(a) The adjusted basis of the original common stock shares remains $8,800 (100 shares x $88 per share). The basis of the new stock rights is $0 since they are worth less than 15% of the original stock's FMV. (b) The holding period of the original common stock shares remains March 31, 2011. The holding period of the new stock rights includes the holding period of the original shares, which is March 31, 2011.

1. Chapter 10
Property Transactions:
Determination of Basis and
Gains and Losses
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2. Chapter 10 Exhibits
1. General Rule for Any Type of Disposition
2. Seller's Amount Realized
3. Adjusted Basis
4. Cost of Improvements
5. Lump-Sum Purchases of Several Properties
6. Selling Taxable Stock Dividends—Rules
7. Selling Taxable Stock Dividends—Example
8. Selling Identical, Nontaxable Stock Dividends—Rules
9. Selling Identical, Nontaxable Stock Dividends—Example
Chapter 10, Exhibit Contents A CCH Federal Taxation Basic Principles 2 of 36

3. Chapter 10 Exhibits
10. Selling Nonidentical, Nontaxable Stock Dividends—Rules
11. Selling Nontaxable Stock Rights Less Than 15% FMV Original Stock—Rules
12. Selling Nontaxable Stock Rights Less Than 15% FMV Original Stock—
Example
13. Selling Nontaxable Stock Rights ≥ 15% FMV Original Stock
14. Selling Nontaxable Stock Rights ≥ 15% FMV Original Stock— Example
15. Exercising Stock Rights—Tax Treatment for New Stock
16. Exercising Stock Rights—Example
Chapter 10, Exhibit Contents B CCH Federal Taxation Basic Principles 3 of 36

4. Chapter 10 Exhibits
17. Selling Gifts by Donees
18. Selling Property by Related Parties
19. Selling Personal-Use Conversions
20. Selling Inherited Property
21. Selling Common Stock
22. Wash Sales—General Rules
23. Wash Sales—Example
Chapter 10, Exhibit Contents C CCH Federal Taxation Basic Principles 4 of 36

5. General Rule for Any Type of Disposition
Amount realized
– Adjusted basis of all consideration given
= Realized gain or loss
⇓
Recognized (i.e., taxable) gain or loss
or Deferred (i.e., postponed) gain or loss
or Exempt (i.e., tax-free) gain or disallowed loss
Chapter 10, Exhibit 1 CCH Federal Taxation Basic Principles 5 of 36

6. Seller's Amount Realized
Cash received
+ Fair market value (FMV) of property received
+ FMV of services received
+ Liabilities of seller assumed by buyer (i.e., “debt relief”)
– Selling expenses (includes brokerage, advertising, and legal fees paid
by seller)
= Amount realized
Chapter 10, Exhibit 2 CCH Federal Taxation Basic Principles 6 of 36

7. Adjusted Basis
Cost (or other adjusted basis) on date of acquisition
+ Cost of improvements
+ Buying expenses, including commissions, legal, title search, surveys and appraisal
fees paid at date of original purchase
_ Depreciation (allowable depreciation reduces basis, even if not taken)
– Insurance proceeds received on partial destruction casualties
– Deductible loss on partial destruction casualties
+ Capital gain on partial destruction casualties
= Adjusted basis
Chapter 10, Exhibit 3 CCH Federal Taxation Basic Principles 7 of 36

8. Cost of Improvements
Repair and Maintenance Deductions vs. Capital Expenditures
Tax Treatment
Deductible Unless Personal Use Capitalized
Roofing Patching leaks Adding new roof
Wiring Mending Major replacement
Plumbing Replacing segments Replacing systems
Plastering Filling cracks Installation, renovation, and
remodeling
Paving and Patching potholes Initial paving, major resurfacing
resurfacing
Fire damage Cleanup, removal, and temporary facilities Modernization incident to
restoring former facilities
Land clearing Ordinary maintenance, bush-hogging Preparing building site for
construction
Chapter 10, Exhibit 4 CCH Federal Taxation Basic Principles 8 of 36

