. She sells the computer on December 28, 2015 for $2,000 when the machine has an adjusted tax basis of $1,700. What is the amount and character of the gain on the sale?

  1. $300 short-term capital gain.
  2. $300 long-term capital gain.
  3. $300 ordinary income.
  4. $300 Section 1231 gain
A

$300 ordinary income.

Tangible assets that are used in a trade or business and owned for one year or less are ordinary assets. Since the computer was owned for slightly more than four months, the gain is classified as ordinary income.

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10
Q

Kaitlin owns a computer that she uses for business, investment, and personal use, as follows:

  1. Personal use 25%
  2. Investment use 30%
  3. Business use 45%

Will Kaitlin’s use qualify her to use accelerated or straight-line depreciation, and what percentage of the asset’s basis qualifies to be depreciated?

  1. Straight-line, 45%.
  2. Accelerated, 45%.
  3. Straight-line, 75%.
  4. Accelerated, 75%
A

Straight-line, 75%.

A computer qualifies as listed property, and MACRS accelerated depreciation can be claimed for listed property only if the business use of the asset exceeds 50% of the total use. Since Kaitlin’s business use is 45%, she does not meet the 50% test and must use straight-line (ADS) depreciation. However, she can depreciate both the business and investment use of the asset, so 75% of the asset’s basis qualifies to be depreciated.

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11
Q

Under modified accelerated cost recovery system (MACRS) depreciation for property placed in service after 1986,

  1. Used tangible depreciable property is excluded from the computation.
  2. Salvage value is ignored for the purposes of computing the MACRS deduction.
  3. No type of straight-line depreciation is allowable.
  4. The recovery period for depreciable realty is 27.5 years.
A

Salvage value is ignored for the purposes of computing the MACRS deduction.

Under MACRS, the property’s depreciable basis as determined by Code Section 162 is used to compute the depreciation deductions, except that salvage values are considered to be zero. Hence, the salvage value is ignored for computing the MACRS depreciation deduction and, therefore, this response is correct.

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12
Q

A taxpayer purchased five acres of land for $200,000 and placed in service other tangible business assets that cost $450,000. Disregarding business income limitations and assuming that the annual Section 179 (Election to Expense Certain Depreciable Business Assets) limit is $500,000, what maximum amount of cost recovery can the taxpayer claim this year?

  1. $650,000
  2. $500,000
  3. $450,000
  4. $200,000
A

$450,000

Land is not depreciable. Section 179 can be elected to expense the $450,000 of business assets since it does not exceed the maximum Section 179 limit of $500,000 as given in the problem.

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13
Q

Browne, a self-employed taxpayer, has 2015 business net income of $15,000 prior to any expense deduction for equipment purchases. In 2015, Browne purchases and places into service, for business use, office machinery costing $20,000. This is Browne’s only 2015 capital expenditure.

Browne’s business establishment is not in an economically distressed area. Browne makes a proper and timely expense election to deduct the maximum amount (assumed to be $25,000 ignoring bonus depreciation). Browne is not a member of any pass-through entity.

What is Browne’s deduction under the election?

  1. $4,000
  2. $10,000
  3. $15,000
  4. $20,000
A

$15,000

Property purchased for use in active trade or business is considered Code-Section 1245 property. Code-Section 1245 property is eligible for the Code-Section 179 election. Under this election, taxpayers may expense a statutory amount of the cost of property used by the taxpayers in active trade or business. The statutory amount is $25,000 for 2015. The Code-Section 179 deduction is limited to the amount of taxable income originating from the trade or business in which the property is used and is reduced dollar-for-dollar when the taxpayer places qualifying tangible personal property in service that exceeds $200,000. Since Browne purchases the equipment for use in business, the property qualifies as Code-Section 1245 property and, therefore, is eligible for the Code-Section 179 deduction. Browne’s income could limit the amount of the deduction, because the statutory amount, $25,000, is more than Browne’s business income of $15,000. Hence, Browne may elect under Code Section 179 to deduct $15,000. The remaining $5,000 of the cost of $20,000 can be carried over to future years.

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14
Q

Gem Corp. purchased all the assets of a sole proprietorship, including the following intangible assets:

  • Goodwill $50,000
  • Covenant not to compete $13,000

For tax purposes, what amount of these purchased intangible assets should Gem amortize over the specific statutory cost recovery periods?

  1. $63,000
  2. $50,000
  3. $13,000
  4. $0
A

$63,000

Goodwill is always amortizable. Covenants not to compete qualify if acquired in connection with the acquisition of a trade or business. Therefore, $63,000 can be amortized.

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15
Q

On January 1, Fast, Inc. entered into a covenant not to compete with Swift, Inc. for a period of five years, with an option by Swift to extend it to seven years. What is the amortization period of the covenant for tax purposes?

  1. 5 years.
  2. 7 years.
  3. 15 years.
  4. 17 years.
A

15 years.

The statutory amortization period for a covenant not to compete that is related to a business acquisition is 15 years.

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16
Q

On August 1, 2015, Graham purchases and places into service an office building costing $264,000, including $30,000 for the land. What was Graham’s MACRS deduction for the office building in 2015?

  1. $9,600
  2. $6,000
  3. $3,600
  4. $2,250
A

$2,250

Under MACRS, the office building is considered non-residential real property. Land cannot be depreciated. Its class life is 39 years. MACRS requires that the straight-line method be used to compute the depreciation of 39-year class life property. Therefore, the office building would be depreciated at a rate of $6,000 per year ([$264,000 building cost, less $30,000 cost of land]/39 years). However, the mid-month convention applies to 39-year class life property. This convention requires that, regardless of when realty is placed into service, it is considered to be placed into service at mid-month.

Therefore, for August 2015 (the first month of service), Graham could deduct $250 (= $6,000/12 months x one-half of a month). For the period of September 2015 to December 2015 (the remainder of the tax year), Graham could deduct $2,000 (= $6,000 x 4/12 months). Hence, Graham’s MACRS deduction for the office building in 2015 would be $2,250, the sum of the two periods.

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17
Q

ACE Landscaping purchased equipment for $3,000 in the current year that it plans to use 100% for business purposes. The equipment qualifies as 5-year property. The deprecation percentages provided in the MACRS tables are as follows:

  • Year 120.00%
  • Year 232.00%
  • Year 319.20%
  • Year 411.52%
  • Year 511.52%
  • Year 65.76%

On August 20 of Year 3 ACE sells the equipment for $1,800. The depreciation allowed for the equipment for Year 3 is (rounded to the nearest dollar):

  1. $ 0
  2. $173
  3. $288
  4. $575
A

$288

The MACRS rules for personalty use the half-year convention which provides a deduction for one-half of the regular deprecation for the asset in the year it is sold. This, the depreciation for Year 3 is $3,000 x 19.2% x ½, or $288.

