REG - Federal Taxation of Property Transactions

Question 1

3 categories of assets

Answer 1

1. Ordinary
2. Section 1231
3. Capital

Question 2

Ordinary assets

Answer 2

1. Inventory and A/R are ordinary assets
2. Depreciable property that is used in business and has been owned for a year or less
3. Copyrights, musical/artistic/literary works are ordinary assets if held by the creator

Question 3

Section 1231 assets

Answer 3

Depreciable property used in trade/business and realty that have been owned for more than 1 year are Section 1231 assets

Question 4

Capital assets

Answer 4

1. Capital assets don’t include the items listed above as ordinary and Section 1231 assets
2. Property held for investment use and personal use are capital assets
3. Goodwill and patents

Question 5

Acquired property can be divided into 4 categories

Answer 5

1. Real property
2. Personal property
3. Intangible assets
4. Natural assets

Question 6

A realized gain or loss must be computed any time there is a sale or disposition of property

Question 7

Sale or disposition includes

Answer 7

sales, exchanges, trade-ins, casualties, thefts, and retirements

Question 8

Realized gain or loss is computed as follows

Answer 8

amounted realized - adjusted basis = realized gain or loss

Question 9

Calculating the amount realized is a 4-step process

Answer 9

amount realized = Cash received + fair market value of any property and services received + (liabilities assumed by buyer - debts of buyer assumed by seller) - selling expenses

Question 10

Adjusted basis

Answer 10

Adjusted basis = the cost or other acquisition basis of the property + capital improvements (not repairs) - depreciation/amortization/depletion

Cost includes any liabilities or expenses connected w/the acquisition

Question 11

Assume that all realized gains/losses are recognized

Question 12

Basis issues for gifts

If property is gifted to a taxpayer, the donee’s basis is:

Answer 12

1. gain basis = adjusted basis of the donor
2. Loss basis = lower of:
   
   1. Fair market value at date of gift, or
   2. Adjusted basis of the donor
3. Depreciable basis = gain basis
4. The basis is increased for the portion of any gift tax paid by the donor due to appreciation in the property

Question 13

Adjustment to basis (basis issues for gifts)

Answer 13

adjustment to basis = Unrealized appreciation/(fair market value at date of gift - annual exclusion) x Gift tax paid

The annual exclusion amount is the amount of money that 1 person may transfer to another as a gift w/out incurring a gift tax -> Currently, it should be $15k

Question 14

Tax Effects of Basis for Gifts

Answer 14

1. A gain is recognized only if the donee sells property for more than the gain basis
2. A loss is recognized only if the donee sells property for less than the loss basis
3. If the property is sold by the donee for an amount in-between the gain and loss basis, no gain or loss is recognized

Question 15

Inheritance - Basis

Answer 15

The basis of property acquired from a decedent (person who died) is the fair market value at the date of death OR the alternative valuation date (6 months after the date of death) if that date is selected by the executor as the valuation date

Question 16

Inheritance - Holding Period

Answer 16

Holding period for property acquired from a decedent is deemed to be long-term

Question 17

On February 1, Year 9, 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 4. Fair market value of the stock on February 1, Year 9, 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 9, the date that the executor distributed the stock to him. How much income should Hall include in his Year 9 individual income tax return for the inheritance of the 500 shares of stock that he received from his father’s estate?

Answer 17

Answer: 0

Since the definition of gross income excludes property received as a gift, bequest, devise, or inheritance, Hall recognizes no income upon receipt of the stock. Since the executor of his father’s estate elected the alternate valuation date (August 1), and the stock was distributed to Hall before that date (June 1), Hall’s basis for the stock would be its $4,500 FMV on June 1. Since Hall also sold the stock on June 1 for $4,500, Hall would have no gain or loss resulting from the sale.

