FINRA Series 6 — All Questions

For a first-time issuer with no prior reporting history, how long before it sends a confirmation must a broker-dealer give the buyer a preliminary prospectus?

• a.At the same time as the confirmation
• b.At least 5 business days before
• c.At least 48 hours before✓
• d.At least 24 hours before

Rule 15c2-8 requires delivery of the preliminary prospectus at least 48 hours before the confirmation goes out when the issuer has not previously reported under the Exchange Act. Twenty-four hours is too short, five business days is too long, and delivery with the confirmation would leave the buyer no time to read it before the sale.17 CFR 240.15c2-8(b)

An issuer sells securities under Rule 506(b) of Regulation D. How many non-accredited purchasers may it have in any 90-day period?

• a.No more than 100
• b.None; every buyer must be accredited
• c.No more than 10
• d.No more than 35✓

Rule 506(b) allows unlimited accredited investors and up to 35 non-accredited purchasers who meet the sophistication test in a 90-day period. Ten and one hundred are not limits under this rule. A rule requiring every purchaser to be accredited describes Rule 506(c), which also permits general solicitation but requires verification.17 CFR 230.506(b)

An issuer makes its first sale in a Regulation D offering on March 3. By what date must it file Form D?

• a.30 calendar days after March 3
• b.15 calendar days after March 3✓
• c.15 business days after March 3
• d.45 days after March 3

Form D is a notice filed within 15 calendar days after the first sale. Counting business days stretches the deadline by several days. Thirty and forty-five days are longer than the rule allows.17 CFR 230.503

An unmarried individual has a net worth of $800,000, excluding a primary home, and income of $210,000 in each of the last two years with the same expected this year. Is the person an accredited investor?

• a.Yes, because her net worth counting the primary home exceeds $1,000,000
• b.No, because the income test requires $300,000 for an individual filer
• c.No, because net worth excluding the home is below the $1,000,000 threshold
• d.Yes, because her income topped $200,000 in each of the last two years✓

The income test is met by individual income above $200,000 in each of the two most recent years with an expectation of reaching it again this year. Failing the net worth test does not matter because only one test must be met. The $300,000 figure is the joint income threshold. Net worth is counted without the primary home, and a person's home value is not a way to qualify here.17 CFR 230.501(a)

Under the intrastate offering exemption in Rule 147A, how long after the sale may a security be resold only to residents of the issuer's state?

• a.Two years
• b.Thirty days
• c.One year
• d.Six months✓

For six months after the issuer's sale, resales must be made only to residents of the issuer's state. Thirty days is shorter than the rule requires. One and two years are longer than the rule requires; they resemble the holding periods under Rule 144, which is a different exemption.17 CFR 230.147A

A broker-dealer representative sells mutual funds inside a bank branch under a networking arrangement. What disclosure must customers receive?

• a.The products are protected by the FDIC only if purchased with a check
• b.The bank guarantees repayment of principal on mutual funds
• c.The products are not FDIC-insured, not bank-guaranteed, and may lose value✓
• d.The products are insured by the bank up to $250,000 per depositor

Rule 3160 requires disclosure that the products are not FDIC-insured, not guaranteed by the bank, and may lose value. FDIC deposit insurance does not cover securities, so the bank cannot promise coverage. The method of payment has no effect on whether the FDIC insures a security.FINRA Rule 3160

A firm's retail communication cites a ranking of a mutual fund. Which requirement applies to the ranking?

• a.It may be one year old if the fund has more than $1 billion in assets
• b.It must come from the fund's own research department or its adviser
• c.It must cover at least ten years of performance, even for a new fund
• d.It must be current to the latest calendar quarter-end✓

A ranking must be, at a minimum, current to the most recent calendar quarter ended before the communication is used. It also must come from an independent ranking entity, or from a fund-created ranking that uses that entity's measurements. A ten-year period is not required, and a fund's size does not excuse a stale ranking.FINRA Rule 2212

A new customer declines to name a trusted contact person when opening a mutual fund account. What may the firm do?

