14
Property Transactions: Basis Determination and Recognition of Gain or Loss
Solutions to Tax Research Problems
14-39 1. In the first situation, H is able to find a buyer who will pay $1,000 for the
building. Upon this transfer, H has gain as follows:
Amount realized:
Amount of cash received $ 1,000
Fair market value of other property 0
Liabilities discharged 155,000 $ 156,000
Less: Adjusted basis ($175,000 – $37,500) (137,500)
Gain recognized $ 18,500
This analysis follows the general rules under § 1001 and the Supreme Court
decision in Crane v. Comm. as covered in the chapter.
2. When the property is of less value than the remaining balance on the note, some
question arises as to the amount realized. It is because the liability is nonrecourse
that questions arise as to the amount that is “realized.” It is arguable that
“realization” equates to “benefits,” and that the benefit to the owner cannot exceed
the value of the property, since that is the only benefit the transferee obligee
receives. The two possible results are compared below.
Method 1 Method 2
Amount realized:
Amount of cash received $ 0 $ 0
Fair market value of other property 0 0
Liabilities discharged 155,000 150,000
Total $ 155,000 $ 150,000
Less: Adjusted basis (137,500) (137,500)
Gain recognized $ 18,500 $ 13,500
Essentially, under Method 2, the seller was able to include liabilities in the basis
of the property sold, without including them in the amount realized upon sale.
This results in a “double deduction” of sorts, because different standards are used
when the asset is depreciated and when it is sold.
Method 2 was rejected by the Supreme Court in the appeal of Comm. v. Tufts,
83-1 USTC 1¶9328, 51 AFTR2d 83-1133, 103 S. Ct. 1826 (USSC, 1983). This is
consistent with the IRS’ position in Reg. § 1.1001-2. It is, therefore, appropriate
that the amount realized include the entire amount of the liabilities, as in Method
1 above.
14-40 The purpose for this problem is to consider the effect of using the fair market
value of property to value charitable contributions and analyze the effects of the
limitations on charitable deductions of property on bargain sales. The limits do
not apply to contributions of real property to “public charities.” However, they do
apply to contributions of tangible personalty which is capital gain property.
1. Since the limits do not apply, the contribution is the fair market value minus
the sales price, determined as follows:
Fair market value $ 85,000
Less: Sales price (55,000)
Net charitable contribution $ 30,000
K also has gain on this transaction measured by the difference between the
sales price and the allocable portion of the adjusted basis per § 101 l(b),
determined as follows:
Sales price $ 55,000
Less: Allocable basis*(25,882)
Recognized gain or loss $ 29,118
*$55,000/$85,000 × $40,000 = $25,882
In summary, K will report a long-term capital gain of $29,118 on Schedule D
and a charitable contribution of $30,000, limited to 30 percent of A.G.I., on
Schedule A.
2. Since the painting is tangible personalty which is a capital asset, the amount of
the charitable contribution is the fair market value minus 100 percent of the
gain which would be recognized if the property were sold for its fair market
value. This results in a contribution value of $40,000. Since $55,000 is
realized on sale, no charitable contribution is allowable. Furthermore, no
allocation of basis is required since allocation is required under § 1011 (b)
only if a charitable contribution deduction is allowed. Therefore, K reports a
gain on Schedule D as follows:
Sales price $ 55,000
Less: Adjusted basis (40,000)
Gain on sale $ 15,000
Note: K receives much better treatment on the bargain sale of the real property
than she receives upon transfer of the painting.
14
Property Transactions: Basis Determination and Recognition of Gain or Loss
Test Bank
True or False
________ 1. Gain or loss is realized any time there is a sale or other disposition of
property.
________ 2. The cost basis of a given property does not include liabilities payable to
the seller by the buyer because no cash changes hands.
________ 3. A taxpayer who owns indistinguishable shares of stock purchased in two
or more transactions and who later sells some of the stock must identify
the shares sold using the last-in, first-out (LIFO) method.
________ 4. The general rule to determine the basis of property acquired by gift is
that the donee’s basis is equal to the donor’s basis plus any gift taxes
paid.
________ 5. The general rule for determining the basis of property acquired from a
decedent does not apply to income in respect of a decedent.