Question 18

On October 1, Year 7, Lois Rice learned that she was bequeathed 1,000 shares of Elin Corp. common stock under the will of her uncle, Pat Prevor. Pat had paid $5,000 for the Elin stock in Year 2. Fair market value of the Elin stock on October 1, Year 7, the date of Pat’s death, was $8,000 and had increased to $11,000 six months later. The executor of Pat’s estate elected the alternative valuation for estate tax purposes. Lois sold the Elin stock for $9,000 on December 1, Year 7, the date that the executor distributed the stock to her. Lois’s basis for gain or loss on sale of the 1,000 shares of Elin stock is

Answer 18

Answer: 9000

Since the alternate valuation was elected for Prevor’s estate, but the stock was distributed to Lois within six months of date of death, Lois’s basis is the $9,000 FMV of the stock on date of distribution (December 1, Year 7).

Question 19

In Year 5, Iris King bought shares of stock as an investment, at a cost of $10,000. During Year 8, when the fair market value was $8,000, Iris gave the stock to her daughter, Ruth. Ruth’s holding period of the stock for purposes of determining her loss

Answer 19

Answer: Started in Year 8

If property is received as a gift, and the property’s FMV on date of gift is used to determine a loss, the donee’s holding period begins when the gift was received. Thus, Ruth’s holding period starts in Year 8.

Question 20

Holding period of gifted property

Answer 20

1. If the gain basis is used (when FMV > basis of property) to compute realized gain or loss, the holding period of the donee includes the holding period of the donor
2. If the loss basis is used (when FMV < basis of property), the holding period of the donee begins on the date of the gift

Question 21

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?

Answer 21

Answer: 1300

A donee’s basis for appreciated property received as a gift is generally the same as the donor’s basis. Since Smith had a basis for the property of $1,200 and Thompson sold the property for $2,500, Thompson must recognize a gain of $1,300.

Question 22

Capital assets

Answer 22

Includes all assets except inventory, A/R, depreciable assets and realty used in business, creative works, or certian miscellaneous assets (such as government publications or obligations)

Investment assets and personal use assets are capital asets

Common capital assets include stocks, bonds, real estate, and goodwill of a corporation

Question 23

Long term assets are those held over 1 year

Question 24

Netting process - individuals and corporations

Answer 24

1. Short term gains and short term losses are netted against each other to get net short term gain or net short term loss
2. Long term gains and long term losses are netted against each other to get net long term gain or net short term loss
3. if the first 2 steps result in 2 net positions of opposite signs (one is a gain and the other is a loss), they are netted against each other -> outcome is a net capital gain or net capital loss. If net short term and net long term signs are the same, they maintain their separate character (no further netting)

Question 25

If the combination of net short-term and net long-term gains and losses = negative, then individuals can deduct this net capital loss up to $3000/yr -> this deduction is for AGI and is limited to taxable income

Question 26

Net capital loss

Answer 26

Occurs if a net loss results from combining net short term gains and losses w/net long term gains and losses

Question 27

Long-term capital losses that have been carried forward offset capital gains in the following order:

Answer 27

1. Capital gains taxed at 28%
2. Capital gains taxed at 25%
3. Capital gains taxed at 20% (or 15% for some taxpayers)

Question 28

A corporation is not allowed to deduct a net capital loss in computing its taxable income.

Instead, a net capital loss is generally carried back 3 years and forward 5 years as a short-term capital loss to offset capital gains in the carryback and carryforward years.

Question 29

Sec. 1244 permits an individual to deduct an ordinary loss on the sale or worthlessness of stock. The amount of ordinary loss deduction is annually limited to $50,000 ($100,000 for a married taxpayer filing a joint return), with any excess loss treated as a capital loss.

Question 30

Jackson, a single individual, inherited Bean Corp. common stock from Jackson’s parents. Bean is a qualified small business corporation under Code Sec. 1244. The stock cost Jackson’s parents $20,000 and had a fair market value of $25,000 at the parents’ date of death. During the year, Bean declared bankruptcy and Jackson was informed that the stock was worthless. What amount may Jackson deduct as an ordinary loss in the current year?

