Deck 14: Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions

Question 1

An individual taxpayer received a valuable painting from his uncle, a famous artist who painted it. After the taxpayer held the painting for two years, he sold it for a $400,000 gain. The gain is a long-term capital gain.

Answer 1

False

Question 2

For tax purposes, there is no original issue discount on a bond unless the bond is issued for less than its face value and the difference between the face value and the bond issue price is at least one-fourth of 1% of the redemption price at maturity multiplied by the number of years to maturity.

Answer 2

True

Question 3

If a capital asset is sold at a gain, the holding period is important.

Answer 3

True

Question 4

A franchisor licenses its mode of business operation to a franchisee.

Question 5

The only thing that the grantee of an option may do with the option is to exercise it or let it expire.

Question 6

If the holder of an option fails to exercise the option, the lapse of the option is considered a sale or exchange on the option expiration date.

Question 7

The tax law requires that capital gains and losses be separated from other types of gains and losses because there are limitations on the deduction of net capital losses.

Question 8

Since the Code section that defines capital asset says what is not a capital asset, other Code sections have to help determine what is and what is not a capital gain or loss.

Question 9

A business taxpayer sells depreciable business property with an adjusted basis of $40,000 for $32,000. The taxpayer held the property for more than a year and has an $8,000 capital loss.

Question 10

Individuals who are not professional real estate developers may get capital gain treatment for the sale of their real property if they engage only in limited development activities.

Question 11

Tom has owned 40 shares of Orange Corporation stock for five years. He sells the stock short for a total of $1,100.
One month later, he closes the short sale by purchasing and delivering 40 shares of Orange Corporation stock for a total of $600. Tom has a $500 short-term capital gain.

Question 12

The subdivision of real property into lots for resale when no substantial physical improvements have been made to the property never causes the gain from sale of the lots to be treated as ordinary income.

Question 13

Lease cancellation payments received by a lessor are always ordinary income because they are considered to be in lieu of rental payments.

Question 14

A security that was purchased by an individual and qualifies as § 1244 stock becomes worthless. The taxpayer is single and the loss is $30,000. The loss is treated as an ordinary loss.

Question 15

When a patent is transferred, the most common forms of payment received by the transferor are a lump sum and/or a periodic payment.

Question 16

To compute the holding period, start counting on the day after the property was acquired and include the day of disposition.

Question 17

An accrual basis taxpayer accepts a note receivable from a retail customer with a weak credit rating. The taxpayer immediately sells the note to a bank for less than the note's stated value. The taxpayer has an ordinary loss.

Question 18

The holding period of property given up in a like-kind exchange includes the holding period of the asset received if the property that has been exchanged is a capital asset.

Question 19

A lease cancellation payment received by a lessee is generally treated as an exchange because the lease extinguished is usually a capital asset.

Question 20

The tax law requires that capital gains and losses be separated from other types of gains and losses because an alternative tax calculation may be used when taxable income includes net long-term capital gain.

Question 21

Rental use depreciable machinery held more than 12 months is an example of a § 1231 asset.

Question 22

An individual business taxpayer owns land on which he grows trees for logging. The land has been held more than
10 years and the trees growing on the land were planted eight years ago. Normally, the timber would be inventory
for this taxpayer, but the tax law allows the taxpayer to elect to treat cutting the timber as the disposition of a § 1231 asset.

Question 23

The tax status of an asset refers to whether the asset is a capital asset, a § 1231 asset, or an ordinary asset.

Question 24

An individual taxpayer with 2019 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2020.

Question 25

Section 1231 property includes nonpersonal use property whose casualty gains exceed casualty losses for the taxable year.

Question 26

Section 1231 applies to the sale or exchange of business properties but not to personal use activity casualties.

Question 27

There can be three subgroups within the long-term capital gain or loss group - 0%/15%/20%, 25%, and 28%.

Question 28

The effect of § 1244 may be to convert a capital loss into an ordinary loss deductible for adjusted gross income.

