ACC 570
Chapter 13 Homework Solutions
54.
Stock Sales & Identification
10/3/10
Purch. 1,000 sh @$200
12/12/10
Purch. 500 sh @ $225
3/1/11
Sells 400 @ $250
a.
Kevin’s adjusted basis for Bluebird Corporation stock on December 31, 2010, is
$312,500 ($200,000 + $112,500).
b.
Amount realized
Less: Adjusted basis (400 shares × $225 per share)
Realized gain
$100,000
(90,000)
$ 10,000
Recognized gain
$ 10,000
c.
56.
If Kevin cannot adequately identify the shares sold, a FIFO presumption is made.
Amount realized
Less: Adjusted basis (400 shares @ $200 per share)
Realized gain
$100,000
(80,000)
$ 20,000
Recognized gain
$ 20,000
Stock Rights
Paula owns stock ($5,000 basis; $6,000 FMV)
a.
FMV of the nontaxable stock rights ($1,000) > 15% FMV of the stock ($6,000).
Therefore, Paula must allocate a portion of the basis of the Yellow stock to the
stock rights received, based on their relative fair market values. The adjusted
basis of the Yellow stock decreases to $4,286 [($6,000/$7,000) × $5,000].
b.
Basis = $714 [($1,000/$7,000 × $5,000).
c.
Amount realized
Adjusted basis
Realized gain
Recognized gain
d.
No gain or loss is recognized on the lapse of the stock rights. The amount of the
stock basis that has been allocated to the stock rights of $714 is restored to the
basis of the stock. Thus, the basis of the stock after the lapse is $5,000 ($4,286 +
$714).
e.
FMV of the nontaxable stock rights ($750) < 15% FMV of the stock ($6,000),
Paula is not required to allocate part of her basis for the stock to the stock rights.
Thus, there would be no effect on the basis of her stock, and the stock rights
would have a basis of zero. Paula may elect to make the allocation, however. If
she chooses to allocate, her basis for the Yellow stock is $4,444 ($6,000/$6,750
× $5,000). Paula’s basis for the stock rights is $556 [($750/$6,750 × $5,000) or
($5,000 – $4,444)].
$1,200
(714)
$ 486
$ 486
60.
Gift Basis
a.
Natalie’s adjusted basis for the painting:
Aunt’s adjusted basis
Gift tax paid on appreciation:
$295,000 . X $392,000 =
$1,120,000 - $13,000
Natalie’s adjusted basis
b.
63.
$825,000
104,462
$929,462
Dual basis exists. Gain = $825,000; Loss = $824,000
Inheritance Basis
a.
If the primary valuation date applies, Robert’s basis for the assets would be the
fair market value at the date of Earl’s death.
Cash
Stock
Apartment building
Land
b.
$ 10,000
125,000
300,000
100,000
$535,000
The election of the alternate valuation date will produce the following basis for
each asset distributed to Robert.
Cash
Stock
Apartment building
Land
$ 10,000
85,000
325,000
110,000
$530,000
Since the stock was disposed of prior to the alternate valuation date, Robert’s
basis will be its the fair market value on the date of distribution to him.
64.
Deathbed Gift Rule
a.
The inherited stock is subject to the deathbed gift rule in that the
period between the date of the gift and the date of the donee’s death
(i.e., Uncle George) is not greater than one year. The basis per share
is $30 ($3,150/105 shares) as a result of the 5% stock dividend.
Therefore, Emily’s basis for the 100 shares she inherited is $3,000
($30 × 100 shares).
b.
Since the deathbed gift rule would not be applicable, Emily’s basis for
the inherited stock would be $5,500 ($55 × 100 shares).
69.
Conversion & sale of mixed use property
a.
Jean’s basis for gain, loss, and cost recovery for the business use portion (50%)
of the house is as follows:
House
b.
Land
Gain basis
$100,000 ($200,000 × 50%)
$30,000 ($60,000 × 50%)
Loss basis
$95,000 ($190,000 × 50%)
$30,000 ($60,000 × 50%)
Cost recovery basis
$95,000 (same as loss basis)
The cost recovery for the 5-year period is calculated as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
Total
$95,000 × 2.461%
$95,000 × 2.564%
$95,000 × 2.564%
$95,000 × 2.564%
$95,000 × 2.564% x (11.5/12)
=
=
=
=
$ 2,338
2,436
2,436
2,436
2,334
$11,980
Note: A bed and breakfast is 39-year nonresidential real property.
c.
