Cch Comprehensive Topics Chapter 10
Cch ComprehensiChapter 10: Questions #1-20 1. Distinguish between realized gains and losses and recognized gains and losses. Realized gain or loss is the difference between the amount realized from the sale or other disposition of property and the adjusted basis at the time of sale or disposition. The amount realized is the sum of money received plus the fair market value of other property received. If a realized gain or loss is recognized the gain is includible and the loss is deductible in determining taxable income.
Thus, “recognition” means that the result of a particular transaction is considered to be taxable income or a deductible loss. Generally, recognition occurs at the time of sale or exchange. Therefore, realized gain or loss is the amount the owner incurred from ownership of the property, whereas recognized game is the taxable portion of the realized gain or loss. 2. How is the adjusted basis of property determined? Original Basis + Capital Expenditures – Capital Returns= Adjusted Basis 3. List 3 capital additions or expenditures and 3 capital returns or recoveries and discuss the treatment of each category for tax purposes.
Capital expenditures include improvements, betterments, acquisition costs, purchase commissions and legal costs for defending title. Capital returns include depreciation, depletion, amortization, tax-free dividends, deductible casualty losses, and insurance reimbursements. For tax purposes, capital expenditures cannot be deducted in the year in which they are paid or incurred and must be capitalized. The general rule is that if the property acquired has a useful life longer than the taxable year, the cost must be capitalized.
The capital expenditure costs are then amortized or depreciated over the life of the asset in question. Capital expenditures create or add basis to the asset or property, which once adjusted, will determine tax liability in the event of sale or transfer. Capital Returns, on the other hand, proper adjustment shall be made to the extent of the amount allowed as deductions in computing taxable income under Code Section 1016 and to the extent that the amount results (because of allowed deductions) in a reduction in any taxable year of the taxpayer’s taxes. . Why is allocation of basis necessary? Allocation is necessary because some of the property may be depreciable and other property not depreciable. Different treatment may be necessary for the assets. It may also be that only some of the assets purchased are sold. 5. Are gains or losses from the sale or exchange of personal use assets recognized for tax purposes? The sale of a personal-use asset results in gain recognition but not loss recognition. 6. When is FMV of an asset used as the basis of an asset?
If property is acquired in a taxable exchange, the basis of the property is generally its fair market value at the time of exchange. Also, if the price paid is a bargain purchase, then the basis of the property is its fair market value. 7. What’s the basis and holding period for nontaxable stock dividends? For nontaxable stock dividends, the basis of the original stock is allocated to the old and new shares. The holding period begins on the date of the original acquisition. 8. What’s the basis and holding period for taxable stock dividends?
In the case of taxable stock dividends, the amount of income is the stock’s fair market value at the date of distribution. The basis of the new stock is its fair market value at the time of the receipt of the stock dividend and the basis of the old stock remains the same. The holding period of the new stock begins on the date of receipt of the stock dividend. 9. What is the basis and holding period for nontaxable stock rights? If nontaxable stock rights are received, whether or not any part of the basis of the stock is allocated to the rights depends on the FMV of the rights compared with the FMV of the stock.
If FMV is less than 15% of the FMV of old stock at the time, basis of such rights is zero unless taxpayer elects to allocate. If value is 15% or more, basis must be allocated to the rights but only if rights are exercised or sold. The holding period runs from the date the original stock was acquired. 10. What’s the basis and holding period of taxable stock rights and the basis and holding period of the shares of stock if the rights are exercised? Amount of income and the basis of the rights constitute the FMV of the rights at the date of distribution, which is the date the holding period of the rights begin.
If rights are exercised, basis of new shares = subscription price + basis of rights and holding period of new shares begins on date of exercise. Basis and holding period of old stock remain the same. 11. What’s the basis of gift property? A taxpayer’s original basis for gift property is the same as the property’s adjusted basis in the hands of the donor or the last preceding owner by whom it was not acquired by gift. However, if the property’s FMV at time of gift is less than adjusted basis to the donor, then basis for determining loss is the FMV at the time of the gift.
CODE SECTION 1015 12. What adjustment, if any, must be made to the basis of property acquired by gift if gift was made prior to 1977? After 1976? For gifts made after 1976, basis is increased by the portion of gift that attributable to the net appreciation value of the gift. For gifts made before 1977, the full amount of gift tax is added to donor’s adjusted basis, but the basis may not be increased above the fair market value at the date of the gift. 13. What’s the basis of an asset acquired from a decedent?
General rule is that the basis of property acquired from a decedent is the FMV of the property at the date of the decedent’s death. Commonly known as a “step-up” in basis. 14. What’s the alternative valuation of assets acquired from a decedent? If the executor elects for estate tax purposes to value the decedent’s gross estate as of 6 months after death, the property is the FMV at that time. If property is distributed before the alternate valuation date, basis = FMB at the date of distribution or other disposition.
The alternate valuation may be used only where the election will reduce both the value of the decedent’s gross estate and the federal estate tax liability. 15. Distinguish the holding period of assets acquired by gift w/ that of assets acquired from a decedent. The holding period of gift property begins with the date the property was acquired by the donor. If, however, the FMV of the property at the date of gift was less than the donor’s adjusted basis and the property is sold at a loss, the holding period begins on the date of the gift. The holding period of property acquired from a decedent is long-term. 6. How is the basis computed when a sale of shares of stock occurs? When a seller can identify the shares of stock sold or transferred, the basis is the basis of the stock so identified. Shares of stock are adequately identified if it can be shown that shares, which were delivered to the buyer, were from a lot acquired on a certain date or for a certain price. 17. When is the sale or exchange of stock or securities considered a wash sale? How is any loss treated? Wash sales occur when substantially identical stock is bought within 30 days before or after the sale.
No deduction for losses is allowed on the sale of stock or securities if, within a period beginning 30 days before the date of sale and ending 30 days after the date of sale, substantially identical stock are acquired. CODE SEC. 109 18. What’s the basis of a personal use asset that’s converted to business or income-producing use? When property purchased for personal use is converted to business or income-producing use, the basis for determining loss is the lessor of the FMV of the property at the time of conversion or the adjusted basis for loss at the time of the conversion.
The basis for gain is the adjusted basis on the date of conversion. The basis for determining depreciation is the basis for determining loss. 19. What are the special rules for gains or losses on sales to related parties? No loss deduction is allowed on sales or exchanges of property, directly or indirectly, between related parties. Any losses disallowed, however, may be used to offset the gain realized by the related purchaser on a later sale of the property. Code Sec. 267 20. What are the benefits of installment reporting? The installment method allows gain to be spread over more than one year.