REG R3 Flagged Questions #19 Flashcards
MCQ-06419 A taxpayer is trading a building used solely for business purposes for another building to be used in his business. The building originally cost $35,000 and he has taken $18,000 in depreciation. The old building is currently worth $20,000 and the new building the taxpayer wants in exchange is only worth $17,500. The other party agrees to give the taxpayer a trailer worth $3,500 in addition to the new building, and the taxpayer agrees to pay $1,000 cash in addition to the trade-in. What is the gain or loss realized by the taxpayer on this transaction? 1. $2,500 gain 2. $500 gain 3. $2,500 loss 4. $3,000 gain
Calculations for “Realized Gain with Boot Received and Paid”
Gain/Loss Realized:
Amount realized
=
Fair market value of new building + Boot received − Adjusted basis of building given up
=
$17,500 fair market value new building + $3,500 fair market value of trailer received − $1,000 cash boot paid − $17,000 adjusted basis of the old building ($35,000 cost −
$18,000 accumulated depreciation)
=
$3,000 gain
Gain/Loss Recognized:
Gain recognized
=
$3,000 (the lesser of realized gain of $3,000 or boot received of $3,500)
Basis of New Property:
New basis
=
Adjusted basis of property given up + Gain recognized − Boot received + Boot paid
=
$17,000 + $3,000 − $3,500 + $1,000
=
$17,500
Alternative calculation: $17,500 FMV new property + $0 deferred loss − $0 deferred gain = $17,500 basis new property.
Choice “4” is correct. A $3,000 gain is realized [fair market value of the new building $17,500 + $3,500 fair market value of the trailer boot received − $1,000 cash boot paid − $17,000 adjusted basis of the old building ($35,000 cost − $18,000 accumulated depreciation)].
Choices “1” and “3” are incorrect. $2,500 is the net value of the boots received and paid ($3,500 fair market value of the trailer received − $1,000 cash boot paid).
Choice “2” is incorrect. $500 would be the gain/loss realized if the boots paid and received were ignored.
MCQ-12118
As of the beginning of Year 3, Wolf Inc. has a written accounting policy to expense amounts paid for tangible personal property costing up to $8,000. Wolf does not have an applicable
financial statement for the year. During Year 3, Wolf pays $12,000 for three pieces of office furniture that cost $4,000 each and have an economic life of five years. Under the de
minimis safe harbor rule, how much can Wolf deduct for tax purposes in Year 3?
1. $4,000
2. $0
3. $12,000
4. $7,500
Choice “2” is correct. The de minimis safe harbor rule will apply, because Wolf has a written policy to expense certain property as of the beginning of the year. Because it does not have an applicable financial statement (AFS), the de minimis rule allows the company to expense items costing up to $2,500 each. These three items cost $4,000 each, which is in excess of $2,500 each. Therefore, none of these costs can be expensed under the de minimis rule.
Choice “1” is incorrect. $4,000 would be the deductible cost per item if the company had an applicable financial statement (AFS).
Choice “3” is incorrect. $12,000 is the full amount of the three items purchased.
Choice “4” is incorrect. $2,500 is the maximum cost of an item that can be expensed, because the company does not have an applicable financial statement (AFS). $7,500 would only be correct if the company did not have an applicable financial statement, and the cost of each item did not exceed $2,500.
MCQ-06415
A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $18,000 in depreciation. The old real property is currently worth $20,000 and the new real
property the taxpayer wants in exchange is only worth $17,500. The other party agrees to give the taxpayer $2,500 in cash in addition to the new real property. What is the taxpayer’s basis in the new real property received?
1. $17,000
2. $22,000
3. $20,000
4. $17,500
Calculations for “New Basis of Like-Kind Property with Liabilities Assumed (Boot Paid)”
Gain/Loss Realized:
Amount realized
=
Fair market value of new real property + Boot received - Adjusted basis of real property given up
=
$17,500 fair market value new real property + $2,500 cash boot − $17,000 adjusted
basis of the old real property ($35,000 cost − $18,000 accumulated depreciation)
=
$3,000 gain
Gain/Loss Recognized:
Gain recognized
=
$2,500 (the lesser of realized gain of $3,000 or boot received of $2,500)
Basis of New Property:
New basis
=
Adjusted basis of property given up + Gain recognized − Boot received
=
$17,000 + $2,500 + $0 − $2,500
=
$17,000
Alternative calculation: $17,500 FMV new property - $500 deferred gain = $17,000 basis of new property.