Question 29

A corporation has a $50,000 short-term capital loss for the year. The corporation has $1,200,000 of taxable income from other sources. The taxable income for the year is $1,200,000.

Question 30

All short-term gain from collectibles is subject to a potential alternative tax rate of 28%.

Question 31

In order to be long term, the holding period must include at least parts of two tax years.

Question 32

A net § 1231 loss is treated as an ordinary loss.

Question 33

Section 1231 property generally does not include accounts receivables arising in the ordinary course of business.

Question 34

A net short-term capital loss first offsets any 28% net long-term capital gain before it offsets either 25% of net long- term capital gain or 0%/15%/20% of net long-term capital gain.

Question 35

Section 1231 property generally does not include artistic compositions.

Question 36

A sheep must be held more than 18 months to qualify as a § 1231 asset.

Question 37

Short-term capital losses are netted against long-term capital gains, and long-term capital losses are netted against short-term capital gains.

Question 38

Section 1231 property generally includes certain purchased intangible assets (such as patents and goodwill) that are eligible for amortization and held for more than one year.

Question 39

Confusingly, §1221 defines what is not a capital asset.

Question 40

Short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.

Question 41

Section 1250 depreciation recapture will apply when accelerated depreciation was used on property employed outside the United States and that is sold at a gain.

Question 42

Involuntary conversion gains may be deferred if the proceeds of the involuntary conversion are reinvested.

Question 43

Nonrecaptured § 1231 losses from the six prior tax years may cause current-year net § 1231 gain to be treated as ordinary income.

Question 44

Depreciation recapture under § 1245 and § 1250 is reported on Form 4797.

Question 45

Part III of Form 4797 is used to report gains from the sale of depreciable business equipment sold at a gain and held more than one year.

Question 46

Property sold to a related party that is depreciable by the purchaser may cause the seller to have ordinary gain.

Question 47

If § 1231 asset casualty gains and losses net to a gain, the gain is treated as a § 1231 gain.

Question 48

The maximum § 1245 depreciation recapture generally equals the accumulated depreciation.

Question 49

Casualty gains and losses from nonpersonal use assets are not netted against casualty gains and losses from personal use assets.

Question 50

Section 1231 lookback losses may convert some or all of § 1245 gain into ordinary income.

Question 51

The Code contains two major depreciation recapture provisions: § 1245 and § 1250.

Question 52

The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.

Question 53

Recognized gains and losses from the disposition of a capital asset may occur as a result of a:

A) Sale.
B) Exchange.
C) Casualty.
D) Condemnation.
E) All of these.

Question 54

A personal use property casualty loss that occurs in a nonfederally declared disaster area is deductible only to the extent it exceeds 10% of AGI.

Question 55

Section 1245 applies to amortizable § 197 intangible assets.

Question 56

Personal use property casualty gains and losses are not subject to the § 1231 rules.

Question 57

For § 1245 recapture to apply, accelerated depreciation must have been taken on the property.

Question 58

The maximum amount of the unrecaptured § 1250 gain (25% gain) is the depreciation taken on real property sold at a recognized gain.

Question 59

Section 1245 depreciation recapture potential does not carry over from a deceased taxpayer to the beneficiary taxpayer.

Question 60

Once § 1231 gains are netted against § 1231 losses, if the gains exceed the losses, the net gain is offset by the
lookback nonrecaptured § 1231 losses.

Question 61

Virgil was leasing an apartment from Marple, Inc. Marple paid Virgil $1,000 to cancel his lease and move out so that Marple could demolish the building. As a result:

A) Virgil has a $1,000 capital gain.
B) Virgil has a $1,000 capital loss.
C) Marple has a $1,000 capital loss.
D) Marple has a $1,000 capital gain.
E) None of these.

Question 62

In 2019, Mark has $18,000 short-term capital loss, $7,000 28% gain, and $6,000 0%/15%/20% gain. Which of the following statements is correct?

A) Mark has a $5,000 capital loss deduction.
B) Mark has a $3,000 capital loss deduction.
C) Mark has a $13,000 net capital gain.
D) Mark has a $5,000 net capital gain.
E) Mark has a $18,000 net capital loss.

