TAX ch 5

Example 5-2

Alice owns land for investment with a basis of $20,000. The land is taken by the city by right of eminent domain, and she receives a payment of $30,000 for the land. How is this recorded?

This condemnation is treated as a sale or disposition for income tax purposes, and Alice's realized gain is $10,000

30-20

[realized gain]

Example 5-3

Two years ago, Bob purchased stock of a newly formed corporation for $10,000. During the current year, he receives a $12,000 distribution, constituting a return of capital, from corporation. This distribution is treated as a sale.

Bob has a realized gain of $2,000 (12-10) Bob's basis for the stock is now zero because his basis of $10,000 has been recovered.

[realized gain]

Example 5-4

Tony sells land to Rita for $15,000 in cash and a machine having $3,000 FMV. Realized?

Tony's amount realized is $18,000 (15-3)

[amount realized]

Examples 5-5

Anna exchanges land subject to a liability of $20,000 for $35,000 of stock owned by Mario. Mario takes the property subject to liability. Amount realized?

What is Anna's realized gain if her AB is $42,000.

The amount realized is $55,000 (35+20)

Her realized gain is $13,000 (55 - 42)

[realized gain]

Example 5-8

Jeremy paid $100,000 for equipment two years ago and has claimed depreciation deductions of $37,000 for the two years. The cost of repairs during the same period was $6,000. At the end of the two year period, the property's adjusted basis is?

$63,000 (100 - 37)

[adjusted basis]

Example 5-9

Ralph purchases a personal residence for $60,000. Deductions for depreciation are not allowed because the asset is not used in a trade or business or held for the production of income. If Ralph sells the house for $55,000, realized gain/loss?

Realized loss of $5,000 is a capital loss but not deductible. He recovers only $55,000 of his original $60,000 basis

Problem 5-33

Tracy owns a non depreciable capital asset held for investment. The asset was purchased for $250,000 six years earlier and is now subject to a $75,000 liability. During the current year, Tracy transfers the asset to Tim in exchange for $94,000 cash and a new automobile with a $50,000 FMV to be used by Tracy for personal use; Tim assumes the $75,000 liability. Determine the amount of Tracy's LTCG or LTCL

(94,000 + 50,000 + 75,000) - 250,000 = (31,000)

[amount realized]

Example 5-13

The Indiana corporation started construction of a $3 million motel on 7/1/17, and borrowed an amount equal to the motel's construction costs. The motel is completed and ready for service on 10/1/18. Interest incurred for the construction loan for the period from 7/1/17, through 10/1/18 is included in the motel's cost.

The capitalized interest cost is depreciated over the motel's thirty-nine year recovery period

[construction period interest and taxes must be capitalized for certain "long useful life"]

Example 5-10

Penny purchases equipment for $15,000, pays delivery costs of $300, and installation costs of $250. What is the cost of the acquired property?

15,550 (15,000 + 300 + 250)

[adjusted basis]

Example 5-11

Peggy purchases an asset by paying cash of $40,000 and signs a note payable to the seller for $60,000. She also assumes a $2,000 lien against the property. What is the basis for the asset and the amount realized?

basis: 102

amount realized: 40 + 60 + 2 = 102

[adjusted basis]

Example 5-16

Kevin makes a gift of property held for investment with a basis of $350 to Janet when it has a $425 FMV. If Janet sells the property for $450, what is her realized gain/loss?

If she sells for $330

450- 350 = 100 gain

330 - 350 = (20) loss

[property received as a gift]

Example 5-17

Chuck makes a gift of property held for investment with a basis of $600 to Maggie when the property has a $500 FMV. What is the basis for the property if sold at a gain and loss?

If sold at a gain (more than $600) the basis is 600

If sold at a loss (less than 600) the basis is 500

[property received by gift]

Example 5-18

During the year, Cindy makes one gift of property with a $25,000 basis to Jessie when the property has a $65,000 FMV. Cindy pays a gift tax of $18,500. What is the amount of the gift? What percent of the gift tax is added to Jessie's basis? What is her basis for determining gain and loss?

