# Solution manual south western federal taxation individual income tax 35e by hoffman chapter 14

CHAPTER 14
PROPERTY TRANSACTIONS: DETERMINATION OF GAIN
OR LOSS AND BASIS CONSIDERATIONS
SOLUTIONS TO PROBLEM MATERIALS

Question/
Problem

Learning
Objective

1
2
3
4
5

LO 1
LO 1

LO 1
LO 1
LO 1

6
7

LO 1
LO 1

8
9
10

LO 1
LO 1
LO 1

11

LO 1

12

LO 1

13
14
15

LO 1
LO 1
LO 2

16

LO 2

17

LO 3

18
19

LO 4
LO 4

Topic
Sale or other disposition: tax aspects
Realization: definitions
Sale or other disposition
Sale or other disposition
Sale or other disposition versus mere
change in value
Amount realized: determination of
Amount realized and basis
considerations
Basis and effect of liability
Basis: note versus cash
Amount realized and basis
considerations
Basis and cost recovery: allowed versus
allowable depreciation
Basis and cost recovery: effect of
depreciation
Corporate distributions
Sale of personal use assets: gain versus
loss
Sale of personal use assets: gain versus
loss
Recovery of capital and life insurance
proceeds
Bargain purchase
Lump-sum purchase, basis, and
goodwill

Status:
Present
Edition

Q/P
in Prior
Edition

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1
2

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6

Modified
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8
9
10

4
5

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13

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16

Modified

17

New
New

Instructor: For difficulty, timing, and assessment information about each item, see p. 14-4.

14-1
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

14-2

Question/
Problem

2012 Individual Income Taxes/Solutions Manual

Learning
Objective

20

LO 4

21
22

LO 1, 2, 4
LO 1, 2,
4, 6

23

LO 4

24

LO 4

25
26

LO 4
LO 4

27
28
*29

LO 5
LO 5, 6
LO 1

*30

LO 1

31

LO 1

*32
*33

LO 1
LO 1, 2

*34

LO 1

*35

LO 1, 2

*36

LO 1, 2

*37
38
*39
*40
*41

LO 1, 2
LO 4
LO 1, 2, 4
LO 1, 2, 4
LO 4

42
43
44
45
*46
*47
48

LO 4
LO 4
LO 1, 2, 4
LO 1, 2, 4
LO 4
LO 4
LO 1, 2,
4, 6

Topic
Stock basis: cost basis versus no cost
basis for stock dividend
Gift basis: gain basis and loss basis
proceeds; inheritance versus sale of
asset and bequest of proceeds
Gift basis: gain basis and loss basis and
inherited property
Property transferred by inheritance
Basis for inherited property versus
Related-party transactions
Wash sale
Amount realized and basis
determination
Amount realized and basis
determination
Amount realized and effect of various
Personal use asset sale, exchange, or
casualty
Corporate distributions that are a return
of capital
effect of
Realization versus recognition: sale
and condemnation of personal use
assets
Recognition and condemnation
Bargain purchase by employee
Basis and cost identification of stock
Basis and cost identification of stock
Allocation of purchase price to
goodwill
Nontaxable stock dividends and basis
Nontaxable stock rights
Gift basis: gain basis and loss basis
Gift basis: gain basis and loss basis
considerations

Status:
Present
Edition

Q/P
in Prior
Edition

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20

Modified
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21
22

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New
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25
26

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New
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29

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30

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31

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32
33

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34

Modified

35

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36

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38
39
40
41

New
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Updated
Unchanged

43
44
46
47
48

Instructor: For difficulty, timing, and assessment information about each item, see p. 14-4.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Property Transactions: Determination of Gain or Loss & Basis Considerations

Question/
Problem

Learning
Objective

49

LO 4

50

LO 4

51
*52

LO 4
LO 4

*53
*54

LO 4, 5
LO 1, 2,
4, 5
LO 1, 2,
4, 5
LO 1, 2, 5
LO 1, 2, 5
LO 5, 6
LO 4, 6

55
56
*57
58
59
*60
*61

Topic

Status:
Present
Edition

14-3

Q/P
in Prior
Edition

Basis for inherited property: primary
versus alternate valuation date
Basis for inherited property: primary
versus alternate valuation date
Basis for inherited property:
community property and common
law property
Related party loss disallowance
Related party loss disallowance

Unchanged

49

Unchanged

50

Modified
New

51

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New

53

Wash sales

Unchanged

55

Wash sales
Property converted from personal use
Property converted from personal use
Selection of property for making gifts
and bequests
Cumulative
Cumulative

Unchanged
New
Unchanged
Modified

56

Modified
Updated

60
61

58
59

*The solution to this problem is available on a transparency master.
Instructor: For difficulty, timing, and assessment information about each item, see p. 14-4.

Research
Problem

Topic

1
2
3
4
5
6
7
8

Allocation of adjusted basis for purchased assets
Amount realized and nonrecourse debt
Stock basis: FIFO versus specific identification
Wash sale
Stock redemption and covenant not to compete
Internet activity
Internet activity

Status:
Present
Edition
New
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New
Unchanged

Q/P
in Prior
Edition
2
3
4
5
6
8

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

14-4

2012 Individual Income Taxes/Solutions Manual

Question/
Problem

Difficulty

Est’d
completion
time

1

Easy

5

2

Easy

5

3
4

Easy
Medium

5

Easy

5
10
5
10
5
5
5
10

Assessment Information
AICPA*
AACSB*
Core Comp
Core Comp
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Reporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement | FNReporting
FN-Measurement
FN-Measurement
FN-Measurement

6
7
8
9
10

Easy
Easy
Easy
Easy
Medium

11
12
13

Easy
Easy
Easy

5
5
5

14

Easy

10

15

Medium

10

16

Medium

10

17

Medium

10

18

Easy

5

19

Easy

5

20

Easy

10

21
22

Easy
Medium

10
10

FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement
FN-Measurement

23
24

Medium
Easy

10
5

FN-Measurement
FN-Measurement

25
26

Easy
Easy

5
5

27

Easy

5

28

Easy

5

FN-Measurement
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting

Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic | Reflective
Thinking
Analytic
Analytic
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic
Analytic
Analytic | Reflective
Thinking
Analytic
Analytic | Reflective
Thinking
Analytic
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking

