You are on page 1of 18

Name: ________________________ Class: ___________________ Date: __________ ID: A

Chapter 11, 13, and 14

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

____ 1. Which of the following decreases a taxpayer’s at-risk amount?


a. Cash and the adjusted basis of property contributed to the activity.
b. Amounts borrowed for use in the activity for which the taxpayer is personally liable or
has pledged as security property not used in the activity.
c. Taxpayer’s share of amounts borrowed for use in the activity that is qualified
nonrecourse financing.
d. Taxpayer’s share of the activity’s income.
e. None of the above.
____ 2. Josh has investments in two passive activities. Activity A, acquired three years ago, produces income of
$30,000 this year. Activity B, acquired two years ago, produces a loss of $50,000. What is the amount of
Josh’s suspended loss with respect to these activities for the year?
a. $0.
b. $18,000.
c. $20,000.
d. $50,000.
e. None of the above.
____ 3. Jill acquired a passive activity several years ago which, until 2004, was profitable. In 2004, the activity
produced a loss of $40,000, and in 2005, the loss was $20,000. Jill had no passive income in 2004 or 2005.
How much is her suspended loss from the activity?
a. $36,000 from 2004 and $20,000 from 2005.
b. $40,000 from 2004 and $20,000 from 2005.
c. $0 from 2004 and $0 from 2005.
d. None of the above.
____ 4. Nell sells a passive activity with an adjusted basis of $45,000 for $105,000. Suspended losses attributable to
this property total $45,000. The total gain and the taxable gain are:
a. $60,000 total gain; $105,000 taxable gain.
b. $10,000 total gain; $15,000 taxable gain.
c. $60,000 total gain; $0 taxable gain.
d. $60,000 total gain; $15,000 taxable gain.
e. None of the above.

1
Name: ________________________ ID: A

____ 5. Matt has three passive activities and has at-risk amounts in excess of $100,000 for each. During the year, the
activities produced the following income (losses).

Activity A ($30,000)
Activity B (20,000)
Activity C 25,000
Net passive loss ($25,000)

Matt’s suspended losses are as follows:


a. $25,000 is allocated to C; $0 to A and B.
b. $12,500 is allocated to A; $12,500 to B.
c. $15,000 is allocated to A; $10,000 to B.
d. $8,333 is allocated to A, B, and C.
e. None of the above.
____ 6. White Corporation, a personal service corporation, has $150,000 of passive losses, $120,000 of active
business income, and $30,000 of portfolio income. How much of the passive loss may White Corporation
deduct?
a. $0.
b. $30,000.
c. $120,000.
d. $150,000.
e. None of the above.
____ 7. Tara owns a shoe store and a bookstore. Both businesses are operated in a mall. She also owns a restaurant
across the street and a jewelry store several blocks away. Which of the following statements is correct?
a. All four businesses can be treated as a single activity if Tara elects to do so.
b. Only the shoe store and bookstore can be treated as a single activity, the restaurant must
be treated as a separate activity, and the jewelry store must be treated as a separate
activity.
c. The shoe store, bookstore, and restaurant can be treated as a single activity, and the
jewelry store must be treated as a separate activity.
d. All four businesses must be treated as separate activities.
e. None of the above.
____ 8. Tess owns a building in which she rents apartments to tenants and operates a restaurant. Which of the
following statements is incorrect?
a. If 60% of Tess’s gross income is from apartment rentals and 40% is from the restaurant,
the rental operation and the restaurant business must be treated as separate activities.
b. If 95% of Tess’s gross income is from apartment rentals and 5% is from the restaurant,
she may treat the rental operation and the restaurant business as a single activity that is a
rental activity.
c. If 5% of Tess’s gross income is from apartment rentals and 95% is from the restaurant,
she may treat the rental operation and the restaurant business as a single activity that is
not a rental activity.
d. If 98% of Tess’s gross income is from apartment rentals and 2% is from the restaurant,
the rental operation and the restaurant business must be treated as a single activity that is
not a rental activity.
e. None of the above.

