FTax IRGTB ch14 p001-018

FTax IRGTB ch14 p001-018 - 14 Property Transactions Basis...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 14 Property Transactions: Basis Determination and Recognition of Gain or Loss Solutions to Tax Research Problems 14-39 1. In the first situation, H is able to find a buyer who will pay $1,000 for the building. Upon this transfer, H has gain as follows: Amount realized: Amount of cash received Fair market value of other property Liabilities discharged Less: Adjusted basis ($175,000 $37,500) Gain recognized $ 1,000 ,000 155,000 $ 156,000 (137,500) $ 18,500 This analysis follows the general rules under 1001 and the Supreme Court decision in Crane v. Comm. as covered in the chapter. 2. When the property is of less value than the remaining balance on the note, some question arises as to the amount realized. It is because the liability is nonrecourse that questions arise as to the amount that is "realized." It is arguable that "realization" equates to"benefits," and that the benefit to the owner cannot exceed the value of the property, since that is the only benefit the transferee obligee receives. The two possible results are compared below. Method 1 Method 2 Amount realized: Amount of cash received $ ,000 $ ,000 Fair market value of other property ,000 ,000 Liabilities discharged 155,000 150,000 Total $ 155,000 $ 150,000 Less: Adjusted basis (137,500) (137,500) Gain recognized $ 18,500 $ 13,500 Essentially, under Method 2, the seller was able to include liabilities in the basis of the property sold, without including them in the amount realized upon sale. This results in a "double deduction" of sorts, because different standards are used when the asset is depreciated and when it is sold. 14-1 14-2 Chapter 14 Property Transactions: Basis Determination and Recognition of Gain or Loss Method 2 was rejected by the Supreme Court in the appeal of Comm. v. Tufts, 83-1 USTC {9328, 51 AFTR2d 83-1133, 103 S. Ct. 1826 (USSC, 1983). This is consistent with the IRS' position in Reg. 1.1001-2. It is, therefore, appropriate that the amount realized include the entire amount of the liabilities, as in Method 1 above. 14-40 The purpose for this problem is to consider the effect of using the fair market value of property to value charitable contributions and analyze the effects of the limitations on charitable deductions of property on bargain sales. The limits do not apply to contributions of real property to "public charities." However, they do apply to contributions of tangible personalty which is capital gain property. 1. Since the limits do not apply, the contribution is the fair market value minus the sales price, determined as follows: Fair market value Less: Sales price Net charitable contribution $ 85,000 (55,000) $ 30,000 K also has gain on this transaction measured by the difference between the sales price and the allocable portion of the adjusted basis per 1011(b), determined as follows: Sales price Less: Allocable basis* Recognized gain or loss *$55,000/$85,000 $40,000 = $25,882 In summary, K will report a long-term capital gain of $29,118 on Schedule D and a charitable contribution of $30,000, limited to 30 percent of A.G.I., on Schedule A. 2. Since the painting is tangible personalty which is a capital asset, the amount of the charitable contribution is the fair market value minus 100 percent of the gain which would be recognized if the property were sold for its fair market value. This results in a contribution value of $40,000. Since $55,000 is realized on sale, no charitable contribution is allowable. Furthermore, no allocation of basis is required since allocation is required under 1011(b) only if a charitable contribution deduction is allowed. Therefore, K reports a gain on Schedule D as follows: Sales price Less: Adjusted basis Gain on sale $ 55,000 (40,000) $ 15,000 $ 55,000 (25,882) $ 29,118 Note: K receives much better treatment on the bargain sale of the real property than she receives upon transfer of the painting. 14 Property Transactions: Basis Determination and Recognition of Gain or Loss Test Bank True or False 1. Gain or loss is realized any time there is a sale or other disposition of property. 2. The cost basis of a given property does not include liabilities payable to the seller by the buyer because no cash changes hands. 3. A taxpayer who owns indistinguishable shares of stock purchased in two or more transactions and who later sells some of the stock must identify the shares sold using the last-in, first-out (LIFO) method. 4. The general rule to determine the basis of property acquired by gift is that the donee's basis is equal to the donor's basis plus any gift taxes paid. 5. The general rule for determining the basis of property acquired from a decedent does not apply to income in respect of a decedent. 6. The alternate valuation date for an estate is nine months after a decedent's death. 