MCQ's Subunit 10 Sept 2023 Flashcards
Fact Pattern:
Two transactions for a sole proprietorship were made during the current year. These were the only sales or exchanges of capital assets or Sec. 1231 assets (there were no unrecaptured Sec. 1231 losses from the previous year).
A machine used in the business was sold for $400,000. It cost $330,000 when purchased 3 years ago, and its adjusted tax basis when sold was $210,000. Depreciation had been recorded on an accelerated basis; straight-line depreciation would have been $99,000.
A $500,000 insurance recovery on a small warehouse destroyed by fire was received. It was used in the business and depreciated using the straight-line method. Its adjusted tax basis at the date of the fire was $524,000. A new warehouse was rebuilt at a cost of $600,000.
What is the combined tax effect of these two transactions on the proprietor’s Form 1040?
A. $46,000 long-term capital gain and $120,000 ordinary income.
B. $190,000 long-term capital gain and $24,000 ordinary loss.
C. $70,000 long-term capital gain and $96,000 ordinary income.
D. $70,000 long-term capital gain; $120,000 ordinary income; and $24,000 adjustment to the tax basis of the new warehouse.
C. $70,000 long-term capital gain and $96,000 ordinary income.
The sale of the machine resulted in a realized gain of $190,000 ($400,000 amount realized – $210,000 adjusted basis). A portion of the gain equal to the depreciation already taken is recaptured as ordinary income under Sec. 1245. Thus, $120,000 of the gain on the sale of the machine is ordinary income. The remaining $70,000 of gain is characterized under Sec. 1231. The involuntary conversion results in a realized loss of $24,000 ($500,000 amount realized – $524,000 adjusted basis). Realized losses on involuntary conversions are fully recognized.
Under Sec. 1231(a), if losses on business property from involuntary conversions by casualty or theft exceed such gains, they are not netted with other Sec. 1231 capital gains. The $24,000 loss will be treated as an ordinary loss and netted with the $120,000 of Sec. 1245 ordinary income for a total of $96,000. The $70,000 of Sec. 1231 gain will be treated as long-term capital gain.
$400,000 - $210,000 = $190,000
$330,000 - $210,000 = $120,000
$190,000 - $120,000 = $70,000 long-term capital gain
$524,000 - $500,000 = $24,000
$120,000 - $24,000 = $96,000 ordinary income
Mary Brown purchased an apartment building on January 1, 2013, for $200,000. The building was depreciated using the straight-line method. On December 31, 2023, the building was sold for $210,000 when the asset basis net of accumulated depreciation was $160,000. On her 2023 tax return, Brown should report
A. Ordinary income of $50,000.
B. Section 1231 gain of $10,000 and Sec. 1250 unrecaptured gain of $40,000.
C. Section 1231 gain of $10,000 and ordinary income of $40,000.
D. Section 1231 gain of $40,000 and ordinary income of $10,000.
B. Section 1231 gain of $10,000 and Sec. 1250 unrecaptured gain of $40,000.
When depreciable property used in a trade or business is sold at a gain, first Sec. 1245 and Sec. 1250 are applied; then the balance of the gain not recaptured as ordinary income is Sec. 1231 gain. In this case, Sec. 1245 does not apply, and Sec. 1250 recapture is limited to the excess of accelerated depreciation over straight-line depreciation. Since the building was depreciated using the straight-line method, Sec. 1250 does not apply, and $40,000 of the total $50,000 gain ($210,000 – $160,000) is attributable to straight-line depreciation and taxed at the maximum Sec. 1250 unrecaptured gains rate of 25%. The remaining $10,000 is taxed at the Sec. 1231 preferential capital gains rate of 0/15/20%.
$210,000 - $160,000 = $50,000
$200,000 - $160,000 = $40,000
$50,000 - $40,000 = $10,000
On March 1 of the previous year, a parent sold stock with a cost of $8,000 to their child for $6,000, its fair market value. On September 30 of the current year, the child sold the same stock for $7,000 to Hancock, who is unrelated to the parent and child. What is the proper treatment for these transactions?
