sol ch 10 - HIISWCI 3 LU “UCSLIUI I3 Gain or Loss...

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Unformatted text preview: HIISWCI 3 LU “UCSLIUI I3 Gain or Loss Realization and Recognition 1. Realized gain or loss is the difference between the amount realized from the sale or other disposition of property and the adjusted basis at the time of sale or disposition. If the amount realized exceeds the adjusted basis, there is a realized gain. If the adjusted basis exceeds the amount realized, there is a realized loss. If a realized gain or loss is recognized, the gain is includible and the loss is deductible in determining taxable income. Thus, “recognition” means that the result of a particular transaction is considered to be taxable income or a deductible loss. Adjusted Basis of Property 2. The adjusted basis of property is: Original Basis + Capital Expenditures - Capital Returns Basis: Capital Expenditures and Capital Returns 3. Examples of capital expenditures or additions are improvements, betterments, acquisition costs, purchase commissions, and legal costs for defending title. These are added to the original basis of the asset. Examples of capital returns or recoveries are depreciation, depletion, amortization, tax-free dividends, compensation or awards for involuntary conversions, deductible casualty losses, and insurance reimbursements. These are deducted from the original basis of the asset. Allocation of Basis 4. Allocation of basis is necessary for several reasons. Some of the property may be depreciable (buildings) and other property nondepreciable (land). Difi‘erent treatment may be necessary for the assets—such as Section 1231 asset treatment compared to capital asset treatment. Or it may be that only some of the assets purchased ' are sold. If only one item is involved, allocation may be required because of different treatment such as in the case where part of the asset is used for business and part for personal use. Or the initial single asset may be sold in separate transactions such as when a piece of land is divided into two parcels and sold. Gain or Loss Recognition 5. There are situations where a realized gain may be recognized, but realized losses are not recognized. For example, a sale of a personal-use asset, such as an automobile, results in gain recognition but not loss recognition. (An exception to the latter rule is that losses resulting fiom casualty and theft of personal-use assets are deductible provided they exceed certain limits, but the condemnation loss on a personal-use asset is not deductible.) Basis: 6. Basis: Basis: 8. Basis: 9. Basis: 10. Basis: 1 1. Basis: 12. Taxable Exchange If property is acquired in a taxable exchange, the basis of the property received is generally its fair market value at the time of exchange. Also, if the price paid is a bargain purchase from an employer, then the basis of the property is its fair market value. The basis of inherited property is also fair market value. Nontaxable Stock Dividends For nontaxable stock dividends, the basis of the original stock is allocated to the old and new shares. In the case of identical stock (common on common) the basis of the original common shares is allocated among the total number of shares owned. The holding period begins On the date of the original acquisition. If the stock is not identical (e.g., preferred shares received on common), then the basis of the common stock is allocated between the common and preferred stock according to the relative market value. Taxable Stock Dividends The basis of the new stock is its fair market value at the time of the receipt of the stock dividend and the basis of the old stock remains the same. The holding period of the new stock begins on the date of the receipt of the stock dividend. Nontaxable Stock Rights If nontaxable stock rights are received, whether or not any part of the basis of the stock is allocated to the rights depends on the fair market value of the rights as compared with the fair market value of the stock. If the fair market value of the rights at the time of the distribution is less than 15 percent of the fair market value of the old stock at that time, the basis of such rights is zero unless the taxpayer elects to allocate. If the value is 15 percent or more, a basis must be allocated to the rights, but only if the rights are exercised or sold. The stock basis is allocated between the stock and the rights according to the relative fair market value at their distribution date. If nontaxable rights are sold, the holding period runs from