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18
Q

An individual entered into several exchanges during the current tax year. Which of the following exchanges is classified as like-kind?

  1. Partnership interest for partnership interest.
  2. Common stock for common stock.
  3. Apartment building for unimproved land.
  4. Manufacturing equipment for factory building.
A

Apartment building for unimproved land.

All realty is like kind for purposes of the like-kind exchange rules. Realty is land and buildings, so the unimproved land and apartment building are like-kind.

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19
Q

Hogan exchanged a business-use machine having an original cost of $100,000 and accumulated depreciation of $30,000 for business-use equipment owned by Baker having a fair market value of $80,000 plus $1,000 cash. Baker assumed a $2,000 outstanding debt on the machine. What taxable gain should Hogan recognize?

  1. $0
  2. $3,000
  3. $10,000
  4. $11,000
A

$3,000

This is a qualified like-kind exchange because a machine was exchanged for equipment and Hogan’s use for each is for business purposes.

Amount Realized:

  • Equipment received $80,000
    • Cash $1,000
    • Debt relief $2,000
  • Total $83,000
  • Adjusted Basis:
    • Cost $100,000
    • Depreciation ($30,000)
  • Total ($70,000)
  • Realized Gain $13,000

Debt relief and the cash received are both considered to be boot received, which is a total of $3,000. The recognized gain is the lower of the realized gain, $13,000, or boot received, $3,000.

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20
Q

Mr. N’s business building is destroyed by a hurricane. The building had an adjusted basis to Mr. N of $200,000 and a fair market value immediately before the hurricane of $300,000. Mr. N receives a reimbursement of $270,000 from his insurance company and immediately spends $268,000 on a new business building. What amount must Mr. N include in his gross income?

  1. $(32,000) loss.
  2. $(30,000) loss.
  3. $2,000 gain.
  4. $70,000 gain.
A

$2,000 gain.

  • Amount realized from conversion.$270,000
    • Adjusted basis of old property.$200,000
  • Realized gain/loss.$70,000

========================

  • Amount realized from conversion$270,000
    • Cost of replacement property.$268,000
  • Recognized gain, limited to realized gain. $2,000

========================

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21
Q

In a “like-kind” exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of

  1. Convertible debentures.
  2. Convertible preferred stock.
  3. Partnership interests.
  4. Rental real estate located in different states.
A

Rental real estate located in different states.

Exchanges involving property held primarily for sale; stocks, bonds, notes and other securities; partnership interests; certificates trusts or beneficial interest; and evidences of indebtedness are not considered “like-kind” exchanges and, as a result, do not qualify for the non-recognition of gains or losses.

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22
Q

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?

  1. $0
  2. $ 50,000
  3. $100,000
  4. $150,000
A

$ 50,000

This transaction qualifies as a like-kind exchange because farmland (realty) was exchanged for an office building (realty). The realized gain on the property transaction is computed as follows:

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23
Q

A heavy equipment dealer would like to trade some business assets in a non-taxable exchange. Which of the following exchanges would qualify as non-taxable?

  1. The company jet for a large truck to be used in the corporation.
  2. Investment securities for antiques to be held as investments.
  3. A road grader held in inventory for another road grader.
  4. A corporate office building for a vacant lot.
A

A corporate office building for a vacant lot.

Remember, an exchange will be non-taxable if it qualifies under the like-kind exchange rules. Inventory items do not qualify under the like-kind exchange rules, so even though this is a grader for a grader, it will be a taxable exchange.

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24
Q

Aviary Corp., a sole proprietorship, 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?

  1. $180,000
  2. $120,000
  3. $54,000
  4. $36,000
A

$36,000

Aviary’s basis in the building is $420,000 ($500,000 cost - $80,000 depreciation). Aviary’s gain on the sale of the building is $180,000 ($600,000 amount realized - $420,000 basis). On the installment basis, the $180,000 gain is reported pro-rata as payments are received. In the year of sale, 20% ($120,000/$600,000) of the total payments of $600,000 are received. Thus, 20% of the gain is recognized, or $36,000 ($180,000 x 20%).

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25
Q

Sands purchased 100 shares of Eastern Corp. stock for $18,000 on April 1 of the prior year. On February 1 of the current year, Sands sold 50 shares of Eastern for $7,000. Fifteen days later, Sands purchased 25 shares of Eastern for $3,750. What is the amount of Sand’s recognized gain or loss?

  1. $0
  2. $500 loss.
  3. $1,000 loss.
  4. $2,000 loss
A

$1,000 loss.

Sand’s basis per share is $180 ($18,000/100 shares). Sand’s realized loss on the 50 shares sold is $2,000 ($7,000 amount realized - $9,000 basis ($180 x 50 shares). This loss is not recognized under the wash sale rule if the same stock is repurchased within 30 days. Since only 25 shares were repurchased during the 30 day period, 50% (25 shares/50 shares) of the loss is not recognized. Therefore, $1,000 of the realized loss is recognized.

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26
Q

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?

  1. $115,000
  2. $125,000
  3. $165,000
  4. $175,000
A

$165,000

The gross profit on the sale is the amount realized less the property’s adjusted basis. The amount realized is $200,000 + $50,000 debt relief - $10,000 selling expenses, or $240,000. The $240,000 is reduced by the basis of $75,000 to produce the gross profit of $165,000.

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27
Q

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?

  1. $0
  2. $ 60,000
  3. $274,000
  4. $310,000
A

$0

The realized gain is computed as follows:

  • Amount Realized:
    • Cash $650,000
    • Commission ($36,000)
      • $614,000
  • Adjusted Basis:
    • Cost $300,000
    • Improvements $40,000
      • ($340,000)

Realized gain $274,000

Since this is a married couple that meets the ownership and use test they can exclude up to $500,000 of gain on the sale of a principal residence. Thus, none of the $274,000 gain is included in income.

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28
Q

Wynn, a single individual age 60, sold Wynn’s personal residence for $450,000. Wynn had owned Wynn’s residence, which had a basis of $250,000, for six years. Within eight months of the sale, Wynn purchased a new residence for $400,000. What is Wynn’s recognized gain from the sale of Wynn’s personal residence?

  1. $0
  2. $50,000
  3. $75,000
  4. $200,000
A

$0

A taxpayer may exclude realized gains up to $250,000 ($500,000 if filing joint) on the sale of a residence if the residence has been owned and used by the taxpayer as a principal residence for at least two of the preceding five years. (Note that for the $500,000 exclusion both spouses must meet the use test, but only one must meet the ownership test). Wynn’s realized gain is $200,000 ($450,000 amount realized - $250,000 adjusted basis), so all of this gain can be excluded.