A. Parent has $0 recognized loss and child has $0 recognized gain.
B. Parent has $2,000 recognized loss and child has $0 recognized gain.
C. Parent has $0 recognized loss and child has $1,000 recognized gain.
D. Parent has a $2,000 recognized loss and child has $1,000 recognized gain.
A. Parent has $0 recognized loss and child has $0 recognized gain.
With a related party stock sale, the original related seller is not permitted to recognize any realized loss on the disposition. However, if the recipient of that stock subsequently disposes of it at a gain, they are permitted to reduce any gain realized by the amount of the disallowed loss. In this case, $2,000 ($6,000 amount realized, less $8,000 adjusted basis) of loss is realized to the parent on the initial disposition. The child takes a $6,000 fair market value basis. Upon subsequent disposition, the child realizes a $1,000 gain on the sale of the shares ($7,000 amount realized, less $6,000 adjusted basis). However, this is reduced to $0 by the disallowed loss to the parent. The remaining $1,000 loss ($2,000 disallowed loss, less $1,000 used to offset the child’s gain) is permanently lost.
Jan, an unmarried individual, gave the following outright gifts in 2023:
Jan’s 2023 exclusions for gift tax purposes should total
A. $43,000
B. $42,000
C. $17,000
D. $34,000
B. $42,000
The unlimited exclusion for amounts paid for qualified tuition and medical expenses on behalf of the donee is allowed only when paid directly to the provider. The annual exclusion of up to $17,000 of gifts of present interest to each donee is available. Since the $18,000 for Craig’s tuition was not paid directly to the college, only $17,000 of the gift is excluded. Jan’s 2023 exclusion is for the value of gifts of $17,000 to Jones, $17,000 to Craig, and $8,000 to Kande.
The following data pertain to installment sales of personal property made by Fred Dale, an accrual-method taxpayer, in his retail furniture store:
These sales were not under a revolving credit plan. Under the installment method, Dale should report gross profit for Year 3 of
A. $75,000
B. $35,000
C. $130,000
D. $80,000
A. $75,000
The installment method is usually disallowed for dispositions of property by dealers. This includes any disposition of (1) personal property, if the person regularly sells such personal property on the installment plan, and (2) real property held by the taxpayer for sale to customers in the ordinary course of his or her trade or business. Exceptions are made for property used or produced in the trade or business of farming and, if so elected, sales of residential lots or timeshares, subject to interest payments on the deferred tax. Dale is excluded from installment sale deferral because the disposition of his property falls under “personal property of a type regularly sold by the person on the installment plan.” Because he does not qualify, he must recognize all of his profit in Year 3, which is stated in the question as $75,000.
Kuo sells residential rental property to his son Karl for $100,000. Karl gives Kuo $1,000 and an installment note for the balance of $99,000. Kuo’s basis is $50,000. Karl pays Kuo $4,000 in Year 1. In Year 2, after paying Kuo $5,000, Karl sells the property for $70,000. Which of the following statements about this situation is correct?
A. Kuo should report the entire gain of $50,000 in Year 1 because installment sales of depreciable property are not allowed between related parties.
B. Kuo should report $2,500 gain in Year 1.
C. Kuo should report a $49,000 gain in Year 2.
D. Kuo should report the entire gain of $50,000 in Year 1 because Karl disposed of the land within 2 years of purchase.
B. Kuo should report $2,500 gain in Year 1.
The recognized gain for an installment sale in any year is equal to the gross profit percentage multiplied by the amount of payments received in the year. In this case, the gross profit is $50,000 ($100,000 received – $50,000 basis), and the gross profit percentage is 50% ($50,000 gross profit ÷ $100,000 total contract price). In Year 1, Karl pays $1,000 up front and makes an additional $4,000 of payments for a total of $5,000. Therefore, the recognized gross profit is $2,500 ($5,000 × 50%).
Terry, a taxpayer, purchased stock for $12,000. Later, Terry sold the stock to a relative for $8,000. What amount is Terry’s recognized gain or loss?
A. $4,000 gain.
B. $2,000 gain.
C. $2,000 loss.
D. $0
D. $0
Loss realized on sale or exchange of property to a related person is not deductible. The transferee takes a cost basis. Since the relative purchased the stock from Terry for $8,000, the relative has an $8,000 cost basis in the stock. Terry realizes a $4,000 loss, but the loss is not recognized.
Four years ago, a self-employed taxpayer purchased office furniture for $30,000. During the current tax year, the taxpayer sold the furniture for $37,000. At the time of the sale, the taxpayer’s depreciation deductions totaled $20,700. What part of the gain is taxed as long-term capital gain?