the date the original stock was acquired. If the rights are exercised, the new stock’s holding period starts on the date of exercise. Taxable Stock Rights In the case of taxable stock rights, the amount of income is the fair market value of the rights at the date of distribution. This fair market value is then the basis of the rights and the holding period of the rights begins on the date of distribution. If the rights are exercised, the basis of the new shares is the subscription price plus the basis of the rights and the holding period of the new shares begins on the date of exercise. The basis and holding period of the old stock remain the same. Gift Property Ataxpayer’s original basis for property acquired by gift is the same as the property’s adjusted basis in the hands of the donor or the last preceding owner by whom it was not acquired by gift. If, however, the property’s fair market value at the time of the gift is less than the adjusted basis to the donor, thencthe basis for determining loss is the fair market value at the time of the gift. A selling price of gift property between the basis for determining gain and a lesser fair market value will result in neither gain nor loss. Pre-1977 and Post-1976 Gift Property For gifts made prior to 1977, the full amount of the gift tax is added to the donor’s adjusted basis, but the basis may not be increased above the fair market value at the date of the gift. For gifts made after December 31, 1976, the basis is increased by the portion of the gift tax that is attributable to the net appreciation in value of the gift. Net appreciation in value is defined as the amount by which the fair market value of the gift exceeds the donor’s adjusted basis immediately before the gift. The amount of basis increase is as follows: Net appreciation X Gift tax paid Taxable amount of gift This adjustment plus the donor’s adjusted basis becomes the basis for asset write-offs and for gain or loss determination. Basis: Inherited Property 13. The general rule is that the basis of property acquired from a decedent is the fair market value of the property at the date of the decedent’s death. Basis: Inherited Property Alternate Valuation 14. If the executor elects for estate tax purpoSes to value the decedent’s gross estate as of six months after death, the basis of the property is the fair market value at that time. If the property is distributed before the alternate valuation date, the basis is the fair market value at the date of distribution or other disposition. For decedents dying after July 18, 1984, the alternate valuation may be used only where the election will reduce both the value of the decedent’s gross estate and the federal tax liability. Basis: Gift Property and Inherited Property 15. The holding period of gift property begins with the date the property was acquired by the donor. If, however, the fair market value of the property at the date of the gift was less than the donor’s adjusted basis, the holding period begins on the date of the gift. The holding period of property acquired from a decedent is long-term. This is the case regardless of how long the beneficiary or decedent held the property and regardless of whether the property is disposed of at a gain or at a loss. Basis: Stock Transactions 16. Shares of stock may be specifically identified and if they are not so identified, a first-in, first-out (FIFO) method is used. Wash Sales 17. Wash sales occur when substantially identical stock is bought within 30 days before or after the sale. No deduction for losses is allowed on the sale of stock or securities if within a period beginning 30 days before the date of the sale and ending 30 days after the date of the sale substantially identical stock or securities are acquired. “Substantially identical stock or securities” means the same in all important particulars such as earning power, interest rate, value of assets, preference, etc. Also, no deduction is allowed if the taxpayer has during that 61-day period entered into a contract or option to acquire substantially identical stock or securities. Basis: Personal-Use Property Conversion 18. When property purchased for personal use is converted to business or income-producing use, the basis for determining loss is the lesser of (1) the fair market value of the property at the time of the conversion or (2) the adjusted basis for loss at the time of the conversion. This rule is to prevent the taxpayer from converting a nondeductible personal loss into a deductible business loss. The basis for gain is the adjusted