INDIVIDUAL FED. TAXATION EXAM 2

Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to the equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for business use. At the time the gift was made, the equipment had a fair market value of $32,000. Ignoring gift tax consequences, what is Russett’s basis in the equipment?

$31,000

($35,000 cost + $1,000 improvements – $5,000 depreciation).

Ms. Willow operated a small manufacturing plant. She took delivery on a new plastic mold stamping machine. Her costs included the following:

Cost of machine	$88,000
Sales tax	4,000
Freight charges to deliver property to her	1,500
Excise taxes	2,000

What is Ms. Willow’s basis in the machine?

$95,500

The basis of property is the cost of the property. Sales and excise taxes paid in connection with the acquisition of property are treated as a cost of the property. Delivery, installation, and freight charges are also included as part of the cost of the property. Basis is computed as follows:

Purchase price	$88,000
Sales tax	4,000
Freight charges	1,500
Excise taxes	2,000
Basis in equipment	$95,500

The basis in property inherited from a decedent may be determined as follows:

The fair market value at the date of death or the fair market value at an alternative valuation date.

Powerful Partnership purchased real property in Year 1. In Year 4, the city where the property is located assessed taxes for sidewalks. How should Powerful Partnership treat the accrued taxes for this local improvement?

Capitalize the taxes by adding them to the property’s adjusted basis.

Taxes assessed for local benefit that tend to increase the value of real property, such as sidewalks, are a betterment and are added to the property’s adjusted basis and are not currently deductible as tax expense.

In January of Year 1, Joan Hill bought one share of Orban Corp. stock for $300. On March 1, Year 4, Orban distributed one share of a new class of preferred stock for each share of common stock held. This distribution was nontaxable. On March 1, Year 4, Joan’s one share of common stock had a fair market value of $450, while the preferred stock had a fair market value of $150. After the distribution of the preferred stock, Joan’s bases for her Orban stocks are

common: $225

preferred: $75

($450 ÷ $600) × $300 = $225

Joan’s tax basis in the preferred stock is

($150 ÷ $600) × $300 = $75

Which of the following types of costs are required to be capitalized under the Uniform Capitalization Rules of Code Sec. 263A?

warehousing

The uniform capitalization method must be used by

1. Manufacturers of tangible personal property with average annual gross receipts of $32 million for the preceding 3 years

2. Retailers of personal property with $2 million in average annual gross receipts for the 3 preceding years

I only

In June of the current year, Susan’s mother gave her 100 shares of a listed stock. The donor’s basis for this stock, which she bought 10 years ago, was $4,000, and market value on the date of the gift was $3,000. Susan sold this stock in July of the current year for $3,500. The donor paid no gift tax. What was Susan’s reportable gain or loss in the current year on the sale of the 100 shares of stock gifted to her?

$0

To compute gain, a donee’s basis is the same as the donor’s basis, adjusted for gift tax. For computing loss, the lower of the donor’s adjusted basis or the FMV of the property is used. If the property is later transferred for more than FMV at the date of the gift but for less than the donor’s basis at the date of the gift, no gain (loss) is recognized. Therefore, Susan reports neither gain nor loss.

	Gain	Loss
Amount realized	$3,500	$3,500
Less: Basis	(4,000)	(3,000)
	No gain	No loss

Greller owns 100 shares of Arden Corp., a publicly traded company, which Greller purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Arden declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 share. Immediately following the split, the FMV of Arden stock was $62 per share. On February 1, Year 3, Greller had his broker specifically sell the 100 shares of Arden stock received in the split when the FMV of the stock was $65 per share. What is the basis of the 100 shares of stock Greller sold?

$5,000

A stock split is not a distribution. The basis in the old stock is “split” and allocated to the new stock. Consequently, the basis in the new stock is $50 per share ($10,000 ÷ 200 shares). Therefore, the total basis in sold shares is $5,000 (100 shares × $50).

On December 1, 2023, Michael, a self-employed cash-basis taxpayer, borrowed $100,000 to use in his business. The loan was to be repaid on November 30, 2024. Michael paid the entire interest of $12,000 on December 1, 2023. What amount of interest was deductible on Michael’s 2024 income tax return?