A. $0
B. $20,700
C. $7,000
D. $27,700
C. $7,000
Section 1245 property is depreciable personal property held for greater than 1 year and used in a trade or business (e.g., office furniture). Gain on the disposition of Sec. 1245 property is ordinary income to the extent of the lesser of all depreciation taken or gain realized. The realized gain in excess of the depreciation taken may be treated as a gain from the sale or exchange of Sec. 1231 property. If the net result of all Sec. 1231 gains and losses is a gain, the gain is taxed as a long-term capital gain. The realized gain of $27,700 is greater than the depreciation taken ($20,700) by $7,000. All Sec. 1245 and 1231 property is long term.
$30,000 - $20,700 = $9,300
$37,000 - $9,300 = $27,700
$27,000 - $20,700 = $7,000
Martha, filing single, purchased her home on July 7, Year 1, and lived in it continuously until its sale on January 7, Year 3, due to a qualified hardship. Her gain on the sale of the home is $300,000. She did not exclude any gain on any other home sale during this time. What is the maximum amount of gain she may exclude on this sale?
A. $300,000
B. $187,500
C. $125,000
D. $250,000
B. $187,500
An individual may exclude $250,000 ($500,000 for married individuals filing jointly) on the sale of a principal residence, provided (s)he lived there for at least 2 years. Additionally, a pro rata exclusion is available if the sale occurred prior to 2 years, provided the sale was as a result of a qualified hardship, including a change in job locations, health reasons, or other unforeseen circumstances. Therefore, Martha may exclude $187,500 [(18 ÷ 24) × $250,000].
Benson exchanged a warehouse used exclusively for business and with an adjusted basis of $100,000 for a new warehouse with a fair market value of $120,000 and received $5,000 in cash. What amount of gain did Benson recognize from the transaction?
A. $20,000
B. $0
C. $5,000
D. $25,000
C. $5,000
Gain is recognized on a like-kind exchange equal to the lesser of gain realized or boot received. Gain realized is $25,000 ($120,000 FMV of the new warehouse + $5,000 cash – adjusted basis of the warehouse given up). Boot received is the $5,000 cash. Therefore, the recognized gain is $5,000.
In an installment sale, if the buyer assumes a mortgage that is greater than the installment sale basis of the property sold,
A. The transaction is disqualified as an installment sale.
B. There is never a profit or a loss.
C. The gross profit percentage is always 100%.
D. The gain is treated as short-term capital gain.
C. The gross profit percentage is always 100%.
In an installment sale when the buyer assumes a mortgage that is greater than the basis of the asset, the seller is required to recognize the excess mortgage as a payment in year of sale and also increase the contract price by the amount of the excess. If the contract price were not increased, the gross profit percentage would be greater than 100%. The amount of increase in the contract price will make the contract price equal to the gross profit, thus giving a gross profit percentage of 100%.
A taxpayer sold for $200,000 equipment that had an adjusted basis of $180,000. Through the date of the sale, the taxpayer had deducted $30,000 of depreciation. Of this amount, $17,000 was in excess of straight-line depreciation. What amount of gain would be recaptured under Section 1245, Gain from Dispositions of Certain Depreciable Property?
A. $20,000
B. $30,000
C. $17,000
D. $13,000
A. $20,000
Gain on the disposition of Sec. 1245 property is ordinary income to the extent of the lesser of all depreciation taken or gain realized. The realized gain in excess of the depreciation taken may be treated as a gain from the sale or exchange of Sec. 1231 property. The $20,000 gain realized is less than the depreciation taken ($30,000).
Which of the following questions would be relevant in determining whether a tuition payment made on behalf of another individual is excludable for gift tax purposes?
A. I, II, and IV only.
B. II and IV only.
C. III only.
D. I, III, and IV only.
C. III only.
Whether the tuition payment was made directly to the educational organization is a relevant question. The tuition payments made on behalf of another individual are excludable for gift tax purposes whether the student is full-time or part-time, whether the qualifying educational organization is foreign or domestic, and whether or not the tuition payment is made for a family member.
Among which of the following related parties are losses from sales and exchanges not recognized for tax purposes?
A. Brother-in-law and sister-in-law.
B. Ancestors, lineal descendants, and all in-laws.
C. Father-in-law and son-in-law.
D. Grandfather and granddaughter.
D. Grandfather and granddaughter.
Losses are not allowed on sales or exchanges of property between related parties. Related parties include ancestors (grandfather), descendants (granddaughter), spouses, and siblings.
