Reg 4 Flashcards
Smith made a gift of property to Thompson. Smith's basis in the property was $1,200. The fair market value at the time of the gift was $1,400. Thompson sold the property for $2,500. What was the amount of Thompson's gain on the disposition? a. $0 b. $2,500 c. $1,300 d. $1,100
Choice "c" is correct. The general rule for the basis on gifted property is that the donee receives the property with a rollover cost basis (equal to the donor's basis). An exception exists where the fair market value of the property at the time of the gift is less than the donor's basis. That is not the case in this question; thus, the calculation of the gain on the disposition of the property is: Amount realized $ 2,500 Basis (1,200) Gain recognized $ 1,300
Leker exchanged a van that was used exclusively for business and had an adjusted tax basis of $20,000 for a new van. The new van had a fair market value of $10,000, and Leker also received $3,000 in cash. What was Leker's tax basis in the acquired van? a. $13,000 b. $7,000 c. $20,000 d. $17,000
Choice “d” is correct. $17,000 is the tax basis in the van.
The basis for like-kind exchanges is computed as follows:
Basis of old property $ 20,000
Less: Boot received (3,000)
New basis $ 17,000
Alternate calculation: FMV of new van $10,000 + deferred loss $7,000 = New basis $17,000.
The general rule is the gain is recognized to the extent boot is received. As the transaction results in a loss to Leker (he received an asset worth $10,000 plus $3,000 cash less a $20,000 tax basis equals $7,000 loss) no gain is recognized and the $3,000 received reduces his basis in the new asset.
Capital assets include:
a.
Seven-year MACRS property used in a corporation’s trade or business.
b.
A corporation’s accounts receivable from the sale of its inventory.
c.
A manufacturing company’s investment in U.S. Treasury bonds.
d.
A corporate real estate developer’s unimproved land that is to be subdivided to build homes, which will be sold to customers.
Choice “c” is correct. Investment assets of a taxpayer that are not inventory are capital assets. The manufacturing company would have capital assets including an investment in U.S. Treasury bonds.
Conner purchased 300 shares of Zinco stock for $30,000, 20 years ago. On May 23 of the current year, Conner sold all the stock to his daughter Alice for $20,000, its then fair market value. Conner realized no other gain or loss during the year. On July 26 of the current year, Alice sold the 300 shares of Zinco for $25,000. What amount of the loss from the sale of Zinco stock can Conner deduct in the current year? a. $10,000 b. $3,000 c. $5,000 d. $0
Choice “d” is correct. Even though Conner has a realized loss of $10,000 on this transaction he cannot deduct the loss since it was incurred in a transaction with his daughter, a related party.
Conner purchased 300 shares of Zinco stock for $30,000, 20 years ago. On May 23 of the current year, Conner sold all the stock to his daughter Alice for $20,000, its then fair market value. Conner realized no other gain or loss during the year. On July 26 of the current year, Alice sold the 300 shares of Zinco for $25,000. What was Alice's recognized gain or loss on her sale? a. $5,000 long-term gain. b. $5,000 long-term loss. c. $0 d. $5,000 short-term loss.
Choice “c” is correct. Alice has a realized gain of $5,000 on the transaction: $25,000 sales price less $20,000 purchase price. However, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her. Thus, Alice can reduce her gain by up to $10,000, but not below zero. Here, the gain is $5,000, so it is reduced to zero. Conner should have sold the stock in the open market so that he could deduct the entire loss. Alice could then have purchased the stock in the open market.
If the executor of a decedent's estate elects the alternate valuation date and none of the property included in the gross estate has been sold or distributed, the estate assets must be valued as of how many months after the decedent's death? a. 3 b. 6 c. 9 d. 12
Choice “b” is correct.
Rule: 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 six months after the decedent’s death or the earlier date of sale or distribution.
Note: The valuation of the assets in an estate impacts the recipient as basis of the inherited assets.
In December, Year 10, Davis, a single taxpayer, purchased a new residence for $200,000. Davis lived in the new residence continuously from Year 10 until selling the new residence in July, Year 17 for $455,000. What amount of gain is recognized from the sale of the residence on Davis' Year 17 tax return? a. $455,000 b. $0 c. $5,000 d. $255,000
Choice "c" is correct. Provided Davis has lived in his home for a total of 2 years out of the 5 years preceding his sale of his residence, as a single taxpayer he may exclude up to $250,000 of gain on its sale. The basis on the residence sold in Year 17 is equal to its cost ($200,000). Selling Price $ 455,000 Less: Basis (200,000) Realized Gain 255,000 Less: Excluded Amount (250,000) Recognized Gain $ 5,000
Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common stock for $15,000 on December 15, Year 1, and an additional 100 shares for $13,000 on December 30, Year 1. On January 3, Year 2, Smith sold the shares purchased on December 15, Year 1, for $13,000. What amount of loss from the sale of Core’s stock is deductible on Smith’s Year 1 and Year 2 income tax returns?
Choice “b” is correct. In Year 1, no sale of stock occurred so there would be no loss. In Year 2, there is a $2,000 loss realized ($15,000 basis less $13,000 received), but it is not deductible because it is a wash sale. A wash sale occurs when a taxpayer sells stock at a loss and invests in substantially identical stock within 30 days before or after the sale. In this case, Smith reinvested in an additional 100 shares four days prior to selling 100 shares of the same stock at a loss. The $2,000 disallowed loss would, however, increase the basis of the new shares by $2,000.
n Year 3, Fay sold 100 shares of Gym Co. stock to her son, Martin, for $11,000. Fay had paid $15,000 for the stock in Year 1. Subsequently in Year 3, Martin sold the stock to an unrelated third party for $16,000. What amount of gain from the sale of the stock to the third party should Martin report on his Year 3 income tax return? a. $5,000 b. $4,000 c. $0 d. $1,000
Choice “d” is correct. Losses between related parties are disallowed. Therefore, Fay’s $4,000 capital loss ($15,000 basis less $11,000 received) is disallowed because she sold the stock to her son, a related party. When her son sells the stock to an unrelated party, however, he can use the $4,000 disallowed loss to reduce any gain he realized from the sale (but not to create or increase a loss). His realized gain is $5,000 ($16,000 received less $11,000 basis), but he can reduce it by $4,000 to $1,000 using his mother’s disallowed loss. Employing the “Pass Key” in the text, Martin sold the stock for higher than Fay purchased it. The donor’s basis (i.e., $15,000) is, therefore, used to determine gain on the sale by Martin.
Hall, a divorced person and custodian of her 12-year-old child, filed her Year 9 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her Year 9 return: In June, Year 9, Hall's mother gifted her 100 shares of a listed stock. The donor's basis for this stock, which she bought in Year 1, was $4,000, and market value on the date of the gift was $3,000. Hall sold this stock in July, Year 9 for $3,500. The donor paid no gift tax. What was Hall's reportable gain or loss in Year 9 on the sale of the 100 shares of stock gifted to her? a. $0 b. $500 loss. c. $1,000 loss. d. $500 gain.
