Chapter 9
58. Sonya inherits 1,000 shares of Big Red Airline Corporation stock from the estate of her Uncle Tony. Tony died on
August 4, 2015. The stock’s value on August 4, 2015, is $2,000. Tony purchased the stock for $3,000 several years ago.
Sonya sells the 1,000 shares for $2,300 on December 8, 2015. What is Sonya’s holding period of the stock?
a.
Short-term.
b.
Long-term.
c.
Depends on which value is used.
d.
Depends on whether an estate tax was paid.
59. Sandi sells 100 shares of Gray Corporation stock on December 4, 2015. She inherited the stock from Christine, who
died on January 30, 2015. The executor of the estate used the primary valuation date. Sandi’s holding period for the stock
is
a.
Long-term.
b.
Short-term.
c.
Long-term if sold at a gain; short-term if sold at a loss.
d.
Short-term if sold at a gain; long-term if sold at a loss.
60. Mary inherits an interest in Laser Partnership from her Aunt Lillian during 2015. The fair market value of the interest
as of the primary valuation date is $28,000. Aunt Lillian’s adjusted basis was $16,000. What is Mary’s initial basis and
holding period in the partnership interest if she sells the interest seven months after inheriting it?
a.
$16,000, short-term.
b.
$16,000, long-term.
c.
$28,000, short-term.
d.
$28,000, long-term.
e.
Both depend on whether it is sold at a gain or a loss.
61. If the executor of a decedent’s estate elects the alternate valuation date and none of the estate’s property is sold or
distributed before the alternate date, the estate’s assets are valued as of how many months after the date of death?
a.
0, date of death is the correct valuation date.
b.
3 months.
c.
6 months.
d.
9 months.
e.
12 months.
62. Ludwig died on April 5, 2015. As part of his will, he leaves land for which he paid $6,000 on December 31, 2014, to
his son Don. On April 5, 2015, the land is worth $11,000. However, due to local real estate conditions, the land declines in
18.
I.
In the absence of any special elections, Don‘s basis in the land is $11,000.
II.
If the executor elects the alternate valuation date and distributes the land to Don on July 28,
Don’s basis in the land will be $9,000.
III.
If the executor elects the alternate valuation date and distributes the land to Don on
December 18, Don’s basis will be $7,000.
IV.
In the absence of any special elections, if the executor distributes the land to Don on
Chapter 9
October 5, Don’s basis in the land will be $9,000.
a.
Only I is correct.
b.
I and II are correct.
c.
I, II and IV are correct.
d.
I and IV are correct.
e.
All the statements are correct.
63. Tony died on April 5, 2015. As part of his will, he leaves land that he paid $6,000 for in 2003 to his son Philip. On
April 5, 2015, the land is worth $11,000. However, due to local real estate conditions, the land continues to decline in
18.
I.
In the absence of any special elections, Philip‘s basis in the land is $6,000.
II.
If the executor distributes the land to Philip on July 28, Philip’s basis in the land will be
$10,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
64. On February 3 of the current year, Caroline converts her house to a rental property. Caroline’s adjusted basis in the
house is $120,000 and the fair market value is $150,000 on the date of conversion. What is Caroline’s adjusted basis in the
rental property for depreciation purposes?
a.
$30,000
b.
$120,000
c.
$150,000
d.
$170,000
e.
$180,000
65. On February 3 of the current year, Samantha converts her house to a rental property. Samantha’s adjusted basis in the
house is $150,000 and the fair market value is $120,000 on the date of conversion. Samantha uses the rental for 3 years
and properly deducts depreciation totaling $12,000. Then, she sells the house for $130,000. What is the amount of the
gain or (loss) recognized on the sale?
a.
No gain or loss
b.
$8,000 gain
c.
$20,000 loss
d.
$22,000 gain
e.
$ 8,000 loss
66. Dana purchases an automobile for personal use for $27,000. After using it for three years, Dana converts the
automobile to business use when the fair market value is $19,000. What is Dana’s basis for depreciation purposes?
a.
$- 0 –
b.
$19,000
Chapter 9
c.
$27,000
d.
The automobile cannot be depreciated.
67. Dana purchases an automobile for personal use for $27,000. After using it for three years, Dana converts the
automobile to business use when the fair market value is $19,000. After a few months of business use, Dana sells the
automobile for $18,000. What is the amount of gain or loss recognized on the sale of the automobile?
a.
No gain or loss
b.
$1,000 loss
c.
$8,000 loss
d.
$9,000 loss
e.