$11,000

Deductions are allowed under the cash method of accounting in the taxable year when paid. However, prepaid interest must be capitalized. Thus, $11,000 of interest attributable to the 2024 tax year may be deducted on Michael’s 2024 income tax return and not earlier.

Browne, a self-employed taxpayer, had 2024 business taxable income of $1,190,000 prior to any expense deduction for equipment purchases. In 2024, Browne purchased and placed into service, for business use, office machinery costing $1,265,000. This was Browne’s only 2024 capital expenditure. Browne’s business establishment was not in an economically distressed area. Browne made a proper and timely expense election to deduct the maximum amount. Browne was not a member of any pass-through entity. What is Browne’s deduction under the election?

$1,190,000

Deduction = taxable income limited to $1,220,000.

A taxpayer purchased and placed in service during the year a $100,000 piece of equipment. The equipment is 7-year property. The first-year depreciation for 7-year property is 14.29%. Assume that, of the allowable Sec. 179 limit for the current year, $25,000 is allocated to this piece of equipment. The taxpayer has opted out of bonus depreciation. What amount is the maximum allowable depreciation?

$35,718

Purchase price of asset	$100,000
Less: Sec. 179 expense	(25,000)
Depreciable basis	$  75,000
Times: Depreciation rate (14.29%)	(10,718)
New adjusted basis of equipment	$  64,282

Total depreciation for the first year equals $25,000 + $10,718 = $35,718.

Under the modified accelerated cost recovery system (MACRS) of depreciation for property placed in service after 1986,

Salvage value is ignored for purposes of computing the MACRS deduction.

Mr. Anderson, a sole proprietor, purchased $12,000 worth of office equipment and furniture in 2024 for use in his business. He elected to take the maximum Sec. 179 deduction. What is Mr. Anderson’s basis for the MACRS computation?

$0

The original cost of an asset must be reduced for any Sec. 179 expense up to $1,220,000 in 2024. Since Mr. Anderson took the Sec. 179 expense deduction of $12,000 in 2024, he must reduce the cost of his property. Mr. Anderson’s depreciable basis is

Original cost	$12,000
Less: Sec. 179 deduction	(12,000)
Depreciable basis	$         0

During 2024, Danny, a calendar-year taxpayer, acquired and placed in service the following business assets:

January: Delivery trucks	$ 50,000
March: Warehouse building	150,000
June: Computer system	30,000
September: Automobile	30,000
November: Office equipment	90,000

Which convention(s) is used to figure Danny’s depreciation for 2024?

Mid-quarter for all assets except the warehouse building, which uses the mid-month.

On January 1, Fast, Inc., entered into a covenant not to compete with Swift, Inc., for a period of 5 years, with an option by Swift to extend it to 7 years. What is the amortization period of the covenant for tax purposes?

15 years

The cost of certain intangibles acquired in connection with the conduct of a trade or business or income-producing activity is amortized over a 15-year period, beginning with the month in which the intangible is acquired. Qualified intangibles include covenants not to compete.

Justin Peter earned a salary of $30,000 during 2024. During the year, he was required by his employer to take several overnight business trips, and he received an expense allowance of $1,500 for travel and lodging. In the course of these trips, he incurred the following expenses which were either adjustments to income or deductions from adjusted gross income.

Travel	$1,100
Lodging	500
Entertainment of customers	400

What is Justin’s adjusted gross income if he does not account to his employer for the expenses?

$31,500

Salary + expense allowance

In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes?

As a $1,000 deduction to arrive at AGI for the year.

Taxpayers may deduct up to $2,500 of interest paid on qualified educational loans.

In 2024, Cole earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and contributed $100 to his church. What is Cole’s minimum adjusted gross income?

$2,600

wages - student loan interest deduction

$3000 - $400

$100 charitable contribution is below the line for itemized deduction

Emil Gow owns a two-family house that has two identical apartments. Gow lives in one apartment and rents out the other. In 2024, the rental apartment was fully occupied, and Gow received $7,200 in rent. During the year ended December 31, 2024, Gow paid the following:

Real estate taxes	$6,400
Painting of rental apartment	800
Annual fire insurance premium	600

In 2024, depreciation for the entire house was determined to be $5,000. What amount should Gow include in his adjusted gross income for 2024?

