Tax Exam Problems

 

Any reference to the Code is to the Internal Revenue Code of 1986, as amended.

 

There are 2 essay questions (with multiple parts to each) requiring concise answers. Essay One is worth a maximum total of 21 points (7 parts with a maximum of 3 points each) and Essay Two is  worth a maximum total of 12 points (3 parts with a maximum of 4 points each).

 

Please answer each of the following questions.  In addition to choosing the correct answer, please concisely explain why the chosen answer is correct, what primary sources and what secondary sources you used in reaching your conclusion. Please be specific and advise as to which of the tax service databases you used and what materials in the database assisted you in reaching your conclusion.

 

Essay One

 

Part 1 – Bob owned a duplex used as rental property.  The duplex had an adjusted basis to Bob of $86,000 and a fair market value of $300,000.  Bob transferred the duplex to his brother, Carl, in exchange for a triplex that Carl owned.  The triplex had an adjusted basis to Carl of $279,000 and a fair market value of $300,000.  Two months after the exchange, Carl sold the duplex to his business associate to whom he was not related for $312,000.  How much, if any, was Bob’s recognized gain or loss with respect to these transactions?

 

  1. No gain or loss is recognized.
  2. $11,000 gain is recognized.
  3. $214,000 gain is recognized.
  4. The transfer by Bob to Carl is a gift.
  5. $21,000.

 

Letter answer: _____

Explanation:

 

 

 

Part 2.  What Code Section or Sections govern the result in part 1?

  1. Code Sections 1015 and 2503.
  2. Code Sections 61 and 707.
  3. Code Sections 318 and 1001.
  4. None of the above, and the two governing sections are discussed in the short essay below.

 

Letter Answer: ____

Explanation:

 

 

 

 

Part 3.  Bob owned a duplex used as rental property.  The duplex had an adjusted basis to Bob of $86,000 and a fair market value of $300,000.  Bob transferred the duplex to his brother, Carl, in exchange for a triplex that Carl owned.  The triplex had an adjusted basis to Carl of $279,000 and a fair market value of $300,000.  Two months after the exchange, Carl sold the duplex to his business associate to whom he was not related for $312,000.  How much, if any, gain or loss did Carl recognize with respect to the transaction with Bob?

 

  1. No gain or loss was recognized.
  2. $21,000 gain was recognized.
  3. The transfer by Bob to Carl was a gift.
  4. None of the above is correct.

 

Letter Answer: ____

Explanation:

 

 

 

 

 

Part 4.  Bob owned a duplex used as rental property.  The duplex had an adjusted basis to Bob of $86,000 and a fair market value of $300,000.  Bob transferred the duplex to his brother, Carl, in exchange for a triplex that Carl owned.  The triplex had an adjusted basis to Carl of $279,000 and a fair market value of $300,000.  Two months after the exchange, Carl sold the duplex to his business associate to whom he was not related for $312,000.  How much, if any, gain or loss did Carl recognize with respect to the sale by Carl two months after the transaction with Bob?

  1. No gain or loss was recognized.
  2. $11,000 gain was recognized.
  3. $12,000 gain was recognized.
  4. None of the above.

 

Letter Answer: ____

Explanation:

 

 

 

 

 

Part 5.   Assume the same facts as in Part 4, except that Carl sold the duplex to the business associate more than two years after the exchange with Bob.  Without taking into consideration any changes to the adjusted basis of the property subsequent to the exchange with Bob (such as for depreciation), how much, if any, gain or loss did Bob recognize with respect to the exchange with Carl?

 

  1. No gain or loss was recognized.
  2. $11,000 gain was recognized.
  3. $214,000 gain was recognized.
  4. The transfer by Bob to Carl is a gift.
  5. $21,000.

 

 

 

 

Letter Answer: ____

Explanation:

 

 

 

 

 

 

 

Part 6.  Under the facts of Part 5, what is Bob’s basis in the triplex?

 

  1. $86,000.
  2. $279,000.
  3. $300,000.
  4. $312,000.

 

Letter Answer: ____

Explanation:

 

 

 

 

Part 7.   Assume the same facts as in part 6, except that Carl sold the duplex to his business associate more than two years after the exchange with Bob.  Without taking into consideration any changes to the adjusted basis of the property subsequent to the exchange with Bob (such as for depreciation), how much, if any, is Carl’s recognized gain with respect to these transactions?

 

  1. No gain or loss on the exchange with Bob, and $12,000 gain on the subsequent sale.
  2. $11,000 gain on the exchange with Bob, and $12,000 gain on the subsequent sale.
  3. $12,000 gain on the exchange with Bob, and $279,000 on the subsequent sale.
  4. None of the above.

 

Letter Answer: ____

Explanation:

 

 

 

 

 

 

 

Essay Two

 

 

Part 1. Bobby and Bobbi were married in 2000 and in October 2015, they sold for $450,000  their principal residence that they had purchased in 2004 for $200,000. The property was owned by them as tenants by the entirety. They made major capital improvements during their 10-year ownership totaling $40,000.  What Code Section is applicable to the amount of gain recognized, and what, if any, is their recognized gain?

 

  1. $250,000; Code Section 1014.
  2. $210,000; Code Sections 61 and 1001.
  3. $-0-; Code Section 1034.
  4. $-0-; Code Section 121.
  5. None of the above

 

 

Letter Answer: ____

Explanation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Part 2. Suppose instead that in the preceding problem (part 1) Bobby and Bobbi sold their home for $800,000. They moved into a smaller home costing $250,000. How much gain must they recognize?

 

  1. $560,000.
  2. $500,000.
  3. $310,000.
  4. $60,000.
  5. None of the above.

 

 

Letter Answer: ____

Explanation:

 

 

 

 

 

 

 

Part 3. Assume instead that Bobby and Bobbi resided in a neighborhood where the values had gone way down, and the home purchased in 2004 for $200,000 (capital improvements of $40,000) was sold for only $110,000. How much loss is deductible on their 2015 Form 1040?

 

  1. $200,000.
  2. $130,000.
  3. $90,000.
  4. $-0-
  5. None of the above.

 

 

Letter Answer: ____

Explanation:

 

 

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