7. In order for an executor of an estate to elect the alternate valuation date, an estate tax return must be filed and the alternate valuation must be less than the FMV as of the decedent's death. 8. A deferred gain resulting from a nontaxable exchange of property represents an increase in basis. 9. When property is converted from personal to business use, the basis for loss and for depreciation can be no greater than the fair market value at the time of the conversion. 10. 11. 12. Allowable depreciation reduces the basis of an asset whether the depreciation is deducted or not. Liabilities are included in the amount realized only if the seller was personally liable for their payment. If a taxpayer converts business property to personal use before selling it, he or she will be prohibited from deducting a loss on the sale. 14-3 14-4 Chapter 14 Property Transactions: Basis Determination and Recognition of Gain or Loss 13. Gain or loss is realized when property other than cash is transferred to a creditor in satisfaction of a debt obligation. The transfer of 20 shares of stock in satisfaction of a liability constitutes a sale or other disposition of the stock, resulting in gain or loss realized. The abandonment of property used in a business or income-producing activity generally results in a loss equal to the property's adjusted basis. Where there is no intent to demolish a building at the time of acquisition, the amount of loss on the building may be deducted at the time of subsequent demolition. F sold 30 shares of GMX stock to R, her husband, for its fair market value of $1,500. F's basis in the stock was $1,200, so she recognizes a gain of $300. Under a divorce agreement, R was required to transfer his share of the jointly owned home to his ex-wife, L. The home cost $72,000 and was worth $124,000 at the time of the transfer. R has no gain and L's basis is $72,000. The recipient of a property that is transferred part as a gift and part as a sale acquires a basis in the property that is the lesser of the basis under the gift rules or the purchase (i.e., cost) basis. A bargain sale of property to a qualified charity can result in both a charitable deduction and gain recognition. A businessman purchases three trucks at an auction. Six months later, he sells one of the trucks. He may choose as his basis for this truck either his adjusted basis in the truck or the FMV of the truck on the date of the auction. When a sole proprietorship is sold, the gain or loss is generally capital gain or loss. Installment sale reporting applies to gains only. M sold 10 shares of Ford Motor Co. at a gain through his broker on December 30, 2011. M must report the gain on his 2011 return. If an installment sale agreement involving a $15,000 note calls for no interest, interest must be imputed both to the buyer as interest expense and to the seller as interest income. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. Multiple Choice 26. The adjusted basis of purchased property is a. b. c. d. Equal to the fair market value of the property at the time of purchase Defined as the book value of the property Reduced by any debt owed on the property before any gain or loss is computed Generally its cost, plus or minus certain adjustments 27. Which statement below is true with regard to property transactions? a. b. c. d. The amount realized represents the economic value received by the taxpayer. The amount recognized represents the economic value received by the taxpayer. A recognized loss generally is deferred to later tax years. A recognized gain may be included in the computation of taxable income but may not be offset against loss for the year. Test Bank 14-5 28. N sold a summer cabin to Y for $30,000 in cash and a recreational vehicle. Y had an adjusted basis in the RV of $15,000 at the time of the sale, although its fair market value was $22,000. N had an adjusted basis in the cabin of $44,000. Assume there were no selling costs. What was N's amount realized in the sale? a. b. c. d. $55,000 $45,000 $52,000 $44,000 29. N sold a summer cabin to Y for $30,000 in cash and a recreational vehicle. Y had an adjusted basis in the RV of $15,000 at the time of the sale, although its fair market value was $22,000. N had an adjusted basis in the cabin of $44,000. Assume there were no selling costs. What was N's realized gain or (loss)? a. b. c. d. ($8,000) ($1,000) $8,000 $10,000 30. F traded in a business automobile worth $4,500 subject to $2,000 of outstanding debt, for a new automobile worth $10,500. F signed a note for $8,000, and no cash changed hands. What is F's amount realized on this trade? a. b. c. d. $2,000 $4,500 $10,500 Indeterminable from the facts given 31. Which one of the following is true of selling costs? a. b. c. d. They generally are divided equally between the seller and the buyer. They include costs associated with offering a property for sale, but not those associated with transacting the sale. They do not affect the amount realized in a transaction. They may include both sales commissions and transfer taxes. 