Tax Research Gleim Chapter 8

Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to the equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for business use. At the time the gift was made, the equipment had a fair

A. $31,000
Answer (A) is correct.
According to IRS Publication 551, if the FMV of the property is equal to or greater than the donor's adjusted basis, the donee's basis is the donor's adjusted basis at the time the donee received the gift. The fair market

Fred Berk bought a plot of land with a cash payment of $40,000 and a $50,000 mortgage. In addition, Berk paid $200 for a title insurance policy. Berk's basis in this land is
A. $40,000
B. $40,200
C. $90,000
D. $90,200

D. $90,200
Answer (D) is correct.
The basis of property is its cost. Cost includes cash paid and any debt to which the property is subject, regardless of whether the debt is recourse or nonrecourse. In addition, basis includes expenditures for major impro

In January Year 1, Joan Hill bought one share of Orban Corp. stock for $300. On March 1, Year 3, Orban distributed one share of preferred stock for each share of common stock held. This distribution was nontaxable. On March 1, Year 3, Joan's one share of

B.
$225
$75
Answer (B) is correct.
Since the preferred stock dividend was nontaxable, the original basis of the common stock is allocated between the common stock and the preferred stock based on the relative fair market value of each on the date of the s

The uniform capitalization method must be used by
Manufacturers of tangible personal property
Retailers of personal property with $2 million in average annual gross receipts for the 3 preceding years
A. I only.
B. II only.
C. Both I and II.
D. Neither I n

A. I only.
Answer (A) is correct.
A taxpayer that produces tangible personal property must capitalize all of the direct costs of producing the property and an allocable share of indirect costs regardless of whether the property is sold or used in the taxp

In June of the current year, Susan's mother gave her 100 shares of a listed stock. The donor's basis for this stock, which she bought 10 years ago, was $4,000, and market value on the date of the gift was $3,000. Susan sold this stock in July of the curre

A. $0
Answer (A) is correct.
To compute gain, a donee's basis is the same as the donor's basis, adjusted for gift tax. For computing loss, the lower of the donor's adjusted basis or the FMV of the property is used. If the property is later transferred for

Which of the following is subject to the Uniform Capitalization Rules of Code 263A?
A. Editorial costs incurred by a freelance writer.
B. Research and experimental expenditures.
C. Mine development and exploration costs.
D. Warehousing costs incurred by a

D. Warehousing costs incurred by a manufacturing company with $12 million in annual gross receipts.
Answer (D) is correct.
The uniform capitalization rules require the costs for construction (manufacture) of real or tangible personal property to be used i

Dunn received 100 shares of stock as a gift from Dunn's grandparent. The stock cost Dunn's grandparent $32,000, and it was worth $27,000 at the time of the transfer to Dunn. Dunn sold the stock for $29,000. What amount of gain or loss should Dunn report f

A. $0
Answer (A) is correct.
If the FMV on the date of the gift is less than the donor's basis, the donee has a dual basis for the property.
Loss basis. The FMV at the date of the gift is used if the property is later transferred at a loss.
Gain basis. Th

Greller owns 100 shares of Arden Corp., a publicly traded company, which Greller purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Arden declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 share. Immediat

A. $5,000
Answer (A) is correct.
A stock split is not a distribution. The basis in the old stock is "split" and allocated to the new stock. Consequently, the basis in the new stock is $50 per share ($10,000 � 200 shares). Therefore, the total basis in sol

Farr made a gift of stock to her child, Pat. At the date of gift, Farr's stock basis was $10,000 and the stock's fair market value was $15,000. No gift taxes were paid. What is Pat's basis in the stock for computing gain?
A. $0
B. $5,000
C. $10,000
D. $15

C. $10,000
Answer (C) is correct.
The amount of the gift is the FMV of the property given. However, the donee's basis in the gift is the same basis as it was in the donor's hands plus any gift taxes paid

Iris King bought a diamond necklace for her own use at a cost of $10,000 10 years ago. In the current year, when the fair market value was $12,000, Iris gave this necklace to her daughter, Ruth. No gift tax was due. If Ruth sells this diamond necklace in

A. $3,000
Answer (A) is correct.
The basis of property acquired by gift is usually the donor's adjusted basis, increased by any gift tax attributable to appreciation. Since no gift tax was paid, Ruth's sale produces gain of $3,000, all of which must be cu

Lewis Brown bought four lots of land for $100,000. On the date of purchase, the lots had the following fair market values:
Lot #1 $25,000
Lot #2 $31,250
Lot #3 $20,625
Lot #4 $48,125
What is the basis to Lewis of Lot #3?
A. $31,250
B. $25,000
C. $20,625
D

D. $16,500
Answer (D) is correct.
When more than one asset is purchased for a lump sum, the basis of each is computed by apportioning the total cost based on the relative FMV of each asset. Lot #3 has a FMV that is 16.5% of the FMV of all of the lots purc

Mr. Pine purchased a small office building. Included in his costs were the following:
Cash down payment $ 50,000
Mortgage on property assumed
300,000
Title insurance 2,000
Fire insurance premiums 2,000
Attorney fees 1,000
Rent to former owner to allow Mr.

C. $353,000
Answer (C) is correct.
The basis of property is its original cost. The cost of property includes debt to which the property is subject (Crane, 331 U.S. 1, 1947). Further, the cost of property includes necessary expenses paid in connection with

Ms. Willow operated a small manufacturing plant. She took delivery on a new plastic mold stamping machine. Her costs included the following:
Cost of machine $88,000
Sales tax 4,000
Freight charges to deliver property to her 1,500
Excise taxes 2,000
What i

A. $95,500
Answer (A) is correct.
The basis of property is the cost of the property. Sales and excise taxes paid in connection with the acquisition of property are treated as a cost of the property. Delivery, installation, and freight charges are also inc

On January 3 of the current year, Wilson purchased 300 shares of common stock in Corporation Why for $120 per share. Four months later, he purchased 100 additional shares at $180 per share. On December 10 of the current year, Wilson received a 10% nontaxa

D. 330 shares at $109 a share and 110 shares at $164 a share.
Answer (D) is correct.
The stock dividend made by Corporation Why is a tax-free distribution. The basis of the new stock is determined by allocating the basis of the old stock between the new s

Ms. Pear owned 1,000 shares of YZ Corporation which she had purchased in Year 1 at a cost of $12 per share. In Year 3, she received a nontaxable 20% stock dividend. The shares were identical to those she already held. She ended the year owning 1,200 share

D. $2,000
Answer (D) is correct.
A distribution of common stock as a stock dividend on common stock is generally a tax-free distribution. The same is true for a stock split. The basis of the original stock is allocated between it and the distributed stock

Andrew purchased Maple Manufacturing Company on March 17 of the current year for a lump-sum price of $3.5 million. The value of the assets was as follows:
Carrying Fair Market
Amount Value
Inventory
$ 100,000 $ 100,000
Cash
500,000 500,000
Equipment
1,650

B. $175,000
Answer (B) is correct.
Under 1060, both the buyer and the seller involved in a transfer of assets that amount to a trade or business must allocate the purchase price among the assets using the "residual method." The residual method requires th

In the current year, Christian received a gift of property from his mother that had a fair market value of $50,000. Her adjusted basis was $20,000. She paid a gift tax of $9,000. What is Christian's basis in the property?
A. $50,000
B. $59,000
C. $29,000

D. $27,500
Answer (D) is correct.
The basis of property acquired by gift is generally the donor's adjusted basis, increased by a gift tax paid applicable to appreciation. The gift tax applicable to appreciation is the appreciation divided by the taxable g

In Year 1, Paul received a boat as a gift from his father. At the time of the gift, the boat had a fair market value of $60,000 and an adjusted basis of $80,000 to Paul's father. After Paul received the boat, nothing occurred affecting Paul's basis in the

D. Neither a gain nor a loss.
Answer (D) is correct.
For determining gain on the sale of property acquired by gift, the basis is the donor's adjusted basis. Paul's sale results in no gain ($75,000 sales price - $80,000 basis). For determining loss on the

The basis of property received in exchange for service is determined by which of the following?
A. The value of the services rendered.
B. The basis of the property received.
C. The fair market value of the property received.
D. None of the answers are cor

C. The fair market value of the property received.
Answer (C) is correct.
The receipt of property for services provided is a taxable transaction. Accordingly, the fair market value of the property must be included in gross income as compensation, and the

The basis in property inherited from a decedent may be determined as follows:
A. The decedent's basis plus any inheritance tax paid on the increased value.
B. The fair market value at the date of death.
C. The fair market value at an alternate valuation d

D. The fair market value at the date of death or the fair market value at an alternative valuation date.
Answer (D) is correct.
The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent's

Which of the following will decrease the basis of property?
A. Depreciation.
B. Return of capital.
C. Recognized losses on involuntary conversions.
D. All of the answers are correct.

D. All of the answers are correct.
Answer (D) is correct.
Basis must be reduced by the larger of the amount of depreciation allowed or allowable (even if not claimed). A return of capital is a tax-free distribution that reduces a stock's basis by the amou

Which of the following costs is includible in inventory under the uniform capitalization rules for merchandise manufactured by a company for sale to its customers?
A. Advertising.
B. General legal fees.
C. Engineering.
D. Selling expenses.

C. Engineering.
Answer (C) is correct.
A manufacturer capitalizes costs for construction of real or tangible personal property to be used or sold in a trade or business. Both direct and most allocable indirect costs necessary to prepare the inventory for

Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $10,000. Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for dam

D. $150,000
Answer (D) is correct.
For property converted into business use, the basis for depreciation is the lesser of the FMV of the property at the conversion date or the adjusted basis at conversion. Additionally, the $20,000 expenditure for permanen

In January Year 1, Kirk Kelly bought 100 shares of a listed stock for $8,000. In March Year 2, when the fair market value was $6,000, Kirk gave this stock to his cousin, Clara. No gift tax was paid. Clara sold this stock in June Year 3 for $7,000. How muc

A. $0.
Answer (A) is correct.
The basis of property received by gift is the donor's basis (transferred or carryover basis). If the fair market value of the property at the time of the gift is lower, however, the basis for purposes of determining loss is t

Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when the stock had a market price of $100 per share. One year later, on April 1, the stock spli

A. $5,000
Answer (A) is correct.
Inherited and gifted property are differentially treated from each other. Property received by inheritance (bequeathed) has a basis equal to the FMV on the date of death or 6 months after if the executor elects the alterna

Starr, a self-employed individual, purchased a piece of equipment for use in Starr's business. The costs associated with the acquisition of the equipment were:
Purchase price $55,000
Delivery charges 725
Installation fees 300
Sales tax 3,400
What is the d

D. $59,425
Answer (D) is correct.
Initial basis in purchased property is the cost of acquiring it, which includes (1) stated purchase price, (2) closing costs (e.g., brokerage commissions, pre-purchase taxes, sales tax on purchase, title transfer taxes, t

Taylor owns 1,000 shares of Media Corporation common stock with a basis of $22,000 and a fair market value of $33,000. Media paid a nontaxable 10% common stock dividend. What is the basis for each share of Media common stock owned by Taylor after receipt

A. $20
Answer (A) is correct.
The basis of the new stock is determined by allocating the basis of the old stock between the new stock and the old stock. Taylor owns 1,000 shares with a basis of $22,000, or $22 per share. After the dividend, Taylor owns 1,

XYZ Corporation rented construction equipment in 2016 and 2017, which it used to build a storage facility. The total rent paid for the equipment was $40,000 with $10,000 paid in 2016 and $30,000 paid in 2017. The storage facility was completed in 2016. Wh

D. None of the answers are correct.
Answer (D) is correct.
For costs incurred after 1986, the IRC establishes a uniform set of rules requiring the capitalization of certain previously deductible production costs. Companies subject to the uniform capitaliz

Under the uniform capitalization rules applicable to property acquired for resale, which of the following costs should be capitalized with respect to inventory if no exceptions are met?
Marketing Costs Off-Site Storage
Costs
A.
Yes Yes
B.
Yes No
C.
No No

D.
No Yes
Answer (D) is correct.
Nonmanufacturing costs are not required to be included in inventory. Since marketing expenses are nonmanufacturing costs, they are not included in inventory. Overhead costs relating to manufacturing, including maintenance

Which of the following costs are subject to the Uniform Capitalization Rules of Code Sec. 263A for manufactured tangible personal property?
A. Off-site storage.
B. Advertising.
C. Research.
D. Marketing.

A. Off-site storage.
Answer (A) is correct.
Costs for the manufacture of tangible personal property to be used in trade or business are capitalized under the Uniform Capitalization Rules.

The Uniform Capitalization Rules of Code Sec. 263A apply to retailers whose average gross receipts for the preceding 3 years exceed what amount?
A. $1,000,000
B. $2,500,000
C. $5,000,000
D. $10,000,000

D. $10,000,000
Answer (D) is correct.
Uniform capitalization rules do not apply if property is acquired for resale and the company's annual gross receipts (for the past 3 years) do not exceed $10 million.

Powerful Partnership purchased real property in Year 1. In Year 4, the city where the property is located assessed taxes for sidewalks. How should Powerful Partnership treat the accrued taxes for this local improvement?
A. Deduct the taxes as tax expense

B. Capitalize the taxes by adding them to the property's adjusted basis.
Answer (B) is correct.
Taxes assessed for local benefit that tend to increase the value of real property, such as sidewalks, are a betterment and are added to the property's adjusted

Which of the following types of costs are required to be capitalized under the Uniform Capitalization Rules of Code Sec. 263A?
A. Marketing.
B. Distribution.
C. Warehousing.
D. Office maintenance.

C. Warehousing.
Answer (C) is correct.
UNICAP rules require the capitalization of all expenses necessary to bring the asset to its intended use. Storage of an asset prior to its intended use would qualify as a cost incurred to bring it to its full use and

IRC Section 263A requires the capitalization of certain indirect costs related to inventory when a qualifying business is manufacturing tangible personal property. Which of the following costs is not required to be capitalized as part of this adjustment?

A. Marketing.
Answer (A) is correct.
Marketing costs are not required to be capitalized as part of uniform capitalization rules.