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29
Q

Conner purchases 300 shares of Zinco stock for $30,000 in 2001.

On May 23, 2014, Conner sells all the stock to his daughter, Alice, for $20,000, its then fair market value. Conner realizes no other gain or loss during 2014. On July 26, 2015, Alice sells the 300 shares of Zinco for $25,000.

What is Alice’s recognized gain or loss on her sale?

  1. $0
  2. $5,000 long-term gain.
  3. $5,000 short-term loss.
  4. $5,000 long-term loss.
A

$0

A taxpayer acquiring property through purchase or exchange from a person who sustained a loss on the transaction that was disallowed owing to related taxpayer rules realizes a gain on the sale or other disposition of the property only to the extent that the gain exceeds the amount of the disallowed loss. Alice acquired the Zinco stock from her father, who sustained a disallowed loss of $10,000 ($20,000 selling price, less $30,000 purchase price). Hence, Alice would have to realize a gain of more than $10,000 for her to recognize a gain, since she now has a right of offset of $10,000.

Alice purchased the stock from her father for $20,000 and sold the stock for $25,000 - realizing a gain of $5,000. Since Alice’s realized gain is less than her father’s right of offset, Alice does not recognize any gain on the sale of the stock.

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30
Q

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 five years, beginning in the second year. Under the installment method, what gain should Essex include in gross income for the year of sale?

  1. $25,000
  2. $20,000
  3. $15,000
  4. $ 5,000
A

$5,000

The total gain from the sale is $20,000 ($100,000 - $80,000). Under the installment method, 25% ($25,000 paid first year/$100,000) is of the gain is recognized in the year of sale. 25% x $20,000 = $5,000.

31
Q

Thayer Corporation purchased an apartment building on January 10, 2009 for $200,000. The building was depreciated using the straight-line method. On February 20, 2015, the building was sold for $220,000, when the asset balance net of accumulated depreciation was $170,000. On its 2015 tax return, Thayer Corporation should report

  1. Section 1231 gain of $42,500 and ordinary income of $7,500.
  2. Section 1231 gain of $44,000 and ordinary income of $6,000.
  3. Ordinary income of $50,000.
  4. Section 1231 gain of $50,000.
A

Section 1231 gain of $44,000 and ordinary income of $6,000.

Since the building qualifies as Sec. 1250 property and was sold by a corporation, it is subject to the recapture provisions of both Sec. 1250 and Sec. 291. Under Sec. 1250, the gain recognized on the sale must be recaptured as ordinary income to the extent of “excess” depreciation (i.e., depreciation deducted in excess of straight-line). Because the building was depreciated using the straight-line method, there is no Sec. 1250 recapture. However, Sec. 291 recaptures 20% of the difference between the ordinary income that would have been recognized had the building been Sec. 1245 property ($30,000) and the ordinary income recognized under Sec. 1250. Thus, ordinary income is $6,000 ($30,000 × 20%) and the remaining gain of $44,000 ($50,000 − $6,000) is treated as Sec. 1231 gain.

32
Q

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?

  1. $0
  2. $2,000
  3. $4,000
  4. $6,000
A

$2,000

The adult child sold the stock to Gibson for $12,000 when the stock was worth $14,000. As a result, the transfer of property to Gibson is treated as part sale and part gift. As such, the adult child (transferor) is not allowed to recognize a loss, and is treated as having made a gift to Gibson equal to the difference between the stock’s FMV of $14,000 and the selling price of $12,000, or $2,000. Where a transfer of property is in part a sale and in part a gift, the basis of the property in the hands of the transferee (Gibson) is generally the greater of (1) the amount paid by the transferee for the property ($12,000), or (2) the transferor’s basis for the property at the time of the transfer ($16,000). As a result, Gibson’s basis for the stock is $16,000, and the subsequent sale of the stock to an unrelated party for $18,000 results in Gibson recognizing a gain of $2,000.

33
Q

On May 31, 2015, Day Corporation sold machinery for $41,000. The machinery which had been purchased on January 2, 2013, for $40,000 had an adjusted basis of $21,000 on the date of sale. For 2015 Day should report

  1. Ordinary income of $20,000.
  2. Section 1231 gain of $20,000.
  3. Section 1231 gain of $19,000 and ordinary income of $1,000.
  4. Section 1231 gain of $1,000 and ordinary income of $19,000.
A

Section 1231 gain of $1,000 and ordinary income of $19,000.

Since the sale of machinery is subject to Sec. 1245 recapture, Day’s realized gain of $20,000 ($41,000 − $21,000) is treated as ordinary income to the extent of the depreciation deducted of $19,000 ($40,000 − $21,000). The remaining $1,000 ($20,000 − $19,000) is Sec. 1231 gain.

  • Upon the disposition of property subject to Sec. 1245, any recognized gain will be ordinary income to the extent of all depreciation or post-1980 cost recovery deductions.
  • Any remaining gain after recapture will be Sec. 1231 gain if property held more than one year.
34
Q

Which of the following items is a capital asset?

  1. An automobile for personal use.
  2. Depreciable business property.
  3. Accounts receivable for inventory sold.
  4. Real property used in a trade or business.
A

An automobile for personal use. The definition of capital assets includes investment property and property held for personal use (e.g., personal-use automobile), but excludes accounts receivable, depreciable business property, and real property used in a trade or business.

The term specifically excludes:

  1. Stock in trade, inventory, or goods held primarily for sale to customers in the normal course of business
  2. Depreciable or real property used in a trade or business
  3. Copyrights or artistic, literary, etc., compositions created by the taxpayer
  4. Accounts or notes receivable arising from normal business activities
  5. US government publications acquired other than by purchase at regular price
  6. Supplies of a type regularly used or consumed by a taxpayer in the ordinary course of the taxpayer’s trade or business
35
Q

Folly Corporation, which was formed in 2011, had $40,000 of net Sec. 1231 gain for its 2014 calendar year. Its net Sec. 1231 gains and losses for its 3 preceding tax years were as follows:

  • Year Sec.1231 results
    • 2012Loss of $15,000
    • 2013Loss of $20,000
    • 2014Gain of $5,000

As a result, Folly Corporation’s 2015 net Sec. 1231 gain would be characterized as?

  1. A net long-term capital gain of $5,000, and ordinary income of $35,000.
  2. A net long-term capital gain of $10,000, and ordinary income of $30,000.
  3. A net long-term capital gain of $30,000, and ordinary income of $10,000.
  4. A net long-term capital gain of $40,000.
A

A net long-term capital gain of $10,000, and ordinary income of $30,000.

