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TRUE OR FALSE 1. ____When a taxpayer sells part of his/her holdings in a stock which has been purchased in different lots at different prices, he/she should employ the LIFO assumption for determining the basis of shares sold. 2. ____ Arnold received stock as a gift three years ago. At the time of the gift, the donor's basis in the stock was $6,000 and the fair market value was $4,000. Arnold sells the stock this year for $5,000. Arnold has a $1,000 loss on the sale. 3. ____ Ted exchanges business equipment with a basis of $5,000 and a value of $7,000 for business equipment with a value of $10,000. Ted also gives the other party inventory with a basis of $2,000 and a value of $3,000. Although Ted doesn't recognize any gain on the exchange of the equipment, Ted must recognize the gain on the transfer of inventory included in the exchange. 4. ____ The holding period of property acquired by inheritance is always long-term. 5. ____ Gains are recognized on sales of property used for personal purposes (unless specifically excludable) but losses are disallowed. 6. ____ An individual taxpayer's capital losses are $10,000 and capital gains are $5,000 during the tax year. The taxpayer may use only $3,000 of the net capital loss to offset other income for the current tax year and must use the remaining loss in future years. 7. ____ Sam has a $10,000 Sec. 1231 gain in the current year. Sam had $8,000 of Sec. 1231 losses during the past two years. As a result of these facts, Sam has $10,000 of ordinary income in the current year. 8. ____ Bill, a single taxpayer, sells his principal residence in the current year for $300,000. He bought the residence 20 years ago for $105,000. In order to defer all of the tax on the gain, Bill must purchase a new residence costing at least $300,000. 9. ____ Sarah's business property was condemned by the county for highway construction. The county awarded Sarah $110,000 for the property. Sarah's basis in the property was $90,000. Sarah relocated to another locale and purchased a property for $100,000. Sarah's gain on the condemnation is $10,000. 10. ____ Tom inherits two items from his grandfather who died during the current year. One item is a parcel of land that his grandfather purchased 20 years ago for $10,000 but was worth $50,000 at the time of his grandfather's death. The other is an installment note for a land sale made by his grandfather three years ago. His grandfather's basis in the land sold was $30,000 but the sale price was $90,000. At his grandfather's death, the remaining balance due on the installment contract was $70,000. Tom's total basis in these two assets is $120,000. 11. ____ Sybil sold her personal automobile for a loss of $3,000 and her personal stamp collection for a gain of $700. Sybil will report a gain of $700 on her tax return as a result of these transactions. 12. ____Jill sells stock received as a gift from her grandfather last year. At the time of the gift, the stock had a basis to the grandfather of $5,000 and a fair market value of $8,000. Jill sold the stock for $7,000 in the current year. She has a gain of $2,000 on the sale. 13. ____Tom converts his personal auto to business use in the current year. He purchased the auto two years ago for $27,000. On the date of conversion, the fair market value of the auto is $18,000. If Tom uses the actual expense method for vehicles, his basis for depreciation is $18,000. 14. ____ After accumulating $9,000 of depreciation on the auto referenced in the question directly above, Tom sells the auto for $10,000. Tom has a realized and recognized gain of $1,000. 15. ____Clyde made five sales of investment securities during the current year. Two sales produced short-term gains of $2,000 and $6,000 respectively. Three sales were long-term and produced a loss of $15,000, a loss of $5,000 and a gain of $16,000 respectively. Clyde has a net short-term capital gain and will receive no preferential tax rate on the overall gain. 16. ____A taxpayer purchases rental real estate during 2002 at a cost of $200,000. After taking depreciation of $60,000, the taxpayer sells the property during 2011 for $240,000. The taxpayer has a gain or $100,000. $60,000 of this gain will be taxed at a maximum rate of 25% and $40,000 of the gain will be taxed at a maximum rate of 15%. 17. ____A taxpayer is required to own and occupy the residence three out of the last five years in order to qualify for the exclusion on the sale of a personal residence. 18. ____Any excluded gain on the sale of a personal residence reduces the basis of a new residence purchased. 19. ____ Tom sells business machinery for a $4,500 loss. If he has no capital gains, he will only be allowed to deduct $3,000 of this loss in the current year. 20. ____ George Jessup died leaving a net estate with a date of death fair market value of $750,000, well below the value of a taxable estate for estate tax purposes. George did not have a surviving spouse but left his entire estate to his two adult children. Six months after death, the assets of the estate are valued at $790,000. The executor of the estate should elect to value the assets on the alternative valuation date because the beneficiaries will receive a higher basis in the assets for future income taxation purposes while the estate is not liable for estate taxes. 