9. Lump-Sum Purchases of Several Properties
General Rule. Allocate total cost according to the relative fair market
value of each property.
Example
FACTS: A buyer pays a seller a lump-sum amount of $800,000 for land tracts A, B,
and C valued at $200,000, $300,000, and $500,000 respectively. ($1,000,000 is the total
value of the three tracts.)
QUESTION: What is the buyer’s basis in the three tracts?
SOLUTION:
A: $160,000 ($800,000 x [$200,000 ÷ $1,000,000])
B: $240,000 ($800,000 x [$300,000 ÷ $1,000,000])
C: $400,000 ($800,000 x [$500,000 ÷ $1,000,000])
Chapter 10, Exhibit 5 CCH Federal Taxation Basic Principles 9 of 36

10. Selling Taxable Stock Dividends—Rules
Upon receipt. Stock dividends are taxable as ordinary
income at their fair market value.
Upon sale. The basis of new shares of stock received in a
taxable stock dividend is their fair market value on the date
of receipt . The holding period begins on the day following
the date of receipt of the stock dividend.
Chapter 10, Exhibit 6 CCH Federal Taxation Basic Principles 10 of 36

11. Selling Taxable Stock Dividends—Example
FACTS:
 1,000 shares of common stock are purchased for $12,000 on March 31, 2011.
 On September 30, 2011, the shareholder receives a 20% taxable common stock dividend; the
FMV is $20 per share.
 On June 30, 2012, the 200 new dividend shares are sold for $30 per share.
QUESTION: Determine the tax treatment for the receipt and sale of the stock dividends.
SOLUTION:
September 30, 2011, receipt: the $4,000 stock dividend is taxable income
$20 per share x (1,000 shares x 20%)
June 30, 2012, sale: $2,000 short-term capital gain
$6,000 sales proceeds – $4,000 basis of new shares
Chapter 10, Exhibit 7 CCH Federal Taxation Basic Principles 11 of 36

12. Selling Identical, Nontaxable Stock Dividends—Rules
Upon receipt. Stock dividends are not taxable.
Upon sale. Allocate old basis over original and new shares using the
following formula:
Basis per share = old basis / (number of original shares +
number of new shares)
The holding period begins on the day following the date of the original
acquisition.
Chapter 10, Exhibit 8 CCH Federal Taxation Basic Principles 12 of 36

13. Selling Identical, Nontaxable Stock Dividends—Example
FACTS:
1. 1,000 shares of common stock are purchased for $12,000 on March 31, 2011.
2. On September 30, 2011, the shareholder receives a 20% nontaxable common stock dividend.
3. On June 30, 2012, the 200 new dividend shares are sold for $30 per share.
QUESTION: Determine the tax treatment for the receipt and sale of the stock dividends.
SOLUTION:
September 30, 2011, receipt: The stock dividends are not taxable.
June 30, 2012, sale results is a $4,000 long term capital gain.
Amount realized = 200 shares x $30 = $6,000
Adjusted basis = 200 shares x $10 = $2,000
**Basis per share = [$12,000 ÷ (1,000 old shares + 200 new shares)] = $10
Chapter 10, Exhibit 9 CCH Federal Taxation Basic Principles 13 of 36

14. Selling Nonidentical, Nontaxable Stock
Dividends—Rules
Upon receipt. Stock dividends are not taxable.
Upon sale. Allocate the original common stock basis
between the number of original common stock shares and the
number of new preferred stock shares using relative FMVs as
of the date of receipt.
The holding period of the original common stock does not
change. The holding period of the new preferred stock shares
includes the holding period of the original shares.
Chapter 10, Exhibit 10 CCH Federal Taxation Basic Principles 14 of 36

15. Selling Nontaxable Stock Rights Less Than
15% FMV Original Stock—Rules
Basis of the stock rights = 0, but the taxpayer may elect to
special allocation rules as if greater than or equal to 15%.
Holding period of nontaxable stock rights is same as the
holding period of the original stock.
Chapter 10, Exhibit 11 CCH Federal Taxation Basic Principles 15 of 36