Which expense listed below would be subject to the Uniform Capitalization Rules of Code Sec. 263A?
A. Quality control.
B. Research and development.
C. Advertising.
D. Selling.

A. Quality control.
Answer (A) is correct.
A manufacturer capitalizes costs for construction of real or tangible personal property to be used or sold in a trade or business. Both direct costs and most allocable indirect costs necessary to prepare for sale

Dove Corp. began operating a hardware store in the current year after constructing a building at a total cost of $100,000 on land previously acquired for $50,000. In the current year, the land had a fair market value of $60,000. Dove paid real estate taxe

A. $100,000
Answer (A) is correct.
The depreciable basis equals the total capitalized costs of the building. Land is not depreciated. Furthermore, real estate taxes are an expense and are not capitalized. Therefore, only the costs of constructing the buil

Parrot received land as a gift with a fair market value of $5,000. The land was purchased by the donor for $8,000. The land is sold for $6,000. What amount of gain should be reported?
A. $3,000
B. $2,000
C. $1,000
D. $0

D. $0
Answer (D) is correct.
If property acquired by gift is later transferred for more than FMV ($5,000) but for less than the donor's basis at the date of the gift ($8,000), no gain or loss is recognized. The property is transferred at $6,000, and there

A beneficiary acquired property from a decedent. The fair market value at the date of the decedent's death was $100,000. The decedent had paid $130,000 for the property. Estate taxes attributed to the property were $2,000. The beneficiary sold the propert

A. $100,000
Answer (A) is correct.
Basis is the FMV on the date of death or 6 months after if the executor elects the alternate valuation date for the estate tax return.

On August 1 of the current year, Graham purchased and placed into service an office building costing $264,000, including $30,000 for the land. What was Graham's MACRS deduction for the office building in the current year?
A. $9,600
B. $6,000
C. $3,600
D.

D. $2,250
Answer (D) is correct.
Under MACRS, an office building is nonresidential real estate having a 39-year recovery period and is depreciated using the straight-line depreciation method. The land is not depreciable. The cost of the office building ($

Browne, a self-employed taxpayer, had 2017 business taxable income of $505,000 prior to any expense deduction for equipment purchases. In 2017, Browne purchased and placed into service, for business use, office machinery costing $508,000. This was Browne'

A. $505,000
Answer (A) is correct.
Tangible and depreciable personal property can be expensed by up to $510,000 in 2017, the year of acquisition. This amount is reduced when the amount of Sec. 179 property placed in service in a given year exceeds $2,030,

A taxpayer purchased and placed in service during the year a $100,000 piece of equipment. The equipment is 7-year property. The first-year depreciation for 7-year property is 14.29%. Assume that, of the allowable Sec. 179 limit for the current year, $25,0

C. $35,718
Answer (C) is correct.
Depreciation for an asset is first determined based upon the election of the taxpayer to take a Sec. 179 expense on the asset. However, if the taxpayer chooses to expense any of the property, the property's adjusted basis

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?
The property must be purchased for use in the

C. Both I and II.
Answer (C) is correct.
In order for a property to be expensed under Sec. 179, it must be both purchased for use in the taxpayer's active trade or business as well as be purchased from an unrelated party.

John Budd is the sole shareholder of Ral Corp., an accrual-basis taxpayer engaged in wholesaling operations. Ral's retained earnings at January 1, 2017, amounted to $1 million. For the year ended December 31, 2017, Ral's book income before federal income

C. $1,600
Answer (C) is correct.
The cost of certain intangibles acquired (not created) in connection with the conduct of a trade or business or income-producing activity is amortized over a 15-year period, beginning with the month in which the intangible

How is the depreciation deduction of nonresidential real property, placed in service in 2017, determined for regular tax purposes using MACRS?
A. Straight-line method over 40 years.
B. 150%-declining-balance method with a switch to the straight-line metho

D. Straight-line method over 39 years.
Answer (D) is correct.
Nonresidential real estate placed in service in 2017 has a 39-year recovery period using the straight-line depreciation method.

With regard to depreciation computations made under the general MACRS method, the half-year convention provides that
A. One-half of the first year's depreciation is allowed in the year in which the property is placed in service, regardless of when the pro

A. One-half of the first year's depreciation is allowed in the year in which the property is placed in service, regardless of when the property is placed in service during the year, and a half-year's depreciation is allowed for the year in which the prope

In 2017, Roe Corp. purchased and placed in service a machine to be used in its manufacturing operations. This machine cost $2,031,000. What portion of the cost may Roe elect to treat as an expense rather than as a capital expenditure?
A. $499,000
B. $500,

C. $509,000
Answer (C) is correct.
A taxpayer may treat up to $510,000 of the cost of Sec. 179 property acquired during 2017 as an expense rather than as a capital expenditure. The amount deductible under Sec. 179 must be reduced by the amount by which th

Under the modified accelerated cost recovery system (MACRS) of depreciation for property placed in service after 1986,
A. Used tangible depreciable property is excluded from the computation.
B. Salvage value is ignored for purposes of computing the MACRS

B. Salvage value is ignored for purposes of computing the MACRS deduction.
Answer (B) is correct.
Salvage value is treated as zero in computing the amount allowable as a depreciation deduction under the MACRS. Used tangible property is depreciable under M

Question: 48 Kell Corporation's financial accounting income for 2017 includes operating expenses of $4,000 for depreciation of a machine that Kell purchased and placed in service in January 2017 for use in the active conduct of Kell's business. This machi

C. $510,000
Answer (C) is correct.
If a firm wishes to minimize its taxable income for a given year, a Sec. 179 deduction may be made. Section 179 allows a taxpayer to elect to treat all or part of the cost of Sec. 179 property as an expense. The maximum

Mr. Anderson, a sole proprietor, purchased $12,000 worth of office equipment and furniture in 2017 for use in his business. He elected to take the maximum Sec. 179 deduction. What is Mr. Anderson's basis for the MACRS computation?
A. $12,000
B. $7,000
C.

D. $0
Answer (D) is correct.
The original cost of an asset must be reduced for any Sec. 179 expense up to $510,000 in 2017. Since Mr. Anderson took the Sec. 179 expense deduction of $12,000 in 2017, he must reduce the cost of his property. Mr. Anderson's

Which of the following statements regarding the Sec. 179 deduction is not true?
A. The amount that is not deductible due to the taxable income limitation can be carried forward.
B. The amount expensed cannot exceed the taxable income derived from any trad

D. The maximum cost that is deductible for 2017 is $500,000.
Answer (D) is correct.
There are several limitations on the deduction allowed by Sec. 179. One limitation is taxable income and, to the extent that causes an amount to be nondeductible, such amo

In 2017, Walt Sheen purchased and placed in service a packaging machine at a cost of $2,034,000. He had $170,000 taxable income from his business before considering the deduction allowed under Sec. 179. What is Walt's allowable Sec. 179 deduction for 2017

D. $170,000
Answer (D) is correct.
Section 179 allows a taxpayer to treat up to $510,000 of the cost of Sec. 179 property acquired in 2017 as an expense rather than as a capital expenditure. There are certain limitations that can reduce the allowable dedu

On May 10, 2017, Larry purchased and placed in service a pickup truck (GVWR 7,000 lbs. and a 7-ft. bed). The selling price was $12,000. He received a trade-in allowance of $2,000 on his old truck and received a loan for the $10,000 balance. He had an adju

B. $9,000
Answer (B) is correct.
Section 179 allows a taxpayer to treat up to $510,000 of the cost of Sec. 179 property acquired in 2017 as an expense rather than as a capital expenditure. But the cost of Sec. 179 property does not include the basis deter

Which of the following statements regarding the alternative MACRS depreciation system is not true?
A. The election to use the alternative MACRS system can be revoked.
B. The election must be made by the due date, including extensions, for the tax return o

A. The election to use the alternative MACRS system can be revoked.
Answer (A) is correct.
For personal property acquired after 1986, MACRS uses the 200%-declining-balance method over a prescribed recovery period. The alternative MACRS depreciation system

During 2017, Danny, a calendar-year taxpayer, acquired and placed in service the following business assets:
January: Delivery trucks $ 50,000
March: Warehouse building 150,000
June: Computer system 30,000
September: Automobile 30,000
November: Office equi

A. Mid-quarter for all assets except the warehouse building, which uses the mid-month.
Answer (A) is correct.
Under the MACRS rules, the mid-quarter convention must be used for all personal property placed in service during the year if substantial propert

Mainstream Company purchased depreciable equipment in 2017 for $533,000 and claimed the maximum Sec. 179 deduction for that year of $510,000. The equipment qualified as 5-year property under MACRS. Mainstream sold all of this equipment on June 30, 2018. T

B. $3,680
Answer (B) is correct.
The deduction for MACRS depreciation is calculated using the 200%-declining-balance method for 5-year property. The basis is reduced by $510,000 (the Sec. 179 deduction for 2017). The half-year convention allows one-half y

Residential rental property that was placed in service during 2017 using MACRS is depreciated over how many years, using which depreciation method and convention?
A. 15 years, 150%-declining-balance method, half-year convention.
B. 27.5 years, straight-li

B. 27.5 years, straight-line method, mid-month convention.
Answer (B) is correct.
Section 168(c) provides that the recovery period for residential rental property is 27.5 years. Section 168(b)(3) provides that the straight-line method shall be used for re

Wendy Flower has an adjusted basis of $20,000 in mineral property. It is estimated there are 40,000 tons of recoverable coal on the property. Wendy produced and sold 10,000 tons during 2017. What is her cost depletion deduction for 2017?
A. $1,000
B. $5,0

B. $5,000
Answer (B) is correct.
A deduction is allowed for reasonable depletion of mines, oil and gas wells, other natural deposits, and timber. Cost depletion for any year is the adjusted basis of the mineral property, divided by the number of units of

Data Corp., a calendar-year corporation, purchased and placed into service office equipment during November 2017. No other equipment was placed into service during 2017. Under the general MACRS depreciation system, what convention must Data use?
A. Full-y

C. Mid-quarter.
Answer (C) is correct.
The taxpayer must apply the mid-quarter convention to all depreciable property acquired during the tax year when the sum of the bases of all depreciable personal property placed in service during the last quarter of

Pine Breezes Corporation is in the business of manufacturing and selling cleaning products. In the process of developing what it hopes will be a best-selling floor wax, Pine Breezes has incurred significant research and experimental costs. Which of the fo

D. Capitalize, amortize, or expense.
Answer (D) is correct.
Three alternative recovery methods are available to corporations incurring research and experimental costs. Research and experimental costs must generally be capitalized and recovered when the pr

Most tangible depreciable property falls within the general rule of MACRS. However, the law requires use of the ADS for certain property. ADS must be used for all of the following except
A. Tax-exempt use property.
B. Tax-exempt bond-financed property.
C.

C. Tangible property leased to a person who owned or used the property in 2017.
Answer (C) is correct.
MACRS provides two systems for depreciating property placed in service after 1986: the general depreciation system (GDS) and the alternative depreciatio

In order to determine the MACRS deduction using the percentage tables, all of the following must be determined (i.e., known in order to use the table) except
A. The basis of the property.
B. The recovery period.
C. The declining balance rate.
D. The place

C. The declining balance rate.
Answer (C) is correct.
The percentage tables are based on the depreciation method, recovery period, and convention. An applicable percentage is determined each year by matching the year of the recovery period with the placed

Under MACRS, the cost of depreciable property is recovered using
A. The applicable depreciation method.
B. The applicable recovery period.
C. The applicable convention.
D. All of the answers are correct.

D. All of the answers are correct.
Answer (D) is correct.
Under MACRS, useful lives for assets are termed recovery periods and are prescribed by statute. Each asset is deemed to have a particular useful life of 3, 5, 7, 10, 15, 20, 27.5, or 39 years. Also

Juliet bought and placed in service computer equipment in 2017. She paid $10,000 and received a $2,000 trade-in allowance for her old computer equipment. She had an adjusted basis of $3,000 in the old computer equipment. Juliet used both the old and new e

D. $9,000
Answer (D) is correct.
In 2017, Sec. 179 allows a taxpayer to treat up to $510,000 of the cost of Sec. 179 property acquired as an expense rather than as a capital expenditure. However, the cost of Sec. 179 property does not include the basis de

When determining the proper treatment of a corporation's organizational and start-up costs, which of the following is true?
A. The election must be made on the tax return for the first tax year you are in business, even if the return is not timely filed.

D. Amortization of organization and start-up costs start with the month business operations begin.
Answer (D) is correct.
A corporation may elect to amortize its organizational expenditures over at least 180 months, and its start-up costs over at least 18

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 5-year property?
A. $3,000
B. $25,000
C. $28,000
D. $33,00

C. $28,000
Answer (C) is correct.
Under MACRS, personal property is assigned a recovery period of either 3, 5, 7, 10, 15, or 20 years, according to the midpoint of the ADR class life applicable to the type of property. Common 5-year property includes comp

In 2017, Micro Corp. purchases a machine to be used in its business. The machine qualifies as Section 179 property. The cost of the machine is $2,073,500. What is the amount of Section 179 deduction that Micro Corp. may take in 2017?
A. $0
B. $466,500
C.

