707

Chapter 10
Property Transactions: Determination of Basis and
Gains and Losses

TRUE-FALSE QUESTIONS—CHAPTER 10
*Some of the true-false questions have been adapted from the IRS Examinations.
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 2012, 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 2012, 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 $12,000.
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 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.

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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 business—a 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, 2012. On December 23, 2012, 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 $185,000 and spent $5,000 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.

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MULTIPLE CHOICE QUESTIONS—CHAPTER 10

*Questions 36, 38–44, 52, 53, and 60–62 have been adapted from the IRS Examinations.
36. Leonard Lambert’s commercial building, which had an adjusted basis of $500,000, was partially destroyed by
fire. The fair market value was $800,000 just before the fire and $600,000 immediately after. Leonard received
$150,000 insurance proceeds and deducted a $50,000 casualty loss. What is Leonard’s basis in the building
before any repairs are made?
a. $300,000
b. $350,000
c. $450,000
d. $500,000
e. $600,000
37. Lem Lumberjack sells 100 shares (basis of $5,000) of Redwood Corporation common stock on March 8, 2012,
for $4,000. On March 29, 2012, 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
38. In 2012, Allen Anders sold an asset which cost $70,000. Allen incorrectly claimed $40,000 depreciation over a
five-year period. He should have claimed $50,000 depreciation. What was the adjusted basis when sold?
a. $0
b. $20,000
c. $30,000
d. $50,000
e. $70,000
39. Which of the following items is not a reduction to the basis of an asset?
a. Depreciation
b. Assessments for maintenance of sidewalks
c. Cash rebate from manufacturer
d. Casualty losses
40. In 2012, Bob Brown’s aunt Barbara gave him a house. At the time of the gift, the house had a fair market value
of $193,000, the taxable gift was $180,000, and his aunt’s adjusted basis was $73,000. His aunt paid a gift tax of
$30,000 on the house. What is Bob’s basis in the house for purposes of determining gain?
a. $73,000
b. $93,000
c. $180,000
d. $193,000
41. In May 2012, 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

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42. 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
43. Brenda Baines sells land to Carla Chandler for $15,000 cash and a piece of equipment with an adjusted basis of
$15,000 and a fair market value of $20,000. The land was subject to a $25,000 mortgage which Carla assumed.
Brenda incurred $2,500 in selling expenses. What is the amount realized by Brenda?
a. $55,000
b. $60,000
c. $52,500
d. $57,500
44. Bill Burns purchases furniture from his employer for $5,000 during 2012. The fair market value of the furniture
is $8,500. What is Bill’s basis in the furniture?
a. $5,000
b. $8,500
c. $12,500
d. $2,500
45. Bill Burns purchases furniture from his employer for $5,000 during 2012. The fair market value of the furniture
is $8,500. What amount, if any, must Bill include as income for 2012?
a. $0
b. $5,000
c. $7,500
d. $3,500
46. 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 is:
a. $0
b. $40
c. $50
d. $60
47. Freda Freemont receives a nontaxable stock dividend of 30 shares of preferred stock on her Georgia Corporation
common stock. Freda purchased the 200 shares of common stock two years ago for $12,000. On the date of
distribution, the fair market value of the common stock was $75 per share and the fair market value of the
preferred was $100 per share. What is the new basis, per share, of the common stock?
a. $75.00
b. $50.00
c. $100.00
d. $66.67

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48. Freda Freemont receives a nontaxable stock dividend of 30 shares of preferred stock on her Georgia Corporation
common stock. Freda purchased the 200 shares of common stock two years ago for $12,000. On the date of
distribution, the fair market value of the common stock was $75 per share and the fair market value of the
preferred was $100 per share. What is the new basis, per share, of the preferred stock?
a. $75.00
b. $50.00
c. $100.00
d. $66.67
49. George Greco gave Harold Hudson property which George acquired five years ago for $15,000. At the time of
the gift, the property’s fair market value was $35,000. Harold subsequently sold the property for $40,000. What
amount of gain did Harold realize?
a. $20,000
b. $25,000
c. $5,000
d. $40,000
50. Kurt Kramer purchased stock five years ago for $12,000 which he gave to Jim Jensen when its fair market value
was $9,000. Subsequently, Jim sold the stock for $7,500. What is the amount of Jim’s loss on the sale?
a. $3,000
b. $1,500
c. $4,500
d. $2,000
51. Kent Knobe gave Larry Lawson a gift having a fair market value of $133,000 on February 14, 2012. Kent had
purchased the gift property in 2004 for $93,000, the taxable gift was $120,000, and paid a gift tax of $15,000.
What is Larry’s basis in the property?
a. $93,000
b. $120,000
c. $98,000
d. $108,000
e. $133,000
52. On January 6, 2012, Sally Strom purchased 300 shares of common stock in Corporation XYZ for $120 per share.
Four months later she purchased 100 additional shares at $180 per share. On December 13, 2012, Sally received
a 20 percent nontaxable stock dividend. What is Sally’s basis in each share of stock after the stock dividend?
a. 480 shares at $112.50 per share
b. 360 shares at $120 per share and 120 shares at $180 per share
c. 360 shares at $120 per share and 120 shares at $150 per share
d. 360 shares at $100 per share and 120 shares at $150 per share
53. Bob Bixby gave his daughter, Jane, his personal residence with an adjusted basis to him of $260,000 and a fair
market value of $250,000. Jane lived in the house for two years and then sold it for $240,000. As a result of the
sale, Jane will:
a. Report no gain or loss
b. Report a $10,000 loss
c. Report a $20,000 loss
d. Have her father report a $20,000 loss
54. Martha Meyers, an employee of Ace, Inc., purchased an asset with a fair market value of $8,000 from her
employer for $5,000. What amount should Martha report as income and what should her basis in the asset be?
a. $0 and $5,000
b. $3,000 and $5,000
c. $0 and $8,000
d. $3,000 and $8,000