*Instructor: See the Introduction to this supplement for a discussion of using AICPA and
AACSB core competencies in assessment.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Property Transactions: Determination of Gain or Loss & Basis Considerations

Question/
Problem

Difficulty

Est’d
completion
time

29
30
31
32

Medium
Medium
Easy
Medium

10
10
10
10

33

Medium

10

34

Easy

10

35

Easy

10

36

Easy

10

37

Medium

10

38

Medium

10

39
40
41

Easy
Medium
Medium

10
10
15

42

Easy

10

43

Medium

10

44
45
46
47
48

Medium
Medium
Easy
Medium
Hard

10
10
5
10
20

49

Easy

50
51
52
53

Medium
Medium
Medium
Medium

10
10
10
10

54

Hard

15

55

Medium

10

56

Medium

10

5

14-5

Assessment Information
AICPA*
AACSB*
Core Comp
Core Comp
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting
FN-Measurement | FNReporting

Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Communication |
Analytic
Analytic
Analytic
Communication |
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic | Reflective
Thinking

*Instructor: See the Introduction to this supplement for a discussion of using AICPA and
AACSB core competencies in assessment.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

14-6

Question/
Problem

2012 Individual Income Taxes/Solutions Manual

Difficulty

Est’d
completion
time

Assessment Information
AICPA*
AACSB*
Core Comp
Core Comp

57
58

Hard
Medium

15
10

FN-Measurement
FN-Measurement

59

Medium

10

FN-Measurement

60

Hard

61

Hard

FN-Measurement | FNReporting
FN-Measurement | FNReporting

Analytic
Analytic | Reflective
Thinking
Analytic | Reflective
Thinking
Analytic
Analytic | Reflective
Thinking

*Instructor: See the Introduction to this supplement for a discussion of using AICPA and
AACSB core competencies in assessment.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Property Transactions: Determination of Gain or Loss & Basis Considerations

14-7

CHECK FIGURES
29.
30.a.
30.b.
30.c.
32.a.
32.b.
33.a.
33.b.
33.c.
33.d.
34.a.
34.b.
34.c.
35.a.
35.b.
36.a.
36.b.
36.c.
36.d.
36.e.
36.f.
37.a.
37.b.
37.c.
38.a.
38.b.
39.a.
39.b.
39.c.
39.d.
40.a.
40.b.
40.c.
41.a.
41.b.
42.a.
42.b.
43.a.
43.b.
43.c.
43.d.
43.e.
44.a.
44.b.
44.c.
44.d.

\$74,100.
\$177,200 realized gain.
\$252,200 realized gain.
\$252,200 realized gain.
\$24,000.
\$351,000.
\$0.
\$0.
\$0.
\$3,000 recognized gain.
\$50,000 return of capital.
Recognized gain \$70,000; stock basis
\$0.
Basis \$70,000.
\$5,000.
\$2,000 recognized loss.
Recognized gain \$50,000.
Realized loss of \$50,000 is disallowed.
Realized loss of \$10,000 is disallowed.
\$0; no sale or other disposition has
occurred.
Recognized gain \$1,000.
Realized loss of \$450 is disallowed.
\$0.
\$45,000.
\$15,000 recognized loss.
Yes, \$30,000.
\$280,000.
\$0.
Realized loss \$900.
Realized gain \$2,700.
MDG: Realized gain \$2,400; GRU:
Realized gain \$13,875.
\$510,000.
\$22,500 recognized gain.
\$12,500 recognized gain.
\$550,000 recognized gain.
Goodwill \$140,000.
\$0 gross income.
Total adjusted basis for common is
\$40,000; basis per share for common
is \$47.62.
Decreases to \$4,286.
\$714.
Recognized gain \$486.
\$0.
Not required to allocate.
\$60,000 recognized gain.
\$21,000 recognized gain.
\$6,000 recognized loss.
\$0.

45.a.
45.b.
45.c.
46.
47.a.
47.b.
49.a.
49.b.
49.c.
50.a.
50.b.
51.a.
51.b.
52.a.
52.b.
53.a.
53.b.
53.c.
53.d.
54.a.

54.b.
54.c.
54.d.
55.a.
55.b.
55.c.
56.a.
56.b.
56.c.
56.d.
57.a.

57.b.
57.c.
58.a.
58.b.
58.c.
58.d.
60.
61.

\$24,000.
\$1,500 recognized gain.
\$1,500 recognized loss.
\$0 recognized gain or loss.
\$929,462 basis.
Gain basis: \$825,000; loss basis:
\$824,000.
Alternate election not permitted.
\$3,820,000 basis.
\$3,800,000 basis.
\$535,000.
\$530,000.
\$6,000.
\$9,500.
\$940,000.
\$695,000.
Disallowed loss to Joyce of
\$5,000.
\$0 recognized gain for Iris.
Recognized gain of \$10,000.
Recognized loss of \$5,000 for
Hector.
Parcel A: \$25,000 recognized
loss; Parcel B: \$5,000
recognized loss; Parcel C: \$0
recognized loss.
\$40,000 recognized gain.
Recognized gain \$10,000.
Recognized gain \$0.
Basis \$42,000.
Basis \$35,000.
No, same results.
Recognized loss \$0.
Basis \$62,500.
Recognized loss of \$1,250.
Recognized loss of \$5,000; basis
of \$57,500 for 125 shares.
Gain basis for house \$140,000;
loss basis for house \$129,500;
gain basis for land \$112,000,
loss basis for land \$108,500.
Cost recovery \$13,009.
Recognized gain for house
\$107,509; recognized gain for
land \$3,500.
\$320,000.
\$320,000.
\$340,000.
No, \$20,000 realized loss is
disallowed.
Refund due for 2010 \$1,050.
Refund due for 2011 \$6,327.50.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

14-8

2012 Individual Income Taxes/Solutions Manual

DISCUSSION QUESTIONS
1.

Is there a realized gain or loss?

If so, is the realized gain or loss recognized?

If the realized gain or loss is recognized, is it classified as ordinary or capital?

What is the basis of replacement property, if any, that is acquired?

p. 14-3
2.

a.

The amount realized from a sale or other disposition of property is the sum of any
money received plus the fair market value of other property received. Any liability on
the property is included in the amount realized if the buyer assumes it or takes the
property subject to the liability.

b.