Choice “a” is correct.
Rule: The basis of property received as a gift in the hands of the donee depends on whether the selling price of the property is more or less than the basis for gain or loss.
If the property is sold at a gain, the basis to the donee is the same as it would be in the hands of the donor. If the property is sold at a loss, the basis to the donee is the same as it would be in the hands of the donor or the FV of the property at the date of the gift, whichever is lower. In some cases, such as this fact situation, there is neither gain nor loss on the sale of the gift, because the selling price is less than the basis for gain and more than the basis for loss.
In a "like-kind" exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of: a. Convertible preferred stock. b. Partnership interests. c. Rental real estate located in different states. d. Convertible debentures.
Choice “c” is correct. No taxable gain or loss will be recognized on a like-kind exchange if both assets are tangible property. Rental real estate located in different states qualifies for a like-kind exchange.
Exception: If the same class of stock of the same corporation is exchanged, it will qualify for “substituted basis.”
In Year 9, Joan Reed exchanged commercial real estate that she owned for other commercial real estate plus cash of $50,000. The following additional information pertains to this transaction: Property given up by Reed Fair value $ 500,000 Adjusted basis 300,000 Property received by Reed Fair value 450,000 What amount of gain should be recognized in Reed's Year 9 income tax return? a. $0 b. $50,000 c. $200,000 d. $100,000
Choice "b" is correct. $50,000 is Reed's recognized gain in Year 9.
Rule: Gain is only recognized on an exchange of "like-kind" property for the lesser of the amount of "gain realized" or the amount of "boot" received in the exchange.
Fair value of property received
$ 450,000
Amount of cash ("boot") received
50,000
Total amount realized
$ 500,000
Basis of property given up
(300,000)
Gain realized
$ 200,000
Gain recognized*
$ 50,000
* Gain recognized is the lesser of the amount of "gain realized" or amount of the "boot" received.Platt owns land that is operated as a parking lot. A shed was erected on the lot for the related transactions with customers. With regard to capital assets and Section 1231 assets, how should these assets be classified?
Choice “b” is correct. Because the parking lot and the shed constitute real estate and depreciable assets used in a trade or business, respectively, they are not capital assets per the definition below.
Note: The parking lot and shed will fall under Section 1231 (provided they are used in the business over 12 months) and possibly Section 1250 and 1245, respectively, upon sale of the assets.
Capital assets are defined as all property held by the taxpayer, except:
Property normally included in inventory or held for sale to customers in the ordinary course of business.
Depreciable property and real estate used in business.
Accounts and notes receivable arising from sales or services in the taxpayer’s business.
Copyrights, literary, musical, or artistic compositions held by the original artist. (Exception: Sales of musical compositions held by the original artist receive capital gain treatment.)
Treasury stock.
Lee qualified as head of a household for Year 9 tax purposes. Lee's Year 9 taxable income was $100,000, exclusive of capital gains and losses. Lee had a net long-term loss of $8,000 in Year 9. What amount of this capital loss can Lee offset against Year 9 ordinary income? a. $0 b. $4,000 c. $8,000 d. $3,000
Choice “d” is correct. The capital loss deduction is limited to $3,000 per year with the excess carried forward indefinitely. In this case, Lee can deduct $3,000 against his income and carry forward the remaining $5,000.
Greller owns 100 shares of Arden Corp., a publicly traded company, which Greller purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Arden declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Arden stock was $62 per share. On February 1, Year 3, Greller had his broker specifically sell the 100 shares of Arden stock received in the split when the FMV of the stock was $65 per share. What is the basis of the 100 shares of Arden sold? a. $6,500 b. $6,000 c. $6,200 d. $5,000
Choice “d” is correct. 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. Therefore, Greller’s total basis remains the same, $10,000, but is now split between 200 shares (a 2-for-1 split and he originally owned 100 shares). Therefore, his basis per share goes from $100/share ($10,000/100) to $50/share ($10,000/200). Consequently, his basis in 100 share is 100 x $50 = $5,000.
Farr made a gift of stock to her child, Pat. At the date of gift, Farr's stock basis was $10,000 and the stock's fair market value was $15,000. No gift taxes were paid. What is Pat's basis in the stock for computing gain? a. $0 b. $10,000 c. $15,000 d. $5,000
Choice “b” is correct. Property acquired as a gift generally retains the rollover cost basis that it had in the hands of the donor at the time of the gift. Basis is increased by any gift tax paid that is attributable to the net appreciation in the value of the gift. Since there were no gift taxes paid, Pat’s basis for computing a gain is the rollover cost (basis), $10,000.
Allen owns 100 shares of Prime Corp., a publicly traded company, which Allen purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Prime declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Prime stock was $62 per share. On February 1, Year 3, Allen had his broker specifically sell the 100 shares of Prime stock received in the split when the FMV of the stock was $65 per share. What amount should Allen recognize as long-term capital gain income on his Form 1040, U.S. Individual Income Tax Return, for Year 3? a. $1,500 b. $2,000 c. $300 d. $750
Choice “a” is correct. The receipt of a nontaxable stock dividend will require the shareholder to spread the basis of his original shares 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. Therefore, Allen’s total basis remains the same, $10,000, but is now split between 200 shares (a 2-for-1 split and he originally owned 100 shares). Therefore, his basis per share goes from $100/share ($10,000/100) to $50/share ($10,000/200). Consequently, his basis in the 100 shares sold is 100 x $50 = $5,000. Calculate his gain as follows:
Amount realized ($65 x 100) $ 6,500
Adjusted basis (5,000 - calculated above) (5,000)
Realized & recognized gain $ 1,500
Wallace purchased 500 shares of Kingpin, Inc. 15 years ago for $25,000. Wallace has worked as an owner/employee and owned 40% of the company throughout this time. This year, Kingpin, which is not an S corporation, redeemed 100% of Wallace's stock for $200,000. What is the treatment and amount of income or gain that Wallace should report? a. $200,000 long-term capital gain. b. $0 c. $175,000 ordinary income. d. $175,000 long-term capital gain.
Choice “d” is correct. An investment in a capital asset (e.g., stock) results in the income being capital (either a capital loss or a capital gain). Ownership percentage is not a factor in the calculation, and, in this question, nor is the fact that the corporation is not an S corporation. The calculation is simple: Wallace invested $25,000 in the stock and received $200,000 for 100% of his investment 15 years later. The capital gain is $175,000 ($200,000 - $25,000), and it is considered long-term because the stock was held for greater than one year.
Which of the following sales should be reported as a capital gain?
a.
Sale of equipment.
b.
Real property subdivided and sold by a dealer.
c.
Government bonds sold by an individual investor.
d.
Sale of inventory.
Choice “c” is correct. Government bonds held by an individual investor are considered capital assets in the hands of the investor. When these types of security investments are sold, the resulting gain or loss is reported as capital.