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55. On September 24, 2012, Walter Whistler gave property with a fair market value of $63,000 to Jim Jacobs.
Walter’s adjusted basis in the property was $48,000. The taxable gift was $50,000 and gift taxes paid on the
property were $10,000. What is Jim’s basis in the property?
a. $48,000
b. $50,000
c. $51,000
d. $55,000
e. $63,000
56. Joe Jimson died in 2012. Property with an adjusted basis of $60,000 and a fair market value of $120,000 went
to Joe’s beneficiary. The executor chose the alternate valuation date when the value was $112,000. The property
was distributed four months after Joe’s death when the fair market value was $115,000. What is the basis of the
property to the beneficiary?
a. $60,000
b. $112,000
c. $115,000
d. $120,000
57. February 20, 2012: Lee Ranger purchased 100 shares of Pine Corp. stock for $30 a share.
April 7, 2012: Lee sold 50 shares of Pine Corp. stock for $20 a share.
April 24, 2012: Lee purchased 25 shares of Pine Corp. stock for $25 a share.
What is the basis of the 25 shares purchased on April 24, 2012?
a. $625
b. $875
c. $1,125
d. $750
58. Ralph Rugby wanted to sell 100 shares of a stock that had suffered a serious decline in value. Several members of
his family were interested in purchasing the stock. In order to preserve the loss deduction, which of the following
family members should Ralph sell his stock to?
a. Grandfather
b. Half-sister
c. Ralph, Inc. (Ralph’s 51% owned corporation)
d. Cousin
59. Which of the following statements is not true concerning installment reporting?
a. At least one payment is to be received after the close of the year in which a sale of property is made.
b. The installment method allows gain to be spread over more than one year.
c. The gross profit rate is used to determine the portion of the payment received that is reported as income.
d. An advantage of the installment method is that the dollar amount of income recognized from each payment
never varies from year to year.
60. On January 1, 2012, Daniel Durrow owned rental property which had an adjusted basis to him of $250,000.
Daniel made the following expenditures during 2012:
Ordinary painting of building $ 5,000
Repair of roof section (useful life not appreciably extended) 2,500
Legal fees paid to defend title 10,000
Property taxes 6,000
Assessment for local street improvement (value of property increased greatly) 15,000
Not considering depreciation, what is Daniel’s basis in the property at year-end?
a. $225,000
b. $240,000
c. $260,000
d. $275,000
e. None of the above
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61. On October 7, 2012, Grace Gems purchased a going business for the lump-sum price of $200,000. The fair
market values of the assets Grace purchased were as follows:
U.S. government securities $10,000
Land 36,000
Building 90,000
Equipment 15,000
Furniture 9,000
What is Grace’s basis in the building?
a. $90,000
b. $95,000
c. $100,000
d. $102,500
e. None of the above
62. In 2012, Leon Longrove sold a piece of business equipment that had an adjusted basis to him of $50,000 for
$75,000 cash plus artwork that had a fair market value of $25,000. The buyer assumed Leon’s $20,000 loan on
the equipment. Leon paid $5,000 in selling expenses. What is the amount of Leon’s gain on the sale?
a. $25,000
b. $45,000
c. $65,000
d. $75,000
e. None of the above
63. Recognized gain or loss is the term used to describe:
a. a taxpayer’s amount of true economic gain or loss when property is disposed.
b. the amount of realized gain or loss taxpayers report on their tax returns.
c. an amount that does not affect the taxpayer’s tax liability.
d. none of the above.
64. An example of a basket purchase is:
a. the purchase of real property with one or more items of personal property.
b. the purchase of land and a building for a single, lump-sum amount.
c. two separate property purchases completed one right after another.
d. both a and b.
e. all of the above.
65. Losses between related parties are:
a. always realized, but never recognized.
b. always recognized, but never realized.
c. always realized and recognized.
d. never realized and recognized.
66. Under the rules of constructive ownership:
a. if a partnership with two equal partners owns 10 percent of the stock in a corporation, each partner is treated
as owning 5 percent of the stock in that corporation.
b. stock owned by the taxpayer’s spouse, descendants, ancestors, or siblings is treated as owned by the
taxpayer.
c. a taxpayer may be treated as owning stock that is actually owned by another person or entity in which the
taxpayer has an ownership interest.
d. both a and c.
e. all of the above.