Realized gain is the excess of the amount realized over the adjusted basis of the
property.

c.

Realized loss is the excess of the adjusted basis of the property over the amount
realized.

pp. 14-3 and 14-4
3.

Other transactions which are treated as dispositions of property include trade-ins, causalities,
condemnations, thefts, and bond retirements. p. 14-3

4.

Over the 5-year period, the results for Ivan and Grace are the same (i.e., recognized gain of
\$40,000). However, the timing of the recognition of the gain differs. Grace will include the
interest income of \$8,000 in her gross income for each of the 5 years. Ivan will recognize his
\$40,000 gain in the fifth year when he sells the land (i.e., mere fluctuation in value is not
a disposition or identifiable event for tax purposes). In addition, the character of the income
is different. The interest is ordinary income and the land sale is probably a long-term capital
gain. p. 14-3

5.

While the stock owned by Carol and by Dave decreases in value by \$2,000, only Carol has
a realized and recognized loss of \$2,000. The key factor in determining whether a disposition
has taken place usually is whether an identifiable event has occurred. Carol’s stock sale
qualifies as a disposition whereas Dave’s stock value decrease does not qualify as
a disposition. Example 3

6.

a.

Whether the property is sold for cash or on credit is not relevant for this purpose. The
amount realized includes both the cash received at the time of sale and the cash to be

b.

The mortgage assumption increases the amount realized by the seller.

c.

The assumption by the seller of the buyer’s mortgage decreases the amount realized
by the seller.

d.

The buyer’s acquisition of the property subject to the mortgage of the seller increases
the amount realized by the seller.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Property Transactions: Determination of Gain or Loss & Basis Considerations
e.

14-9

The receipt of the stock worth \$10,000 by the seller increases the amount realized by
\$10,000.

p. 14-4 and Example 4
7.

a.

The real property taxes must be apportioned between Adrian and Shelly as follows:
Adrian: 58/365 × \$3,650 = \$580
Shelly: 307/365 × \$3,650 = \$3,070
Property taxes are deducted \$580 by Adrian and \$3,070 by Shelley.

b.

Even though Shelly paid the real property taxes of \$3,650 for the entire year, she is
permitted to deduct only her apportioned share of \$3,070. Her adjusted basis for the
property is increased by the \$580 she paid that is apportioned to Adrian.
Cost
+ Property taxes she paid apportioned to Adrian

c.

Since Adrian paid none of the real property taxes and is permitted to deduct the
apportioned share of \$580, his amount realized is increased by this amount.
Selling price
+ Property taxes apportioned to Adrian
Amount realized

d.

\$200,000
580
\$200,580

\$200,000
580
\$200,580

Adrian’s amount realized would be his cost minus the real property taxes apportioned
to Shelly (\$200,000 – \$3,070 = \$196,930). Shelly’s adjusted basis would be her cost
minus the real property taxes apportioned to her (\$200,000 – \$3,070 = \$196,930).

pp. 14-3 and 14-4
8.

Under the first option, the basis for the land consists of the sum of the cash paid by Troy
(\$150,000) and the mortgage on the land (\$80,000) which Troy would assume. The basis
under the second option is the \$230,000 paid by Troy. Therefore, Troy’s basis will be the
same regardless of which option he selects. However, the first option will require a smaller
current cash outflow. The same current cash outflow of \$150,000 could be achieved under
the second option if Troy were to place an \$80,000 mortgage on the land immediately.
However, this may result in additional closing costs. p. 14-4

9.

a.

Eve’s basis is the cost of \$500,000 (\$100,000 + \$400,000). Whether the full
acquisition price is paid in cash is not relevant.

b.

Eve’s basis for the land remains at \$500,000. The interest paid does not affect the

p. 14-4
10.

a.

One factor that could contribute to this result is that mortgages are granted based on
the fair market value of the property rather than based on the taxpayer’s adjusted
basis for the property. Another factor is that depreciation deductions in the early life

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

14-10

2012 Individual Income Taxes/Solutions Manual
of the asset may have exceeded the amortization of the mortgage principal. Also, it is
possible that the property declined in value after the mortgage was granted.
b.

The amount realized is \$360,000, the full amount of the debt forgiveness. The
Supreme Court ruled in Tufts that the fair market value of the property does not serve
as a ceiling on the debt forgiveness in calculating the amount realized. The adjusted
basis is not affected (i.e., it remains at \$75,000). Therefore, the realized gain is
\$285,000 (\$360,000 – \$75,000).

c.

No. In either case, the amount realized is \$360,000. The justification for this
treatment for the non recourse mortgage is that the taxpayer initially benefited when
the mortgage was incurred in terms of increasing the property’s adjusted basis (e.g., if
the purchase price is \$500,000 of which \$400,000 is financed by a non recourse
mortgage, the basis is \$500,000).

pp. 14-3 to 14-5
11.

As discussed in Chapter 8, allowed depreciation is the depreciation actually deducted,
whereas allowable depreciation is the amount that could have been deducted under the
applicable depreciation method. In most circumstances, the allowed and allowable
depreciation amounts are the same. The adjusted basis of the property is reduced by the
greater of the allowed or allowable depreciation. p. 14-5 and Chapter 8

12.

a.

Teresa is able to deduct cost recovery on her car because she uses it in her trade or
business (i.e., 60% of the usage). She is not allowed cost recovery associated with
the 40% personal use. Since all of Chuck’s use of his car is personal, he cannot
deduct any cost recovery.

b.

Chuck’s adjusted basis for his car still is \$29,000. Since his amount realized of
\$24,000 on the sale of the car is less than \$29,000, he has a realized loss. However,
the realized loss cannot be recognized due to personal use.
Teresa was able to deduct cost recovery which reduced her adjusted basis. Her
adjusted basis apparently is less than the amount realized of \$24,000 on the sale of the
car. So she has a realized gain and a recognized gain. A realized gain on a sale is
recognized regardless of the use (i.e., personal, investment, or business).

pp. 14-4 and 14-5
13.