B. $466,500
Answer (B) is correct.
The maximum dollar amount that may be deducted under Sec. 179 is $510,000 in 2017 for the cost of qualifying depreciable tangible property placed in service in the year 2017. The phase-out threshold for eligible property

On January 1, Fast, Inc., entered into a covenant not to compete with Swift, Inc., for a period of 5 years, with an option by Swift to extend it to 7 years. What is the amortization period of the covenant for tax purposes?
A. 5 years.
B. 7 years.
C. 15 ye

C. 15 years.
Answer (C) is correct.
The cost of certain intangibles acquired in connection with the conduct of a trade or business or income-producing activity is amortized over a 15-year period, beginning with the month in which the intangible is acquire

A taxpayer purchased 5 acres of land for $20,000 and placed in service other tangible business assets that cost $502,000. Disregarding business income limitations and assuming that the annual Section 179 (Election to Expense Certain Depreciable Business A

C. $502,000
Answer (C) is correct.
Section 179 property is tangible personal property that is depreciable and is Sec. 1245 property. Since land is not depreciable, it is not Sec. 179 property. Therefore the only Sec. 179 property that can be expensed is t

Gem Corp. purchased all the assets of a sole proprietorship, including the following intangible assets:
Goodwill $50,000
Covenant not to compete 13,000
For tax purposes, what amount of these purchased intangible assets should Gem amortize over the specifi

A. $63,000
Answer (A) is correct.
The cost of certain intangibles acquired (not created) in connection with the conduct of a trade or business or income-producing activity is amortized over a 15-year period. Qualified intangibles include acquired goodwill

For a taxpayer to claim a deduction for depletion, (s)he must possess an "economic interest" in the natural resource. For an economic interest to be considered present, the taxpayer is only required to
A. Possess an ownership interest in the land containi

D. Have acquired by investment any interest in the mineral in place, and look solely to the extraction and sale of the mineral for a return of capital.
Answer (D) is correct.
Regulation 1.611-1(b)(1) states that a taxpayer possesses an economic interest w

Donny owns and leases a coal mine to Brian. The lease agreement states that Brian will pay Donny $4 per ton royalty on coal mined. What is Brian's percentage depletion deduction for the current year from the information given below?
Gross income from coal

A. $20,000
Answer (A) is correct.
Section 611(a) authorizes a reasonable allowance for depletion of mines, oil and gas wells, other natural deposits, and timber. Percentage depletion (for other than oil and gas wells) is provided in Sec. 613 as the specif

Which of the following assets are depreciable or amortizable for federal income tax purposes?
1.Land
2.Personal residence
3.Rental residence
4.Inventory
5.Acquired goodwill
6.Business automobile
A. 3, 5, and 6.
B. 1, 2, and 3.
C. 1 and 4.
D. 3, 4, and 6.

A. 3, 5, and 6.
Answer (A) is correct.
Section 167(a) provides a depreciation deduction with respect to property used in a trade or business or held for the production of income. A rental residence and a business automobile are both used in a trade or bus

Which of the following is not depreciable under MACRS?
A. Customer list, acquired in a purchase transaction, with an established acquisition cost and an expected life in excess of 1 year.
B. Low-income housing.
C. Technical books with a 5-year useful life

A. Customer list, acquired in a purchase transaction, with an established acquisition cost and an expected life in excess of 1 year.
Answer (A) is correct.
From 1981 to 1987, Sec. 168(c) defined recovery property for the ACRS rules as tangible property of

Intangible property may be depreciated (or amortized) if its use in the business or in producing income is definitely limited in duration. Which one of the following may not be depreciated (or amortized)?
A. Patent.
B. Baseball contract.
C. Interest in a

C. Interest in a partnership.
Answer (C) is correct.
Section 167(a) provides a depreciation deduction with respect to property used in a trade or business or held for the production of income. The deduction is not allowed if an asset lacks a determinable

Lobster, Inc. purchased the following assets during Year 1:
Computers $ 35,000
Computer desks 22,000
Office furniture 4,000
Delivery trucks 25,000
Building 425,000
What should be reported as the cost basis for a MACRS 7-year property?
A. $26,000
B. $86,00

A. $26,000
Answer (A) is correct.
Computers and delivery trucks are MACRS 5-year property. Buildings are real property and are depreciated using the straight-line method and the mid-month convention. Office furniture and computer desks are the only items

A calendar-year taxpayer purchases a new business on July 1. The contract provides the following price allocation: customer list, $100,000; trade name, $50,000; goodwill, $90,000. What is the amortization deduction for the current year?
A. $3,000
B. $6,00

C. $8,000
Answer (C) is correct.
Intangible assets make up the majority of amortizable assets and are recovered over the asset's useful life or, in the case of Sec. 197 intangibles, 15 years. The intangibles are worth a total of $240,000 ($100,000 custome

Which of the following is a capital asset?
A. Inventory held primarily for sale to customers.
B. Accounts receivable.
C. A computer system used by the taxpayer in a personal accounting business.
D. Land held as an investment.

D. Land held as an investment.
Answer (D) is correct.
All property is classified as a capital asset unless specifically excluded. Accounts receivable, inventory, and depreciable property or real estate used in a business are not capital assets. Land held

Which of the following items is a capital asset?
A. An automobile for personal use.
B. Depreciable business property.
C. Accounts receivable for inventory sold.
D. Real property used in a trade or business.

A. An automobile for personal use.
Answer (A) is correct.
All property is characterized as a capital asset, unless expressly excluded. The IRC specifically excludes depreciable business property, accounts receivable for inventory sold, and real property u

Which one of the following is a capital asset when a business was built by the taxpayer?
A. Delivery truck.
B. Goodwill.
C. Land used as a parking lot for customers.
D. Machinery used in business.

B. Goodwill.
Answer (B) is correct.
Capital assets include all property held by a taxpayer unless excluded by the IRC. Goodwill is not excluded unless it was acquired in connection with a trade or business. Goodwill acquired is thus treated as amortizable

Capital assets include
A. A corporation's accounts receivable from the sale of its inventory.
B. Seven-year MACRS property used in a corporation's trade or business.
C. A manufacturing company's investment in U.S. Treasury bonds.
D. A corporate real estat

C. A manufacturing company's investment in U.S. Treasury bonds.
Answer (C) is correct.
Capital assets are all property held by a taxpayer not excluded by the IRC. Among the items excluded are accounts receivable, depreciable property, and real property us

Joe Hall owns a limousine for use in his personal service business of transporting passengers to airports. The limousine's adjusted basis is $40,000. In addition, Hall owns his personal residence and furnishings, which together cost him $280,000. Hall's c

B. $280,000
Answer (B) is correct.
Capital assets include all property held by a taxpayer unless excluded by the IRC, such as property used in a trade or business. Personal-use property, such as a residence, is a capital asset.

In the current year, Susan sold an antique that she bought 6 years ago to display in her home. Susan paid $800 for the antique and sold it for $1,400. Susan chose to use the proceeds to pay a court-ordered judgment. The $600 gain that Susan realized on th

B. Long-term capital gain.
Answer (B) is correct.
The antique is a capital asset. A capital asset must be held for more than 1 year for gain or loss on its sale or exchange to be treated as long-term.

In Year 1, Betty Lane bought 100 shares of a listed corporation's stock for $8,000. In Year 4, Betty sold this stock for $15,000. Betty had no other capital gains or losses in Year 4. How much of the Year 4 long-term capital gain should be included in Bet

D. $7,000
Answer (D) is correct.
Gain is any excess of the amount realized over adjusted basis. All $7,000 ($15,000 - $8,000) of gain realized is currently recognized unless an exception applies.

Sand purchased 100 shares of Eastern Corp. stock for $18,000 on April 1 of the prior year. On February 1 of the current year, Sand sold 50 shares of Eastern for $7,000. Fifteen days later, Sand purchased 25 shares of Eastern for $3,750. What is the amount

C. $1,000
Answer (C) is correct.
A current loss realized on a wash sale of securities is not recognized. A wash sale occurs when substantially the same securities are purchased within 30 days before or after being sold at a loss. Although Sand sold 50 sha

During the current year, all of the following events occurred: On June 1, Ben Rork sold 500 shares of Kul Corp. stock. Rork had received this stock on May 1 as a bequest from the estate of his uncle, who died on March 1. Rork's basis was determined by ref

B. Long-term.
Answer (B) is correct.
Under Sec. 1223(11), if property acquired from a decedent is sold or otherwise disposed of by the recipient within 12 months of the decedent's death, then the property is considered to have been held for more than 12 m

Earl Cook, who worked as a machinist for Precision Corp., lent Precision $1,000 in Year 1. Cook did not own any of Precision's stock, and the loan was not a condition of employment. In Year 5, Precision declared bankruptcy, and Cook's note receivable from

. $1,000 short-term capital loss.
Answer (C) is correct.
When a nonbusiness bad debt becomes worthless, the loss that results is treated as a short-term capital loss. A nonbusiness bad debt is one that arises other than in connection with a trade or busin

Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common stock for $15,000 on December 15, Year 1, and an additional 100 shares for $13,000 on December 30, Year 1. On January 3, Year 2, Smith sold the shares purchased on Decemb

A.
$0 $0
Answer (A) is correct.
The January 3, Year 2, sale was a wash sale because substantially the same stock (as that sold at a loss) was purchased within 30 days. The $2,000 loss realized on the wash sale is not recognized in Year 1 or Year 2. The di

On March 10, Year 6, James Rogers sold 300 shares of Red Company common stock for $4,200. Rogers had acquired the stock in Year 1 at a cost of $5,000. On April 4, Year 6, he repurchased 300 shares of Red Company common stock for $3,600 and held them until

C. A long-term capital gain of $1,600.
Answer (C) is correct.
The sale of stock on March 10 was a wash sale because identical stock was repurchased within 30 days. The $800 loss realized in March will not be recognized for tax purposes. The disallowed los

Alan Kupper had the following transactions during 2017:
Gain of $7,000 on sale of Sec. 1202 stock purchased on January 15, 2016, and sold on April 15, 2017.
Gain of $5,000 on sale of common stock purchased on October 15, 2016 and sold on March 25, 2017.
R

A. $15,000 ($7,000 - 28% basket, $8,000 - 15% basket).
Answer (A) is correct.
Net capital gains (losses) are first computed separately for each tax rate basket. The sale of stock in April resulted in a long-term capital gain in the 28% rate basket because

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. Immediat

C. $1,500
Answer (C) is correct.
The basis in the old stock is "split" and allocated to the new stock. Therefore, the basis in the new stock is $50 per share ($10,000 � 200 shares), and the total basis in sold shares is $5,000 ($50 � 100 shares). Gain is

At December 31, Year 2, the following assets were among those owned by Rea:
Date
Acquired Asset Cost
Jan. Year 1 Personal residence
$200,000
Feb. Year 1 Stock of listed corp.
16,000
Dec. Year 2 Stock of listed corp.
6,000
Total capital assets amounted to

D. $222,000
Answer (D) is correct.
Capital assets include all property held by a taxpayer unless excluded by the IRC. Excluded are inventory (e.g., stock in trade held by a broker for sale to customers), depreciable business property, real property used i

Al Oran bought a paved vacant lot adjacent to his retail store for use as a customers' parking lot at a cost of $15,000. In addition, Oran bought new store fixtures costing $8,000. What portion of these assets constitutes capital assets?
A. $0
B. $8,000
C

A. $0
Answer (A) is correct.
Capital assets are all property held by a taxpayer not excluded by IRC definition. Real property used in a trade or business is specifically excluded, as is depreciable business property such as the store fixtures.

In Year 1, Iris King bought a diamond necklace for her own use at a cost of $10,000. In Year 6, when the fair market value was $12,000, Iris gave this necklace to her daughter, Ruth. No gift tax was due. Ruth's holding period for this gift
A. Starts in Ye

B. Starts in Year 1.
Answer (B) is correct.
The basis of property acquired by gift is generally the same as the basis in the hands of the donor. The holding period of property that has a transferred basis includes the holding period of the prior owner. Ru

The holding period for determining long-term capital gains and losses is more than
A. 6 months.
B. 9 months.
C. 12 months.
D. 18 months.

C. 12 months.
Answer (C) is correct.
Under Sec. 1222, capital assets must be held for more than 1 year in order for the gain or loss on sale or exchange to be treated as long-term.

Harold Crowe had the following capital transactions for Year 1:
$3,000 long-term capital loss
9,000 long-term capital gain
2,000 net short-term capital gain
What is the amount of Crowe's reportable capital gain net income in the Year 1 Schedule D summary?

C. $8,000
Answer (C) is correct.
Schedule D is used to report capital gains and losses, and the summary combines the long-term gains (losses) with the short-term gains (losses). When these capital gains and losses all net to a gain, it is called "capital

For the current year, Diana Clark had salary income of $38,000. In addition, she had the following capital transactions during the year:
Long-term capital gain
$14,000
Short-term capital gain
6,000
Long-term capital loss
(4,000)
Short-term capital loss
(8

D. $46,000
Answer (D) is correct.
In determining the amount of income to be included from capital gains and losses, the long-term capital gains and losses are netted and the short-term capital gains and losses are netted. These totals are then netted to d

Bennet Hanover purchased a tract of land for $20,000 in Year 1 when he heard that a new highway was going to be constructed through the property and that the land would soon be worth $200,000. Highway engineers surveyed the property and indicated that he

A. $0
Answer (A) is correct.
The IRC allows a deduction for uncompensated losses sustained during the taxable year. Since Hanover has not sold, exchanged, or otherwise disposed of the land, he has not realized a loss. Therefore, he cannot claim any loss i

During Year 4 (the current year), Abby sold several shares of stock held for investment. Abby is in the 35% income tax bracket. The following is a summary of her capital transactions for the year:
Acquired Sold Selling Price Cost
02/15/Year 4 07/15/Year 4

A.
$700
$0
$700
Answer (A) is correct.
For property acquired after 1988, long-term capital gain or loss is the gain or loss from the sale or exchange of a capital asset held for more than 1 year. If the capital gain or loss is not long-term, it is short-t

n Year 1, Rick bought a collectible watch for his own use at a cost of $8,000. In Year 5, when the fair market value was $12,000, Rick gave this watch to his son, Chris. No gift tax was due. Which of the following correctly states the holding period and t

C.
Starts Year 1
Capital asset
Answer (C) is correct.
The basis of property acquired by gift is generally the same as the basis in the hands of the donor. The holding period of property that has a transferred basis includes the holding period of the prior

Mr. Wolf purchased a building in Year 1 to use in his business. The purchase price was $400,000. He paid $100,000 cash and took out a mortgage of $300,000. In Year 11, he made certain permanent improvements to the building at a cost of $80,000. In Year 20

C. $400,000
Answer (C) is correct.
The amount of the realized gain is the amount realized less the adjusted basis. Mr. Wolf realized $700,000 ($600,000 cash + $100,000 debt relief) from the sale of the building. His basis in the building was $300,000 ($40

Mr. Jones had the following capital transactions during the current year:
Short-term capital gain $1,000
Short-term capital loss 2,700
Long-term capital gain 6,500
Long-term capital loss 1,800
What is the amount of Mr. Jones's capital gain net income (or

B. $3,000
Answer (B) is correct.
Schedule D is used to report capital gains and losses, and the summary combines the long-term gains (losses) with the short-term gains (losses). When these capital gains and losses all net to a gain, it is called "capital

Sam purchased 100 shares of stock in Year 1 for $2,500. The company had no earnings and profits in Year 2 or Year 3. In Year 3, he received a return of capital distribution on that stock of $2,000, and in Year 4, he received a second return of capital dis

C. $1,500 as long-term capital gain income.
Answer (C) is correct.
A return of capital is a tax-free distribution that reduces a stock's basis by the amount of the distribution. If a shareholder's basis is reduced to zero because of a tax-free return of c

Ms. Birch purchased the following stocks:
300 shares of Music Corp. on
1/18/16 for $3,000
200 shares of Play Corp. on 2/11/16
for $2,000
600 shares of Fun Corp. on 4/27/16
for $16,000
100 shares of Book Corp. on
12/19/16 for $8,000
On April 27, 2017, Ms.