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714 CCH Federal Taxation—Comprehensive Topics

67. When a taxpayer realizes a loss on the sale of securities and purchases the same or substantially identical securities
within 61 days surrounding the date of the sale, this is known as:
a. a related-party transaction.
b. a wash sale.
c. a basket purchase.
d. none of the above.
68. When taxpayers sell property in an installment sale and realize gain, they generally recognize the gain:
a. in the first year in which an installment payment is received.
b. over the tax years in which they collect the proceeds from the sale.
c. at the time of the sale.
d. none of the above.
69. In 2008, Jane Jones pays $2,500 for 1,000 shares of ABC common stock. On August 27, 2012, Jane purchases
an additional 250 shares of ABC common stock for $600. On September 5, 2012, she sells the 1,000 shares
purchased in 2008 for $1,800. Jane’s recognized loss on the sale is:
a. $0.
b. $175.
c. $350.
d. $525.
e. $700.
70. In 2008, Jane Jones pays $2,500 for 1,000 shares of ABC common stock. On August 27, 2012, Jane purchases
an additional 250 shares of ABC common stock for $600. On September 5, 2012, she sells the 1,000 shares
purchased in 2008 for $1,800. Jane’s basis in the shares of stock purchased on August 27, 2012 is:
a. $75.
b. $425.
c. $600.
d. $775.
e. $1,125.
71. Becky Bell owned common stock in a corporation that she purchased two years ago for $25,000. On June 6,
2012, Becky sold the stock for its $11,000 fair market value to her son, Max Monroe. On December 19, 2012,
Max sells the stock to an unrelated party for its $13,000 fair market value. How much gain or loss will Becky and
Max recognize on their respective income tax returns for 2012?
a. $0 and $0, respectively.
b. ($14,000) and $0, respectively.
c. ($14,000) and $2,000, respectively.
d. $0 and $2,000, respectively.
e. None of the above.
72. North Enterprises sells land for $15,000 cash and machinery worth $20,000. The other party’s adjusted basis in the
machinery is $8,000. The land was subject to a $25,000 mortgage, which the other party assumes. North incurs
$2,000 of selling expenses on the sale. What is North’s amount realized from the sale?
a. $58,000.
b. $60,000.
c. $23,000.
d. $33,000.
e. $35,000.

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73. Nancy Nelson pays $200,000 for land and a building in a single transaction. At the time of the purchase, the land
and building were appraised at $120,000 and $180,000, respectively. Nancy’s depreciable basis in the building
is:
a. $0.
b. $100,000.
c. $80,000.
d. $120,000.
e. $180,000.
74. Jay Jamison sold property to Joan Jacobs. Joan paid $100,000 in cash and $20,000 in other property (fair market
value). The property sold by Jay was subject to an $80,000 mortgage, which Joan assumed. Jay paid a $7,200
sales commission and $5,000 in property taxes. Jay had purchased the property three years before for $120,000—
$20,000 in cash and a $100,000 mortgage. Jay had added $20,000 in improvements during the period of time in
which he held the property. What is Jay’s realized gain or loss on this transaction?
a. ($32,200) loss
b. ($27,200) loss
c. $47,800 gain
d. $52,800 gain
e. $112,000 gain
75. Douglas Duke received a summer home from his father as a gift in 2012. The fair market value at the time of the
gift was $90,000 (this was also the taxable gift), and it had an adjusted basis to the father of $50,000. The father
paid $9,000 in gift tax. What is Douglas’s basis in the property?
a. $41,000
b. $50,000
c. $54,000
d. $59,000
e. $90,000
76. Albert Arnett’s personal residence cost him $70,000, and it had a fair market value of $64,000 when it was
converted to rental use. Albert claimed $4,000 depreciation during the time it was rented. The rental building
was sold for $62,000. What is his gain or loss?
a. ($8,000) loss
b. ($4,000) loss
c. ($2,000) loss
d. no gain or loss
e. $2,000 gain
77. Leonard London sold a building used in his business to Michelle Martinson. He had purchased the property
several years previously for $340,000, $300,000 of which was the mortgage. Major improvements in the amount
of $240,000 had been made. At the time of the sale, Leonard had taken $220,000 in straight-line depreciation.
Leonard paid $104,000 in selling expenses. Michelle gave Leonard $400,000 in cash and unlike property with a fair
market value of $240,000, assumed a delinquent real estate bill of $105,000 and assumed Leonard’s mortgage on
the property in the amount of $234,000. What is Leonard’s gain on the sale?
a. $191,000
b. $385,000
c. $410,000
d. $503,000
e. $515,000