The amount of the gift is the FMV of the property less the amount of the annual exclusion (15,000) so the amount of the gift is $50,000

(65,000 - 25,000) / 50,000 = .80 Thus 80% of the gift tax is added to Jessie's basis

Jessie's basis for determining both gain and loss is (25,000 + (.08 x 18,500) = $39,800

Problem 5-34

Doug receives a duplex as a gift from his uncle. The uncle's basis for the duplex and land is $90,000. At the time of the gift, the land and building have FMV of $40,000 and $80,000, respectively. No gift tax is paid by Doug's uncle at the time of the gift.

A. To determine gain, what is Doug's basis for the land?

B. To determine gain, what is Doug's basis for the building?

C. Will the basis of the land and building be the same as in parts A and B for purposes of determining a loss?

(40/120) x 90,000 = 30,000

(80/120) x 90,000 = 60,000

Yes because the fair market value on the date of the gift is greater than the donor's basis

[basis of property received as a gift]

Problem 5-35

During the current year, Stan sells a tract of land for $800,000. The property was received as a gift from Maxine on March 10, 1995, when the property had a FMV of $310,000. The taxable gift was $300,000 because the annual exclusion was $10,000 in 1995. Maxine purchased the property April 12, 1980 for $110,000. At the time of the gift, Maxine paid a gift tax of $12,000. In order to sell the property, Stan paid a sales commission of $16,000.

A. What is Stan's realized gain on the sale?

B. How would your answer to part a change, if at all, if the FMV of the gift property was $85,000 as of the date of the gift?

(12 x (

[sale of property received as a gift]

Problem 5-36

Bud received 200 shares of Georgia Corporation stock from his uncle as a gift on July 20, 2017 when the stock had a $45,000 FMV. His uncle paid $30,000 for the stock on April 12, 2002. The taxable gift was $45,000 because his uncle made another gift to Bud for $20,000 in January and used the annual exclusion. The uncle paid a gift tax of $1,500. Without considering the transactions below, Bud's AGI is $45,000 in 2018. No other transactions involving capital assets occur during the year. Analyze each transaction below, independent of the others, and determine Bud's AGI in each case.

A. He sells the stock on October 12, 2018 for $48,000

B. He sells the stock on October 12, 2018 for $28,000

C. He sells the stock on December 16, 2018 for $42,000

[sale of asset received as a gift]

Example 5-20

Patrick inherited property having an $8 million FMV on the date of his sister's death in 2018. The decendent's basis in the property is $3.6 million. The executor does not elect the AVD. What is the basis for the property?

$8 billion

[basis of inherited property]

Example 5-24

Michelle inherited property with a $6.2 million FMV at the date of the decedent's death in 2018. The FMV of the property on the AVD (six months after the date of the decedent's death) is $5.74 million. The executor of the estate elects to use $5.74 million to value the property for estate tax purposes. What is Michelle's basis for the property

$5.74 million

[basis of inherited property]

Example 5-25

Matt and Jane, a married couple, live in Texas, a community property state, and jointly own land as community property that cost $110,000. The land has an $800,000 FMV when Janes dies, leaving all the property to Matt. What is his basis?

$800,000

[basis of inherited property]

Example 5-26

Barry and Maria, a married couple, live in Iowa, a common law state, and jointly own land that cost $200,000. The property has a FMV of $700,000 when Barry dies leaving all his property to Maria. What is her basis for the land?

$450,000 (100,000 x (.50 x 700,000))

[basis of inherited property]

Example 5-27

Olga owns a boat that cost $2,000 and is used for personal enjoyment. At a time when the boat has a $1,400 FMV , Olga transfers the boat to her business of operating a marina. What is the basis for depreciation?

$1,400 because the FMV is less than Olga's adjusted basis at the time of conversion to business use. The $600 decline that occurred while Olga used the boat for personal use may not be deducted as depreciation.