A net Sec. 1231 gain must be treated as ordinary income to the extent of the taxpayer’s nonrecaptured net Sec. 1231 losses for its 5 preceding tax years. Since the nonrecaptured net Sec. 1231 losses for 2012 and 2013 total ($15,000 + $20,000) − $5,000 = $30,000, only $10,000 of the $40,000 net Sec. 1231 gain for 2015 will be treated as long-term capital gain.

36
Q

On January 10, 2013, Martin Mayne bought 3,000 shares of Hance Corporation stock for $300,000. The fair market values of this stock on the following dates were as follows:

  • Dec. 31, 2014 $210,000
  • Mar. 31, 2015 $240,000
  • June 30, 2015 $270,000

Martin died on December 31, 2014, bequeathing this stock to his son, Philip. The stock was distributed to Philip on March 31, 2015. The alternate valuation was elected for Martin’s estate. Philip’s basis for this stock is

  1. $210,000
  2. $240,000
  3. $270,000
  4. $300,000
A

$240,000

Since the alternate valuation (6/30/15) was elected for Martin’s estate but the property was distributed to Philip before that date, Philip’s basis is the $240,000 FMV of the stock on date of distribution (3/31/15).

If acquired from decedent, basis is property’s FMV on date of decedent’s death, or alternate valuation date (generally 6 months after death).

37
Q

Which of the following is a capital asset?

  1. Delivery truck.
  2. Personal-use recreation equipment.
  3. Land used as a parking lot for customers.
  4. Treasury stock, at cost.
A

Personal-use recreation equipment.

The definition of capital assets generally includes personal use property and investment property, but excludes property used in a trade or business (e.g., delivery truck, land used as a parking lot). Treasury stock is not considered an asset, but instead is treated as a reduction of stockholders’ equity.

Capital gains and losses result from the “sale or exchange of capital assets.” The term capital assets includes investment property and property held for personal use. The term specifically excludes:

  1. Stock in trade, inventory, or goods held primarily for sale to customers in the normal course of business
  2. Depreciable or real property used in a trade or business
  3. Copyrights or artistic, literary, etc., compositions created by the taxpayer
  • They are capital assets only if purchased by the taxpayer.
  • Patents are generally capital assets in the hands of the inventor.
  1. Accounts or notes receivable arising from normal business activities
  2. An agreement (i.e., covenant) not to compete for a fixed number of years that is separable from goodwill
38
Q

On February 1, 2015, Rick Landerholm learned that he was bequeathed a baseball card collection under the will of his uncle, John. John had a basis in the baseball card collection of $2,000. Fair market value of the collection on January 19, 2015, the date of John’s death, was $10,000 and had increased to $15,000 six months later. The executor of John’s estate elected the alternate valuation for estate tax purposes. Rick sold the baseball card collection for $12,000 on March 1, 2015, the date that the executor distributed the collection to him. Assuming that Rick is not a dealer in baseball cards, Rick should treat the baseball collection as a

  1. Short-term Section 1231 asset.
  2. Long-term Section 1231 asset.
  3. Short-term capital asset.
  4. Long-term capital asset.
A

Long-term capital asset.

The collection should be treated as a capital asset held long-term since

  1. property inherited from a decedent having a FMV basis is considered to be held for more than 12 months regardless of its actual holding period and
  2. the collection is an investment asset in Rick’s hand.

The collection is not a Sec. 1231 asset because it was not held for use in Rick’s trade or business.

39
Q

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?

  1. $20
  2. $22
  3. $30
  4. $33
A

$20

Generally the receipt of a common stock distribution on common stock is excluded from gross income. As a result, the cost of the original shares is divided by the total shares owned (including the dividend shares) to determine the basis for each share. Here, the $22,000 cost of the original shares would be divided by the total shares owned after the stock distribution (1,000 + 100) to arrive at a basis of $20 per share.

40
Q

Which of the following sales should be reported as a capital gain?

  1. Sale of business equipment.
  2. Real property subdivided and sold by a dealer.
  3. Sale of inventory.
  4. Government bonds sold by an individual investor.
A

Government bonds sold by an individual investor.

A capital gain generally results from the sale or exchange of a capital asset. The term capital assetincludes investment property, but specifically excludes stock in trade, inventory, property held primarily for sale to customers in the normal course of business, and depreciable or real property used in a trade or business.

41
Q

Danielson invested $2,000,000 in DEC, a qualified small business corporation. Seven years later, Danielson sold all of the DEC stock for $16,000,000 and purchased an office building with the proceeds. Danielson had not previously excluded any gain on the sale of small business stock. What is Danielson’s taxable gain after the exclusion if he sold the stock in 2014?

  1. $0
  2. $6,000,000
  3. $7,000,000
  4. $9,000,000
A

$7,000,000

A noncorporate taxpayer can generally exclude 50% of the capital gain resulting from the sale of qualified small business stock held more than five years. The amount of excludible gain is subject to a cumulative limit of the greater of $10 million, or 10 times the investor’s stock basis. Here, the sale for $16,000,000 of qualified stock that was acquired for $2,000,000 results in a gain of $14,000,000. Since the $14,000,000 gain does not exceed 10 times Danielson’s stock basis, 50% of the gain can be excluded. resulting in a taxable gain after exclusion of $7,000,000.

42
Q

Joseph Kurtz exchanged land that he held for 4 years as an investment, with a tax basis of $36,000, for similar land valued at $40,000 which was owned by Adrian Flemming. In connection with this transaction, Kurtz assumed Flemming’s $10,000 mortgage and Flemming assumed Kurtz’s $12,000 mortgage. As a result of this transaction Kurtz should report a long-term capital gain of

  1. $0
  2. $2,000
  3. $4,000
  4. $6,000
A

$2,000

In a like-kind exchange of investment property, a realized gain is recognized to the extent of un-like (boot) property received. Here, boot includes the assumption of a liability. Since Flemming’s assumption of $12,000 exceeds Kurtz’s assumption of $10,000, there is net boot received of $2,000.

43
Q

Murd Corporation, a domestic corporation, acquired a 90% interest in the Drum Company in 2013 for $30,000. During 2015, the stock of Drum was declared worthless. What type and amount of deduction should Murd take for 2015?

  1. Long-term capital loss of $3,000.
  2. Long-term capital loss of $15,000.
  3. Ordinary loss of $30,000.
  4. Long-term capital loss of $30,000.
A

Ordinary loss of $30,000.

Worthless securities generally receive capital loss treatment. However, if the loss is incurred by a corporation on its investment in an affiliated subsidiary corporation (80% or more ownership), the loss is generally treated as an ordinary loss.