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716 CCH Federal Taxation—Comprehensive Topics

78. Wilma Waters purchased land from Carl Carmichael for $32,000 cash, the assumption of an existing mortgage of
$43,000, and payment of delinquent back taxes of $8,300. Carl’s adjusted basis in the land that he had purchased
as an investment was $85,000. Carl also incurred $9,330 in selling costs. What is Carl’s recognized gain or loss?
a. ($19,330)
b. ($11,030)
c. ($1,700)
d. $7,630
e. $11, 030
79. As a graduation present Barbara Brooks received 1,000 shares of stock from her aunt. The stock has a fair market
value of $25,000 at the time of the gift. The aunt’s adjusted basis in the stock at the time of the gift was $30,000.
A gift tax of $2,800 was paid by the aunt. Barbara sold the stock in the following year for $29,000. What is
Barbara’s gain or loss on the sale?
a. ($1,000)
b. no gain or loss
c. $1,200
d. $1,667
e. $4,000

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SUPPLEMENTARY PROBLEMS—CHAPTER 10
80. On April 18, 2012, Jim Jenkins sold 300 shares of Redwood Corporation common stock for $8,400. Jim acquired
the stock in 2008 at a cost of $10,000. On May 9, 2012, he repurchased 150 shares of Redwood Corporation
common stock for $3,600 and held them until August 25, 2012, when he sold them for $6,000. How should
Jim report the above transactions for 2012?
81. Norman Nelson owns 1,000 shares of Newton Corp. common stock which he purchased for $60,000 and later
receives a nontaxable preferred stock dividend of 300 shares of Newton preferred stock when the FMV of the
preferred was $100 per share and the FMV of the common was $90 per share. What is the basis of the common
and preferred shares after the dividend?
82. Ronald Rankin owns 1,000 shares of Royal Corp. common stock with a basis of $30,000. He receives a 10
percent taxable stock dividend when the FMV of each share of stock is $15. How much income does he have?
What is the basis in the new shares? When does the holding period of the new shares begin? What is the basis in
the old stock?
83. Stanley Steamer purchased 1,000 shares of Patrick Corporation common stock at $6 per share in 2008. On
September 26, 2012, he received 1,000 nontaxable stock rights entitling him to buy 200 additional shares of
Patrick Corporation common stock at $10 per share. On the day that the rights were issued, the fair market value
of the stock was $12.50 per share ex-rights and that of the rights was $2.50 each. Stanley sold 500 of the rights
for $1,100 on October 24, 2012, and let the other 500 rights expire.
(a.) What is the gain or loss that Stanley should report in 2012?
(b.) What gain or loss should Stanley report if the value of the rights were $1.25 instead of $2.50?
84. Betty Bell owns 1000 shares of Banner Corp. stock purchased in January 2010 for $30,000. On January 11,
2012, she receives 300 taxable stock rights valued at $6 with the right to purchase additional shares at $32.
(a.) How much income does Betty have? What is the basis in the rights? When does the holding period of the
rights begin?
(b.) On February 19, 2013, Brian exercises 150 rights and sells the remaining 150 rights for $8 each. What is the
basis of each new share? When does the holding period begin? How much and what kind of gain does she have
on the sale of the rights?
85. Joe Juggler sold some common stock to his brother Tim for $12,000, the current market price. He paid $15,000
for the stock two years ago. The stock market recovered rapidly and three months later Tim sold the stock to a
business acquaintance for $16,000. How much gain or loss should Joe and Tim report?
86. Mike Morgan gives Paul Piers property worth $35,000. Mike’s basis in the property is $30,000.
(a.) If Paul sells the property for $37,000, what is his gain or loss on the sale?
(b.) If Paul sells the property for $25,000, what is his gain or loss?
(c.) If the fair market value on the date of the gift is $27,000 and Paul sells the property for $24,500, what is his
gain or loss?
(d.) If the fair market value equals $27,000 and Paul sells the property for $28,000, what is the gain or loss?
87. Brian Bradley purchased property for $50,000 in 2004. The property was valued at $200,000 on May 14, 2012,
when Brian died. His daughter Anita inherited the property. Six months later, on November 14, 2012, the
property was valued at $170,000.
(a.) What is Anita’s basis in the property?
(b.) If the executor of Brian’s estate elected the alternate valuation date, what is Anita’s basis?
(c.) If the executor elected the alternate valuation date but distributed the property on August 18, 2012, what is
Anita’s basis?
(d.) If the executor elected the alternate valuation date, but distributed the property on December 22, 2012, what
is Anita’s basis?
(e.) If Anita sells the property on December 27, 2012, will she have short-term or long-term gain or loss?

