CPA Exam — Tax Compliance and Planning (TCP) — All Questions

Hana exchanges an office building held for investment (basis $300,000, value $500,000) for land held for investment worth $450,000 plus $50,000 of cash. What are her recognized gain and her basis in the land?

• a.Gain $0; land basis $250,000
• b.Gain $50,000; land basis $300,000✓
• c.Gain $200,000; land basis $450,000
• d.Gain $50,000; land basis $350,000

Realized gain is $500,000 − $300,000 = $200,000. Under IRC §1031(b), gain is recognized only up to the $50,000 of cash boot. Under §1031(d), the land's basis is $300,000 − $50,000 cash + $50,000 gain recognized = $300,000, which also equals the $450,000 value less the $150,000 deferred gain. Recognizing nothing ignores the boot. Recognizing all $200,000 treats the exchange as fully taxable. $350,000 adds the gain without subtracting the cash.

Ivo exchanges investment land (basis $200,000, value $400,000, subject to a $100,000 mortgage the other party assumes) for investment land worth $300,000 with no debt. No cash changes hands. What is Ivo's recognized gain?

• a.$100,000✓
• b.$300,000
• c.$0
• d.$200,000

Under the last sentence of IRC §1031(d), a liability of the taxpayer assumed by the other party is treated as money received. Ivo therefore received $100,000 of boot against a realized gain of $200,000, and he recognizes $100,000. His basis in the new land is $200,000 − $100,000 + $100,000 = $200,000. Recognizing nothing ignores the debt relief. $200,000 is the full realized gain. $300,000 is the value of the land received.

After the 2017 amendments, which of the following exchanges can qualify for like-kind treatment under §1031?

• a.A developer's lots held for sale exchanged for other such lots
• b.A U.S. office building exchanged for an office building in Canada
• c.Delivery trucks exchanged for newer delivery trucks
• d.An apartment building exchanged for raw land, both held for investment✓

IRC §1031(a)(1) is limited to real property held for productive use in a business or for investment and exchanged for like-kind real property. Improved and unimproved real property are like kind. Trucks are personal property. Under §1031(h), U.S. and foreign real property are not like kind. Real property held primarily for sale is excluded by §1031(a)(2).

In a deferred exchange, Jay transfers his relinquished property on March 1. Which deadlines apply to receiving the replacement property?

• a.Identify in 45 days; receive in 180 days or by the return due date, if earlier✓
• b.Identify it within 45 days, and receive it by the end of the taxable year
• c.Receive it within 180 days, with no separate identification deadline
• d.Identify it within 60 days, and receive it within 1 year of the transfer

Under IRC §1031(a)(3), replacement property must be identified within 45 days after the relinquished property is transferred. It must be received by the earlier of 180 days after that transfer or the due date, including extensions, of the transferor's return for the year of transfer. Otherwise it is not treated as like-kind property. The 60-day and one-year figures do not appear in the statute. Year-end is not the deadline. Identification is a separate requirement.

Kai's rental building (basis $200,000) is destroyed by fire, and he receives $500,000 of insurance proceeds. Within the replacement period he buys a similar rental building for $450,000 and elects §1033. What are his recognized gain and his basis in the new building?

• a.Gain $50,000; basis $200,000✓
• b.Gain $50,000; basis $450,000
• c.Gain $0; basis $150,000
• d.Gain $300,000; basis $450,000

Realized gain is $300,000. Under IRC §1033(a)(2)(A), gain is recognized only to the extent the amount realized exceeds the cost of qualifying replacement property: $500,000 − $450,000 = $50,000. Under §1033(b)(2), basis is the $450,000 cost less the $250,000 of unrecognized gain, or $200,000. Recognizing nothing ignores the $50,000 not reinvested. The full-gain option ignores the election. A $450,000 basis would erase the deferred gain.

Lou, who is single, sells the home she has owned and lived in as her principal residence for six years, realizing a $300,000 gain. She has not excluded gain on another home within the past two years. How much gain must she recognize?

• a.$175,000
• b.$300,000
• c.$50,000✓
• d.$0

IRC §121(a) excludes gain on a home owned and used as a principal residence for periods totaling at least two of the five years before the sale. The exclusion is capped at $250,000 for a single taxpayer (§121(b)(1)). She recognizes $300,000 − $250,000 = $50,000. $0 applies the $500,000 joint-return cap, which requires married filing jointly. $300,000 ignores the exclusion. $175,000 has no basis in the statute.