Dividend treatment will result only if the corporation has adequate earnings and profits to
cover the amount of the distribution. Any excess of the amount of the distribution over the
earnings and profits will be treated as a recovery of capital. In the case of a recovery of
capital, the basis of the stock is reduced. Once the basis of the stock is reduced to zero, the
amount of any subsequent distributions is a capital gain if the stock is a capital asset. p. 14-6

14.

a.

Amortization of bond premium and the related basis adjustment are mandatory for
tax-exempt bonds. However, since the bonds are tax-exempt, the interest income of
\$2,250 (\$75,000 × 6% × 1/2) is not included in gross income. Likewise, the interest
expense of \$700 [(\$82,000 – \$75,000)/5 × 1/2] associated with the amortization of the

b.

Even though the \$700 of amortized bond premium is not deductible, Katrina’s
adjusted basis must be reduced. Thus, her adjusted basis for the tax-exempt bonds on
January 1, 2012 is \$81,300 (\$82,000 – \$700).

p. 14-6

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Property Transactions: Determination of Gain or Loss & Basis Considerations
15.

14-11

a.

Sandra’s impression of the tax consequences is wrong. The sale of the appreciated
personal use asset will result in a \$14,000 recognized gain. As losses on the sale of
personal use assets are disallowed, the sale of the personal use asset that produces
a \$18,000 realized loss cannot be recognized.

b.

No. The \$14,000 realized gain would still be taxable, and the \$18,000 realized loss
would still be disallowed.

p. 14-7 and Examples 8 and 9
16.

Both assets are personal use assets. Therefore, gains are recognized and losses are not
recognized. Ron may think that if he sells both assets this year he can net the gain and loss.
Unfortunately, this is not permitted. By accepting Jeff’s offer, Ron can defer the \$5,000
realized gain on the sale of the motorcycle until next year. p. 14-7

17.

If the recovery of capital doctrine were completely applicable in determining the amount of
the exclusion, only \$115,000 would be excludible. Therefore, one can view the relationship
between the recovery of capital doctrine and the exclusion under § 101(a)(1) in one of two
ways. First, since the \$500,000 exclusion is not dependent on the recovery of capital doctrine,
one view is that there is no relationship. The other view is that a relationship does exist with
respect to the \$115,000, but does not exist with respect to the remaining \$385,000 of
proceeds received. Note that the recovery of capital doctrine is evident with respect to the
§ 101(a)(2) exclusion (i.e., transfer for valuable consideration). See Chapter 5 and pp. 14-8
and 14-9

18.

If the fair market value of the lot is \$100,000, then Helen has made a bargain purchase of
\$20,000 (\$100,000 FMV – \$80,000 purchase price). In this case, Helen recognizes income of
\$20,000, and her basis in the lot becomes \$100,000 (\$80,000 purchase price + \$20,000
recognized income). If the fair market value of the lot is only \$90,000, then Helen’s
recognized gain is \$10,000 (\$90,000 FMV – \$80,000 purchase price), and her basis in the lot
is \$90,000 (\$80,000 purchase price + \$10,000 recognized gain).
Based on the facts, Melba’s adjusted basis could not be \$75,000. This is less than her cost of
\$80,000. In this situation, there is no bargain purchase and Melba’s basis would be her cost
of \$80,000.
p. 14-9

19.

In a lump-sum purchase, cost is allocated according to the relative fair market values of the
individual assets acquired. However, if a business is purchased and goodwill is involved,
§ 1060 requires that the allocation be made according to the residual method. Under the
residual method when a business is purchased, the purchase price is assigned to the assets,
excluding goodwill, based on their respective fair market values. Any excess (i.e., the
residual) of the purchase price over the summation of these fair market value amounts is
assigned to the goodwill. pp. 14-9, 14-10, and Example 13

20.

a.

If the stock dividend is common stock on common stock, the basis of the original
common shares is allocated to the total shares owned after the stock dividend.

b.

If the stock dividend is preferred stock on common stock, the basis of the original
common shares is allocated between the common shares and the preferred shares
based on their relative fair market values on the date of the distribution.

p. 14-11 and Examples 14 and 15
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

14-12
21.

2012 Individual Income Taxes/Solutions Manual
a.

Janine’s basis for gain is \$20,000 and her basis for loss is \$12,000 (the fair market
value of the boat on the date of the gift is less than donor’s adjusted basis).

b.

Janine’s realized loss on the sale is \$1,500 (\$10,500 amount realized – \$12,000 basis
for loss). However, the recognized loss is \$0 because the sailboat is a personal use
asset.

c.

The adjusted basis of the boat to Janine would be Marla’s original cost of \$20,000. So
Janine’s realized loss would be \$9,500 (\$10,500 amount realized – \$20,000 adjusted
basis). However, the recognized loss is \$0 because the sailboat is a personal use asset.

p. 14-13 and Example 19
22.

Property acquired by gift generally has a carryover basis, while inherited property receives
a step-up or step-down in basis. The crucial issue is whether Agnes’s adjusted basis in the
stock is greater or less than \$50,000.
If less than \$50,000, recognized gain occurs to Agnes if she sells the stock and gives the
proceeds. If, however, Agnes gives the stock and Stan sells it, he has the recognized gain. If,
instead, Stan inherits the stock, his adjusted basis is the fair market value at the date of death
(i.e., at least \$50,000). Thus, any appreciation is not subject to income tax.
If the adjusted basis of the stock is greater than \$50,000, the sale of the stock by Agnes
results in a recognized loss. She could then give the proceeds to Stan. If, instead, Stan
inherits the stock, his adjusted basis is the fair market value at the date of death (i.e., at most
\$50,000). Thus, the decline in value while Agnes held the property would never be
recognized either by Agnes or Stan.
p. 14-25

23.

If the property in the hands of the donor/decedent has declined in value, the donee’s loss
basis and the heir’s basis would be the same. The donee’s loss basis is the lower of (1) the
donor’s adjusted basis or (2) the fair market value on the date of the gift. The heir’s basis is
the fair market value on the date of the decedent’s death. Note that the donee’s gain basis
would be different, since it is the same as the donor’s adjusted basis. pp. 14-12, 14-13, and
14-15

24.

