Stock Basis and Gift Tax Implications

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Questions and Answers

What is Son’s basis in the stock when he sells it for $6,000 after receiving it as a gift from Mom?

$3,000

$6,000

$4,000

$5,000 (correct)

If Son sells the stock for $2,000, what is the amount of loss he incurs based on the basis?

$5,000

$2,000

$3,000

$1,000 (correct)

When Son sells the stock for $4,000, what is the resulting gain or loss based on the basis he has?

Gain of $2,000

Loss of $1,000

Gain of $1,000

No gain or loss (correct)

What is Son's basis in the stock if it was valued at $3,000 at the time of the gift?

$5,000 Signup and view all the answers

After receiving the stock as a gift, which selling price would result in no taxable gain for Son?

$5,000 Signup and view all the answers

Which factor contributes to determining if the LA home was used as a principal residence for two years or more?

Total time spent in LA during the five-year period Signup and view all the answers

What is the significance of Regulation §1.121-1(c)(2) in determining occupancy?

It allows for the exclusion of short-term absences in occupancy calculations. Signup and view all the answers

How long did Susan stay in the hotel in NY, and how does this affect her principal residence claim?

She stayed for 3 months, which does not significantly affect her claim. Signup and view all the answers

What does Regulation §1.121-1(b)(4) relate to when evaluating residency?

It sets out factors for determining 'majority of time' spent in residence. Signup and view all the answers

Can Susan exclude the sale of the adjoining lot used as a garden from her taxable income?

Yes, because it was used for personal enjoyment. Signup and view all the answers

How should Paul Plumber report the fair market value of the root canal services received from Don Dentist for his plumbing work?

As gross income equal to the fair market value Signup and view all the answers

What is the gross income recognized from the sale of ABC Stock for $30,000 if the adjusted basis is $15,000?

$15,000 Signup and view all the answers

Which of the following represents gross income under §61(a) regarding interest income?

$19,000 from an investment account Signup and view all the answers

In relation to tax expenditures, which provision is correctly classified as a tax expenditure?

Code Section 170(a) Signup and view all the answers

What is the total gross income derived from the described transactions in the content?

$320,000 Signup and view all the answers

Which accounting method allows for recognizing accounts receivable as not gross income?

Cash receipts method Signup and view all the answers

How is gain calculated from a transaction involving selling an asset?

Amount Realized minus Adjusted Basis Signup and view all the answers

What kind of income does the provision §1.61-2(d)(1) encompass?

Fair market value of services received Signup and view all the answers

What is the tax consequence of receiving a loan, according to the given content?

The loan proceeds are not included in gross income due to the obligation to repay. Signup and view all the answers

How should a landlord treat advanced rent received from tenants?

As gross income in the year it is received. Signup and view all the answers

In the case of a tenant paying to cancel a lease early, how is this treated for tax purposes?

It is treated as gross income to the landlord. Signup and view all the answers

What happens to a security deposit in the context of gross income?

It is not considered income because of the obligation to repay. Signup and view all the answers

What is true about the repayment of a loan regarding tax deductions?

Repayment of the principal is not deductible. Signup and view all the answers

What amount would Mary include in her gross income upon receiving the $47,500?

$7,500 Signup and view all the answers

What is the tax consequence for Andrew receiving $85,000 in life insurance proceeds?

The entire amount is excludable from taxation. Signup and view all the answers

What is the cash surrender value of the life insurance policy that John purchased from Closely Held Co.?

$60,000 Signup and view all the answers

What amount is excluded from Phillip's taxable income upon receiving the $250,000 from his father's life insurance policy?

$250,000 Signup and view all the answers

What would be the tax implication if Phillip had purchased his father’s life insurance contract?

Only the premiums paid would be excluded. Signup and view all the answers

What was the total amount paid in premiums by Closely Held Co. for John's insurance policy?

$75,000 Signup and view all the answers

What does §101(a)(2) refer to in the context of life insurance benefits?

Transfer for value rules affecting taxable amounts. Signup and view all the answers

After the purchase of the policy, who made all subsequent premium payments?

John Signup and view all the answers

What is included in gross income according to the gain realized on the sale of property?

Gain realized on sale or exchange of property, unless legally excluded Signup and view all the answers

How is the realized gain calculated using the formula in §1001(a)?

Amount realized minus adjusted basis Signup and view all the answers

What does 'amount realized' include according to §1001(b)?

Sum of money received plus the FMV of any property received Signup and view all the answers

What type of basis is considered the default when determining adjusted basis?

Cost basis as defined in §1012 Signup and view all the answers

What is the adjusted basis based on when using a property received as a gift?

The donor's basis for the property as per §1015 Signup and view all the answers

Under §1014, what is generally the basis for property inherited at the time of the transferor's death?

The fair market value at the time of the transferor's death Signup and view all the answers

Which type of transaction does not recognize gains or losses for tax purposes that generally uses a substituted basis?

Lifetime exchange under §1031 Signup and view all the answers

What is NOT true regarding the calculation of gain from the sale of stock bought for $2,000 and sold for $5,000?

The total amount realized would be less than the sale price Signup and view all the answers

Study Notes

Income Tax - Class Notes

Students can bring calculators to the exam. Only cash receipts will be used.
Income Tax is calculated annually.
VAT (Value Added Tax) is a federal sales tax used in Europe.
Consumption taxes are applied at various production stages, often with a corresponding federal income tax.

Tax Base

Income Tax is based on annual taxable income.
Federal tax on wealth/property similar to state property taxes (like house).
Property tax is a percentage of the appraised value.
To generate revenue, governments apply a percentage to property value.
Tax rates on various properties may differ.
Taxing the increase in assets from the beginning to end of each year.

Tax Expenditure Provisions

Government spending via the tax code to advance social/economic policies.
Such provisions are not purely for revenue generation.
Examples include charitable deductions, exclusion of employer-provided insurance, and home mortgage interest deductions. Maximum deduction amounts are typically per individual for applicable provisions.

Economic Goal Expenditures

Businesses can deduct the value of equipment purchases in the year of purchase, rather than depreciating it over time.

Sources of Tax Law

Congress creates the Internal Revenue Code (statutory law) Title 26 USC.
Regulations and rulings from IRS provide further interpretation (Rev. Rules, PLRs).
Courts handle tax disputes.

Courts for Tax Disputes

Tax Court: for taxpayers who don't pay first
No Jury trials; Appeals to the Federal Circuit.
U.S. Courts of Federal Claims: for taxpayers who pay first and later sue for refund.
No Jury Trials; Appeals to the Federal Circuit.
District Courts: for taxpayers who pay first and later sue for refund.
Jury trials available; Appeals to the Federal Circuit.
Tax disputes may be resolved in one of these three types of courts.

Determining Tax Due

Part 1 includes two steps:
Step 1: calculating Adjusted Gross Income ("AGI") by subtracting above the line deductions from Gross Income.
Step 2: calculating Taxable Income by subtracting below-the-line deductions (or the standard deduction) from AGI.
Taxpayers can choose either itemized or standard deductions.

Book Problems (Examples)

Detailed examples of calculating gross income, adjusting gross income, and determining tax liability are presented in the book problems.
These problems involve various income sources, such as consulting fees, interest income, dividends, and gains from the sale of assets.
They also illustrate different accounting methods like cash receipts and accrual.

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Description

This quiz covers the concept of stock basis when received as a gift, including calculations for gains and losses upon sale. Through various scenarios, you will learn how to determine the basis and the financial implications of selling gifted stock.