32. C sold 300 shares of IBM stock for $5,200. She had paid $3,000 for the stock. Commissions of $300 on the sale and $180 on the purchase were paid. How much are C's amount realized and her gain realized, respectively, on this sale? a. b. c. d. $2,200 and $1,720 $4,720 and $1,720 $4,900 and $1,720 $5,200 and $2,200 33. T purchased the following lots of ZYX Corporation stock: 25 Shares 40 Shares 25 Shares Purchased 4/30/2011 Purchased 5/20/2011 Purchased 9/21/2011 Cost $1,800 Cost $3,000 Cost $2,000 T sold 70 shares in December, 2011, for $6,300, but was unable to identify specific shares to be sold by certificate number and date of purchase. What was T's adjusted basis in the $30,000 shares sold? a. b. c. d. $5,200 $5,250 $5,360 $6,300 14-6 Chapter 14 Property Transactions: Basis Determination and Recognition of Gain or Loss 34. G inherited a late model Mercedes Benz from his great-aunt last year. The auto was worth $28,000 when his aunt died, and G sold the auto two months later for $30,000. The aunt had purchased the auto three months before her death for $38,000. How much gain (or loss) does G recognize on this sale? a. b. c. d. $0 $2,000 ($10,000) ($8,000) 35. E received 50 acres of undeveloped land as a gift from her grandmother this year. The land had cost $20,000 15 years ago, but was appraised at $50,000 on the date of the gift. E's grandmother paid gift taxes of $12,000 on this $36,000 taxable gift ($50,000 fair value $14,000 annual gift tax exclusion). What is E's basis in the land? a. b. c. d. $20,000 $30,000 $32,000 $36,000 36. Last year, E received 50 acres of undeveloped land as a gift from her grandmother. The land had cost $20,000 15 years ago, but was appraised at $50,000 on the date of the gift. E's grandmother paid gift taxes of $12,000 on this $36,000 taxable gift ($50,000 fair value $14,000 annual gift tax exclusion). If E sells the land this year for $55,000 (net of selling expenses), what is her gain on the sale? a. b. c. d. $5,000 $19,000 $23,000 $25,000 37. Several years ago, E received 50 acres of undeveloped land as a gift from her grandmother. The land had cost $20,000 15 years ago, but was appraised at $50,000 on the date of the gift. E's grandmother paid gift taxes of $12,000 on this $36,000 taxable gift ($50,000 fair value $14,000 annual gift tax exclusion). If E sells the land this year for $32,000 (net of selling expenses), what is her gain or loss on the sale? a. b. c. d. $2,000 gain $4,000 loss $18,000 loss No gain or loss 38. The adjusted basis to the recipient of property bequeathed by a decedent generally is which of the following? a. b. c. d. Fair market value on the valuation date of the decedent's estate Adjusted basis to the decedent on the valuation date of his or her estate Fair market value on the valuation date of the decedent's estate, less estate taxes paid on the transfer Adjusted basis to the decedent on the valuation date of his or her estate, plus estate taxes paid on the transfer 39. D owns a new pizza restaurant. She converted her home, which she had purchased for $75,000 for use in the business when it was worth $70,000. Which of the following is not true of the home's basis for the business? a. b. c. d. $75,000 is used for determining depreciation. $70,000 is used for determining loss. $75,000 is used for determining gain. The basis must be adjusted for depreciation allowed or allowable for determining either gain or loss. Test Bank 14-7 40. C replaced the car that she had used exclusively for her business with a new model. The older car cost $20,000, and its basis after allowable depreciation had been $15,500 at the time C converted it to personal use. This year C sold the older car for $9,000. What loss on the sale may she claim as a deduction? a. b. c. d. $0 $6,500 $11,000 C's loss is indeterminable from the given information. 41. S sold a business microcomputer for $2,000 that she had purchased for $2,500 several months earlier. Assume the depreciation deducted under MACRS on the computer for the actual holding period was $1,795. What is the amount of S's gain recognized on this sale? a. b. c. d. $0 $500 $1,795 $1,295 42. Liabilities that reduce the amount realized from a transaction include which of the following? a. b. c. d. Any liabilities of the seller assumed by the buyer Limited liabilities of the seller assumed by the buyer Any liabilities assumed by the seller related to the transaction Nonrecourse debt assumed by the buyer 43. W sold a residence for $40,000 payable as follows: Cash down payments Existing loan assumed by buyer Promissory note bearing interest at 10 percent, payable to W in two years $ 8,000 20,000 12,000 No payments were made on the promissory note during the year of sale. Assuming W's basis is $30,000, how much gain is recognized by W in the year of sale? Ignore selling