This year, a sole proprietor has a $40,000 section 1231 gain (after depreciation recapture) and a $15,000 section 1231 loss. In the prior five years she had $10,000 of net §1231 losses, none of it yet recaptured. How is her net §1231 gain characterized?

• a.$10,000 ordinary income and $15,000 long-term capital gain✓
• b.$15,000 ordinary income and $10,000 long-term capital gain
• c.$25,000 long-term capital gain
• d.$25,000 ordinary income

The net §1231 gain is $40,000 − $15,000 = $25,000 (IRC §1231(a)(1)). Under §1231(c), the net gain is ordinary income to the extent of non-recaptured net §1231 losses from the five most recent preceding years, here $10,000. The remaining $15,000 is long-term capital gain. Treating all $25,000 as capital ignores the lookback rule. Treating it all as ordinary overapplies the rule. $15,000 ordinary and $10,000 capital swaps the two amounts.

A business has a $10,000 section 1231 gain and a $25,000 section 1231 loss this year, with no other §1231 transactions and no prior §1231 losses. How is the result treated?

• a.A $15,000 loss, only $3,000 of it deductible
• b.A $10,000 capital gain and a $25,000 ordinary loss
• c.A $15,000 long-term capital loss
• d.A $15,000 ordinary loss✓

When §1231 losses exceed §1231 gains, IRC §1231(a)(2) treats the gains and losses as not from sales or exchanges of capital assets, so the $15,000 net loss is fully ordinary. It is not subject to the capital loss limits of §1211. The items are netted, not characterized separately. The $3,000 limit applies to individuals' net capital losses, not to §1231 losses.

A machine used in a business cost $100,000, and $70,000 of depreciation has been allowed. It is sold after four years for $120,000. How is the $90,000 gain characterized?

• a.$90,000 section 1231 gain
• b.$20,000 ordinary income under §1245 and $70,000 section 1231 gain
• c.$70,000 ordinary income under §1245 and $20,000 section 1231 gain✓
• d.$90,000 ordinary income under §1245

IRC §1245(a)(1) treats as ordinary income the lesser of the gain or the depreciation allowed. Here that is the $70,000 of depreciation. The $20,000 of gain above original cost is §1231 gain because the machine was held more than one year in a business (§1231(b)). Treating all of it as ordinary overstates recapture. Treating it all as §1231 ignores recapture. $20,000 ordinary and $70,000 §1231 reverses the two amounts.

An individual sells a commercial building bought in 2012 and depreciated straight-line. It cost $500,000, $150,000 of depreciation was taken, and it sells for $600,000. How much of the $250,000 gain is unrecaptured §1250 gain?

• a.$100,000
• b.$250,000
• c.$150,000✓
• d.$0

Section 1250 recaptures as ordinary income only depreciation in excess of straight-line (§1250(a), (b)), which is zero here. Under IRC §1(h)(6), unrecaptured §1250 gain is the gain that would be ordinary if §1250 recaptured all depreciation, limited to the §1231 gain: $150,000, taxed at a maximum 25% rate. The remaining $100,000 is §1231 gain treated as long-term capital gain. $0 confuses §1250 ordinary recapture with unrecaptured §1250 gain. $250,000 counts the appreciation too.

Mona and her husband, who file jointly, bought §1244 stock for $180,000 directly from a small business corporation when it was formed. This year the stock becomes worthless. How is the loss treated?

• a.$180,000 ordinary loss
• b.$50,000 ordinary loss and $130,000 capital loss
• c.$100,000 ordinary loss and $80,000 capital loss✓
• d.$180,000 capital loss

IRC §1244(a) treats a loss on §1244 stock as ordinary. Under §1244(b)(2), the ordinary amount is capped at $100,000 on a joint return, so the other $80,000 is a capital loss (worthless securities are treated as sold under §165(g)). $50,000 is the cap for other returns. $180,000 of ordinary loss ignores the cap. All-capital treatment ignores §1244.

Nico, not a dealer, sells investment land (basis $60,000) for $200,000: $40,000 down this year and the balance in four equal annual installments plus adequate interest. How much gain does he recognize this year under the installment method?

• a.$12,000
• b.$28,000✓
• c.$140,000
• d.$40,000

The gross profit ratio is gross profit ÷ contract price: $140,000 ÷ $200,000 = 70% (IRC §453(c)). Gain this year is 70% × $40,000 = $28,000. $40,000 treats the whole payment as gain. $140,000 reports all the gain now. $12,000 is the 30% basis-recovery portion of the payment.

Ola sells business equipment (cost $100,000, depreciation $60,000) for $120,000: $30,000 down this year and the rest over three years with adequate interest. How much gain must she recognize this year?