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88. On January 1, 2010, Jane Judge paid $12,000 for taxable bonds with a face value of $10,000 that mature on
January 1, 2020. She sells them on December 31, 2012, for $11,000. What are the tax consequences for Jane?
89. Margo Manor has a Victorian style residence with an adjusted basis of $200,000 and a fair market value of
$150,000. Because of the unique styling of the home, she decided to convert it to rental property. One year later,
after taking depreciation of $15,000, she is considering selling the property. Determine the results if she sells the
property for:
(a.) $130,000
(b.) $165,000
(c.) $220,000
90. In November 2012, Bill Barley sells property with an adjusted basis of $50,000 for $200,000. The buyer pays Bill
$40,000 cash at the time of sale transaction with the remaining $160,000 to be paid in five annual installments
of $32,000 beginning in November 2013 with interest at 10 percent.
(a.) What is the amount of income to be reported by Bill in 2012?
(b.) What is the amount of income to be reported in later years?
In both cases, ignore interest.
91. In 2012, Tina Turnips gave property with an adjusted basis of $63,000 to Sally when the fair market value was
$163,000. Gift taxes paid on the property were $30,000, and the taxable gift was $150,000.
(a.) What is the adjusted basis of the property to Sally?
(b.) What is the adjusted basis of the property to Sally if adjusted basis of the property to Tina was $180,000
instead of $63,000?
(c.) What is the answer to (a) if the gift had been made in 1975?

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 Testbank 719

ANSWERS TO TRUE-FALSE QUESTIONS—CHAPTER 10

1. True. Expenditures chargeable to the capital account are additions to the basis.
2. True. Cost includes cash paid and any debt to which the property is subject.
3. False. When nonbusiness property is converted to business use, the basis for determining gains is the adjusted
basis, but the basis for determining loss or depreciation is the lesser of the adjusted basis of the property or its fair
market value at the date of conversion.
4. False. The donor’s adjusted basis is increased by the proportion of the gift tax paid which is attributable to the
appreciation in the value of the gift. The appreciation in the gift is $4,000 and the increase in the basis for the gift
tax is $112 ($700 gift tax × $4,000 divided by $25,000).
5. True.
6. True.
7. False. David owns three shares with an adjusted basis of $20 each and three shares with an adjusted basis of $10
each.
8. True. Allocation of basis to stock rights can occur only if the rights are sold or exercised.
9. False. The holding period begins on the date the property was acquired by the donor.
10. False. A loss incurred on the sale or exchange of property between related persons is not deductible. Brothers are
considered to be related persons.
11. True. Under Code Sec. 1239, gain recognized on the sale of property between related persons is ordinary income
if the property is depreciable property in the hands of the transferee.
12. False. Adjusted basis is cost plus capital expenditures minus capital recoveries.
13. True.
14. False. The basis of inherited property is the fair market value at the date of death unless the alternate valuation
date was elected.
15. True.
16. True.
17. True.
18. False. Acquisition costs are not capital returns but are additions to the asset accounts.
19. False. Events such as nontaxable exchanges, sales of residences, and involuntary conversions do not necessarily
result in recognition of gain or loss.
20. True.
21. False. The general rule for the basis of property acquired from a decedent is that it is the fair market value of the
property at the date of death of the decedent.
22. False. There is no basis adjustment for any estate tax paid on the property.
23. True. FIFO is used unless the stock is specifically identified.
24. True. Gains and losses from appreciation or decline in value are not realized gains and losses.
25. False. Such costs must be capitalized as part of the initial basis in the property.
26. False. Ancestors, descendants, and siblings are all considered “related persons.”
27. True. The loss not recognized in a wash sale is added on to the basis of the new stock so that the loss is merely
postponed until the taxpayer sells the stock in a nonwash sale transaction.
28. True. The basis of the asset should include costs attributable to the construction of the asset.
29. True. The basis to the heir is the fair market value of the property at the date of death of the decedent.
30. True. The adjusted basis of the property at the time of conversion is used to determine the gain.
31. True. The cost of obtaining the mortgage should increase the basis in the home.

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720 CCH Federal Taxation—Comprehensive Topics

32. False. The rebate of $1,000 should reduce the basis to $16,500.
33. False. The loss is not deductible since it was sold to his brother, a related party.
34. False. Neither gain nor loss would be reported since the selling price was between the basis in the hands of the
donor and a lesser fair market value.
35. True. This is a nondeductible loss since it was a sale to a related party (her sister).