2
Name: ________________________ ID: A

____ 9. Lew owns five activities, and he elects not to group them together as a single activity under the “appropriate
economic unit” standard. During the year, he participates for 120 hours in Activity A, 150 hours in Activity
B, 140 hours in Activity C, 110 hours in Activity D, and 100 hours in Activity E. Which of the following
statements is correct?
a. Activities A, B, C, D, and E are all significant participation activities.
b. Lew is a material participant in Activities A, B, C, and D only.
c. Lew is a material participant in Activities A, B, C, D, and E.
d. None of the above.
____ 10. Maria, who owns a 50% interest in a restaurant, has been a material participant in the restaurant activity for
the last 20 years. She retired from the restaurant at the end of last year and will not participate in the
restaurant activity in the future. However, she continues to be a material participant in a retail store in which
she is a 50% partner. The restaurant operations produce a loss for the current year, and Maria’s share of the
loss is $80,000. Her share of the income from the retail store is $150,000. She does not own interests in any
other activities. Which of the following statements is correct?
a. Maria cannot deduct the $80,000 loss from the restaurant because she is not a material
participant.
b. Maria can offset the $80,000 loss against the $150,000 of income from the retail store.
c. Maria will not be able to deduct any losses from the restaurant until she has been retired
for at least three years.
d. None of the above.
____ 11. Leigh, who owns a 50% interest in a sporting goods store, was a material participant in the activity for the
last fifteen years. She retired from the sporting goods store at the end of last year and will not participate in
the activity in the future. However, she continues to be a material participant in an office supply store in
which she is a 50% partner. The operations of the sporting goods store resulted in a loss for the current year
and Leigh’s share of the loss is $40,000. Leigh’s share of the income from the office supply store is $75,000.
She does not own interests in any other activities. Which of the following statements is correct?
a. Leigh cannot deduct the $40,000 loss from the sporting goods store because she is not a
material participant.
b. Leigh can offset the $40,000 loss from the sporting goods store against the $75,000 of
income from the office supply store.
c. Leigh will not be able to deduct any losses from the sporting goods store until future
years.
d. None of the above.
____ 12. Jenny spends 32 hours a week, 50 weeks a year, operating a DVD rental store that she owns. She also owns a
music store in another city that is operated by a full-time employee. Jenny spends 140 hours per year
working at the music store. She elects not to group them together as a single activity under the “appropriate
economic unit” standard. Which of the following statements is correct?
a. Neither store is a passive activity.
b. Both stores are passive activities.
c. Only the DVD rental store is a passive activity.
d. Only the music store is a passive activity.
e. None of the above.

3
Name: ________________________ ID: A

____ 13. Sandra acquired a passive activity three years ago. Until last year, the activity was profitable and her at-risk
amount was $300,000. Last year, the activity produced a loss of $100,000, and in the current year, the loss is
$50,000. Sandra has received no passive income in the current or prior years. How much is her suspended
passive loss from the activity?
a. $90,000 from last year and $50,000 from the current year.
b. $100,000 from last year and $50,000 from the current year.
c. $0 from last year and $0 from the current year.
d. $50,000 from the current year.
e. None of the above.
____ 14. Rita earns a salary of $150,000, and invests $40,000 for a 20% interest in a passive activity. Operations of
the activity result in a loss of $250,000, of which Rita’s share is $50,000. How is her loss characterized?
a. $40,000 is suspended under the passive loss rules and $10,000 is suspended under the
at-risk rules.
b. $40,000 is suspended under the at-risk rules and $10,000 is suspended under the passive
loss rules.
c. $50,000 is suspended under the passive loss rules.
d. $50,000 is suspended under the at-risk rules.
e. None of the above.
____ 15. Josie, an unmarried taxpayer, has $155,000 in salary, $10,000 in income from a limited partnership, and a
$26,000 passive loss from a rental real estate activity in which she actively participates. If her modified
adjusted gross income is $155,000, how much of the $26,000 loss is deductible?
a. $0.
b. $10,000.
c. $25,000.
d. $26,000.
e. None of the above.
____ 16. The bank forecloses on Lisa’s apartment complex. The property had been pledged as security on a
nonrecourse mortgage, whose principal amount at the date of foreclosure is $750,000. The adjusted basis of
the property is $480,000, and the fair market value is $750,000. What is Lisa’s recognized gain or loss?
a. $270,000.
b. ($750,000).
c. $0.
d. ($480,000).
e. None of the above.
____ 17. Chuck purchases land for $250,000. He incurs legal fees of $2,000 associated with the purchase. He
subsequently incurs additional legal fees of $16,000 in having the land rezoned from agricultural to
residential. He subdivides the land and installs streets and sewers at a cost of $600,000. What is Chuck’s
basis for the land and the improvements?
a. $250,000.
b. $850,000.
c. $852,000.
d. $868,000.
e. None of the above.