$400

Gross rental income $ 7,200

Less: Rental expense

Maintenance and repair $   800

Depreciation ($5,000 × 1/2) 2,500

Real estate tax ($6,400 × 1/2) 3,200

Insurance ($600 × 1/2) 300 (6,800)

Net rental income $    400

In 2024, a self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony per a 2018 divorce agreement. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer’s adjusted gross income?

$40,000

[$57,000 GI – $4,000 SE tax paid – $6,000 health insurance – $5,000 alimony (paid pursuant to a pre-2019 divorce) – $2,000 contribution to IRA].

taxpayer may only deduct 50% of SE tax.

Sol and Julia Crane, both age 48, are married and filed a joint return for 2024. Sol received a distribution of $80,000 from his employer’s pension plan. In addition, Sol and Julia earned interest of $3,000 in 2024 on their joint savings account. Julia is not employed, and the couple had no other income. On January 15, 2024, Sol contributed $3,000 to an IRA for himself and $3,250 to an IRA for his spouse. The allowable IRA deduction in the Cranes’ 2024 joint return is

$0

The allowable deduction for contributions to an IRA is limited to the lesser of $7,000 or compensation. Compensation represents earned income and does not include distributions from pension plans or interest income. Therefore, since compensation is $0, the allowable IRA deduction is limited to $0. Note that the maximum amount otherwise deductible is $7,000 for Sol and another $7,000 for the contribution for his spouse.

Jamal and Ronee Smith, both age 49, are married and filed a joint return for 2024. Jamal earned a salary of $100,000 in 2024 from his job at Sunshine Corporation. Ronee earned $8,000 from her part-time job at Rain Corporation. On March 1, 2024, Jamal contributed $7,000 to a Roth IRA for himself. What is the maximum contribution Ronee may make in 2024 to her Roth IRA?

$7,000

Roth IRAs are subject to income limits. The maximum yearly contribution that can be made to a Roth IRA is phased out for joint filers with adjusted gross income (AGI) between $230,000 and $240,000. Since the Smiths’ AGI does not exceed $218,000, Ronee is permitted her maximum contribution of $7,000 (for taxpayers under the age of 50) for a total yearly IRA contribution of $14,000 for the married couple.

A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a 4-month extension to file until August 15 but did not file the return until November 1. What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year’s return?

April 15

(tax day)

Jim and Carolyn, who are married, establish a Coverdell Education Savings Account to pay for the future college expenses of their infant son. They file jointly and have a modified AGI of $100,000. What is the maximum contribution they can make to a CESA in the current year?

$2,000

Joint filers with modified AGI below $190,000 may contribute up to $2,000 per beneficiary (child) per year.

In 2024, Moore, a single taxpayer, had $50,000 in adjusted gross income. During 2024, she contributed $23,000 in cash to her church. She had a $10,000 charitable contribution carryover from her 2023 church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for 2024?

$30,000

Properly substantiated cash contributions by individuals to qualified charities are limited to 60% of the taxpayer’s AGI, or $30,000 in this case.

The 2024 deduction by an individual taxpayer for interest on investment indebtedness is

Limited to the taxpayer’s 2024 net investment income.

Which of the following is not an itemized deduction?

Gambling losses up to the amount of gambling winnings.

Medical expenses.

Real estate tax.

Employee business expenses.

Employee business expenses.

How may taxes paid by an individual to a foreign country be treated?

As a credit against federal income taxes due.

Smith paid the following unreimbursed medical expenses:

Dentist and eye doctor fees	$  5,000
Contact lenses	500
Facial cosmetic surgery to improve Smith’s personal appearance (surgery is unrelated to personal injury or congenital deformity)	10,000
Premium on disability insurance policy to pay him if he is injured and unable to work	2,000

What is the total amount of Smith’s tax-deductible medical expenses before the adjusted gross income limitation?

$5500

dentist/eye doctor fees + contact lenses

Which one of the following expenditures qualifies as a deductible medical expense for tax purposes?

Vitamins for general health not prescribed by a physician.

Health club dues.

Transportation to physician’s office for required medical care.

Mandatory employment taxes for basic coverage under Medicare A.

Transportation to physician’s office for required medical care.

In 2024, the Browns borrowed $20,000, secured by their home, to pay their son’s college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as

nondeductible interest

Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be

Carried forward 5 years.