For property received by gift, there is a carryover basis (i.e., same as the donor’s basis plus
gift tax paid on any appreciation). If no gift tax is paid, then Albert’s adjusted basis is the
\$7,000.
For inherited property, the basis is a new basis (i.e., fair market value on the date of the
decedent’s death unless the executor of the estate elects the alternate valuation date and
amount). The \$55,000 adjusted basis for Robin’s Wal-Mart shares appears to be the fair
market value of the stock at the date of her aunt’s death.
pp. 14-12 to 14-16

25.

The gift and related inheritance are subject to the special rule for ‘‘deathbed’’ gifts because
the period between the date of the gift of the appreciated property by Gary and the date of
Carmen’s death is not greater than one year. Thus, Gary’s basis for the building is the same
as Carmen’s adjusted basis for the building. This is calculated by determining Carmen’s gain
basis for the gift property, increasing it by the capital expenditure, and decreasing it by the
depreciation deduction. pp. 14-4, 14-15, and 14-16

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Property Transactions: Determination of Gain or Loss & Basis Considerations

14-13

26.

If Thelma received the land as a gift from Sadie, her holding period would include not only
Thelma’s holding period would not be long term (i.e., 6 months plus 3 months). For
inherited property, however, Thelma’s holding period is automatically long term. Therefore,
she can sell it now and qualify for long-term capital gain treatment. p. 14-18

27.

a.

Marilyn’s realized loss is \$70,000 (\$180,000 amount realized – \$250,000 adjusted
basis). However, since her brother Amos is a related party under § 267, none of the
\$70,000 realized loss is recognized.

b.

Amos has a realized gain of \$60,000 on the sale of the land two years later.
Amount realized
Realized gain

\$240,000
(180,000)
\$ 60,000

However, none of Amos’ realized gain is recognized because it can be offset by
\$60,000 of the \$70,000 realized loss that was disallowed to Marilyn.
c.

The family unit is not treated fairly. The \$10,000 of Marilyn’s realized loss that was
not used by Amos to offset his realized gain disappears (i.e., cannot be used by either
Marilyn or Amos.)

d.

In terms of the brother and the sister, the brother wins. Marilyn was not permitted to
use any of her realized loss of \$70,000. On the other hand, Amos is able to reduce his
realized gain of \$60,000 to \$0 by using \$60,000 of Marilyn’s realized loss.

e.

Marilyn could avoid the § 267 loss disallowance treatment if she sells the land to an
unrelated party.

pp. 14-18 and 14-19
28.

a.

Amber’s realized loss of \$5,000 on the sale of 500 shares of John Deere stock on
December 18, 2011, is disallowed because Amber has a wash sale. That is, she sold
the John Deere stock and within 30 days before or after the date of the sale she
acquired John Deere stock. Any loss realized from a wash sale is disallowed (i.e.,
actually postponed).

b.

Amber’s basis for the 500 shares of John Deere stock purchased on January 8, 2012,
is the sum of the cost of these shares and Amber’s previously disallowed loss of
\$5,000.

c.

Amber could avoid wash sale treatment by not acquiring substantially identical stock
within the 60-day window. This can be done by acquiring the John Deere stock
outside the 60-day window or acquiring stock other than John Deere stock within the
60-day window. Then she would have been able to recognize the realized loss of
\$5,000.

pp. 14-19 and 14-20

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

14-14

2012 Individual Income Taxes/Solutions Manual

PROBLEMS
29.

Cost

Paving and sidewalks (\$7,000 + \$8,000)
Elevator (\$20,000 – \$13,000)
Subtotal
Deduct: Depreciation deductions claimed
Casualty insurance proceeds
Casualty loss allowed

\$15,000
7,000
\$ 4,500
13,500
5,500

Amount realized (\$290,000 – \$17,400)
Less:
Realized gain

\$200,000
22,000
\$222,000
(23,500)
\$198,500
\$272,600
(198,500)
\$ 74,100

pp. 14-4 to 14-6, Example 5, and Concept Summary 14.2
30.

a.

Original basis of land
Original basis of house
Less: Depreciation
Adjusted basis of house and land

\$ 50,000
200,000
(30,900)
\$219,100

Original basis of tennis court
Less: Depreciation

\$ 5,000
(1,300)
\$ 3,700

Amount realized
Less: Adjusted basis (\$219,100 + \$3,700)
Realized gain

\$400,000
(222,800)
\$177,200

b.

Amount realized [\$400,000 (cash) + \$75,000 (mortgage)]
Realized gain

\$475,000
(222,800)
\$252,200

c.

Same answer as in part b. above.

pp. 14-3 to 14-5
31.

a.

IARN, IABP

b.

IARN, IABP

c.

IARN, IABP

d.

IARN, IABP

e.

IARN by \$1,000, IABP by \$1,000

f.

IABP

g.

DARN

p. 14-3

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Property Transactions: Determination of Gain or Loss & Basis Considerations
32.

14-15

a.

Gayla must report on her income tax return the greater of the depreciation allowed of
\$20,000 (\$24,000 × 10/12) or allowable of \$24,000. The depreciation allowed is the
amount actually deducted, whereas the depreciation allowable is the amount that
should have been deducted under the depreciation convention. Gayla should amend
her 2011 income tax return and deduct the correct amount of depreciation (\$24,000).

b.

Adjusted basis on January 1, 2011
Less: Depreciation allowable
Adjusted basis on December 31, 2011
and January 1, 2012

\$375,000
(24,000)
\$351,000

pp. 14-4 and 14-5
33.

a.

Amount realized
Realized loss
Recognized loss

\$32,500
(45,000)
(\$12,500)
\$

–0–

Realized losses on the sale or exchange of personal use assets are not deductible.
p. 14-7

34.

b.

Same result as in part a. above.

c.

Melanie’s realized loss is \$0. Since the form of the transaction is a theft, the realized
loss is the lesser of the adjusted basis or the fair market value of the asset, reduced by
the insurance proceeds that she received (see Chapter 7). Therefore, the opportunity
for the theft loss deduction on personal use property is not present in this case
because the insurance proceeds received of \$32,500 equal the fair market value of
\$32,500. p. 14-5

d.

Melanie’s realized and recognized gain is \$3,000 (\$48,000 amount realized – \$45,000
adjusted basis). Even though the boat is a personal use asset, the realized gain is
recognized. p. 14-7

a.

The \$50,000 distribution is labeled a return of capital because Dove has no earnings
and profits. Butch reduces the basis of his stock by \$50,000 to \$20,000 (\$70,000
adjusted basis – \$50,000 return of capital distribution).

b.