• a.Open the account and keep making reasonable efforts to obtain the name✓
• b.Enter the representative as the trusted contact
• c.Enter the customer's spouse without asking the customer
• d.Refuse to open the account because the rule requires a named contact

Rule 4512 requires the firm to make reasonable efforts to get a trusted contact's name and contact details, but the absence of one does not prevent opening the account. The firm may not make the contact a condition. A representative or an unconsented spouse is not the customer's choice and would defeat the purpose, which is to have someone the customer trusts.FINRA Rule 4512(a)(1)(F)

Who must sign the customer account record to show the account was accepted under the firm's account acceptance procedures?

• a.The customer's trusted contact person
• b.A partner, officer or manager of the firm✓
• c.A transfer agent for the fund
• d.The soliciting representative acting alone

Rule 4512 requires the signature of a partner, officer or manager to show the account was accepted under the firm's procedures. The trusted contact is a third party to the firm, so signing is not part of that role. A representative acting alone has no authority to accept for the firm. A transfer agent works for the fund and has no role in the firm's account acceptance.FINRA Rule 4512(a)(1)(D)

After a firm sends a customer the account record within 30 days of opening an account, how often must it furnish an updated copy?

• a.Only when the customer asks in writing
• b.At intervals of no more than 12 months
• c.At intervals of no more than 36 months✓
• d.At intervals of no more than 24 months

Rule 17a-3(a)(17) requires the firm to send an updated account record at least every 36 months after the initial 30-day mailing. Twelve and twenty-four months are shorter than the rule requires, though a firm may choose them. The duty does not depend on a customer request.17 CFR 240.17a-3(a)(17)

A customer notifies the firm of a new mailing address. Within what time must the firm send a notice of the change to the customer's old address?

• a.10 days
• b.90 days
• c.60 days
• d.30 days✓

The firm must send the notice of the name or address change within 30 days of being told, so that the customer is alerted if someone else made the change. Ten days is shorter than the rule requires, while sixty and ninety days are too long.17 CFR 240.17a-3(a)(17)

A representative wants the customer's authority to submit a check drawn on the customer's bank account to buy fund shares. What does the rule require?

• a.Approval from the firm's principal alone, with no customer paperwork
• b.Nothing, if the purchase is under $1,000
• c.Express written authorization, which can be the customer's signature on the check✓
• d.Verbal consent noted on the order ticket by the representative

Rule 4514 requires express written authorization from the customer to obtain or submit a check or similar negotiable paper drawn on the customer's account, and the customer's signature on the check can serve as the authorization. A verbal note does not satisfy it. A principal cannot authorize in the customer's place. There is no dollar-amount exemption.FINRA Rule 4514

After an order is entered, a representative asks to move the trade from a customer's account to the firm's error account. Who must authorize the change?

• a.The customer, by telephone, with no record kept
• b.A registered principal designated by the firm, who documents the essential facts in writing✓
• c.The compliance department, which may document the reasons later
• d.The representative's branch assistant, who notes the change on the ticket

A change in account name or designation requires authorization by a qualified, registered principal designated by the firm, who must be told the essential facts and record them in writing. An assistant has no such authority. The customer's consent does not substitute for the principal's. Documentation must be made when the change is approved, not later.FINRA Rule 4515

A carrying firm has validated a customer's transfer instruction. Within what time must it complete the account transfer?

• a.Five business days after the firm validates the instruction
• b.Three business days after validation✓
• c.Ten calendar days after the instruction is received
• d.One business day after validation

The carrying firm must validate or take exception within one business day, then complete the transfer within three business days after validation. One business day is the validation deadline, not the completion time. Five business days and ten calendar days are longer than the rule allows.FINRA Rule 11870

At the opening of an account, FINRA's know-your-customer rule requires a firm to use reasonable diligence to learn:

• a.Only the customer's stated risk tolerance and investment objectives
• b.The essential facts about the customer and the authority of anyone acting for the customer✓
• c.The customer's net worth, proven by the most recent tax return
• d.The financial profile of each of the customer's relatives

Rule 2090 requires reasonable diligence to know the essential facts about every customer and the authority of each person acting on the customer's behalf. Risk tolerance and objectives are part of the suitability profile under other rules and do not capture the whole duty. Tax returns are not required. Relatives' finances are outside the rule.FINRA Rule 2090

A customer signs a limited trading authorization in favor of her representative. Which action is outside the authority?