[property converted from personal use to business use]

Problem 5-37

Irene owns a truck costing $15,000 and used for personal activities. The truck has a $9,600 FMV when it is transferred to her business, which is operated as a sole proprietorship.

A. What is the basis of the truck for determining depreciation?

B. What is Irene's realized gain or loss if the truck is sold for $5,000 after claiming depreciation of $4,000?

A. $9,600

B. 5000 - (9600 - 4000)

[basis of property converted from personal use]

Problem 5-38

Daniel receives 400 shares of AM corporation stock from his aunt on May 20, 2018 as a gift when the stock has a $60,000 FMV. His aunt purchased the stock in 2008 for $42,000. The taxable gift is $60,000 because she made earlier gifts to Daniel during 2018 and used the annual exclusion. She paid a gift tax of $9,300 on the gift of Am stock to Daniel.

Daniel also inherited 300 shares of longhorn corp preferred stock when his uncle died on November 12, 2017, when the stock's FMV was $30,000. His uncle purchased the stock in 1996 for $27,600. Determine the gain or loss on the sale of AM and Longhorn stock on December 15, 2018 under the alternative situations

A. AM stock was sold for $62,600 and longhorn was sold for $30,750

B. AM stock was sold for $58,200 and longhorn was sold for $28,650.

C. Assume the same as part A except the aunt purchased AM stock for $71,000 and his uncle purchased Longhorn stock for $31,200

Problem 5-39

Tally owns a house that she has been living in for eight years. She purchased the house for $245,000 and the FMV today is $200,000. She is moving into her friend's house and she decided to convert her residence to rental property. Assume 20% of the property's value is allocated to land.

A. What is the basis of the house for depreciation?

B. Is she claims depreciation os $15,000 and sells the property six years later for $260,000 (20% allocated to land) determine the gain on the sale of the building and gain on the sale of the land.

C. How much of gain is due to depreciation?

D. If the FMV is $290,000 when she converts the house to rental property instead of $200,000 what is the basis of the house for depreciation?

[personal use property converted to rental property]

Example 5-31

Kelly purchases a duplex for $400,000 to use as a rental property. The land has a $75,000 FMV, and the building has a $325,000 FMV. What is Kelly's basis for the land and building?

$75,000 for the land

$325,000 for the building

[basket purchase]

Example 5-33

Wayne owns 1,000 shares of Bell Corporation common stock with a $44,000 basis. Wayne receives a nontaxable 10% common stock dividend and now owns 1,100 shares of common stock. What is the basis for the common stock?

The basis for each share of common stock is now $40 ($44,000 / 1,100)

[nontaxable stock dividends received]

Example 5-34

Stacey owns 500 shares of Montana corporation common stock with a $60,000 basis. She receives a nontaxable stock dividend payable in 50 shares of preferred stock. At time of distribution, the common stock has a $40,000 FMV ($80 x 500 shares) and the preferred stock has a $10,000 FMV (200 x 50 shares). What is the basis of the preferred stock?

She owns 50 shares of preferred stock with a basis of $12,000 ((10,000/50,000) x $60,000) Thus $12,000 of the basis of the common stock is allocated to the preferred stock and the basis of the common stock is reduced from $60,000 to $48,000

Example 5-35

Tina owns 100 shares of Bear Corporation common stock with a $27,000 basis and a $50,000 FMV. She receives 100 nontaxable stock rights with a total FMV of $4,000. What is the basis of the stock?

Because the FMV of the stock rights is less than 15% of the FMV of the stock (0.15 x 50,000 = 7,500), the basis of the stock rights is zero unless Tina elects to make an allocation

[nontaxable stock rights received]

Example 5-37

Helen owns 100 shares of NMO common stock with a $14,000 basis and a $30,000 FMV. She receives 100 stock rights with a total FMV of $5,000. What is the basis of the stock?