Starr, a self-employed individual, purchased a piece of equipment for use in Starr's business. The costs associated with the acquisition of the equipment were: Purchase price $ 55,000 Delivery charges 725 Installation fees 300 Sales tax 3,400 What is the depreciable basis of the equipment? a. $59,125 b. $55,000 c. $59,425 d. $58,400
Choice "c" is correct. The rules for depreciable basis in tax are generally the same as the GAAP rules for capitalizing an asset. The depreciable basis is the cost associated with the purchase of the asset and with getting the asset ready for its intended use. Further improvements are also capitalized, and the basis is reduced for any accumulated depreciation. In this case, the cost of obtaining the equipment and getting the equipment ready for its intended use includes all the items shown above, as follows: Purchase price $ 55,000 Delivery charges 725 Installation fees 300 Sales tax 3,400 Total depreciable basis $ 59,425
Which of the following statements is the best definition of real property?
a.
Real property is land and everything permanently attached to it.
b.
Real property is land and intangible property in realized form.
c.
Real property is only land.
d.
Real property is all tangible property including land.
Choice “a” is correct. Real property includes land and all items permanently affixed to the land (e.g., buildings, paving, etc.)
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. $2,000 b. $4,000 c. $6,000 d. $0
Choice “a” is correct. Losses are disallowed on most related party sales transactions even if they were made at an arm’s length (FMV) price. The basis (and related gain or loss) of the (second) buying relative depends on whether the second relative’s resale price is higher, lower, or between the first relative’s basis and the lower selling price to the second relative. In this case, the $4,000 capital loss on the sale by Gibson’s adult child to Gibson [$12,000 SP - $16,000 Basis] is disallowed. Gibson’s basis is determined by his selling price to a third party. In this case, the selling price is $18,000, which is HIGHER than the original basis of Gibson’s adult child. Gibson’s basis in the stock is, therefore, his adult child’s basis of $16,000. Gibson’s recognized basis is calculated as follows:
Selling price $ 18,000
Basis (16,000)
Gain $ 2,000
A heavy equipment dealer would like to trade some business assets in a nontaxable exchange. Which of the following exchanges would qualify as nontaxable?
a.
Investment securities for antiques to be held as investments.
b.
The company jet for a large truck to be used in the corporation.
c.
A road grader held in inventory for another road grader.
d.
A corporate office building for a vacant lot.
Rule: Nonrecognition treatment is accorded to a “like-kind” exchange of property used in the trade or business or held for investment (with the exception of inventory, stock, securities, partnership interests, and real property in different countries). “Like-kind” means the same type of investment (e.g., realty for realty or personalty for personalty, assuming the personal property falls within the same “asset class” for tax depreciation purposes).
Choice “d” is correct. The exchange of a corporate office building for a vacant lot qualifies for like-kind nonrecognition treatment. It is the exchange of realty for realty of property used in the trade or business or held for investment.
In the current year, Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered by a $70,000 mortgage. Each party assumed the other's mortgage. What is the amount of Tatum's recognized gain? a. $100,000 b. $0 c. $50,000 d. $150,000
Rule: Per IRC Section 1031, non-recognition treatment is accorded to a like-kind exchange of property used in a trade or business. “Like-kind” exchanges include exchanges of business property for business property, where like-kind is interpreted very broadly and refers to the nature or character of the property and not to its grade or quality.
Choice “c” is correct. The exchange in this question qualifies for Section 1031 treatment since the exchange appears to be business property for business property. However, the boot involved in the exchange (the mortgages) must be taken into account to determine the recognition or non-recognition of the gain realized on the exchange. In this transaction, the total consideration received by Tatum is the FMV of the property received of $350,000 plus the mortgage of $120,000 that was assumed by the other party, for a total of $470,000. The adjusted basis of the property given up was $250,000, and there is also $70,000 of mortgage given up by the other party (and assumed by Tatum), for a total of $320,000. The realized gain is thus $470,000 - $320,000 = $150,000. The recognized gain will be the lesser of realized gain or net boot received. The $120,000 of mortgage given up (and assumed by the other party) is treated as boot received, and the $70,000 of mortgage assumed is treated as boot given up. The net is $50,000 of boot received. The $50,000 of boot received is the recognized gain. The treatment is somewhat the same as if cash/boot had been received in the transaction.
Terry, a taxpayer, purchased stock for $12,000. Later, Terry sold the stock to a relative for $8,000. What amount is the relative's gain or loss? a. $2,000 loss. b. $4,000 gain. c. $0. d. $2,000 gain.
Rule: IRC Section 267 controls the nonrecognition of realized losses on sales or exchanges of property to related parties. The most common related parties for individual taxpayers are members of a family (although there are certainly many other examples).
Choice “c” is correct. The loss realized on the transaction by Terry is $4,000 ($8,000 - $12,000). This transaction appears to qualify under Section 267. “Relative” is not defined in the question. Section 267 limits “family” to brothers and sisters, spouse, ancestor, and lineal descendants. However, the definition of relative is really irrelevant if the question is read closely. The question wants to know the relative’s gain or loss, not Terry’s gain or loss. Since all the relative did to this point was to buy the stock, the relative has no gain or loss.
Aviary Corp. sold a building for $600,000. Aviary received a down payment of $120,000 as well as annual principal payments of $120,000 for each of the subsequent four years. Aviary purchased the building for $500,000 and claimed depreciation of $80,000. What amount of gain should Aviary report in the year of sale using the installment method? a. $36,000 b. $120,000 c. $54,000 d. $180,000
Rule: Under the installment method, revenue is reported over the period in which the cash payments are received. The amount of cash received is multiplied by the gross profit percentage on the sale to determine the revenue (which retains its character as capital gain or ordinary income, depending on the transaction).
Choice “a” is correct. The gross profit percentage is calculated as follows:
Sales Price
$600,000
Original Cost
$500,000
Accumulated Depreciation
(80,000)
Adjusted Basis
(420,000)
Realized Gain on Sale
$180,000
Gross Profit Percentage = $180,000 ÷ $600,000 = 30%
Gain Recognized in Year of Sale:$120,000 [cash received] × 30%= $36,000
Choice “d” is incorrect. The answer option recognizes as income the total realized gain ($180,000) on the sale. As indicated in the rule above, under the installment method, revenue is reported over the period in which the cash payments are received. The amount of cash received is multiplied by the gross profit percentage on the sale to determine the revenue.
Wynn, a single individual age 60, sold Wynn's personal residence for $450,000. Wynn had owned Wynn's residence, which had a basis of $250,000, for six years. Within eight months of the sale, Wynn purchased a new residence for $400,000. What is Wynn's recognized gain from the sale of Wynn's personal residence? a. $0 b. $200,000 c. $75,000 d. $50,000
Rule: The sale of a taxpayer’s primary residence is subject to an exclusion from gross income for gain. A maximum of $250,000 gain exclusion is provided for all taxpayers other than married couples filing jointly. Married couples filing jointly have a maximum gain exclusion of $500,000. To qualify for the full exclusion, the taxpayers must have owned and used the property as a primary residence for two years or more during the five-year period ending on the date of the sale or exchange. There is no age requirement to receive the exclusion, and no roll-over to another house is required [these applied to an older tax law].
