CPA Regulation (REG) : Basis of Assets Received by Gift or Inheritance

Study concepts, example questions & explanations for CPA Regulation (REG)

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Example Questions

Example Question #1 : Basis Of Assets Received By Gift Or Inheritance

Parent gave securities with an adjusted basis of $10,000 and fair market value of $9,000 to a child. Later the child sold the securities for $7,000. What is the child’s basis for the securities sold?

Possible Answers:

$0

$9,000

$7,000

$10,000

Correct answer:

$9,000

Explanation:

The general rule with gifts is that the donor’s basis rolls over to the recipient. The exception, however, is when FMV at the time of transfer is lower than the donor’s basis and the recipient sells the assets at a price lower than the FMV at the time of transfer. In this case, the recipient’s basis in the sold stock was the FMV at the time of the gift.

Example Question #2 : Basis Of Assets Received By Gift Or Inheritance

Ann purchased 100 shares of stock for $50 per share. Ten years later, Ann died on February 1 and bequeathed the 100 shares of stock to a relative, Blake, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1. Blake gave 100 shares of the stock to another of Ann’s relatives, Greg, on June 1 that same year, when the market value of the stock was $150 per share. What was Greg’s basis in the 100 shares of stock when acquired on June 1?

Possible Answers:

$5,100

$15,000

$10,000

$5,000

Correct answer:

$5,000

Explanation:

In an inheritance, unless an alternative valuation date is selected the beneficiary’s basis in the received property is the FMV at the time of the donor’s death (here, 100 stocks at $100 per share, or $10,000). At the split, the basis remained the same, but the value and number of stocks changed (now 200 stocks at $50, still $10,000 total). In a gift, typically the recipient’s basis is that of the donor’s, which means that Greg received 100 stocks with a basis of $50 per share, or a total basis of $5,000.

Example Question #3 : Basis Of Assets Received By Gift Or Inheritance

On February 1, Year 3, Howard learned that he was bequeathed 500 shares of common stock under his mother’s will. Howard’s mother had paid $2,500 for the stock 10 years ago. Fair market value of the stock on February 1, Year 3, the date of his mother’s death, was $4,000 and had increased to $5,000 six months later. The executor of the estate elected the alternative valuation date for estate tax purposes. Howard sold the stock for $4,500 on June 1, Year 3, the date that the executor distributed the stock to him. How much income should Howard include in his Year 3 individual income tax return for the inheritance of the 500 shares of stock that he received from his mother’s estate?

Possible Answers:

$5,500

$2,500

$0

$4,000

Correct answer:

$0

Explanation:

Gifts, whether from a living or deceased donor, are not taxable to the beneficiary, on the donor or the donor’s estate. In this case, Howard would only report a gain or loss for income tax purposes if he had sold the stock at a different value than the stock’s value on the alternative valuation date.

Example Question #5 : Basis Of Assets Received By Gift Or Inheritance

Mr and Mrs Johns are US citizens. They were married for the entire calendar year. During the year, Mr gave a $60,000 cash gift to his sister. The Johns’ did not make any other gifts that year. They signed a timely election to treat the $60,000 gift as one made by each spouse. Disregarding the applicable credit and estate tax consequences, what amount of the current year gift is taxable to the Johns for gift tax purposes?

Possible Answers:

$45,000

$0

$60,000

$30,000

Correct answer:

$30,000

Explanation:

A donor may exclude the first $15,000 of gifts made to each donee. This gift is allowed to be split among the two spouses $15,000 each for a total of $30,000.

Example Question #6 : Basis Of Assets Received By Gift Or Inheritance

This year, Brad gave $5,000 cash to his nephew, canceled $3,000 of the same nephew’s debt, donated $1,500 to a political party, and gave $1,200 of municipal bonds to a parent. What is the amount of Brad’s gifts before considering the gift tax annual exclusion?

Possible Answers:

$5,000

$8,000

$10,700

$9,200

Correct answer:

$9,200

Explanation:

In general, taxable gifts include every transfer of property for less than full consideration. This would include the gift of $5,000, the cancellation of debt, and the $1,200 of municipal bonds. However, donations such as to the political party are excluded.

Example Question #7 : Basis Of Assets Received By Gift Or Inheritance

Of the following listed payments, which would necessitate a gift tax return filed by the donor?

Possible Answers:

$50,000 transfer sent directly to a doctor for a friend’s surgery

$75,000 transfer directly to a university for a daughter’s room and board

$20,000 transfer directly to a university for tuition payment

$85,000 transfer directly to a medical facility for a grandparent’s surgery expenses

Correct answer:

$75,000 transfer directly to a university for a daughter’s room and board

Explanation:

There are four exclusions to not file a gift tax return: payments directly to a university for tuition, payments directly to a facility for medical care, charitable gifts, and marital transfers.

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