4
Name: ________________________ ID: A

____ 18. Allie transfers stock to Walt. Her adjusted basis for the stock is $20,000 and the fair market value is
$50,000. Which of the following is correct?
a. If the transfer is a gift, gift taxes of $6,000 are paid by Allie, and the gift is made in
1970, Walt’s basis for the stock is $26,000.
b. If the transfer is a gift, gift taxes of $6,000 are paid by Allie, and the gift is made in
2004, Walt’s basis for the stock is $26,000.
c. If the transfer is an inheritance and $6,000 of estate taxes are paid by Allie’s estate,
Walt’s basis is $20,000.
d. If the transfer is an inheritance and $6,000 of estate taxes are paid by Allie’s estate,
Walt’s basis is $26,000.
e. None of the above is correct.
____ 19. Martha gives 100 shares of Green, Inc. stock to her niece, Jennifer. Martha’s adjusted basis for the stock is
$3,000 and the fair market value is $7,000. Four months after the gift, Jennifer is killed in an automobile
accident. Martha inherits the stock which then is worth $9,000. What is the adjusted basis of the inherited
stock to Martha?
a. $3,000.
b. $7,000.
c. $9,000.
d. $10,000.
e. None of the above.
____ 20. Taylor inherited 100 acres of land on the death of his father in 2005. A Federal estate tax return was filed
and this land was valued therein at $15,000, its fair market value at the date of the father’s death. The father
had originally acquired the land in 1939 for $2,000 and prior to his death he had expended $1,000 on
permanent improvements. Determine Taylor’s holding period for the land.
a. Will begin with the date his father acquired the property.
b. Will automatically be long-term.
c. Will begin with the date of his father’s death.
d. Will begin with the date the property is distributed to him.
e. None of the above.
____ 21. Karen purchased 100 shares of Gold Corporation stock for $11,500 on January 1, 1968. In the current tax
year, she sells 25 shares of the 100 shares purchased on January 1, 1968, for $2,500. Twenty-five days
earlier, she had purchased 30 shares for $3,000. What is Karen’s recognized gain or loss on the sale of the
stock, and what is her basis in the 30 shares purchased 25 days earlier?
a. $375 recognized loss, $3,000 basis in new stock.
b. $0 recognized loss, $3,000 basis in new stock.
c. $0 recognized loss, $3,375 basis in new stock.
d. $0 recognized loss, $3,450 basis in new stock.
e. None of the above.
____ 22. Andrew acquires 2,000 shares of Eagle Corporation stock for $75,000 on March 31, 1989. On January 1,
2005, he sells 125 shares for $4,375. On January 22, 2005, he purchases 135 shares of Eagle Corporation
stock for $4,790. When does Andrew’s holding period begin for the 135 shares?
a. January 22, 2005.
b. January 1, 2005.
c. March 31, 1989.
d. March 31, 1989, for 125 shares and January 22, 2005, for 10 shares.
e. None of the above.

5
Name: ________________________ ID: A

____ 23. In order to qualify for like-kind exchange treatment under § 1031, which of the following requirements must
be satisfied?
a. The form of the transaction is an exchange.
b. Both the property transferred and the property received are held either for productive use
in a trade or business or for investment.
c. The exchange must be completed by the end of the second tax year following the tax
year in which the taxpayer relinquishes his or her like-kind property.
d. Only a. and b.
e. a., b., and c.
____ 24. Lily exchanges a building she uses in her rental business for a building owned by Kendall, her brother, which
she will use in her rental business. The adjusted basis of Lily’s building is $120,000 and the fair market
value is $170,000. Which of the following statements is correct?
a. Lily’s recognized gain is $50,000 and her basis for the building received is $120,000.
b. Lily’s recognized gain is $50,000 and her basis for the building received is $170,000.
c. Lily’s recognized gain is $0 and her basis for the building received is $120,000.
d. Lily’s recognized gain is $0 and her basis for the building received is $170,000.
e. None of the above is correct.
____ 25. Taxpayer receives stock as a gift from his uncle. The adjusted basis of the stock is $10,000 and the fair
market value is $17,000. Taxpayer trades the stock for bonds with a fair market value of $15,000 and $2,000
cash. What is his recognized gain and the basis for the bonds?
a. $0, $8,000.
b. $0, $15,000.
c. $2,000, $10,000.
d. $7,000, $15,000.
e. None of the above.
____ 26. Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a
fair market value of $700,000. In addition, Pam receives $100,000 in cash. What is the recognized gain or
loss and the basis of the investment land?
a. $0 and $420,000.
b. $100,000 and $420,000.
c. $100,000 and $520,000.
d. $280,000 and $700,000.
e. None of the above.
____ 27. If boot is received in a § 1031 like-kind exchange and gain is recognized, which formula correctly calculates
the basis for the like-kind property received?
a. Adjusted basis of like-kind property surrendered + gain recognized - fair market value of
boot received.
b. Fair market value of like-kind property surrendered + gain recognized - fair market value
of boot received.
c. Fair market value of like-kind property received - postponed gain.
d. Only a. and c.
e. None of the above.

