Exam (elaborations)
Tax 4001 - Exam 3 Chapter 13.
Tax 4001 - Exam 3 Chapter 13.
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Tax 4001 - Exam 3 Chapter 13Adjusted Basis - ANS-Cost basis + Capital additions - Capital Recoveries
Allocation Problems - ANS-Must allocate basis to each asset obtained
lump-sum purchase
* to determine assets' basis: allocate purchase price based on relative FMV of assets
* If goodwill is involved:
- Assign purchase price to assets to extent of their total FMV
- Then allocate among assets based on relative FMV
- Residual amount is goodwill
* Goodwill is an amortizable asset
- Allocation applies to both purchaser and seller
* Nontaxable stock dividends
- Basis of original shares is allocated over the original and new shares
- Common on Common: Based on number of shared
- Preferred on Common: Based on relative FMV
- Holding Period includes the holding period of the original shares
Amortizable bond premium - ANS-Investors in taxable bonds may elect to amortize the
premium as an interest deduction over the life of the bond
investors in tax-exempt bonds are required to amortize the premium over the life of the
bond (with no annual interest deduction)
Amount Realized - ANS-a measure of the economic value received for property given
up
Basis (Conversion of Property from Personal Use to Business or Income-producing
Use) - ANS-If eventually sold at a loss:
BASIS = Lessor of (1) GMV at the time of conversion or
(2) Adjusted basis at time of conversion
* Also the basis for depreciating property
If eventually sold at a gain: Basis = Adjusted basis at time of conversion
Basis for depreciation (Gift basis) - ANS-Basis of depreciation = Donee's gain basis
(even if property is later sold at a loss)
, Calculating Exclusion (Sale of Residence) - ANS-Gain / Loss Realized = Amount
Realized - Adj Basis
* Amount Realized = Sales Price - Selling Expenses
- Selling expenses include: any costs relating to the sale of the residence (e.g. realtor's
commissions, advertising, inspection fees, title fees, buyer's expenses paid by the
seller, etc.)
* Adjusted Basis = Original Purchase Price + Improvements
- Improvements include items that extend the useful life of the home and/or add value
to the home (smoke detectors, additions, new roof or siding, etc.)
Capital Additions - ANS-cost of improvements and betterments to the property that are
capital in nature and NOT currently deductible
Capital Recoveries - ANS-Amount of basis recovered through...
Depreciation or cost recovery allowances
Casualty and theft losses (and insurance proceeds)
Certain corporate distributions
Amortizable bond premium
Easements
Certain Corporate Distributions - ANS-nontaxable corporate distributions reduce the
sharehodler's stock basis
once the stock basis is reduced to zero, excess distributions are capital gains
Computation of the reduced exclusion (sale of residence) - ANS-Reduced Exclusion =
Exclusion (250k or 500k MFJ) x # of qualifying months (24)
Conversion of Property from Personal Use to Business or Income-producing Use -
ANS-
Cost Basis - ANS-Basis = Cost
exception: In a bargain purchase, the asset's basis = FMV
Bargain amount may be income to purchaser (e.g. employee - compensation;
shareholder = dividend)
Determination of cost basis - ANS-
Determination of gain or loss - ANS-The sale or other disposition of property triggers
realization of gain (loss)
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