$8,000 gain
68. Kim owns a truck that cost $35,000 several years ago. After using it personally for two years, she converts the truck to
business use when the truck’s fair market value is $20,000. She uses the truck in her business and appropriately deducts
$5,000 in depreciation. Then, she sells the truck for $42,000. What is Kim’s recognized gain or loss on the sale?
a.
No gain or loss
b.
$12,000 gain
c.
$27,000 gain
d.
$32,000 gain
e.
$ 7,000 gain
69. Marjorie starts a new consulting business out of her home. She converts her personal computer, which cost $3,400, to
business use when it is worth $1,200. Which of the following is correct?
I.
The initial basis for determining a gain on the sale of the computer is $1,200.
II.
The basis for depreciation purposes is $1,200.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
70. Kevin buys one share of Mink, Inc., common stock for $100. On February 3 of the current year, the corporation makes
a nontaxable distribution of one share of preferred stock to all holders of record of common stock. On the distribution
date, the common stock is trading at $250 and the preferred stock is trading at $50. After the distribution, Kevin’s bases in
the two shares of stock are:
Common Preferred
a.
$50.00 $50.00
b.
$100.00 $- 0 –
c.
$83.33 $16.67
d.
$250.00 $50.00
e.
$80.00 $20.00
71. Jenny purchased 1,000 shares of Hewlett Corporation preferred stock for $66,000 two years ago. During the current
year, Jenny receives a 10% nontaxable stock dividend at a time when the stock has a fair market value of $40. What is
Jenny’s basis in the stock dividend shares?
a.
$- 0 –
b.
$6,000
c.
$6,600
d.
$8,000
e.
$8,800
72. Mitaya purchased 500 shares of Sundown Inc., common stock on December 13, 2013, at a cost of $3,600. She paid a
commission of $150 on the purchase. On February 18, 2014, she received 250 shares of Sundown Inc., common stock as a
tax-free dividend. Mitaya sells 600 shares for $3,700 on January 8, 2015, and pays a $100 commission on the sale.
Mitaya’s gain (loss) on the sale is characterized as:
a.
Long-term capital gain of $600.
b.
Long-term capital gain of $500; short-term capital gain of $100.
c.
Long-term capital gain of $100; short-term capital gain of $500.
d.
Short-term capital gain of $600.
73. Terri owns 1,000 shares of Borneo Corporation common stock. On March 31 of the current year, when the stock is
trading at $2 per share, Borneo declares a 5% stock dividend with the option to receive $2 cash per dividend share in lieu
of taking the dividend shares. The dividend is distributed on April 30. Terri elects to receive the stock shares rather than
the cash dividend. What are the tax effects for Terri?
I.
Terri’s stock dividend is nontaxable.
II.
Terri’s basis in her new shares is $100.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
74. Dustin buys 200 shares of Monroe Corporation common stock on December 1, 2014, for $2,000. He buys an
additional 200 shares for $1,800 on December 23, 2015. On December 28, 2015, Dustin sells the first 200 shares for
$1,700. He sells the last 200 for $1,600 on June 15, 2016. What is (are) the amount(s) and the year of recognition of losses
that Dustin can recognize?
2014 2015
a.
– 0 – $200
b.
– 0 – $500
c.
$300 $200
d.
$300 $500
75. Reiko buys 200 shares of Saratoga Corporation common stock on December 10, 2014, for $2,000. He buys an
additional 200 shares for $1,800 on December 23, 2015. On December 28, 2015, Reiko sells 100 of the first 200 shares
for $800. He sells the remaining 300 shares for $2,500 on November 15, 2016. What is(are) the amount(s) and the year of
recognition of losses that Reiko can recognize?
Chapter 9
2015 2016
a.
– 0 – $300
b.
– 0 – $500
c.
$200 $500
d.
$200 $300
76. During 2006, Charles purchased 1,000 shares of Ryan Corporation stock for $12,000. On February 22, 2015, he sells
all the shares for $9,000. On March 15, 2015, he repurchases 1,000 shares of Ryan for $8,000 and holds them until May
29, 2015, when he sells them for $10,000. What is Charles’ recognized gain or loss on the May 29, 2015, sale?
a.
$1,000 loss.
b.
$2,000 gain.
c.
$2,000 loss.
d.
$1,000 gain.
e.
No gain or (loss) recognized
77. Melonie purchased 100 shares of Wake Corporation stock for $6 per share on August 3, 2013. On December 18, 2014,
Melonie sells all 100 shares for $4 per share. On January 5, 2015, Melonie purchases 50 shares of Wake stock for $5 per
share. What is the basis of the 50 shares Melonie holds on January 5, 2015?
a.
– 0 –
b.
$50
c.
$250
d.
$450
e.
