REG R3 Flagged Questions #20 Flashcards
MCQ-01909 Alice gifted stock to her son, Bob, in Year 5. Alice bought the stock in Year 1 for $8,300. The value of the stock on the date of gift was $13,400. Bob sold the stock in Year 7 for $15,800. What is Bob’s recognized gain or loss on the sale in Year 7? 1. $15,800 gain 2. $2,400 gain 3. $0 4. $7,500 gain
Choice “4” is correct. The general rule for the basis of an asset acquired by gift is a carryover of the donor’s basis. So Bob’s basis is the $8,300 carryover from Alice. Therefore, his recognized gain is $7,500 ($15,800 – $8,300).
Choice “1” is incorrect. $15,800 is the full proceeds of Bob’s sale before considering the basis.
Choice “2” is incorrect. $2,400 would be correct if Bob’s basis was $13,400.
Choice “3” is incorrect. $0 would be correct if Bob sold at the same amount as his basis.
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 gain.
2. $5,000 short-term loss.
3. $0
4. $5,000 long-term loss.
Choice “3” 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. $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 “2” 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.
Choice “4” 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.
MCQ-11066 Parent gave securities with an adjusted basis of $10,000 and fair market value of $9,000 to a child. Later the child sold the securities for $7,000. What is the child's basis for the securities sold? 1. $7,000 2. $0 3. $9,000 4. $10,000
Choice “3” is correct. Gifted property generally retains the cost basis it had in the hands of the donor at the time of the gift. An exception applies, however, if the fair market value at the date of the gift is lower than the cost basis. In such situations, the donee’s basis depends on the donee’s future selling price of the asset. If the sales price exceeds the donor’s cost basis, the donee’s basis equals the donor’s cost basis. If the sales price is less than the donor’s cost basis but is greater than the fair market value at gift, the donor’s basis equals the sales price. If the sales price is less than donor’s cost basis and fair market value, the donee’s basis equals fair market value, which is applicable to this situation. The child’s basis is $9,000 (fair market value at date of the gift) because the sales price of $7,000 is less than both the adjusted basis of $10,000 and the fair market value of $9,000.
Choices “1” and “2” are incorrect. The basis in gifted property equals fair market value if the donor’s basis exceeds fair market value at the date of the gift, and the sales price of the asset is less than the donor’s basis and fair market value at the date of the gift.
Choice “4” is incorrect. The basis in gifted property is limited to fair market value if the donor’s basis exceeds the fair market value at the date of the gift, and the sales price of the asset is less than the donor’s basis and the fair market value at the date of the gift.
MCQ-14661 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? 1. $2,000 gain. 2. $2,000 loss. 3. $4,000 gain. 4. $0.
Choice “4” is correct. The loss realized on the transaction by Terry is $4,000 ($8,000 - $12,000). Terry is not allowed to deduct the loss because it is on a sale to a related party. However, the question asks about the relative’s gain or loss, not Terry’s gain or loss. Because all the relative did to this point was to buy the stock, the relative has no gain or loss.
Choices “2”, “1”, and “3” are incorrect, per the above explanation.
MCQ-01662
Capital assets include:
1. A corporation’s accounts receivable from the sale of its inventory.
2. A corporate real estate developer’s unimproved land that is to be subdivided to build homes, which will be sold to customers.
3. A manufacturing company’s investment in U.S. Treasury bonds.
4. Seven-year MACRS property used in a corporation’s trade or business.
Choice “3” 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.
Choice “1” is incorrect. Accounts receivable generated from the sale of inventory are excluded from the statutory definition of capital assets.
Choice “2” is incorrect. Land is usually a capital asset, but when it is effectively inventory, as when it is used by a developer to be subdivided, it is excluded from the statutory definition of capital assets.
Choice “4” is incorrect. Depreciable property used in a trade or business is excluded from the statutory definition of capital assets.
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. II only.
3. I 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-06905
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 $1,000,000, what maximum amount of cost recovery can the taxpayer claim this year?
1. $108,000
2. $120,000
3. $100,000
4. $20,000
Choice “3” 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 $1,000,000. Therefore, only the cost of the depreciable tangible business assets can be expensed ($100,000).
Choice “1” is incorrect. Taxpayer can only expense up to the purchase price, not to exceed the limitation.
Choice “2” is incorrect. Land is not a depreciable asset.
Choice “4” is incorrect. Land is not a depreciable asset.
MCQ-06430
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 taxpayer agrees to assume a liability secured by the new real property of $1,000. The other party also agrees to assume a liability secured by the taxpayer’s old real property of $3,500. What is the
taxpayer’s basis in the new real property received?