• a.Exchanging one fund's shares for another fund's in the same family
• b.Withdrawing cash from the account and mailing a check to the representative✓
• c.Buying shares of a fund that the representative has selected for the customer
• d.Selling shares of a fund that the customer already holds in the account

A limited trading authorization permits buying and selling in the account; it never permits taking money or securities out. The representative cannot withdraw cash and pay it to himself. Selecting a fund, selling holdings and exchanging within a family are all trades within the authority, and any discretionary trading needs the customer's written authorization and the firm's written acceptance.FINRA Rule 3260

A broker-dealer closes a customer's account. How long must it keep the identifying information collected under its customer identification program?

• a.One year after closing
• b.Seven years after the account was opened
• c.Five years after the account is closed✓
• d.Three years after closing

The identifying information must be kept for five years after the account closes. One and three years are shorter than the rule allows. A seven-year period measured from the opening date could expire while the account is still open, and it is not the rule.31 CFR 1023.220(a)(3)

A brokerage fails. A customer has $420,000 of securities and $180,000 of cash in one account. How much does SIPC protect?

• a.$500,000✓
• b.$600,000
• c.$420,000
• d.$250,000

SIPC protects up to $500,000 per customer in a separate capacity, including no more than $250,000 of cash. The cash of $180,000 is within its sub-limit, so the covered total is $500,000, and the remaining $100,000 is an unprotected claim. Paying the full $600,000 ignores the cap. Covering only the securities or only the cash sub-limit understates the protection.Securities Investor Protection Act

When must a broker-dealer give a new customer its initial privacy notice?

• a.At the end of the customer's first year of service
• b.By the time the customer relationship is established✓
• c.Only if the firm will share information with nonaffiliates
• d.Within 30 days after the customer's account is opened

The initial notice is due no later than when the customer relationship is established, with narrow exceptions that allow a reasonable delay. A 30-day grace period is not part of the general rule. The notice is required whether or not the firm shares information. Waiting a year would leave the customer uninformed during the period when information is collected.Regulation S-P, 17 CFR 248.4

A firm wants to share a customer's nonpublic personal information with a nonaffiliated marketing company. What must it do first?

• a.Nothing, since a service contract allows sharing with any company
• b.Get the customer's signed opt-in consent on a principal-approved form
• c.Send notice after sharing begins so the customer can stop it later
• d.Give an opt-out notice and a reasonable time to opt out first✓

Before sharing with a nonaffiliate outside the exceptions, the firm must give the opt-out notice and a reasonable opportunity to opt out, and the regulation gives 30 days as an example. Sharing needs no signed opt-in, but it cannot start without the opt-out step. Notice after sharing starts is too late.Regulation S-P, 17 CFR 248.10

Which statement describes a transfer-on-death registration on a brokerage account?

• a.The beneficiary and owner hold equal shares with a right of survivorship
• b.The beneficiary owns the securities now and may sell them during the owner's life
• c.At death, the securities pass to the named beneficiary outside probate✓
• d.The securities pass through probate under the terms of the owner's will

With a transfer-on-death designation the owner keeps full control, and the securities pass to the beneficiary at death without going through probate. The beneficiary has no present rights, so the beneficiary cannot sell during the owner's life. Passing under a will means probate, which the designation avoids. Equal ownership with survivorship describes a joint account.Transfer on death registration

A firm is opening a brokerage account for a general partnership. Which document should it obtain?

• a.A corporate resolution signed by the board of directors and the secretary
• b.A trust certification naming the current and successor trustees
• c.The partnership agreement, showing which partners may trade✓
• d.Each partner's personal tax return, which proves identity

The partnership agreement shows the partners and which of them may act for the partnership. Tax returns are not an account opening document. A corporate resolution and a trust certification belong to corporate and trust accounts and describe entities the customer is not.Account opening documentation

An executor wants to open an account for a decedent's estate. Which document shows the executor's authority?