Worthless stock and securities

  1. Treated as a capital loss as if sold on the last day of the taxable year they become worthless
  2. Treated as an ordinary loss if stock and securities are those of an 80% or more owned corporate subsidiary that derived more than 90% of its gross receipts from active-type sources
44
Q

In 2015, Mr. Trader had a net long-term capital loss of $13,000 and a net short-term capital gain of $5,000. What are his 2015 capital loss deduction and carryover to 2016 respectively?

  1. $3,000 and $5,000.
  2. $1,000 and $4,000.
  3. $2,500 and $0.
  4. $2,500 and $2,500.
A

$3,000 and $5,000.

The net long-term capital loss (LTCL) ($13,000) is netted against the net short-term capital gain ($5,000) resulting in an $8,000 net LTCL. A net LTCL is deducted dollar for dollar, the same as a net STCL. A maximum of $3,000 of capital loss may be taken in any one year. The result of taking a $3,000 loss deduction is that the net LTCL is reduced by $3,000 and $5,000 of LTCL ($8,000 − $3,000) will be available for carryover to the next taxable year.

45
Q

In 2015 Studley Corporation, not a dealer in securities, realized taxable income of $80,000 from the operation of its business. Additionally in 2015, Studley realized a long-term capital loss of $12,000 from the sale of marketable securities. Studley had not realized any other capital gains or losses since it began operations. What is the proper treatment for the $12,000 long-term capital loss in Studley’s income tax return?

  1. Use $3,000 of the loss to reduce taxable income for 2015, and carry $9,000 of the long-term capital loss forward 5 years.
  2. Use $6,000 of the loss to reduce taxable income by $3,000 for 2015, and carry $6,000 of the long-term capital loss forward 5 years.
  3. Use $12,000 of the long-term capital loss to reduce taxable income by $6,000 for 2015.
  4. Carry the $12,000 long-term capital loss forward 5 years, treating it as a short-term capital loss.
A

Carry the $12,000 long-term capital loss forward 5 years, treating it as a short-term capital loss.

A corporation’s net capital loss is not currently deductible, but is generally carried back 3 years and forward 5 years as a STCL to offset capital gains in those years. Since Studley had not realized any capital gains since it began operations, the $12,000 LTCL can only be carried forward for 5 years as a STCL.

Corporations have special capital gain and loss rules.

  • Capital losses are only allowed to offset capital gains, not ordinary income.
  • A net capital loss is carried back 3 years, and forward 5 years to offset capital gains in those years. All capital loss carrybacks and carryovers are treated asshort-term capital losses.
46
Q

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?

  1. $0
  2. $2,000 gain.
  3. $3,000 gain.
  4. $3,000 loss.
A

$0

Since Dunn’s basis for computing a gain is the same as the donor’s basis of $32,000, Dunn’s sale of the stock for $29,000 does not result in a gain. Similarly, since Dunn’s basis for computing a loss would be the stock’s $27,000 FMV at date of gift, the sale of the stock for $29,000 does not result in a loss. As a result, no gain or loss should be reported by Dunn.

47
Q

On August 20, 2014, Roger Carlson paid $60,000 for 250 shares of Hewlett Corp. common stock. Roger received a nontaxable stock dividend of 50 new common shares in July 2015. On September 30, 2015, Roger sold the 50 new shares for $13,000. What is Roger’s reportable gain on the sale of the 50 new shares?

  1. $3,000 short-term capital gain.
  2. $3,000 long-term capital gain.
  3. $13,000 short-term capital gain.
  4. $13,000 long-term capital gain.
A

$3,000 long-term capital gain.

Since the holding period of the new shares includes the holding period of the old shares, the sale of the 50 new shares for $13,000 results in a LTCG of $3,000 [$13,000 − (50 shares × $200)].

The basis of stock received as a dividend depends upon whether it was included in income when received.

  • If included in income, basis is its FMV at date of distribution.
  • If nontaxable when received, the basis of shareholder’s original stock is allocated between the dividend stock and the original stock in proportion to their relative FMVs.
  • The holding period of the dividend stock includes the holding period of the original stock.
48
Q

On July 1, 2015, Louis Herr exchanged an office building having a fair market value of $400,000, for cash of $80,000 plus an apartment building having a fair market value of $320,000. Herr’s adjusted basis for the office building was $250,000. How much gain should Herr recognize in his 2015 income tax return?

  1. $0
  2. $80,000
  3. $150,000
  4. $330,000
A

$80,000

  • FMV of building received $320,000
  • Cash received $80,000
  • Amount realized $400,000
  • Basis of property exchanged ($250,000)
  • Gain realized $150,000

Since boot was received in the form of cash, the realized gain is recognized to the extent of the $80,000 cash received.

49
Q

Matt Hewlett bought a plot of land with a cash payment of $60,000 and a purchase money mortgage of $45,000. In addition, Hewlett paid $150 for a title insurance policy. Hewlett’s basis for this land is

  1. $60,000
  2. $60,150
  3. $105,000
  4. $105,150
A

$105,150

The basis of the land consists of the cash paid ($60,000), the purchase money mortgage ($45,000), and the cost of the title insurance policy ($150), a total of $105,150.

50
Q

In 2015, Joan sold 1,000 shares of Cornell Co. stock to her sister, Susan, for the stock’s fair market value of $30,000. Joan had paid $36,000 for the stock in 2012. Subsequently in 2015, Susan sold the stock to an unrelated third party for $41,000. What amount of gain from the sale of the stock to the third party will be taxed to Susan on her 2015 income tax return?

  1. $0
  2. $5,000
  3. $6,000
  4. $11,000
A

$5,000

Losses are disallowed on sales of property between related taxpayers, including family members. Any gain later realized by the transferee on the disposition of the property is not recognized to the extent of the transferor’s disallowed loss. Here Joan’s realized loss of $36,000 — $30,000 = $6,000 is disallowed because she sold the stock to her sister, Susan. Susan’s basis for the stock is her cost of $30,000. On the subsequent sale of the stock to an unrelated third party, Susan realized a gain of $41,000 — $30,000 = $11,000. However, this realized gain of $11,000 is recognized only to the extent that it exceeds Joan’s $6,000 disallowed loss, or $5,000.

51
Q

In 2013, Martha received as a gift several shares of Good Corporation stock. The donor’s basis of this stock was $2,800. On the date of the gift, the fair market value of the stock was $2,600. If Martha sells this stock in 2015 for $2,700, what amount and type of gain or loss should Martha report in her 2015 income tax return?

  1. $ 50 long-term capital gain.
  2. $100 long-term capital gain.
  3. $100 long-term capital loss.
  4. No gain or loss.
A

No gain or loss.

