CHAPTER 13 PROPERTY TRANSACTIONS: DETERMINATION OF GAIN

1. Marilyn owns 100% of the stock of Lilac, Inc., with an adjusted basis of $45,000. She receives a cash distribution of $160,000 from Lilac when its earnings and profits are $90,000.

a. What is Marilyn’s dividend income?

b. What is Marilyn’s recognized gain or loss?

c. What is Marilyn’s adjusted basis for her stock after the distribution?

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2. Hilary receives $10,000 for a 15-foot wide utility easement along one of the boundaries to her property. The easement provides that no structure can be built on that portion of the property. Her adjusted basis for the property is $200,000 and the easement covers 15% of the total acreage. Determine the effect of the $10,000 payment on Hilary’s gross income and her basis for the property.

3. Ollie owns a personal use car for which he originally paid $48,000. He trades the car in on a sports utility vehicle (SUV) paying the automobile dealer cash of $30,000. If the negotiated price of the SUV is $49,000, what is Ollie’s recognized gain or loss and his adjusted basis for the SUV?

4. Omar has the following stock transactions during 2014:

Stock	Date purchased	Number of shares sold	Number of shares	Basis	Selling price
Orange	1/2012		100	$1,000
Blue	6/2012		200	3,000
Yellow	4/2013		50	1,250
Blue	2/2014		150	1,800
Yellow	3/2014		175	5,250
Blue	7/2014	250			$3,500
Yellow	11/2014	200			7,200

a. What is Omar’s recognized gain or loss on the stock sales if his objective is to minimize the recognized gain and to maximize the recognized loss?

b. What is Omar’s recognized gain or loss if he does not identify the shares sold?

5. Hubert purchases Fran’s jewelry store for $950,000. The identifiable assets of the business are as follows:

	Basis	FMV
Inventory	$ 90,000	$ 97,000
Accounts receivable	55,000	50,000
Building	100,000	225,000
Land	280,000	300,000

Hubert and Fran agree to assign $110,000 to a 7-year covenant not to compete. How should Hubert allocate the $950,000 purchase price to the assets?

6. Marge purchases the Kentwood Krackers, a AAA level baseball team, for $1.5 million. The appraised values of the identified assets are as follows:

Prepaid season tickets	$150,000
Stadium lease	400,000
Player contracts	500,000
Equipment	100,000

The Krackers have won the pennant for the past two years. Determine Marge’s adjusted basis for the assets of the Kentwood Krackers.

7. Melody’s adjusted basis for 10,000 shares of Cardinal, Inc. common stock is $1,000,000. During the year, she receives a 5% stock dividend that is a nontaxable stock dividend.

a. What is the amount of Melody’s gross income?

b. What is Melody’s total basis for the stock?

c. What is Melody’s basis per share?

8. On September 18, 2014, Jerry received land and a building from Ted as a gift. Ted had purchased the land and building on March 5, 2011, and his adjusted basis and the fair market value at the date of the gift were as follows:

Asset	Adjusted Basis	FMV
Land	$150,000	$200,000
Building	90,000	100,000

Ted paid no gift tax on the transfer to Jerry.

a. Determine Jerry’s adjusted basis and holding period for the land and building.

b. Assume instead that the FMV of the land was $89,000 and the FMV of the building was $60,000. Determine Jerry’s adjusted basis and holding period for the land and building.

9. Emma gives her personal use automobile (cost of $32,000; fair market value of $12,000) to her son, Louis, on July 3, 2014. She has owned the automobile since July 1, 2011.

a. What is Louis’ basis for the car?

b. When does his holding period begin?

10. Faith inherits an undivided interest in a parcel of land from her father on February 15, 2014. Her father purchased the land on August 25, 1987 and his basis for the land was $325,000. The fair market value of the land is $12,500,000 on the date of her father’s death and is $11,000,000 six months later. The executor elects the alternate valuation date. Faith has nine brothers and sisters and each inherited a one-tenth interest.

a. What is Faith’s adjusted basis for her one­tenth undivided interest in the land?

b. What is her holding period for the land?

11. Ed and Cheryl have been married for 27 years. They own land jointly with a basis of $300,000. Ed dies in 2014, when the fair market value of the land is $500,000. Under the joint ownership arrangement, the land passed to Cheryl.

a. If Ed and Cheryl reside in a community property state, what is Cheryl’s basis in the land?

b. If Ed and Cheryl reside in a common law state, what is Cheryl’s basis in the land?