basis on the date of conversion. The basis for determining depreciation is the basis for determining loss. No gain or loss results on sale of converted personal-use property if the amount realized is between the basis for gain and the basis for loss. Gain or Loss: Sales to Related Parties 19. No loss deduction is allowed on sales or exchanges of property, directly or indirectly, between certain related parties. Any losses disallowed, however, may be used to offset the gain realized by the related purchaser on a later sale of the property. This offset possibility is available only to the original transferee. In case of a sale or exchange of property, directly or indirectly, between related taxpayers, any gain realized is ordinary income if the property is depreciable in the hands of the transferee. Related parties for this pu ose are (1) members of a family as defined in Code Sec. 267(c), or (2) a taxpayer and an entity that is contrrcflled by the taxpayer. This provision prevents a husband, for example, from getting capital gain treatment on sale of property to_his wife and then their getting on a joint return ordinary depreciation deductions on the amount pald by the w1fe for the property. Installment Reporting 20. installment reporting has several advantages. The income is spread over a number of years, which helps to keep Income out. of hlgher tax brackets. In addition, because of the time value of money, there is the benefit that the taxpayer Will be able to earn income on the amount that will not have to be paid in taxes until future years. AnsiNers to Problems 21. The basis in the equipment is $50,900 ($43,000 price of the equipment, plus $2,500 delivery and installation costs plus $1,600 legal fees plus $3,800 in sales taxes). Basis and Gain or Loss: Depreciable Property 22. a. Basis: $630,000 plus $60,000 cost of windows plus $90,000 cost of elevator minus $400,000 depreciation = $380,000 Note: The painting of the exterior is an expense of maintaining the building and not capitalized. b. and 0. Selling price $950,000 Less: Adjusted basis 380 000 Realized and Recognized Gain m Basis and Gain or Loss: Sale of Depreciable Property 23. The adjusted basis of the building at the time of sale is $450,000 and the realized and recognized gain is $350,000, computed as follows: Cost $570,000 Air conditioning system 60,000 Installation of unmovable bookcases 40,000 Electrical wiring system 150,000 Partitioning 50,000 $870,000 Less: Capital recovery (depreciation) 420,000 Adjusted basis ggggmggzgg Selling price $800,000 Less: Adjusted basis 450,000 Gain realized and recognized M allowable f0? 14 years (i.e., $550,000) must be deducted from $975,000. Gain or Loss: Sale of Taxable Bonds 25. If Rodney elects to amortize the premium, there is a $4,000 loss ($104,000 - $108,000), and there is a premium amortization and a reduction in interest income of $1,000 for 2010 and for 2011. If Rodney does not elect to amortize the premium, there is a $6,000 loss ($104,000 - $110,000). If the bonds are tax-exempt, the premium must be amortized for purposes of reducing basis, but no reduction in interest income in computing taxable income is allowable because the interest income is not included in taxable income. Thus, there is a $4,000 loss, but no reduction in interest income for 2010 and 2011. Basis: Sale of Stock 26. Basis is $750, the fair market value of the stock. Taxable income is $750. Gain or Loss: Sale of Stock and Personal-Use Assets 27. a. Recognized gain of $2,000. b. Recognized gain of $2,000 on sale of personal-use assets. c. No loss is recognized on sale of personal-use assets. Allocation of Basis: Depreciable and Nondepreciable Property 28. The basis of the land is $112,500, the building $450,000, and the truck $22,500 and $45,000 as follows: $125,000 Land —— >< $630,000 = $112,500 $700,000 $500,000 Building >< $630,000 = $450,000 $700,000 $25,000 Truck I X $630,000 = $22,500 $700,000 $50,000 Truck 11 X $630,000 = $45,000 $700,000 Basis and Gain or Loss: Stock Dividends 29. With the 25 percent stock dividend, 30 shares were received, which brings the total number of shares up to 150. Basis after the dividend: $1,800/150 = $12.00 per share. (This was identical stock.) Upon sale: Selling Price $1,700 Arlincfprl Dacia (2‘ X Q17‘ 1 100 x $30,000 = m 500 +100 Henry has a long-term capital loss of $600 ($4,400 selling price - $5,000 basis). The holding period starts on the day following the date of original purchase; thus, the loss is long-term. Nontaxable Preferred Stock Dividend 31 . ' $15,000 The basis