Choice “a” is correct. Wynn’s realized gain on the sale of the home is $200,000 [$450,000 - $250,000]. Wynn has owned and used the residence as his primary residence for the last six years. [Note that the purchase of the new home is of no consequence to the recognizable gain on the sale of the old home.] As the realized gain is less than the maximum excludable gain of $250,000 and Wynn has owned and used the property for more than two out of the last five years, Wynn has zero recognized gain on the sale of his residence.
Sands purchased 100 shares of Eastern Corp. stock for $18,000 on April 1 of the prior year. On February 1 of the current year, Sands sold 50 shares of Eastern for $7,000. Fifteen days later, Sands purchased 25 shares of Eastern for $3,750. What is the amount of Sand's recognized gain or loss? a. $0 b. $500 c. $2,000 d. $1,000
Rule: A loss on a wash sale is disallowed for tax purposes. A wash sale exists when a security is sold for a loss and is repurchased within 30 days before or after the sale. Choice "d" is correct. A wash sale exists in this case, but only a partial wash sale. Unfortunately, the dollar amounts for the recognized loss and wash sale (disallowed) loss are the same in this question (so the illustration can become somewhat confusing). Let's use 20X1 and 20X2 for illustration. On 4/1/X1, Sands purchased 100s of Eastern stock for $18,000 ($180/share). On 2/1/X2, Sands sold 50s of the stock for $7,000 ($140/share), creating a realized loss of $2,000 (50s * ($140 - $180)). Now, if Sands had stopped there, it would have also had a recognized loss of $2,000. However, on 2/16/X2 Sands repurchased half of the shares it had sold at a loss (25s/50s), and this was within the 30-day period indicated in the rule (above). Thus, half of the realized loss is not recognizable in year 2, and it becomes part of the basis of the 25s of Eastern stock owned by Sands [note that the 50s not initially sold by Sands has a basis of $180/share, or $9,000]. The calculation follows: 2/1/X2 Sell 50s $7,000 Basis 50s (9,000) [$180 × 50 = $9,000, from the initial purchase] Realized Loss $(2,000) [$40/share loss] 2/16/X2 Purchase 25s $3,750 [Repurchased within 30 days of loss sale] Add: Wash Sale Loss 1,000 [($140 - $180) × 25s = $1,000] Resulting Basis of 25s $4,750 Result: Sands owns 75s of Eastern stock. The first 50 shares (those that were not sold on 2/1/X2) has a basis of $9,000 in total ($180/share), and the 25 shares repurchased on 2/16/X2 has a basis of $4,750 ($190/share), the purchase price of the 25s plus the disallowed loss as a result of the wash sale rule.
Winkler, a CPA, provided accounting services to a client, Thompson. On December 15 of the same year, Thompson gave Winkler 100 shares of Foster Corp. as compensation for services. The adjusted basis of the stock was $4,000, and its fair market value at the time of transfer was $5,000. Two months later, Winkler sold the stock on February 15 for $7,500. What is the amount that Winkler should recognize as gain on the sale of stock? a. $5,000 b. $1,000 c. $2,500 d. $0
Choice “c” is correct. The adjusted basis of the stock to Winkler was the $5,000 fair market value at the time of transfer (that same amount will be considered compensation in the form of property). The proceeds from the sale were $7,500. The gain on the sale of the stock was thus $2,500. The $4,000 adjusted basis of the stock to Thompson is irrelevant. Note that there is no “gift” here even though the word “gave” was used in the question.
On February 1, Year 4, Hall learned that he was bequeathed 500 shares of common stock under his father's will. Hall's father had paid $2,500 for the stock in Year 1. Fair market value of the stock on February 1, Year 4, the date of his father's death, was $4,000 and had increased to $5,500 six months later. The executor of the estate elected the alternate valuation date for estate tax purposes. Hall sold the stock for $4,500 on June 1, Year 4, the date that the executor distributed the stock to him. How much income should Hall include in his Year 4 individual income tax return for the inheritance of the 500 shares of stock, which he received from his father's estate? [Assume that the estate tax rules in effect for 2011 and forward apply]. a. $2,500 b. $0 c. $4,000 d. $5,500
Choice “b” is correct. There is no income tax on the value of inherited property. The gain on the sale is the difference between the sales price of $4,500 and Hall’s basis. Hall’s basis is the alternate valuation elected by the executor. This is the value six months after date of death or date distributed if before six months. The property was distributed four months after death and the value that day ($4,500) is used for the basis. $4,500 - $4,500 = 0.
In the current year, Essex sold land with a basis of $80,000 to Yarrow for $100,000. Yarrow paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next five years, beginning in the second year. Under the installment method, what gain should Essex include in gross income for the year of sale? a. $25,000 b. $5,000 c. $20,000 d. $15,000
Choice “b” is correct. Under the installment method, revenue is reported (recognized) over the period in which the cash payments are received. Included gross income is determined in 3 steps:
Step 1: Gross Profit:
Sale on Installment $ 100,000
Cost 80,000
Total Gross Profit $ 20,000
Step 2: Gross Profit Percentage:
Gross Profit/Sale on Installment ($20,000/$100,000) = 20%
Step 3: Taxable Gross Profit:
Collections ($25,000) x Gross Profit Percentage (20%) = $5,000
Hogan exchanged a business-use machine having an original cost of $100,000 and accumulated depreciation of $30,000 for business-use equipment owned by Baker having a fair market value of $80,000 plus $1,000 cash. Baker assumed a $2,000 outstanding debt on the machine. What taxable gain should Hogan recognize? a. $0 b. $11,000 c. $3,000 d. $10,000
Choice “c” is correct. In a like-kind exchange, if property other than property qualifying for such exchange is received, (e.g., cash known as “boot”), the transaction, while not qualified for complete nonrecognition, produces recognized gain. The recognized gain is the lower of realized gain or the boot. Cancellation of debt is classified as “boot,” so the total boot is $3,000 ($1,000 cash + $2,000 debt cancellation).
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. $274,000 b. $310,000 c. $60,000 d. $0
Choice "d" is correct. The sale of the taxpayer's personal (primary or principal) residence is subject to an exclusion from gross income for gain of $500,000 married filing joint or $250,000 single. To qualify, the taxpayer must have owned and used the property as a principal residence for two years or more during the five year period ending on the date of the sale or exchange. Taxpayer's Basis: $ 300,000 Purchase price 40,000 Improvements 36,000 Real estate commissions 376,000 Ending basis Sales Price: 650,000 Gain on sale: $ 274,000 Under allowed $500,000 exclusion for married couple
Chris and Jennifer purchased their home in California on January 15, Year 1, for $160,000. During their ownership they made no capital improvements. On August 1, Year 4, the couple moved to Virginia from California and rented out that home. On June 30, Year 6; the couple contracted to sell the California rental home for $437,500. For the calendar Year 6, the couple will file a joint tax return. Disregarding any depreciation recapture rules, how should they treat the sale of the home for tax purposes?
a.
Realized gain of $437,500; not taxable due to the home exclusion.
b.