costs. a. b. c. d. 44. $2,000 $4,000 $7,000 $10,000 A realization of gain or loss occurs a. b. c. d. When the seller has an unqualified right to collect the purchase price When the seller receives cash or cash equivalents in payment of the purchase price When possession of the burdens and benefits of ownership are transferred to the buyer Under any circumstance listed above, depending in part on the accounting method used by the taxpayer 45. Which of the following transactions is a taxable event? (Assume that the condition of being substantially identical is determined in terms of rate of return and fair market value.) a. b. c. d. Conversion of bonds into stock under a conversion privilege contained in the bond instrument Exchange of substantially identical bonds of state or municipal governments Exchange of substantially identical stocks of publicly held corporations Conversion of stock into some other stock of the same corporation pursuant to a right granted under the stock certificate 14-8 Chapter 14 Property Transactions: Basis Determination and Recognition of Gain or Loss 46. Which of the following transactions is not a taxable disposition of property? a. b. c. d. Voluntary transfer of mortgaged property to creditors in satisfaction of a debt Loss of property in a foreclosure sale Transfer of physical property in lieu of cash payments to retire a note Grant of a lien against property to secure a loan 47. A and E are a married couple living in a community property state. E owned an apple orchard in which she had a basis of $70,000. She sold the orchard to A last year for its fair market value of $100,000. They remain happily married. What gain did E recognize on the sale? a. b. c. d. $0 $30,000 $70,000 $100,000 48. F owns land with an adjusted basis of $45,000 and a fair market value of $72,000. Which one of the following is true of a transfer by F to his spouse, G? a. b. c. d. If F gives a one-half interest in the land to G as a wedding gift, gain of $13,500 is recognized. If F sells the land to G for $50,000 incident to their divorce, no gain is recognized and G's basis is $45,000. If F transfers the land to G without consideration incident to their divorce, gain of $13,500 is recognized. If F sells the land to G for $72,000 incident to their divorce, gain of $27,000 is recognized and G's basis is $72,000. 49. R sold the family homestead to his daughter for $250,000 at a time when its fair market value was $400,000. R's basis was $130,000. How much gain does R realize on the transaction? a. b. c. d. $0 $120,000 $250,000 $270,000 50. M sold a family heirloom to her nephew last year for $1,200 plus an $1,800 note payable to M at $100 per month plus interest. The silver place settings had been purchased by M 30 years earlier for $1,600, and were worth $6,000 at the time of the sale/gift. How much gain does M realize? a. b. c. d. $0 $1,400 $3,000 $4,400 51. In which transaction did the donor/seller not recognize a gain? a. b. c. d. A gave his car to his brother, who took over the 12 months of payments remaining due; the indebtedness represented by the remaining payments exceeded A's basis in the car at the time of the transfer. B sold a boat with a basis of $40,000 and fair market value of $60,000 to her nephew for $50,000. C sold a cabin with a basis of $45,000 and fair market value of $50,000 to his niece for $50,000. D gave her sister securities with a basis and fair market value of $25,000 in exchange for $10,000 in cash and a five-year, $15,000 note at 10 percent interest. Test Bank 14-9 52. H sold a parcel of real estate worth $45,000 to his favorite qualified charity for $30,000. H had a tax basis in the unimproved parcel of $36,000. What are the amounts of H's charitable contribution and his gain or loss recognized, respectively, on this sale? a. b. c. d. $0 and $0 $15,000 and ($6,000) $15,000 and $0 $15,000 and $6,000 53. H sold a parcel of real estate worth $45,000 to his favorite qualified charity for $30,000, subject to a $10,000 note that is assumed by the charity. H had a tax basis in the unimproved parcel of $36,000. What are the amounts of H's charitable contribution and his gain or loss recognized, respectively, on the sale? a. b. c. d. $0 and $0 $5,000 and $8,000 $15,000 and $8,000 $15,000 and $16,000 54. W owned and operated a printing shop as a sole proprietorship for two decades before selling it to Z. Which statement is true? a. b. c. d. W should report the total amount realized, less his total adjusted basis in the business, as a capital gain or loss. W should report the total amount realized, less his total adjusted basis in the business, as an addition to or a deduction from net income. W should proportionally allocate the total sales price to each category of property represented among the assets of the business in order to determine the amount of gain or loss for each category. W and Z should agree on a value for each category of property from which W can subtract the respective adjusted bases in order to determine the amount of gain or loss for each category. 