A. LTCG, $10,000; STCL, $6,000.
Answer (A) is correct.
For property acquired after 1988, long-term capital gain or loss is the gain or loss from the sale or exchange of a capital asset held for more than 1 year. If the capital gain or loss is not long-ter

Mr. Smith, a single taxpayer, died in Year 4. His Year 4 taxable income of $40,000 included the following stock transactions:
Adjusted Selling Stock Purchased Sold Basis Price
Charlie 03/18/Yr 4 5/20/Yr 4
$3,000 $4,500
Edward 10/10/Yr 1 7/11/Yr 4
5,500 1,

C.
$3,000
$0
Answer (C) is correct.
Individuals and other noncorporate taxpayers may deduct up to $3,000 of a capital loss against ordinary income. Any excess capital loss may be carried over for an unlimited time period until the loss is exhausted. Howev

Sal used a building in his business that cost $200,000. In September Year 1, Sal sold the building to Benno for $100,000 cash. Benno also agreed to assume Sal's $150,000 mortgage and pay Sal's $5,000 accrued real estate taxes. The total depreciation claim

D. $75,000 gain.
Answer (D) is correct.
The gain from a sale or exchange of property is the excess of the amount realized from the sale or exchange over the property's adjusted basis. The adjusted basis of an asset is generally its original cost plus the

Maria Mordant acquired all of the original stock of The Diamond, Inc., a Sec. 1244 small business, on January 10, Year 1, for $10,000. She contributed another $9,000 to capital before selling all of her stock on June 30, Year 5, for $10,000. How much loss

A. Deduct $4,737 as ordinary loss and $4,263 as capital loss subject to limitations.
Answer (A) is correct.
If an owner of Sec. 1244 stock invests additional capital but is not issued additional shares of stock, the amount of the additional investment is

If 100 shares of stock are purchased February 14, Year 1, what is the earliest date on which the stock can be sold and the gain or loss qualify for the long-term holding period?
A. August 14, Year 2.
B. February 15, Year 2.
C. February 14, Year 2.
D. Augu

B. February 15, Year 2.
Answer (B) is correct.
The holding period of an asset for purposes of long-term gain treatment is more than 1 year beginning on the day after acquisition but including the day of disposition.

On June 1, Year 1, Mr. Smart purchased investment land. On January 31, Year 2, Mr. Smart traded the land plus cash for some other investment land in a non-taxable exchange. On August 15, Year 2, he sold the land received in the non-taxable exchange for a

B. Long-term capital gain.
Answer (B) is correct.
If property received in an exchange has the same basis in whole or in part as that of the property given (and if the property given is a capital asset or a Sec. 1231 asset), the holding period of the prope

Don invested in Ho Ho Mutual Fund by purchasing 100 shares on March 1, Year 1. On the first day of every month, the Ho Ho fund pays a dividend that Don elected to have reinvested in the Ho Ho fund. Don received five additional shares each month. On April

B. 105
Answer (B) is correct.
The holding period of an asset for purposes of long-term gain treatment is 1 year from the date of acquisition, not including the day of acquisition but including the day of disposition. In this case, the only dividend reinve

Billy Luker made several stock sales during 2017. Determine the net capital gain or loss for the following transactions:
Date
Purch. Cost DateSold SalesPrice
1-1-17 4,000 6-2-17 6,000
7-6-16 10,000 7-7-17 14,000
7-6-16 20,000 7-6-17 17,000
4-3-16 5,000 6-

B. $2,000 net capital gain.
Answer (B) is correct.
The term "net capital gain or loss" means the excess of net long-term capital gain over net short-term capital loss, $2,000 ($3,000 - $1,000). The term "net long-term capital gain" means the excess of lon

Bob and Gloria sold securities in Year 1. The sales resulted in a capital loss of $7,000. They had no other capital transactions. Their taxable income was $26,000. How much can they deduct on their joint Year 1 return?
A. $7,000
B. $3,000
C. $4,000
D. $0

B. $3,000
Answer (B) is correct.
Individuals and other noncorporate taxpayers may deduct up to $3,000 of a capital loss against ordinary income. Any excess capital loss may be carried over for an unlimited time period until the loss is exhausted.

Bob sold securities in Year 1. The sales resulted in a capital loss of $7,000. He had no other capital transactions. He and his wife Gloria decide to file separate returns for Year 1. His taxable income was $26,000. What amount of capital loss can he dedu

D. $1,500 in Year 1 and $5,500 carry over to Year 2.
Answer (D) is correct.
If capital losses exceed capital gains for the tax year, the excess is taken into account as negative taxable income for up to $3,000 ($1,500 if married filing a separate return).

In December, Emily sold an antique rug for $4,100. She bought the rug 5 years ago for $1,100. What is her taxable gain and at what maximum rate will it be taxed?
A. $3,000 long-term capital gain, taxed at a regular rate.
B. $3,000 long-term capital gain,

B. $3,000 long-term capital gain, taxed at 28% rate.
Answer (B) is correct.
The sale of the antique rug qualifies as a sale of a collectible item. For individuals, capital transactions involving long-term holding periods are grouped by tax rates. A 28% ra

In Year 4, Bach sold a painting for $50,000 purchased for his personal use in Year 1 at a cost of $20,000. In Bach's Year 4 income tax return, the sale of the painting should be treated as a transaction resulting in
A. No taxable gain.
B. Section 1231 (ca

C. Long-term capital gain.
Answer (C) is correct.
The gain upon the disposition of the painting is taxable because Bach recognized income as defined in Sec. 61(a)(3) from "dealings in property." Since Bach held the painting for over one year, the gain rec

David sells depreciable real property held for more than 12 months in Year 1. It is his only capital transaction for the year, and he has no capital loss carryovers to Year 1. He has a net capital gain of $100,000 from the sale, $80,000 of which is attrib

C. $80,000 - 25% basket, $20,000 - 15% basket.
Answer (C) is correct.
The 25% rate basket consists of unrecaptured Sec. 1250 gain. (There are no losses in this basket.) Unrecaptured Sec. 1250 gain is long-term capital gain, not otherwise recaptured as ord

Soft Cream sells franchises to independent operators. In the current year, it sold a franchise to Edward Trent, charging an initial fee of $20,000 and a monthly fee of 2% of sales. Soft Cream retains the right to control such matters as employee and manag

D. Ordinary income of $24,000.
Answer (D) is correct.
The transfer of a franchise is not treated as a sale or exchange of a capital asset if the transferor retains significant power, rights, or continuing interest with respect to the franchise. The right

Which one of the following statements is true with regard to an individual taxpayer who has elected to amortize the premium on a bond that yields taxable interest?
A. The amortization is treated as an itemized deduction.
B. The amortization is not treated

C. The bond's basis is reduced by the amortization.
Answer (C) is correct.
An election may be made to amortize the premium on a bond yielding taxable interest income. If the premium is amortized, the basis of the bond must be reduced by the amount of prem

Which of the following sales should be reported as a capital gain?
A. Sales of equipment.
B. Real property subdivided and sold by a dealer.
C. Sale of inventory.
D. Government bonds sold by an individual investor.

D. Government bonds sold by an individual investor.
Answer (D) is correct.
A capital gain or loss is realized on the sale of a capital asset. All property is characterized as a capital asset, unless expressly excluded. Capital assets do not include (1) in

An individual had the following capital gains and losses for the year:
Short-term capital loss $70,000
Long-term gain (unrecaptured
Section 1250 at 25%) 56,000
Collectibles gain (28% rate) 10,000
Long-term gain (15% rate) 20,000
What will be the net gain(

A. Long-term gain of $16,000 at the 15% rate.
Answer (A) is correct.
The short-term capital loss will be used first to offset net gain for the highest long-term rate basket, then to offset the next highest rate basket and so on. The $70,000 loss will enti

On June 15, Year 2, Tim sold 100 shares of Y Corporation stock for $20 per share. Tim's records relating to the sale reflect the following information:
Date Purch. #of Shares Adj .Basis
June 1, Year 1 40 $25
January 2, Year 2 60 $10
Determine the gain or

A. $600 short-term capital gain and $200 long-term capital loss.
Answer (A) is correct.
Under Reg. 1.1012-1(c), the basis and holding period of stock which was acquired in several different transactions is determined by specific identification of the stoc

In 2008, Danielson invested $2,000,000 in DEC, a qualified small business corporation. Six years later, Danielson sold all of the DEC stock for $16,000,000 and purchased an office building with the proceeds. Danielson had not previously excluded any gain

C. $7,000,000
Answer (C) is correct.
Taxpayers may exclude 50% of the gain from the sale or exchange of small business stock if the stock was held for more than 5 years. Danielson has realized gain of $14,000,000 ($16,000,000 sales price - $2,000,000 AB),

Winkler, a CPA, provided accounting services to a client, Thompson. On December 15 of the same year, Thompson gave Winkler 100 shares of Foster Corp. as compensation for services. The adjusted basis of the stock was $4,000, and its fair market value at th

C. $2,500
Answer (C) is correct.
The FMV of property received in exchange for services is income to the provider when it is not subject to a substantial risk of forfeiture and not restricted as to transfer. The property acquired has a tax cost basis equal

Upon her grandfather's death, Jordan inherited 10 shares of Universal Corp. stock that had a fair market value of $5,000. Her grandfather acquired the shares in 1996 for $2,500. Four months after her grandfather's death, Jordan sold all her shares of Univ

A. $2,500 long-term capital gain.
Answer (A) is correct.
The basis of inherited property is the FMV on the date of death, so Jordan's basis in the shares of Universal stock is $5,000. Therefore, Jordan recognizes a gain of $2,500 ($7,500 sales price - $5,

In the current year, Fitz, a single taxpayer, sustained a $48,000 loss on Sec. 1244 stock in JJJ Corp., a qualifying small business corporation, and a $20,000 loss on Sec. 1244 stock in MMM Corp., another qualifying small business corporation. What is the

D. $50,000 ordinary loss and $18,000 capital loss.
Answer (D) is correct.
Up to $50,000 of loss realized on disposition or worthlessness of Sec. 1244 stock is treated as an ordinary loss. This limit applies to Sec. 1244 stock held in all corporations. The

On February 1, Year 1, a taxpayer purchased an option to buy 1,000 shares of XYZ Co. for $200 per share. The taxpayer purchased the option for $50,000, which was to remain in effect for 6 months. The market declined, and the taxpayer let the option lapse

B. $50,000 short term.
Answer (B) is correct.
The taxpayer's basis in the option is the cost basis, or $50,000. Therefore, when the option lapsed, it became worthless, and the taxpayer realized a loss of $50,000. Since the taxpayer purchased the option on

A taxpayer lived in an apartment building and had a 2-year lease that began 16 months ago. The taxpayer's landlord wanted to sell the building and offered the taxpayer $10,000 to vacate the apartment immediately. The taxpayer's lease on the apartment was

C. A long-term capital gain.
Answer (C) is correct.
Since the lease is a capital asset with no tax basis and the taxpayer would receive $10,000 to vacate the apartment immediately, the taxpayer would have a realized gain of $10,000 ($10,000 cash - $0 adju

An individual reports the following capital transactions in the current year:
Short-term capital gain
$ 1,000
Short-term capital loss
11,000
Long-term capital gain
10,000
Long-term capital loss
6,000
What amount is deducted in arriving at adjusted gross i

C. $3,000
Answer (C) is correct.
The net short-term capital loss for the year is $6,000. This is partially deductible in the current year, as individuals are permitted to deduct up to $3,000 of capital losses to offset ordinary income each year.

If a security becomes worthless in the current taxable year, it is treated as sold or exchanged on
A. The last day of the preceding taxable year.
B. The last day of the current taxable year.
C. The date it is deemed worthless.
D. The first day of the curr

B. The last day of the current taxable year.
Answer (B) is correct.
Treasury Regulation 1.165-5 states that the loss on a capital asset that becomes wholly worthless in the current year is deductible for a loss, but only as if it were from the sale of the

Capital assets include which of the following items?
A. Fixtures used in a retail store.
B. Trade accounts receivable.
C. Real property used to store business assets.
D. Land held for personal use.

D. Land held for personal use.
Answer (D) is correct.
Property held either for personal use or for the production of income is a capital asset. Land held for personal use is a capital asset.