Realized and recognized gain of $277,500, taxable on Schedule D.
c.
Realized and recognized gain of $277,500; taxable on Schedule E.
d.
Realized gain of $277,500; not taxable due to the home exclusion.
Choice “d” is correct. Disregarding any depreciation recapture, Chris and Jennifer have a realized gain of $277,500. For tax purposes, this gain will not be recognized on their Year 6 tax return as it is excludable under the Homeowner’s Exclusion. To qualify for the full exclusion of $500,000 for a joint return, the taxpayers must own and use the home as the principal residence for two years out of the five- year period ending on the date of the sale or exchange (and may not have any unqualified use after 2008).
A taxpayer lived in an apartment building and had a two-year lease that began 16 months ago. The taxpayer's landlord wanted to sell the building and offered the taxpayer $10,000 to vacate the apartment immediately. The taxpayer's lease on the apartment was a capital asset but had no tax basis. If the taxpayer accepted the landlord's offer, the gain or loss would be which of the following? a. A short-term capital gain. b. An ordinary gain. c. A short-term capital loss. d. A long-term capital gain.
Choice “d” is correct. A capital asset which is sold or exchanged more than one year after the date of acquisition will generate either a long-term capital gain (if the capital asset is sold at a price greater than acquisition cost) or a long-term capital loss (if the capital asset is sold at a price less than the acquisition cost). In this question, the lease-hold interest, which is a capital asset, was acquired more than a year ago, and the basis (acquisition cost) in that capital asset is -0-. So, the receipt of $10,000 to vacate the apartment will generate a $10,000 long-term capital gain.
Upon her grandfather's death, Jordan inherited 10 shares of Universal Corp. stock that had a fair market value of $5,000. Her grandfather acquired the shares in 1995 for $2,500. Four months after her grandfather's death, Jordan sold all her shares of Universal for $7,500. What was Jordan's recognized gain in the year of sale? a. $5,000 short-term capital gain. b. $2,500 short-term capital gain. c. $2,500 long-term capital gain. d. $5,000 long-term capital gain.
Choice “c” is correct. Unless the executor elects the “alternative valuation date” method (not applicable to this question), 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. The decedent’s basis is irrelevant. 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.
Calculation of gain realized and recognized:
Amount realized
$ 7,500
Less: Basis (date-of-death fair market value)
(5,000)
Long-term capital gain realized and recognized
$ 2,500
For an individual business owner, which of the following would typically be classified as a capital asset for federal income tax purposes? a. Inventory. b. Marketable securities. c. Machinery and equipment used in a business. d. Accounts receivable.
Choice “b” is correct. Capital assets include all marketable securities unless the taxpayer is a dealer.
Simmons gives her child a gift of publicly-traded stock with a basis of $40,000 and a fair market value of $30,000. No gift tax is paid. The child subsequently sells the stock for $36,000. What is the child’s recognized gain or loss, if any? a. $36,000 gain. b. $4,000 loss. c. No gain or loss. d. $6,000 gain.
Choice “c” is correct. This situation falls into the exception of the gift tax basis rule because the FMV at date of gift is lower than the donor’s original basis. The donee then sold the stock at a price less than the donor’s rollover cost basis but higher than the FMV on date of gift. Therefore, there is no gain or loss on the sale.
An individual entered into several exchanges during the current tax year. Which of the following exchanges is classified as like-kind?
a.
Common stock for common stock.
b.
Apartment building for unimproved land.
c.
Manufacturing equipment for factory building.
d.
Partnership interest for partnership interest.
Choice “b” is correct. Real property exchanged for other real property will be classified as a like-kind exchange (unless the property is in different countries).
Baker, an unmarried individual, sold a personal residence, which has an adjusted basis of $70,000, for $165,000. Baker owned and lived in the residence for seven years. Selling expenses were $10,000. Four weeks prior to the sale, Baker paid a handyman $1,000 to paint and fix up the residence. What is the amount of Baker's recognized gain? a. $84,000 b. $0 c. $95,000 d. $85,000
Choice “b” is correct. This is a principal residence that the taxpayer has owned and lived in for the last seven years. This exceeds the requirement of at least two of the last five years. Baker may therefore exclude up to $250,000 of gain. The realized gain is $84,000 ($165,000 selling price – $70,000 adjusted basis – $10,000 selling expenses – $1,000 fix-up expenses incurred within 90 days of the sale). All of the realized gain is excluded, and none of it is recognized.
An individual reports the following capital transactions in the current year: Short-term capital gain $ 1,000 Short-term capital loss $ (11,000) Long-term capital gain $ 10,000 Long-term capital loss $ (6,000) What amount is deducted in arriving at adjusted gross income? a. $0 b. $10,000 c. $6,000 d. $3,000
Choice “d” is correct. First, the long-term capital gains and losses are netted to arrive at a net long-term capital gain of $4,000. Next, the short-term capital gains and losses are netted to arrive at a net short-term capital loss of $10,000. The next step is to net the net long-term capital gain of $4,000 with the net short-term capital loss of $10,000. This results in a net capital loss of $6,000. Only $3,000 of that loss is currently deductible against ordinary income. The remaining loss of $3,000 is carried forward indefinitely.
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 $2,000 recognized loss and child has $0 recognized gain.
b.
Parent has $0 recognized loss and child has $1,000 recognized gain.
c.
Parent has $0 recognized loss and child has $0 recognized gain.
d.
Parent has a $2,000 recognized loss and child has $1,000 recognized gain.
Choice “c” is correct. The parent has a realized loss of $2,000 ($6,000 sale less $8,000 cost). However, none of this loss is recognized, because it is disallowed under the related party transaction rules. The child has a realized gain of $1,000 ($7,000 sale less $6,000 cost). This gain can be reduced (but not below zero) by the disallowed loss of the parent. Therefore, the recognized gain to the child is zero.
A sole proprietor of a farm implement store sold a truck for $15,000 that had been used to make service calls. The truck cost $30,000 three years ago, and $21,360 depreciation was taken. What is the appropriate classification of the $6,360 gain for tax purposes? a. Ordinary gain. b. Long-term capital gain. c. Short-term capital gain. d. Section 1231 (Property Used in the Trade or Business and Involuntary Conversions) gain.
Choice “a” is correct. The truck is a depreciable asset used in a trade or business. Therefore, it is a Section 1231 asset. It is also personal property, so the recapture rules of Section 1245 will apply to any gains. The truck was sold at a gain. However, that gain is less than the accumulated depreciation. Under the rules of Section 1245, the gain is all recaptured as an ordinary gain.
Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Code Sec. 1245? a. $100,000 b. $60,000 c. $0 d. $40,000
Choice “b” is correct. Under Sec. 1245, ordinary income is recognized on the gain to the extent of the accumulated depreciation. Any gain in excess of the original cost is capital gain.
Lobster, Inc. incurs the following losses on disposition of business assets during the year:
Loss on the abandonment of office equipment
$25,000
Loss on the sale of a building (straight-line
depreciation taken in prior years of $200,000)
250,000
Loss on the sale of delivery trucks
15,000
What is the amount and character of the losses to be reported on Lobster’s tax return?
a.