1. $14,500
2. $17,500
3. $17,000
4. $19,500
Calculations for “New Basis on Like-Kind Property with Liability Assumed (Boot Paid) and Liability Relieved (Boot Received)”
Gain/Loss Realized:
Amount realized
=
Fair market value of new real property + Boot received − Boot paid − Adjusted basis of real property given up
=
$17,500 fair market value new real property + $3,500 in relieved liabilities (boot received) −
$1,000 in liabilities assumed (boot paid) $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 net relief from liabilities (boot received) of $2,500]
Basis of New Property:
New basis
=
Adjusted basis of property given up + Gain recognized − Boot received + Boot paid
=
$17,000 + $2,500 − $3,500 + $1,000
=
$17,000
Alternative calculation: $17,500 FMV new property − $500 deferred gain = $17,000 basis of new property.
Choice “3” is correct. $17,000 is the basis of the new real property [$17,000 adjusted basis of the old real property ($35,000 cost − $18,000 accumulated depreciation) + $2,500 gain recognized − $2,500 net relief from liabilities (boot received) ($3,500 relief from liability (boot received) − $1,000 liability assumed (boot paid))].
Choice “1” is incorrect. A basis of $14,500 ignores the $2,500 gain recognized.
Choice “2” is incorrect. $17,500 is the fair market value of the new real property.
Choice “4” is incorrect. A basis of $19,500 adds the adjusted basis of the old property and the gain recognized, and ignores the boots paid and received.
MCQ-08971
A cash-basis taxpayer made a bona fide, nonbusiness loan to an acquaintance in Year 1. At the end of Year 2, it is determined that the taxpayer will likely be able to collect only 20 percent of the principal, and no interest has been or will be collected. How should the loss
be treated for tax purposes in Year 2?
1. None of the loss is deductible in Year 2.
2. Eighty percent of the principal and 80 percent of the interest are deductible in Year 2.
3. Eighty percent of the principal, but none of the interest, is deductible in Year 2.
4. Eighty percent of the principal, up to $3,000, is deductible in Year 2.
Choice “1” is correct. None of the loss is deductible. A nonbusiness bad debt must be totally worthless to be deductible. A nonbusiness bad debt is treated as a short-term capital loss in the year the debt becomes totally worthless.
Choice “2” is incorrect. A taxpayer cannot deduct a partially worthless nonbusiness bad debt. A cash-basis taxpayer cannot take a deduction for unpaid interest, even if the loan principal becomes totally worthless.
Choice “3” is incorrect. A taxpayer cannot deduct a partially worthless nonbusiness bad debt.
Choice “4” is incorrect. A taxpayer cannot deduct a partially worthless nonbusiness bad debt.
MCQ-06403
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 worth $20,000. No other cash or property is exchanged in the transaction. What is the taxpayer’s basis in the new building received?
1. $20,000
2. $35,000
3. $18,000
4. $17,000
Calculations for “New Basis on Like Kind-Exchange Property with No Boot”
Gain/Loss Realized:
Amount realized
=
Fair market value of building received − Adjusted basis of building given up
=
$20,000 fair market value of new building − ($35,000 cost − $18,000 depreciation)
=
20,000 fair market value of new building − $17,000 adjusted basis of old building
=
$3,000 gain
Gain/Loss Recognized:
Gain recognized
=
$0 (the lesser of gain realized of $3,000 or boot received of $0)
Basis of New Property:
New basis
=
Adjusted basis of property given up + Gain recognized
=
$17,000 + $0
=
$17,000
Alternative calculation: $20,000 FMV new property − $3,000 deferred gain = $17,000 basis of new property.
Choice “4” is correct. $17,000 is the substituted basis [the adjusted basis of the old building ($35,000 cost − $18,000 accumulated depreciation) + gain recognized $0].
Choice “1” is incorrect. $20,000 is the fair market value of both the old and new buildings.
Choice “2” is incorrect. $35,000 is the original cost of the old building.
Choice “3” is incorrect. $18,000 is accumulated depreciation on the old building.
MCQ-05523 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? 1. $2,000 2. $0 3. $4,000 4. $6,000
Choice “1” 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
Choice “2” is incorrect. There would be a zero gain or loss if the selling price were between the adult child’s basis and Gibson’s purchase price, but this is not the case in the facts.
Choice “3” is incorrect. This answer option uses the fair market value of the stock at the date of purchase as the basis. As is discussed above, the rules do not provide for this treatment. [$18,000 SP - $14,000 FMV = $4,000]
Choice “4” is incorrect. This would be the answer if the basis were Gibson’s purchase price of $12,000; however, because the stock sold for more than Gibson’s child’s basis and the child had a disallowed loss on the sale to Gibson, Gibson is allowed to use his child’s original basis of $16,000 as his basis for the stock on the date of the second sale. [$18,000 SP - $12,000 PP = $6,000]
MCQ-08205
An individual entered into several exchanges during the current tax year. Which of the following exchanges is classified as like-kind?