6
Name: ________________________ ID: A

____ 28. A factory building owned by the taxpayer is destroyed by a hurricane. The adjusted basis of the building was
$300,000 and the appraised value was $310,000. The taxpayer receives insurance proceeds of $275,000. A
factory building is constructed during the eleven-month period after the hurricane at a cost of $360,000.
What is the recognized gain or loss and what is the basis of the new factory building?
a. $0 and $300,000.
b. $0 and $385,000.
c. ($25,000) and $360,000.
d. ($35,000) and $360,000.
e. None of the above.
____ 29. April’s personal residence was condemned, and she received a condemnation award of $80,000. The
adjusted basis in the residence at the time of condemnation was $100,000. April used the condemnation
proceeds to purchase a new residence for $90,000. What is her recognized gain or loss and her basis in the
new residence?
a. $0; $70,000.
b. $0; $90,000.
c. ($20,000); $90,000.
d. ($20,000); $70,000.
e. None of the above.
____ 30. Amos sells his principal residence, which has an adjusted basis of $100,000 for $150,000. He incurs selling
expenses and legal fees of $6,000. He had purchased another residence one month prior to the sale for
$140,000. What is the recognized gain or loss and the basis of the replacement residence if the taxpayer
elects to forgo the § 121 exclusion (exclusion of gain on sale of principal residence)?
a. $0 and $100,000.
b. $0 and $140,000.
c. $44,000 and $100,000.
d. $44,000 and $140,000.
e. None of the above.
____ 31. An individual taxpayer owns a landscape painting. The painting would not be a capital asset if it was held by
the taxpayer in which of the following circumstances?
a. It is used in his business and is depreciable property.
b. It is personal use activity property for the taxpayer.
c. It is investment activity property for the taxpayer.
d. It is held as inventory by the taxpayer.
e. a and d
____ 32. Sam operates a variety store as a sole proprietorship. Which of the following items are capital assets in the
hands of Sam?
a. The vacant lot next to his store that was purchased for use as a parking lot for his
customers.
b. Sixteen bicycles that have been in his inventory for over a year.
c. A note receivable that was given to him by a customer in payment of the balance due on
the customer’s account at the store.
d. A corporate bond in which Sam invested some of the store’s excess cash.
e. None of the above.

7
Name: ________________________ ID: A

____ 33. A worthless security had a holding period of 11 months when it became worthless on November 10, 2005.
The investor who had owned the security had a basis of $10,000 for it. Which of the following statements is
correct?
a. The investor has a long-term capital loss of $10,000.
b. The investor has a short-term capital loss of $10,000.
c. The investor has a nondeductible loss of $10,000.
d. The investor has a long-term capital gain of $10,000.
e. None of the above.
____ 34. Sylvia purchased for $680 a $2,000 bond when it was issued two years ago. Sylvia amortized $200 of the
original issue discount and then sold the bond for $1,800. Which of the following statements is correct?
a. Sylvia has $920 of long-term capital gain.
b. Sylvia has $1,220 of long-term capital gain.
c. Sylvia has no capital gain or loss.
d. Sylvia has $200 of long-term capital loss.
e. None of the above.
____ 35. Which of the following events causes the purchaser of an option to add the cost of the option to the basis of
the property to which the option relates?
a. The option is exercised.
b. The option is sold.
c. The option lapses.
d. The option is rescinded.
e. None of the above.
____ 36. Which of the following is correct concerning short sales of stock?
a. At the time the short sale is made, the taxpayer does not deliver to the purchaser the
shares sold short.
b. At the time the short sale is made, the taxpayer delivers to the purchaser the shares sold
short.
c. At the time the short sale is made, the taxpayer does not already own the shares sold
short.
d. At the time the short sale is made, the taxpayer always already owns the shares sold
short.
e. None of the above.
____ 37. In 2005, Mark has $14,000 short-term capital loss, $6,000 28% gain, and $7,000 5%/15% gain. Which of the
statements below is correct?
a. Mark has a $1,000 capital loss deduction.
b. Mark has a $3,000 capital loss deduction.
c. Mark has a $1,000 net capital gain.
d. Mark has a $6,000 net capital gain.
e. Mark has a $14,000 net capital loss.
____ 38. In 2005, Satesh has $4,000 short-term capital loss, $14,000 5%/15% long-term capital gain, and $7,000
qualified dividend income. Satesh is single and has other taxable income of $15,000. Which of the
following statements is correct?
a. No more than $14,000 of Satesh’s taxable income is taxed at 5%.
b. No more than $7,000 of Satesh’s taxable income is taxed at 5%.
c. No more than $17,000 of Satesh’s taxable income is taxed at 5%.
d. None of Satesh’s taxable income is taxed at 5%.
e. All of Satesh’s taxable income is taxed at 5%.

