Question:
Frank's car was
completely destroyed in an automobile accident for which Frank was at fault.
He did not file a claim with his insurance company because he feared his
premiums would be raised. His loss was $4,500. His policy had a $1,000
deductible. How much casualty loss can Frank claim on his return (before the
deduction limits)?
- $-0-
- $4,500
- $3,500
- $1,000
Answer: D. Frank
can claim a casualty loss of $1,000.
Frank's fear costs him
$3,500. If Frank's car is covered by insurance, he should file a timely
insurance claim for reimbursement of his loss. Otherwise, he cannot deduct
this loss as a casualty loss. However, this rule does not apply to the
portion of the loss not covered by insurance, e.g., a deductible.
Easy, huh?
Publication: Pub 17, pp 162-8.
Topic:Employee benefits and compensation
Question:
In 2007, Sally sold a
personal residence on the installment method. She needed cash in 2009 so she
sold the note for $7,500 when the balance due her was $9,000. Her gross
profit percentage was 47.5%. How much profit must Sally report on the
disposition of the obligation?
- $2,775
- $7,500
- $-0-
- $3,225
Answer:
A. Sally reports a gain of $2,775.
This may be the toughest
question in this part because it deals with the disposition of an installment
obligation, not an ordinary installment sale.
Two rules cover the gain
or loss from the disposition of an installment obligation.
- If she disposes of the obligation in any other
way, the gain or loss is the difference between her basis in the
obligation and its FMV at the time of the disposition. This rule
applies, for example, if she were to give the installment obligation to
someone else or cancels the buyer's debt to her.
Which rule
applies to Sally? That's easy. Rule 1.
She receives $7,500.
What is her basis in the obligation? Her basis in the obligation is the
amount of her original basis that has not been recovered up to the date of
sale. The balance due on the principal of the obligation is $9,000. Part of
this is unrecovered basis and part is profit.
|
Profit
|
Basis of obligation
|
|
Balance
|
$9,000
|
Balance
|
$9,000
|
|
Profit % = 47.5
|
x .475
|
less profit
|
(4,275)
|
|
Profit
|
$4,275
|
Basis
|
$4,725
|
|
Gain/loss
|
|
Amount
received
|
$7,500
|
|
less basis
|
(4,725)
|
|
Gain/loss
|
$2,775
|
Publication: Pub 537, pg 11.
Topic:Installment sales
Question:
In 2008, B invested
$20,000 cash for a 55% interest in ABC Partnership. B materially participates
in the partnership's business and the partnership agreement states he is
liable for all of the partnership's debts. The only partnership debt at the
year-end was a $17,000 loan from Cook bank. Partner B and the other general
partner had a separate agreement that B's liability would not exceed $12,000.
The partnership reported a $60,000 ordinary loss for 1999. Assuming there
were no other adjustments to B's basis, what is the amount of B's deductible
loss for 2008?
- $ 37,000
- $ 33,000
- $ 32,000
- $ 20,000
Answer:
C. B's deductible
loss is $32,000. Another one to read carefully.
The basis of a partnership interest is the money plus the adjusted basis of
any property the partner contributed. If the partner must recognize gain as a
result of the contribution, this gain is included in the basis of her
interest. Any increase in a partner's individual liabilities because of an
assumption of partnership liabilities is considered a contribution of money
by the partner.
B's deduction for a distributive share of a loss is allowed only to the
extent of the adjusted basis of the partner's partnership interest.
The nut of the problem is determining B's adjusted basis. No question that
the $20,000 cash he invested is included. The partnership agreement states
that B is liable for all of the partnership's $17,000 debt. Ordinarily, this
amount would be included in B's adjusted basis. B, however, has hedged his
liability with an separate agreement with another partner that limits her
liability to $12,000.
Are you ready for the numbers? Here we go, ready or not!!
|
Adjusted
basis
|
|
Cash
|
$20,000
|
|
Partnership
debt
|
12,000
|
|
Adjusted
basis
|
$32,000
|
Distributive share of loss -
$60,000 x 35% = 33,000
Deductible loss (limited to adjusted basis) = $32,000
Basis on 1/1/2000 = $-0-
Carryover loss = $1,000
Publication: Pub 544, pp
3, 23-4.