Question 63

Gold Company signs a 13-year franchise agreement with Silver. Silver retained significant powers, rights, and a continuing interest. Gold (the franchisee) makes noncontingent payments of $18,000 per year for the first four years of the franchise. Gold also pays a contingent fee of 2% of gross sales every month. Which of the following statements is correct?

A) Gold may deduct the $18,000 per year noncontingent payments in full as they are made.
B) Gold may deduct the monthly contingent fee as it is paid.
C) Gold may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
D) Gold may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
E) None of these.

Question 64

A business taxpayer sells inventory for $80,000. The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year. The taxpayer has:

A) No gain or loss.
B) Sold a long-term capital asset.
C) Sold a short-term capital asset.
D) An ordinary gain.
E) None of these.

Question 65

Stella purchased vacant land in 2012 that she subdivided for resale as lots. All 10 of the lots were sold during 2019. Each lot had a tax basis of $12,000 and sold for $35,000. Stella made no substantial improvements to the lots. She acted as her own real estate broker; so there were no sales expenses for selling the lots. Which of the following statements is correct?

A) Stella must hold the lots for at least 10 years before she is eligible for the special capital gain treatment of § 1237.
B) The $230,000 gain from the sale of the 10 lots is all ordinary income.
C) All of the $230,000 gain from the sale of the 10 lots is long-term capital gain.
D) To be eligible for the special capital gain treatment of § 1237, Stella must be a real estate dealer.
E) None of these.

Question 66

Hiram is a computer engineer and, while unemployed, invents a switching device for computer networks. He patents the device but does not reduce it to practice. Hiram has a zero tax basis for the patent. In consideration of $800,000 plus a $1 royalty per device sold, Hiram assigns the patent to a computer manufacturing company. He assigns all substantial rights in the patent. Which of the following is correct?

A) Hiram automatically has long-term capital gain from the lump-sum payment, but not from the royalty payments.
B) Hiram automatically has long-term capital gain from the royalty payments but not from the lump-sum payment.
C) Hiram automatically has long-term capital gain from both the lump-sum payment and the royalty payments.
D) Hiram does not have automatic long-term capital gain from either the lump-sum payment or the royalty payments.
E) None of these.

Question 67

Cason is filing as single and has 2019 taxable income of $36,000 which includes $34,000 0%/15%/20% net long-term capital gain. What is his tax on taxable income using the alternative tax method? Note: Use the tax rate schedule rather than the tax table.

A) $0
B) $200
C) $300
D) $4,924
E) None of these.

Question 68

A worthless security had a holding period of six months when it became worthless on December 10, 2018. The investor who had owned the security had a basis of $20,000 for it. Which of the following statements is correct?

A) The investor has a long-term capital loss of $20,000.
B) The investor has a short-term capital loss of $20,000.
C) The investor has a nondeductible loss of $20,000.
D) The investor has a short-term capital gain of $20,000.
E) None of these.

Question 69

The possible holding periods for capital assets include:

A) Short-term = held 14 months or less.
B) Long-term = greater than six months.
C) Long-term = greater than 12 months.
D) Short-term = greater than 12 months.
E) None of these.

Question 70

Lana purchased for $1,410 a $2,000 bond when it was issued two years ago. She amortized $200 of the original issue discount and then sold the bond for $1,800. Which of the following statements is correct?

A) Lana has $10 of long-term capital loss.
B) Lana has $190 of long-term capital gain.
C) Lana has no capital gain or loss.
D) Lana has $190 of long-term capital loss.
E) None of these.

Question 71

A lessor is paid $45,000 by its commercial tenant as a lease cancellation fee. The tenant wanted to get out of its lease so it could move to a different building. The lessor had held the lease for three years before it was canceled. The lessor had a zero tax basis for the lease. The lessor has received:

A) Ordinary income of $45,000.
B) Long-term capital gain of $45,000.
C) Short-term capital gain of $45,000.
D) Neither gain nor loss.
E) None of these.