A married individual invested in Section 1244 small business stock in Year 1. In Year 7, the individual sold the stock at a loss of $157,000. There were no other stock transactions during Year 7. If the taxpayer files a joint return, how much loss can the

C. $103,000
Answer (C) is correct.
Up to $100,000 (if filing a joint return) of loss realized on disposition or worthlessness of Sec. 1244 stock is treated as an ordinary loss. The remaining $57,000 ($157,000 - $100,000) is a capital loss. However, for th

In 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?
A. $400
B. $700
C. $1,10

C. $1,100
Answer (C) is correct.
A current loss realized on a wash sale of securities is not recognized. A wash sale occurs when substantially the same securities are purchased within 30 days before or after being sold at a loss. On May 12, Janice sold 50

Estie Tate is in the real estate business. She purchased a vacant office building for the purpose of reselling it. Estie's sister, not a real estate dealer, owns a large tract of residential land she purchased 7 years ago as an investment. Winfield Nestar

A. Estie's sister's subdivision of the residential land into five lots and sale to five purchasers.
Answer (A) is correct.
Generally, the subdivision of land into parcels converts the parcels into property held primarily for sale to customers, so the prop

Halbert Zweistein is a renowned physicist and Nobel Prize winner who holds numerous patents. Halbert owns the copyrights to the 75 books he wrote in a long career. He has also collected his voluminous correspondence, notes, journals, and other papers that

A. The sale of the patents.
Answer (A) is correct.
A capital gain or loss results from a sale or exchange of a capital asset. Patents are capital assets since they are not excluded from being capital assets by Sec. 1221.

Mr. E, a sole proprietor, is in the process of selling his retail store. Based on the following list of assets used in his business, what is the total amount of E's capital assets?
Accounts receivable $20,000
Merchandise inventories 30,000
Buildings 40,00

A. $30,000
Answer (A) is correct.
Under Sec. 1221, a capital asset is defined as any property held by the taxpayer (whether or not it is connected with his or her trade or business) that is not specifically excluded by Sec. 1221. Land used in a business,

Bear" Wall is a dealer in stocks. She sells them to customers in the ordinary course of business. "Bull" Street is in the business of trading stocks for his own benefit. He buys and sells stocks as his sole means of support and business activity. Which o

B. Stocks held by "Bear" are not capital assets, but stocks held by "Bull" are capital assets.
Answer (B) is correct.
Capital assets are defined as all property held by a taxpayer which is not excluded by Sec. 1221. One exclusion is the stock in trade of

Helen Chambers owns and manages an apartment building. She also paints seascapes that she exhibits and sells, and she published several volumes of art criticism for which she owns the copyrights. With the profits from the books, she acquired stock in a lo

D. The stock in the art supply company.
Answer (D) is correct.
Capital gains and losses result from the sale or exchange of capital assets. Capital assets are defined as all property held by a taxpayer which are not excluded by Sec. 1221. Shares of stock

Mr. L purchased stock in Corporation O in Year 1 for $500. In Year 2, Mr. L received a distribution of $200 at a time when Corporation O had no current or accumulated earnings and profits, so it was a nontaxable return of capital. Mr. L sold his Corporati

C. $400
Answer (C) is correct.
L's gain will be the amount realized ($700) less the adjusted basis of the stock. The adjusted basis is L's original basis of $500 reduced by the return of capital ($200), or $300 [Sec. 1016(a)(4)]. The $400 gain ($700 - $30

During Year 1, Mr. F acquired 100 shares of stock in ABC Corporation for $500. During Year 3, he sold the stock for $1,000. His adjusted basis in the stock at the time of sale was $500, and he had no other capital gains or losses during the year. What is

A. $500 long-term capital gain.
Answer (A) is correct.
F's gain is the amount realized less the adjusted basis of the stock. The amount realized is the $1,000 selling price. The adjusted basis is the original $500 purchase price. Therefore, his gain is $5

During 2017, Abby sold several shares of stock held for investment. The following is a summary of her capital transactions for the year:
Acquired Sold Selling Price Cost
02/15/17 07/15/17 2,100 1,400
06/25/15 08/02/17 3,500 2,300
09/25/17 12/15/17 800 1,0

B.
$900
$500
Answer (B) is correct.
For property acquired after 1987, long-term capital gain or loss is the gain or loss from the sale or exchange of a capital asset held for more than 1 year (Sec. 1222). If the capital gain or loss is not long-term, it i

On July 1, Year 1, Lila Perl paid $90,000 for 450 shares of Janis Corporation common stock. Lila received a nontaxable stock dividend of 50 new common shares in November of Year 4. On December 20, Year 5, Lila sold the 50 new shares for $11,000. How much

C. $2,000
Answer (C) is correct.
When a shareholder receives a nontaxable stock dividend, the basis of the new stock must be determined by allocating to it part of the adjusted basis of the old stock (Sec. 307). The new shares (50) represented 10% of the

Iam Broke frequently traded on the stock market. On November 1, Year 1, when stock prices were very high, Broke sold short (sold without owning any stock by borrowing from the broker) 100 shares of Ducko, Inc., at $80 per share. On July 1, Year 2, Broke p

A. $4,000 short-term capital gain in Year 1, and $3,000 short-term capital gain in Year 2.
Answer (A) is correct.
Under Sec. 1259, certain hedging transactions are treated as constructive sales. A taxpayer is considered to have made a constructive sale of

Stanley Garret purchased 1,000 shares of Pat Corporation common stock at $5 per share in Year 1. On September 19, Year 3, he received 1,000 stock rights entitling him to buy 250 additional shares of Pat Corporation common stock at $10 per share. On the da

A. No gain or loss.
Answer (A) is correct.
When a taxpayer receives nontaxable stock rights, the cost basis of the rights under Sec. 307 is determined by allocating part of the basis of the stock on which the distribution was made. If the fair market valu

Mr. and Mrs. Able are investors in a mutual fund that is not part of a qualified retirement plan. For the current year, the fund notified them that it had allocated a $9,500 long-term capital gain to their account. Of this total, only $4,500 was distribut

B. $9,500
Answer (B) is correct.
A mutual fund is a regulated investment company, the taxation of which is determined by Sec. 852. Dividends paid by the mutual fund to shareholders are taxed. Undistributed capital gains must be included in income by share

On April 5, Year 3, Mr. Jeffries sold all his shares of C Corporation stock for $50,000. He originally purchased the shares on January 30, Year 1, for $10,000. On June 1, Year 3, Mr. Jeffries purchased stock in a specialized small business investment comp

C. $20,000
Answer (C) is correct.
If an individual realizes a capital gain on the sale of publicly traded stock and uses the proceeds from the sale within 60 days to purchase stock in a specialized small business investment company (SBIC), the individual

Mr. J bought an asset on June 19, 2016. What is the earliest date on which Mr. J could have sold that asset and qualified for long-term capital gain or loss treatment?
A. December 19, 2016.
B. December 20, 2016.
C. June 19, 2017.
D. June 20, 2017.

D. June 20, 2017.
Answer (D) is correct.
For assets acquired after 1987, long-term capital gain or loss treatment is provided if the asset is held for more than 1 year. The general rule is that the date the property is acquired is excluded and the date th

Jack had the following items of income and loss in Year 7:
Wages $122,500
Nonbusiness bad debt 1,400
Gain on stock held since Year 5
2,600
Flood loss to his personal residence
owned since Year 1 4,100
Loss on stock held since Year 4
300
Gain on stock held

C. $2,950 gain.
Answer (C) is correct.
Jack had a net long-term capital gain of $2,300 resulting from the $2,600 gain on the sale of stock and the $300 loss on the sale of some other stock. Jack had a net short-term capital gain of $650 resulting from the

On July 1 of the current year, Mr. A, a cash-method taxpayer, sold a painting for which he received $50,000 in cash and a note with a face value of $50,000 and a fair market value of $35,000. He paid a commission of $5,000 on the sale. Mr. A had acquired

C. $75,000
Answer (C) is correct.
The amount realized under Sec. 1001 includes money received plus the fair market value of other property. Mr. A realized $85,000 ($50,000 cash + $35,000 note). Commissions reduce the amount realized under Reg. 1.263(a)-2.

Kerry Orange owned a 20% interest for 20 years in the T & T Partnership, which owns no unrealized receivables or inventory items. In the current year, he sold his interest for $30,000 and was relieved of his share of partnership liabilities of $2,200. At

C. $8,200 capital gain.
Answer (C) is correct.
Gain or loss on the sale of a partnership interest is capital gain or loss under Sec. 741. Liabilities assumed by the purchaser are part of the amount realized on the sale. Therefore, Orange is considered to

Mr. Patel sold a piece of land he had purchased for $40,000. The buyer paid cash of $50,000 and transferred to Mr. Patel a piece of farm equipment having a fair market value of $30,000. The buyer also assumed Mr. Patel's $10,000 loan on the land. Mr. Pate

B. $45,000
Answer (B) is correct.
The amount realized under Sec. 1001 includes money received, fair market value of other property received, and any liabilities of which the seller is relieved. Mr. Patel realized $90,000 ($50,000 cash + $30,000 fair marke

On September 1, Year 1, Sam purchased for $9,200 cash a $10,000 bond with 10% annual interest that matures in Year 11. Sam did not elect to accrue market discount currently as interest income. On September 2, Year 2, Sam sold the bond for $9,400. The amou

D. $80 ordinary income; $120 long-term capital gain.
Answer (D) is correct.
Section 1276(a)(1) requires that gain on the disposition of any market discount bond be treated as ordinary income to the extent that the market discount could have been accrued a

On March 1 of the current year, Barry Beech received a gift of income-producing real estate having a donor's adjusted basis of $50,000 at the date of the gift. Fair market value of the property at the date of the gift was $40,000. Beech sold the property

A. No gain or loss.
Answer (A) is correct.
For the purpose of computing gain, a donee's basis is the same as the donor's basis. For computing loss, the donee takes the lower of the donor's basis or the fair market value of the property (Sec. 1015). Beech

The maximum tax rate on net capital gains for individuals for 2016 is
A. 20%
B. 28%
C. 25%
D. 15%

B. 28%
Answer (B) is correct.
For tax years beginning after December 31, 2012, the capital gains rate for individuals is 20% if the taxpayer is in the 39.6% income tax bracket; 15% if in the 25%, 28%, 33%, or 35% income tax bracket; and 0% if in the 10% o

During the year, Mr. G had the following capital transactions:
L-Term L-Term
S-Term (28% Basket)(15% Basket)
Gains
$ 9,000 $15,000 $ 8,000
Losses
10,000 10,000 12,000
Determine the overall result of the transactions.
A. $1,000 short-term capital loss.
B.

B. $0 long-term capital gain.
Answer (B) is correct.
Net capital gains and losses are computed separately for each basket. This step leaves a $5,000 long-term gain in the 28% basket and a $4,000 long-term loss in the 15% basket. The 28% basket contains co

Taxpayer G had the following items of income and loss in 2017:
Wages $28,000
Nonbusiness bad debt 1,000
Gain on commodity futures held
14 months 1,000
Loss on stock purchased in 2000
800
Flood loss on personal residence
owned since 2002 4,500
Gain on stoc

C. $3,700 long-term capital gain.
Answer (C) is correct.
Nonbusiness bad debts are treated as short-term capital losses. The nonbusiness bad debt is the only short-term transaction. The long-term transactions are the $800 loss on stock, the $4,500 gain on

For 2017, Mr. Opal had the following capital gains and losses:
Short-term gains
$ 4,300
Short-term loss from a partnership
(3,000)
Short-term gain from an S corporation
22,500
Short-term carryover loss from 2015
(5,700)
Long-term gains (15% basket)
7,500

A. $14,600 short-term capital gain.
Answer (A) is correct.
A taxpayer's distributive shares of capital gains and losses from a partnership or an S corporation must be combined with the taxpayer's personal capital gains and losses. Mr. Opal has a net short

Capital losses incurred by a married couple filing a joint return
A. Will be allowed only to the extent of capital gains.
B. Will be allowed to the extent of capital gains, plus up to $3,000 of ordinary income.
C. May be carried forward up to a maximum of

B. Will be allowed to the extent of capital gains, plus up to $3,000 of ordinary income.
Answer (B) is correct.
The amount of capital losses that can be deducted is the lesser of the excess of capital losses over capital gains or $3,000 [Sec. 1211(b)]. Th

Mr. J, who has $15,000 of salary income, sold land that he had purchased for investment purposes 10 years ago to Ms. P for $5,000 cash and her assumption of an existing mortgage of $2,000 and delinquent back taxes of $1,500. Mr. J's adjusted basis in the

C. $(2,100)
Answer (C) is correct.
The gain or loss from the sale of property is the amount realized less the adjusted basis (Sec. 1001). Mr. J realized $5,000 in cash, relief of a mortgage liability of $2,000, and relief of back taxes of $1,500. This gro

During 2017, Mr. H, who is married filing separately, made the following sales of stock:
100 shares of ABC Company on 6/1/17 $1,000
Purchased 2/1/17 for $2,000
100 shares of XYZ Company on 9/1/17 750
Purchased 4/1/17 for $1,500
100 shares of EFG Company o

B. $1,500
Answer (B) is correct.
Mr. H has a net short-term capital loss of $1,750 ($1,000 from the stock sold in June and $750 from the stock sold in September). He has net long-term capital loss in the 15% basket of $2,000 from the stock sold in Novembe

For 2017, Mr. G has a short-term capital loss of $4,000, a short-term capital gain of $1,900, a short-term capital loss carryover from 2015 of $700, a long-term capital gain of $800 from property held for 3 years, and a long-term capital loss of $1,500 fr

C. $3,000
Answer (C) is correct.
Short-term capital gains and losses and long-term capital gains and losses are first netted to determine the capital loss deduction. The carryover from 2015 retains its character as a short-term capital loss and is netted

For the current year, Michael King reported salary and taxable interest income of $40,000. His capital asset transactions during the year were as follows:
Long-term capital gains (15% basket) $2,000
Long-term capital losses (28% basket) (8,000)
Short-term

B. $37,000
Answer (B) is correct.
Under Sec. 1211, a taxpayer may deduct the excess of the net long-term capital loss over net short-term capital gain, provided that such amount does not exceed $3,000. The long-term capital loss in the 28% basket is first

On February 16, Year 1, Fred Samson purchased 100 shares of Oscar Corporation stock at $40 per share. On July 28, Year 5, he sold the 100 shares at $25 per share. On August 10, Year 5, his wife purchased 50 shares of Oscar Corporation at $30 per share. Th