Topic: Gains and losses
Question:
Fred is a partner in
DEF Partnership. The adjusted basis of his partnership interest is $38,000,
which includes his $30,000 share of partnership liabilities. Fred's share of
unrealized receivables in the partnership is $12,000. Fred sold his share of
the partnership interest for $45,000 cash. What is the amount and character
of Fred's gain?
- $12,000 ordinary gain;
$25,000 capital gain
- $25,000 ordinary gain;
$12,000 capital gain
- $ 7,000 capital gain
- $37,000 capital gain
Answer: A. Fred has $12,000 ordinary gain and $25,000 capital gain.
The sale or exchange of Fred's interest in DEF partnership results in a gain
or loss. Gain or loss is the difference between the amount realized and his
adjusted basis.
If Fred is relieved of
any partnership liabilities, he must include the liability relief as part of
the amount realized.
If any of the amount Fred
receives is for his share of DEF's unrealized receivables or inventory items,
it is ordinary income. The remaining gain is a capital gain.
More easy numbers:
[Fred receives $12,000 as
his share of unrealized receivables. If he has a gain, the first $12,000 will
be ordinary. Choice A is the only on that fits.]
|
Amount realized -
|
|
|
$45,000
|
cash
|
|
|
$30,000
|
liability
relief
|
|
|
Amount
realized
|
$75,000
|
|
|
|
less basis
|
($38,000)
|
|
|
|
Gain
|
$37,000
|
|
|
Fred's ordinary gain is
$12,000; his capital gain is $25,000.
Note that the payment for
unrealized receivables or inventory items affects the character of Fred's
gain but not its amount.
Publication: Pub 541, pp
15-6.
Topic: Partnerships
Question:
Buffalo Properties, Inc. owned and displayed a collection of watercolors in
its main office. When the 75% owner retired, he was presented with his choice
from the collection. He selected a painting with a fair market value of
$250,000. Buffalo Properties' basis in the painting was $150,000. How should
the distribution be reported on the return of Buffalo Properties?
- No reporting required.
- $150,000 distribution reduces
assets on the balance sheet but no effect on tax.
- $100,000 taxable gain
- $250,000 taxable gain
Answer:
C.Buffalo reports
a taxable gain of $100,000.
Most distributions are in money, but they may also be in stock or other
property. For this purpose, "property" generally does not include
stock in Buffalo or rights to acquire this stock.
Buffalo generally does not recognize gain
or loss on distributions unless the FMV of property is greater than its
adjusted basis in the property.
Buffalo recognizes a gain on the
distribution. It is the same treatment as if the painting was sold.
|
Amount
realized (FMV)
|
$250,000
|
|
less adjusted basis
|
|
(150,000)
|
|
Recognized
gain
|
|
$100,000
|
Publication: Pub 542, pg
11.
Topic:Corporations (including distributions)
Question:
On January 1, 2008, Bob purchased 50% of the stock
of Lebeck Industries, an S Corporation, for $100,000, and Bob also loaned the
corporation $20,000. At the end of 2008, Lebeck Industries incurred an
ordinary loss of $180,000. How much of the loss can Bob deduct on his
personal income tax return for 2008?
- $90,000
- $180,000
- $-0-
- $120,000
Answer:
A. Bob can deduct
$90,000 of Lebeck's loss.
The amount of Lebeck's loss that Bob can deduct is limited to his adjusted
basis. Bob's 50% share of Lebeck's $180,000 loss is $90,000.
Bob deducts the $90,000
and reduces his adjusted basis to $10,000.
The loan to Lebeck does not affect Bob's basis in his stock.
Publication: Pub 542, pg 3; Inst for Form 1120S, Sch K-1, Pg 1.
Topic: S corporations
----------------------------------- -->
Question:
Identify the appropriate action that a practitioner should take when he or
she becomes aware of an error or omission on a client's return.
- Amend the return and provide
it to the client.
- Inform the IRS of the
noncompliance, error, or omission.
- Do nothing.
- Promptly advise the client of
such noncompliance, error, or omission.
Answer:
D.
A practitioner is not required to be a snitch.
A
practitioner who knows that his or her client has not complied with the
revenue laws or has made an error or omission from any return, document,
affidavit, or other required paper has the responsibility to advise the
client promptly of the noncompliance, error, or omission.
[Note that
the practitioner is not required to advise or notify anyone else.]
Publication: Pub 947, pg 5.
Topic: Practice before the IRS and representation
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2008-FASTAX
Most Recent Update, August 31, 2009
For More Information Contact: Jim Banks