Because the FMV of the stock rights is at least 15% of the FMV of the stock, the $14,000 basis must be allocated between the stock rights and the stock. The basis of the stock rights is $2,000 [(5,000 / 35,000) x 14,000] and the basis of the stock is $12,000 [(30,000/35,000) x 14,000]

[nontaxable stock rights received]

Problem 5-40

Kathleen owns 500 shares of Buda Corporation common stock which was purchased on March 20, 2000 for $48,000. On October 10 of the current year, she receives a distribution of 500 stock rights. Each stock has a $20 FMV and the FMV of the Buda common stock is $1000 per share. With each stock right, she may acquire one share of Buda common stock for $95.

A. How much gross income must Kathleen recognize?

B. What is the basis of each stock right received?

C. If she sells the 500 stock rights for $10,600, what is her gain?

D. If she exercises the 500 stock rights on November 10, what is the basis of the 500 shares she receives and when does the holding period for those share start?

[stock rights]

Problem 5-41

Martha Lou owns 100 shares of Blain Corporation common stock. She purchased the stock on July 25, 1998 for $4,000. On May 2 of the current year, she receives a nontaxable distribution of 100 stock rights. each stock right has a $10 FMV, and the FMV of the Blain common stock is $70 per share. With each stock right, Martha Lou may acquire one share of Blain common for $68 per share. Assuming that she elects to allocate basis to the stock rights, answer the following:

A. What is the basis allocated to the stock rights?

B. If she sells the stock rights on June 10 for $1,080, determine the amount and character of the recognized gain.

C. If she exercises the stock rights on May 14, what is the basis of the 100 shares purchased and when does the holding period start?

D. If she does not elect to allocate basis to the stock rights, determine the amount and character of the gain if she sells the stock rights on June 10 for $1,080?

[stock rights]

Example 5-38

Maxine owns a building used in her business. Other business assets include equipment, inventory, and accounts receivables. What is classified as a capital asset?

none of it

[definition of a capital asset]

Example 5-39

Eric owns an automobile held for personal use and also owns a copyright for a book he has written. What is classified as a capital asset?

Because the copyright is held by the taxpayer whose personal efforts created the property, it is not a capital asset. The automobile held for personal use is a capital asset.

[definition of a capital asset]

Problem 5-43

Mr. and Mrs. Dunbar have taxable income of $260,000 without considering the following sales. Consider the following independent cases where capital gains are recognized and determine the marginal tax rate for the capital gain in each case. Ignore the effect of increasing AGI on deductions.

CASE A: $10,000 gain from sale of Storm Lake common stock held for seven months

CASE B: $10,000 gain from sale of antique clock held for six years

CASE C: $10,000 gain from sales of Ames preferred stock held for three years

[marginal tax rates]

Example 5-40

Allyson, a dealer in securities, purchases Cook Corporation stock on April 8, and identifies the stock as being held for investment on that date. Four months later, Allyson sells the stock. Gain or Loss?

Any gain or loss recognized due to the sale is capital gain

[dealers in securities]

Example 5-42

Jim Spikes, a dealer in securities and calendar-year taxpayer, purchases a security for inventory on October 10, 2018, for $10,000 and sells the security for $18,000 on July 1, 2019. The security's FMV on December 31, 2018 is $15,000.

[dealers in security]

Example 5-45

Two years ago, Alice loaned $4,000 to a friend. During the current year, the friend declares bankruptcy and the debt is entirely worthless. Assuming that Alice no other gains and losses from the sale or exchange of capital assets during the year, what does she deduct?

She deducts $3,000 in determining adjusted gross income and has a STCL carry forward of $1,000

[nonbusiness bad debts]

Example 5-46

Hal has two transactions involving the sale of capital assets during the year. As a result of those transactions, he has a STCG of $4,000 and a STCL of $3,000. What is Hal's NSTCG is $1,000 and his AGI increases by $1,000. His gross income increases by $4,000 and he is entitled to a $3,000 deduction for AGI.

Example 5-47

Clay has two transactions involving the sale of capital assets during the year. As a result of the transactions, he has a LTCG of $5,000 and LTCL of $3,000. What is his NLTCG and net capital gain/loss?

