Marlena receives stock as a gift from her uncle. The uncle's adjusted basis in the stock was 35,000. No gift tax was paid. What is Marlena's basis in the gifted stock for purposes of determining gain?
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CPA Regulation Reg Quiz
Practice Determine Initial Basis Of Property in CPA Regulation Reg with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.
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Marlena receives stock as a gift from her uncle. The uncle's adjusted basis in the stock was 20,000,andthefairmarketvalueonthedateofthegiftwas35,000. No gift tax was paid. What is Marlena's basis in the gifted stock for purposes of determining gain?
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Marlena receives stock as a gift from her uncle. The uncle's adjusted basis in the stock was 20,000,andthefairmarketvalueonthedateofthegiftwas35,000. No gift tax was paid. What is Marlena's basis in the gifted stock for purposes of determining gain?
Explanation: Under Section 1015, the basis of property received as a gift is generally the donor's adjusted basis (carryover basis), for purposes of determining gain. Since the FMV (35,000)exceedsthedonor′sbasis(20,000), there is no 'loss basis' issue, and Marlena's basis for gain purposes is the donor's basis of 20,000.IfMarlenalatersellsthestockformorethan20,000, the gain is measured from $20,000. Answer A (FMV) would be the basis under Section 1014 for inherited property, not gifted property. Answer C is an average, which has no basis in Section 1015. Answer D is incorrect because the donee receives a carryover basis, not zero.
Derek receives stock as a gift. The donor's adjusted basis was 50,000,andthefairmarketvalueonthedateofthegiftwas30,000. No gift tax was paid. Derek later sells the stock for $25,000. What is Derek's recognized loss?
Explanation: Under Section 1015, when the FMV of gifted property is less than the donor's basis at the time of the gift, the donee uses a dual basis rule: the basis for gain is the donor's basis (50,000),andthebasisforlossistheFMVatthedateofthegift(30,000). Derek sold for 25,000,whichisbelowtheFMVatthegiftdate(30,000), so the loss basis of 30,000controls.Loss=30,000 - 25,000=5,000. Answer D is correct. Answer A (25,000loss)incorrectlyusesthedonor′sbasisof50,000 to compute the loss; the donor's basis is only used when the sale price exceeds the donor's basis (gain scenario). Answer B is incorrect; the no-gain/no-loss zone applies only when the sale price falls between the two bases (between 30,000FMVand50,000 donor's basis). Since Derek's sale price of 25,000isbelowtheFMVbasisof30,000, a loss is recognized using the FMV basis. Answer C is incorrect because losses are recognized under the dual basis rule when the sale price falls below the FMV at the gift date.
A corporation receives property in a Section 351 exchange. Under Section 362, what is the corporation's initial basis in the received property?
Explanation: Under Section 362(a), when property is received by a corporation in a Section 351 exchange, the corporation's basis in the property equals the transferor's adjusted basis in the property, increased by any gain recognized by the transferor. If no boot was paid and no gain was recognized, the corporation takes a carryover basis equal to the transferor's basis. This preserves the built-in gain inside the corporation. Answer B (FMV) would apply only if gain were fully recognized. Answer C (zero basis) is incorrect because the corporation takes a carryover basis from the transferor. Answer D (lower of basis or FMV) is not the Section 362 rule.
A shareholder transfers property to a corporation in a qualifying Section 351 exchange and receives stock in return. Under Section 358, what is the shareholder's initial basis in the stock received?
Explanation: Under Section 358(a), a shareholder's basis in stock received in a Section 351 exchange equals the adjusted basis of the property transferred to the corporation, decreased by money received and any loss recognized, and increased by any gain recognized and any amount included in income (such as boot characterized as ordinary income). If no boot is received and no gain is recognized, the stock basis equals the adjusted basis of the transferred property. Answer A (FMV of stock) would be the basis only if gain were fully recognized. Answer C (FMV of transferred property) is incorrect; transferred property basis, not FMV, is the starting point. Answer D (zero) is incorrect.