________ 6. The alternate valuation date for an estate is nine months after a
decedent’s death.
________ 7. In order for an executor of an estate to elect the alternate valuation date,
an estate tax return must be filed and the alternate valuation must be less
than the FMV as of the decedent’s death.
________ 8. A deferred gain resulting from a nontaxable exchange of property
represents an increase in basis.
________ 9. When property is converted from personal to business use, the basis for
loss and for depreciation can be no greater than the fair market value at
the time of the conversion.
________ 10. Allowable depreciation reduces the basis of an asset whether the
depreciation is deducted or not.
________ 11. Liabilities are included in the amount realized only if the seller was
personally liable for their payment.
________ 12. If a taxpayer converts business property to personal use before selling it,
he or she will be prohibited from deducting a loss on the sale.
________ 13. Gain or loss is realized when property other than cash is transferred to a
creditor in satisfaction of a debt obligation.
________ 14. The transfer of 20 shares of stock in satisfaction of a liability constitutes
a sale or other disposition of the stock, resulting in gain or loss realized.
________ 15. The abandonment of property used in a business or income-producing
activity generally results in a loss equal to the property’s adjusted basis.
________ 16. Where there is no intent to demolish a building at the time of acquisition,
the amount of loss on the building may be deducted at the time of
subsequent demolition.
________ 17. F sold 30 shares of GMX stock to R, her husband, for its fair market
value of $1,500. F’s basis in the stock was $1,200, so she recognizes a
gain of $300.
________ 18. Under a divorce agreement, R was required to transfer his share of the
jointly owned home to his ex-wife, L. The home cost $72,000 and was
worth $124,000 at the time of the transfer. R has no gain and L’s basis is
$72,000.
________ 19. The recipient of a property that is transferred part as a gift and part as a
sale acquires a basis in the property that is the lesser of the basis under
the gift rules or the purchase (i.e., cost) basis.
________ 20. A bargain sale of property to a qualified charity can result in both a
charitable deduction and gain recognition.
________ 21. A businessman purchases three trucks at an auction. Six months later, he
sells one of the trucks. He may choose as his basis for this truck either
his adjusted basis in the truck or the FMV of the truck on the date of the
auction.
________ 22. When a sole proprietorship is sold, the gain or loss is generally capital
gain or loss.
________ 23. Installment sale reporting applies to gains only.
________ 24. M sold 10 shares of Ford Motor Co. at a gain through his broker on
December 30, 20112012. M must report the gain on his 20112012 return.
________ 25. If an installment sale agreement involving a $15,000 note calls for no
interest, interest must be imputed both to the buyer as interest expense
and to the seller as interest income.
Multiple Choice
________ 26. The adjusted basis of purchased property is
a. Equal to the fair market value of the property at the time of purchase
b. Defined as the book value of the property
c. Reduced by any debt owed on the property before any gain or loss is
computed
d. Generally its cost, plus or minus certain adjustments
________ 27. Which statement below is true with regard to property transactions?
a. The amount realized represents the economic value received by the
taxpayer.
b. The amount recognized represents the economic value received by
the taxpayer.
c. A recognized loss generally is deferred to later tax years.
d. A recognized gain may be included in the computation of taxable
income but may not be offset against loss for the year.
________ 28 N sold a summer cabin to Y for $30,000 in cash and a recreational
vehicle. Y had an adjusted basis in the RV of $15,000 at the time of the
sale, although its fair market value was $22,000. N had an adjusted basis
in the cabin of $44,000. Assume there were no selling costs. What was
N’s amount realized in the sale?
a. $55,000
b. $45,000
c. $52,000
d. $44,000
________ 29 N sold a summer cabin to Y for $30,000 in cash and a recreational
vehicle. Y had an adjusted basis in the RV of $15,000 at the time of the
sale, although its fair market value was $22,000. N had an adjusted basis
in the cabin of $44,000. Assume there were no selling costs. What was
N’s realized gain or (loss)?
a. ($8,000)
b. ($1,000)
c. $8,000
d. $10,000
________ 30. F traded in a business automobile worth $4,500 subject to $2,000 of
outstanding debt, for a new automobile worth $10,500. F signed a note
for $8,000, and no cash changed hands. What is F’s amount realized on
this trade?
a. $2,000
b. $4,500
c. $10,500
d. Indeterminable from the facts given
________ 31 Which one of the following is true of selling costs?
a. They generally are divided equally between the seller and the buyer.
b. They include costs associated with offering a property for sale, but
not those associated with transacting the sale.
c. They do not affect the amount realized in a transaction.
d. They may include both sales commissions and transfer taxes.
