Inc Tax Chp. 14 – Flashcards
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51. Albert purchased a tract of land for $140,000 in 2011 when he heard that a new highway was going to be constructed through the property and that the land would soon be worth $200,000. Highway engineers surveyed the property and indicated that he would probably get $180,000. The highway project was abandoned in 2014 and the value of the land fell to $100,000. What is the amount of loss Albert can claim in 2014?
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e. None of these
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52. Abby sells real property for $300,000. The buyer pays $5,000 in property taxes that had accrued during the year while the property was still legally owned by Abby. In addition, Abby pays $15,000 in commissions and $3,000 in legal fees in connection with the sale. How much does Abby realize (the amount realized) from the sale of her property?
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c. $287,000
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53. Alice owns land with an adjusted basis of $610,000, subject to a mortgage of $350,000. Real estate taxes are $9,000 per calendar year and are payable on December 31. On April 1, 2014, Alice sells her land subject to the mortgage for $650,000 in cash, a note for $600,000, and property with a fair market value of $120,000. What is the amount realized?
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d. $1,722,219
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54. Pedro borrowed $250,000 to purchase a machine costing $300,000. He later borrowed an additional $25,000 using the machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $145,000 and $18,000. Pedro sells the machine subject to the two liabilities for $45,000. What is his realized gain or loss?
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d. $208,000
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55. The bank forecloses on Lisa's apartment complex. The property had been pledged as security on a nonrecourse mortgage, whose principal amount at the date of foreclosure is $750,000. The adjusted basis of the property is $480,000, and the fair market value is $750,000. What is Lisa's recognized gain or loss?
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a. $270,000
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56. Carlton purchases land for $550,000. He incurs legal fees of $10,000 and broker's commission of $28,000 associated with the purchase. He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $800,000. What is Carlton's basis for the land and the improvements?
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d. $1,413,000
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57. Jamie bought her house in 2008 for $395,000. Since then, she has deducted $70,000 in depreciation associated with her home office and has spent $45,000 replacing all the old pipes and plumbing. She sells the house on July 1, 2014. Her realtor charged $34,700 in commissions. Prior to listing the house with the realtor, she spent $300 advertising in the local newspaper. Sammy buys the house for $500,000 in cash, assumes her mortgage of $194,000, and pays property taxes of $4,200 for the entire year on December 1, 2014. What is Jamie's adjusted basis at the date of the sale and the amount realized?
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b. $370,000 adjusted basis; $661,100 amount realized.
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58. Yolanda buys a house in the mountains for $450,000 which she uses as her personal vacation home. She builds an additional room on the house for $40,000. She sells the property for $560,000 and pays $28,000 in commissions and $4,000 in legal fees in connection with the sale. What is the recognized gain or loss on the sale of the house?
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b. $38,000
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59. On February 2, 2014, 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:
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b. $375,000.
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60. Capital recoveries include:
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d. Amortization of bond premium.
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61. Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public accounting practice in his home. For this business, he uses one room exclusively and regularly as a home office. In Year 1, $3,042 of depreciation expense on the home office was deducted on his income tax return. In Year 2, Steve sustained losses in his business; therefore, no depreciation was taken on the home office. Had he been allowed to deduct depreciation expense, his depreciation expense would have been $3,175. What is the adjusted basis in the home?
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a. $493,783
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62. Sandra's automobile, which is used exclusively in her trade or business, was damaged in an accident. The adjusted basis prior to the accident was $11,000. The fair market value before the accident was $10,000 and the fair market value after the accident is $6,000. Insurance proceeds of $3,200 are received. What is Sandra's adjusted basis for the automobile after the casualty?
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b. $7,000
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63. Joyce's office building was destroyed in a fire (adjusted basis of $350,000; fair market value of $400,000). Of the insurance proceeds of $360,000 she receives, Joyce uses $310,000 to purchase additional inventory and invests the remaining $50,000 in short-term certificates of deposit. She received only $360,000 because of a co-insurance clause in her insurance policy. What is Joyce's recognized gain or loss?
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c. $10,000 gain
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64. Elvis owns all of the stock of White Corporation. The accumulated earnings and profits of White Corporation at the beginning of the year are a deficit of $20,000. The current earnings and profits are $30,000. Elvis' basis for his stock is $250,000. He receives a distribution of $300,000 on the last day of the tax year. How much dividend income and/or capital gain should Elvis report?
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b. Dividend income of $30,000 and capital gain of $20,000.