of the preferred is X $ 40,000 = $8,000 $15,000 + $60,000 $60,000 The basis of the common is X $40,000 = $32,000 $15,000 + $60,000 Taxable Stock Dividend 32. Jamie has $1,200 income (100 shares >< $12). The basis in the new shares is $12 per share. The holding period begins on the day following the date of receipt of the stock dividend. The basis in the old stock remains the same or $20,000. Basis and Gain or Loss: Stock Rights 33. a. Since the fair market value of each right of $4 is less than 15 percent of the fair market value of the stock of $40, there is no need to allocate part of the basis of the stock to the rights (although taxpayers may elect to allocate if they wish). Therefore, the basis of the old stock remains $30 a share. The basis of the new stock is $35, the price paid for the new shares. b. If the market value of the rights was $8 instead of $4, then an amount of the basis of the old stock would have to be allocated to the rights since the $8 as a percent of the fair market value of the stock is 20 percent, greater than 15 percent. This allocation would be as follows: Basis of stock: [$24,000 /($24,000 plus $4,800)] times $18,000) = $15,000 or $25 a share ($15,000 divided by 600 shares) Basis of rights: [$4,800 /($24,000 plus $4,800)] times $18,000) = $3,000 or $5 a right ($3,000 divided by 600 rights). Basis of the new stock: $35 exercise price plus $5 basis of each right = $40. 0. If the 300 rights are sold for $4,500, the gain is $3,000 [$4,500 less $1,500 (300 times $5)]. Basis and Gain or Loss: Stock Rights 34. Fair market value of stock is $67,500 (900 X $75). Fair market value of rights is $10,800 (900 X $12). The value of the rights is more than 15 percent of the value of the stock; therefore, an amount of the basis of tho efnnl’ mncf hp allocated to the riahts, $67,500 Basis of the old stock: —— >< $58,500 = $50,431, or $56.03 per share. $78,300 Basis of the new stock: $50.00 + (3 X $8.97) = $76.91 per share for 200 shares. Gain on sale of rights: $3,000 — (300 X $8.97) = $309 gain. Taxable Stock Rights 35. a. Brian has $1,000 income (200 X $5). The basis in the rights is $1,000 or $5 per right. The holding period begins on January 30, 2011. b. The basis of each new share is $30 ($25 exercise price plus the basis of each right of $5). The holding period begins on the day following the date of exercise of February 20, 2011. On sale of the rights, he has long-term capital gain of $200 ($700 less $500 basis) since the rights were held longer than 12 months. Basis and Gain or Loss: Gift Property 36. Basis for gain is $17,000, the basis to Chester. Basis for loss is $12,000, the lesser of the basis in the hands of the donor or the fair market value at the date of the gift. Basis and Gain or Loss: Gift Property 37. The basis in the hands of the donor is $60 per share ($3 0,000/500 shares). Since the fair market value at the date of the gift is $55 and the selling price is $56 per share ($14,000/250 shares), there is neither gain nor loss. There is no gain or loss when the selling price is between the basis in the hands of the donor and a lower fair market value at the time of the gift. Basis and Gain or Loss: Gift Property 38. a. $7,000 gain ($17,000 — $10,000). b. $4,500 loss ($5,500 — $10,000). c. $2,000 loss ($5,500 — $7,500). d. No gain or loss because using the gain basis one gets a $2,000 loss ($8,000 - $10,000) and using the loss basis one gets a $500 gain ($8,000 — $7,500). Basis and Holding Period: Gift Property 39. a. Paula’s basis is $42,000. With the $13,000 gift tax exclusion, the taxable gift is $80,000. The appreciation is $60,000 ($93,000 less $33,000). So the appreciation of $60,000 divided by the taxable gift of $80,000 gives 75%. That percentage is multiplied by the gift tax of $12,000 to give $9,000 which is added to $33,000 to give a basis for gain and loss purposes of $42,000. b. The holding period begins in 2001, when the donor acquired the gift. Basis and Gain or Loss: Gift Property 40. The problem assumes that the gift tax exclusion of $13,000 is used. The $6,000 is added to $43,000 to give $49,000 for the basis. b. There is a loss of $5,000 ($44,000 — $49,000). 