Question 72

Tan, Inc., sold a forklift on April 12, 2019, for $8,000 (its FMV) to its 100% shareholder, Ashley. Tan's adjusted basis for the forklift was $12,000. Ashley's holding period for the forklift:

A) Includes Tan's holding period for the forklift.
B) Begins on April 12, 2019.
C) Begins on April 13, 2019.
D) Does not begin until Ashley sells the forklift.
E) None of these.

Question 73

In 2019, Satesh has $5,000 short-term capital loss, $13,000 0%/15%/20% long-term capital gain, and $7,000 qualified dividend income. Satesh is single and has other taxable income of $15,000. Which of the following statements is correct?

A) No more than $13,000 of Satesh's taxable income is taxed at 0%.
B) No more than $7,000 of Satesh's taxable income is taxed at 0%.
C) No more than $15,000 of Satesh's taxable income is taxed at 0%.
D) None of Satesh's taxable income is taxed at 0%.
E) All of Satesh's taxable income is taxed at 0%.

Question 74

Which of the following is correct concerning short sales of stock at the time the short sale is made?

A) The taxpayer does not deliver to the purchaser the shares sold short.
B) The taxpayer delivers to the purchaser the shares sold short.
C) The taxpayer may already own the shares sold short.
D) The taxpayer always already owns the shares sold short.
E) None of these.

Question 75

In 2018, Jenny had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction. In 2019, Jenny has a $18,000 0%/15%/20% long-term capital gain and no other capital gain or loss transactions. Which of the statements below is correct for 2019?

A) Jenny has a $18,000 net capital gain.
B) Jenny has a $9,000 net capital gain.
C) Jenny has a $9,000 net capital loss.
D) Jenny has a $3,000 capital loss deduction.
E) Jenny has a $9,000 capital loss deduction.

Question 76

Which of the following events causes the purchaser of an option to add its cost to the basis of the property to which the option relates?

A) The option is exercised.
B) The option is sold.
C) The option lapses.
D) The option is rescinded.
E) None of these.

Question 77

On June 1, 2019, Brady purchased an option to buy 1,000 shares of General, Inc. at $40 per share. He purchased the option for $3,000. It was to remain in effect for five months. The market experienced a decline during the latter part of the year, so Brady decided to let the option lapse as of December 1, 2019. On his 2019 tax return, what should Brady report?

A) A $3,000 long-term capital loss.
B) A $3,000 short-term capital loss.
C) A $3,000 § 1231 loss.
D) A $3,000 ordinary loss.
E) None of these.

Question 78

Ryan has the following capital gains and losses for 2019: $6,000 STCL, $5,000 28% gain, $2,000 25% gain, and $6,000 0%/15%/20% gain. Which of the following is correct:

A) The net capital gain is composed of $1,000 25% gain and $6,000 0%/15%/20% gain.
B) The net capital gain is composed of $5,000 28% gain and $2,000 0%/15%/20% gain.
C) The net capital gain is composed of $3,000 28% gain, $2,000 25% gain, and $2,000 0%/15%/20% gain.
D) The net capital gain is composed of $1,000 28% gain and $6,000 0%/15%/20% gain.
E) None of these.

Question 79

On June 10, 2018, Ebon, Inc. acquired an office building as a result of a like-kind exchange. Ebon had given up a factory building that it had owned for 26 months as part of the like-kind exchange. Which of the following statements is correct?

A) The holding period of the factory building includes the holding period of the office building.
B) The holding period of the office building starts on June 11, 2018.
C) The holding period of the office building starts on June 10, 2018.
D) The holding period of the office building includes the holding period of the factory building.
E) None of these.

Question 80

Stanley operates a restaurant as a sole proprietorship. Which of the following items are capital assets in his hands?

A) The restaurant's tables and chairs.
B) A portable sound system used to play theme music for the restaurant.
C) The restaurant building that is an asset of the sole proprietorship.
D) An interest-bearing savings account used to keep the restaurant's excess cash.
E) None of these.