In 2023, Sayer, who is single, gave an outright gift of $53,000 to a friend, Johnson, who needed the money to pay medical expenses. In filing the 2023 gift tax return, Sayer was entitled to a maximum exclusion of
A. $17,000
B. $0
C. $3,000
D. $53,000
A. $17,000
An unlimited exclusion is available for amounts paid on behalf of the donee as medical care. The transfer for medical care must be made directly to the person who provides it (not the donee). Therefore, this unlimited exclusion is not available for Sayer. However, the annual exclusion of $17,000 is allowed.
Which of the following items qualifies for treatment under Sec. 1231 (Property Used in the Trade or Business and Involuntary Conversions)?
A. Building used in the business, held for 6 months.
B. Machinery used in the business, held for 11 months.
C. Computer used in the business, held for 4 years.
D. Copyright used in the business, held for 10 years.
C. Computer used in the business, held for 4 years.
Section 1231 property is property held for more than 1 year and includes all real or depreciable property used in a trade or business. A computer used in the business that was held for 4 years meets this definition.
With respect to the disposition of an installment obligation, which of the following is false?
A. A gift of an installment obligation is considered a disposition.
B. No gain or loss is recognized on the transfer of an installment obligation between a husband and wife if incident to a divorce.
C. If an installment obligation is canceled, it is not treated as a disposition.
D. If the obligation is sold, the gain or loss is the difference between the basis in the obligation and the amount realized.
C. If an installment obligation is canceled, it is not treated as a disposition.
Section 453B provides that, when an installment obligation is disposed of, gain or loss is recognized to the extent of the difference between the basis of the obligation and the amount realized (or the fair market value of the obligation if disposed of other than by sale or exchange). The main purpose of Sec. 453B is to prevent the shifting of income between taxpayers. Section 453B(a) expressly requires recognition whether the obligation is sold or otherwise disposed of. Cancellation of an installment obligation is a disposition of the obligation.
During 2023, Sadie made the following transfers:
What is the gross amount of gifts given by Sadie in 2023?
A. $5,000
B. $90,000
C. $80,000
D. $105,000
C. $80,000
If a donor buys property with his or her own funds and the title to such property is held by the donor and the donee as joint tenants with right of survivorship and if either the donor or the donee may give up those rights by severing his or her interest, the donor has made a gift to the donee in the amount of half the value of the property.
If the donor creates a joint bank account for himself or herself and the donee (or a similar kind of ownership by which (s)he can get back the entire fund without the donee’s consent), the donor has made a gift to the donee when the donee draws on the account for his or her own benefit. The amount of the gift is the amount that the donee took out without any obligation to repay the donor. If the donor buys a U.S. savings bond registered as payable to himself, herself or the donee, there is a gift to the donee when (s)he cashes the bond without any obligation to account to the donor. Therefore, Sadie’s gross amount of gifts given is $80,000 ($75,000 + $5,000).
On October 1, 2023, Donald Anderson exchanged an apartment building, having an adjusted basis of $375,000 and subject to a mortgage of $100,000, for $25,000 cash and another apartment building with a fair market value of $550,000 and subject to a mortgage of $125,000. The property transfers were made subject to the outstanding mortgages. What amount of gain should Anderson recognize in his tax return for 2023?
A. $125,000
B. $0
C. $25,000
D. $175,000
C. $25,000
Under Reg. 1.1031(d)-2, excess mortgage incurred cannot be netted against cash received to reduce the amount of boot received.
Gibson purchased stock with a fair market value of $14,000 from Gibson’s adult child for $12,000. The child’s cost basis in the stock at the date of sale was $16,000. Gibson sold the same stock to an unrelated party for $18,000. What is Gibson’s recognized gain from the sale?
A. $6,000
B. $0
C. $4,000
D. $2,000
D. $2,000
Under Sec. 267, losses are not allowed on sales or exchanges of property between related parties. Gibson’s adult child realized a $4,000 loss ($16,000 – $12,000) on the sale but may not deduct it. On the subsequent sale, Gibson realized a $6,000 gain ($18,000 sales price – $12,000 basis). However, he only recognizes a gain of $2,000 ($18,000 – $16,000) because the Sec. 267(d) disallowed loss is used to offset the subsequent gain on the sale of the property.