• a.$80,000
• b.$20,000
• c.$60,000
• d.$65,000✓

Total gain is $120,000 − $40,000 = $80,000, and $60,000 of it is §1245 recapture. Under IRC §453(i), recapture income is recognized in full in the year of sale, and it is added to basis for figuring the gross profit on the rest: ($80,000 − $60,000) ÷ $120,000 = 1/6. This year's $30,000 payment adds 1/6 × $30,000 = $5,000, for a total of $65,000. $60,000 omits the installment portion. $20,000 applies an $80,000 gross profit to the down payment and ignores §453(i). $80,000 reports all the gain now.

Pat sells stock (basis $20,000) to her brother for $14,000. Two years later, her brother sells the stock to an unrelated buyer for $18,000. What does her brother recognize?

• a.A $4,000 capital gain
• b.A $6,000 capital loss
• c.A $2,000 capital loss
• d.No gain or loss✓

Pat's $6,000 loss is disallowed under IRC §267(a)(1) because brothers and sisters are family members under §267(c)(4). Under §267(d), her brother's later $4,000 gain ($18,000 − $14,000 basis) is recognized only to the extent it exceeds the $6,000 previously disallowed loss. That is zero, so he recognizes nothing, and $2,000 of Pat's loss is never used. He does not inherit Pat's basis to produce a $2,000 loss. The disallowed $6,000 cannot become his deduction.

Joe owns 30% of Axle Corp.'s stock. His father owns 25%, his wife owns 10%, and his wife's brother owns 15%. The rest is owned by unrelated persons. Joe sells land to Axle at a loss. What is Joe's ownership percentage for §267, and is the loss allowed?

• a.30%, so the loss is allowed
• b.65%, so the loss is disallowed✓
• c.80%, so the loss is disallowed
• d.40%, so the loss is allowed

Under IRC §267(c)(2) and (c)(4), an individual constructively owns stock owned by his family: brothers and sisters, spouse, ancestors and lineal descendants. Joe's 30%, his father's 25% and his wife's 10% total 65%, which is more than 50%, making Joe and Axle related under §267(b)(2) and disallowing the loss under §267(a)(1). In-laws are not family members, so the brother-in-law's 15% is not attributed. The 30% and 40% figures leave out family attribution.

Quinn sells equipment to Rook Corp., in which he owns 70% of the stock by value, at a $40,000 gain. Rook will depreciate the equipment. What is the character of Quinn's gain?

• a.Ordinary income under §1239✓
• b.Capital gain, because he held the equipment over a year
• c.Section 1231 gain, taxed as long-term capital gain
• d.No gain, because he and Rook are related persons

IRC §1239(a) treats gain on a sale of property between related persons as ordinary income if the property is depreciable in the buyer's hands. Related persons include a person and a corporation more than 50% of whose value he owns (§1239(b)(1), (c)(1)(A)). Quinn owns 70%, so the §1231 or capital characterization is overridden. Related-party rules disallow losses under §267, but gains are still recognized.

Tax software flags a sale of business equipment that was placed in service 10 months before the sale; the preparer entered the $8,000 gain as §1231 gain. How should the reviewer resolve the diagnostic?

• a.Report it as ordinary income; the asset was held one year or less✓
• b.Reclassify the $8,000 as short-term capital gain on Schedule D
• c.Treat the $8,000 as unrecaptured §1250 gain taxed at up to 25%
• d.Keep the entry; business equipment yields §1231 gain

Section 1231 property must be held for more than one year (IRC §1231(b)(1)). Business equipment held one year or less is not a capital asset (§1221(a)(2)), so the gain is ordinary, reported as ordinary gain on the sale of business property. Short-term capital gain would require a capital asset. Unrecaptured §1250 gain applies only to depreciable real property.

Rita gives her son land that she bought eight years ago for $50,000; it is worth $90,000 at the date of the gift, and no gift tax is paid. Three months later he sells it for $95,000. What are his gain and holding period?

• a.$5,000 long-term gain; Rita's holding period is added to his
• b.$5,000 short-term gain; his holding period starts at the gift
• c.$45,000 long-term gain; Rita's holding period is added to his✓
• d.$45,000 short-term gain; his holding period starts at the gift

Under IRC §1015(a), a donee's basis for gain is the donor's basis, $50,000, so the gain is $95,000 − $50,000 = $45,000. Because his basis is determined by reference to her basis, §1223(2) adds her holding period to his, so the gain is long-term even though he owned the land only three months. The $5,000 figure uses the value at the date of the gift, which applies only to loss property.