During 2024, William Clark was assessed a deficiency on his 2023 federal income tax return. As a result of this assessment, he was required to pay $1,120, determined as follows:

Additional tax	$900
Late filing penalty	60
Negligence penalty	90
Interest	70

What portion of the $1,120 qualifies as itemized deductions for 2024?

$0

Federal income taxes and penalties are not deductible.

In Year 1, Farb, a cash-basis individual taxpayer, received an $8,000 invoice for personal property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and immediately started legal action to recover the overstatement. In November Year 2, the matter was resolved in Farb’s favor, and he received a $5,000 refund. Farb itemizes deductions on his tax returns. Which of the following statements is true regarding the deductibility of the property taxes?

Farb should deduct $8,000 in his Year 1 income tax return and report the $5,000 refund as income in his Year 2 income tax return.

Jose bought new office equipment for $30,000 on July 3, 2022. The office equipment is seven-year property. Jose did not purchase any other personalty for use in his business in 2022. Jose’s business is located in Houston. Jose does not take any Section 179 deduction or bonus depreciation. What depreciation table should he use to calculate depreciation for the equipment in 2022?

Exhibit 8-3 MACRS Accelerated Depreciation for Personal Property Assuming Half-Year Convention.

Since office equipment is personal property rather than real property, a table for personal property needs to be chosen. The next question is whether MACRS depreciation or ADS (alternative depreciation system) should be used. Since the equipment is located in the U. S., Houston, the MACRS depreciation should be taken. The next issue is whether to use the half-year convention or mid-quarter convention. Since the equipment is bought in July and no other personal property is acquired, the half-year convention is chosen. The mid-quarter convention is required if 40% or more of personal property is placed in service in the fourth quarter.

Jose bought new office equipment for $30,000 on October 3, 2022. The office equipment is seven-year property. Jose did not purchase any other personalty for use in his business in 2022. Jose’s business is located in Houston. Jose does not take any Section 179 deduction or bonus depreciation. What depreciation table should he use to calculate depreciation for the equipment in 2022?

Exhibit 8-4 MACRS Accelerated Depreciation for Personal Property Assuming Mid-Quarter Convention.

Since office equipment is personal property rather than real property, a table for personal property needs to be chosen. The next question is whether MACRS depreciation or ADS (alternative depreciation system) should be used. Since the equipment is located in the U. S., Houston, the MACRS depreciation should be taken. The next issue is whether to use the half-year convention or mid-quarter convention. Since the equipment is bought in October and no other personal property is acquired, the mid-quarter convention is chosen. The mid-quarter convention is required if 40% or more of personal property is placed in service in the fourth quarter.

Jose bought an office building on July 3, 2022. The price of the building was $700,000, and the price of the land was $200,000. The office building is located in Juarez, Mexico. What depreciation table should he use to calculate depreciation for the building in 2022?

Exhibit 8-9 ADS Straight-Line for Real Property Assuming the Mid-Month Convention

Since an office building is real property rather than personal property, a table for real property needs to be chosen. The next question is whether MACRS depreciation or ADS (alternative depreciation system) should be used. Since the equipment is located outside the United States, Juarez, Mexico, the ADS should be chosen. All real property uses the mid-month convention.

Anita bought a new luxury automobile for $70,000 on May 5, 2022. The luxury automobile is five-year property. Anita bought no other personalty that was used in her business or for production of income. The luxury automobile is used 40% for business, 30% for production of income, and 30% for personal use. What depreciation table should she use to calculate depreciation for the luxury automobile in 2022?

Exhibit 8-7 ADS Straight-Line for Personal Property Assuming Half-Year Convention

Since an automobile is personal property rather than real property, a table for personal property needs to be chosen. The next question is whether MACRS depreciation or ADS (alternative depreciation system) should be used. A passenger automobile is listed property. Since the passenger automobile is used 50% or less for business purposes, the ADS should be chosen. Since the only personal property placed in service during the year was in May, the half-year convention is chosen.

On November 4, 2022, Blue Company acquired and placed in service an asset (27.5-year residential real property) for $200,000 for use in its business. In 2022 and 2023, respectively, Blue deducted $642 and $5,128 of cost recovery. These amounts were incorrect; Blue applied the wrong percentages (i.e., those for 39-year rather than 27.5-year assets). Blue should have taken $910 and $7,272 cost recovery in 2022 and 2023, respectively.