________ 32 C sold 300 shares of IBM stock for $5,200. She had paid $3,000 for the
stock. Commissions of $300 on the sale and $180 on the purchase were
paid. How much are C’s amount realized and her gain realized,
respectively, on this sale?
a. $2,200 and $1,720
b. $4,720 and $1,720
c. $4,900 and $1,720
d. $5,200 and $2,200
________ 33 T purchased the following lots of ZYX Corporation stock:
25 Shares Purchased 4/30/20112012 Cost $1,800
40 Shares Purchased 5/20/20112012 Cost $3,000
25 Shares Purchased 9/21/20112012 Cost $2,000
T sold 70 shares in December, 20112012, for $6,300, but was unable to
identify specific shares to be sold by certificate number and date of
purchase. What was T’s adjusted basis in the $30,000 shares sold?
a. $5,200
b. $5,250
c. $5,360
d. $6,300
________ 34. G inherited a late model Mercedes Benz from his great-aunt last year.
The auto was worth $28,000 when his aunt died, and G sold the auto two
months later for $30,000. The aunt had purchased the auto three months
before her death for $38,000. How much gain (or loss) does G recognize
on this sale?
a. $0
b. $2,000
c. ($10,000)
d. ($8,000)
________ 35. E received 50 acres of undeveloped land as a gift from her grandmother
this year. The land had cost $20,000 15 years ago, but was appraised at
$50,000 on the date of the gift. E’s grandmother paid gift taxes of
$12,000 on this $36,000 taxable gift ($50,000 fair value – $14,000
annual gift tax exclusion). What is E’s basis in the land?
a. $20,000
b. $30,000
c. $32,000
d. $36,000
________ 36. Last year, E received 50 acres of undeveloped land as a gift from her
grandmother. The land had cost $20,000 15 years ago, but was appraised
at $50,000 on the date of the gift. E’s grandmother paid gift taxes of
$12,000 on this $36,000 taxable gift ($50,000 fair value – $14,000
annual gift tax exclusion). If E sells the land this year for $55,000 (net of
selling expenses), what is her gain on the sale?
a. $5,000
b. $19,000
c. $23,000
d. $25,000
________ 37. Several years ago, E received 50 acres of undeveloped land as a gift
from her grandmother. The land had cost $20,000 15 years ago, but was
appraised at $50,000 on the date of the gift. E’s grandmother paid gift
taxes of $12,000 on this $36,000 taxable gift ($50,000 fair value –
$14,000 annual gift tax exclusion). If E sells the land this year for
$32,000 (net of selling expenses), what is her gain or loss on the sale?
a. $2,000 gain
b. $4,000 loss
c. $18,000 loss
d. No gain or loss
________ 38. The adjusted basis to the recipient of property bequeathed by a decedent
generally is which of the following?
a. Fair market value on the valuation date of the decedent’s estate
b. Adjusted basis to the decedent on the valuation date of his or her
estate
c. Fair market value on the valuation date of the decedent’s estate, less
estate taxes paid on the transfer
d. Adjusted basis to the decedent on the valuation date of his or her
estate, plus estate taxes paid on the transfer
________ 39. D owns a new pizza restaurant. She converted her home, which she had
purchased for $75,000 for use in the business when it was worth
$70,000. Which of the following is not true of the home’s basis for the
business?
a. $75,000 is used for determining depreciation.
b. $70,000 is used for determining loss.
c. $75,000 is used for determining gain.
d. The basis must be adjusted for depreciation allowed or allowable for
determining either gain or loss.
________ 40. C replaced the car that she had used exclusively for her business with a
new model. The older car cost $20,000, and its basis after allowable
depreciation had been $15,500 at the time C converted it to personal use.