As in a., the \$140,000 distribution is treated as a return of capital because Dove has
no earnings and profits. Butch has a capital gain calculated as follows:
Amount realized
Realized gain

\$140,000
(70,000)
\$ 70,000

Recognized gain

\$ 70,000

The basis for his stock is reduced to \$0.
c.

Since the \$50,000 distribution is a taxable dividend, Butch’s adjusted basis for his
Dove stock remains at \$70,000.

p. 14-6
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14-16
35.

2012 Individual Income Taxes/Solutions Manual
a.

Chee’s interest income for 2011 is calculated as follows:
\$100,000 × 5% = \$5,000

b.

Since Chee is not required to amortize the bond premium and does not elect to do so,
his adjusted basis for the bonds is \$108,000.
Amount realized
Realized and recognized loss

\$106,000
(108,000)
(\$ 2,000)

p. 14-6
36.

a.

Gain of \$50,000 (\$150,000 – \$100,000) on the sale of a personal use asset is
recognized.

b.

Loss of \$50,000 (\$100,000 – \$150,000) on the sale of a personal residence is not
deductible.

c.

Condemnation loss of \$10,000 (\$55,000 – \$65,000) on a personal residence is not
recognized.

d.

No gain is recognized, since neither a sale nor other disposition of the land has
occurred.

e.

Amount realized
Realized and recognized gain

f.

The loss of \$450 (\$50 – \$500) on the sale of personal use assets is not recognized.

\$23,000
(22,000)
\$ 1,000

pp. 14-3, 14-7, and Examples 8 and 9
37.

a.

Amount realized
Realized loss
Recognized loss

\$390,000
(405,000)
(\$ 15,000)
\$

–0–

A realized loss on the condemnation of a personal use asset is not recognized.
b.

Amount realized
Realized gain

\$450,000
(405,000)
\$ 45,000

Recognized gain

\$ 45,000

A realized gain on the condemnation of a personal use asset is recognized if similar
property is not acquired. However, as discussed in Chapter 15 under ‘‘Sale of
a Residence—§ 121,’’ the recognized gain of \$45,000 can be avoided if the § 121
requirements are satisfied.
c.

If the house were income-producing property, the realized loss of \$15,000 would be
recognized.

p. 14-7
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Property Transactions: Determination of Gain or Loss & Basis Considerations
38.

14-17

a.

Buddy must treat the purchase of the land at a \$30,000 (\$280,000 – \$250,000)
discount as a bargain purchase, since it represents compensation for services. Thus,
he must include the \$30,000 in his gross income.

b.

Buddy’s adjusted basis for the land is the fair market value of \$280,000 (\$250,000
cost + \$30,000 increase in gross income).

c.

Hoffman, Smith, and Willis, CPAs
5191 Natorp Boulevard
Mason, OH 45040
June 25, 2011
Mr. Buddy Morris
San Diego, CA 92182
Dear Mr. Morris:
You requested advice on the tax consequences of the purchase of a lot from your
employer, Presidential Estates. Based on an outstanding sales performance, you were
permitted to purchase a lot for \$250,000 that normally would sell for \$280,000. You
were the only real estate agent permitted to do so.
The \$30,000 discount represents compensation for services and, therefore, must be
included in gross income. Your adjusted basis for the lot is \$280,000 (\$250,000 cost
+ \$30,000 amount included in gross income).
Sincerely,
Jane Reeves, CPA
Tax Partner

Example 10
39.

a.

Zero. No sales have occurred.

b.

MDG stock basis (180 × \$75) = \$13,500; [\$12,600 (amount realized) – \$13,500
(basis)] = \$900 realized loss on MDG stock.

c.

GRU stock basis (90 × \$300) = \$27,000; [\$29,700 (amount realized) – \$27,000
(basis)] = \$2,700 realized gain on GRU stock.

d.

Second MDG sale: \$13,500 (amount realized) – \$11,100 (basis) = \$2,400 realized
gain on MDG stock.
(120 × \$75)
(30 × \$70)
Basis

\$ 9,000
2,100
\$11,100

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

14-18

2012 Individual Income Taxes/Solutions Manual
Second GRU sale: \$37,500 (amount realized) – \$23,625 (basis) = \$13,875 realized
gain on GRU stock.
(60 × \$300)
(15 × \$375)
Basis

\$18,000
5,625
\$23,625

Example 11
40.

a.

Kevin’s adjusted basis for Bluebird Corporation stock on December 31, 2011, is
\$510,000 (\$300,000 + \$210,000).

b.

Amount realized
Less: Adjusted basis (500 shares × \$280 per share)
Realized gain

\$162,500
(140,000)
\$ 22,500

Recognized gain

\$ 22,500

c.

If Kevin cannot adequately identify the shares sold, a FIFO presumption is made.
Thus, the 500 shares sold are presumed to come from the 1,000 shares purchased on
October 3, 2011, for \$300,000 (i.e., \$300 per share). Therefore, Kevin has
a recognized gain of \$12,500 as calculated below.
Amount realized
Less: Adjusted basis (500 shares @ \$300 per share)
Realized gain

\$162,500
(150,000)
\$ 12,500

Recognized gain

\$ 12,500

Example 11
41.

a.

b.

Seth’s realized and recognized gain on the sale of his business is calculated as follows:
Amount realized
Realized gain

\$950,000
(400,000)
\$550,000

Recognized gain

\$550,000

Irene’s basis for each of the assets is as follows:
Accounts receivables
Notes receivables
Machinery and equipment
Building
Land
Goodwill

\$ 10,000
20,000
110,000
320,000
350,000
140,000
\$950,000

The basis for each of the listed assets is the fair market value. Application of the
residual method results in the balance of \$140,000 (\$950,000 – \$810,000) being
assigned to goodwill.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Property Transactions: Determination of Gain or Loss & Basis Considerations
c.