Qualified small business stock, for purposes of applying rollover and exclusion rules, is stock that meets all the following tests except
A. Total gross assets of $100 million or less at all times after August 10, 1993, and before it issued the stock.
B. Originally issued after August 10, 1993.
C. Acquired by original issue in exchange for money or other property or as pay for services.
D. Stock in a C corporation.
A. Total gross assets of $100 million or less at all times after August 10, 1993, and before it issued the stock.
Stock qualifies as Section 1202 stock if it is received after August 10, 1993, the corporation is a domestic C corporation, the seller is the original owner of the stock, and the corporation’s gross assets do not exceed $50 million at the time the stock was issued. Additional requirements do exist. However, the total gross assets requirement is $50 million.
For the current year, the installment method may not be used for
A. Sales of real property (except farm property and certain sales of residential lots or timeshares) held by a dealer for sale in the ordinary course of business.
B. Sales of personal property (except farm property) by dealers who regularly sell this type of personal property on an installment plan.
C. Publicly traded equity securities.
D. All of the answers are correct.
D. All of the answers are correct.
Under current law, use of the installment method is usually disallowed for dispositions of property by dealers [Sec. 453(b)(2)]. This includes any disposition of (1) personal property, if the person regularly sells such personal property on the installment plan, and (2) real property held by the taxpayer for sale to customers in the ordinary course of his or her trade or business. Exceptions are made for property used or produced in the trade or business of farming, and, if so elected, sales of residential lots or timeshares, subject to interest payments on the deferred tax [Sec. 453(l)]. Additionally, in general, installment sales do not apply to publicly traded securities.
During the current year, Nancy, who is single, made the following gifts:
What is the amount of Nancy’s taxable gifts in the current year?
A. $62,000
B. $11,000
C. $6,000
D. $10,000
D. $10,000
Under Sec. 2503, gifts are taxable to the extent that they exceed $17,000 unless they are made on behalf of any individual as tuition to an educational organization or as payment to someone who provides medical care to such individual. The payment must be made directly to the educational organization or person providing medical care.
The $18,000 Nancy paid directly to her friend’s doctor is not a taxable gift. The gifts to her mother and to her nephew Tom are each taxable to the extent that they exceed the $17,000 exclusion of Sec. 2503(b). An interest-free loan generally results in a deemed transfer of interest between the borrower and the lender [Sec. 7872(a)]. The lender is deemed to have made a gift of the forgone interest to the borrower. The amount of Nancy’s gift to her nephew James is deemed to be $5,000. Because the amount of deemed interest is less than the $17,000 exclusion, it is not a taxable gift.
$21,000 - $17,000 = $4,000
$23,000 - $17,000 = $6,000
$4,000 + $6,000 = $10,000
Mary made the following gifts in the current year:
Mary’s taxable gifts for the current year total
A. $108,000
B. $100,000
C. $79,000
D. $151,000
B. $100,000
“Taxable gifts” means the total amount of gifts made during the calendar year reduced by the charitable and marital deductions [Sec. 2503(a)]. The first $17,000 of gifts of present interests made to each donee during the year is excluded [Sec. 2503(b)].
Mary transferred $159,000 of property by gift during the year. The only gift not subject to the exclusion is the gift of the trust remainder, since it is a future interest. The exclusion for the gift to Daughter is limited to the $8,000 certificate of deposit.
Which type of income is not subject to self-employment tax?
A. Wages, salaries, and tips received as an employee.
B. Non-employee compensation.
C. Distributive share of partnership income.
D. Net profits from sole proprietorship.
A. Wages, salaries, and tips received as an employee.
In some instances, a self-employed individual may also earn wages while working as a full- or part-time employee. In such a case, the income is not subject to self-employment tax, but is subject to withholding.
Bank Corp.’s voting stock is owned by the following individuals: Farber, 25%; Farber’s mother, 15%; Farber’s father, 40%; and Grosset, an unrelated person, 20%. Farber’s sister sold equipment to Bank at a loss. For the purposes of determining whether the sister’s loss is deductible under the related party rules, what percentage of Bank’s stock, if any, does the sister constructively own?
A. 25%
B. 55%
C. 0%
D. 80%
D. 80%
Tax avoidance is limited on related party sales. For purposes of these provisions, related parties generally include ancestors (parents, grandparents, etc.), descendants (children, grandchildren, etc.), spouses, siblings, trusts and beneficiaries of trusts, and controlled entities (50% ownership). Therefore, Farber’s sister constructively owns 80% (25% Farber + 15% Farber’s mother + 40% Farber’s father).