• a.The decedent's durable power of attorney, signed before death
• b.The decedent's most recent account statement from the firm
• c.Letters testamentary issued by the probate court✓
• d.The death certificate issued by the county health office

Letters testamentary are the court's grant of authority to the executor. A death certificate proves the death, but it does not name who may act. A power of attorney ends at death, so it gives no authority over the estate. An account statement shows holdings and not authority.Account opening documentation

A 58-year-old customer inherits $300,000 and asks her representative what to do with it. What should the representative do first?

• a.Move the money into a money market fund for a year
• b.Update her investment profile before making any recommendation✓
• c.Recommend the fund she already owns, since she is familiar with it
• d.Recommend the fund with the highest sales charge to cover advice

A wealth event changes the customer's finances, so the representative should refresh her goals, time horizon and risk tolerance before recommending anything. Recommending the fund she already owns because it is familiar skips the care obligation and risks concentration. Parking the money in a money market fund for a year presumes needs that have not been learned. A higher sales charge is a conflict, not a reason.Regulation Best Interest, 17 CFR 240.15l-1

A customer buys $40,000 of fund shares, then within days asks to redeem and send the check to an unrelated third party abroad. What should the representative do?

• a.Escalate to the AML compliance officer and do not alert the customer✓
• b.Process the redemption after confirming the customer's identification
• c.Tell the customer that the firm may file a suspicious activity report
• d.Refuse the request and close the account without making an internal report

Rapid in-and-out activity paid to an unrelated third party abroad is a money laundering red flag that belongs with the AML compliance officer. A SAR is confidential, so telling the customer is prohibited. Checking identification alone misses the red flag. Refusing and closing without a report leaves the firm's own filing duty unmet.31 CFR 1023.320; FINRA Rule 3310

A standalone broker-dealer prepares its relationship summary, Form CRS. What is the page limit?

• a.Six pages
• b.Four pages
• c.One page
• d.Two pages✓

A standalone broker-dealer's Form CRS is limited to two pages. Four pages is the limit for a dual registrant that is both a broker-dealer and an investment adviser. One and six pages are not limits in the form instructions.17 CFR 240.17a-14; Form CRS

A customer plans to buy and hold three mutual funds for 10 years and expects to trade rarely. A representative proposes an asset-based fee account. What must the representative consider?

• a.Whether the fee account allows more frequent trading
• b.Whether a commission account would cost the customer less over the holding period✓
• c.Nothing, because fee-based accounts always cost less
• d.Only the representative's higher compensation under the fee

The care obligation requires the representative to consider the cost of the account type for this customer, and a buy-and-hold customer might pay less in commissions than in annual fees. Assuming one structure is always cheaper skips that analysis. Compensation is a conflict to manage, not a basis for the choice. Frequent trading is not what this customer wants.Regulation Best Interest, 17 CFR 240.15l-1

In 2026, a 52-year-old with $90,000 of earned income wants to make the maximum IRA contribution. What is the limit, ignoring deductibility?

• a.$7,500
• b.$8,600✓
• c.$15,500
• d.$8,500

The 2026 IRA limit is $7,500, and people 50 and older may add a $1,100 catch-up, for $8,600. The base alone leaves out the catch-up. A $1,000 catch-up is the older figure and gives $8,500. The $15,500 total adds the larger 401(k) catch-up, which does not apply to IRAs.IRC Section 219

In 2026, a 61-year-old participant wants to make the maximum elective deferral to a 401(k). The base limit is $24,500, the age-50 catch-up is $8,000, and the ages 60-63 catch-up is $11,250. What is the limit?

• a.$35,750✓
• b.$24,500
• c.$43,750
• d.$32,500

A participant aged 60 through 63 gets the higher catch-up in place of the age-50 catch-up, so the limit is $24,500 plus $11,250, or $35,750. Using the $8,000 catch-up gives $32,500, which misses the special rule. The base alone skips the catch-up. Adding both catch-ups gives $43,750, but only one applies.IRC Section 402(g)

An employee's 401(k) plan allows loans, and her vested balance is $70,000. What is the most she can borrow?