B. $750
Answer (B) is correct.
Fred sold 100 shares of stock on July 28, and his wife subsequently purchased 50 shares of the same corporation's stock on August 10. Consequently, 50 of the shares Fred sold are not eligible for the capital loss deduction b

On March 1, Year 1, Roland Doe bought 200 shares of Gummit stock at $40 per share. On April 1, Year 2, Roland sold short (sold without delivering) 100 shares of Gummit stock for $50 per share. On December 1, Year 2, Roland bought 100 shares of Gummit stoc

D. $1,000 long-term capital gain.
Answer (D) is correct.
Section 1259 provides that there is a constructive sale of an appreciated financial position when the taxpayer sells short stock that is substantially identical to stock held. The taxpayer must reco

Fact Pattern: During 2018, Stacy, who is single and has no dependents, sold the following shares of stock:
Date Adjusted Date Sales
Stock Purch. Basis Sold Proc.
Alpha C. 12/2/15 3,500 6/29/17 1,100
Beta C.7/11/15 2,000 4/15/17 100
Delta C. 5/27/16 3,0005

B. $500
Answer (B) is correct.
The capital losses from the four transactions are categorized as follows:
Gain or Loss
Stock
Short-term
Long-term
Alpha
$(2,400)
Beta
(1,900)
Delta
$(1,500)
Gamma
(1,300)
Total
$(2,800)
$(4,300)
The loss on the Delta stock i

Fact Pattern: During 2018, Stacy, who is single and has no dependents, sold the following shares of stock:
Date
Adjusted
Date
Sales
Stock
Purchased
Basis
Sold
Proceeds
Alpha Corp.
12/2/15
$3,500
6/29/17
$1,100
Beta Corp.
7/11/15
2,000
4/15/17
100
Delta Co

D. $2,300 short-term; $4,300 long-term (28% basket).
Answer (D) is correct.
Stacy reported $7,100 ($2,800 + $4,300) of capital losses, of which $500 were deductible in 2017; $6,600 ($7,100 - $500) of these losses can be carried over to 2018. For 2017's de

During the current year, Nancy had the following transactions:
Short-term capital loss
($2,400)
Short-term capital gain
2,000
Short-term capital loss carryover from
2 years ago
(1,400)
Long-term capital gain (15% basket)
3,800
Long-term capital loss (28%

B.
$3,000
$3,000 long-term (28% basket)
Answer (B) is correct.
The deduction for any capital loss is the excess of capital losses over capital gains (Sec. 1211). The capital loss deduction, however, is limited to $3,000 in any year. Unused capital losses

For 2017, Mr. H had taxable income of $120,000, excluding exemptions and capital transactions. In 2017, H's capital transactions were as follows:
Long-Term
Long-Term
Short-Term
(28% Basket)
(15% Basket)
Gains
$10,000
$20,000
$ 2,000
Losses
(13,000)
(24,00

D.
$3,000
$2,200
$3,000
$0
Answer (D) is correct.
A net loss of $5,000 is contained in the 28% basket ($20,000 gain - $24,000 loss - $1,000 long-term loss carryover). The long-term loss carryover of $1,000 belongs in the 28% basket, regardless of its bask

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 fo

B. $500
Answer (B) is correct.
Deductions are allowed for business related losses. Because the laptop was used solely for business, Talbot is entitled to deduct a loss of $500 ($1,000 - $1,500).

Aqua Corp. had an operating income of $500,000 and operating expenses of $350,000 in the current year. Aqua had a long-term capital gain of $30,000 and a $50,000 short-term capital loss. What is Aqua's taxable income for the current year?
A. $130,000
B. $

C. $150,000
Answer (C) is correct.
A corporation may use capital losses to offset capital gains each year. A corporation must carry the excess capital loss back 3 years and forward 5 years. Aqua Corp.'s taxable income for the current year is $150,000 [$50

An individual with gross income of $78,000 had the following gains and losses from capital transactions during the current year:
Loss of $11,000 on the sale of principal residence held for 5 years;
Gain of $5,000 from the sale of securities held for 4 yea

A. $5,000
Answer (A) is correct.
The amount of $5,000 is calculated as the deductible losses of $13,000 ($9,000 loss on municipal bonds + $4,000 loss on investment) - $5,000 gain from the sale of securities - $3,000 allowable deduction. An individual may

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 recognize

B. $2,000
Answer (B) is correct.
Under Sec. 267, losses are not allowed on sales or exchanges of property between related parties. Gibson's adult child realized a $4,000 loss ($16,000 - $12,000) on the sale but may not deduct it. On the subsequent sale, G

Fact Pattern: Conner purchased 300 shares of Zinco stock for $30,000 in 1999. On May 23, 2017, Conner sold all the stock to his daughter Alice for $20,000, its fair market value at the time. Conner realized no other gain or loss during 2017. On July 26, 2

A. $0
Answer (A) is correct.
The $10,000 realized loss ($20,000 proceeds - $30,000 basis) on the sale of the stock from father to daughter is disallowed. The daughter takes a cost basis of $20,000 in the stock as well as a new holding period. Related part

Fact Pattern: Conner purchased 300 shares of Zinco stock for $30,000 in 1999. On May 23, 2017, Conner sold all the stock to his daughter Alice for $20,000, its fair market value at the time. Conner realized no other gain or loss during 2017. On July 26, 2

A. $0
Answer (A) is correct.
The $5,000 realized gain ($25,000 proceeds - $20,000 basis) is recognized only to the extent it exceeds the previously disallowed loss of $10,000. Since the realized gain on the sale to an unrelated third party is less than th

In Year 4, 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 4, Martin sold the stock to an unrelated third party for $16,000. What amount of gain from the sale of the

B. $1,000
Answer (B) is correct.
The $4,000 loss on the sale by mother to son (related parties) is disallowed. Martin took a cost basis of $11,000. The $5,000 ($16,000 - $11,000) gain realized on the subsequent sale to an unrelated party is recognized onl

On July 1, Daniel Wright owned stock (held for investment) purchased 2 years earlier at a cost of $10,000 and having a fair market value of $7,000. On this date, he sold the stock to his son, William, for $7,000. William sold the stock for $6,000 to an un

A. As a short-term capital loss of $1,000.
Answer (A) is correct.
Losses are not allowed on sales or exchanges of property between related parties. A father and son are related parties for this purpose. Thus, Daniel's loss of $3,000 on the sale of the sto

Justin Justice owns 55% of the outstanding stock of Rego Corporation. During the current year, Rego sold a trailer to Justin for $10,000. The trailer had an adjusted tax basis of $12,000 and had been owned by Rego for 3 years. In its current-year income t

A. $0.
Answer (A) is correct.
Rego realized a $2,000 loss ($10,000 realized - $12,000 adjusted basis). A loss from the sale or exchange of property between related parties is not deductible. Related parties include a corporation and an individual who owns

Mitchell sold his Saratoga Bombers Corporation stock to his brother Sheldon for $7,000. Mitchell's cost basis in the stock was $10,000. Sheldon later sold this stock to Sonia, an unrelated party, for $10,500. What is Sheldon's recognized gain?
A. $2,100
B

C. $500
Answer (C) is correct.
Losses are not allowed on sales or exchanges of property between related parties. Brothers are related parties. Mitchell realized a $3,000 ($10,000 - $7,000) loss on the sale but may not deduct it. On the subsequent sale, Sh

Larry sold stock with a cost basis of $10,500 to his son for $8,500. Larry cannot deduct the $2,000 loss. His son sold the same stock to an unrelated party for $15,000, realizing a gain. What is his son's reportable gain?
A. $6,500
B. $4,500
C. $2,000
D.

B. $4,500
Answer (B) is correct.
Losses are not allowed on sales or exchanges of property between related parties. Related parties include a father and a son. Larry realized a $2,000 loss on the sale but may not deduct it. On the subsequent sale, his son

Among which of the following related parties are losses from sales and exchanges not recognized for tax purposes?
A. Father-in-law and son-in-law.
B. Brother-in-law and sister-in-law.
C. Grandfather and granddaughter.
D. Ancestors, lineal descendants, and

C. Grandfather and granddaughter.
Answer (C) is correct.
Losses are not allowed on sales or exchanges of property between related parties. Related parties include ancestors (grandfather), descendants (granddaughter), spouses, and siblings.

Terry, a taxpayer, purchased stock for $12,000. Later, Terry sold the stock to a relative for $8,000. What amount is Terry's recognized gain or loss?
A. $2,000 loss.
B. $0
C. $2,000 gain.
D. $4,000 gain.

B. $0
Answer (B) is correct.
Loss realized on sale or exchange of property to a related person is not deductible. The transferee takes a cost basis. Since the relative purchased the stock from Terry for $8,000, the relative has an $8,000 cost basis in the

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

D. Parent has $0 recognized loss and child has $0 recognized gain.
Answer (D) is correct.
With a related party stock sale, the original related seller is not permitted to recognize any realized loss on the disposition. However, if the recipient of that st

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?
A. $0
B. $500
C. $7,000
D. $7,50

A. $0
Answer (A) is correct.
Good realized a $7,500 loss ($4,500 sale price - $12,000 adjusted basis). A loss from the sale or exchange of property between related parties is not deductible. Related parties include a corporation and an individual who owns

Christina and Anne are equal partners in the capital and profits of Agee & Nolan but are otherwise unrelated. The following information pertains to 300 shares of Mast Corporation stock purchased by Anne 12 years ago and sold this year to Agee & Nolan.
Bas

A. $5,000
Answer (A) is correct.
Under Sec. 1001, Anne would realize and recognize a $5,000 long-term capital loss on the sale of stock to the partnership, since she held the stock for more than a year. If Anne had owned greater than a 50% interest in the

Doug Outt, a former baseball coach, decided to open a sporting goods store. He formed a corporation and sold a building for $80,000 to the corporation. The building originally cost Doug $75,000, and $25,000 of straight-line depreciation had been claimed p

C. $30,000 ordinary income.
Answer (C) is correct.
Doug realized a gain of $30,000 ($80,000 realized - $50,000 adjusted basis). There is no depreciation recapture since the straight-line method was used (Sec. 1250). The property is Sec. 1231 property, and

Senior sold Junior (his son) a rental residence with an adjusted basis of $60,000 for $40,000. Junior rented the house to an unrelated tenant for 2 years, properly claiming $8,000 in depreciation on the house. He then sold it for $42,000. As a result of t

A. Report no gain or loss.
Answer (A) is correct.
Under Sec. 267(a), Senior's $20,000 loss incurred on the sale or exchange of property to Junior is not deductible. Section 267(d) provides that, if a loss has previously been disallowed because of the rela

Among which of the following relatives are losses from sales and exchanges recognized for tax purposes?
A. Grandfather and granddaughter.
B. Father-in-law and son-in-law.
C. Brother and sister.
D. Lineal descendants.

B. Father-in-law and son-in-law.
Answer (B) is correct.
Under Sec. 267, losses are not allowed on sales or exchanges of property between related parties. A father-in-law and a son-in-law are not considered related parties for purposes of Sec. 267, so loss

Allen sold stock, a capital asset, he had purchased for $40,000 to his sister Alice for $30,000. Later, Alice sold the stock to an unrelated party for $45,000. What is the amount of Alice's recognized gain?
A. $5,000
B. $10,000
C. $15,000
D. $0

A. $5,000
Answer (A) is correct.
Under Sec. 267, losses are not allowed on sales or exchanges of property between related parties. Allen realized a $10,000 ($40,000 - $30,000) loss on the sale but may not deduct it. On the subsequent sale, Alice realized

S. Lumlord owns the large, two-story home in which his mother lives. It is situated in a neighborhood adjacent to a large university. S. Lumlord purchased the property several years ago for $60,000. The property has recently been rezoned to permit apartme

D. $40,000 ordinary income.
Answer (D) is correct.
S. Lumlord's gain is $40,000. Lumlord realized $30,000 cash, was relieved of a mortgage of $40,000, and received a note for $30,000. These total $100,000 and, after deducting the basis of $60,000, result

Individual Y owns 55% of Beta Corporation. Five years ago, Y contributed property with an adjusted basis of $20,000 and a fair market value of $8,000 to Beta in a transaction qualifying under Sec. 351. In the current year, Beta adopted a plan of complete

A. $0
Answer (A) is correct.
Normally gain or loss is recognized on a liquidating distribution of assets [Sec. 336(a)]. However, under Sec. 336(d)(1), a loss is not recognized in a liquidation on the distribution of property to a related person (which inc

Bank Corp.'s voting stock is owned by the following individuals: Farber, 25%; Farber's mother, 15%; Farber's father, 40%; and Grosset, an unrelated person, 20%. Farber's sister sold equipment to Bank at a loss. For the purposes of determining whether the

D. 80%
Answer (D) is correct.
Tax avoidance is limited on related party sales. For purposes of these provisions, related parties generally include ancestors (parents, grandparents, etc.), descendants (children, grandchildren, etc.), spouses, siblings, tru

The following data pertain to installment sales of personal property made by Fred Dale, an accrual-method taxpayer, in his retail furniture store:
Year of Installment Collections
Sale Sales Profit in Year 3
Year 1 $ 50,000 $15,000 $10,000
Year 2 100,000 4

B. $75,000
Answer (B) is correct.
The installment method is usually disallowed for dispositions of property by dealers. This includes any disposition of (1) personal property, if the person regularly sells such personal property on the installment plan, a

Arlene sold property with an adjusted basis of $35,000 to Sandy for $50,000. Sandy paid cash of $5,000 and assumed an existing mortgage of $20,000. Sandy signed an installment note for the $25,000 balance at 8% interest. Payments on the note were to be ma

B. $2,500
Answer (B) is correct.
The installment method is a special method of reporting gains (not losses) from sales of property for which at least one payment is received in a tax year after the year of sale. Under the installment method, gain from an

Cheryl sold a boat, which had cost her $3,600, for $6,000. The boat was not used in a trade or business or held for rent. Cheryl accepted a $1,800 down payment and an installment obligation calling for 30 monthly payments of $140, plus interest. After rec

D. $652
Answer (D) is correct.
Section 453B provides that, when an installment obligation is disposed of, gain or loss is recognized to the extent of the difference between the basis of the obligation and the amount realized (or the fair market value of t