This year C sold the older car for $9,000. What loss on the sale may she
claim as a deduction?
a. $0
b. $6,500
c. $11,000
d. C’s loss is indeterminable from the given information.
________ 41. S sold a business microcomputer for $2,000 that she had purchased for
$2,500 several months earlier. Assume the depreciation deducted under
MACRS on the computer for the actual holding period was $1,795.
What is the amount of S’s gain recognized on this sale?
a. $0
b. $500
c. $1,795
d. $1,295
________ 42. Liabilities that reduce the amount realized from a transaction include
which of the following?
a. Any liabilities of the seller assumed by the buyer
b. Limited liabilities of the seller assumed by the buyer
c. Any liabilities assumed by the seller related to the transaction
d. Nonrecourse debt assumed by the buyer
________ 43. W sold a residence for $40,000 payable as follows:
Cash down payments $ 8,000
Existing loan assumed by buyer 20,000
Promissory note bearing interest at
10 percent, payable to W in two years 12,000
No payments were made on the promissory note during the year of sale.
Assuming W’s basis is $30,000, how much gain is recognized by W in
the year of sale? Ignore selling costs.
a. $2,000
b. $4,000
c. $7,000
d. $10,000
________ 44. A realization of gain or loss occurs
a. When the seller has an unqualified right to collect the purchase price
b. When the seller receives cash or cash equivalents in payment of the
purchase price
c. When possession of the burdens and benefits of ownership are
transferred to the buyer
d. Under any circumstance listed above, depending in part on the
accounting method used by the taxpayer
________ 45. Which of the following transactions is a taxable event? (Assume that the
condition of being substantially identical is determined in terms of rate
of return and fair market value.)
a. Conversion of bonds into stock under a conversion privilege
contained in the bond instrument
b. Exchange of substantially identical bonds of state or municipal
governments
c. Exchange of substantially identical stocks of publicly held
corporations
d. Conversion of stock into some other stock of the same corporation
pursuant to a right granted under the stock certificate
________ 46. Which of the following transactions is not a taxable disposition of
property?
a. Voluntary transfer of mortgaged property to creditors in satisfaction
of a debt
b. Loss of property in a foreclosure sale
c. Transfer of physical property in lieu of cash payments to retire a note
d. Grant of a lien against property to secure a loan
________ 47. A and E are a married couple living in a community property state. E
owned an apple orchard in which she had a basis of $70,000. She sold
the orchard to A last year for its fair market value of $100,000. They
remain happily married. What gain did E recognize on the sale?
a. $0
b. $30,000
c. $70,000
d. $100,000
________ 48. F owns land with an adjusted basis of $45,000 and a fair market value of
$72,000. Which one of the following is true of a transfer by F to his
spouse, G?
a. If F gives a one-half interest in the land to G as a wedding gift, gain
of $13,500 is recognized.
b. If F sells the land to G for $50,000 incident to their divorce, no gain
is recognized and G’s basis is $45,000.
c. If F transfers the land to G without consideration incident to their
divorce, gain of $13,500 is recognized.
d. If F sells the land to G for $72,000 incident to their divorce, gain of
$27,000 is recognized and G’s basis is $72,000.
________ 49. R sold the family homestead to his daughter for $250,000 at a time when
its fair market value was $400,000. R’s basis was $130,000. How much
gain does R realize on the transaction?
a. $0
b. $120,000
c. $250,000
d. $270,000
________ 50. M sold a family heirloom to her nephew last year for $1,200 plus an
$1,800 note payable to M at $100 per month plus interest. The silver
place settings had been purchased by M 30 years earlier for $1,600, and
were worth $6,000 at the time of the sale/gift. How much gain does M
realize?
a. $0
b. $1,400
c. $3,000
d. $4,400
________ 51. In which transaction did the donor/seller not recognize a gain?
a. A gave his car to his brother, who took over the 12 months of
payments remaining due; the indebtedness represented by the
remaining payments exceeded A’s basis in the car at the time of the
transfer.
b. B sold a boat with a basis of $40,000 and fair market value of
$60,000 to her nephew for $50,000.
c. C sold a cabin with a basis of $45,000 and fair market value of
$50,000 to his niece for $50,000.
d. D gave her sister securities with a basis and fair market value of
$25,000 in exchange for $10,000 in cash and a five-year, $15,000
note at 10 percent interest.