1. Manufacturing equipment for factory building.
2. Apartment building for unimproved land.
3. Common stock for common stock.
4. Partnership interest for partnership interest.
Choice “2” is correct. Real property exchanged for other real property will be classified as a like-kind exchange (unless the property is in different countries).
Choice “1” is incorrect. Manufacturing equipment is not like-kind to a factory building. The factory building is real property and is only like-kind to other real property.
Choice “3” is incorrect. Common stock is specifically excluded from like-kind exchange classification.
Choice “4” is incorrect. Partnership interests are specifically excluded from like-kind exchange classification.
MCQ-04111 On year 1, Janice had the following transactions in Jacky, Inc. common stock: Shares Price Jan. 01 – Purchase 500 $25 May 12 – Sale 500 $23 May 28 – Purchase 250 $22 Oct. 15 – Sale 100 $18 What is Janice's deductible capital loss? 1. $700 2. $1,400 3. $400 4. $1,100
Choice “4” is correct. The wash sale rules apply to 250 shares that were sold on May 12, because they were repurchased within 30 days of the sale. The computation of Janice’s total deductible capital loss is as follows:
May 12 sale of 250 shares that were not repurchased within 30 days:
250 shares × sale price of $23/share
5,750
250 shares × purchase price of $25/share
(6,250)
Loss on May 12 sale
500
October 15 sale of 100 shares:
100 shares × sale price of $18/share
1,800
100 shares × basis of $24/share*
(2,400)
Loss on October 15 sale
600
Total deductible capital loss
1,100
- The basis of these shares includes the purchase price of $22/share plus the loss of $2/share (sale price of $23/share less purchase price of $25/share) that was disallowed because of application of the loss disallowance rules.
Choices “3”, “1”, and “2” are incorrect per the explanation above.
MCQ-11067
In the current year, Vinton exchanged unimproved land for an apartment building. The land had a basis of $300,000, and a fair market value (FMV) of $420,000, and was encumbered by a $100,000 mortgage. The apartment building had an FMV of $550,000 and was
encumbered by a $230,000 mortgage. Each party assumed the other’s mortgage. What is Vinton’s basis in the apartment building?
1. $300,000
2. $320,000
3. $430,000
4. $550,000
Choice “3” is correct. Because the two properties are like-kind real estate, gain or loss on the exchange is deferred. Vinton’s deferred gain is $120,000 ($550,000 fair market value of the apartment building less $230,000 mortgage acquired plus $100,000 of mortgage transferred less $300,000 basis in the land). The basis in the property acquired in a like-kind exchange is the fair market value of the like-kind property received less deferred gain, which is $430,000 ($550,000 − $120,000).
Choice “1” is incorrect. The basis of the acquired property is the fair market value of the property received decreased by the deferred gain. The basis of the property given up is used to determine the deferred gain when boot is received.
Choice “2” is incorrect. The basis of the acquired property is the fair market value of the property received decreased by the deferred gain, not the fair market value of the property net the mortgage amount.
Choice “4” is incorrect. To arrive at the basis of the acquired property, the fair market value of the property received is decreased by the deferred gain.
MCQ-05902 Talbot purchased a laptop for $1,500 and a television for $1,300. The laptop is used solely for business and the television solely for personal entertainment. During the same year, Talbot experienced serious financial difficulty and sold the television for $300 and the laptop for $1,000. What amount, if any, is Talbot entitled to deduct as a loss relating to the sale of the television and laptop? 1. $500 2. $0 3. $1,500 4. $1,000
Choice “1” is correct. The loss on the disposal of business-use assets is deductible, but the loss on the disposal of personal-use assets is not deductible. Because the laptop was used for business purposes, the $500 loss (calculated as the sales price of $1,000 minus the cost of $1,500) on the sale of the laptop is deductible. However, because the television was used for personal purposes, the loss on the sale of the television is not deductible.
Choice “2” is incorrect. This answer incorrectly excludes the $500 loss on the sale of the laptop. Losses on the disposal of business-use assets are deductible. Because the laptop was used for business purposes, the $500 loss (calculated as the sales price of $1,500 minus the cost of $1,000) on the sale of the laptop is deductible.
Choice “3” is incorrect. This answer incorrectly includes the $1,000 loss on the sale of the television. Losses on the sale of personal-use assets are not deductible. Because the television was used for personal purposes, the loss on the sale of the television is not deductible.
Choice “4” is incorrect. This answer incorrectly includes the $1,000 loss on the sale of the television and incorrectly excludes the $500 loss on the sale of the laptop. Losses on the sale of personal-use assets are not deductible. Because the television was used for personal purposes, the loss on the sale of the television is not deductible. On the other hand, losses on the disposal of business-use assets are deductible. Because the laptop was used for business purposes, the $500 loss (calculated as the sales price of $1,500 minus the cost of $1,000) on the sale of the laptop is deductible.