• a.$35,000✓
• b.$50,000
• c.$10,000
• d.$70,000

The limit is the lesser of 50% of the vested balance or $50,000, which here is $35,000. The $50,000 cap applies only when half the balance is larger than that. Borrowing the full balance is not allowed. The $10,000 figure applies only when half of the vested balance is smaller than $10,000.IRC Section 72(p)

A participant receives a $50,000 distribution from a former employer's 401(k) paid directly to her, and 20% is withheld. How much must she add from other funds within 60 days to roll over the full $50,000?

• a.$0
• b.$25,000
• c.$10,000✓
• d.$5,000

The plan withheld 20%, or $10,000, so she received only $40,000, and she must replace the $10,000 from other money to roll the whole amount. The 10% rate that applies to IRA distributions would give $5,000, but plan distributions carry mandatory 20% withholding. Rolling only what she received leaves $10,000 taxable. A $25,000 top-up has no basis. A direct trustee-to-trustee transfer would have avoided the problem.IRC Section 3405(c)

A 40-year-old takes $10,000 from a Traditional IRA for a first-time home purchase. How is the withdrawal taxed?

• a.Taxable income, but the 10% additional tax is waived✓
• b.Completely tax-free because the money is used to buy a home
• c.Taxed only at the long-term capital gains rate for assets held over a year
• d.Included in income and also subject to the 10% additional tax

Traditional IRA distributions are taxable income, and the first-time homebuyer exception waives only the 10% additional tax, up to $10,000 over a lifetime. The withdrawal is not tax-free just because the money buys a home. Because the additional tax is waived, taxing it twice is wrong. IRA distributions are ordinary income and never get capital gains treatment.IRC Section 72(t)

An employee exercises 200 nonqualified stock options with a $20 exercise price when the stock trades at $35. How much ordinary income is recognized at exercise?

• a.$3,000✓
• b.$7,000
• c.$0, until the shares are sold
• d.$4,000

The spread is $15 per share, so 200 shares produce $3,000 of compensation income at exercise. Deferring until sale describes an incentive stock option for regular tax. The $7,000 total is the full market value and the $4,000 total is the strike cost, neither of which is the spread.IRC Section 83

A fund pays a capital gain distribution to an investor who bought the shares two months ago. How does the investor report the distribution?

• a.As a long-term gain, regardless of how long the shares were held✓
• b.As a short-term gain, because the shares were held two months
• c.As a non-taxable return of capital
• d.As ordinary income, because it came from the fund

A capital gain distribution is long-term to the shareholder based on how long the fund held the securities, not on the shareholder's own holding period. Treating it as short-term uses the wrong holding period. It is not ordinary income, and it is a taxable distribution of realized gains rather than a return of capital.IRC Section 852(b)(3)

An investor buys 100 fund shares for $2,000 and reinvests $150 of dividends in additional shares. She later sells everything for $2,600. What is her taxable gain?

• a.$2,600
• b.$150
• c.$450✓
• d.$600

Reinvested dividends were taxed when paid, so they add to the cost basis, which becomes $2,150, and the gain is $2,600 less $2,150, or $450. Ignoring the reinvestment gives $600 and taxes the dividends twice. The dividends alone are $150, and the whole proceeds of $2,600 are not the gain.IRC Section 1012; Treas. Reg. 1.1012-1

A fund notifies a shareholder that part of a distribution is a return of capital. What is the tax treatment?

• a.It is taxed as a qualified dividend in the year received
• b.It is taxed as a short-term gain in the year received
• c.It lowers the shareholder's basis and is taxed only once basis reaches zero✓
• d.It is exempt from tax forever and leaves basis unchanged

A return of capital is not taxed when received but reduces the cost basis, which raises the gain at a later sale; once basis hits zero, further amounts are capital gain. It is not a dividend. Leaving basis unchanged would let the shareholder escape tax permanently. It is not a short-term gain.IRC Section 301(c)

A qualified dividend paid by a fund to an individual shareholder is generally taxed at which rates?

