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Tax questions: wide variety of subjects

1. Paul inherits stock from his Aunt Sadie that had a basis of $63,000 to Sadie and a fair market value of $54,000 on February 23, 2006, the date of her date. Paul sells the stock on June 21, 2006 for $58,000. What is the amount and character of the gain or loss on the sale?

2. What incentive provisions or preferential treatments exist for capital gains?

3. Stallings' personal residence, located in a plush suburban area, is condemned to facilitate the construction of a new freeway artery. Stallings receives a condemnation award of $1,000,000. She uses the award to purchase anew residence for 41,150,000. The adjusted basis of the former residence was $1,000,000 at the date of condemnation. Determine Stallings' recognized gain or loss and the basis in the new residence. Discuss in terms of the concepts of taxation how you arrived at your answer.


1. A sole proprietor may deduct investment interest and investment expense without limitations if investments are made in the name of the business.

2. If a sole proprietorship has a net operating loss for current period, the loss can only be used to offset other business income in the current year. Any current loss can be carried back three years and forward four years and used to offset business income in those years.

3. A corporation may reduce trade or business income by any charitable contribution made by the corporation, but the deduction is limited to 10% of the trade or business income.

4. The employee's contribution to a nonqualified pension plan cannot be deferred, and the employer is not allowed a tax deduction for the contribution even though the employee includes the contribution in their income.

5. A Keogh plan can be either a defined benefit or a defined contribution plan and the rules are similar to those of a qualified pension plan.

6. Classification of a nonrecognition transaction as a continuation of an investment requires a replacement asset.

7. A gain on like-kind exchange is recognized to the extent of any boot received, but never more than the realized gain on the exchange.

1. Kyle is 31 years old, single, self-employed, and has no qualified pension plan. His net self-employment income is $35,000 and he contributes the maximum amount to his IRA account during the current year. How much can Kyle deduct for AGI this year?

2. In November 2006, Arthur sells stock he purchased in October 2005 at a gain of $5,000. If Arthur is in the 25% marginal tax bracket and he has no other capital asset sales in 2006, what is his tax on the sale of the stock?

3. Periodic capital recovery deductions for tax purposes include
I. Depletion
II. Amortization
III. Depreciation
IV. Capitalization

4. Which of the following would be allowed a depreciation deduction?
I. Inventory
II. Land acquired as investment
III. Residence used as rental property
IV. Business automobile

5. During 2006, Witt Processing Corporation places $452,000 of Section 179 property for use in its business. What is the amount of Witt Processing's maximum Section 179 deduction for 2006?

6. On June 10, 2006, Chase receives a gift of a car with a fair market value of $9,000. The car had an adjusted basis of $12,000 to the donor. Chase sells the car a year later for $8,000. What is the amount of the realized gain or loss on the sale?

7. Dana purchases an automobile for personal use for $27,000. After using it for three years, Dana converts the automobile to business use when the fair market value is $19,000. What is Dana's basis for depreciation purposes?


Solution Preview

First group

1. Holding period is inherited so gain is long term assuming Aunt Sadie had held it for over a year. Basis is value as of the date of death. Paul has a gain of $4000 and it is presumably long term capital gain.

2. Incentives to hold investments long term include a preferential tax rate, and the right of offset against capital losses carrying forward or back.

3. There is no recognized gain or loss on an involuntary conversion such as condemnation, provided the property is replaced within a reasonable time period. Code Sec 1033 gives the rules for non recognition of gain. There may be a typo in the cost of the new residence. Maybe it should be $1,150,000 but it makes no difference because the replacement property is equivalent or more in value than the property lost. Further, there would be no reportable gain in any event because the basis and the value of the former property were ...

Solution Summary

The 600 word solution gives a sentence or two in response to each question. The subject matter includes taxation as it relates to capital gains, sale of residence, net operating loss, investment interest, like-kind exchange, depreciation and basis in gifts.