Question 1

For a corporate distribution of cash or other property to a shareholder, when does dividend income or a return of capital result?

Accepted Answer

To the extent of corporate earnings and profits, a distribution to a shareholder is treated as dividend income. When the distribution exceeds corporate earnings and profits, a distribution to a shareholder is treated as a return of capital (i.e., tax-free to the extent of shareholder basis and capital gain for any excess).

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

Realized losses from the sale or exchange of stock are disallowed if within 30 days before or 30 days after the sale or exchange, the taxpayer acquires substantially identical stock.

Accepted Answer

A) True 
 B)False  True

Question 4

Jamie is terminally ill and does not expect to live much longer. Pondering the consequences of her estate, she decides how to allocate her property to her nephews. She makes a gift of depreciated property (i.e., adjusted basis exceeds fair market value) to Will, a gift of appreciated property (i.e., fair market value exceeds adjusted basis) to Jim, and leaves appreciated property to Sam in her will. Each of the properties has the same fair market value. From an income tax perspective, which nephew is her favorite?

Accepted Answer

The answer of Jamie is terminally ill and does not...

Question 5

Joseph converts a building (adjusted basis of $50,000 and fair market value of $40,000) from personal use to business use. Justin receives a building with a $40,000 fair market value ($50,000 donor's adjusted basis) from his mother as a gift. Discuss the tax consequences with respect to Joseph's and Justin's adjusted basis.

Accepted Answer

The answer of Joseph converts a building (adjusted basis of...

Question 6

Jan purchases taxable bonds with a face value of $250,000 for $265,000. The annual interest paid on the bonds is $10,000. Assume Jan elects to amortize the bond premium. The total premium amortization for the first year is $1,600.
a.What is Jan's interest income for the first year?
b.What is Jan's interest deduction for the first year?
c.What is Jan's adjusted basis for the bonds at the end of the first year?

Accepted Answer

The answer of Jan purchases taxable bonds with a face...

Question 7

Tara owns common stock in Taupe, Inc., with an adjusted basis of $250,000. She receives a preferred stock dividend which is nontaxable.
a.What effect does the preferred stock dividend have on Tara's adjusted basis of the common stock?
b.How is the basis of the preferred stock calculated?
c.What effect does the preferred stock dividend have on Tara's gross income?

Accepted Answer

The answer of Tara owns common stock in Taupe, Inc.,...

Question 8

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

Accepted Answer

The answer of Marsha transfers her personal use automobile to...

Question 9

Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?

Accepted Answer

The answer of Under what circumstances will a distribution by...

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

In 2013, Harold purchased a classic car that he planned to restore for $12,000. However, Harold is too busy to work on the car and he gives it to his daughter Julia in 2017. At this time, the fair market value of the car has declined to $10,000. Harold paid no gift tax on the transaction. Julia completes some of the restoration herself with out-of-pocket costs of $5,000. She later sells the car for $30,000. What is Julia's recognized gain or loss on the sale of the car?

Accepted Answer

A)  $0
B)  $13,000
C)  $15,000
D)  $18,000
E)  None of the above

Question 12

If the buyer assumes the seller's liability on the property acquired, the seller's amount realized is decreased by the amount of the liability assumed.

Accepted Answer

A) True 
 B)False

Question 13

Reggie owns all the stock of Amethyst, Inc. (adjusted basis of $100,000). If he receives a distribution from Amethyst of $90,000 and corporate earnings and profits are $15,000, Reggie has a capital gain of $5,000 and an adjusted basis for his Amethyst stock of $0.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

In 1973, Fran received a birthday gift of stock worth $75,000 from her aunt. The aunt had owned the stock (adjusted basis $50,000) for 10 years and paid gift tax of $27,000 on the transfer. Fran's basis in the stock is $75,000-the lesser of $77,000 ($50,000 + $27,000) or $75,000.

Accepted Answer

A) True 
 B)False

Question 16

Parker bought a brand new Ferrari on January 1, 2017, for $125,000. Parker was fatally injured in an auto accident on June 23, 2017, when the fair market value of the car was $105,000. Parker was driving a loaner car from the Ferrari dealership while his car was being serviced. In his will, Parker left the Ferrari to his best friend, Ryan. Ryan's holding period for the Ferrari begins on January 1, 2017.

Accepted Answer

A) True 
 B)False

Question 17

On February 1, Karin purchases real estate for $375,000. The annual property taxes of $5,000 are payable on December 31. Realizing that she will pay the property taxes for the entire year, Karin remits $374,575 to the seller at closing. Karin's adjusted basis for the real estate is:

Accepted Answer

A)  $374,583.
B)  $375,000.
C)  $375,417.
D)  $379,583.
E)  None of the above.

Question 18

​Milton owns a bond (face value of $25,000) for which he paid $28,000. Which of the following statements is correct?

Accepted Answer

A)  ​If the bond is taxable, Milton must amortize the $3,000 premium over its remaining life.
B)  ​The adjusted basis of the taxable bond remains at $28,000, as the amortized amount is deducted as interest.
C)  ​ If the bond is tax-exempt, Milton can elect to amortize the $3,000 premium over the remaining life of the bond.
D)  ​The adjusted basis of the tax-exempt bond remains at $28,000, as the amortized amount cannot be deducted as interest.
E)  ​None of the above is correct.

Question 19

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

Accepted Answer

The answer of Nigel purchased a blending machine for $125,000...

Question 20

What effect does a deductible casualty loss have on the adjusted basis of property?

Accepted Answer

The answer of What effect does a deductible casualty loss...

Exam 14: Property Transactions: Determination of Gain or Loss and Basis Considerations

For a corporate distribution of cash or other property to a shareholder, when does dividend income or a return of capital result?

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

Realized losses from the sale or exchange of stock are disallowed if within 30 days before or 30 days after the sale or exchange, the taxpayer acquires substantially identical stock.

Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?

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

If the buyer assumes the seller's liability on the property acquired, the seller's amount realized is decreased by the amount of the liability assumed.

Reggie owns all the stock of Amethyst, Inc. (adjusted basis of $100,000). If he receives a distribution from Amethyst of $90,000 and corporate earnings and profits are $15,000, Reggie has a capital gain of $5,000 and an adjusted basis for his Amethyst stock of $0.

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

In 1973, Fran received a birthday gift of stock worth $75,000 from her aunt. The aunt had owned the stock (adjusted basis $50,000) for 10 years and paid gift tax of $27,000 on the transfer. Fran's basis in the stock is $75,000-the lesser of $77,000 ($50,000 + $27,000) or $75,000.

On February 1, Karin purchases real estate for $375,000. The annual property taxes of $5,000 are payable on December 31. Realizing that she will pay the property taxes for the entire year, Karin remits $374,575 to the seller at closing. Karin's adjusted basis for the real estate is:

​Milton owns a bond (face value of $25,000) for which he paid $28,000. Which of the following statements is correct?

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

What effect does a deductible casualty loss have on the adjusted basis of property?

Milton owns a bond (face value of $25,000) for which he paid $28,000. Which of the following statements is correct?