16. Selling Nontaxable Stock Rights Less Than
15% FMV Original Stock—Example
FACTS:
1. On March 31, 2011, Frost purchased 100 common stock shares at $88 per share.
2. On September 30, 2011, Frost received 100 nontaxable stock rights.
3. Each common stock and stock right is worth $100 and $10 respectively on September
30, 2011.
4. One stock right enables Frost to purchase common stock share for $90.
QUESTIONS:
Determine (a) the adjusted basis of the new stock rights and the original common stock
shares; and (b) the holding period beginning date and the basis of the new stock rights and
original common stock shares.
Chapter 10, Exhibit 12a CCH Federal Taxation Basic Principles 16 of 36

17. Selling Nontaxable Stock Rights Less Than
15% FMV Original Stock—Example
SOLUTION to (a):
Adjusted basis of new stock rights: $0, since their value is < 15% FMV of common stock
[100 stock rights x $10 FMV per share] < [15% x (100 common stock shares x $100 FMV
per share)];
Adjusted basis of original common stock shares: $8,800 (i.e., no change).
SOLUTION to (b):
Holding period of the stock rights and original common stock shares begins on the day
following March 31, 2011.
Chapter 10, Exhibit 12b CCH Federal Taxation Basic Principles 17 of 36

18. Selling Nontaxable Stock Rights ≥ 15% FMV
Original Stock
Basis of stock rights =
original basis of common stock x FMV stock rights
(FMV stock rights + FMV of common stock)
Basis of common stock =
original basis of common stock x FMV of common stock
(FMV stock rights + FMV of common stock)
Holding period of nontaxable stock rights is same as the holding period of the original
stock.
Chapter 10, Exhibit 13 CCH Federal Taxation Basic Principles 18 of 36

19. Selling Nontaxable Stock Rights ≥ 15% FMV
Original Stock—Example
FACTS:
 On March 31, 2011, Frost purchased 100 common stock shares at $88 per share.
 On September 30, 2011, Frost received 100 nontaxable stock rights.
 Each common stock and stock right is worth $100 and $20 on September 30, 2011.
 One stock right enables Frost to purchase 1 common stock share for $90.
QUESTIONS: Determine (a) the adjusted basis of the new stock rights and the original
common stock shares; and (b) the holding period of the new stock rights if sold on June
30, 2012.
Chapter 10, Exhibit 14a CCH Federal Taxation Basic Principles 19 of 36

20. Selling Nontaxable Stock Rights ≥ 15% FMV
Original Stock—Example
SOLUTION to (a):
Basis of stock rights: $1,467 or $14.67 per stock right.
$1,467 = (100 common stock shares x $88 per share) x 100 stock rights x $20 per right
$2,000 + $10,000
SOLUTION to (b):
Basis of common stock: $7,333 or $73.33 per share of stock.
$7,333 = (100 shares x $88 per share) x 100 common stock shares x $100 per share
($2,000 + $10,000)
Holding period of nontaxable stock rights is long-term (i.e., from the day following
March 31, 2011 to June 30, 2012).
Chapter 10, Exhibit 14b CCH Federal Taxation Basic Principles 20 of 36

21. Exercising Stock Rights—
Tax Treatment for New Stock
New Stock Taxable Stock Rights Nontaxable Stock Rights
Basis FMV of rights Adjusted basis of
when received rights, if any
+ +
Exercise price Exercise price
Beginning Holding Begins on the day following Begins on the day following
Period date of exercise date of exercise
Chapter 10, Exhibit 15 CCH Federal Taxation Basic Principles 21 of 36