8
Name: ________________________ ID: A

____ 39. Corrine is filing as head of household and has 2005 taxable income of $35,000 which includes $24,000 of
5%/15% gain. What is the tax on her taxable income using the alternative tax method?
a. $1,750.
b. $2,331.
c. $4,731.
d. $5,250.
e. None of the above.
____ 40. Which of the following comparisons is correct?
a. Corporations may carryback capital losses; individuals may not.
b. Both corporation and individual long-term capital losses carryover as short-term capital
losses.
c. Corporations may carryforward capital losses indefinitely; individuals may only
carryforward capital losses for five years.
d. Both corporations and individuals may use an alternative tax rate on net capital gains.
e. None of the above.
____ 41. Tan, Inc., has a 2005 $50,000 long-term capital gain included in its $185,000 taxable income. Which of the
following is correct?
a. Tan will benefit from an alternative tax on net capital gains computation.
b. Tan’s regular tax on taxable income will be the same as its tax using an alternative tax on
net capital gains approach.
c. Tan’s $50,000 net capital gain is not taxable.
d. Tan’s regular tax on taxable income will be greater than its tax using an alternative tax
on net capital gain approach.
e. None of the above.
____ 42. Blue Company sold machinery for $55,000 on December 23, 2005. The machinery had been acquired on
April 1, 2003 for $49,000 and its adjusted basis was $14,200. The § 1231 gain, § 1245 recapture gain, and §
1231 loss from this transaction are:
a. $6,000 § 1231 gain, $34,800 § 1245 recapture gain, $0 § 1231 loss.
b. $0 § 1231 gain, $40,400 § 1245 recapture gain, $0 § 1231 loss.
c. $6,000 § 1231 gain, $40,400 § 1245 recapture gain, $0 § 1231 loss.
d. $0 § 1231 gain, $40,400 § 1245 recapture gain, $14,200 § 1231 loss.
e. None of the above.
____ 43. Orange Company had machinery destroyed by a fire on December 23, 2005. The machinery had been
acquired on April 1, 2003 for $49,000 and its adjusted basis was $14,200. The machinery was completely
destroyed and Orange received $30,000 of insurance proceeds for the machine and did not replace it. This
was Orange’s only casualty or theft event for the year. As a result of this event, Orange has:
a. $4,200 ordinary loss.
b. $15,800 § 1245 recapture gain.
c. $14,200 § 1245 recapture gain.
d. $30,000 § 1231 gain.
e. None of the above.

9
Name: ________________________ ID: A

____ 44. Kari owns depreciable residential rental real estate which has accumulated depreciation (all from
straight-line) of $45,000. If Kari sold the property, she would have a $33,000 gain. The initial
characterization of the gain would be:
a. Section 1245 gain.
b. Section 1231 gain.
c. Section 1250 gain.
d. Section 1239 gain.
e. None of the above.
____ 45. Which of the following would extinguish the § 1245 recapture potential?
a. An exchange of depreciable business equipment for like-kind business equipment with
gain realized, but not recognized.
b. A nontaxable incorporation under § 351.
c. A nontaxable contribution to a partnership under § 721.
d. A nontaxable reorganization.
e. None of the above.