A taxpayer purchases and is the owner of an insurance contract on his own life and designates his two children as equal beneficiaries. The taxpayer makes all premium payments. How many gifts of property, if any, have been made for gift tax purposes?
A. Three.
B. One.
C. Zero.
D. Two.
C. Zero.
A taxpayer has given a gift when (s)he has given over dominion and control such that (s)he is without legal power to change its disposition. Because the taxpayer is responsible for his life insurance policy, he still has dominion and control and is not considered to have made any gifts of property.
Maria Mordant acquired all of the original stock of The Diamond, Inc., a Sec. 1244 small business, on January 10, Year 1, for $10,000. She contributed another $9,000 to capital before selling all of her stock on June 30, Year 5, for $10,000. How much loss should Maria report on her Year 5 return, and is the loss capital or ordinary?
A. Deduct $4,737 as ordinary loss and $4,263 as capital loss subject to limitations.
B. Deduct her $9,000 loss as an ordinary loss.
C. Deduct $3,000 of her loss on Schedule D as a capital loss and carry over the remainder.
D. None of the answers are correct.
A. Deduct $4,737 as ordinary loss and $4,263 as capital loss subject to limitations.
If an owner of Sec. 1244 stock invests additional capital but is not issued additional shares of stock, the amount of the additional investment is added to the basis of the originally issued stock, but this subsequent increase to the basis of the originally issued stock does not qualify for ordinary loss treatment. Any resulting loss must then be apportioned between the qualifying Sec. 1244 stock and the nonqualifying additional capital interest. Since the additional capital interest of $9,000 is 9/19 of the total basis of $19,000, the $9,000 loss is apportioned as follows: $4,263 of capital loss (9/19 of $9,000) and $4,737 of qualifying ordinary loss.
Fact Pattern:
Two transactions for a sole proprietorship were made during the current year. These were the only sales or exchanges of capital assets or Sec. 1231 assets (there were no unrecaptured Sec. 1231 losses from the previous year).
A machine used in the business was sold for $400,000. It cost $330,000 when purchased 3 years ago, and its adjusted tax basis when sold was $210,000. Depreciation had been recorded on an accelerated basis; straight-line depreciation would have been $99,000.
A $500,000 insurance recovery on a small warehouse destroyed by fire was received. It was used in the business and depreciated using the straight-line method. Its adjusted tax basis at the date of the fire was $524,000. A new warehouse was rebuilt at a cost of $600,000.
What is the basis of the new warehouse?
A. $576,000
B. $600,000
C. $524,000
D. $624,000
B. $600,000
The realized loss was fully recognized, so the basis of the new warehouse is its cost of $600,000.
Ms. Orchard purchased a duplex in Year 1. She lived in one unit as her principal residence and rented out the other unit until she sold the duplex in February Year 15 (the current year). In April Year 15, she bought and lived in a small single home. She did not replace the rental property. Her records showed the following:
What is the amount of gain that Ms. Orchard may exclude in Year 15?
A. $140,000
B. $0
C. $150,000
D. $50,000
D. $50,000
Since there are two units to the duplex, the calculations must be divided in half between the personal residence and the rental property. Accordingly, the realized gain is $50,000 [($125,000 sales price – $10,000 selling expenses) – ($50,000 cost of residence + $15,000 capital improvements)]. The depreciation does not reduce the basis of the residence portion because it is attributed to the rental unit only. The $50,000 realized gain is excluded because Ms. Orchard owned and occupied the residence for at least 2 years.
In determining the amount of taxable gifts, the Internal Revenue Code allows each of the following except the
A. Charitable contribution deduction.
B. Gift tax annual exclusion.
C. Marital deduction.
D. Standard deduction.
D. Standard deduction.
The standard deduction is not allowed in determining the amount of taxable gifts. See below for the formula to calculate gift tax liability.
Prime Corporation’s building was destroyed by a tornado in a federally declared disaster area. The fair market value of the building at the time of the tornado was $400,000, and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows:
Prime does not defer any gain under the involuntary conversion provisions of Sec. 1033. What amount of the insurance proceeds is taxable to Prime?