22. Exercising Stock Rights—Example
FACTS:
 On September 30, 2011, a taxpayer receives at no cost 100 stock rights valued at $3
per share.
 The stock rights enable the taxpayer to purchase common stock at $15 per share.
 On June 30, 2012, the taxpayer exchanges 100 stock rights plus the $1,500 exercise
price for 100 shares of common stock.
QUESTION: What is the tax treatment for the new stock if the stock rights are (a)
taxable upon receipt; and (b) nontaxable on receipt?
New Stock Taxable Stock Rights Nontaxable Stock Rights
Basis $18 per share $15 per share
($3 FMV of rights when received + $15 ($0 cost of rights when received + $15 exercise
exercise price) price)
Beginning Holding The day following June 30, 2012, The day following June 30, 2012, the
Period the date of exercise date of exercise
Chapter 10, Exhibit 16 CCH Federal Taxation Basic Principles 22 of 36

23. Selling Gifts by Donees
Gift Sales. When a donor gives a donee a gift, the value of
the gift is excluded from the donee’s income. When the
donee later sells the gift property to third party, special rules
govern the determination of the donee’s basis for computing
gain or loss.
Chapter 10, Exhibit 17a CCH Federal Taxation Basic Principles 23 of 36

24. Selling Gifts by Donees
Donee's Adjusted Basis (AB) Donee's Holding Period (HP)
“Gain” basis Same as donor's AB. Same as donor's HP.
“Loss” basis Lesser of: If donor's basis is used,
 Donor's basis or HP = donor's HP.
 FMV at gift date (but use GAIN If FMV is used,
basis for depreciation.). HP begins on gift date.
“No gain or loss” For depreciation, use GAIN basis. Same HP for GAIN basis.
basis
Gift tax rule. When a donee assumes a donor's basis, the basis includes:
[Gift tax paid by donor x (FMV at gift date - Donor's basis at gift date)]
taxable amount of the gift
Chapter 10, Exhibit 17b CCH Federal Taxation Basic Principles 24 of 36

25. Selling Property by Related Parties
Related-party Sales. When a related party sells to a second
related party at a loss, the related-party loss (but not the gain) is
disallowed, regardless of the reasonableness of the amount.
When the second related party later sells the property to an
unrelated third party, special rules govern the determination of
the second related party’s gain or loss.
Chapter 10, Exhibit 18 CCH Federal Taxation Basic Principles 25 of 36

26. Selling Personal-Use Conversions
Personal-use Conversions. A “personal-use conversion” is a
property that has changed in function from personal use to
business or investment use (e.g., a principal residence
converted into a rental house or into business offices).
Special rules must be applied to determine the basis of a
personal-use conversion when it is sold. These rules are
intended to prevent a taxpayer from converting a personal-use
property that has declined in value, to business (or investment)
use and then selling the property to recognize a business or
capital loss. (Recall that personal-use losses are generally not
deductible.)
Chapter 10, Exhibit 19a CCH Federal Taxation Basic Principles 26 of 36

27. Selling Personal-Use Conversions
Adjusted Basis (AB) Holding Period (HP)
“Gain” basis AB at conversion date less accumulated HP begins on day of
depreciation (but use LOSS basis for conversion.
depreciation.)
“Loss” basis Lesser of HP begins on day of
 AB at conversion date less accumulated conversion.
depreciation* or
 FMVat conversion date
“No gain or loss” For depreciation, use lesser of HP begins on day of
basis  AB at conversion date or conversion.
 FMVat conversion date
* Accumulated depreciation is determined from the conversion date to the sale date.
Chapter 10, Exhibit 19b CCH Federal Taxation Basic Principles 27 of 36

28. Selling Inherited Property
Heir's basis = “Step-up” or “step-down” basis using FMV of
property as of either:
1. Date of death or
2. If elected by executor (not heir), the earlier of:
a. 6 months after date of death or
b. Date received by heir if before 6 months.
The FMV at the 6-month date may not be greater than the
value at the date of death.
Chapter 10, Exhibit 20a CCH Federal Taxation Basic Principles 28 of 36