$40,000 Section 1231 loss, $50,000 long-term capital loss.
b.
$40,000 Section 1231 loss only.
c.
$40,000 Section 1231 loss, $250,000 long-term capital loss.
d.
$290,000 Section 1231 loss.
Choice “d” is correct. Section 1231 assets are comprised principally of depreciable personal and real property used in the taxpayer’s trade or business and held for over twelve months. Trade or business property and capital assets (held over twelve months) that have been involuntarily converted are also included. All of the assets listed in this problem are Section 1231 assets. Net 1231 losses (Sec. 1231 losses less Sec. 1231 gains) are treated as ordinary losses.
Which of the following conditions must be satisfied for a taxpayer to expense, in the year of purchase, under Internal Revenue Code Section 179, the cost of new or used tangible depreciable personal property?
I.
The property must be purchased for use in the taxpayer’s active trade or business.
II.
The property must be purchased from an unrelated party.
Choice “d” is correct. To qualify for IRC Section 179, the property must be tangible personal property acquired by purchase from an unrelated party for use in the active conduct of a trade or business.
Statements I and II are both correct statements concerning the criteria for property to qualify under IRC Section 179.
A taxpayer purchased five acres of land for $20,000 and placed in service other tangible business assets that cost $100,000. Disregarding business income limitations and assuming that the annual Section 179 (Election to Expense Certain Depreciable Business Assets) limit is $108,000, what maximum amount of cost recovery can the taxpayer claim this year? a. $108,000 b. $20,000 c. $100,000 d. $120,000
Choice “c” is correct. Under the election to expense certain depreciable business assets (sec. 179), the taxpayer may expense the cost of the depreciable asset up to the limitation, in this example $108,000. Therefore, only the cost of the depreciable tangible business assets can be expensed ($100,000).
Bent Corp., a calendar-year C corporation, purchased and placed into service residential real property during February, Year 8. No other property was placed into service during Year 8. What convention must Bent use to determine the depreciation deduction for the alternative minimum tax? a. Mid-month. b. Half-year. c. Mid-quarter. d. Full-year.
Choice “a” is correct. Real property (buildings) is subject to the mid-month convention under MACRS. Only personal property (machinery & equipment) is subject to the half-year and/or mid-quarter conventions.
Data Corp., a calendar year corporation, purchased and placed into service office equipment during November Year 1. No other equipment was placed into service during Year 1. Under the general MACRS depreciation system, what convention must Data use? a. Full-year. b. Mid-quarter. c. Mid-month. d. Half-year.
Choice “b” is correct. When a taxpayer places 40% or more of its property (other than certain qualifying real property) into service in the last quarter of the taxable year, the corporation must use the mid-quarter convention for MACRS depreciation purposes. With this method the acquisitions are segregated by quarter and treated as if placed in service in the middle of each respective quarter.
On August 1, Year 1, Graham purchased and placed into service an office building costing $264,000 including $30,000 for the land. What was Graham's MACRS deduction for the office building in Year 1? a. $6,000 b. $9,600 c. $3,600 d. $2,250
Choice “d” is correct. Only the building is depreciable, so the depreciable portion is $264,000 less $30,000 land, for a net of $234,000. The MACRS rules provide a 39-year life, straight-line depreciation, and a “mid-month” acquisition convention that treats the property as acquired in the middle of the month, regardless of the actual date of acquisition. Therefore, the August 1, Year 1, service date provides a half-month’s depreciation for August, plus a full month for September through December, for a total of 4.5 months for Year 1. ($234,000/39 years) × (4.5/12) = $2,250.
How is the depreciation deduction of nonresidential real property determined for regular tax purposes using MACRS?
a.
Straight-line method over 39 years.
b.
Straight-line method over 40 years.
c.
150% declining-balance method with a switch to the straight-line method over 39 years.
d.
150% declining-balance method with a switch to the straight-line method over 27.5 years.
Choice “a” is correct. Nonresidential realty is depreciated over 39 years straight-line if placed in service after May 1993.
In Year 6, an IRS agent completed an examination of a corporation’s Year 5 tax return and proposed an adjustment that will result in an increase in taxable income for each of Years 1 through 5. All returns were filed on the original due date. The proposed adjustment relates to the disallowance of corporate jet usage for personal reasons. The agent does not find the error to be fraudulent or substantial in nature.
Which of the following statements regarding this adjustment is correct?
a.
The adjustment is improper because the statute of limitations has expired for several years of the adjustment.
b.
The adjustment is proper because it relates to a change in accounting method, which can be made retroactively irrespective of the statute of limitations.
c.
The adjustment is proper because there is no statute of limitations for improperly claiming personal expenses as business expenses.
d.
The adjustment is improper because an agent may only propose adjustments to the year under examination.
Choice “a” is correct. Unless there is a substantial 25% misstatement of income or fraud, the statue of limitations is generally three years from the later of the due date or filing date of a return. This adjustment is improper because there is no evidence of fraud or substantial misstatement and some of the years are old enough that the three year statute has expired.
The sale of which of the following types of business property should be reported as Section 1231 (Property Used in the Trade or Business and Involuntary Conversions) property? a. Land held for 18 months. b. Inventory held for resale. c. Machinery held for six months. d. Cattle held for 6 months.
Choice “a” is correct. 1231 Assets are depreciable personal property and real property used in a business and held for over 12 months. Land held for 18 months meets this definition.
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. $13,000 b. $20,000 c. $30,000 d. $17,000
Choice “b” is correct. Under Section 1245, the amount of depreciation in excess of straight-line depreciation is irrelevant (the “excess depreciation” rule is a Section 1250 rule and applies to real property). In this question, $30,000 of depreciation was deducted and, at first glance, the answer would appear to be $30,000. However, Section 1245 actually only requires that the lesser of the depreciation taken ($30,000) or the gain recognized ($200,000 - $180,000 = $20,000) be recaptured.
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. $20,700 b. $7,000 c. $0 d. $27,700
Choice “b” is correct. When property is sold, the realized gain is the difference between the proceeds and the adjusted basis, in this question, the difference between the $37,000 and $9,300 ($30,000 - $20,700), or $27,700. Under Section 1245 (office furniture qualifies as Section 1245 property because it is not real property), the total depreciation deducted will be recaptured as ordinary income, and the remainder (any amount in excess of the original cost) will be Section 1231 (taxed as a long-term capital) gain. In this question, the $20,700 of depreciation deductions is ordinary income and $7,000 ($37,000 - $30,000) is Section 1231 (taxed as a long-term capital) gain.
[Note: Section 1245 actually requires that the lesser of the depreciation taken ($20,700) or the gain recognized ($37,000 - an assumed $9,300 = $20,700) be recaptured. Normally, the two steps of the formula produce the same result.