Clay has a NLTCG and a net capital gain of $2,000. His AGI increases by $2,000

[net long term capital gain]

Example 5-48

Linda has four transactions involving the sale of capital assets during the year. As a result of the transactions, she has a STCG of $5,000, a STCL of $7,000 a LTCG of $10,000 and a LTCL of $2,000. What is her net gain/loss?

After the initial netting of short-term and long-term gains and losses Lina has an NSTCL of $2,000 (7-5) and a NLTCG of $8,000 (10-2). Because the NLTCG exceeds the NSTCL by $6,000 (8-2) her NCG is $6,000

[net long term capital gain]

Example 5-49

Carolina is single with taxable income of $150,000 without considering the sale of Micron common stock during 2018 for $25,000. The stock was purchased three years ago for $14,000 and is her only sale of a capital asset during the year. Her NCG which is ANCG is $11,000 taxed at 15%. What is her total tax for 2018?

To compute her total tax for 2018, ordinary rates are applied to the $150,000 and then taxed on ANCG (15% x 11,000) is added

[lower rates for adjusted net capital gain ANCG]

Example 5-51

The Dances file a joint return with taxable income fo $800,000 which includes ANCG of $100,000 and no other investment income. How is their tax determined?

Their tax is determined by adding the tax on $70,000 where marginal tax rate is 37% to $20,000 (20% x 100,000). They are also subject to the 3.8% medicare tax of $3,800 (3.8% x 100,000) on investment

[lower rates for adjusted net capital gain ANCG]

Example 5-57

Bob has gross income of $60,000 before considering capital gains and losses. If Bob has an NLTCG of $10,000 and a NSTCL of $15,000. What is his NLTCG/L?

He has $5,000 of NSTCL in excess of NLTCG and may deduct $3,000 of the losses from gross income. Assuming no other deductions for AGI, Bob's AGI is $57,000 (60-3)

[net short term capital loss]

Example 5-58

Last year, Milt had a NSTCL of $8,000 and a NLTCG of $2,600.

The netting of short/long gain/loss resulted in $5,400 excess of NSTCL of NLTCG and $3,000 of the amount was offset against ordinary income. Milt's NSTCL carryforward is $2,400. During the current year he sells a capital asset and generates a STCG of $800. His NSTCL is $1,600 (2400-800) and the loss is less than $3,000 and offset against $1,600 of ordinary income

[net short term capital loss]

Example 5-60

In the current year, Beth has a NSTCL of $2,800 and a NLTCL of $2,000. What is the gain/loss/co?

The entire NSTCL is offset initially against $2,800 of ordinary income. Because capital losses may offset only $3,000 of ordinary income, $200 is used to offset $200 of ordinary income. The NLTCL carryover to the next year is $1,800

[net long-term capital loss]

Example 5-61

Leroy, whose tax rate is 32% has NSTCL of $20,000 a $25,000 LTCG from the sale of a rare stamp held 16 months and a $18,000 LTCG from the sale of stock held for three years.

The $20,000 NSTCL is offset against $20,000 of the collectibles gain in the 28% group. Leroy's NCG is $23,000 and his ANCG is $18,000. Leroy's tax liability increases by $4,100 (5,000 x 28%) + (18,000 x 15%)

[capital losses applied to capital gains by group]

Problem 5-44

see textbook

Problem 5-45

Donna files as a head of household in 2018 and has taxable income of $110,000, including the sale of a stock held as an investment for two years at a gain of $20,000. Only one user was sold during the year and Donna does not have any capital loss carryovers.

