MODULE 34 TAXES: TRANSACTIONS IN PROPERTY 517

A.4.b. Involuntary Conversions determined by the ratio of the number of shares acquired to

23. (d) The requirement is to determine the end of the

replacement period for nonrecognition of gain following the
condemnation of real property. For a condemnation of real
property held for productive use in a trade or business or for
investment, the replacement period ends three years after the
close of the taxable year in which the gain is first realized.
Since the gain was realized in 2009, the replacement period
ends December 31, 2012.

A.4.c. Sale or Exchange of Residence

24. (c) The requirement is to determine the amount of

gain from the sale of the former residence that is recognized
on Davis' 2009 return. An individual may exclude from
income up to $250,000 of gain that is realized on the sale or
exchange of a residence, if the individual owned and occu-
pied the residence as a principal residence for an aggregate
of at least two of the five years preceding the sale or ex-
change. Davis' former residence cost $65,000 and he had
made improvements costing $5,000, resulting in a basis of
$70,000. Since Davis sold his former residence for
$380,000 and paid a real tor commission of $20,000, the net
amount realized from the sale was $360,000. Thus, Davis
realized a gain of $360,000 - $70,000 = $290,000. Since
Davis qualifies to exclude $250,000 of the gain from in-
come, the remaining $40,000 of gain is recognized and in-
cluded in Davis' income for 2009.

25. (a) The requirement is to determine the amount of

gain to be recognized on the Orans' 2009 joint return from
the sale of their residence. An individual may exclude from
income up to $250,000 of gain that is realized on the sale or
exchange ofa residence, if the individual owned and occu-
pied the residence as a principal residence for an aggregate
of at least two of the five years preceding the sale or ex-
change. The amount of excludable gain is increased to
$500,000 for married individuals filing jointly if either
spouse meets the ownership requirement, and both spouses
meet the use requirement. Here, the Orans realized a gain of
$760,000 - $170,000 = $590,000, and qualify to exclude
$500,000 of the gain from income. The remaining $90,000
of gain is recognized and taxed to the Orans for 2009.

26. (b) The requirement is to determine the maximum

exclusion of gain on the sale of Ryan's principal residence.
An individual may exclude from income up to $250,000 of
gain that is realized on the sale or exchange of a residence, if
the individual owned and occupied the residence as a princi-
pal residence for an aggregate of at least two of the five
years preceding the sale or exchange. Since Ryan meets the
ownership and use requirements, and realized a gain of
$400,000 - $180,000 = $220,000, all of Ryan's gain will be
excluded from his gross income.

A.S. Sales and Exchanges of Securities .

27. (b) The requirement is to determine Miller's recog-

nized loss and the basis for her remaining fifty shares of
Maples Inc. stock. No loss can be deducted on the sale of
stock if substantially identical stock is purchased within
thirty days before or after the sale. Any loss that is not de-
ductible because of this rule is added to the basis of the new
stock. If the taxpayer acquires less than the number of
shares sold, the amount of loss that cannot be recognized is
the number of shares sold. Miller purchased 100 shares of
Maples stock for $10,000 and sold the stock on January 8,
2009, for $7,000, resulting in a loss of $3,000. However,
only half of the loss can be deducted by Miller because on
December 24,2008 (within thirty days before the January 8,
2009 sale), Miller purchased an additional 50 shares of Ma-
ples stock. Since only $1,500 of the loss can be recognized,
the $1,500 ofloss not recognized is added to the basis of
Miller's remaining 50 shares resulting in a basis of $4,000 +
$1,500 = $5,500.
28. (a) The requirement is to determine the amount of
loss from the sale of Core stock that is deductible on Smith's
2008 and 2009 income tax returns. No loss can be deducted
on the sale of stock if substantially identical stock is pur-
chased within thirty days before or after the sale. Any loss
that is not deductible because of this rule is added to the
basis of the new stock. In this case, Smith purchased 100
shares of Core stock for $15,000 and sold. the stock on Janu-
ary 3, 2009, for $13,000, resulting in a loss of $2,000.
However, the loss cannot be deducted by Smith because on
December 30, 2008 (within thirty days prior to the Janu-

ary 3, 2009 sale), Smith purchased an additional 100 shares

of Core stock. Smith's disallowed loss of $2,000 is added to
the $13,000 cost of the 100 Core shares acquired on Decem-
ber 30 resulting in a tax basis of $15,000 for those shares.
29. (c) The purchase of substantially identical stock
within thirty days of the sale of stock at a loss is known as a
wash sale. The $800 loss incurred in the wash sale ($5,000
basis less $4,200 amount realized) is disallowed. The basis
of the replacement (substantially identical) stock is its cost
($3,600) plus the disallowed wash sale loss ($800). The
holding period of the replacement stock includes the holding
period of the wash sale stock. The amount realized ($6,000)
less the basis ($4,400) results in a long-term gain of $1,600.

30. (c) 'Worthless securities generally receive capital

loss treatment. However, if the loss is incurred by a corpo-
ration on its investment in an affiliated corporation (80% or
more ownership), the loss is treated as an ordinary loss.

A.6. Losses on Deposits in Insolvent Financial Institu-

tions
31. (d) A loss resulting from a nonbusiness deposit in an
insolvent financial institution is generally treated as a non-
business bad debt deductible as a short-term capital loss.
However, subject to certain limitations, an individual may
elect to treat the loss as a casualty loss or as a miscellaneous
itemized deduction.

A.7. Losses, Expenses, and Interest between Related

Taxpayers
32. (a) The requirement is to determine the amount of
the $10,000 loss that Conner can deduct from the sale of
stock to his daughter..Alice. Losses are disallowed on sales
or exchanges' of property between related taxpayers, includ-
ing members of a family. For this purpose, the termfamily
includes an individual's spouse, brothers, sisters, ancestors,
and lineal descendants (e.g., children, grandchildren, etc.).
Since Conner sold the stock to his daughter, no loss can be
deducted.

33. (a) The requirement is to determine the recognized

gain or loss on Alice's sale of the stock that she had pur-
chased from her father. Losses are disallowed on sales or