0. The adjustment for gift taxes is not made here since there was no appreciation. Therefore, the gain is $23,000 ($66,000 - $43,000 basis). d. The loss is $1,000 ($34,000 ‘— $35,000 basis). The basis is the lesser of the basis in the hands of the donor or the fair market value at the time of the gift. e. There is no gain or loss because the selling price of $37,000 is between the basis for gain of $43,000 and the basis for loss of $35,000. Basis: Gift Property 41. Since the fair market value is less than the basis, no appreciation has occurred. The basis for determining loss is $25,000, and the basis for determining gain is $28,000. None of the gift tax paid is added to determine the donee’s basis. Basis: Inherited Property 42. a. The basis in Property Q is $80,000 and the basis in Property R is $10,000, in both cases the fair market value of the property at the time of Callie’s death. This is the case whether the property has appreciated in value (Property Q) or declined in value (Property R). b. The changes in value from the time of Callie’s original acquisition to the time of her death are not gains or losses. Instead, the fair market value at the date of Callie’s death becomes the basis to the heir (it is a step up or step down in basis). Basis and Gain or Loss: Inherited Property 43. $180,000, the fair market value at the date of Beverly’s death. $170,000, the value on October 15, 2011. The fair market value on July 21, 2011. $170,000, the fair market value on October 15, 2011, six months after Beverly’s death. There is long—term treatment for property that is acquired from a decedent. 9999‘s» Basis: Inherited Property 44. a. There is a $12,000 basis to Evelyn. Where appreciated property was acquired by the decedent by gift during the one-year period before death, and the property is acquired from the decedent by the original donor, the adjusted basis to the recipient is the adjusted basis in the hands of the decedent immediately before death. b. The basis here is the fair market value at the date of Sharon’s death or $85,000 since more than one year has passed since the gift. Basis: Inherited Property 45. Robert lived more than one year after he acquired the gift from Sam. Thus, Sam’s basis is the fair market value at the time of Robert’s death. or $75.000. Gain or Loss: Sale of Stock 47. Basis per share of stock purchased on April 18, 2011: $7 ($210 + 30). Basis per share of stock purchased on September 29, 2011: $10 ($900 + 90). Sale on November 28, 2011: 30 shares (all of 4-18-11 purchase) $ 210 18 shares (18 of 9-29-11 purchase) M Basis under FIFO $__3_QQ Selling price $ 576 Less: Basis _399 Gain w Sale on December 8, 2011: Selling price $ 188 Less: Basis (25 X $10) _2_5_0 Loss fig) Combining the two sales: Gain $ 186 Loss 44;) Net gain M Gain or Loss: Wash Sales 48. Realized loss is $1,000 or ($9,000 — $10,000). Recognized loss is $200 or ($1,000 X 20/ 100). This is a wash sale only for 80 shares of stock because the time from July 28 to August 18 was only 21 days and only 80 shares were purchased. Basis of New Common: $7,500 + $800 = $8,300 or $103.75 per share (80 shares). Basis of. Preferred: $3,000 or $150 per share. Gain or Loss: Sale to Related Party ‘ 49. ’a. Ashley’s realized loss is $7,000 ($18,000 less $25,000), but it is not recognized since the stock was sold to her daughter, a related party. b. Brittany’s realized gain is $9,000 ($27,000 less $18,000), but it is reduced by Ashley’s $7,000 realized loss to give Brittany a $2,000 recognized gain. c. If Brittany sells the stock for $24,000, the realized gain is $6,000 ($24,000 less $18,000), but it is reduced by $6,000 to give $0 recognized gain. (1. If Brittany sells the stock for $16,000, the realized loss is $2,000 ($16,000 less $18,000), and the recognized loss is also $2,000. Gain or Loss: Sales to Related Party 50. a. There is a realized loss of $4,000 ($8,000 - $12,000), but it is disallowed because it is a sale to a related party. b. $2,000 gain. The $6,000 gain is reduced by the $4,000 disallowed loss. n Nnnp T119 ‘2’) non rpali—mri 02in iq eliminated, Gain or Loss: Sales to Related Party 52. The loss of $2,500 (selling price of $2,500 - adjusted basis of $5,000) is not allowed to the corporation because the corporation and Sheryl are related due to her 60 percent ownership. However, the $2,500 loss can be offset against Sheryl’s $4,500 gain (selling price of $7,000 - adjusted basis of $2,500) to give a $2,000 gain recognized. Installment Reporting 53. $60,000 Gross profit rate is 75% $80,000 75% X $20,000 = $15,000 in 2011. 