M1-Basis and Holding Period of Assets

Question 1

The receipt of a nontaxable stock dividend will require the shareholder to spread the basis of his original share over both the original shares and the new shares received resulting in the same total basis, but a lower basis per share of stock held. (true or false)

Answer 1

true

Question 2

Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift. (true or false)

Answer 2

true

Basis is increased by any gift tax paid attributable to the appreciation in the value of the gift. There is an exception to the general rule: if the FMV at the date of gift is lower than the roll-over cost basis from the donor, the basis for the donee depends upon the donee’s future selling price of the asset.

Question 3

There is no income tax on the value of inherited property. (true or false)

Answer 3

true

Question 4

The executor can elect to use an alternate valuation date rather than the decedent’s date of death to value the property included in the gross estate. The alternate date is generally _______ months after the decedent’s death or the earlier date of sale or distribution.

Answer 4

6 months

The valuation of the assets in an estate affects the recipient as basis of inherited assets.

Question 5

Unless the executor elects the “alternative valuation date” method, the basis of property acquired by bequest or by inheritance is the property’s fair market value on the date of the decedent’s death. (true or false)

Answer 5

True

Additionally, such acquired property is always considered to be “long-term” property, regardless of how long it has been held by the decedent and by the beneficiary or heir.

Question 6

Companies can make a de minimis annual expense election regarding expenditures to acquire or produce property if they have a capitalization policy in effect as of the beginning of the year. (true or false)

Answer 6

true

The capitalization policy must be a written accounting policy for nontax purposes that treats as an expense in the F/S:

• Property purchases under a certain dollar amount; and/or
• Property with an economic useful life of 12 months or less

If the company has an applicable F/S, the maximum amount allowed for federal tax purposes is $5,000 per asset (IF WRITTEN)

If a company does NOT have an applicable F/S, the maximum amount is $2,500 per asset, (NOT WRITTEN)

Question 7

Qualifying small taxpayers can expense costs related to an eligible building if they do not exceed the lesser of 2% of unadjusted basis of the building or $10,000. (true or false)

Answer 7

true

A qualifying small taxpayer is a taxpayer with average annual gross receipts of $10 million or less during the 3 preceding tax years.

An eligible building is any building with an adjusted basis that does not exceed $1 million

Question 8

The exception of the gift tax basis rule is when the FMV at date of gift is lower than the donor’s original basis. If the donee sells the stock at a price less than the donor’s rollover cost basis but higher than the FMV on date of gift, there is NO gain or loss on the sale. (true or false)

Answer 8

True

Donee gets:
Stock with basis of $40,000
FMV of stock is $30,000

Donee subsequently sells stock for $36,000

No gain or loss