In Year 1, Ray sold land with a basis of $40,000 for $100,000. He received a $20,000 down payment and the buyer's note for $80,000. In Year 2, he received the first of four annual payments of $20,000 each, plus 12% interest. What is the gain to be reporte

C. $12,000
Answer (C) is correct.
The transaction qualifies for treatment as an installment sale. The amount of gain is the proportion of the payments received in the year that the gross profit bears to the total contract price. The contract price is the

In an installment sale, if the buyer assumes a mortgage that is greater than the installment sale basis of the property sold,
A. There is never a profit or a loss.
B. The transaction is disqualified as an installment sale.
C. The gross profit percentage i

C. The gross profit percentage is always 100%.
Answer (C) is correct.
In an installment sale when the buyer assumes a mortgage that is greater than the basis of the asset, the seller is required to recognize the excess mortgage as a payment in year of sal

Oliver, a widower who does not live in a community property state, sold 50 acres of land he and his wife had paid $10,000 for in 1999. She died in 2009. As of the date of her death, the land was valued at $50,000 for estate tax purposes. Oliver sold the l

B. 70%
Answer (B) is correct.
To calculate the gross profit percentage, "A certain percentage of each payment [received]. . .is reported as gain from the sale. It is called the 'Gross profit percentage' and is calculated by dividing your gross profit from

Kuo sells residential rental property to his son Karl for $100,000. Karl gives Kuo $1,000 and an installment note for the balance of $99,000. Kuo's basis is $50,000. Karl pays Kuo $4,000 in Year 1. In Year 2, after paying Kuo $5,000, Karl sells the proper

B. Kuo should report $2,500 gain in Year 1.
Answer (B) is correct.
The recognized gain for an installment sale in any year is equal to the gross profit ratio multiplied by the amount of payments received in the year. In this case, the gross profit is $50,

Steve Bullman sold his business in the current year for $120,000. The sales contract allocated $40,000 to inventory and $80,000 to real property. The adjusted basis of the inventory was $38,000. The real property, held more than 1 year, had a cost of $40,

A.
$2,000
$15,000
Answer (A) is correct.
The sale of the business is essentially a sale of each of the separate assets. The inventory was sold at a gain of $2,000, which is ordinary income because inventory is neither a capital asset nor Sec. 1231 propert

During the current year, Mr. C sold property that had an adjusted basis to him of $19,000. The buyer assumed C's existing mortgage of $15,000 and agreed to pay an additional $10,000 consisting of a cash down payment of $5,000, and payments of $1,000, plus

C. 50%
Answer (C) is correct.
The gross profit percentage is the proportion of gross profit in relation to total contact price. The gross profit is the selling price reduced by the adjusted basis of the property and any selling expenses. The contract pric

Mr. P purchased property from Mr. A by assuming an existing mortgage of $12,000 and agreeing to pay an additional $6,000, plus interest, over the next 3 years. Mr. A had an adjusted basis of $8,800 in the building and paid selling expenses totaling $1,200

C.
$18,000
$8,000
Answer (C) is correct.
The sales price includes any cash paid, relief of seller's liability by buyer, and any installment note given by the buyer. Here, the sales price is $18,000 ($12,000 relief of liability + $6,000 installment note).

For the current year, the installment method may not be used for
A. Sales of personal property (except farm property) by dealers who regularly sell this type of personal property on an installment plan.
B. Sales of real property (except farm property and

C. Sales of personal property (except farm property) by dealers who regularly sell this type of personal property on an installment plan or sales of real property (except farm property and certain sales of residential lots or timeshares) held by a dealer

During Year 1, Frank, a cash-basis taxpayer, sold a piece of land that had an adjusted basis to him of $110,000 to Tony for $200,000. Tony paid $50,000 down and agreed to pay $30,000 per year plus interest for the next 5 years beginning in January of Year

B. $20,000
Answer (B) is correct.
The amount of gain under Sec. 453 is the proportion of the payments received in the year that the gross profit bears to the total contract price. The contract price is the total amount the seller will ultimately collect f

Mr. A, a cash-basis taxpayer, sold his business in the current year for $120,000. The contract allocated $40,000 to inventory and $80,000 to real property. The book value of the inventory was $38,000. The real property had a cost of $40,000 and depreciati

D. $2,000 ordinary income, $15,000 capital gain.
Answer (D) is correct.
An installment sale is a disposition of property in which at least one payment is to be received after the close of the taxable year in which the disposition occurs. However, sales of

On August 1 of the current year, Roger Company sold machinery used in its business for a total price of $20,000, payable in four equal annual installments of principal plus interest at 10%. The first payment was due and paid on December 31 of the current

C. $8,000 ordinary income and $2,000 capital gain.
Answer (C) is correct.
Section 453(i) requires full recognition of depreciation recapture in the year of sale regardless of payments. Any amounts treated as ordinary income by reason of the recapture prov

Fact Pattern: L.E. operates an accounting service as a sole proprietorship. For income tax purposes, he reports on the cash and calendar-year bases. During Year 3, L.E. received the following receipts in connection with his business, which was his only so

B. $119,000
Answer (B) is correct.
A cash-basis taxpayer generally reports income attributable to services in the taxable year cash is received. The installment method applies to this sale of land because L.E. did not elect otherwise. Income recognized un

In the current year, Mr. U sold property with an adjusted basis to him of $1,000 for $10,000. The sales agreement called for a down payment of $1,000 and payments of $1,500 in each of the next 6 years to be made from an irrevocable escrow account, establi

A. $9,000
Answer (A) is correct.
An installment sale is a disposition of property in which at least one payment has to be received after the close of the tax year in which the disposition occurs. Funds can be escrowed provided they are still the property

Jake sold an office building in Year 1 on the installment method for $5.5 million. At the end of Year 2, he is still owed $4.9 million on the debt from the sale. In which situation will Jake have to pay interest on the deferred tax of his Year 2 sales if

C. In Year 2 he sells a rental duplex for $160,000 and an apartment complex for $4.9 million.
Answer (C) is correct.
Interest is charged under Sec. 453A on the deferred tax of nondealer installment sales of over $150,000 involving any type property. Exclu

Robert, a calendar-year taxpayer, sells an office building in the current year for $9 million, receiving $1 million cash in the current year and a note for $8 million. Assume Robert's gross profit percentage is 30% and the Sec. 6621 rate for underpayments

B. $36,000
Answer (B) is correct.
Interest is computed each year at the underpayment rate of Sec. 6621 that is in effect for the month in which the tax year ends. The interest is computed on the "applicable percentage" of the deferred tax. The applicable

When property (other than marketable securities) is sold to a related person on the installment method, which of the following will cause the seller to recognize the remainder of the gain on the installment obligation before all payments are received?
A.

D. The buyer gives the property away within 2 years of the installment sale.
Answer (D) is correct.
To prevent intermediary sales on an installment basis to related parties followed by other dispositions, Sec. 453(e) requires the amount realized on a seco

With respect to the disposition of an installment obligation, which of the following is false?
A. No gain or loss is recognized on the transfer of an installment obligation between a husband and wife if incident to a divorce.
B. If the obligation is sold,

D. If an installment obligation is canceled, it is not treated as a disposition.
Answer (D) is correct.
Section 453B provides that, when an installment obligation is disposed of, gain or loss is recognized to the extent of the difference between the basis

Last year, Ricardo sold a piece of unimproved real estate to Cliff for $20,000. Ricardo acquired the property 15 years ago at a cost of $10,000. Last year, Ricardo received $4,000 cash and Cliff's note in the amount of $16,000 for the remainder of the sel

C. $7,000
Answer (C) is correct.
Section 453B provides that, when an installment obligation is disposed of, gain or loss is recognized to the extent of the difference between the basis of the obligation and the amount realized (or the fair market value of

In Year 1, Neptune sold his lakefront lot in which he had a basis of $14,000 on the installment method for $28,000. Neptune received $8,000 in Year 1 and $1,000 in Year 2 before having to repossess the land after payments stopped. What is Neptune's gain o

B. $5,000
Answer (B) is correct.
Section 1038(b) provides that, on the repossession of real property that was sold on the installment method, gain is recognized to the extent the payments received prior to the repossession exceed the gain on the property

Four years ago, Mr. B sold his personal property on contract for $200,000, which resulted in a capital gain of $100,000. Mr. B properly elected to use the installment method of reporting and through last year had collected $40,000 on the contract. At the

C. $80,000 capital gain.
Answer (C) is correct.
Under Sec. 453B(f)(1), a taxpayer recognizes a gain or loss (capital if the asset was capital) on the repossession of property sold on the installment method. The gain or loss is the difference between the f

Alan Kupper had the following transactions during 2017:
Gain of $7,000 on sale of common stock purchased on January 15, 2016, and sold on April 15, 2017.
Gain of $5,000 on sale of common stock purchased on October 15, 2016, and sold on March 25, 2017.
Rec

A. $15,000 long-term capital gain.
Answer (A) is correct.
The sale of stock in April resulted in a long-term capital gain. The sale of stock in March resulted in a short-term capital gain because the stock was held less than 1 year. The sale of land in 20

A heavy-equipment dealer would like to trade some business assets in a nontaxable exchange. Which of the following exchanges would qualify as nontaxable?
A. The company jet for a large truck to be used in the corporation.
B. Investment securities for anti

D. A corporate office building for a vacant lot.
Answer (D) is correct.
Property qualifying for a like-kind treatment under IRC Sec. 1031 depends on the property's nature or character, but not necessarily in grade or quality. Real property is of like kind

Joan Reed exchanged commercial real estate that she owned for other commercial real estate plus cash of $50,000. The following additional information pertains to this transaction:
Property given up by Reed
Fair market value $500,000
Adjusted basis 300,000

C. $50,000
Answer (C) is correct.
Neither gain nor loss is recognized on an exchange of like-kind property held for productive use in a trade or business or for investment. When boot (cash) is received, gain or loss is recognized to the extent of the boot

Wynn, a 60-year old single individual, sold his personal residence for $450,000. Wynn had owned his residence, which had a basis of $250,000, for 6 years. Within 8 months of the sale, Wynn purchased a new residence for $400,000. What is Wynn's recognized

A. $0
Answer (A) is correct.
Wynn will realize a $200,000 ($450,000 sales price - $250,000 adjusted basis) gain on the sale of the residence. Section 121, as amended by the Taxpayer Relief Act of 2000, allows an exclusion of up to $250,000 for single taxp

On October 1, 2017, Donald Anderson exchanged an apartment building, having an adjusted basis of $375,000 and subject to a mortgage of $100,000, for $25,000 cash and another apartment building with a fair market value of $550,000 and subject to a mortgage

B. $25,000
Answer (B) is correct.
Anderson's realized gain is
Fair market value of building received $ 550,000
Mortgage on old building 100,000
Cash received 25,000
Total amount realized =$ 675,000
Less: Basis of old building
$375,000
Mortgage on new buil

In a "like-kind" exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of
A. Convertible debentures.
B. Convertible preferred stock

D. Rental real estate located in different states.
Answer (D) is correct.
Like-kind refers to the nature or character of the property. Real estate for real estate qualifies as a like-kind exchange even if the properties are as different as a rental office

Fact Pattern: Two transactions for a sole proprietorship were made during the current year. These were the only sales or exchanges of capital assets or Sec. 1231 assets (there were no unrecaptured Sec. 1231 losses from the previous year).
A machine used i

D. $7,000 long-term capital gain; $12,000 ordinary income; and $2,400 ordinary loss.
Answer (D) is correct.
The sale of the machine resulted in a realized gain of $19,000 (amount realized of $40,000 less the adjusted basis of $21,000). A portion of the ga

Fact Pattern: Two transactions for a sole proprietorship were made during the current year. These were the only sales or exchanges of capital assets or Sec. 1231 assets (there were no unrecaptured Sec. 1231 losses from the previous year).
A machine used i

C. $60,000
Answer (C) is correct.
The realized loss was fully recognized, so the basis of the new warehouse is its cost of $60,000.

Mr. and Mrs. Jones sold their principal residence for $750,000. They had lived in their residence for 20 years, and it had an adjusted basis of $210,000. The Joneses have decided not to purchase a new home and will instead rent a condominium on the beach.

B. $40,000
Answer (B) is correct.
Mr. and Mrs. Jones will realize a $540,000 ($750,000 sales price - $210,000 adjusted basis) gain on the sale of the residence. An exclusion of up to $500,000 is allowed for married taxpayers filing jointly on the sale of

Mr. Baker sold his home on November 1, Year 15 (the current year) for $355,000. He owned and lived in the home for 15 years, and it had an adjusted basis of $75,000. He purchased a new home for $200,000. What amount of gain may Mr. Baker exclude on this t

B. $250,000
Answer (B) is correct.
Mr. Baker will realize a $280,000 ($355,000 - $75,000) gain on the sale of the home. Mr. Baker is allowed to exclude up to $250,000 of gain on this sale. Therefore, he recognizes a gain of $30,000.