75% X $15,000 = $11,250 each year from 2012 through 2015. Basis and Gain or Loss: Taxable Income Computation 54. The taxable income for Cathy is $8,845. Wages and net rental income $20,000 Interest 500 Gain on inherited stock 4 1,000 Gain on Almond Corporation stock 45 Adjusted gross income $21,545 Less: Itemized deductions 9,000 Less: Personal exemption (1 X $3,700) 3,700 Taxable income M a. Gain on the inherited stock is $1,000 ($2,800 - $1,800, the fair market value at the date of the father’s death). b. The gain on Almond Corporation stock is $45 ($150 - $105). The $105 is computed as 10 units at $8 + 5 units at $5. c. There is a realized loss of $150 ($800 — $950) on the sale of the Bass Corporation stock to her sister Janice, but no deductible loss is allowed on a sale to a related party. d. The basis for determining loss is $139,000 and the basis for determining gain is $143,000 after deducting the $1,000 depreciation. Since the selling price is between these two amounts, no gain or loss is recognized. Multiple Choice—Recognized Gain 55. b. The amount realized is $85,000, which is $50,000 plus the value of the equipment of $30,000 plus the loan assumed by the buyer of $10,000, less the selling expenses of $5,000. The difference between the amount realized of $85,000 and the basis of $40,000 is $45,000, the gain recognized. Multiple Choice—Basis: Stock and Stock Dividends -1 1 A n. .1 Ann—- . u u- - 1 I v 1 I rn 1 , , ,,!L‘. _ L__:- -L‘G‘FIE “2‘. -l--_.- “’:LL tL.‘ f1H1 1 I‘d-Anlr "alu $150,000, times the gift tax of $45,000. Multiple Choice—Basis: Inherited Property 58. d. The value of the stock at the date of death is the basis for Kenneth, since the alternate value date was not elected by the executor. Comprehensive Problem (Tax Return Problem)—Taxable Income Computation 59. Kevin and Emily’s taxable income is $52,545. Kevin's earnings $45,000 Emily's earnings 30,000 Emily's self-employment income 8,000 Dividends 300 Gain from sale of stock rights 20 Less: Alimony deduction 12,000 Gain from sale of Waverly stock 1,625 Adjusted gross income $72,945 Less: Itemized deductions 13,000 Less: Personal exemptions (2 X $3,700) 7,400 Taxable income m Itemized deductions are $13,000 consisting of $3,800 state income taxes, $2,500 property taxes, $2,300 charitable contributions, and $4,400 interest on home mortgage. The $3,000 medical expenses do not exceed 7‘/2% of adjusted gross income. Kevin may not claim his son from a previous marriage as an exemption since his former wife is the custodial parent. a. On the property received from his father, Kevin has no gain or loss because the selling price was between the basis to his father and the lesser fair market value at the time of the gift. b. There is no loss recognized on the sale of the personal use automobile. c. Since the fair market value of the rights is greater than 15 percent of the fair market value of the stock, Emily must allocate some of the basis of the Webster Corporation stock to the rights. This must be done according to the relative fair market value of the rights and stock as follows: Fair market value of rights (50 X $5) $250 Fair market value of stock (50 X $30) 1,500 $1,750 $250 >< $1,400 = $200 basis of the rights or $4.00 per right. $1,750 With a selling price of the 20 rights of $100 and a basis of the rights of $80 (20 X $4), there is a gain of $20. d. On the Waverly Corporation stock, there is a gain of $1,625. The basis of the stock sold is calculated on 50 shares at $35 $1,750 25 shares at $45 1,125 Total basis M Selling price $4,500 Less: Basis 2 875 Gain M Comprehensive Problem (Tax Return Problem)—Taxable Income Computation 60. Carl and Dawn have taxable income of $37,600 treating all gains as ordinary income as follows: Carl's earnings $55,000 Dividends , 1,000 Gain on sale of personal automobile ($19,000 - $18,500) 500 Gain on sale of inherited property ($12,500 - $9,000) 3,500 Adjusted gross income $60,000 Less: Itemized deductions 15,000 Less: Personal exemptions (2 X $3,700) 7,400 Taxable income M The loss of $100 on the sale of Riverdale stock to the son is disallowed. The basis of the inherited property is the value six months after the sister’s death since the executor elected the alternate valuation date. Federal income taxes and state sales taxes are not deductible and medical expenses are not deductible because they do not exceed 7.5 percent of adjusted gross income. Itemized deductions are $15,000 ($8,500 + $5,000 + $1,500), which is more than the standard deduction of $13,900 ($11,600 plus her old age and blindness ' standard deduction of $1,150 each). ...
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This note was uploaded on 12/02/2011 for the course ACCOUNTING 4001 taught by Professor Nathanielbell during the Spring '11 term at FIU.

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sol ch 10 - HIISWCI 3 LU “UCSLIUI I3 Gain or Loss...

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