10
ID: A

Chapter 11, 13, and 14


Answer Section

MULTIPLE CHOICE

1. ANS: E
Concept Summary 11–1

PTS: 1
2. ANS: C
The $30,000 of passive income is offset by $30,000 of the $50,000 passive loss, leaving a net passive loss of
$20,000. None of the $20,000 net passive loss is deductible in the current year and it is all suspended.

PTS: 1 REF: p. 11-6 | p. 11-7


3. ANS: B
$40,000 is suspended from 2004 and $20,000 is suspended from 2005.

PTS: 1 REF: p. 11-7 | p. 11-8


4. ANS: D
$105,000 amount realized – $45,000 adjusted basis = $60,000 total gain – $45,000 suspended loss = $15,000
taxable gain.
Example 7

PTS: 1
5. ANS: C
$30,000/$50,000 X $25,000 = $15,000 allocated to Activity A
$20,000/$50,000 X $25,000 = $10,000 allocated to Activity B
Example 9

PTS: 1
6. ANS: A
White Corporation, a personal service corporation, may not offset the passive loss against the active or
portfolio income.
Example 14

PTS: 1
7. ANS: A
All four businesses may be treated as a single activity because of common ownership.
Examples 19, 20, and related discussion

PTS: 1

1
ID: A

8. ANS: D
Rental and nonrental operations are generally treated as separate activities. However, when an insubstantial
portion of the gross income is attributable to either rental or nonrental operations, both activities may be
treated as a single activity. The single activity is treated as rental or nonrental, depending on which made the
predominant contribution to gross income. Since the Regulations do not require a grouping of rental and
nonrental activities, the statement that they must be treated as a single activity is incorrect.

PTS: 1 REF: p. 11-13


9. ANS: B
Lew’s participation in significant participation activities (A, B, C, and D) exceeds 500 hours (120 + 150 +
140 + 110 = 520). Therefore, Lew is a material participant with respect to those activities. Activity E is not
a significant participation activity because Lew did not participate for more than 100 hours.
Examples 27, 28, and related discussion

PTS: 1
10. ANS: B
Statement b. is correct. Because Maria materially participated in the restaurant activity for at least five of the
last ten taxable years before the current year (Test 5), she is still considered an active participant in the
activity. Therefore, her loss is an active loss that can be offset against her active income from the retail store.
Example 29

PTS: 1
11. ANS: B
Because Leigh materially participated in the sporting goods activity for at least five of the last ten taxable
years before the current year (Test 5), she is still considered an active participant in that activity. Therefore,
her loss is an active loss that can be offset against her active income from the office supply store.
Example 29

PTS: 1
12. ANS: A
A DVD rental store is not treated as a rental activity because the average period of customer use is 7 days or
less. Because Jenny participates for more than 500 hours during the year, the DVD rental store is treated as
an active business. Jenny participates for more than 100 hours in the music store which makes it a significant
participation activity. Her total participation in the two significant participation activities is more than 500
hours, so neither business is treated as passive.
Example 27 and related discussion

PTS: 1 REF: p. 11-18


13. ANS: B
$100,000 suspended from last year; $50,000 of the current year loss is suspended.

PTS: 1 REF: p. 11-20


14. ANS: A
$10,000 of Rita’s loss is suspended under the at-risk rules, leaving a potential deduction of $40,000. The
$40,000 loss is suspended under the passive loss rules.
Examples 38 to 41

PTS: 1

2
ID: A

15. ANS: B
A rental loss of $10,000 is deducted against the passive income from the limited partnership interest. None
of the remaining $16,000 rental loss is deducted against Josie’s salary, even though she actively participates
in the activity. The special $25,000 offset for rental real estate is reduced to $0 [$25,000 – 50%($155,000 –
$100,000)]. Therefore, of the remaining $16,000 loss, none can be deducted in the current year.

PTS: 1 REF: p. 11-21 | p. 11-22


16. ANS: A
Amount realized $750,000
Adjusted basis (480,000)
Realized gain $270,000

Recognized gain $270,000

The amount realized includes the amount of the nonrecourse mortgage.

PTS: 1 REF: p. 13-3


17. ANS: D
All of the costs incurred by Chuck are capital expenditures. Thus, his adjusted basis for the land and the
improvements is:

Cost $250,000
Legal fees ($2,000 + $16,000) 18,000
Streets and sewers 600,000
Basis $868,000

PTS: 1 REF: p. 13-3 to 13-5


18. ANS: A
Choice b. is incorrect because Walt’s basis would be $24,615 [$20,000 + ($6,000 X $30,000/$39,000)].
Choices c. and d. are incorrect because Walt’s basis would be $50,000.