A. What is the amount of Donna's tax liability?

B. What is the amount of Donna's tax liability if the stock is held for 11 months?

[computing the tax]

Problem 5-48

see textbook

[capital gains and losses]

problem 5-49

see textbook

[capital losses]

Problem 5-53

During 2018, Gary receives a $90,000 salary and has no deductions for AGI. In 2017, Gary had a $5,000 STCL and no other capital losses or capital gains. Consider the following sales and determined Gary's AGI for 2018

- an Automobile purchased in 2013 for $20,500 and held for personal use is sold for $7,000

- on April 10, 2018, stock held for investment is sold for $21,000. the stock was acquired on November 20, 2017, for $9,300

[capital gains and losses]

Example 5-70

In 2013 the Rocket Corporation issued $50,000 of five year, interest bearing bonds that were purchased by Elaine as an investment for $49,800. Elaine receives $50,000 at maturity in 2018.

Retirement of the debt instrument is an exchange, and the $200 gain is an LTCG.

[retirement of debt instruments]

Problem 5-51

On December 31, 2017 Phil purchased $20,000 of newly issued bonds of Texas Corporation for $16,568. The bonds are dated December 31, 2017. The bonds are 9%, 10 year bonds paying interest semiannually on June 30 and December 31. The bonds are priced to yield 12% compound semiannually.

A. What is the amount of the original issue discount?

B. For the first semiannual period, what is the amount of the original issue discount Phil must recognize as ordinary income?

C. What is the total amount of interest income Phil must recognize in 2018?

D. What is Phil's basis for the bonds as of December 31, 2018?

[original issue discount]

Problem 5-57

On January 1, 2017, Sean purchased a 8%, $100,000 corporate bond for $92,277. The bond was issued on January 1, 2017 and matures on January 1, 2022. Interest is paid semiannually, and the effective yield to maturity is 10% compound semiannually. On July 1, 2018, Sean sells the bond for $95,949. A schedule of inter amortization for the bond is shown in table 5-3.

A. How much interest income must Sean recognize in 2017?

B. How much interest income must Sean recognize in 2018?

C. How much gain must Sean recognize in 2018 on the sale of the bond?

[original issue discount]

example 5-75

On January 1, Stephanie purchased $100,000 of 8%, 20 year bonds for $82,000. The bonds were issued at par by the solar corporation two years ago on January 1. The bonds are market discount bonds. Stephanie sells the bonds to Smith three years later for $86,400 on January 1. How much of the gain is ordinary income?

$3000 (3/18 x 18,000) of the $4,400 (86,400-82000) gain is ordinary income and the remaining is LTCG. If Stephanie sold the bond for more than $82,000 but less than $85,000 all of the gain is ordinary income. The entire $18,000 gain is ordinary income if the bond is held to maturity.

[market discount bonds purchased after April 30, 1998]

Example 5-77

On March 2, 2018 Holly pays $270 for an option to acquire 100 shares of Arkansas Corporation stock for $30 per share at any time before December 10, 2018. As a result of an increase in the market value of the Arkansas stock, the market price of an option increase and Holly sells the option for $600 on August 2, 2018. What must she recognize?

Because the Arkansas stock is a capital asset in the hands of Holly, the option is a capital asset and she must recognize an STCG of $330 (600-270)

[options]

Example 5-78

On October 12, 2017, Mary paid $400 for an option to acquire 100 shares of Portland Corporation stock for $50 per share at any time before February 19, 2018. The price never exceeds $50 before February 19, 2018, and Mary does not exercise the option.

Because the option expires, Mary recognizes an STCL of $400 in 2018

[options]

Example 5-79

Sam owns 100 shares of Madison Corporation common stock, which he purchased on May 1, 2011 for $4000. On November 8, 2018, Sam writes a call that gives Joan, an investor, the option to purchase Sam's 100 share of Madison stock at $60 per share any time before April 19, 2019. The current market price of Madison stock is $56 per share, and Sam receives $520 for writing the call.

If the call is exercised, Sam has an LTCG of $5,250 [(6,000 + 520) - 4,000] in the year the call is exercised. If the call is not exercised and expires on April 19, 2019, Sam must recognize an STCG of $520 in 2019.