On January 1, 2024, the asset was sold for $180,000. Calculate the gain or loss on the sale of the asset for that year.

Cost of asset $200,000

Less: Greater of allowed and

allowable cost recovery

2022 $ 910

2023 $7,272 (8,182)

Basis at end of 2023 $191,818

Less: Cost recovery for 2024-Exhibit 8-8

($200,000 X 3.636%X.5/12) (303)

Basis on date of sale $191,515

Loss = ($180,000-$191,515) = ($11,515)

Debra acquired and placed in service the following new assets during 2024:

Date   Asset Cost 

April 11 Furniture $40,000

July 28 Trucks 40,000

November 3 Computers 70,000

Determine Debra’s cost recovery deductions for the current year. Debra does not elect immediate expensing under § 179. She does not claim any available additional first-year depreciation.

The mid-quarter convention must be used because the cost of the computers acquired in the 4th quarter exceeds 40% of the cost of all the personal property acquired during the year ($70,000/$150,000=47%).

Depreciation rates from Exhibit 8-4

Furniture(7-year class)

MACRS depreciation $40,000 X 17.85% = $7,140

Trucks(5-year class)

MACRS depreciation $40,000 X 15%= $6,000

Computers(5-year class)

MACRS depreciation $70,000 X 5%= $3,500

Total cost recovery = $7,140 + $6,000 + $3,500 =

$16,640

Emma Doyle is employed as a corporate attorney. For calendar year 2024, she had AGI of $75,000 and paid the following medical expenses:

Medical insurance premiums $3,700

Doctor and dentist bills for Bob and April (Emma’s parents) 6,800

Doctor and dentist bills for Emma 5,200

Prescription medicines for Emma 400

Nonprescription insulin for Emma 350

Bob and April would qualify as Emma’s dependents except that they file a joint return. Emma’s medical insurance policy does not cover them. Emma filed a claim for reimbursement of $2,800 of her doctor, dentist, and prescription expenses (detailed above) with her insurance company in December 2024 and received the reimbursement in January 2025. What is Emma’s maximum allowable medical expense deduction for 2024? Prepare a memo for your firm’s tax files in which you document your conclusions.

Emma can a claim medical expense deduction for the current year as follows:

Medical insurance premiums $3,700

Doctor and dentist bills for Bob and April 6,800

Doctor and dentist bills for Emma 5,200

Prescription medicine for Emma 400

Nonprescription insulin for Emma 350

Total medical expenses $16,450

Minus $75,000 AGI X 7.5% ($5,625)

Deductible portion of medical expenses $10,825

Paul suffers from emphysema and severe allergies and, upon the recommendation of his physician, has a dust elimination system installed in his personal residence. In connection with the system, Paul incurs and pays the following amounts during 2024:

Doctor and hospital bills $ 4,500

Dust elimination system 10,000

Increase in utility bills due to the system 450

Cost of certified appraisal 300

In addition, Paul pays $750 for prescribed medicines.

The system has an estimated useful life of 20 years. The appraisal was to determine the value of Paul’s residence with and without the system. The appraisal states that his residence was worth $350,000 before the system was installed and $356,000 after the installation. Paul’s AGI for the year was $50,000. How much is Paul’s medical expense deduction in 2024?

Only $4,000 qualifies since $6,000 of the $10,000 of the dust elimination system increased the value of Paul’s residence. The total medical expense is $9,700 ($4,000 + $450 additional operating costs +$4,500 doctor and hospital bills + $750 prescriptions). The $300 appraisal fee is not deductible. Paul’s medical expense deduction is $5,950 [$9,700 – 7.5% X $50,000 AGI].

Total = $9950

Alicia sold her personal residence to Rick on June 30 for $300,000. Before the sale, Alicia paid the real estate tax of $4,380 for the calendar year. For income tax purposes, the deduction is apportioned as follows: $2,160 to Alicia and $2,220 to Rick. What is Rick’s basis in the residence?

$297,780

Cost - taxes paid by Alicia

300,000 - 2220

This year, Nadia donates $4,000 to Eastern University’s athletic department. The payment guarantees that Nadia will have preferred seating at football games near the 50-yard line. Assume that Nadia subsequently buys four $100 game tickets. How much can she deduct as a charitable contribution to the university’s athletic department?