PTS: 1 REF: p. 13-11 to 13-13 | p. 13-15


19. ANS: A
The death-bed gift rules apply since the time period between the date of the gift by Martha and the date of
Jennifer’s death is not greater than one year. Thus, Martha’s basis is a carryover basis of $3,000.

Example 30

PTS: 1
20. ANS: B
Section 1223(11) provides that the holding period for inherited property is automatically long-term regardless
of whether the property is disposed of at a gain or a loss.

PTS: 1 REF: p. 13-17

3
ID: A

21. ANS: C
Amount realized $2,500
Adjusted basis (25 X $115) (2,875)
Realized loss ($ 375)

Recognized loss $ -0-

Since the transaction qualifies as a wash sale, the realized loss of $375 is disallowed. This amount is added
to the adjusted basis of the shares purchased 25 days earlier. Therefore, the adjusted basis for these shares is
$3,375 ($3,000 + $375).

Example 34

PTS: 1 REF: p. 13-19


22. ANS: D
The sale of the 125 shares at a loss and the purchase of 135 shares within 30 days results in the loss being
disallowed under the wash sales provisions. Therefore, for 125 of the 135 shares, there is a carryover basis
and a carryover holding period.

PTS: 1 REF: p. 13-19


23. ANS: D
The time period for a nonsimultaneous like-kind exchange includes a 45-day period and an 180-day period,
but does not include the period mentioned in choice c.

PTS: 1 REF: p. 13-27 | p. 13-28


24. ANS: C
Lily’s realized gain is $50,000 ($170,000 – $120,000), but her recognized gain is $0. The exchange qualifies
as a like-kind exchange even though Lily and Kendall are related parties. Lily’s basis for the building
received is a carryover basis of $120,000. However, if Kendall should dispose of the building he received
from Lily within the two-year period following the date of the exchange, Lily’s postponed gain of $50,000
would be recognized as of the date of such early disposition.

PTS: 1 REF: p. 13-26 | p. 13-27 | p. 13-29 | p. 13-30


25. ANS: D
Amount realized ($15,000 + $2,000) $17,000
Adjusted basis (10,000)
Realized gain $ 7,000

Recognized gain $ 7,000

The property received by gift has a carryover basis of $10,000. Stocks and bonds do not qualify as like-kind
property. Therefore, the realized gain of $7,000 is recognized. The bonds have a basis of $15,000, the fair
market value.

PTS: 1 REF: p. 13-25

4
ID: A

26. ANS: C
Amount realized ($700,000 + $100,000) $800,000
Adjusted basis (520,000)
Realized gain $280,000

Recognized gain $100,000

The receipt of boot in a like-kind exchange triggers the recognition of realized gain, with the ceiling on
recognition being the realized gain. Because the boot received of $100,000 is less than the ceiling, gain up to
the amount of the boot received is recognized. The basis of the land is calculated as follows:

FMV $700,000
Less: Postponed gain (180,000)
Basis $520,000

Example 44

PTS: 1 REF: p. 13-28 to 13-31


27. ANS: D
Both the formula in a. and the formula in c. produce the correct amount for the basis of the like-kind property
received in a § 1031 exchange.

PTS: 1 REF: p. 13-29 | p. 13-30


28. ANS: C
Amount realized $275,000
Adjusted basis (300,000)
Realized loss ($ 25,000)

Recognized loss ($ 25,000)

Section 1033 does not modify the normal rules for loss recognition. The basis of the replacement factory
building is its cost of $360,000.

Example 59

PTS: 1
29. ANS: B
Amount realized $ 80,000
Adjusted basis (100,000)
Realized loss ($ 20,000)

Recognized loss $ -0-

The loss on the condemnation of a personal residence is not recognized. The basis for April’s new residence
is the cost of $90,000.

PTS: 1 REF: p. 13-37

5
ID: A

30. ANS: D
Amount realized ($150,000 – $6,000) $144,000
Adjusted basis (100,000)
Realized gain $ 44,000

Recognized gain $ 44,000

Since Amos elected to forgo the § 121 exclusion, the realized gain of $44,000 is recognized. The basis of the
residence purchased one month prior to the sale is the cost of $140,000.