21. ____ Fred and Martha, husband and wife, purchased land in joint tenancy for $200,000 in 1999. Fred died in 2007 and the land was valued at $300,000 at the time of his death. Martha's current basis in the land is $300,000. 22. ____ Assume the same facts as question 26 except that Fred is Martha's brother and Fred purchased the property completely with his own funds in 1999 but placed Martha on the property as a joint tenant with right of survivorship as a way of easing passage of title after his death. Under those circumstances, Martha's current basis in the land would be $300,000. 23. ____ Clawson Corporation generates a $10,000 long-term capital gain in the current year and a $20,000 long-term capital loss. Clawson may deduct only $3,000 of the net long-term capital loss in the current year and must carry forward the remaining $7,000 of long-term capital loss. 24. ____ Ellen is in the 33% tax bracket. She sold machinery used in her business this year for $3,000. She bought the machinery six years ago for $9,000 and had made a Section 179 election to expense the machinery at the time. Jane's tax on this sale is $450. 25. ____ Edith is in the 25% tax bracket. Edith bought stock in a public company for $10,000 and sold the stock 10 months later for $11,000. Edith's tax on the gain is $250. 26. ____ Walter sold a number of assets during the year. One sale generated an ordinary loss of $2,000, another a long-term capital gain of $5,000, and another a short-term capital loss of $2,000. As a result of these transactions, Walter has a net long-term capital gain of $3,000 and an ordinary loss of $2,000. 27. ____ Julia has a champion breeding horse that she sells in the current year for $20,000 after owning the horse for 3 years and depreciating $11,000 of its original cost of $16,000. Julia has a capital (1231) gain of $4,000 and an ordinary gain of $11,000. Multiple Choice: 28. Lem Lumberjack sells 100 shares (basis of $5,000) of Redwood Corporation common stock on March 8, 2011, for $4,000. On March 29, 2011, Lem purchases 50 shares of Redwood Corporation common stock for $2,500. Lem's recognized loss on the sale is: a. $1,000 b. $500 c. $1,500 d. $0 29. Which of the following items results in an increase to the basis of a business real estate? a. Depreciation b. Assessments for construction of sidewalks outside of the property c. Periodic maintenance of building d. Casualty loss taken for partial destruction of the property 30. In May 2011, Automatic, Inc. sold land with a basis to Automatic of $100,000, to Jack Jones, its 60% shareholder, for $80,000. In July, Jack sold the land to an unrelated party for $110,000. What is the amount of Jack's recognized gain? a. $0 b. $10,000 c. $20,000 d. $30,000 31. Brian Brewster sold property to a buyer who paid him $400,000 cash and assumed an existing mortgage of $150,000. The property had cost $250,000 and he had made improvements of $50,000. Depreciation of $100,000 has been claimed and selling expenses were $20,000. What is the amount of gain? a. $100,000 b. $200,000 c. $250,000 d. $280,000 e. $330,000 32. Doug Doolittle receives a nontaxable stock dividend of 20 shares of Edwards Corporation common stock with a fair market value at distribution of $800. Doug previously owned 100 shares of Edwards Corporation common stock which he purchased three years ago for $6,000. The basis per share of the 20 shares of Edwards Corporation stock received as a dividend is: a. $0 b. $40 c. $50 d. $60 33. Which of the following is not an example of a nontaxable like-kind exchange? a. b. c. d. e. Improved real estate for unimproved real estate. A printer for a computer. Common stock of one company exchanged for common stock of another. The trade of an apartment building for a store building. A tractor plus cash for a combine. 34. Which of the following is a capital asset? a. Property held primarily for sale to customers b. Accounts or notes receivable acquired in the ordinary course of business c. Machinery and equipment used in a trade or business d. Temporary investment of idle business cash in marketable corporate securities e. Real property used in a trade or business 35. Which of the following is not Section 1245 property? a. Intangible personalty (property not real estate) b. Machinery used in a business c. An office building depreciated using MACRS straight line d. Breeding livestock 36. Tom Truman sells a business machine which he has owned for four years for $27,000. Tom purchased the machine for $42,000 and has taken $18,000 in depreciation. How much and what type of gain will result from this sale? a. $3,000 long-term capital gain b. $3,000 ordinary income c. $18,000 ordinary income; $3,000 long-term capital gain d. $3,000 Section 1231 gain Use the following data for the last four questions: Harlan and Dane companies exchange manufacturing equipment with each other. The exchange qualifies as like-kind for both parties. Each of the exchanged properties is encumbered by liabilities. Harlan gives equipment with a $50,000 value and an adjusted basis of $35,000. Harlan's equipment is encumbered by a $30,000 liability that is assumed by Dane. Dane transfers manufacturing equipment with a value of $30,000 and an adjusted basis of $35,000 to Harlan. Dane's equipment is encumbered by a $10,000 liability assumed by Harlan. 37. What is Harlan's recognized gain or loss? 38. What is Dane's recognized gain or loss? 39. What is the basis of the equipment acquired by Harlan? 40. What is the basis of the equipment acquired by Dane