• a.No federal tax if the dividend is reinvested
• b.The long-term capital gains rates✓
• c.Ordinary income rates only
• d.A flat 10% rate for every taxpayer

Qualified dividends are taxed at the 0%, 15% or 20% long-term capital gains rates, subject to holding-period tests. They are not limited to ordinary rates. No flat 10% exists. Reinvestment does not exempt a dividend, since it is taxed when paid.IRC Section 1(h)(11)

A resident of Ohio owns a national municipal bond fund. Which statement about the fund's year-end distributions is correct?

• a.Capital gain distributions are exempt from tax but interest dividends are taxable
• b.All dividends are exempt from federal income tax and from Ohio state and local income taxes
• c.Interest dividends are federally exempt; capital gain distributions are taxable✓
• d.Every distribution is exempt from federal tax, because gains realized on municipal bonds keep their exempt status

A fund can pass through exempt-interest dividends, but capital gains it distributes are taxable (IRC Section 852(b)(5)). The treatment is not reversed: the interest dividends, not the gains, receive the exemption. Gains realized on municipal bonds do not keep the exemption, so the claim that every distribution is exempt is wrong. A national fund holds bonds from many states, so the state exemption depends on in-state issuers and is not automatic for an Ohio resident.IRC Section 852(b)(5)

An investor in the top bracket holds a municipal fund that owns private activity bonds. What tax risk should the representative explain?

• a.The interest is exempt from state tax only, not from federal tax
• b.Some of the interest may be an AMT preference item✓
• c.The fund must be sold within a year of purchase to keep the exemption
• d.All of the interest becomes fully taxable at ordinary rates

Interest from certain private activity bonds is a tax preference item for the alternative minimum tax, so some investors owe tax on part of it. The interest does not become fully taxable. No holding requirement forces a sale. The exemption is from federal tax, not only state tax.IRC Section 57(a)(5)

A municipal fund yields 4.2% and the investor is in the 24% federal bracket. Ignoring state tax, what taxable yield would match it?

• a.6.00%
• b.3.19%
• c.5.04%
• d.5.53%✓

The taxable-equivalent yield is the tax-free yield divided by one minus the tax rate: 4.2% divided by 0.76 is 5.53%. Multiplying 4.2% by 0.76 gives 3.19%, which converts in the wrong direction. Adding 24% of 4.2% gives 5.04% and treats the rate as an addition. A result of 6.00% would need a 30% bracket.Tax-equivalent yield

A 45-year-old owns a nonqualified deferred annuity with a cost basis of $50,000 and a value of $65,000. She withdraws $10,000 before annuitizing. What is the result?

• a.Nothing is taxable until the basis is fully recovered
• b.Only $2,308 is taxable, since the basis is recovered pro rata
• c.The full $10,000 is taxable income and may carry a 10% additional tax✓
• d.The $10,000 is a taxable gain but has no additional tax

Withdrawals from a nonqualified annuity before annuitization come out of earnings first, so the whole $10,000 is taxable because $15,000 of earnings exists. Because she is under 59 1/2, the 10% additional tax generally applies. A pro rata split and a basis-first rule both describe other types of contracts. Exempting the additional tax ignores her age.IRC Section 72(e)

A retiree pays $60,000 for an annuity with an expected total payout of $120,000 and receives $9,600 in the first year. How much is taxable that year?

• a.$4,800✓
• b.$6,000
• c.$0
• d.$9,600

The exclusion ratio is the $60,000 investment divided by the $120,000 expected return, or 50%, so half of each payment is a return of basis and $4,800 is taxable. Taxing the whole payment ignores the basis. The $6,000 figure has no basis in the ratio. Each payment is split by the exclusion ratio, so none is wholly tax-free this year.IRC Section 72(b)

Which exchange qualifies as a tax-free exchange under Section 1035?