Under Section 1014, which of the following types of property does NOT receive a stepped-up basis at death?
Explanation: Section 1014 applies to property includible in the decedent's gross estate for federal estate tax purposes. Retirement account assets (traditional IRAs, 401(k)s) receive income in respect of a decedent (IRD) treatment under Section 691 - the beneficiary receives the same income tax character as if the decedent had received the income, and no step-up in basis applies to IRD assets. When distributions are made from retirement accounts, they are taxable as ordinary income to the beneficiary. Answer A (appreciated stock in taxable accounts) is includible in the estate and receives a step-up. Answer C (real estate) similarly receives a step-up. Answer D (U.S. savings bonds) may be IRD, but the question targets retirement accounts as the clearest non-step-up category.
A taxpayer purchases land for 200,000andimmediatelypays30,000 to clear the land for construction. The taxpayer then begins construction of a building at a cost of $500,000. What is the basis of the land and the basis of the building separately?
Explanation: The cost of clearing the land is a capital cost that must be allocated to the land (not the building) because it improves the land itself and is a prerequisite to using the land, not part of the construction costs of the building. Land basis = 200,000+30,000 = 230,000.Buildingbasis=500,000. Answer C is correct. Answer A incorrectly allocates the 30,000clearingcosttothebuildinginsteadoftheland.AnswerBincorrectlycapitalizesthe30,000 clearing cost into both the land and the building, double-counting it. Answer D ignores the clearing cost entirely, understating the land basis.
A taxpayer receives stock as compensation for services rendered. The stock has a FMV of $25,000 on the date it is received, and the taxpayer includes this amount in gross income. What is the taxpayer's basis in the stock?
Explanation: When a taxpayer receives stock or other property as compensation for services, the FMV of the property is included in ordinary income. The taxpayer's basis in the property equals the FMV included in income - effectively the 'cost' of the property from a tax perspective. This ensures that when the stock is later sold, only appreciation accruing after acquisition is taxed. Answer B ($0 basis) would result in double taxation since the full FMV was already included in income. Answer C (50% reduction) has no basis in tax law. Answer D incorrectly reduces basis by employment taxes; employment taxes are a separate liability not affecting the property's income basis.
A taxpayer converts personal-use property (a boat) to business use. The adjusted basis was 40,000andtheFMVatthedateofconversionwas28,000. What is the taxpayer's basis for purposes of depreciation and for purposes of determining loss on a subsequent sale?
Explanation: When personal-use property is converted to business use and the FMV at the date of conversion is less than the adjusted basis, the taxpayer uses the lower of cost or FMV as the basis for both depreciation and for determining loss. This rule prevents taxpayers from generating artificial tax losses by converting property that has already declined in personal use. Both the depreciation basis and the loss basis equal 28,000(theFMVatconversion).AnswerA(40,000 for both) ignores the conversion basis rule. Answer B (depreciation 28,000,loss40,000) incorrectly uses the higher basis for loss. Answer D (depreciation 40,000,loss28,000) incorrectly uses the higher basis for depreciation.
A taxpayer purchases 100 shares of stock for $5,000 and later receives a 100% stock dividend (100 additional shares). What is the taxpayer's basis per share after receiving the stock dividend?
Explanation: When a taxpayer receives a nontaxable stock dividend, no income is recognized and the original basis is reallocated proportionally among all shares held (old and new). Original basis = 5,000for100shares.Afterthe1005,000 / 200 = 25pershare.AnswerA(50 per share) is the pre-dividend basis per share, not the post-dividend allocation. Answer B ($100 per share as FMV) would apply if the dividend were taxable and included in income. Answer C incorrectly allocates all basis to the new shares, ignoring the original shares.