Choice “1” is correct. The basis of the new real property is $17,000 ($17,000 adjusted basis of the old real property ($35,000 cost − $18,000 accumulated depreciation) + $2,500 gain recognized − $2,500 boot received).
Choice “2” is incorrect. $22,000 would be the new basis if the $2,500 boot was added, instead of subtracted.
Choice “3” is incorrect. $20,000 is the fair market of the old real property.
Choice “4” is incorrect. $17,500 is fair market value of the new real property.
MCQ-01668
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?
1. $5,000 long-term loss.
2. $0
3. $5,000 long-term gain.
4. $5,000 short-term loss.
Choice “2” 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.
Choice “1” is incorrect. Alice can reduce the gain by the amount of loss her father could not deduct on the sale to her. However, she cannot reduce the gain below zero.
Choice “3” is incorrect. $5,000 is Alice’s realized long-term gain on the sale. 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.
Choice “4” is incorrect. Alice has a realized gain of $5,000 on the sale. However, since she is related to Conner, her holding period includes his holding period. Therefore, her realized gain is long-term. In addition, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her.
MCQ-04759
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?
1. $1,500
2. $2,000
3. $750
4. $300
Choice “1” 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 decreases 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
Choices “4”, “3”, and “2” are incorrect, per the explanation above.
MCQ-08460 A corporate taxpayer's capital gains and losses are as follows: Short-term capital gain $7,000 Short-term capital loss $(43,000) Long-term capital gain $9,000 Long-term capital loss $(21,000) What amount of capital loss deduction is the taxpayer entitled to use to offset against ordinary income? 1. $0 2. $3,000 3. $12,000 4. $48,000
Choice “1” is correct. First, the long-term capital gains and losses are netted to arrive at a net long-term capital loss of $12,000. Next, the short-term capital gains and losses are netted to arrive at a net short-term capital loss of $36,000. The next step is to net the net long-term capital loss of $12,000 with the net short-term capital loss of $36,000. This results in a net capital loss of $48,000. None of that loss is currently deductible against ordinary income. It can be carried back three years and forward five years.
Choice “2” is incorrect. $3,000 is the deductible amount of capital loss against ordinary income for an individual, not a corporation.
Choice “3” is incorrect. $12,000 is just the net long-term capital loss.
Choice “4” is incorrect. $48,000 is the net capital loss, but it is not deductible against ordinary income.
MCQ-02032
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.
1. Both I and II.
2. I only.
3. II only.
4. Neither I nor II.
Choice “1” 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.
MCQ-08965
A sole proprietor owned an office building with a cost of $100,000 and accumulated
depreciation of $28,000 using straight-line depreciation under modified accelerated cost recovery system (MACRS). If the company sold the building for $110,000 after using it for 10 years, what is the unrecaptured Section 1250 gain from this transaction?
1. $38,000
2. $28,000
3. $18,000
4. $10,000
Choice “2” is correct. Depreciable real property used in a trade or business for more than one year is Section 1250 property. A gain on the sale of a Section 1250 asset is unrecaptured Section 1250 gain to the extent of straight-line accumulated depreciation (A/D) on the asset. Any gain in excess of the unrecaptured Section 1250 gain is Section 1231 gain. Adjusted basis = $100,000 cost − $28,000 A/D = $72,000. Gain recognized = $110,000 sales price − $72,000 adjusted basis = $38,000. A/D on the asset is $28,000, so $28,000 of the gain is unrecaptured Section 1250 gain. The remaining $10,000 of gain is Section 1231 gain.
Choice “1” is incorrect. Only $28,000 of the $38,000 total gain recognized is unrecaptured Section 1250 gain.
Choice “3” is incorrect. Unrecaptured Section 1250 gain is $28,000, not $18,000.
Choice “4” is incorrect. Section 1231 gain is $10,000 and unrecaptured Section 1250 gain is $28,000.
MCQ-05549 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? $28,000 $25,000 $33,000 $3,000
Choice “1” 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
Choice “2” is incorrect. While the delivery van ($25,000) is included, the computer ($3,000) is also MACRS 5-year property.
Choice “3” is incorrect. This answer option assumes that all of the assets in the question are MACRS 5-year property. However, the computer desk and the office furniture are MACRS 7-year property, which includes office furniture and fixtures, equipment and property with no ADR midpoint classified elsewhere, and railroad track.
Choice “4” is incorrect. While the computer ($3,000) is included, the delivery van ($25,000) is also 5-year MACRS property.