The recognized gain on the sale of the business use portion of the house and
land is:
House (50%)
Land (50%)
Amount realized
Less: Adjusted basis*
Realized gain
$150,000
(88,020)
$ 61,980
$37,500
(30,000)
$ 7,500
Recognized gain
$ 61,980
$ 7,500
*Original basis for gain
Less: Cost recovery
Adjusted basis
$100,000
(11,980)
$ 88,020
A few other good problems if you’re interested in additional practice &/or topic.
52.
62.
67.
a.
Buddy must treat the purchase of the land at a $70,000 ($280,000 – $210,000)
discount as a bargain purchase, since it represents compensation for services.
Thus, he must include the $70,000 in his gross income.
b.
Buddy’s adjusted basis for the land is the fair market value of $280,000
($210,000 cost + $70,000 increase in gross income).
a.
No, the executor cannot elect the alternate valuation date and amount. In order
to do so, the following requirements must be satisfied:

The election must result in the reduction of the value of the gross estate.

The election must result in the reduction of the estate tax liability.
b.
Dazie’s basis for the property is the fair market value on the date of Mary’s death
(primary valuation date) of $3,820,000.
c.
In this case, the fair market value at the alternate valuation date is less than at
the primary valuation date. Assuming the election also results in the reduction of
the estate tax liability, it can be made. So, Dazie’s basis for the property now
becomes $3,800,000.
a.
Amount realized
Less: Adjusted basis
Realized loss
Less: Disallowed loss under § 707(b)
Recognized loss
$165,000
(200,000)
($ 35,000)
35,000
$
–0–
The loss is disallowed under § 707(b) since Thad owns greater than a 50%
capital or profits interest in the partnership.
b.
Thad’s basis is $165,000, the amount he paid for the property.
c.
Amount realized
Less: Adjusted basis
Realized gain
Less: Amount of previously disallowed loss used
to eliminate realized gain
Recognized gain
$187,000
(165,000)
$ 22,000
$
(22,000)
–0–
The remainder of the disallowed loss of $13,000 ($35,000 – $22,000) can never
be deducted either by Thad or the partnership.
d.
Amount realized
Less: Adjusted basis
Realized gain
$187,000
(165,000)
$ 22,000
Recognized gain
$ 22,000
Since the property was received by gift, Donna’s carryover basis is $165,000.
However, Donna is not permitted to use any of the partnership’s disallowed loss
since she is not the original transferee (i.e., the related-party buyer is Thad).
68.
70.
e.
The results will be the same. The shareholder and the corporation are related
parties under § 267(b)(2) since the shareholder owns greater than 50% of the
corporation’s outstanding stock.
a.
Tyneka receives a stepped-up basis of $45,000 for the stock received on July 15,
2010. Selling the stock for $33,000 on July 30, 2011, creates a realized loss of
$12,000 ($33,000 amount realized – $45,000 adjusted basis). Because she
purchases 1,000 shares of Amber within 30 days of the sale, the transaction is a
wash sale and the realized loss is disallowed. Her basis for the 1,000 shares of
stock purchased on August 20, 2011, is $42,000 ($30,000 cost + $12,000
disallowed loss).
b.
Because Tyneka made a gift of the Amber stock to Joe within a year of his death,
the inherited stock is treated as a deathbed gift. Her basis for the inherited stock
received on July 15, 2010, is $35,000.
c.
The tax consequences would have been the same. Tyneka has a wash sale to
the extent of the 1,000 shares purchased. To avoid the limitations of the wash
sale, Tyneka should not purchase substantially identical stock within the 60-day
window (30 days before and 30 days after the sale date) for a wash sale.
Conversion of personal-use to business-use.
a.
Surendra’s basis for loss is $320,000, the lower of the adjusted basis
of $340,000 or the fair market value at the date of the conversion of
$320,000.
b.
Surendra’s basis for depreciation is $320,000, the same as the basis
for loss.
c.
Surendra’s basis for gain is the adjusted basis of $340,000.
d.
No. The realized loss of $20,000 ($320,000 – $340,000) on the sale of
his personal residence would be disallowed.