ACC 460 EXAM #2 UPDATED ACTUAL QUESTIONS AND
CORRECT ANSWERS
Question:
1. Rick purchased 100 shares of XYZ stock on April 4, year 4, for $8,600. He sold 50 shares on February
8, year 5, for $3,000. He then bought another 50 shares of XYZ on March 1, year 5, for $3,200. How much
loss will Rick realize in year 5?
Answer:
$1,300
($3,000 - ($8,600/2))
-rick sold 1/2 of the original shares for $3,000
-cost of those shares is $4,300 ($8,600/2)
-realized loss is $1,300 ($3,000-$4,300)
Question:
2. Alice gifted stock to her son, Bob, in year 5. Alice bought the stock in year 1 for $8,300. The value of
the stock on the date of gift was $6,400. Bob sold the stock in year 7 for $15,800. What is Bob's recognized
gain or loss on the sale in year 7?
Answer:
$7,500 gain
$15,800 - $8,300
-bc bob sold at an amount greater than both the carryover basis & the FMV at the date of gift, he can use
the higher carryover bass as his basis
-bob's basis is the $8,300 carryover from alice
-recognized gain is $7,500 ($15,800 - $8,300)
Question:
3. Jerry inherits an asset from his uncle, who purchased the asset five days before he died. Which of the
following statements is correct?
Answer:
jerry's basis is the FMV on his uncle's date of death
-the basis of inherited property's FMV at date of death (referred to as the primary valuation amt)
Question:
4. Agnes sold 50 shares of ABC stock to her son, Steve, in year 4 for $42,000. She bought the stock eight
years ago for $50,000. Steve sold the stock to an unrelated party in year 6 for $60,000. How much gain
will Steve recognize from the sale in year 6?
Answer:
$10,000
-agnes cannot recognize any of her loss on the sale to steve, a related party
-when steve selss to an unrelated oarty, he may use agnes's original basis of $50,000, bc he sole at an
amount higher than both his cost basis & agnes's basis
-so his recognized gain is $10,000 ($60,000 - $50,000)
Question:
5. Which of the following are related parties under § 267?
,Answer:
father brother grandson corporation & a 55% shareholder
-for purposes of § 267, related parties include: family members (brothers & sisters whether whole, half or
adopted), spouse, ancestors (parents & grandparents) & lineal descendants (children & grandchildren) of
the taxpayer
-corporations & shareholders who own more than 50% (directly or indirectly) of the corporation's stock
-2 corporations that are member of a controlled group
Question:
6. Related parties include brothers and sisters, spouse, ancestors (parents and grandparents), and lineal
descendants (children and grandchildren) of the taxpayer.
Answer:
true
Question:
7. Related parties include two corporations that are members of a controlled group.
Answer:
true
Question:
8. Related parties include a corporation owned more than 35 percent (directly or indirectly) by the
taxpayer.
Answer:
false
-a corporation owned 50% (directly or indirectly) by the taxpayer
Question:
9. Constructive ownership provisions are applied to determine whether the taxpayers are related.
Answer:
true
-under these provisions, stock owned by certain relatives or related entities are deemed to be owned by the
taxpayer for purposes of applying the loss & expense deduction disallowance provisions
Question:
10. In early year 8, Alice sold Tom, her son, 20 shares of common stock for $20,000. Alice had paid
$25,000 for the stock in year 2. In late year 8, Tom sold the stock to an unrelated third party for $35,000.
How much gain must Tom report in his year 8 tax return for the sale of the stock?
Answer:
$10,000
$35,000 - $25,000 = $10,000
-losses betw related parties are disallowed
-subsequent sale price to an unrelated party determines which basis is used to determine gain or loss
-the sale price to the unrelated party is $35,000 (which is higher than the 1st relative's basis/initial seller) &
the 1st relative's basis of $25,000 is used to determine his gain on the subsequent sale
, Question:
11. Indicate whether the following exchanges qualify as nontaxable exchanges of like-kind property under
Section 1031. Select "Qualifies" or "Does not qualify", whichever is applicable.
a. A warehouse located in the United States exchanged for a warehouse in Greece.
b. A machine used in a business exchanged for an office building.
c. Business equipment exchanged for office furniture.
d. Unimproved land, held for investment, exchanged for an apartment building.
e. A personal residence exchanged for a store building.
Answer:
a. does not qualify
-real property located in the US exchanged for foreign real property (& vice versa) doesn't qualify as
like-kind property
b. does not qualify
-section 1031 only applies to real estate, only the office building is real estate
c. does not qualify
-section 1031, like-kind exchanges, only apply to real property used for business or investment purposes
d. qualifies
-real estate can be exchange only for other real estate
e. does not qualify
-property held for personal use, inventory & partnership interests (both limited & general) do not qualify
under the like-kine exchange provisions
Question:
12. Apartment building held for investment (adjusted basis of $145,000) for office building to be held for
investment (fair market value of $225,000). What is the basis of the received property in each of the
following exchanges?
Answer:
$145,000
-bc the postponed gain is $80,000, the basis = $145,000 ($225,000 - $80,000)
Question:
13. Land and building used as a barber shop (adjusted basis of $190,000) for land and building used as a
grocery store (fair market value of $350,000). What is the basis of the received property in each of the
following exchanges?
Answer:
$190,000
-bc the postponed gain is $160,000, the basis = $190,000 ($350,000 - $160,000)
Question:
14. Office building (adjusted basis of $45,000) for bulldozer (fair market value of $42,000), both held for
business use. What is the basis of the received property in each of the following exchanges?