A. $150,000
B. $0
C. $100,000
D. $50,000
A. $150,000
The lost profits during rebuilding would be taxable whether received from customers or insurance proceeds, as they represent business income (or a replacement thereof). As Prime does not elect involuntary conversion treatment, the conversion of the building to cash is treated as a sale of the property. The amount realized on the disposition (the insurance proceeds) is $400,000, less the $350,000 adjusted basis on the property. Accordingly, the taxable income from insurance proceeds is equal to $150,000 ($100,000 lost profits + $50,000 gain on building).
Last year, Ricardo sold a piece of unimproved real estate to Cliff for $20,000. Ricardo acquired the property 15 years ago at a cost of $10,000. Last year, Ricardo received $4,000 cash and Cliff’s note in the amount of $16,000 for the remainder of the selling price, payable in subsequent years. Ricardo reported the sale using the installment method. This year, before Cliff made any further payments, Ricardo sold the note for $15,000 in cash. What is the amount of gain or (loss) Ricardo should report on this year’s tax return?
A. $7,000
B. $9,000
C. $(1,000)
D. $0
A. $7,000
Section 453B provides that, when an installment obligation is disposed of, gain or loss is recognized to the extent of the difference between the basis of the obligation and the amount realized (or the fair market value of the obligation if disposed of other than by sale or exchange). The adjusted basis of the obligation is equal to the face amount of the obligation reduced by the gross profit that would be realized if the holder collected the face amount [Sec. 453B(b)]. The basis is $8,000 [$16,000 face amount × (100% – 50% gross profit percentage)].
Since Ricardo sold the installment obligation, the excess of the amount realized over Ricardo’s basis in the obligation is recognized as income on the transfer. This amount of income is $7,000 ($15,000 amount realized – $8,000 basis). The gain is treated as resulting from the sale or exchange of the property in respect of which the installment obligation was originally held.
Mr. Cypress owned a small three-unit apartment building in Detroit, Michigan. The rent on each apartment was $1,000 per month. During 2023, he received the following payments:
Assuming Mr. Cypress is a cash-basis taxpayer, what amount should Mr. Cypress include in his 2023 gross income from the apartment building?
A. $38,000
B. $35,500
C. $39,500
D. $35,000
A. $38,000
Both cash- and accrual-basis taxpayers must include amounts in gross income upon actual or constructive receipt if the taxpayer has an unrestricted claim to such amounts. Thus, all the rent payments should be included in the current year’s gross rental income. Security deposits are income only if the lessor becomes entitled to the funds because of the lessee’s violation of the terms of the lease. Therefore, Mr. Cypress does not have an unrestricted claim to the security deposit. The cancellation payment is in lieu of rent, so it must be included in income like rent. Mr. Cypress should recognize $12,000 from Apt. A ($1,000 rent × 12 months) plus $11,000 from Apt. B ($10,000 for rent + $1,000 last month’s rent) plus $15,000 from Apt. C ($12,000 rent + $3,000 cancellation payment), for a total of $38,000.
A married couple purchased their principal residence for $300,000. They spent $40,000 on improvements. After living in it for 10 years, the couple sold the home for $650,000 and paid $36,000 in real estate commissions. What gain should the couple recognize on their joint return?
A. $0
B. $310,000
C. $60,000
D. $274,000
A. $0
The IRC provides an exclusion upon the sale of a principal residence. A taxpayer may exclude up to $250,000 ($500,000 for married taxpayers filing jointly) of realized gain on the sale of a principal residence. Realized gain is calculated as follows:
Since the amount of gain realized is less than the exclusion of $500,000 for married taxpayers filing jointly, the couple does not need to recognize any gain on their joint return.
John made the following transfers during tax year 2023:
All of the transfers are gifts that qualify for the annual exclusion. John files one gift tax return for tax year end December 31, 2023. What is the total annual exclusion amount for gifts listed on John’s 2023 gift tax return?
A. $51,000
B. $58,000
C. $17,000
D. $16,000
A. $51,000
Section 2503(b) authorizes a $17,000 exclusion from gross income for income tax purposes and is available to an unlimited number of donees.
During the current year, Mr. C, a U.S. citizen, made the following gifts:
What is the total of Mr. C’s exclusions and deductions for his current-year gift tax return?