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65. Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1, 2014, for $11,000. The maturity date is December 31, 2023. The annual interest rate is 8%. What is the amount of taxable interest income that Karen should report for 2014, and the adjusted basis for the bonds at the end of 2014, assuming straight-line amortization is appropriate?
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b. $0 and $10,900
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66. Jason owns Blue Corporation bonds (face value of $10,000), purchased on January 1, 2014, for $11,000. The bonds have an annual interest rate of 8% and a maturity date of December 31, 2023. If Jason elects to amortize the bond premium, what is his taxable interest income for 2014 and the adjusted basis for the bonds at the end of 2014 (assuming straight-line amortization is appropriate)?
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d. $700 and $10,900
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67. A strip along the boundary of Joy's land is condemned for a utility easement. She receives a payment of $7,500 from the utility company. Her basis in the land is $80,000. Which of the following is correct?
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b. Joy must reduce the basis of the land by $7,500.
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68. Katie sells her personal use automobile for $12,000. She purchased the car three years ago for $25,000. What is Katie's recognized gain or loss?
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a. $0
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69. Noelle owns an automobile which she uses for personal use. Her adjusted basis is $45,000 (i.e., the original cost). The car is worth $22,000. Which of the following statements is correct?
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e. a., b., and c. are correct.
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70. Mary sells her personal use automobile for $20,000. She purchased the car two years ago for $17,000. What is Mary's recognized gain or loss? It increased in value due to its excellent mileage, yet safe design.
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b. $3,000
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71. Which of the following statements is false?
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a. A realized gain that is never recognized results in the temporary recovery of more than the taxpayer's cost or other basis for tax purposes
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72. Nat is a salesman for a real estate developer. His employer permits him to purchase a lot for $75,000. The employer's adjusted basis for the lot is $45,000, and its normal selling price is $90,000. What is Nat's recognized gain and his basis for the lot?
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d. $15,000 $ 90,000
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73. Over the past 20 years, Alfred has purchased 380 shares of Green, Inc., common stock. His first purchase was in 1993 when he acquired 30 shares for $20 a share. In 1998, Alfred bought 150 shares at $10 a share. In 2013, Alfred acquired 200 shares at $50 a share. Alfred intends to sell 125 shares at $60 per share in the current year (2014). If Alfred's objective is to minimize gain and assuming he can adequately identify the shares to be sold, what is his recognized gain?
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a. $1,250
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74. Mona purchased a business from Judah for $1,000,000. Judah's records and an appraiser provided her with the following information regarding the assets purchased: Adjusted Basis FMV Land $195,000 $270,000 Building 310,000 450,000 Equipment 95,000 180,000 What is Mona's adjusted basis for the land, building, and equipment?
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a. Land $270,000, building $450,000, equipment $180,000.
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75. Nontaxable stock dividends result in:
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b. A lower cost per share for all shares than before the stock dividend.
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76. Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share. Two years later, he receives a 5% common stock dividend. At that time, the common stock of Purple Corporation had a fair market value of $12.50 per share. What is the basis of the Purple Corporation stock, the per share basis, and gain recognized upon receipt of the common stock dividend?
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b. $50,000 basis in stock, $9.52 basis per share, $0 recognized gain.
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77. Etta received nontaxable stock rights on October 3, 2014. She allocated $16,000 of the $50,000 basis for the associated stock to the stock rights. The stock rights are exercised on November 8, 2014. The exercise price for the stock is $52,000. What is Etta's basis for the acquired stock?
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d. $68,000
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78. Mike's basis in his stock in Tan Corporation is $75,000. He receives nontaxable stock rights (fair market value of $20,000) when the value of the stock is $100,000. What is the basis for the stock rights?
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b. $12,500
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79. Which of the following statements is correct?
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b. If the fair market value of stock rights is equal to at least 15% of the fair market value of the stock, part of the stock basis must be allocated to nontaxable stock rights.
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80. In 2010, 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 2014. 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 outofpocket 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?
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b. $13,000
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81. Ralph gives his daughter, Angela, stock (basis of $8,000; fair market value of $6,000). No gift tax results. If Angela subsequently sells the stock for $10,000, what is her recognized gain or loss?
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b. $2,000
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82. Gift property (disregarding any adjustment for gift tax paid by the donor):
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b. Has the same basis to the donee as the donor's adjusted basis if the donee disposes of the property at a gain.
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83. Shontelle received a gift of income-producing property with an adjusted basis of $49,000 to the donor and fair market value of $35,000 on the date of gift. No gift tax was paid by the donor. Shontelle subsequently sold the property for $31,000. What is the recognized gain or loss?
