TRUE-FALSE QUESTIONS

1. Terry Trumbull purchased a tract of land. In order to have city water, he had to pay the water company $5,000 to extend the water line to his property. The $5,000 cost is an addition to the basis of the land.

2. When property that is subject to an existing debt is purchased, the basis of the property is the amount of cash paid initially plus the unpaid debt to which the property is subject.

3. The basis for nonbusiness property changed to business use is the greater of the adjusted basis of the property or its fair market value on the date it is converted to business use.

4. During 2020, Carl Crofts received a gift of property having a fair market value of $25,000 at the time of the gift. The donor's adjusted basis in the property at the time of the gift was $21,000. The donor paid a gift tax of $700 on the property. Carl's basis in the property is $21,700.

5. In 2020, Tom Turner received a gift of property that had a fair market value of $10,000 at the time of the gift. The donor's adjusted basis in the property at the time of the gift was $12,000. Tom's basis for computing depreciation is $10,000.

6. When new stock received as a dividend is identical to the old stock on which the dividend is declared, the adjusted basis of the old stock must be apportioned among the shares of old stock and the shares of new stock received as a dividend.

7. David Dawson owned two shares of a corporation's common stock. He paid $60 for one share and $30 for the other share. The corporation declared a stock dividend which gave stockholders two new shares of common stock for each share they held. After the distribution, David owns six shares of stock with an adjusted basis of $15 each.

8. If nontaxable stock rights are allowed to expire, they have no basis.

9. In a gain situation, the holding period of gift property begins on the date of the gift.

10. Richard Rhodes sold his warehouse at a loss to his brother. The loss is deductible by Richard.

11. If a wife sells depreciable property to her husband, the gain on the sale is treated as ordinary income.

12. The adjusted basis of property is its cost plus capital recoveries less capital expenditures.

13. To determine the initial basis of purchased property, cost is used unless it is a bargain transaction from an employer in which case its fair market value is used.

14. The basis of property acquired by inheritance is the lower of the decedent's adjusted basis or the fair market value on the date of the death of the decedent.

15. The holding period of property acquired from a decedent is considered to be long term regardless of when the property was acquired or disposed of.

16. Gains are recognized on sales involving property used for business or income-producing purposes or for personal purposes.

17. Increases in basis decrease the amount of gain realized or increase the amount of realized loss.

18. Depreciation, depletion, amortization, and acquisition costs are all capital returns.

19. Recognition of a gain or loss always occurs at the time of sale or exchange.

20. The fair market value of taxable stock rights at the date of distribution represents both the amount of income and the basis of the rights.

21. The basis of property acquired from a decedent is the fair market value of the property at the date of receipt of the property.

22. There is a basis adjustment for estate taxes paid on property acquired from a decedent that is similar to the gift tax adjustment of gifted property.

23. Unless the taxpayer can specifically identify the shares of stock that are sold or transferred, the FIFO rule comes into play (i.e., the stock sold is charged against the earliest of the stock purchases).

24. Gains and losses resulting from mere appreciation or decline in value are unrealized gains and losses, and are not included in the calculation of taxable income.

25. All costs necessary to get depreciable property in place and ready for use are deductible in the year in which they are paid or incurred.

26. For purposes of the related party rules, the taxpayer's parents are "related persons," but the taxpayer's siblings (brothers and sisters) are not.

27. The wash sale rules merely postpone the loss until the taxpayer sells the securities in a nonwash sale transaction.

28. Elizabeth Eason constructed an asset to be used in her businessa sole proprietorship. The basis she used for the finished asset should include the employee compensation for the work attributable to the construction of the asset.

29. Dan Danielson bought 100 shares of stock on October 20, 2020. On December 23, 2020, Dan died and his son David inherited the stock. David's basis in the stock is the fair market value at the time of Dan's death.

30. Property converted to business use is sold. The adjusted basis of the property at the time of conversion is used to determine the gain.

31. Stanley Summers purchased a personal residence for $35,000 cash and incurred a mortgage of $155,000 for the cost of obtaining a mortgage. Stanley's basis in the home is $190,000.

32. Isabella Iverson bought a new car for $17,500. She received a rebate from the manufacturer in the amount of $1,000. Her basis in the car is $17,500.

33. John Johnson sold his hot dog stand at a loss to his brother. The loss is deductible by John.

34. Marcia Marks received as a wedding present from an old friend a gold necklace worth $22,000. The necklace had been purchased by the friend for $25,000. The friend did not pay any gift tax. Marcia ran into some financial difficulty and sold the necklace for $23,000. Marcia must recognize a gain of $1,000.

35. 500 shares of the Yellow Brick Construction Company were sold for $10,000, its fair market value, by Esmeralda Emerson to her sister, Topaz, for $8,500. Esmeralda has a nondeductible loss of $1,500.