PTS: 1 REF: p. 13-50


31. ANS: E
If the property is depreciable, it is used in a business and is not a capital asset (a.). If the property is
inventory, the taxpayer is in the business of buying and selling paintings and the painting is not a capital asset
(d.). Personal use activity and investment activity assets are capital assets (b.) and (c.).

PTS: 1 REF: p. 14-4


32. ANS: D
Section 1221 excludes all of the listed items from being capital assets except the bond.

PTS: 1 REF: p. 14-4


33. ANS: A
Section 165(g)(1) provides that if a security becomes worthless during the tax year, the loss is treated as if it
occurred on the last day of the tax year. On the last day of the tax year, the security would have been held for
more than a year.

PTS: 1 REF: p. 14-9


34. ANS: A
Sylvia’s original basis of $680 is increased by the $200 of original issue discount amortization. Her basis is
$880 when she sells the bond for $1,800; so her gain is $920.

PTS: 1 REF: p. 14-10


35. ANS: A
If the option is exercised, the cost of the option becomes part of the basis of the property. Otherwise, the
lapse of the option is treated as a sale or exchange.

PTS: 1 REF: p. 14-11


36. ANS: B
A short sale occurs when a taxpayer sells borrowed property and repays the lender with substantially
identical property either held on the date of the sale or purchased after the date of the sale.

PTS: 1 REF: p. 14-17


37. ANS: A
There is a net short-term capital loss of $1,000 ($14,000 short-term capital loss – $6,000 28% gain – $7,000
5%/15% gain) which is deductible for AGI as a capital loss deduction.

PTS: 1 REF: p. 14-22

6
ID: A

38. ANS: C
The net long-term capital gain is $10,000 ($14,000 5%/15% long-term capital gain – $4,000 short-term
capital loss). The $7,000 qualified dividend income is added to the 5%/15% net long-term capital gain and
the $17,000 total is eligible for the 5%/15% alternative tax rate.

Example 37

PTS: 1 REF: p. 14-24


39. ANS: B
Since Corrine’s total taxable income does not take her out of the 15% regular tax bracket, all of the $24,000
5%/15% gain is taxed at 5%. The total tax is $2,331 [$1,131 on $11,000 regular taxable income (Tax
Tables) + 5% of $24,000 long-term capital gain.]

PTS: 1 REF: p. 14-25


40. ANS: A
Corporations may carryback capital losses; individuals may not (a). Individual long-term capital losses
carryover as long-term, not short-term. Corporations have a five-year carryforward limit; individuals may
carryforward capital losses indefinitely. Corporations’ alternative tax rate on long-term capital gains is 35%,
not 20%.

PTS: 1 REF: p. 14-27 | p. 14-29


41. ANS: B
Although there is an alternative tax on net capital gains for corporations, it yields the same tax result as the
regular computation method. This unusual result is caused by the fact that the alternative tax rate and the
maximum regular tax rate are both 35%.

PTS: 1 REF: p. 14-29


42. ANS: A
Since the machine was held more than 12 months and was depreciated, it was a § 1231 asset. Since it was
sold at a gain and the selling price exceeded the original cost, all of the depreciation taken of $34,800
($49,000 cost – $14,200 adjusted basis) is gain recaptured by § 1245 and the remaining $6,000 gain ($55,000
selling price – $49,000 original cost) is § 1231 gain.

PTS: 1 REF: p. 14-38 | p. 14-39


43. ANS: B
Since the machine was held more than 12 months and was depreciated, it was a § 1231 asset. However, since
it was disposed of at a $15,800 gain ($30,000 insurance proceeds – $14,200 adjusted basis), all of the gain is
initially § 1245 depreciation recapture gain and not casualty gain.

PTS: 1 REF: p. 14-39 | p. 14-40


44. ANS: B
The gain is § 1231 gain. Since straight-line depreciation was used, there is no § 1250 recapture. Also, since
Kari is an individual, there is no “ordinary gain adjustment” under § 291. Section 1239 would not apply
because there is no reason to conclude that the property would be sold to a related taxpayer.

PTS: 1 REF: p. 14-42 | p. 14-43 | p. 14-49

7
ID: A

45. ANS: E
All of the transactions involve a carryover of basis and do not extinguish the § 1245 depreciation recapture
potential.

PTS: 1 REF: p. 14-46 | p. 14-47