14-19

Hoffman, Smith, and Willis, CPAs
5191 Natorp Boulevard
Mason, OH 45040
June 2, 2011
Ms. Irene Andrews
300 Riverside Drive
Cincinnati, OH 45207
Dear Ms. Andrews:
I am responding to your inquiry regarding your proposal to purchase the assets of
Seth’s sole proprietorship. Your \$950,000 purchase price would be allocated among
the assets to produce the following adjusted basis for each asset:
Accounts receivable
Notes receivable
Machinery and equipment
Building
Land
Goodwill

\$ 10,000
20,000
110,000
320,000
350,000
140,000
\$950,000

The goodwill of \$140,000 represents the difference between the \$950,000 proposed
purchase price and the total fair market value of each of the other assets of \$810,000.
If I can be of further assistance, please let me know.
Sincerely,
Jeff Rose, CPA
Tax Partner
p. 14-10 and Example 13
42.

43.

a.

Unless the shareholders have the option to receive cash, the stock dividend is
nontaxable. Therefore, Donna has no gross income from the receipt of the stock
dividend. See p. 5-31 in Chapter 5.

b.

Donna’s adjusted basis for her common stock prior to the nontaxable stock dividend
was \$40,000. Her basis per share was \$50 (\$40,000/800 shares). After the stock
dividend, her adjusted basis remains at \$40,000. However, her basis per share
declines to \$47.62 (\$40,000/840 shares). p. 14-11 and Example 14

a.

The fair market value of the nontaxable stock rights (\$1,000) exceeds 15% of the fair
market value 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.

The stock rights are assigned a basis of \$714 [(\$1,000/\$7,000 × \$5,000) or (\$5,000
– \$4,286)].

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14-20
c.

2012 Individual Income Taxes/Solutions Manual
Amount realized
Realized gain
d.

e.

\$1,200
(714)
\$ 486

Recognized gain
\$ 486
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).
Because the fair market value of the nontaxable stock rights (\$750) is less than 15%
of the fair market value of the Yellow 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)].

Examples 16 and 17
44.

a.

Basis for gain = \$35,000; \$95,000 (amount realized) – \$35,000 (adjusted basis)
= \$60,000 (recognized gain).

b.

Basis for gain = \$19,000; \$40,000 (amount realized) – \$19,000 (adjusted basis)
= \$21,000 (recognized gain).

c.

Basis for loss = \$15,000; \$9,000 (amount realized) – \$15,000 (adjusted basis)
= \$6,000 (recognized loss).

d.

\$0. The proceeds of \$38,000 are between the gain basis of \$42,000 and the loss basis
of \$30,000. Therefore, neither gain nor loss is recognized.

Examples 18 to 20
45.

a.

The basis for depreciation is the donee’s gain basis of \$24,000 (\$40,000 cost
– \$16,000 accumulated depreciation). The donee’s loss basis is the fair market value
at the date of the gift of \$21,000.

b.

Amount realized
Adjusted basis (gain basis = \$24,000 – \$5,500)
Realized gain

\$20,000
(18,500)
\$ 1,500

Recognized gain

\$ 1,500

c.

Amount realized
Adjusted basis (loss basis = \$21,000 – \$5,500)
Realized loss

\$14,000
(15,500)
(\$ 1,500)

Recognized loss

(\$ 1,500)

p. 14-15 and Example 24
46.

Laura has generated zero recognized gain or loss, since the amount realized (\$110,000) falls
between the basis for gain (\$125,000) and the basis for loss (\$100,000). In this case, the gift
tax paid of \$14,000 does not affect the donee’s basis. pp. 14-12, 14-13, and Example 22

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Property Transactions: Determination of Gain or Loss & Basis Considerations
47.

a.

14-21

Natalie’s adjusted basis for the painting is calculated as follows:

\$825,000

\$295,000
\$1,120,000 – \$13,000 × \$392,000 =
b.

104,462
\$929,462

Since the painting has declined in value, none of the gift tax paid by Natalie’s aunt is
considered in calculating Natalie’s adjusted basis for gain of \$825,000.
Natalie’s basis for loss is the lower of her aunt’s adjusted basis of \$825,000 or the
FMV at the date of the gift of \$824,000.

pp. 14-12 and 14-13
48.

a.

Ira should not follow the friend’s advice. The sale of the stock by Ira would produce
a realized and recognized gain of \$5,000. If the stock is contributed to the Boy Scouts,
no such recognition occurs for regular income tax purposes. The value of the stock,
for purposes of calculating the amount of the charitable contribution deduction, will
be \$20,000 if its holding period is long term. If the holding period is short-term, the
reduction in the value of the charitable contribution required by § 170(e) from
\$20,000 to \$15,000 [\$20,000 (fair market value) – \$5,000 (short-term capital gain that
would result if the stock had been sold)] would produce a similar negative tax effect
as the \$5,000 realized and recognized gain that would result from the actual sale of
the stock by Ira. Brokerage commissions and taxes would bias the form of the
contribution even more in the direction of contributing the stock.

b.

Ira should follow the friend’s advice in order to recognize a loss of \$2,000 (\$13,000
– \$15,000). The charitable contribution in either case would be \$13,000.

c.

The choice in a. probably would be the same and the choice in b. would be the same.
In making the decision in a., the critical variable is the marginal tax rate of Ira versus
that of the niece (i.e., the sale should be made by the one with the lowest marginal tax
rate). Normally, the niece would be expected to have the lower marginal tax rate. In
b., the sale of the stock by Ira for \$13,000 would result in a realized and recognized
loss of \$2,000, whereas the sale by the niece for \$13,000 would not result in
a realized loss (i.e., the niece’s loss basis for the property received by gift would be
\$13,000). Any gift tax that Ira would be required to pay would not be influenced by
whether he gave the stock or the cash (i.e., the gift tax is based on the fair market

d.

Hoffman, Smith, and Willis, CPAs
5191 Natorp Boulevard
Mason, OH 45040
December 2, 2011
Mr. Ira Cook
500 Ireland Avenue
DeKalb, IL 60115

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

14-22

2012 Individual Income Taxes/Solutions Manual
Dear Mr. Cook:
I am responding to your request concerning whether you should (1) contribute Crystal
stock to the Boy Scouts, or (2) sell the stock and contribute the cash instead. Based on
our telephone conversation, the following data are applicable:
Stock purchased 6 years ago
Fair market value is \$20,000
More beneficial tax consequences result under the first option (i.e., contribute the
stock to the Boy Scouts). Under this option, you will be entitled to a charitable
contribution deduction of \$20,000 (i.e., the fair market value of the stock at the date
of the contribution). Under the second option, a charitable deduction of \$20,000 also
is available as cash is being contributed to the Boy Scouts. However, the sale of the
stock would be a taxable event which would result in a recognized gain of \$5,000
(\$20,000 amount realized – \$15,000 adjusted basis).
I recommend that you contribute the stock to the Boy Scouts. Should you need
Sincerely,
Pat Campbell, CPA
Tax Partner
p. 14-25 and Chapter 10

49.