$650
78. Indicate the classification of each of the following assets as personal property, real property, intangible property,
personal use property or business use property.
a.
A dentist purchases a sofa for the waiting room at his dental office.
b.
A dentist purchases a sofa for his living room at home.
c.
A dentist has a landscape architect plant shrubbery and trees around his office building.
d.
A dentist pays a landscaper to grade his land and install fencing for a baseball practice field for
his son.
e.
A dentist obtains a patent for a procedure he developed.
a.
The sofa is personal property used in a business.
b.
The sofa is personal property that is used for personal use.
The shrubbery and trees are considered land improvements and are classified as real property
d.
The landscaping work would be considered land improvements and classified as real property
e.
The patent is an intangible asset used in his business.
79. Sara constructs a small storage shed for resale to customers and incurs the following costs:
Chapter 9
$3,000
Direct labor
1,500
Direct materials
700
Other direct costs
300
Allocated indirect costs
a.
What is Sara’s basis in this storage shed?
b.
Sara normally sells the storage sheds for $7,000 each. John, one of the workers who builds
the storage sheds, buys one for $5,000. What is John’s basis in his storage shed?
$3,000
Direct labor
1,500
Direct materials
700
Other direct costs
300
Allocated indirect costs
$5,500
Adjusted basis
b.
This is a bargain purchase and John will have to report the $2,000 difference as income
80. Determine the adjusted basis of the following assets.
a.
Dennis buys land by paying $45,000 in cash and assuming a loan for $45,000. He incurs legal
fees and commissions of $5,000. He pays $3,000 to have tree seedlings planted on the property.
A flood causes $6,000 of damage to the property. Dennis does not carry flood insurance, so he
deducts the total loss on his tax return. His property tax liability for this year is $750 and his
interest on the loan is $1,850.
b.
Tyler buys 100 shares of Oliver Corporation stock at $150 per share plus commissions of $300.
At the end of the year, Oliver pays a $10 per share cash dividend and informs shareholders that
$6 per share is taxable as a dividend and $4 is a nontaxable dividend.
c.
Taylor Corporation acquires an asset for $8,000 in its first year of operation. Since the
company suffers a loss during this first year of operation, the bookkeeper decides to deduct
only half of the depreciation that was allowable on this asset and claims a depreciation
deduction of $800, instead of $1,600.
$95,000
Original basis ($45,000 cash + $45,000 loan + $5,000 fees)
3,000
Tree seedlings
(6,000)
Uninsured casualty loss
$92,000
Adjusted basis
$15,300
Original basis ($150 × 100 shares + $300 commissions)
(400)
Nontaxable dividend ($4 × 100 shares)
$14,900
Adjusted basis
$8,000
Original basis
(1,600)
Allowable depreciation
$6,400
Adjusted basis
Basis must be adjusted for the larger of depreciation allowed ($500) or allowable ($1,000).
81. Tony receives an automobile from his uncle, Ned, as a graduation gift. Ned used the vehicle only for commuting to his
office during the 3 years he owned it. Ned paid $20,000 for the vehicle. It is valued at $8,000 on the date of the gift. Tony
will use the automobile 100% of the time for his business. Determine Tony’s basis in the automobile for depreciation
purposes. Explain your answer in terms of the concepts of taxation.
82. For each of the following situations, identify the property’s adjusted basis and briefly explain how you determined the
adjusted basis amount.
a.
Mei-ling purchased 150 shares of MAPCO stock for $5,400 in 2004. On February 28, 2015,
Mei-ling purchased another lot of 150 shares of identical stock for $3,750. Mei-ling sells the
original 150 shares of MAPCO stock for $3,300 on March 15, 2015. What is Mei-ling’s basis in
the 150 shares she purchased February 28, 2015?
b.
Ralph gives Linda 500 shares of Money Maker common stock. The stock cost Ralph $30,000
several years earlier. The stock is worth $50,000 on the date it is given to Linda, and Ralph
pays $1,500 of gift tax on the transfer. What is Linda’s basis in the stock if she sells it for
$20,000?
c.
Assume the same facts as in part b, except that the fair market value of the stock on the date of
the gift is $25,000.
d.
Leon receives a van as a gift from his father. His father’s basis in the van is $30,000. The fair
market value at the date of the gift is $20,000. A gift tax of $2,000 is paid on the gift. Geroge
uses the van in his pizza delivery service for three years, at which time he sells it for $8,000.
During the three years he used the van in his business, Geroge deducts $10,000 in depreciation
on the van.
e.
Bonita owns a house that she used as a residence until this year. She paid $150,000 for the
house on November 4, 2002. On April 4, 2015, Bonita purchases a new residence and converts
the former residence into office space to use in her real estate business. The former residence is
worth $180,000 on April 4, 2015.