[options]

Example 5-80

Assume the same facts as in example 5-79 and consider the tax treatment for Joan, the holder of the call. If Joan exercises the call, the basis of the stock $6,250 (6,000 + 520). If she does not exercise the call...

the STCL of $520 is recognized. If Joan sells the call, the amount received is compared with her basis in the call ($520) to compute Joan's gain or loss.

[options]

Problem 5-54

On February 10, 2018 Gail produces 20 calls on Red Corporation for $250 per call. Each call represents an option to buy 100 shares of Red stock at $42 per share any time before November 25, 2018. Compute the gain or loss recognized and determine if the gain or loss is long-term or short-term for Gail in the following situations:

A. The 20 calls are sold on May 15, 2018 for $310 per call

B. The calls are not exercised but allowed to expire

C. The calls are exercised on July 15, 2018 and the 2,000 shares of Red Corporation stock are sold on July 20, 2019, for $50 per share

[call options]

Problem 5-55

Dan owns 500 shares of Rocket Corporation common stock. The stock was acquired two years ago for $30 per share. On October 2, 2018, Dan writes five calls on the stock, which represent options to buy the 500 shares of Rocket at $75 per share. For each call, Dan receives $210. The calls expire on June 22, 2019. Consider the following transactions and describe the tax treatment for Dan:

A. the five calls are exercised on December 4, 2018

B. the calls are not exercised and allowed to expire

[call writing]

Example 5-88

Cindy receives a capital asset as a gift from Marc on July 4, 2018, when the asset has a $4,000 FMV. Marc acquired the property on April 12, 2018 for $3,400. If Cindy sells the asset after April 12, 2019

any gain or loss is LTCG or LTCL. Cindy's basis is the donor's cost because the FMV of the property is higher than the donor's basis on the date of the gift. Because Cindy takes Marc's basis, Marc's holding period is included.

[ property received as a gift]

Example 5-89

Roy receives a capital asset as a gift from Diane on September 12, 2018, when the asset has a $6,000 FMV. Diane acquired the asset on July 1, 2017, for $6,500. If the asset is sold at a gain

(from more than 6,500) Roy's holding period starts on July 1, 2017, the date when Diane acquired the property because the donor's basis of $6,500 is used by Roy to compute the gain. If the asset is sold at a loss (less than 6000), Roy's holding period does not start until the day after the date of the gift, September 13, 2018, because Roy's basis is the $6,000 FMV. The FMV is used to compute the loss because it is less than the donor's basis on the date of the gift.

[property received as a gift]

Example 5-90

The executor of Paul's estate sells certain securities for $41,000 on September 2, 2018 which were valued in the estate at their FMV of $40,000 on June 5, 2018, the date of Paul's death.

The estate has a LTCG of $1,000 because the securities are considered to have been held long-term.

[property received from a decedent]

Problem 5-58

Martha has $40,000 AGI without considering the following information. During the year, she incurs an LTCL of $10,000 and has a gain of $14,000 due to the sale of a capital asset held for more than one year.

A. If the $14,000 gain is not property classified as an LTCG (i.e. is improperly treated as an ordinary gain), determine Martha's AGI

B. If the $14,000 gain is properly classified as an LTCG, determine her AGI

C. If Martha has a $2,500 STCL carryover from earlier years, how would the answers to parts a and b be affected?

[capital gains and losses]

Problem 5-59 skip d

Without considering the following capital gains and losses, Charlene, who is single, has taxable income of $660,000 and a marginal tax rate of 37%. During the year, she sold stock held for nine months at a gain of $10,000; stock held for three years at a gain of $15,000; and a collectible asset held for six years at a gain of $20,000. Ignore the effect of the gains on any threshold amounts.

A. What is her taxable income and the increase in her income tax liability after considering the three gains?

B. In addition to the above three sales, assume that she sells another asset and has an STCL of $14,000. What is her taxable income and the increase in her tax liability after considering the four transactions>

C. In addition to the above three sales in part a, assume that she sells another collectible asset held seven years as an investment and has a $27,000 capital loss. What is her taxable income and the increase in tax liability after considering the four transactions?

[capital gains and losses]