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 Testbank 721

ANSWERS TO MULTIPLE CHOICE QUESTIONS—CHAPTER 10

36. a. The $50,000 unreimbursed loss is a reduction in basis and the $150,000 receipt of insurance proceeds is also a
reduction in basis. Leonard’s basis in the building before repairs is $300,000 ($500,000 - $50,000 - $150,000).
37. b. The sale and subsequent purchase of 50 shares is a wash sale since March 8 to March 29 is 21 days. However,
the loss on the other 50 shares may be recognized.
38. b. An adjustment is to be made to the basis of an asset for the amount of depreciation allowed in previous years,
but the adjustment cannot be less than the amount allowable. Therefore, the adjusted basis of the asset when sold
was $20,000 ($70,000 - $50,000).
39. b. Assessments for the maintenance of sidewalks are ordinary expenses of operation. Depreciation is incorrect
because basis must be reduced by depreciation. Cash rebates are a reduction in purchase price and casualty losses
also reduce basis.
40. b. Bob would add $20,000 of the gift tax on to the aunt’s basis of $73,000 to get $93,000. The $20,000 is
computed by multiplying the $30,000 gift tax by a fraction the numerator of which is the $120,000 appreciation
and the denominator is the $180,000 taxable gift.
41. b. Automatic would have a realized loss of $20,000, which is $80,000 less the basis of $100,000. However, the
recognized loss for Automatic would be $0 because this was a sale to a related party, in that Jack owned more than
50% of the stock of Automatic. When Jack sells the property to an unrelated party for $110,000, he has a realized
gain of $30,000 ($110,000 less $80,000), which can be reduced by Automatic’s disallowed loss of $20,000 to
give a recognized gain of $10,000.
42. d. The amount realized after selling expenses is $530,000 ($400,000 + $150,000 - $20,000) and the adjusted
basis is $200,000 ($250,000 + $50,000 - $100,000). Therefore, the gain is $330,000 ($530,000 - $200,000).
43. d. The amount realized is $57,500 ($15,000 cash + $20,000 fair market value of the equipment + $25,000
mortgage assumed by Carla − $2,500 selling expenses).
44. b. The basis of property purchased under a bargain purchase is its fair market value or $8,500.
45. d. The $3,500 difference between fair market value and cost is taxable income for 2012.
46. c. $6,000 divided by 120 shares = $50 per share. This was a nontaxable stock dividend of identical shares.
47. b. The basis of $12,000 is allocated between the common stock and the preferred stock according to the relative
fair market value.
$15,000/$18,000 × $12,000 = $10,000 divided by 200 = $50 per share
48. d. $3,000/$18,000 × $12,000 = $2,000 divided by 30 shares = $66.67 per share.
49. b. The basis for both gain and loss in this case is $15,000. Therefore, the gain is $25,000 ($40,000 - $15,000).
50. b. The basis for determining a loss for property received through a gift is the lesser of the fair market value or basis
at the time of the gift. Therefore, there is a $1,500 loss ($7,500 - $9,000).
51. c. A portion of the gift tax is added to the $93,000 basis as follows:

[ ]
$93,000 + ($15,000) × ($133,000 - $93,000) = $98,000
$120,000
52. d. Sally has 360 shares (300 + 60) from the first batch purchased for a total of $36,000, which gives a basis of
$100 per share. She has 120 shares (100 + 20) from the second batch purchased for a total of $18,000, which
gives a basis of $150 per share.
53. a. The basis for determining loss is the lesser fair market value of $250,000. Therefore, although Jane realized a
$10,000 loss ($240,000 less $250,000), this is not recognized because losses on the sale of personal-use assets are
not recognized.
54. d. There is income of $3,000 equal to the difference between the fair market value and the purchase price, and
the fair market value of $8,000 then becomes the basis.
55. c. $15,000 appreciation divided by $50,000 taxable gifts is multiplied by $10,000 to give $3,000, which is added
to $48,000 to give $51,000.

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722 CCH Federal Taxation—Comprehensive Topics