Answer 30

Answer: 0

Sec. 1244 permits a shareholder to deduct an ordinary loss of up to $50,000 per year ($100,000 if married filing jointly) if qualifying stock is sold, exchanged, or becomes worthless. The qualifying stock must have been issued in exchange for money or other property and must have been issued to the individual or partnership sustaining the loss. Ordinary loss treatment is not available if the shareholder sustaining the loss was not the original holder of the stock. As a result, an individual who acquires stock by purchase, gift, or inheritance from another shareholder is not entitled to ordinary loss treatment. Since Jackson inherited the Bean stock from his parents, Jackson does not qualify for ordinary loss treatment and his $25,000 loss will be recognized as a long-term capital loss.

Question 31

What is the maximum amount of capital losses in excess of capital gains that a C corporation may deduct in a year?

Answer 31

Answer: 0

This answer is correct. A corporation cannot deduct a net capital loss. Instead, the net capital loss is carried back three years and forward five years as a short-term capital loss to offset capital gains in the carryback and carryforward years.

Question 32

During the current year, Ruth Lee sold a painting for $25,000 that she had bought for her personal use ten years ago at a cost of $10,000. In her current-year return, Lee should treat the sale of the painting as a transaction resulting in

Answer 32

Answer: long term capital gain

The definition of “capital assets” includes investment property and property held for personal use (if sold at a gain). Because the painting was held for more than one year, the gain from the sale of the painting must be reported as a long-term capital gain. Note that if personal-use property is sold at a loss, the loss is not deductible.

Question 33

On July 1, Year 8, Kim Wald sold an antique for $12,000 that she had bought for her personal use in Year 6 at a cost of $15,000. In her Year 8 return, Kim should treat the sale of the antique as a transaction resulting in

Answer 33

Answer: non deductible loss

Since the antique was held for personal use, the sale of the antique at a loss is not deductible.

Question 34

Section 1231 Assets

Answer 34

Assets used in a business and held for over 12 months. Section 1231 assets include realty and depreciable property but exclude capital asets, inventory, A/R, copyrights and gov publications

Question 35

Realty

Answer 35

land and other assets affixed thereto (buildings)

Question 36

Personalty

Answer 36

any tangible assets that can be moved (not fixed to land)

Question 37

A mid-quarter convention is used for all personalty (instead of the midyear convention) if more than 40% of personalty acquired during the year is purchased in the last quarter of the year

Question 38

MACRS Personalty

Answer 38

Class lives: 3, 5, 7, 10 yrs 15, 20 yrs

Depreciation method: 200% declining balance for (3-10 yrs) and 150% declining balance for (15-20

Convention: Half year or mid quarter

Question 39

Half-year convention

Answer 39

• General convention for personalty (not always)
• Assets are treated as if they were placed in service (or disposed of) in the middle of the taxable year regardless of when they were actually placed in service (or disposed of)

Question 40

Mid-quarter convention (created to curb abuse of half year convention)

Answer 40

• Applies when more than 40% of personalty is placed in service during the last quarter of the year
• Assets treated as if they were placed into service (or disposed of) in the middle of the quarter in which they were actually placed in servive of (or disposed of)

Question 41

Section 179 (an election to expense limited amount of tangible personalty if used in trade activity)

Answer 41

General rules:

• The maximum amount expensed in any year is limited to the lesser of business income OR $1,020,000

Question 42

This answer is correct. For 2020, Sec. 179 permits a taxpayer to elect to treat up to $1,050,000 of the cost of qualifying depreciable personal property as an expense rather than as a capital expenditure. However, the $1,050,000 maximum is reduced dollar for dollar by the cost of qualifying property placed in service during the taxable year that exceeds $2,620,000

Question 43

To qualify for Section 179, the property must be acquired by purchase from an unrelated party for use in the taxpayer’s active trade or business. Additionally, the amount that can be expensed is further limited to the aggregate taxable income derived from the active conduct of any trade or business of the taxpayer.