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.

pp. 14-15, 14-16, and Examples 27 to 29
50.

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

\$ 10,000
125,000
300,000
100,000
\$535,000

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Property Transactions: Determination of Gain or Loss & Basis Considerations
b.

14-23

The election of the alternate valuation date will produce the following basis for each
asset distributed to Robert.
Cash
\$ 10,000
Stock
85,000
Apartment building
325,000
Land
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.

pp. 14-15, 14-16, and Examples 27 to 29
51.

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 \$60 (\$6,000/100 shares). Therefore, Emily’s
basis for the 100 shares she inherited is \$6,000 (\$60 × 100 shares) rather than \$9,500
(\$95 × 100 shares).

b.

Since the deathbed gift rule would not be applicable, Emily’s basis for the inherited
stock would be \$9,500 (\$95 × 100 shares).

Examples 25 and 30
52.

a.

Helene’s basis for the land is \$940,000, the fair market value of the land at the date of
Frank’s death. Since the Louisiana land is community property, both the decedent’s
share and the survivor’s share have a basis equal to the fair market value on the date
of the decedent’s death.

b.

In this case, Pauline’s basis is stepped-up only for Richard’s share of the Mississippi
land and is calculated as follows:
Pauline’s one-half of the jointly held property (carryover basis
of \$225,000)
Richard’s one-half of the jointly held property (stepped up from
\$225,000 to \$470,000 due to inclusion in his gross estate)
Pauline’s new basis

c.

\$225,000
470,000
\$695,000

Helene’s land is community property (i.e., Louisiana is a community property state).
So Helene’s basis for the land is the fair market value of \$94,000 on the date of
Frank’s death. Pauline’s land is common law property (i.e., Mississippi is a common
law state). So Pauline’s basis for the land is stepped up only for the one-half interest
passing from Richard.

Examples 31 and 32
53.

a.

Amount realized
Realized loss
Less: Disallowed loss
Recognized loss

\$115,000
(120,000)
(\$ 5,000)
5,000
\$
–0–

b.

Amount realized
Realized gain

\$119,500
(115,000)
\$ 4,000

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

14-24

2012 Individual Income Taxes/Solutions Manual
Less: Amount of Joyce’s previously disallowed
loss necessary to eliminate Iris’s realized gain
Recognized gain

\$

(4,000)
–0–

The remainder of Joyce’s disallowed loss of \$1,000 (\$5,000 – \$ 4,000) can never be
deducted either by Joyce or Iris.
c.

Amount realized
Realized gain

\$130,000
(120,000)
\$ 10,000

Recognized gain

\$ 10,000

Realized gains on related-party transactions are recognized.
d.

e.

Since Hector is not a related party, the loss disallowance provision under § 267 does
not apply.
Amount realized
Realized loss

\$115,000
(120,000)
(\$ 5,000)

Recognized loss

(\$ 5,000)

Joyce can avoid the loss disallowance provision of § 267 by selling the real estate to
Hector rather than by selling it to Iris. If the real estate were real estate that the
family wanted to retain, this would justify the sale to Iris. However, since Iris is
going to sell the real estate eventually, this is not relevant. Therefore, Joyce should
sell the real estate to Hector.

p. 14-18 and Example 33
54.

a.

Parcel A: \$50,000 – \$75,000 = \$25,000 recognized loss.
Parcel B: \$120,000 – \$125,000 = \$5,000 recognized loss.
Parcel C: No recognized loss under § 267 (realized loss of \$25,000).

b.

\$90,000 – \$50,000 = \$40,000 recognized gain.

c.

\$130,000 – \$120,000 = \$10,000 recognized gain.

d.

\$165,000 – \$150,000 = \$15,000 realized gain, less \$15,000 of the previously
disallowed loss = \$0 recognized gain.

p. 14-18
55.

a.

Tyneka receives a stepped-up basis of \$45,000 for the stock received on July 15, 2011.
Selling the stock for \$33,000 on July 30, 2012, 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, 2012, is \$42,000 (\$30,000 cost + \$12,000 disallowed loss).

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Property Transactions: Determination of Gain or Loss & Basis Considerations
b.
c.

14-25

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, 2011, is \$35,000.
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.

pp. 14-12, 14-15, 14-16, 14-19, and 14-20
56.

a.

Since the sale and purchase of the Drake stock by Sarah occurred within a 30-day
period, it is a wash sale. The realized loss is disallowed and is added to the adjusted
basis of the 125 shares purchased on November 5, 2011.
Amount realized
Realized loss

\$45,000
(50,000)
(\$ 5,000)

Recognized loss

(\$

–0–)

b.

Cost of 125 shares
Plus: Disallowed loss

\$57,500
5,000
\$62,500

c.

The wash sale provision would apply only to 75 of the 100 shares sold on October 11,
2011.
Amount realized
Realized loss

\$45,000
(50,000)
(\$ 5,000)

Recognized loss (on 25 shares)

(\$ 1,250)

Cost of 75 shares
Plus: Disallowed loss
d.

\$34,500
3,750
\$38,250

Because the sale and purchase did not occur within a 30-day period, the transaction is
not a wash sale. The realized loss of \$5,000 is recognized, and the adjusted basis for
the 125 shares is the cost of \$57,500. Thus, delaying the purchase to November 15,
2011, enables Sarah to recognize all of her realized loss of \$5,000.

pp. 14-19 and 14-20
57.

a.

Abby’s basis for gain, loss, and cost recovery for the business use portion (50%) of
the house is as follows:

Gain basis
Loss basis
Cost recovery basis

House
\$140,000 (\$200,000 × 70%)
\$129,500 (\$185,000 × 70%)
\$129,500 (same as loss basis)

Land
\$112,000 (\$160,000 × 70%)
\$108,500 (\$155,000 × 70%)

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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