There is no gain or loss to be reported. Since the sales price ($2,700) falls below the gain basis ($2,800) and above the loss basis ($2,600), there is no gain or loss.

52
Q

Wynn, a single individual age 60, sold Wynn’s personal residence for $450,000. Wynn had owned Wynn’s residence, which had a basis of $250,000, for six years. Within eight months of the sale, Wynn purchased a new residence for $400,000. What is Wynn’s recognized gain from the sale of Wynn’s personal residence?

  1. $0
  2. $50,000
  3. $75,000
  4. $200,000
A

$0

An individual may exclude up to $250,000 of gain from the sale or exchange of a residence if the individual owned and occupied the residence as a principal residence for at least two of the five years preceding the sale or exchange. Since Wynn’s gain is only $450,000 − $250,000 = $200,000, it can be fully excluded. Note that a taxpayer’s reinvestment in a new residence will never affect the computation of the exclusion.

53
Q

Sands purchased 100 shares of Eastern Corp. stock for $18,000 on April 1 of the prior year. On February 1 of the current year, Sands sold 50 shares of Eastern for $7,000. Fifteen days later, Sands purchased 25 shares of Eastern for $3,750. What is the amount of Sands’ recognized gain or loss?

  1. $0
  2. $500
  3. $1,000
  4. $2,000
A

$1,000

Since Sands purchased 100 shares of Eastern Corp. for $18,000 and sold 50 shares for $7,000, Sands’ realized loss equals $7,000 selling price − $9,000 basis = $2,000. However, no loss can be recognized on the sale of stock if substantially identical stock is purchased within 30 days before or after the loss sale. If a taxpayer acquires less than the number of shares sold, the amount of loss that cannot be recognized is determined by the ratio of the number of shares repurchased to the number of shares sold. Since Sands sold 50 shares of Eastern and 15 days later purchased 25 Eastern shares, 25/50 or 1/2 of Sands’ $2,000 realized loss cannot be recognized, while the remaining $1,000 of Sands’ loss will be recognized.

54
Q

A heavy equipment dealer would like to trade some business assets in a nontaxable exchange. Which of the following exchanges would qualify as nontaxable?

  1. The company jet for a large truck to be used in the corporation.
  2. Investment securities for antiques to be held as investments.
  3. A road grader held in inventory for another road grader.
  4. A corporate office building for a vacant lot.
A

A corporate office building for a vacant lot.

Note: the like-kind exchange provisions do not apply to inventory and property held for sale in the ordinary course of business.

No gain or loss is recognized on the exchange of business or investment property for property of a like kind. The term “like kind” means the same class of property (e.g., real estate must be exchange for real estate, personal property must be exchanged for personal property within the same general asset or product class). Thus, the exchange of a corporate office building for a vacant lot is an exchange of real estate for real estate and qualifies as a nontaxable like-kind exchange.

55
Q

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?

  1. $31,000
  2. $32,000
  3. $35,000
  4. $36,000
A

$31,000

Generally, the basis for property received as gift is the same as the donor’s basis. Here, the equipment’s basis at time of gift was $35,000 cost + $1,000 improvements − $5,000 depreciation = $31,000 basis. Since this is below the $32,000 fair value of the equipment at time of gift, $31,000 is Russett’s basis for computing gain or loss, as well as depreciation on the equipment.

56
Q

On July 1, 2015, Daniel Wright owned stock (held for investment) purchased 2 years earlier at a cost of $10,000 and having a fair market value of $7,000. On this date he sold the stock to his son, William, for $7,000. William sold the stock for $6,000 to an unrelated person on November 1, 2015. How should William report the stock sale on his 2015 tax return?

  1. As a short-term capital loss of $1,000.
  2. As a long-term capital loss of $1,000.
  3. As a short-term capital loss of $4,000.
  4. As a long-term capital loss of $4,000.
A

As a short-term capital loss of $1,000.

Losses are disallowed on sales between related taxpayers, including family members. Thus, Daniel’s loss of $3,000 is disallowed on the sale of stock to his son, William. William’s basis for the stock is his $7,000 cost. Since William’s stock basis is determined by his cost (not by reference to Daniel’s cost), there is no “tack-on” of Daniel’s holding period. Thus, a later sale of the stock for $6,000 on November 1 generates a $1,000 short-term capital loss for William. Note that if William had sold the stock at a gain, Daniel’s disallowed loss would have been used to reduce the recognized gain.

57
Q

A taxpayer sold for $200,000 equipment that had an adjusted basis of $180,000. Through the date of the sale, the taxpayer had deducted $30,000 of depreciation. Of this amount, $17,000 was in excess of straight-line depreciation. What amount of gain would be recaptured under Section 1245 (Gain from Dispositions of Certain Depreciable Property)?

  1. $13,000
  2. $17,000
  3. $20,000
  4. $30,000
A

$20,000

This answer is correct. Sec. 1245 recaptures gain as ordinary income on the disposition of Sec. 1245 property to the extent of all depreciation (including straight-line) previously deducted. However, the amount of gain recaptured cannot exceed the amount of recognized gain. Here, the recapture is limited to the recognized gain of $20,000.

  • Selling price $200,000
    • Cost - $210,000
    • Depreciation ($30,000)
  • Adjusted basis ($180,000)
  • Recognized gain $20,000
58
Q

Which one of the following would not be Sec. 1231 property even though held for more than 12 months?

  1. Unharvested crops on land used in business.
  2. Unimproved land used for business.
  3. Depreciable equipment used in a business.
  4. Copyrights, literary, musical, or artistic compositions held by a taxpayer whose personal efforts created such property.
A

Copyrights, literary, musical, or artistic compositions held by a taxpayer whose personal efforts created such property.

Sec. 1231 property generally includes both depreciable and nondepreciable property used in a trade or business or held for the production of income if held for more than 12 months. Specifically excluded from Sec. 1231 is inventory and property held for sale to customers, as well as accounts and notes receivable arising in the ordinary course of a trade or business. Additionally, copyrights, literary, musical, and artistic compositions held by a taxpayer whose personal efforts created such property are excluded from Sec. 1231.

59
Q

Rose Budd owns 55% of the outstanding stock of Kee Corp. During 2015 Kee sold a machine to Rose for $80,000. This machine had an adjusted tax basis of $92,000 and had been owned by Kee for 3 years. What is the allowable loss that Kee can claim in its 2015 income tax return?

  1. $12,000 Section 1245 loss.
  2. $12,000 Section 1231 loss.
  3. $12,000 ordinary loss.
  4. $0.
A

$0.

A loss is disallowed if it results from a sale or exchange between a corporation and a person who owns (directly or constructively) more than 50% of its stock.

