Exercise
Answer the following questions.
1. How much is Sandy’s initial basis using the following assumptions?
• Tuesday Sandy writes a check to her broker-dealer for $40,000 for her investment in XYZ Company.
• Wednesday Sandy’s broker-dealer transfers $34,000 to XYZ Company. He transfers the remaining $6,000 into his company’s account for his commission.
• Thursday Sandy signs a recourse note, of which her share is $40,000.
• Friday Sandy receives a cash distribution of $7,000.
A. $80,000
B. $34,000
C. $40,000
D. $73,000
2. Using the assumptions as in the previous question and assuming all those events happened in a single tax year, what is Sandy’s end-of-year basis?
A. $87,000
B. $80,000
C. $73,000
D. $33,000
3. At the end of the year, Sandy receives a statement saying XYZ Company had a loss for the year, of which her share is $78,000. Using the assumptions in the previous question and assuming Sandy had $100,000 of passive income last year, how much of her XYZ loss can she use as a deduction on her personal income tax form for the year?
A. $0
B. $73,000
C. $78,000
D. $100,000
4. Shortly after the first of the year Sandy sells her interest in XYZ Company for $75,000. Using the assumptions in the previous question, what is her gain or loss on the sale?
A. $5,000 loss
B. $3,000 loss
C. $2,000 gain
D. $7,000 gain
Answers
1. C. Sandy’s initial basis is the amount o