Answer:
$42,000
-the transaction doesn't qualify as a like-kind exchange
-therefore, the basis of the newly acquired asset is = to its FMV or $42,000
CORRECT ANSWERS
Question:
1. Rick purchased 100 shares of XYZ stock on April 4, year 4, for $8,600. He sold 50 shares on February
8, year 5, for $3,000. He then bought another 50 shares of XYZ on March 1, year 5, for $3,200. How much
loss will Rick realize in year 5?
Answer:
$1,300
($3,000 - ($8,600/2))
-rick sold 1/2 of the original shares for $3,000
-cost of those shares is $4,300 ($8,600/2)
-realized loss is $1,300 ($3,000-$4,300)
Question:
2. Alice gifted stock to her son, Bob, in year 5. Alice bought the stock in year 1 for $8,300. The value of
the stock on the date of gift was $6,400. Bob sold the stock in year 7 for $15,800. What is Bob's recognized
gain or loss on the sale in year 7?
Answer:
$7,500 gain
$15,800 - $8,300
-bc bob sold at an amount greater than both the carryover basis & the FMV at the date of gift, he can use
the higher carryover bass as his basis
-bob's basis is the $8,300 carryover from alice
-recognized gain is $7,500 ($15,800 - $8,300)
Question:
3. Jerry inherits an asset from his uncle, who purchased the asset five days before he died. Which of the
following statements is correct?
Answer:
jerry's basis is the FMV on his uncle's date of death
-the basis of inherited property's FMV at date of death (referred to as the primary valuation amt)
Question:
4. Agnes sold 50 shares of ABC stock to her son, Steve, in year 4 for $42,000. She bought the stock eight
years ago for $50,000. Steve sold the stock to an unrelated party in year 6 for $60,000. How much gain
will Steve recognize from the sale in year 6?
Answer:
$10,000
-agnes cannot recognize any of her loss on the sale to steve, a related party
-when steve selss to an unrelated oarty, he may use agnes's original basis of $50,000, bc he sole at an
amount higher than both his cost basis & agnes's basis
-so his recognized gain is $10,000 ($60,000 - $50,000)
Question:
5. Which of the following are related parties under § 267?
,Answer:
father brother grandson corporation & a 55% shareholder
-for purposes of § 267, related parties include: family members (brothers & sisters whether whole, half or
adopted), spouse, ancestors (parents & grandparents) & lineal descendants (children & grandchildren) of
the taxpayer
-corporations & shareholders who own more than 50% (directly or indirectly) of the corporation's stock
-2 corporations that are member of a controlled group
Question:
6. Related parties include brothers and sisters, spouse, ancestors (parents and grandparents), and lineal
descendants (children and grandchildren) of the taxpayer.
Answer:
true
Question:
7. Related parties include two corporations that are members of a controlled group.
Answer:
true
Question:
8. Related parties include a corporation owned more than 35 percent (directly or indirectly) by the
taxpayer.
Answer:
false
-a corporation owned 50% (directly or indirectly) by the taxpayer
Question:
9. Constructive ownership provisions are applied to determine whether the taxpayers are related.
Answer:
true
-under these provisions, stock owned by certain relatives or related entities are deemed to be owned by the
taxpayer for purposes of applying the loss & expense deduction disallowance provisions
Question:
10. In early year 8, Alice sold Tom, her son, 20 shares of common stock for $20,000. Alice had paid
$25,000 for the stock in year 2. In late year 8, Tom sold the stock to an unrelated third party for $35,000.
How much gain must Tom report in his year 8 tax return for the sale of the stock?
Answer:
$10,000
$35,000 - $25,000 = $10,000
-losses betw related parties are disallowed
-subsequent sale price to an unrelated party determines which basis is used to determine gain or loss
-the sale price to the unrelated party is $35,000 (which is higher than the 1st relative's basis/initial seller) &
the 1st relative's basis of $25,000 is used to determine his gain on the subsequent sale
, Question:
11. Indicate whether the following exchanges qualify as nontaxable exchanges of like-kind property under
Section 1031. Select "Qualifies" or "Does not qualify", whichever is applicable.
a. A warehouse located in the United States exchanged for a warehouse in Greece.
b. A machine used in a business exchanged for an office building.
c. Business equipment exchanged for office furniture.
d. Unimproved land, held for investment, exchanged for an apartment building.
e. A personal residence exchanged for a store building.
Answer:
a. does not qualify
-real property located in the US exchanged for foreign real property (& vice versa) doesn't qualify as
like-kind property
b. does not qualify
-section 1031 only applies to real estate, only the office building is real estate
c. does not qualify
-section 1031, like-kind exchanges, only apply to real property used for business or investment purposes
d. qualifies
-real estate can be exchange only for other real estate
e. does not qualify
-property held for personal use, inventory & partnership interests (both limited & general) do not qualify
under the like-kine exchange provisions
Question:
12. Apartment building held for investment (adjusted basis of $145,000) for office building to be held for
investment (fair market value of $225,000). What is the basis of the received property in each of the
following exchanges?
Answer:
$145,000
-bc the postponed gain is $80,000, the basis = $145,000 ($225,000 - $80,000)
Question:
13. Land and building used as a barber shop (adjusted basis of $190,000) for land and building used as a
grocery store (fair market value of $350,000). What is the basis of the received property in each of the
following exchanges?
Answer:
$190,000
-bc the postponed gain is $160,000, the basis = $190,000 ($350,000 - $160,000)
Question:
14. Office building (adjusted basis of $45,000) for bulldozer (fair market value of $42,000), both held for
business use. What is the basis of the received property in each of the following exchanges?
Answer:
$42,000
-the transaction doesn't qualify as a like-kind exchange
-therefore, the basis of the newly acquired asset is = to its FMV or $42,000