Ms. Orchard purchased a duplex in Year 1. She lived in one unit as her principal residence and rented out the other unit until she sold the duplex in February Year 15 (the current year). In April Year 15, she bought and lived in a small single home. She d

C. $50,000
Answer (C) is correct.
Since there are two units to the duplex, the calculations must be divided in half between the personal residence and the rental property. Accordingly, the realized gain is $50,000 [($125,000 sales price - $10,000 selling

Mr. McCarthy exchanged real estate that he held for investment purposes for other real estate that he will hold for investment purposes. The real estate that he gave up had an adjusted basis of $8,000. The real estate that he received in the exchange had

C. $500
Answer (C) is correct.
The basis of property acquired in a like-kind exchange is equal to the adjusted basis of property surrendered, decreased by any boot received and increased by any gain recognized or boot given [Sec. 1031(d)]. The gain recogn

Clark uses a flatbed truck in his landscaping business. Clark's sister Lois is a home decorator who uses a standard truck in her business. On December 27, Year 1, Clark and Lois exchanged vehicles. The fair market value of Clark's flatbed truck was $7,000

B. $1,200
Answer (B) is correct.
The basis of property acquired in a like-kind exchange is equal to the adjusted basis of property surrendered, decreased by any boot received and increased by any gain recognized or boot given. Since boot is neither given

Qualified small business stock, for purposes of applying rollover and exclusion rules, is stock that meets all the following tests except
A. Stock in a C corporation.
B. Originally issued after August 10, 1993.
C. Acquired by original issue in exchange fo

D. Total gross assets of $100 million or less at all times after August 10, 1993 and before it issued the stock.
Answer (D) is correct.
Stock qualifies as Section 1202 stock if it is received after August 10, 1993, the corporation is a domestic C corporat

In December 2017, Angela sold 20 shares of Neely Co. stock for $8,000. This was qualified small business stock that she had bought in August 2011. Her basis is $2,000. What is her taxable gain?
A. $0
B. $3,000
C. $6,000
D. $8,000

A. $0
Answer (A) is correct.
Under Sec. 1202(a), an individual may exclude from gross income 50% of any gain from the sale or exchange of qualified small business stock held for more than 5 years. The exclusion increased to 75% for purchases between Febru

Martha, filing single, purchased her home on July 7, Year 1, and lived in it continuously until its sale on January 7, Year 3, due to a qualified hardship. Her gain on the sale of the home is $300,000. She did not exclude any gain on any other home sale d

D. $187,500
Answer (D) is correct.
An individual may exclude $250,000 ($500,000 for married individuals filing jointly) on the sale of a principal residence, provided (s)he lived there for at least 2 years. Additionally, a pro rata exclusion is available

Leker exchanged a van that was used exclusively for business and had an adjusted tax basis of $20,000 for a new van. The new van had a fair market value of $10,000, and Leker also received $3,000 in cash. What was Leker's tax basis in the acquired van?
A.

B. $17,000
Answer (B) is correct.
The basis of property received in a like-kind exchange is equal to the adjusted basis of the property surrendered, decreased by any boot received and increased by any gain recognized or boot given. Since this is a like-ki

Gwen owned a duplex and lived in one-half. The other half was rental property. The cost of the property was $80,000, of which $70,000 was allocated to the building and $10,000 to the land. During the current year, the property was condemned by the city. U

B. $67,000
Answer (B) is correct.
Gwen has two assets, one for rental and one for personal use. Each asset must be computed separately. The basis of the rental building before the sale was $17,000 ($40,000 purchase price - $23,000 depreciation taken). Tha

Eight years ago, Ms. Jones, a farmer, inherited a large parcel of land that had a fair market value of $150,000 at that time. She used the large parcel in her farming operations. In the current year, Ms. Jones decided she no longer wanted the large parcel

Eight years ago, Ms. Jones, a farmer, inherited a large parcel of land that had a fair market value of $150,000 at that time. She used the large parcel in her farming operations. In the current year, Ms. Jones decided she no longer wanted the large parcel

In the current year, Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, had a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered

B. $50,000
Answer (B) is correct.
Section 1031 defers recognizing gain or loss to the extent that property productively used in a trade or business is exchanged for property of like-kind. "An exchange of city property for farm property, or improved proper

Hogan exchanged a business-use machine having an original cost of $100,000 and accumulated depreciation of $30,000 for business-use equipment owned by Baker having a fair market value of $80,000 plus $1,000 cash. Baker assumed a $2,000 outstanding debt on

B. $3,000
Answer (B) is correct.
Gain (loss) recognition is deferred to the extent that property productively used in a trade or business or held for investment is exchanged for property of like-kind. However, realized gain is recognized equal to the less

A married couple purchased their principal residence for $300,000. They spent $40,000 on improvements. After living in it for 10 years, the couple sold the home for $650,000 and paid $36,000 in real estate commissions. What gain should the couple recogniz

A. $0
Answer (A) is correct.
The IRC provides an exclusion upon the sale of a principal residence. A taxpayer may exclude up to $250,000 ($500,000 for married taxpayers filing jointly) of realized gain on the sale of a principal residence. Realized gain i

Prime Corporation's building was destroyed by a tornado. The fair market value of the building at the time of the tornado was $400,000, and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows:
$400,000 for the building.
$10

D. $150,000
Answer (D) is correct.
The lost profits during rebuilding would be taxable whether received from customers or insurance proceeds, as they represent business income (or a replacement thereof). As Prime does not elect involuntary conversion trea

Benson exchanged a van used exclusively for business and with an adjusted basis of $100,000 for a new van with a fair market value of $120,000 and received $5,000 in cash. What amount of gain did Benson recognize from the transaction?
A. $0
B. $5,000
C. $

B. $5,000
Answer (B) is correct.
Gain is recognized on a like-kind exchange equal to the lesser of gain realized or boot received. Gain realized is $25,000 ($120,000 FMV of the new van + $5,000 cash - adjusted basis of the van given up). Boot received is

Dawson, Inc.'s warehouse (with an adjusted tax basis of $75,000) was destroyed by fire. The following year, Dawson received insurance proceeds of $195,000 and acquired a new warehouse for $167,000. Dawson elected to recognize the minimum gain possible. Wh

B. $75,000
Answer (B) is correct.
If the company receives an insurance payment or other reimbursement in excess of the adjusted basis of damaged or destroyed property, the company will have a gain. The gain is the amount received minus the adjusted basis

A married couple abandoned their principal residence in May. They had purchased the house five years ago for $350,000. The house had a current fair market value of $300,000. What is the maximum loss, if any, that they are allowed to deduct on the current-

A. $0
Answer (A) is correct.
The house has a basis of $350,000 and a current value of $300,000. Thus, the couple has a realized loss of $50,000 ($350,000 - $300,000). However, a loss is not recognized on the sale of a personal residence. Because no loss c

On January 2, Year 1, Bates Corp. purchased and placed into service 7-year MACRS tangible property costing $100,000. On December 31, Year 3, Bates sold the property for $102,000, after having taken $47,525 in MACRS depreciation deductions. What amount of

C. $47,525
Answer (C) is correct.
Depreciable tangible property used in a trade or business is Sec. 1245 property. Section 1245 states that gain realized on the disposition of this property is recaptured as ordinary income to the extent of the lesser of d

A taxpayer sold for $200,000 equipment that had an adjusted basis of $180,000. Through the date of the sale, the taxpayer had deducted $30,000 of depreciation. Of this amount, $17,000 was in excess of straight-line depreciation. What amount of gain would

C. $20,000
Answer (C) is correct.
Gain on the disposition of Sec. 1245 property is ordinary income to the extent of the lesser of all depreciation taken or gain realized. The realized gain in excess of the depreciation taken may be treated as a gain from

Platt owns land that is operated as a parking lot. A shed was erected on the lot for the related transactions with customers. With regard to capital assets and Sec. 1231 assets, how should these assets be classified?
Land Shed
A.
Capital Capital
B.
Sec. 1

D.
Sec. 1231
Sec. 1231
Answer (D) is correct.
Capital assets are any property not excluded by IRC definition. Real property used in a trade or business is excluded. Section 1231 property includes all real or depreciable property used in the taxpayer's tra

Mary Brown purchased an apartment building on January 1, 2008, for $200,000. The building was depreciated using the straight-line method. On December 31, 2017, the building was sold for $210,000 when the asset basis net of accumulated depreciation was $16

D. Section 1231 gain of $50,000.
Answer (D) is correct.
When depreciable property used in a trade or business is sold at a gain, first Sec. 1245 and Sec. 1250 are applied; then the balance of the gain not recaptured as ordinary income is Sec. 1231 gain. I

Four years ago, a self-employed taxpayer purchased office furniture for $30,000. During the current tax year, the taxpayer sold the furniture for $37,000. At the time of the sale, the taxpayer's depreciation deductions totaled $20,700. What part of the ga

B. $7,000
Answer (B) is correct.
Section 1245 property is depreciable personal property (e.g., office furniture). Gain on the disposition of Sec. 1245 property is ordinary income to the extent of the lesser of all depreciation taken or gain realized. The

Ben Green operates a parking lot that yielded net income of $13,000 during 2017. The only other transactions that Mr. Green had during the year were a gain of $16,000 on the sale of some Westinghouse Corporation stock that he bought 2 years ago, a loss of

B. $16,000
Answer (B) is correct.
Net capital gain is the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for the year. Mr. Green had two Sec. 1231 transactions: the $10,000 loss and the $4,000 gain. Real

Dole, the sole owner of Enson Corp., transferred a building to Enson. The building had an adjusted tax basis of $35,000 and a fair market value of $100,000. In exchange for the building, Dole received $40,000 cash and Enson common stock with a fair market

C. $40,000
Answer (C) is correct.
The amount realized equals $65,000 [$40,000 cash + $60,000 stock - $35,000 adjusted basis.] However, Sec. 351(a) states that no gain or loss shall be recognized on the transfer of assets to a corporation solely in exchang

Iris King bought a diamond necklace for her own use at a cost of $10,000 ten years ago. During the current year, when the fair market value was $12,000, Iris gave this necklace to her daughter, Ruth. No gift tax was due. This diamond necklace is a
A. Capi

A. Capital asset.
Answer (A) is correct.
Capital assets include all property held by a taxpayer unless excluded by the IRC. Personal-use property, such as jewelry, is a capital asset.

Mr. Macabee, a sole proprietor on the accrual basis, prepared the following balance sheet for his business on December 31, Year 14:
Assets
Accounts receivable $ 8,000
Inventory 14,000
Equipment (purchased in Year 1)
40,000
Accumulated depreciation
(30,000

D. $11,000 ordinary income and $5,000 Sec. 1231 gain.
Answer (D) is correct.
The sale of the business resulted in a realized gain of $16,000. The accounts receivable had a tax basis of $8,000 because they were already recognized as income under the accrua

During the current year, a corporation retired obsolete equipment purchased ten years ago having an adjusted basis of $30,000 and sold it as scrap for $1,000. The corporation also had $50,000 taxable income from operations. The taxable income of the corpo

A. $21,000.
Answer (A) is correct.
The corporation realized a loss of $29,000 ($1,000 realized - $30,000 adjusted basis) on the sale of the retired equipment for scrap. This is a Sec. 1231 loss. Since there are no other Sec. 1231 gains or losses to net, i

On March 1, Year 1, Paul purchased a machine for use in his business. He sold the machine 9 months later for $11,000. At the time of the sale, the machine had an adjusted basis of $10,250. What is the amount and character of the gain?
A. $750 long-term ca

B. $750 ordinary income.
Answer (B) is correct.
Capital assets are any property not excluded by IRC definition. Real property used in a trade or business is excluded. Section 1231 property includes all real or depreciable property used in the taxpayer's t

Which of the following dispositions of depreciable property would trigger recapture?
A. Installment sale.
B. Gift.
C. Transfer at death.
D. Tax-free exchange where no money or unlike property is received.

A. Installment sale.
Answer (A) is correct.
Neither Sec. 1245 nor Sec. 1250 applies to a gift disposition or a disposition by bequest, devise, or intestate succession. Like-kind exchanges also do not involve the recapture of depreciable property. In an in

John owned a printing business and sold the following assets in Year 2:
Printing press:
Sales price $25,000
Original cost 20,000
Allowed or allowable depreciation
8,000
Computer equipment:
Sales price $30,000
Original cost 28,000
Allowed or allowable depr

C. $28,000 ordinary income; $1,000 capital gain.
Answer (C) is correct.
Section 1231 property is depreciable or real property used in a trade or business and held for more than 1 year or an involuntarily converted nonpersonal capital asset (i.e., held in

Which of the following is Sec. 1250 property?
A. Land held for investment.
B. Irrigation system.
C. Lease on land.
D. Dams.

C. Lease on land.
Answer (C) is correct.
Land is not Sec. 1250 property, but leases are Sec. 1250 intangible properties. Certain improvements to land may be treated as land, e.g., dams and irrigation systems. Section 1250 property includes depreciable rea

Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Sec. 1245?
A. $0
B. $40,000
C. $60,000
D. $100,000

C. $60,000
Answer (C) is correct.
The amount of gain realized is
Sales Price $200,000
Less: Adjusted Basis
Cost $160,000
Less: Depreciation
(60,000)
(100,000)
Amount Realized =$100,000
Under Sec. 1245, gain on the disposition is ordinary income to the ext

Lobster, Inc., incurs the following losses on disposition of long-term business assets during the year:
Loss on the abandonment of office equipment $ 25,000
Loss on the sale of a building (straight-line
depreciation taken in prior years of $200,000)
250,0

D. $290,000 Section 1231 loss.
Answer (D) is correct.
Section 1231 property is property held for more than 1 year and includes all real or depreciable property used in a trade or business and involuntarily converted capital assets held in connection with

A sole proprietor of a farm implement store sold a truck for $15,000 that had been used to make service calls. Three years ago, the truck cost $30,000, and $21,360 depreciation was taken. What is the appropriate classification of the $6,360 gain for tax p

A. Ordinary gain.
Answer (A) is correct.
As the property is depreciable, personal, trade or business property, it is subject to the Section 1245 recapture rules. These rules provide that any gain realized, to the extent of the lesser of gain realized or d

Which of the following items qualifies for treatment under Section 1231 (Property Used in the Trade or Business and Involuntary Conversions)?
A. Copyright used in the business, held for 10 years.
B. Building used in the business, held for 6 months.
C. Mac

D. Computer used in the business, held for 4 years.
Answer (D) is correct.
Section 1231 property is property held for more than 1 year and includes all real or depreciable property used in a trade or business. A computer used in the business that was held

The results of Digimatic Corporation's first 3 years of operations are presented below:
Year Results of Operations
Year 1 Sec. 1231 losses of $10,000
Year 2 Sec. 1231 losses of $15,000
Year 3 Sec. 1231 gain of $75,000
Digimatic Corporation's Year 3 Sec. 1

C. A net long-term capital gain of $50,000 and ordinary income of $25,000.
Answer (C) is correct.
The net Sec. 1231 gain for any taxable year is treated as ordinary income to the extent that the gain does not exceed the nonrecaptured net Sec. 1231 losses.