A. $178,000
B. $184,000
C. $187,000
D. $167,000
B. $184,000
The first $17,000 of a gift of a present interest in property made to any person during the calendar year may be excluded [Sec. 2503(b)]. This provision allows Mr. C a total of $68,000 in exclusions (four gifts × $17,000). In addition, Sec. 2522(a)(1) provides that a gift to a city may be deducted as a charitable gift. The gift to the spouse of the taxpayer is eligible for a marital deduction under Sec. 2523. Both of these deductions are available for the balance of the gifts not excluded (Sec. 2524). The total of C’s deductions and exclusions is therefore $184,000 ($68,000 in exclusions + $83,000 deduction for the gift to the city + $33,000 marital deduction for the gift to his wife).
Which of the following represents taxable gifts?
A. Only II is a taxable gift.
B. None of the choices is a taxable gift.
C. Only I is a taxable gift.
D. Both II and III are taxable gifts.
B. None of the choices is a taxable gift.
Section 2503(e), which defines taxable gifts, specifically excludes bona fide transfers made on behalf of any individual as tuition to an educational organization or as payment to someone who provides medical care for such individual. Accordingly, neither payment of a son’s tuition for law school (II) nor payment of $17,000 of medical bills for a friend (III) is a taxable gift.
Item I is not a taxable gift because transfers that represent support are not considered gifts.
During 2023, Barbara gave her daughter the following gifts:
What is the gross amount of gifts given by Barbara in 2023?
A. $85,000
B. $95,000
C. None of the answers are correct.
D. $75,000
A. $85,000
The amount of a gift made in property is the fair market value of the property at the date of the gift. The fair market value is that which would occur in an arm’s-length transaction between a willing buyer and a willing seller in the normal market. Therefore, Barbara must include $85,000 of gifts on her 2023 tax return ($10,000 + $25,000 + $50,000).
During the current year, a corporation retired obsolete equipment purchased ten years ago having an adjusted basis of $30,000 and sold it as scrap for $1,000. The corporation also had $50,000 taxable income from operations. The taxable income of the corporation was
A. $50,000 with a capital loss carryover of $29,000.
B. $21,000.
C. $51,000 with a capital loss carryover of $29,000.
D. $20,000 with a capital loss carryover of $30,000.
B. $21,000.
The corporation realized a loss of $29,000 ($1,000 realized – $30,000 adjusted basis) on the sale of the retired equipment for scrap. This is a Sec. 1231 loss. Since there are no other Sec. 1231 gains or losses to net, it is treated as an ordinary loss. Taxable income is
In the current year, Vinton exchanged unimproved land for an apartment building. The land had a basis of $300,000, and a fair market value (FMV), of $420,000, and was encumbered by a $100,000 mortgage. The apartment building had a FMV of $550,000 and was encumbered by a $230,000 mortgage. Each party assumed the other’s mortgage. What is Vinton’s basis in the apartment building?
A. $320,000
B. $550,000
C. $430,000
D. $300,000
C. $430,000
Qualified property received in a like-kind exchange has an exchanged basis adjusted for boot and gain recognized.
Vinton has a net boot given (liability incurred) of $130,000 [$230,000 assumed – $100,000 discharged]. In this exchange, Vinton realized a gain of $120,000 ($550,000 FMV of property received – $300,000 adjusted basis given up – $130,000 net liability assumed). Recognized gain is the lesser of the realized gain of $120,000 or boot received of 0. Thus, recognized gain is 0. The adjusted basis of the apartment building received is $430,000 ($300,000 adjusted basis of property given + 0 recognized gain + $230,000 boot given – $100,000 boot received). The basis of the property received can also be calculated as the excess of the FMV of the property received ($550,000) over the realized gain unrecognized ($120,000).
Alan Kupper had the following transactions during 2023:
Determine the result of the transactions.
A. $8,000 long-term capital gain.
B. $15,000 long-term capital gain.
C. $6,000 long-term capital gain.
D. $7,500 long-term capital gain.
B. $15,000 long-term capital gain.
The sale of stock in April resulted in a long-term capital gain. The sale of stock in March resulted in a short-term capital gain because the stock was held less than 1 year. The sale of land in 2015 resulted in a long-term capital gain because it had been held more than 1 year. Therefore, Kupper’s installment receipt in 2023 is considered long-term, and $8,000 of it represents gain under the installment method.
Note that a net capital gain is the excess of net long-term capital gains over net short-term capital losses. Kupper’s net short-term capital gain is not included in the net capital gain. However, the net short-term capital gain is included in taxable income (but is not given any special treatment).