Mei-ling’s basis is $5,850 ($3,750 + $2,100). The March 15 sale results in a loss of $2,100
basis of the February 28 shares.
Linda’s basis is $30,600. Under the general basis rule for gifts, Linda’s basis is equal to Ralph’s
basis plus any gift tax paid on the net appreciation in the stock. The adjustment for gift tax paid
83. Samantha receives 100 shares of Burnet Corporation stock as a gift from her cousin. At the date of the gift the stock is
valued at $60 per share. It cost her cousin $10 per share several years before. One month later, Samantha’s uncle dies and
she inherits 100 shares of Crockett Corporation stock from her uncle’s estate. The stock cost her uncle $10 per share
twenty-five years ago. On the date of death the stock has a value of $60 per share. Samantha needs money to invest in her
business, but she does not need to sell both blocks of stock this year. Which stock would you recommend Samantha to
sell?
84. Jose is exploring his options to minimize his tax liability for this year. Earlier in the year Jose sold a substantial
number of his securities and recognized a $15,000 gain. He would like to mitigate the tax effects of that gain. The
remainder of Jose’s portfolio consists of 1,000 shares of Garfield Corporation stock. Jose has not sold it because it has a
history of paying large dividends. Jose paid $20,000 for the stock, but it is currently trading for $5 per share. Jose is
considering selling all of his Garfield stock, realizing the loss, netting it against his capital gains, and then repurchasing
1,000 shares a few days later. He knows he will lose some money due to transaction and brokerage costs, but he feels it
may be worth it. Discuss Jose’s plan. Relate your analysis to the basic tax concepts that help drive your position.
85. Morrison received a gift of income-producing property with an adjusted basis of $50,000 to the donor and a fair
market value of $40,000 on the date of the gift (December 31, 2015). The donor paid a gift tax of $1,000. Morrison sells
the property on September 17, 2015 for $45,000. What is the gain or loss on the property?
86. Randall is given five acres of land in 2005. At the time of the gift, the land had a fair market value of $182,000, and its
adjusted basis to the donor was $160,000. What is Randall’s gain if he sells the land for $184,000?
87. Perry inherits stock from his Aunt Margaret that had a basis of $40,000 to Margaret and a fair market value of $54,000
on May 20, 2015, the date of her death. Paul sells the stock on June 21, 2015 for $65,000. What is the amount and
character of the gain or loss on the sale?
88. Gordon is the sole shareholder of Whitman Corporation, an S corporation. At the beginning of the year, Gordon’s basis
in his Whitman stock is $100,000. During the year, Whitman Corporation has operating income of $50,000; dividends
from domestic corporations of $15,000; tax-exempt interest of $5,000; nontaxable life insurance proceeds of $10,000 on
the death of a key employee; and a capital loss of $15,000. Whitman pays no dividends. What is Gordon’s year-end basis
in Whitman stock (after the distribution)?
Beginning basis
Add: Items increasing basis
Operating income
Tax-exempt interest
Deduct: Items decreasing basis
Capital loss
Ending basis
Match each statement with the correct term below.
a.
Land and structures permanently attached to land.
b.
Property that lacks a physical existence.
c.
Property that is used by the taxpayer for purely personal purposes.
d.
Any property that has form, shape, and substance.
e.
Property with a physical existence that is not real estate.
f.
A single property used in more than one category.
89. Intangible property
90. Tangible property
91. Mixed-use property
92. Personal use property
93. Personalty
94. Real property
Match each statement with the correct term below.
a.
Begins on the day after acquisition and ends on the day of disposition.
b.
The initial investment in an asset.
Inherited property always has a long term holding period.
Chapter 9
c.
An asset’s basis transfers from one owner to another.
d.
The capital investment remaining in an asset at the date of its disposition.
e.
Sales price less expenses of disposition.
f.
A purchase of all of the assets of a business.
g.
Amount realized is less than adjusted basis.
h.
A purchase of all of the assets of a business by buying the stock of a corporation.
i.
A term used to identify a situation in which an asset has a different basis for determining gain than for determining
loss.
j.
The date of death used to value a decedent’s estate in the absence of any special election.
k.
Six months after the date of death, used to value a decedent’s estate when the executor of the estate makes election.
l.
Amount realized is greater than adjusted basis.
95. Amount realized
96. Adjusted basis
97. Basis
98. Carryover basis
99. Split basis
100. Indirect purchase
101. Direct purchase
102. Realized loss
103. Realized gain
104. Holding period
105. Primary valuation date
106. Alternate valuation date