60
Q

David Price owned machinery which he had acquired in 2013 at a cost of $100,000. During 2015, the machinery was destroyed by fire. At that time it had an adjusted basis of $86,000. The insurance proceeds awarded to Price amounted to $125,000, and he immediately acquired a similar machine for $110,000. What should Price report as ordinary income resulting from the involuntary conversion for 2015?

  1. $14,000
  2. $15,000
  3. $25,000
  4. $39,000
A

$14,000

The realized gain from involuntary conversion of $39,000 ($125,000 insurance proceeds − $86,000 adjusted basis) is recognized only to the extent that the insurance proceeds are not reinvested in similar property. This results in a recognized gain of $15,000 ($125,000 − $110,000). Because the machinery was Sec. 1245 property, this recognized gain of $15,000 is recaptured as ordinary income to the extent of the $14,000 of depreciation previously deducted, while the remaining $1,000 is classified as Sec. 1231 gain.

61
Q

For a married couple filing a joint return, the excess of net long-term capital loss over net short-term capital gain is

  1. Reduced by 50% before being deducted from ordinary income.
  2. Limited to a maximum deduction of $3,000 from ordinary income.
  3. Allowed as a carryover against future capital gains up to a maximum period of 5 years.
  4. Not deductible from ordinary income.
A

Limited to a maximum deduction of $3,000 from ordinary income.

Both a net long-term capital loss and a net short-term capital loss are used dollar-for-dollar in computing an individual’s capital loss deduction. An individual’s net capital loss is limited to a maximum deduction of $3,000 ($1,500 if married filing separately) from ordinary income. Any unused net capital loss is carried forward for an unlimited period of time retaining its identity as long-term or short-term in the years to which carried.

62
Q

In 2012, Bill Yao bought shares of stock as an investment at a cost of $20,000. During 2014, when the fair market value was $15,000, Bill gave the stock to his son, Tom. Tom sold the stock in 2015 for $12,000. Tom’s holding period of the stock for purposes of determining his loss

  1. Started in 2012
  2. Started in 2014
  3. Started in 2015
  4. Is irrelevant because Tom received the stock for no consideration of money or money’s worth.
A

Started in 2014

If property is received as a gift, and the property’s FMV on date of gift is used to determine a loss, the donee’s holding period begins when the gift was received. Thus, Tom’s holding period starts in 2014.

2012 would be correct if the stock were sold for a gain.

63
Q

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?

  1. $0
  2. $50,000
  3. $100,000
  4. $150,000
A

$50,000 - In a like-kind exchange, the assumption of a mortgage on either side of the transaction will be treated as boot.

Generally, no gain or loss is recognized on the exchange of business or investment property for property of a like kind. Since like-kind means the same class of property, an exchange of farmland for an office building qualifies as a like-kind exchange. However, in a like-kind exchange, a realized gain ($400,000 − $250,000 = $150,000 in this case) will be recognized to the extent of unlike property (i.e., boot) received. Here, Tatum’s assumption of the $70,000 mortgage on the acquired office building is treated as boot paid, while the $120,000 mortgage on the farmland exchanged is treated as boot received. These mortgages are offset and result in Tatum receiving net boot and a recognized gain of $50,000.

64
Q

On March 10, 2015, James Rogers sold 300 shares of Red Company common stock for $4,200. Rogers acquired the stock in 2013 at a cost of $5,000. On April 4, 2015, he repurchased 300 shares of Red Company common stock for $3,600 and held them until July 18, 2015, when he sold them for $6,000. How should Rogers report the above transactions for 2015?

  1. A long-term capital loss of $800.
  2. A long-term capital gain of $1,000.
  3. A long-term capital gain of $1,600.
  4. A long-term capital loss of $800 and a short-term capital gain of $2,400.
A

A long-term capital gain of $1,600.

The purchase of substantially identical stock within 30 days of the sale of stock at a loss is known as a wash sale. The $800 loss incurred in the wash sale ($5,000 basis less $4,200 amount realized) is disallowed. The basis of the replacement (substantially identical) stock is its cost ($3,600) plus the disallowed wash sale loss ($800). The holding period of the replacement stock includes the holding period of the wash sale stock. The amount realized ($6,000) less the basis ($4,400) yields a long-term gain of $1,600.

65
Q

During the current year, Al Oran bought a paved vacant lot adjacent to his retail store for use as a customers’ parking lot at a cost of $15,000. In addition, Oran bought new store fixtures costing $8,000. What portion of these assets constitutes capital assets?

  1. $0
  2. $ 8,000
  3. $15,000
  4. $23,000
A

$0

The definition of capital assets includes investment property and property held for personal use, but excludes property used in a trade or business. Thus, the vacant lot used as a customers’ parking lot and the store fixtures do not constitute capital assets.

66
Q

Carl Slater was the sole proprietor of a high-volume drug store which he owned for 25 years before he sold it to Statewide Drug Stores, Inc. in 2015. Besides the $800,000 selling price for the store’s tangible assets and goodwill, Slater received a lump sum of $60,000 in 2015 for his agreement not to operate a competing enterprise within 10 miles of the store’s location, for a period of 6 years. How will the $60,000 be taxed to Slater?

  1. As $60,000 ordinary income in 2015.
  2. As $60,000 short-term capital gain in 2015.
  3. As $60,000 long-term capital gain in 2015.
  4. As ordinary income of $10,000 a year for 6 years.
A

As $60,000 ordinary income in 2015.

Amounts received for noncompetition agreements are taxed as ordinary income in the year received.

67
Q

The following information pertains to the sale of John and Karen Yale’s principal residence:

  • Date of sale - July 2015
  • Date of purchase - June 1999
  • Net sales price - $890,000
  • Adjusted basis - $225,000

John and Karen owned their home jointly and had occupied it as their principal residence since acquiring the home in 1999. In August 2015, the Yales bought a condo for $275,000 to be used as their principal residence. What amount of gain must the Yales recognize on their 2015 joint return from the sale of their residence?

  1. $140,000
  2. $165,000
  3. $390,000
  4. $415,000
A

$165,000

An individual may exclude from income up to $250,000 of gain that is realized on the sale or exchange of a residence, if the individual owned and occupied the residence as a principal residence for an aggregate of at least 2 of the 5 years preceding the sale or exchange. The amount of excludable gain is increased to $500,000 for married individuals filing jointly if either spouse meets the ownership requirement, and both spouses meet the use requirement. Here the Yales realized a gain of $890,000 — $225,000 = $665,000, and qualify to exclude $500,000 of the gain from income. The remaining $165,000 gain is recognized and taxed to the Yales for 2015.