A taxpayer receives a nontaxable stock right to purchase one share of stock for every 10 shares owned. The FMV of the stock right is 8andtheFMVoftheunderlyingstockis80. The taxpayer elects to allocate basis between the stock and the stock rights. What percentage of the original stock basis is allocated to the stock rights?
Explanation: When nontaxable stock rights are received, the taxpayer may elect to allocate a portion of the original stock's basis to the rights. The allocation is based on the relative FMVs: percentage to rights = FMV of rights / (FMV of stock + FMV of rights) = 8/(80 + 8)=8 / $88 = approximately 9.09%. This allocated basis is assigned to each right. Answer B (10%) incorrectly divides rights FMV by stock FMV only, not the combined FMV. Answer C (50%) has no basis in the allocation formula. Answer D is incorrect because stock rights can have allocated basis when the taxpayer makes the election.
A taxpayer purchases a used machine for 60,000andimmediatelyspends15,000 to recondition it before placing it in service. What is the taxpayer's depreciable basis in the machine?
Explanation: Under Section 263, capital expenditures (including costs to bring an asset to a condition ready for use) must be capitalized and added to the basis of the asset. The 15,000reconditioningcostincurredbeforeplacingthemachineinserviceisacapitalcostthatmustbeincludedinthemachine′sdepreciablebasis.Totaldepreciablebasis=60,000 + 15,000=75,000. Answer A is incorrect because reconditioning costs incurred prior to placing an asset in service must be capitalized, not expensed. Answer C incorrectly separates the reconditioning cost as a separate asset. Answer D has no basis in Section 263 capitalization rules.
A taxpayer assumes a 200,000mortgagewhenpurchasingrealpropertyfor50,000 in cash. What is the taxpayer's initial cost basis in the property?
Explanation: Under Section 1012 and the Supreme Court's ruling in Crane v. Commissioner, cost basis includes not only the cash paid but also any liabilities assumed as part of the purchase. When a taxpayer assumes a mortgage, that amount is included in the cost basis of the property. Total basis = 50,000cash+200,000 mortgage assumed = 250,000.Thisisalsoconsistentwiththeprinciplethatthefullpurchaseprice(includingdebt)istheamountrealizedwhenthepropertyislatersold.AnswerAignorestheassumedmortgage.AnswerBignoresthecashpaid.AnswerD(150,000) is the equity, not the cost basis.
A partner contributes cash of 40,000andpropertywithanadjustedbasisof25,000 to a partnership. Under Section 722, what is the partner's initial outside basis in the partnership interest?
Explanation: Under Section 722, a partner's initial outside basis in the partnership interest equals the sum of money contributed plus the adjusted basis (not FMV) of any property contributed. Outside basis = 40,000(cash)+25,000 (property adjusted basis) = 65,000.AnswerB(40,000) counts only the cash. Answer C incorrectly adds both the property's adjusted basis and its FMV. Answer D (FMV of partnership interest) would be the outside basis only if gain were recognized on the contribution, which does not occur in a typical Section 721 nonrecognition transaction.
Which of the following correctly describes the basis of property acquired in a tax-free reorganization under Section 354?
Explanation: In a tax-free reorganization under Section 368 and Section 354, a shareholder who exchanges stock in the target corporation for stock in the acquiring corporation receives a substituted basis: the basis of the new stock equals the basis of the old stock surrendered, decreased by any money received and any loss recognized, and increased by any gain recognized. This preserves the deferred gain (or loss) in the new shares. Answer A (FMV basis) would apply only if gain were fully recognized. Answer B (zero basis) is incorrect. Answer D has no basis in the reorganization provisions.
A taxpayer buys land and a building together for a lump sum of 500,000.Anindependentappraisalvaluesthelandat150,000 and the building at $350,000. What are the individual bases for the land and the building?