29. Selling Inherited Property
Holding period = ALWAYS long-term, even if held by
heir for 1 day and then sold.
Special rule. If a donee wills “appreciated” property back
to donor and dies within 1 year of receipt from donor, then
the donor/heir's basis is the donee/decedent's BASIS as of
the date of death (i.e., the original basis), NOT the FMV at
date of death.
Chapter 10, Exhibit 20b CCH Federal Taxation Basic Principles 29 of 36

30. Selling Common Stock
Three methods may be used to determine basis:
Specific identification may be used if the certificate
numbers can be identified. (With this method, taxpayers
may select specific shares based on FIFO, LIFO, highest
basis, lowest basis, etc. Average cost is also available if
the shares were bought and sold through a broker or
agent.)
Chapter 10, Exhibit 21a CCH Federal Taxation Basic Principles 30 of 36

31. Selling Common Stock
First-In, First-Out may be used if specific shares cannot be
identified. (However, average cost is also available if the
shares were bought and sold through a broker or agent.)
Average cost may be used if the shares were bought and sold
through a broker or agent. (Specific identification is also
allowed if the shares are bought and sold through a broker or
agent, provided that the certificate numbers can be
identified.)
Chapter 10, Exhibit 21b CCH Federal Taxation Basic Principles 31 of 36

32. Wash Sales—General Rules
Purpose. To prevent investors from avoiding taxes by selling
at a loss, then buying back identical shares.
Definition. A wash sale is a sale of shares that:
 Realizes a LOSS, and
 Where substantially IDENTICAL SHARES are
BOUGHT within 30 days BEFORE or AFTER
the date of sale (i.e., a 61-day period.)
Basis of new shares = Cost of new shares + Postponed
loss from wash sale of old shares
Chapter 10, Exhibit 22 CCH Federal Taxation Basic Principles 32 of 36

33. Wash Sales—Example
FACTS:
On January 1, 2008, 100 ABC shares are purchased for $200 per share.
On December 10, 2012, 50 ABC shares are sold for $160 per share.
On December 20, 2012, 10 ABC shares are purchased for $140 per
share.
QUESTIONS:
(a) Is the December 10, 2012, sale a “wash sale”?
(b) If so, how much loss is postponed? How much is recognized?
(c) Determine the basis of the December 20, 2012, shares.
(d) Determine when the holding period of the December 20, 2012,
shares begins.
Chapter 10, Exhibit 23a CCH Federal Taxation Basic Principles 33 of 36

34. Wash Sales—Example
SOLUTION to (a):
Yes, this is a wash sale because two events occurred:
1. The December 10, 2012, sale resulted in a ($2,000) realized
loss: ($160 x 50 shares) – ($200 x 50 shares)
2. Identical shares were purchased within 30 days of the sale
(i.e., the 10 ABC shares bought on December 20, 2012)
Chapter 10, Exhibit 23b CCH Federal Taxation Basic Principles 34 of 36

35. Wash Sales—Example
SOLUTION to (b):
Loss postponed: ($400); Loss recognized: ($1,600)
Only that portion of loss attributable to the wash sale is postponed as
shown below:
Portion attributable to wash sale: ($400) postponed loss
[10 shares/50 shares x (2,000) = (400)]
Portion NOT attributable to wash sale: ($1,600) recognized loss
[40 shares/50 shares x (2,000) = (1,600)]
Chapter 10, Exhibit 23c CCH Federal Taxation Basic Principles 35 of 36

36. Wash Sales—Example
SOLUTION to (c):
Basis of December 20, 2012, shares: $1,800
$1,400 [10 shares bought on December 20, 2012 x $140 cost per share]
+ 400 [Postponed loss on December 10, 2012 wash sale, computed
= $1,800 at (b)]
SOLUTION to (d):
Beginning holding period of the December 20, 2012 shares: the day
following January 1, 2008 (i.e., the holding period “tacks on” to the
holding period of the original shares)
Chapter 10, Exhibit 23d CCH Federal Taxation Basic Principles 36 of 36