68
Q

Winkler, a CPA, provided accounting services to a client, Thompson. On December 15 of the same year, Thompson gave Winkler 100 shares of Foster Corp. as compensation for services. The client’s adjusted basis of the stock was $4,000, and its fair market value at the time of transfer was $5,000. Two months later, Winkler sold the stock on February 15 for $7,500. What is the amount Winkler should recognize as gain on the sale of the stock?

  1. $0
  2. $1,000
  3. $2,500
  4. $5,000
A

$2,500

Winkler received the stock as compensation for services rendered and would be taxed on the stock’s $5,000 value when it was received in December. As a result, Winkler’s tax basis for the stock would be its value of $5,000, so that the subsequent sale of the stock for $7,500 in February would result in a gain of $2,500.

69
Q

On January 8, 2015, Sam Meyer, age 52 and single, sold for $320,000 his personal residence which had been his principal residence for the past 20 years and had an adjusted basis of $60,000. On May 1, 2015, he purchased a new residence for $420,000. For 2015, Meyer should recognize a gain on the sale of his residence of

  1. $0
  2. $10,000
  3. $15,000
  4. $135,000
A

$10,000

An individual may exclude from income up to $250,000 of gain that is realized on the sale or exchange of a residence, if the individual owned and occupied the residence as a principal residence for an aggregate of at least 2 of the 5 years preceding the sale or exchange. Since Meyer qualifies to exclude $250,000 of his $260,000 realized gain, Meyer must recognize a gain of $10,000.

70
Q

Rick Berger owned a parcel of investment real estate that had an adjusted basis of $30,000 and a fair market value of $47,000. During the current year, Berger exchanged his investment real estate for the items of property listed below.

  • Land to be held for investment (fair market value) $35,000
  • A motorcycle to he held for personal use (fair market value) $5,000
  • Cash $7,000

What is Rick Berger’s recognized gain and basis in his new investment real estate?

  1. $ 7,000 gain recognized; $23,000 basis for real estate.
  2. $ 7,000 gain recognized; $30,000 basis for real estate.
  3. $12,000 gain recognized; $30,000 basis for real estate.
  4. $12,000 gain recognized; $35,000 basis for real estate.
A

$12,000 gain recognized; $30,000 basis for real estate

In a like-kind exchange of property held for investment, a realized gain ($17,000 in this case) will be recognized only to the extent of unlike property (i.e., boot) received. Here the unlike property consists of the $7,000 cash and $5,000 FMV of the motorcycle received, resulting in the recognition of $12,000 of gain. The basis of the acquired like-kind property reflects the deferred gain resulting from the like-kind exchange, and is equal to the basis of the property transferred ($30,000), increased by the amount of gain recognized ($12,000), and decreased by the amount of boot received ($7,000 + $5,000), or $30,000.

71
Q

Pomplin, an individual calendar-year taxpayer, purchased 100 shares of Trix Corporation common stock for $10,000 on October 10, 2015, and an additional 50 shares of Trix Corporation common stock for $4,000 on December 15, 2015. On November 8, 2015, Pomplin sold the 100 shares purchased on October 10, 2015, for $7,000. What is the amount of Pomplin’s recognized loss for 2015 and what is the basis for his remaining 50 shares of Trix Corporation stock?

  1. $3,000 recognized loss; $4,000 basis for his remaining stock.
  2. $1,500 recognized loss; $5,500 basis for his remaining stock.
  3. $1,500 recognized loss; $4,000 basis for his remaining stock.
  4. $0 recognized loss; $7,000 basis for his remaining stock.
A

$3,000 recognized loss; $4,000 basis for his remaining stock.

No loss can be deducted on the sale of stock if substantially identical stock is purchased within 30 days before or after the loss sale. In this case, Pomplin’s November 8 sale of stock at a loss of $3,000 can be recognized because his purchase of identical stock on December 15 was not within 30 days of his November 8 loss sale. The stock purchased on December 15 has a cost basis of $4,000.

72
Q

David Bass died on November 1, 2014, bequeathing his entire $6,000,000 estate to his brother, Jason. The alternate valuation date was validly elected by the executor of David’s estate. David’s estate included 5,000 shares of listed stock for which David’s basis was $515,000. This stock was distributed to Jason 9 months after David’s death. Fair market values of this stock were

  • At the date of David’s death $600,000
  • 6 months after David’s death $670,000
  • 9 months after David’s death $690,000

Jason’s basis for this stock is?

  1. $515,000
  2. $600,000
  3. $670,000
  4. $690,000
A

$670,000

The basis of property received from a decedent is generally the property’s FMV at date of the decedent’s death, or FMV on the alternate valuation date (6 months after death). Since the executor of Bass’ estate elected to use the alternate valuation date for estate tax purposes, the stock’s basis to Jason is its $670,000 FMV 6 months after Bass’ death.

73
Q

During 2015, Fred Good traded a tractor used solely in his construction business for another tractor for the same use. On the date of the trade, the old tractor had an adjusted basis of $3,000 and a fair market value of $3,300. He received in exchange $500 in cash and a smaller tractor with a fair market value of $2,800. Assuming Mr. Good recognized $300 gain on the transaction, what is his basis in the new tractor?

  1. $3,300
  2. $3,000
  3. $2,800
  4. $2,300
A

$2,800

This answer is correct because the basis of an asset received in a like-kind exchange where boot was received is

  • Basis of asset given up $3,000
  • Less boot received− $500
  • Plus gain recognized+ $300
  • Basis of asset received = $2,800
74
Q

At the beginning of the current tax year. the following assets were among those owned by Eli York:

  • Date acquired / Asset Cost
  • Jan. 2012 / Personal residence - $100,000
  • Feb. 2013 / Stock of listed corp. - $8,000
  • Dec. 2014 / Stock of listed corp. - $3,000

What is the total amount of York’s capital assets?

  1. $111,000
  2. $108,000
  3. $ 11,000
  4. $ 8,000
A

$111,000

The definition of capital assets includes investment property (e.g., stock of a corporation) and property held for personal use (e.g., personal residence). Stock is generally held as an investment, but would be excluded from the capital asset category if held for sale to customers in the normal course of business (e.g., stock held by a dealer in securities).

The following are not Capital Assets:

  1. Stock in trade, inventory, or goods held primarily for sale to customers in the normal course of business
  2. Depreciable or real property used in a trade or business
  3. Copyrights or artistic, literary, etc., compositions created by the taxpayer
  4. They are capital assets only if purchased by the taxpayer.
  5. Patents are generally capital assets in the hands of the inventor.
  6. Accounts or notes receivable arising from normal business activities
  7. An agreement (i.e., covenant) not to compete for a fixed number of years that is separable from goodwill

CPA - REG (17 decks)

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