________ 52. H sold a parcel of real estate worth $45,000 to his favorite qualified
charity for $30,000. H had a tax basis in the unimproved parcel of
$36,000. What are the amounts of H’s charitable contribution and his
gain or loss recognized, respectively, on this sale?
a. $0 and $0
b. $15,000 and ($6,000)
c. $15,000 and $0
d. $15,000 and $6,000
________ 53. H sold a parcel of real estate worth $45,000 to his favorite qualified
charity for $30,000, subject to a $10,000 note that is assumed by the
charity. H had a tax basis in the unimproved parcel of $36,000. What are
the amounts of H’s charitable contribution and his gain or loss
recognized, respectively, on the sale?
a. $0 and $0
b. $5,000 and $8,000
c. $15,000 and $8,000
d. $15,000 and $16,000
________ 54. W owned and operated a printing shop as a sole proprietorship for two
decades before selling it to Z. Which statement is true?
a. W should report the total amount realized, less his total adjusted
basis in the business, as a capital gain or loss.
b. W should report the total amount realized, less his total adjusted
basis in the business, as an addition to or a deduction from net
income.
c. W should proportionally allocate the total sales price to each
category of property represented among the assets of the business in
order to determine the amount of gain or loss for each category.
d. W and Z should agree on a value for each category of property from
which W can subtract the respective adjusted bases in order to
determine the amount of gain or loss for each category.
________ 55. Which statement is not true concerning installment contracts and
unstated interest?
a. Unstated interest increases the sale price
b. Unstated interest results in income to the seller
c. The buyer is entitled to an interest deduction for paying unstated
interest
d. Unstated interest sometimes must be taken into account even if a
stated rate of interest is included in the sales contract
________ 56. Which one of the following losses may be recognized?
a. Decline in the value of P’s computer before he converted it from
personal to exclusively business use
b. Sale of property by M to his son for an amount less than either M’s
basis in the property or its fair market value at the time of sale
c. $2,000 by K, if L’s adjusted basis in jewelry was $35,000, its fair
market value in 2007 2008 was $30,000 when she gave it to her
friend K, and K held it for investment and sold it this year for
$28,000
d. $7,000 by K, if L’s adjusted basis in jewelry was $35,000, its fair
market value in 2007 2008 was $30,000 when she gave it to her
friend K, and K held it for investment and sold it this year for
$28,000
________ 57. Which condition is not true of a wash sale?
a. A wash sale occurs when a taxpayer sells securities at a loss and
reinvests in substantially identical securities within 30 days before or
after the date of sale.
b. A taxpayer who transacts a wash sale has not had a change in
economic position.
c. The numbers of shares purchased and sold are not always the same.
d. When the number of shares repurchased is less than the number sold,
none of the loss is deductible.
________ 58. B sold 300 shares of corporate stock for $2,500 on March 15, 20112012.
B had a basis in the shares of $5,500. On February 27, 20112012, B had
purchased 150 shares of identical stock for $1,300. How much are B’s
gain or (loss) recognized and her basis in the new shares, respectively,
from these transactions?
a. ($1,500) and $4,050
b. ($1,500) and $2,800
c. ($250) and $2,800
d. $0 and $5,550
________ 59. Which one of the following family members is not related for purposes
of nondeductible losses on sales to related parties?
a. Sister
b. Spouse
c. Uncle
d. Grandchild
________ 60. B purchased a tractor trailer from his mother for its fair market value of
$2,100. She had used the trailer exclusively for business purposes. At the
time of sale, the mother’s basis in the vehicle was $5,500. What is B’s
recognized gain or loss if he immediately sells the vehicle for $3,200?
a. ($3,400)
b. ($2,300)
c. $0
d. $1,100
14
Property Transactions: Basis Determination and Recognition of Gain or Loss
Solutions to Test Bank
True or False
Multiple Choice
14
Property Transactions: Basis Determination and Recognition of Gain or Loss
Comprehensive Problems
Solutions to Comprehensive Problems