Nadia cannot deduct any portion of the $4,000 donation since it relates to getting preferred seating at an athletic event (here, football games).

Liz had AGI of $130,000 in 2024. She donated Bluebird Corporation stock with a basis of $10,000 to a qualified charitable organization on July 5, 2024.

What is the amount of Liz’s deduction assuming that she purchased the stock on December 3, 2023, and the stock had a fair market value of $17,000 when she made the donation?

Because Liz did not hold the stock for the long-term holding period, it is short-term capital gain property that is subject to the rules for ordinary income property. Therefore, her deduction is limited to $10,000.

Liz had AGI of $130,000 in 2024. She donated Bluebird Corporation stock with a basis of $10,000 to a qualified charitable organization on July 5, 2024.

What is the amount of Liz’s deduction assuming that she purchased the stock on July 1, 2021, and the stock had a fair market value of $17,000 when she made the donation?

Liz held the stock for the long-term holding

period, so it is long-term capital gain property.

Therefore, her deduction is equal to the fair

market value of the stock, $17,000.

Kareem bought a rental house in March 2019 for $300,000, of which $50,000 is allocated to the land and $250,000 to the building. Early in 2021, he had a tennis court built in the backyard at a cost of $7,500. Kareem has deducted $30,900 for depreciation on the house and $1,300 for depreciation on the court. In January 2024, he sells the house and tennis court for $330,000 cash.

What is Kareem’s realized gain or loss?

Original basis of land $ 50,000

Original basis of building 250,000

Less: Depreciation (30,900)

Adjusted basis of building and land $269,100

Original basis of tennis court $ 7,500

Less: Depreciation (1,300)

Adjusted basis of tennis court $ 6,200

Amount realized $330,000

Less: Adjusted basis (275,300)

Realized gain $ 54,700

Kareem bought a rental house in March 2019 for $300,000, of which $50,000 is allocated to the land and $250,000 to the building. Early in 2021, he had a tennis court built in the backyard at a cost of $7,500. Kareem has deducted $30,900 for depreciation on the house and $1,300 for depreciation on the court. In January 2024, he sells the house and tennis court for $330,000 cash.

If an original mortgage of $80,000 is still outstanding and the buyer assumes the mortgage in addition to the cash payment, what is Kareem’s realized gain or loss?

Amount realized

[$330,000(cash) + $80,000(mortgage)] $410,000

Less: Adjusted basis (275,300)

Realized gain $134,700

Liam owns a personal use boat that has a fair market value of $35,000 and an adjusted basis of $45,000. Liam’s AGI is $100,000. Calculate the realized and recognized gain or loss if:

Liam sells the boat for $35,000.

Amount realized $35,000

Less: adjusted basis (45,000)

Realized loss $(10,000)

Recognized loss $ 0

Realized losses on the sale or exchange of

personal use assets are not deductible.

Liam owns a personal use boat that has a fair market value of $35,000 and an adjusted basis of $45,000. Liam’s AGI is $100,000. Calculate the realized and recognized gain or loss if:

The boat is stolen and Liam receives insurance proceeds of $35,000.

Liam’s realized loss is $0. Since the form of the transaction is a theft, the realized loss is the lesser of the adjusted basis or the fair market value of the asset, reduced by the insurance proceeds that he received.

35,000 (FMV) - 35,000 (insurance proceeds) = $0

Ricky owns stock in Dove Corporation. His adjusted basis for the stock is $90,000. During the year, he receives a distribution from the corporation of $75,000 that is a return of capital (i.e., Dove has no earnings and profits).

Determine the tax consequences to Ricky.

The $75,000 distribution is labeled a

return of capital because Dove has no

earnings and profits. Ricky reduces the

basis of his stock by $75,000 to $15,000

($90,000 adjusted basis - $75,000 return

of capital distribution)

Ricky owns stock in Dove Corporation. His adjusted basis for the stock is $90,000. During the year, he receives a distribution from the corporation of $150,000 that is a return of capital (i.e., Dove has no earnings and profits).

Determine the tax consequences to Ricky.

the $150,000 distribution is

treated as a return of capital because

Dove has no earnings and profits. Ricky

has a capital gain calculated as follows:

Amount realized $150,000

Less: Adjusted basis (90,000)

Realized gain $60,000

Recognized gain $60,000

The basis in the stock is reduced to $0.