55. Which statement is not true concerning installment contracts and unstated interest? a. b. c. d. Unstated interest increases the sale price Unstated interest results in income to the seller The buyer is entitled to an interest deduction for paying unstated interest Unstated interest sometimes must be taken into account even if a stated rate of interest is included in the sales contract 56. Which one of the following losses may be recognized? a. b. c. d. Decline in the value of P's computer before he converted it from personal to exclusively business use Sale of property by M to his son for an amount less than either M's basis in the property or its fair market value at the time of sale $2,000 by K, if L's adjusted basis in jewelry was $35,000, its fair market value in 2007 was $30,000 when she gave it to her friend K, and K held it for investment and sold it this year for $28,000 $7,000 by K, if L's adjusted basis in jewelry was $35,000, its fair market value in 2007 was $30,000 when she gave it to her friend K, and K held it for investment and sold it this year for $28,000 57. Which condition is not true of a wash sale? a. b. c. d. A wash sale occurs when a taxpayer sells securities at a loss and reinvests in substantially identical securities within 30 days before or after the date of sale. A taxpayer who transacts a wash sale has not had a change in economic position. The numbers of shares purchased and sold are not always the same. When the number of shares repurchased is less than the number sold, none of the loss is deductible. 14-10 Chapter 14 Property Transactions: Basis Determination and Recognition of Gain or Loss 58. B sold 300 shares of corporate stock for $2,500 on March 15, 2011. B had a basis in the shares of $5,500. On February 27, 2011, B had purchased 150 shares of identical stock for $1,300. How much are B's gain or (loss) recognized and her basis in the new shares, respectively, from these transactions? a. b. c. d. ($1,500) and $4,050 ($1,500) and $2,800 ($250) and $2,800 $0 and $5,550 59. Which one of the following family members is not related for purposes of nondeductible losses on sales to related parties? a. b. c. d. Sister Spouse Uncle Grandchild 60. B purchased a tractor trailer from his mother for its fair market value of $2,100. She had used the trailer exclusively for business purposes. At the time of sale, the mother's basis in the vehicle was $5,500. What is B's recognized gain or loss if he immediately sells the vehicle for $3,200? a. b. c. d. ($3,400) ($2,300) $0 $1,100 14 Property Transactions: Basis Determination and Recognition of Gain or Loss Solutions to Test Bank True or False 1. 2. 3. 4. True. Gain or loss is realized, but in some cases it is not recognized. (See p. 14-3 and 1001.) False. The cost basis of property includes any liabilities incurred. [See Example 8, p. 14-6, and Reg. 1.1012-(a).] False. The first-in, first-out (FIFO) method must be used to identify indistinguishable shares sold. [See Example 10, p. 14-7, and Reg. 1.1012-1(c).] False. The donee's basis is generally the donor's basis plus any gift tax paid on appreciation only. For gifts prior to 1977, the statement is true. There is an exception to the rule if the donor's basis exceeds FMV at the time of the gift. [See Examples 12 through 15, pp. 14-7 through 14-9, and 1015(a).] True. Income in respect of a decedent is recognized as income by the estate or heir under the appropriate method of accounting when it was earned. Accordingly, the basis in such income may not be "stepped up." [See pp. 14-9 and 14-10, and 1014(a) and 691.] False. The alternate valuation date for an estate is six months after the decedent's death. [See p. 14-9 and 2032(a).] True. An estate tax return must be filed, and the alternate valuation must result in a lower estate value and a lower estate tax. (See p. 14-9.) False. Nontaxable exchanges generally defer, rather than dismiss, recognition of gain or loss. Such a deferred gain represents a reduction in basis. [See Example 19, pp. 14-10 and 14-11, and 1034(e).] True. This is to prevent a taxpayer from converting an already incurred personal loss to a business loss either in a sale or through depreciation. [See Example 20, p. 14-11, and Reg. 1.167(g)-1.] True. The Code specifically requires that basis be reduced by depreciation allowed or allowable. [See p. 14-12 and 1016(a).] False. Nonrecourse liabilities are also included in the amount realized. (See Examples 22 and 23, p. 14-13, footnote 36, and 1001.) 14-11 5. 6. 7. 8. 9. 10. 11. 14-12 Chapter 14 Property Transactions: Basis Determination and Recognition of Gain or Loss 12. 13. 14. 