• a.A life insurance policy for shares of a closed-end fund
• b.A variable annuity contract for a life insurance policy
• c.A variable annuity contract for shares of a mutual fund
• d.A variable annuity for another annuity contract✓

Section 1035 allows a nonrecognition exchange of annuity for annuity, life policy for life policy, or life policy for annuity. Moving from an annuity into a life policy is not covered, and moving from an annuity into fund shares is a taxable surrender. Exchanging an insurance policy for closed-end fund shares is not covered either.IRC Section 1035

A variable life policy fails the seven-pay test. What is the consequence?

• a.Cash value growth loses its tax deferral inside the policy each year
• b.The policy is cancelled and all premiums paid are returned to the owner
• c.It becomes a modified endowment contract (MEC)✓
• d.The death benefit becomes taxable income to the policy beneficiary

A policy that fails the seven-pay test becomes a modified endowment contract, so loans and withdrawals are taxed earnings first, with a 10% additional tax before age 59 1/2. The death benefit stays income-tax-free to the beneficiary. The policy remains in force and is not cancelled. Inside buildup stays tax-deferred.IRC Section 7702A

A grandmother wants to contribute the largest amount to a grandchild's 529 plan in one year without using any lifetime gift exemption, using the five-year election. Using the 2026 annual exclusion of $19,000, what is the amount?

• a.$19,000
• b.$95,000✓
• c.$76,000
• d.$114,000

The election spreads a contribution over five years, so the donor may give five times the annual exclusion, $19,000 times 5, or $95,000. A single exclusion of $19,000 ignores the election. A figure of $76,000 uses only four years. An amount of $114,000 uses six years, which the election does not allow.IRC Section 529(c)(2)

An investor sells fund shares at a $1,200 loss and buys substantially identical shares 10 days later for $8,800. What is the basis in the new shares?

• a.$9,000
• b.$10,000✓
• c.$7,600
• d.$8,800

A repurchase within 30 days triggers the wash sale rule, so the $1,200 loss is disallowed and added to the cost of the new shares, making the basis $8,800 plus $1,200, or $10,000. The price alone ignores the disallowed loss. Subtracting the loss gives $7,600, which moves the wrong way. $9,000 has no basis in the facts.IRC Section 1091

Which cost basis method is available for mutual fund shares but not for individual stocks?

• a.First in, first out
• b.Last in, first out
• c.Specific identification
• d.Average cost✓

Average cost may be used for shares of a regulated investment company, which is why funds report it. First-in-first-out is the default for stock when no lot is identified, and specific identification is allowed for stock. Last-in-first-out is not a recognized method for either.Treas. Reg. 1.1012-1(e)

An investor owns lots of 100 shares bought at $10, $14 and $18. She sells 100 shares at $20 and identifies the $18 lot. What is her gain?

• a.$1,400
• b.$600
• c.$1,000
• d.$200✓

Specific identification lets her pick the highest-cost lot, so the gain is $2,000 less $1,800, or $200. Selling the $10 lot gives a gain of $1,000. The $14 lot gives $600. A figure of $1,400 does not match any lot.Treas. Reg. 1.1012-1(c)

A son inherits fund shares his father bought for $10,000 that were worth $25,000 at death. He sells them for $26,000. What is the gain?

• a.$1,000, treated as long-term✓
• b.$15,000, treated as short-term
• c.$1,000, treated as short-term
• d.$16,000, treated as long-term

Inherited property takes a stepped-up basis equal to its value at death, $25,000, so the gain is $1,000 and is automatically long-term. Using the father's basis would give $16,000. A short-term label ignores the automatic long-term rule. $15,000 is the unrealized gain at death, which was never taxed.IRC Section 1014

A mother gives her daughter fund shares with a basis of $5,000 and a value of $8,000. The daughter sells for $9,000. What is her gain?

• a.$9,000
• b.$4,000✓
• c.$1,000
• d.$3,000

A gift carries over the donor's basis, so the gain is $9,000 less $5,000, or $4,000. Using the value at the gift date would give $1,000 and apply a step-up that only applies at death. $3,000 is the gain accrued before the gift. The proceeds of $9,000 are not the gain.IRC Section 1015