MCQ-08442
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?
1. Parent has $0 recognized loss and child has $1,000 recognized gain.
2. Parent has $2,000 recognized loss and child has $0 recognized gain.
3. Parent has a $2,000 recognized loss and child has $1,000 recognized gain.
4. Parent has $0 recognized loss and child has $0 recognized gain
Choice “4” 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.
Choices “3”, “2”, and “1” are incorrect, per the above rule.
MCQ-04080 Good, a C corporation, sells an automobile to its sole shareholder for $4,500. Good's adjusted basis in the automobile is $12,000, and the fair market value is $5,000. What is the amount of loss that is recognized by Good? 1. $7,500 2. $7,000 3. $500 4. $0
Choice “4” is correct. Taxpayers may not deduct losses on sales of property to related parties. A corporation and a shareholder who owns more than 50% of that corporation are considered related parties.
Choices “3”, “2”, and “1” are incorrect per the explanation above.
MCQ-08614
Which of the following items qualifies for treatment under Section 1231 (Property Used in
the Trade or Business and Involuntary Conversions)?
1. Building used in the business, held for 6 months.
2. Machinery used in the business, held for 11 months.
3. Computer used in the business, held for 4 years.
4. Copyright used in the business, held for 10 years.
Choice “3” is correct. 1231 assets are all depreciable assets and all real property used in a trade or business and held over 12 months. The computer fits this definition.
Choice “1” is incorrect. This building is not a 1231 asset because it was held only 6 months.
Choice “2” is incorrect. The machinery is not a 1231 asset because it was held only 11 months.
Choice “4” is incorrect. A copyright is an intangible asset, which is not a 1231 asset.
MCQ-01726
In 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?
1. $0
2. $5,000
3. $1,000
4. $4,000
Choice “3” 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. Martin sold the stock for higher than Fay purchased it. The donor’s basis ($15,000) is, therefore, used to determine gain on the sale by Martin.
Choice “1” is incorrect. Martin’s gain, after reducing it by his mother’s disallowed loss, is reported on his tax return.
Choice “2” is incorrect. The $5,000 gain is reduced by his mother’s $4,000 disallowed loss.
Choice “4” is incorrect. The $4,000 disallowed loss to his mother reduces his $5,000 gain.
MCQ-08204
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?
1. $6,000 gain
2. $4,000 loss
3. $36,000 gain
4. No gain or loss
Choice “4” 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 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. In this instance, the basis is equal to the sales price. Therefore, there is no gain or loss on the sale.
Choices “2”, “1”, and “3” are incorrect per the above explanation.
MCQ-14925
A taxpayer received a painting valued at $8,000 as a gift. The donor purchased the painting
a year earlier for $4,500 and paid no gift tax on the transfer. Nine months later, the taxpayer sold the painting for $9,000. What is the amount and classification of the capital gain?
1. $4,500 short-term
2. $1,000 short-term
3. $1,000 long-term
4. $4,500 long-term
Choice “4” is correct. The taxpayer has a $4,500 long-term capital gain. The basis of property acquired as a gift is the same as the basis in the hands of the donor, which is $4,500 in this situation. The donor’s holding period of one year also rolls over. The total holding period is more than one year, so the gain recognized is long-term.
Sales price $9,000
Rollover cost basis (4,500)
Long-term capital gain $4,500
Choice “1” is incorrect. The amount of the gain is $4,500, but the gain is long-term, not short-term. The taxpayer’s basis in the gifted property is the donor’s rollover cost basis, so the donor’s holding period of one year also rolls over. The total holding period is more than one year, so the gain recognized is long-term.
Choice “2” is incorrect. $1,000 would be the amount of the gain if the $8,000 fair market value at the date of gift is used as the donor’s basis. The taxpayer’s basis in the gifted property is the donor’s rollover cost basis of $4,500, not the fair market value at the date of gift. Although the holding period would be short-term if the fair market value at the date of gift is used as the basis, in this case the taxpayer’s basis in the gifted property is the donor’s rollover cost basis so the donor’s holding period also rolls over so the gain recognized is long-term.
Choice “3” is incorrect. $1,000 would be the amount of the gain if the $8,000 fair market value at the date of gift is used as the donor’s basis. The taxpayer’s basis in the gifted property is the donor’s rollover cost basis of $4,500, not the fair market value at the date of gift. The donor’s holding period of one year also rolls over. The total holding period is more than one year, so the gain recognized is long-term.