15. True. Since the property is personal-use property at the time of sale, no loss is deductible. [See Example 21, p. 14-11, and 165(c).] True. The transfer is treated as an ``other disposition'' of the property transferred, upon which gain or loss is realized. (See Examples 25 and 26, pp. 14-14 and 14-15.) True. Gain or loss is realized on the disposition of the stock without regard to the purpose underlying the disposition. (See Example 25 and pp. 14-14 and 14-15.) True. Whether the property is depreciable or not, the loss is realized. The loss will not be deductible, however, if the property's use was personal, and in certain other cases. If there is an amount realized, the act is not an abandonment but is a sale or disposition. [See Example 27, pp. 14-14 and 14-15, and Reg. 1.165-2 and 1.167(a)-8.] False. The statute specifically states that there is no deduction allowable on the demolition of a building. The basis of the building is added to the basis in the land. (See Example 28, p. 14-15 and 280B.) False. No gain or loss is recognized on the transfer, including a sale, to one's spouse. (See Examples 29 and 30, p. 14-16, and 1041.) True. No gain or loss is recognized on any transfer related to a couple's divorce. The recipient of property assumes the basis of the property prior to the transfer. (See Example 29, p. 14-16, and 1041.) False. The recipient acquires as basis the greater of the two bases. (See Examples 33 and 34, p. 14-17.) True. A charitable contribution deduction may be allowed if the sales price is less than the fair market value of the property, and gain will be recognized if the amount realized exceeds the pro rata share of the adjusted basis allocable to the sale portion. (See Examples 35 and 36, pp. 14-17 and 14-18, 1011(b), and Reg. 1.1011-2.) False. The fair market value of each asset on the date of purchase governs the proportional allocation of the total basis among the assets when sold. (See Example 37, p. 14-18, and Rev. Rul. 72-255, 1972-1 C.B. 221.) False. The sale is treated as the separate sale of each of the proprietorship assets. Only capital assets result in capital gain or loss. Section 1231 assets and other non-capital property would be subject to the applicable rules. (See Example 38, pp. 14-18 and 14-19.) True. Installment reporting does not apply to losses. (See p. 14-19 and 453.) True. Although the installment method generally applies to such a sale, it does not apply to sales on an established securities market. M must therefore report all the gain in 2011. (See p. 14-19.) True. Interest is imputed if the effective rate is less than that specified in the Regulations. (See Example 43, pp. 14-23 and 14-24, and 483 and 1274.) 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. Multiple Choice 26. 27. 28. d. The purchase price of a given property need not equal its fair market value, and its book value does not necessarily reflect adjustments for costs of the transaction and other adjustments. (See p. 14-6.) a. The amount realized represents economic value received; the gain or loss recognized represents the amount realized less the adjusted basis of the property. (See Exhibit 14-3 and pp. 14-4 and 14-5.) c. The amount realized equals the sum of cash received and the fair market value of property received, less selling expenses ($30,000 $22,000 $0). (See pp. 14-4 and 14-5.) Solutions to Test Bank 14-13 29. c. Realized gain or loss is the amount realized ($30,000 $22,000 $0 $52,000) less the adjusted basis of the cabin given up ($44,000). Therefore, N has a realized gain of $8,000. (See Exhibit 14-3 and pp. 14-4 and 14-5.) b. The amount realized is the amount of money received plus the fair market value of the property received. Certain other adjustments are made, including an increase for liabilities relieved and a decrease for liabilities incurred. The $4,500 was calculated as follows: $10,500 2,000 $8,000. (See Exhibit 14-3, pp. 14-4, 14-5, 14-12 and 14-13, and Reg. 1.1001-2.) d. Selling costs, generally borne by the seller, include the costs of transacting a sale of property as well as those associated with offering it for sale. They reduce the amount realized by a seller who incurs them. (See pp. 14-5 and 14-6.) c. The amount realized is reduced by the selling commission, and the basis is increased by the purchase commission. Therefore, the amount realized is $4,900 ($5,200 $300), and the gain realized is $1,720 ($4,900 $3,180). (See Exhibit 14-3, pp. 14-4 through 14-6, and 1001 and 1011.) a. The owner of unidentified shares of stock sold must determine their adjusted basis with the first-in, first-out (FIFO) method. The adjusted basis of T's shares was $5,200 [(25 shares $1,800/25) (40 shares $3,000/40) (5 shares $2,000/25)]. [See Examples 10 and 11, p. 14-7, and Reg. 1.1012-1(c).] b. The basis of property acquired through inheritance is the fair market value on the date of death, or the value on the alternate valuation date if elected. In this case, the basis is $28,000, and since the sales price is $30,000, there is a gain of $2,000. (See Examples 16 and 17, pp. 14-9 and 14-10, and 1014.) b. The basis of property acquired by gift is the donor's basis increased by gift taxes paid on appreciation. In this case, the basis is $30,000: $20,000 [$12,000 ($50,000 $20,000/$36,000)] [See Example 12, pp. 14-7 and 14-8, and 1015(a).] 