56. c. If the alternate valuation date is elected and property is distributed before the alternate valuation date, the basis
is the value on the date of distribution.
57. b. There is a $500 loss on the April 7 sale, but $250 is disallowed and the other $250 is short-term loss. Basis of
25 shares = $625 + $250, or $875.
58. d. A cousin is not a related party.
59. d. The amount of income can vary from year to year depending on the amount received.
60. d. Daniel’s basis in the rental property must be adjusted to take into account the cost of improvements and other
charges such as legal expenses. Thus, $250,000 adjusted basis + $10,000 legal fees + $15,000 assessment for local
street improvements that increased the value of the property = $275,000. The ordinary painting and the roof
repair were not improvements to the property.
61. a. The purchaser of a business for a lump-sum price must divide the basis among the assets acquired by allocating
to each asset an amount of the purchase price proportionate to, but not in excess, of its fair market value, which
is $90,000. The excess of the purchase price over the fair market value of the assets is goodwill.
62. c. The gain on Leon’s sale is the amount realized reduced by the adjusted basis and the selling expenses. The
amount realized is $120,000 ($75,000 cash plus the $25,000 of artwork received and the $20,000 loan assumed
by the buyer). $120,000 less (the adjusted basis of $50,000 + the selling expenses of $5,000) = $65,000.
63. b. Recognized gain or loss is the term used to describe the amount of realized gain or loss that taxpayers report
on their tax return.
64. d. A basket purchase is the purchase of real property with one or more items of personal property or the purchase
of land and a building for a single, lump-sum amount.
65. a. Losses between related parties are always realized, but never recognized.
66. e. All of the answers are included.
67. b. When a taxpayer realizes a loss on the sale of securities and purchases the same or substantially identical
securities within 61 days surrounding the date of the sale, this is known as a wash sale.
68. b. When taxpayers sell property in an installment sale and realize gain, they generally recognize the gain over the
tax years in which they collect the proceeds from the sale.
69. d. Of the $700 realized loss, $175 is disallowed (250/1000 = 25% × ($1,800 - $2,500).
70. d. Of the $700 realized loss, $175 is disallowed (250/1000 = 25% × ($1,800 - $2,500). The disallowed loss
increases the taxpayer’s basis in the 250 shares to $775 ($600 plus $175).
71. a. Becky has a $14,000 realized loss which is not recognized because the sale is to a related party. Max’s $2,000
gain is reduced by the disallowed loss. So neither party recognizes gain or loss.
72. a. The amount realized is the FMV of the property received ($35,000) plus the $25,000 release from debt minus
the $2,000 selling expenses.
73. d. $200,000 × ($180,000/$300,000) = $120,000.
74. d. $52,800 gain. [$192,800 amount realized ($100,000 + $20,000 + $80,000 mortgage assumed by Joan less
$7,200 sales commission)] less $140,000 basis = $52,800
75. c. $54,000. [($90,000-$50,000)/$90,000] × $9,000 = $4,000 which is added to $50,000 to equal $54,000.
76. d. No gain or loss. The basis for gain is $66,000 ($70,000 - $4,000); the basis for loss is $60,000 ($64,000 -
$4,000). With a selling price of $62,000, there is no gain or loss because the selling price is between the basis for
gain and the basis for loss.
77. e. $515,000. $875,000 amount realized [($979,000 ($400,000 + $240,000 + $105,000 + $234,000) - $104,000
selling expenses] less $360,000 adjusted basis.
78. b. ($11,030). $73,970 amount realized ($32,000 + $43,000 + $8,300 - $9,330 selling expenses) less $85,000
adjusted basis gives a loss of ($11,030).
79. b. no gain or loss. There is no gain when the gain basis is used ($29,000 - $30,000); there is no loss when the loss
basis is used ($29,000 - $25,000). No gift tax adjustment is considered because the property was not appreciated.

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 Testbank 723

ANSWERS TO SUPPLEMENTARY PROBLEMS—CHAPTER 10

80. The realized loss to Jim is $1,600 ($8,400 - $10,000); however, only one-half of that loss or $800 is allowed.
There was a wash sale for 150 shares because identical shares were purchased within 30 days of sale. The basis
of the 150 new shares is $4,400 ($3,600 + $800 disallowed loss). Therefore, Jim’s gain on the August 25 sale is
$1,600 ($6,000 - $4,400), and it is long- term gain since the holding period of the old stock is included.
81. The basis of the preferred is
$30,000 × $60,000 = $15,000
$30,000 + $90,000
The basis of the common is
$90,000 × $60,000 = $45,000
$30,000 + $90,000
82. Ronald has $1,500 income (100 shares × $15). The basis in the new shares is $15 per share. The holding period
begins on the day following the date of receipt of the stock dividend. The basis in the old stock remains the same
or $30,000.
83. (a.) Allocation of part of the basis to the rights is required because the value of the rights is greater than 15 percent
of the value of the stock ($2.50 is 20% of $12.50). The amount allocated to the rights is as follows:
$2,500 × $6,000 = $1,000
$12,500 + $2,500
(b.) This gives a basis of $1 per right. If 500 rights are sold for $1,100, there is a $600 gain and it would be long-
term capital gain. There is no gain or loss on the expiration of the remaining 500 rights since no basis is allocated
to rights unless the rights are exercised or sold.
(c.) Since the value of the rights is only 10 percent of the value of the stock, nothing needs to be allocated to the
rights. All of the $1,100 in sales proceeds is long-term capital gain. If the taxpayer made the election to allocate
an amount to the rights, then $545 would be allocated to the rights as follows:
$1,250 × $6,000 = $545
$12,500 + $1,250
84. (a.) Betty has $1,800 income (300 × $6). The basis in the rights is $1,800 of $6 per right. The holding period
begins on the day following January 11, 2012.
(b.) The basis of each new share is $38 ($32 exercise price plus the basis of each right of $6). The holding period
begins on the day following the date of exercise, February 19, 2013. On sale of the rights, she has long-term
capital gain of $300 ($1,200 less $900 basis) since the rights were held longer than 12 months.
85. Although Joe has a realized loss of $3,000, it is not recognized because he sold it to his brother, a related party.
When Tim sells it for $16,000, Tim’s realized gain is $4,000, but he reduces that by the $3,000 disallowed loss
to give $1,000 recognized gain.
86. (a.) $7,000 gain ($37,000 - $30,000).
(b.) ($5,000) loss ($25,000 - $30,000).
(c.) ($2,500) loss ($24,500 - $27,000).
(d.) No gain or loss is recognized if the selling price is between the basis in the hands of the donor and a lesser fair
market value at the date of the gift.
87. (a.) $200,000, the fair market value at the date of death.
(b.) $170,000, the fair market value six months after Brian’s death.
(c.) Fair market value at the date of distribution.
(d.) $170,000, the fair market value at November 14, 2012.
(e.) There is long-term gain on property from a decedent regardless of how long it is held.