Dove Corp. began operating a hardware store in the current year after constructing a building at a total cost of $100,000 on land previously acquired for $50,000. In the current year, the land had a fair market value of $60,000. Dove paid real estate taxes of $5,000 in the current year. What is the total depreciable basis of Dove's business property? a. $155,000 b. $150,000 c. $160,000 d. $100,000
Choice “d” is correct. The only amount that may be depreciated is the $100,000 that Dove spent to construct the building. The $50,000 cost of the land is not depreciable as land is not a depreciable asset. The fair market value of the land ($60,000) is irrelevant for depreciation purposes. The real estate taxes ($5,000) are a deductible expense to the business that would not be capitalized.
Rock Crab, Inc. purchases the following assets during the year: Computer $ 3,000 Computer desk 1,000 Office furniture 4,000 Delivery van 25,000 What should be reported as the cost basis for MACRS five-year property? a. $28,000 b. $3,000 c. $33,000 d. $25,000
Choice “a” is correct. MACRS 5-year property includes automobiles, light trucks, computers, typewriters, copiers, duplicating equipment, and other such items. The cost basis of the MACRS 5-year property is $28,000, calculated as follows:
Computer $ 3,000
Delivery van 25,000
MACRS 5-year $ 28,000
Thompson's basis in Starlight Partnership was $60,000 at the beginning of the year. Thompson materially participates in the partnership's business. Thompson received $20,000 in cash distributions during the year. Thompson's share of Starlight's current operations was a $65,000 ordinary loss and a $15,000 net long-term capital gain. What is the amount of Thompson's deductible loss for the period? a. $55,000 b. $40,000 c. $65,000 d. $15,000
Choice “a” is correct. A partner’s deductible loss is limited to his basis plus any amounts that he is personally liable for (“at risk” provision).
Thompson’s basis would be calculated as follows:
Beginning basis $ 60,000
Plus: Net LT capital gain 15,000
Less: Cash distribution (20,000)
Basis for determining allowable loss deduction $ 55,000
Thompson would be allowed to take a loss deduction for $55,000 of the $65,000 ordinary loss passed through to him from the partnership. The remaining $10,000 would be carried forward until additional basis became available.
Stone and Frazier decided to terminate the Woodwest Partnership as of December 31. On that date, Woodwest's balance sheet was as follows: Cash $ 2,000 Equipment (adjusted basis) 2,000 Capital - Stone 3,000 Capital - Frazier 1,000 The fair market value of the equipment was $3,000. Frazier's outside basis in the partnership was $1,200. Upon liquidation, Frazier received $1,500 in cash. What gain should Frazier recognize? a. $0 b. $500 c. $250 d. $300
Choice “d” is correct. In a complete liquidation of a partnership, the partner’s basis in property received is the same as the adjusted basis of his partnership interest reduced for any monies actually received and is generally a nontaxable event. However, if a partner receives only money that exceeds his basis in the partnership, gain or loss is recognized. In this instance, Frazier’s basis in his partnership interest was $1,200. He received $1,500 in cash in the liquidation. Frazier’s gain is calculated as follows:
Amount realized $ 1,500
Basis in partnership interest (1,200)
Gain recognized $ 300
Note: Don’t be confused by the term “outside basis.” The term outside basis merely refers to the differences that may exist between the partner’s share of the basis of the assets in the hands of the partnership (inside basis) and his basis in his partnership interest.
Barker acquired a 50% interest in Kode Partnership by contributing $20,000 cash and a building with an adjusted basis of $26,000 and a fair market value of $42,000. The building was subject to a $10,000 mortgage, which was assumed by Kode. The other partners contributed cash only. The basis of Barker's interest in Kode is: a. $52,000 b. $36,000 c. $62,000 d. $41,000
Choice “d” is correct. A partner’s basis in a newly formed partnership is determined as follows:
Cash contribution $ 20,000
Adjusted basis of non-cash property 26,000
Share of partnership liabilities assumed by other partners $10,000 × 50% (5,000)
Net total $ 41,000
At partnership inception, Black acquires a 50% interest in Decorators Partnership by contributing property with an adjusted basis of $250,000. Black recognizes a gain if: I. The fair market value of the contributed property exceeds its adjusted basis. II. The property is encumbered by a mortgage with a balance of $100,000. a. Neither I nor II. b. Both I and II. c. I only. d. II only.
Choice “a” is correct. The fair market value of property (high or low) is irrelevant in determining Black’s basis in Decorators. The partner’s adjusted basis is used.
Since the mortgage does not exceed Black’s basis, he will not recognize a gain on the contribution of the encumbered property to Decorators.
On January 4, Year 1, Smith and White contributed $4,000 and $6,000 in cash, respectively, and formed the Macro General Partnership. The partnership agreement allocated profits and losses 40% to Smith and 60% to White. In Year 1, Macro purchased property from an unrelated seller for $10,000 cash and a $40,000 mortgage note that was the general liability of the partnership. Macro’s liability:
a.
Increases Smith’s partnership basis by $16,000.
b.
Increases Smith’s partnership basis by $20,000.
c.
Has no effect on Smith’s partnership basis.
d.
Increases Smith’s partnership basis by $24,000.
Choice “a” is correct. A partner’s basis in the partnership is increased by the partner’s share of partnership liabilities (Smith is a 40% partner). Macro is obligated on the $40,000 mortgage; 40% x $40,000 = $16,000. Even though the partnership is obligated to repay the mortgage, as a partner Smith is jointly and severally liable on the debt.
Hart's adjusted basis in Best Partnership was $9,000 at the time he received the following nonliquidating distributions of partnership property: Cash $5,000 Land Adjusted basis 7,000 Fair market value 10,000 What was the amount of Hart's basis in the land? a. $4,000 b. $10,000 c. $7,000 d. $0
Choice “a” is correct. Hart must reduce his $9,000 original basis by the $5,000 cash distribution to a basis of $4,000. Smith’s basis in the land is the lesser of the land’s basis in the partnership’s hands ($7,000) or Hart’s remaining basis in his partnership interest in Best ($4,000 after the cash distribution).
Stone's basis in Ace Partnership was $70,000 at the time he received a nonliquidating distribution of partnership capital assets. These capital assets had an adjusted basis of $65,000 to Ace and a fair market value of $83,000. Ace had no unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was Stone's recognized gain or loss on the distribution? a. $5,000 capital loss. b. $13,000 capital gain. c. $0. d. $18,000 ordinary income.
Choice “c” is correct. A partner does not ordinarily recognize income on a nonliquidating partnership distribution of property other than money. The distribution of property with an adjusted basis of $65,000 to Stone from Ace will reduce Stone’s basis in Ace partnership to $5,000 ($70,000 - $65,000). The fair market value of the property (high or low) is not relevant.
On January 3, Year 1, the partners’ interests in the capital, profits, and losses of Able Partnership were:
% of capital,
profits, and losses
Dean
25%
Poe
30%
Ritt
45%
On February 4, Year 1, Poe sold her entire interest to an unrelated party. Dean sold his 25% interest in Able to another unrelated party on December 20, Year 1. No other transactions took place in Year 1. For tax purposes, which of the following statements is correct with respect to Able?
a.