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b. ($4,000)
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84. In addition to other gifts, Megan made a gift of stock to Jeri in 1976. Megan had purchased the stock in 1974 for $7,500. At the time of the gift, the stock was worth $20,000. If Megan paid $850 of gift tax on the transaction in 1976, what is Jeri's gain basis for the stock?
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b. $8,350
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85. Noelle received dining room furniture as a gift from her friend, Jane. Jane's adjusted basis was $9,200 and the fair market value on the date of the gift was $7,000. Noelle decided she did not need the furniture and sold it to a neighbor six months later for $6,500. What is her recognized gain or loss?
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a. $0
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86. The holding period of property acquired by gift may begin on:
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c. Either the date the property was acquired by the donor or the date of gift
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87. Nancy gives her niece a crane to use in her business with a fair market value of $61,000 and a basis in Nancy's hands of $80,000. No gift tax was paid. What is the niece's basis for depreciation (cost recovery)?
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d. $80,000
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88. Which of the following is correct?
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e. None of these.
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89. Tobin inherited 100 acres of land on the death of his father in 2014. A Federal estate tax return was filed and the land was valued at $300,000 (its fair market value at the date of the death). The father had originally acquired the land in 1971 for $19,000 and prior to his death had made permanent improvements of $6,000. What is Tobin's basis in the land?
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c. $300,000
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90. Neal and his wife Faye reside in Texas, a community property state. Their community property consists of real estate (adjusted basis of $800,000; fair market value of $6 million) and personal property (adjusted basis of $390,000; fair market value of $295,000). Neal dies first and leaves his estate to Faye. What is Faye's basis in the property after Neal's death?
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d. $6,000,000 real estate and $295,000 personal property.
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91. Robert and Diane, husband and wife, live in Pennsylvania, a common law state. They purchased land as joint tenants in 2010 for $300,000. In 2014, Diane dies and bequeaths her share of the land to Robert. The land has a fair market value of $450,000. What is Robert's adjusted basis for the land?
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b. $375,00
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92. Taylor inherited 100 acres of land on the death of his father in 2014. A Federal estate tax return was filed and this land was valued therein at $650,000, its fair market value at the date of the father's death. The father had originally acquired the land in 1968 for $112,000 and prior to his death he had expended $20,000 on permanent improvements. Determine Taylor's holding period for the land.
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b. Will automatically be long-term.
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93. Kelly inherits land which had a basis to the decedent of $95,000 and a fair market value of $50,000 on August 4, 2014, the date of the decedent's death. The executor distributes the land to Kelly on November 12, 2014, at which time the fair market value is $49,000. The fair market value on February 4, 2015, is $45,000. In filing the estate tax return, the executor elects the alternate valuation date. Kelly sells the land on June 10, 2015, for $48,000. What is her recognized gain or loss?
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a. ($1,000)
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94. Arthur owns a tract of undeveloped land (adjusted basis of $145,000) which he sells to his son, Ned, for its fair market value of $105,000. What is Arthur's recognized gain or loss and Ned's basis in the land?
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a. $0 and $105,000.
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95. Paul sells property with an adjusted basis of $45,000 to his daughter Dean, for $38,000. Dean subsequently sells the property to her brother, Preston, for $38,000. Three years later, Preston sells the property to Hun, an unrelated party, for $50,000. What is Preston's recognized gain or loss on the sale of the property to Hun?
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c. $12,000
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96. Karen purchased 100 shares of Gold Corporation stock for $11,500 on January 1, 2011. In the current tax year (2014), she sells 25 shares of the 100 shares purchased on January 1, 2011, for $2,500. Twenty-five days earlier, she had purchased 30 shares for $3,000. What is Karen's recognized gain or loss on the sale of the stock, and what is her basis in the 30 shares purchased 25 days earlier?
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c. $0 recognized loss, $3,375 basis in new stock.
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97. Andrew acquires 2,000 shares of Eagle Corporation stock for $100,000 on March 31, 2010. On January 1, 2014, he sells 125 shares for $5,000. On January 22, 2014, he purchases 135 shares of Eagle Corporation stock for $6,075. When does Andrew's holding period begin for the 135 shares?
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d. March 31, 2010, for 125 shares and January 22, 2014, for 10 shares.
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98. The basis of personal use property converted to business use is:
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e. None of these.
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99. Lynn purchases a house for $52,000. She converts the property to rental property when the fair market value is $115,000. After deducting depreciation (cost recovery) expense of $1,130, she sells the house for $120,000. What is her recognized gain or loss?
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d. $69,130