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724 CCH Federal Taxation—Comprehensive Topics

88. There is a $200 reduction in interest income per year ($2,000 divided by 10 years). By the end of 2012 when the
bonds are sold, the basis is $11,400. Thus, Jane has a loss of $400 ($11,000 − $11,400). If Jane had not elected
to amortize the premium, she would have had a loss of $1,000 at the time of sale ($11,000 − $12,000).
89. (a.) Sale for $130,000:
Loss = $5,000
$130,000 Sale price
− 135,000 ($150,000 basis for loss - $15,000 depreciation)
($ 5,000) Loss
(b.) Sale for $165,000:
(c.) No gain or loss; the amount realized is between the basis for determining gain and the basis for determining
loss.
(d.) Basis for loss = $135,000
(e.) Basis for gain = $185,000
(f.) Sale for $220,000:
$220,000 Sale price
− 185,000 ($200,000 basis for gain - $15,000 depreciation)
$ 35,000 Gain
90. (a.) During 2012, Bill reports $30,000 ($40,000 × 75%). The gross profit rate is 75%, or $150,000 profit divided
by $200,000.
(b.) In 2013, 2014, 2015, 2016, and 2017, Bill reports $24,000 ($32,000 × 75%).
91. (a.) Sally’s basis is $83,000. The basis increase is $20,000, which is added on to Tina’s basis of $63,000.
Basis increase = $100,000 × $30,000 = $20,000
$150,000
(b.) If the adjusted basis to Tina was $180,000, Sally’s gain basis would be $180,000. The basis for determining
loss is $163,000, the fair market value at the time of the gift.
(c.) If the gift in (a) had been given in 1975, the total amount of the gift taxes of $30,000 would be added to
$63,000, resulting in a basis to Sally of $93,000.

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 Testbank 725

DIFFICULTY LEVEL RATINGS—CHAPTER 10

The following table denotes the relative difficulty level of each question. Teachers may wish to organize test questions
based on the difficulty level of the particular class.
True-False Question Ratings 38. Moderate
1. Moderate 39. Easy
2. Moderate 40. Moderate
3. Moderate 41. Moderate
4. Moderate 42. Moderate
5. Moderate 43. Moderate
6. Moderate 44. Moderate
7. Moderate 45. Moderate
8. Moderate 46. Moderate
9. Moderate 47. Difficult
10. Easy 48. Difficult
11. Easy 49. Moderate
12. Easy 50. Easy
13. Easy 51. Difficult
14. Easy 52. Difficult
15. Easy 53. Moderate
16. Easy 54. Moderate
17. Easy 55. Moderate
18. Easy 56. Moderate
19. Easy 57. Moderate
20. Moderate 58. Easy
21. Moderate 59. Moderate
22. Moderate 60. Moderate
23. Moderate 61. Moderate
24. Easy 62. Moderate
25. Easy 63. Easy
26. Moderate 64. Moderate
27. Moderate 65. Easy
28. Easy 66. Difficult
29. Easy 67. Easy
30. Moderate 68. Easy
31. Easy 69. Moderate
32. Moderate 70. Moderate
33. Moderate 71. Difficult
34. Difficult 72. Moderate
35. Moderate 73. Easy
Multiple Choice Question Ratings 74. Difficult
36. Moderate 75. Difficult
37. Moderate 76. Difficult

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726 CCH Federal Taxation—Comprehensive Topics

77. Difficult
78. Difficult
79. Moderate
Supplementary Problem Ratings
80. Moderate
81. Easy
82. Easy
83. Difficult
84. Easy
85. Easy
86. Easy
87. Easy
88. Easy
89. Moderate
90. Easy
91. Moderate

Chapter 10 ©2012 CCH. All Rights Reserved.