Able did not terminate.
b.
Able terminated as of February 4, Year 1.
c.
Able terminated as of December 31, Year 1.
d.
Able terminated as of December 20, Year 1.
Choice “d” is correct. Among other events, a partnership terminates for income tax purposes when 50% or more of its interests change hands within 12 months. That threshold was reached for Able on December 20, at which time the partnership terminated for income tax purposes.
Curry's sale of her partnership interest causes a partnership termination. The partnership's business and financial operations are continued by the other members. What is (are) the effect(s) of the termination? I. There is a deemed distribution of assets to the remaining partners and the purchaser. II. There is a hypothetical recontribution of assets to a new partnership. a. I only. b. II only. c. Neither I nor II. d. Both I and II.
Choice “d” is correct.
Rule: When a partnership is terminated for tax purposes and its remaining partners decide to carry on the partnership business in a (deemed) new partnership, tax law treats this as a distribution of the prior partnership’s assets followed by a recontribution of the (deemed) distributed assets to the new partnership.
Alt Partnership, a cash basis calendar year entity, began business on October 1, Year 1. Alt incurred and paid the following in Year 1:
Legal fees to prepare the partnership agreement $ 23,000
Accounting fees to prepare the representations in offering materials 15,000
Alt elected to amortize costs. What was the maximum amount that Alt could deduct on the Year 1 partnership return?
a.
$5,300
b.
$0
c.
$300
d.
$4,600
Choice “a” is correct. Eligible expenditures up to $5,000 can be deducted in the first year (with overall limitations). Additional expenditures are amortized over 180 months beginning with the date they begin business. Legal fees to prepare the partnership agreement ($23,000) are eligible for this treatment, but sales and promotional expenses ($15,000) are not deductible or amortizable.
The first year deduction is calculated as follows:
23,000
(5,000)
immediate deduction
18,000 /
180 months = $100 per month x 3 = 300 + 5,000 = $5,300
A guaranteed payment by a partnership to a partner for services rendered may include an agreement to pay: I. A salary of $5,000 monthly without regard to partnership income. II. A 25 percent interest in partnership profits. a. I only. b. II only. c. Both I and II. d. Neither I nor II.
Choice “a” is correct.
I.
A guaranteed payment is a salary or other payment to a partner that is not calculated with respect to partnership income.
II.
Since the 25% interest is calculated with respect to partnership profits, it is not a guaranteed payment.
Curry's adjusted basis in Vantage Partnership was $5,000 at the time he received a nonliquidating distribution of land. The land had an adjusted basis of $6,000 and a fair market value of $9,000 to Vantage. What was the amount of Curry's basis in the land? a. $6,000 b. $1,000 c. $5,000 d. $9,000
Choice “c” is correct. A partner who receives a distribution of non-cash property from a partnership takes the partnership’s basis as his basis, but in no case an amount greater than his basis in his partnership interest. In this case Curry would ordinarily take a $6,000 basis in the land, but since his basis in the partnership interest is only $5,000, that is the basis of the land in his hands. Curry’s partnership interest now has a basis of zero.
White has a one-third interest in the profits and losses of Rapid Partnership. Rapid's ordinary income for the current taxable year is $30,000, after a $3,000 deduction for a guaranteed payment made to White for services rendered. None of the $30,000 ordinary income was distributed to the partners. What is the total amount that White must include from Rapid as taxable income in his current year tax return? a. $11,000 b. $10,000 c. $13,000 d. $3,000
Choice “c” is correct.
Rule: Partnership income is taxable to a partner whether or not it is distributed. White’s share of Rapid’s income is the sum of the $3,000 guaranteed payment and one-third of the partnership’s net income of $30,000 ($10,000), for a total of $13,000.
On January 2, Year 1, Black acquired a 50% interest in New Partnership by contributing property with an adjusted basis of $7,000 and a fair market value of $9,000, subject to a mortgage of $3,000. What was Black's basis in New at January 2, Year 1? a. $7,500 b. $3,500 c. $5,500 d. $4,000
Choice “c” is correct. A contributing partner’s basis is the adjusted basis of assets contributed, plus any gain recognized on the contribution, less debt relief.
Basis $ 7,000
Debt relief ($3,000 x 50%) (1,500)
Basis $ 5,500
Gray is a 50% partner in Fabco Partnership. Gray's tax basis in Fabco at the beginning of the year was $5,000. Fabco made no distributions to the partners during the year and recorded the following: Ordinary income $ 20,000 Tax exempt income 8,000 Portfolio income 4,000 What is Gray's tax basis in Fabco at the end of the year? a. $10,000 b. $16,000 c. $12,000 d. $21,000
Choice “d” is correct. A partner’s basis is increased by the partner’s share of partnership ordinary income, separately stated income, and tax exempt income. $5,000 + 50% x ($20,000 + $8,000 + $4,000) = $21,000.
On January 2, Year 1, Arch and Bean contribute cash equally to form the JK Partnership. Arch and Bean share profits and losses in a ratio of 75% to 25%, respectively. For Year 1, the partnership's ordinary income was $40,000. A distribution of $5,000 was made to Arch during Year 1. What is Arch's share of taxable income for Year 1? a. $5,000 b. $20,000 c. $30,000 d. $10,000
Choice “c” is correct. Partners are taxed on their share of partnership income whether distributed or not. Arch must report 75% x $40,000, or $30,000.
Guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are: I. Deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss). II. Included on schedules K-1 to be taxed as ordinary income to the partners. a. Neither I nor II. b. I only. c. II only. d. Both I and II.
Choice “d” is correct. Guaranteed payments to partners are deductible on Form 1065, Line 10, to arrive at partnership ordinary income. On Schedule K-1, guaranteed payments are shown as income on Line 5 and flow through as ordinary income.
At the beginning of the taxable year, Paul owned a 25% interest in Associates partnership. During the year, a new partner was admitted and Paul's interest was reduced to 20%. The partnership liabilities at January 1 were $150,000 but decreased to $100,000 at December 31. Paul's and the other partners' capital accounts are in proportion to their respective interests. Disregarding any income, loss or drawings for the taxable year, the basis of Paul's partnership interest at December 31 compared to the basis of his interest at January 1 was: a. Decreased by $37,500. b. Increased by $20,000. c. Decreased by $17,500. d. Decreased by $5,000.
Choice “c” is correct. Paul’s partnership interest consists of his capital plus his share of liabilities. Paul’s share of liabilities on January 1 was 25% x $150,000, or $37,500. On December 31 Paul’s share was 20% x $100,000, or $20,000; a decrease during the year of $17,500.
Day's adjusted basis in LMN Partnership interest is $50,000. During the year Day received a nonliquidating distribution of $25,000 cash plus land with an adjusted basis of $15,000 to LMN and a fair market value of $20,000. How much is Day's basis in the land? a. $20,000 b. $10,000 c. $25,000 d. $15,000
Choice “d” is correct. In a nonliquidating distribution, the partner takes the partnership basis for assets distributed. This basis cannot exceed the partner’s partnership interest.