30. 31. 32. 33. 34. 35. 36. d. E's basis in the land is $30,000, determined by adding a $10,000 gift tax paid adjustment to her grandmother's $20,000 basis. This computation is shown below: $20,000 [$12,000 ($50,000 $20,000/$36,000)] $20,000 $10,000 $30,000 With a basis of $30,000, E has a $25,000 gain on the sale ($55,000 $30,000). [See Example 12, pp. 14-7 and 14-8, and 1015(a).] 37. a. E has a $2,000 gain ($32,000 amount realized - $30,000 basis). E's $30,000 basis is computed by adding a $10,000 gift tax paid adjustment to her grandmother's $20,000 basis. This computation is shown below: $20,000 [$12,000 ($50,000 $20,000/$36,000)] $20,000 $10,000 $30,000 [See Example 12, pp. 14-7 and 14-8, and 1015(a).] 38. a. Estate taxes do not affect the adjusted basis of bequeathed property. The valuation date, decided by the executor, is the date of death or six months after the decedent's death. [See pp. 14-9 and 14-10, and 1014(a) and 2032(a).] a. $70,000, which is the lower of adjusted basis and fair market value at the time of conversion, must be used for depreciation purposes. [See Example 20, p. 14-11, and Reg. 1.167(g)-1.] a. No loss is deductible on the sale of business property converted to personal use before the sale. (See Example 21, p. 14-11.) 39. 40. 14-14 Chapter 14 Property Transactions: Basis Determination and Recognition of Gain or Loss 41. 42. 43. d. S's gain recognized is the amount realized, $2,000, reduced by the adjusted basis of $705 ($2,500 cost less depreciation of $1,795). (See p. 14-12.) c. The assumption of liabilities reduces the net economic value realized from a transaction by a taxpayer. [See Examples 22 and 23, p. 14-13, and Reg. 1.1001-2(a)(1).] b. The gross profit on the sale is $10,000 ($40,000 $30,000), resulting in a gross profit ratio of 50 percent ($10,000/$20,000). W recognizes a gain of $4,000 in the year of the sale, 50 percent of the down payment ($8,000). W will report the remaining gain after two years, when she collects the $12,000 note. (See Example 41, p. 14-22, and 453.) 44. d. A gain or loss is realized under the accrual method when the seller becomes entitled to collect the purchase price, under the cash method when the seller actually collects the purchase price, and in any case upon transfer of the burdens and benefits of ownership. (See p. 14-13 and Rev. Rul. 72-381, 1972C C.B. 581.) c. Exchanges and conversions of securities generally are taxable events unless the privilege of conversion is contained in the security instrument, or the securities are state or municipal bonds. (See p. 14-14.) d. The transfer of property in satisfaction of a liability is a taxable disposition. The granting of a lien secures a loan rather than discharges it; there is no actual change in ownership. (See Examples 25 and 26 pp. 14-14 and 14-15.) a. The transfer of property to one's spouse is not a taxable event. (See p. 14-16 and 1041.) b. No gain or loss is recognized on any transfer to a spouse, whether for valuable consideration or otherwise. This rule applies to transfers during the marriage, within one year after a marriage is dissolved, and any subsequent transfers under a divorce decree. In each case, there is a carryover basis (in this case, $45,000). (See Examples 29 and 30, p. 14-16, and 1041.) b. Generally there is no gain or loss realized on a gift. However, when there is a part-gift/part-sale, gain is realized to the extent there is an amount realized in excess of taxpayer's basis. (See Examples 31 and 32 and pp. 14-16 and 14-17.) b. M's amount realized is $3,000, and she may offset it with her entire basis of $1,600 to arrive at the gain of $1,400. In a part-gift/part-sale, the gain is the sales price reduced by the entire basis. (See Examples 33 and 34 and p. 14-17.) d. The amount of interest D will receive for the note is not included in the value she will have received for the securities. In each of the other cases, the donor/seller received value in excess of the adjusted basis or the fair market value of the property. (See Examples 41 and 42, pp. 14-22 and 14-23.) d. H's charitable contribution is $15,000, the excess of the fair market value of the property over its sales price. H then has gain on the sales portion of $6,000 (the sales price of $30,000 over the allocated basis of $24,000 [$36,000 ($30,000/$45,000)]. [See Example 35, p. 14-17, and 1011(b).] b. The amount of H's charitable contribution equals the fair market value of the property, less cash received for it and the liability assumed by the donee/buyer [$45,000 ($30,000 $10,000) $5,000]. His gain recognized is the difference between the sales price of $40,000 and the allocable basis [$36,000 ($40,000/ $45,000) $32,000]. [See Example 36, p. 14-18, and Reg. 1.1011-2(a).] c. Each category of property (e.g., inventory, real property) has a separate impact on taxable income. Consequently, the sales value and seller's adjusted basis should be identified separately for each category. (See Example 38, pp. 14-18 and 14-19, and Rev. Rul. 55-79, 1955-1 C.B. 370.) a. Unstated interest reduces the sale price, and will be taken into account if a stated rate of interest included in the sales contract is unreasonably low. [See Example 43, pp. 14-23 and 14-24, and 483(a) and 1274.] 