Explanation: When multiple assets are acquired for a lump sum, the total cost must be allocated among the individual assets based on their relative fair market values. Total FMV = 150,000+350,000 = 500,000.Landbasis=500,000 x (150,000/500,000) = 150,000.Buildingbasis=500,000 x (350,000/500,000) = $350,000. In this case the total cost equals total FMV, so the allocation equals the appraisal values. Answer A (equal split) ignores relative FMVs. Answer B states the same dollar amounts as D but without the allocation methodology explanation. Answer C incorrectly assigns all basis to land.
Under Section 1033, a taxpayer's property is involuntarily converted and the taxpayer receives insurance proceeds. The taxpayer elects nonrecognition and reinvests in replacement property. Under Section 1033(b), what is the basis of the replacement property?
Explanation: Under Section 1033(b), the basis of replacement property is the cost of the replacement property reduced by the gain not recognized (deferred gain). This preserves the deferred gain inside the replacement property until it is ultimately recognized on a later taxable sale. Formula: replacement basis = cost - deferred gain. Answer A (FMV of replacement) would be the basis only if all gain were recognized. Answer C (adjusted basis of converted property) may equal the replacement basis coincidentally when all proceeds are reinvested, but the statutory formula is cost minus deferred gain. Answer D (insurance proceeds) is not the formula for replacement property basis.
A taxpayer acquires property by winning it as a prize in a contest. The property has a fair market value of $15,000 on the date it is received. What is the taxpayer's initial basis in the prize?
Explanation: When a taxpayer receives property as a prize, the FMV must be included in gross income under Section 74. When property is included in income at its FMV, the taxpayer takes a cost basis equal to the FMV included in income. The basis is 15,000becausethatistheamountonwhichthetaxpayeristaxed,ensuringthesamegainisnottaxedtwicewhenthepropertyislatersold.AnswerA(0) would be correct only if no amount were included in income, which is not the case for prizes. Answer B is a fabricated formula. Answer C incorrectly makes the $15,000 basis conditional on reporting; reporting is required, not optional.
A taxpayer purchases a building for 800,000.Inconnectionwiththepurchase,thetaxpayerpays15,000 in legal fees, 5,000intitleinsurance,and2,000 in recording fees. What is the taxpayer's initial basis in the building?
Explanation: Under Section 1012, the cost of property includes the purchase price plus all costs incurred to acquire the property. The taxpayer's basis = 800,000+15,000 (legal fees) + 5,000(titleinsurance)+2,000 (recording fees) = $822,000. All of these costs are necessary to acquire and establish clear title to the property and are therefore capitalized into the basis. Answer A ignores all acquisition costs beyond the purchase price. Answer B adds only legal fees. Answer D adds only recording fees.
Under Section 1012, what is the general rule for determining the initial cost basis of property acquired by purchase?
Explanation: Under Section 1012, the basis of property is its cost. Cost includes the purchase price plus all additional costs incurred to acquire the property, such as sales taxes, title search fees, legal fees, and commissions paid to acquire the property. These amounts are capitalized into the basis rather than deducted. Answer A is incorrect because cost basis is not FMV unless cost equals FMV. Answer B describes a carryover basis, which applies in certain non-recognition transactions, not to arm's-length purchases. Answer D (lower of cost or FMV) is an accounting concept for inventory, not the tax basis rule for purchased property.
Under Section 1015(d), when a donor pays gift tax on a gift of appreciated property, how does the gift tax affect the donee's basis?
Explanation: Under Section 1015(d)(6), for gifts made after 1976, when gift tax is paid, the donee's basis is increased by the portion of the gift tax that is attributable to the net appreciation in the property. The formula is: basis increase = gift tax paid x (net appreciation / FMV of gift). Net appreciation = FMV - donor's basis. This partial step-up prevents double taxation of the same appreciation at the gift tax level and the income tax level. Answer A is incorrect because gift tax does increase basis. Answer B is incorrect because only the portion attributable to appreciation, not the full gift tax, is added. Answer D incorrectly caps the addition at FMV without the correct formula.