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. Solutions to Test Bank 14-15 56. c. Losses are not recognized when incurred in sales between related taxpayers, or for property devoted to personal use. Losses on sale of property acquired by gift are limited to the decline in its value subsequent to transfer by gift. [See p. 14-8 and 1015(a).] d. The deduction for losses is disallowed only for the number of shares purchased. (See Example 46, p. 14-27, 1091, and Reg. 1.1091-1.) b. This is a partial wash sale. The shares that are not replaced are not affected, and the loss on them of $1,500 ($1,250 $2,750) is allowed. The loss on the replaced shares is deferred, and a carryover basis is utilized ($2,750 $1,250 sales proceeds $1,300 purchase value of replacement). (See Example 47, pp. 14-27 and 14-28, and 1091.) c. The familial relationships that are included are spouses, brothers, sisters, lineal ancestors, and lineal descendants. In-laws are not included. An uncle is a collateral ancestor. [See p. 14-28 and 267(c).] c. The loss on the sale by the mother to B is disallowed, but B's gain of $1,100 is not recognized because it is less than the $3,400 loss to his mother that was disallowed. Accordingly, B has no gain or loss recognized. (See Example 48, p. 14-28, and 267.) 57. 58. 59. 60. 14 Property Transactions: Basis Determination and Recognition of Gain or Loss Comprehensive Problems 1. Francine Wills sold a major portion of her investment portfolio during the current year. Each of the sales is described below: a. Fifty acres of suburban commercial property sold for $1,500,000. The land was inherited from her mother 18 months earlier when it was worth $950,000. Her mother had paid $350,000 for the land 20 years earlier. b. Diamond earrings sold for $5,000 were received as a gift from her father. Her father had a basis of $3,500 and paid no gift taxes based on the fair market value on the date of gift of $4,000. c. A beach cabin worth $105,000 was sold for $25,000, subject to a first mortgage obligation of $80,000. The cabin had cost $85,000 and depreciation of $4,000 had been allowed related to rental usage. Calculate Francine's gain related to each of these sales. Present your answers in good form. 2. Andrew Bart sold a duplex he held as a rental property on the installment basis. The details related to the sale are as follows: Gross sales price Selling expenses Original basis to Andrew Depreciation allowed (straight-line) Down payment received Installment note, 9.5% interest 11a. $70,000 6,000 $45,000 18,000 $ 7,000 63,000 Calculate the gain recognized by Andrew in the year of sale, assuming no payments other than the down payment are received. b. Calculate the gain realized in the following year when interest of $6,100 and principal of $14,000 are received. c. What would have been your answers to the above questions if Andrew had elected the options treatment for this sale? 14-17 14-18 Chapter 14 Property Transactions: Basis Determination and Recognition of Gain or Loss Solutions to Comprehensive Problems 1. Francine Wills reports the following gains related to these transactions: Suburban commercial property--Sales price Less: Basis (fair market, date of inheritance) Gain Diamond earrings--Sales price Less: Basis (donor's gift tax on appreciation) Gain Beach cabin ($25,000 cash $80,000 liability) Less: Basis ($85,000 cost $4,000 depreciation) Gain $1,500,000 ( ,950,000) $ ,550,000 $ ,005,000 ,003,500) ( $ ,001,500 $ ,105,000 ,081,000) ( $ ,024,000 2. The critical amounts related to this sale are as follows: Gross sales price Less: Existing liabilities Contract price Original basis to Andrew Less: Depreciation allowed Adjusted basis Gross sales price Less: Selling expenses Amount realized Less: Adjusted basis Gross profit a. Gross profit/Contract price Principal collected Gain recognized $37,000 $7,000 $3,700 gain $70,000 b. The $6,100 interest is ordinary income and the gain recognized is as follows: $37,000 $14,000 $7,400 gain $70,000 c. What would have been your answers to the above questions if Andrew had elected the optional treatment for this sale? Question 1: $37,000 gain recognized by electing out of installment sale treatment Question 2: $6,100 interest income only $ 70,000 ,000 $ 70,000 $ 45,000 (18,000) $ 27,000 $ 70,000 (6,000) $ 64,000 (27,000) $ 37,000 ...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online