Question 1

Original-issue discount on corporate bonds issued during the current year must be amortized over the life of the bond using the straight-line method.

Accepted Answer

Original issue discount on corporate bonds can be amortized using either the straight-line method or the effective interest rate method, with the latter being the preferred method under U.S. Generally Accepted Accounting Principles (GAAP).

Question 2

Which of the following assets is not generally considered a capital asset?

Accepted Answer

A computer used in a trade or business is not generally considered a capital asset because it is classified as property used in the operation of a business, which is subject to different tax treatment, such as depreciation. Capital assets typically include property held for investment, personal use property, and securities.

Question 3

Market discount only occurs when there is a purchase of a bond after issue, not at original issue.The market discount is the excess of the discount in price over any unamortized original-issue discount.

Accepted Answer

Market discount is a discount that occurs when a bond is purchased in the secondary market at a price below its face value. It does not occur at original issue. The excess of this discount over any unamortized original-issue discount is considered as market discount.

Question 4

For the current year, a taxpayer had a short-term capital gain (STCG) of $5,000 and a short-term capital loss (STCL) of $1,000.The taxpayer also had a long-term capital gain (LTCG) of $3,000 and a long-term capital loss (LTCL) of $6,000.Based upon that information, which of the following is not true?

Accepted Answer

The taxpayer can offset the net short-term capital gain (NSTCG) against the net long-term capital loss (NLTCL), resulting in a net capital loss of $1,000, which can be deducted against ordinary income, not treated just like ordinary income.

Question 5

In order for a corporation's stock to qualify as a qualified small business stock under § 1202, the corporation must be a C corporation and the gross assets at incorporation must be $20 million or less.

Accepted Answer

The gross assets of the corporation at the time of issuance must be $50 million or less, not $20 million, to qualify as a qualified small business stock under § 1202.

Question 6

Dealers in securities hold stocks and bonds as inventory, not as any other class of asset.

Accepted Answer

Dealers in securities hold stocks and bonds primarily for the purpose of facilitating trading and market making, which means these assets are classified as trading securities on their balance sheets, not as inventory in the traditional sense.

Question 7

J purchased stock in X Corporation from C, one of the original shareholders.In C's hands, the shares were § 1244 stock.The stock will also be § 1244 stock to J.Both J and C are individuals.

Accepted Answer

Section 1244 stock retains its status only for the original shareholder who acquired it directly from the corporation, not for subsequent purchasers like J.

Question 8

FGH, Inc.issued stock to individuals for $800,000 cash in 1980 and $400,000 in 1987.None of the stock currently qualifies as § 1244 stock since the paid-in capital of the corporation exceeds $1,000,000.

Accepted Answer

Section 1244 of the Internal Revenue Code allows for the treatment of losses on small business stock as ordinary losses rather than capital losses, subject to certain conditions. The $1,000,000 limit refers to the aggregate amount of money and other property contributed to the corporation in exchange for stock that qualifies for § 1244 treatment. The issuance years and amounts do not automatically disqualify the stock from being § 1244 stock; other factors such as the type of business and how the capital was used also play a role.

Question 9

Which of the following netting processes does not result in a net capital loss (NCL)? (Assume that all results are positive numbers.)

Accepted Answer

In option A, NLTCG (Net Long-Term Capital Gain) is greater than NSTCL (Net Short-Term Capital Loss), which means the overall result is a net gain, not a net capital loss.

Question 10

When stock becomes worthless, the loss is ordinary because there is no "sale or exchange" as required for capital loss treatment.

Accepted Answer

The loss from worthless stock is treated as a capital loss, not ordinary, because the tax code specifically allows for a capital loss deduction in the case of securities that become completely worthless, treating it as if it were sold on the last day of the tax year in which it became worthless.

Question 11

The purchase of an investment from a seller who agrees to buy the investment back at a speculative market price at the option of the buyer for three years is a conversion transaction.

Accepted Answer

A conversion transaction typically involves the simultaneous purchase and sale of related securities to profit from price discrepancies, not an agreement to buy back an investment at a speculative price.

Question 12

M had three separate casualties involving personal use property during the current year:  M received insurance reimbursement as follows: $8,000 for damages to home; $700 for repair of car; and $5,000 for theft of silverware.Which of the following is not necessarily true concerning M's gains and losses?

Accepted Answer

Personal casualty gains and losses are not considered as long-term or short-term gains or losses. They are treated separately from capital gains and losses.

Question 13

The stock of a corporation involved in food processing cannot be qualified small business stock.

Accepted Answer

The stock of a corporation involved in food processing can be qualified small business stock (QSBS) as long as the corporation meets the specific requirements set by the IRS, including being an active C corporation and meeting the gross assets test.

Question 14

Options to purchase property are always treated as capital assets.

Accepted Answer

Options to purchase property are not always treated as capital assets; their classification depends on the intent of the holder and how they are used in the context of the holder's business or investment activities.

Question 15

Which of the following is not an important factor used to determine whether or not real estate is held primarily for sale?

Accepted Answer

The amount of gain or loss on sale is not a factor used to determine whether or not real estate is held primarily for sale. The important factors are subdivision and improvement, purpose and manner of acquisition, and reason for and method of sale.

Question 16

K sold the following investments during the current year:  How much are K's net long-term capital gain or loss and net short-term capital gain or loss, respectively, if any?

Accepted Answer

To calculate K's net long-term capital gain or loss, we need to add up the long-term capital gains and losses separately. K has only one long-term capital gain, which is the sale of investment A for $10,000, resulting in a long-term capital gain of $3,000 ($10,000 - $7,000). K has no long-term capital losses.

To calculate K's net short-term capital gain or loss, we need to add up the short-term capital gains and losses separately. K has two short-term capital gains: the sale of investment B for $5,500, resulting in a short-term capital gain of $1,500 ($5,500 - $4,000), and the sale of investment C for $2,800, resulting in a short-term capital gain of $400 ($2,800 - $2,400). K also has one short-term capital loss: the sale of investment D for $3,600, resulting in a short-term capital loss of $300 ($3,600 - $3,900).

So, K's net short-term capital gain is $1,600 ($1,500 + $400 - $300), and K's net long-term capital gain is $3,000. Therefore, K's total capital gain is $4,600 ($3,000 + $1,600). However, the question only asks for the net long-term and net short-term capital gains or losses, so the answer is (C) $1,900 and $600.

Question 17

A taxpayer can defer gain on the sale of stock traded on a stock exchange if the proceeds are invested in a specialized small business investment company within 60 days.

Accepted Answer

This is known as the Qualified Small Business Stock (QSBS) exclusion, which allows for the deferral of gain on the sale of qualified small business stock if certain criteria are met, including investing in a specialized small business investment company within 60 days.

Question 18

Which of the following dispositions of property is not treated as a sale or exchange?

Accepted Answer

Abandonment of unencumbered property is not treated as a sale or exchange, as there is no transfer of property in this case. The other options (A, B, and D) involve transfers of property and are treated as sales or exchanges for tax purposes.

Question 19

M had three separate casualties involving personal use property during the current year:  M received insurance reimbursement as follows: $8,000 for damages to home; $700 for repair of car; and $5,000 for theft of silverware.What is M's deductible gain (or loss) on each casualty, respectively, before any percentage limit?

Accepted Answer

The answer of M had three separate casualties involving personal...

Question 20

Which of the following is not true of the netting process for capital gains and losses?

Accepted Answer

C is not true because if a taxpayer has both a net short-term capital gain (NSTCG) and a net long-term capital gain (NLTCG) or both a net short-term capital loss (NSTCL) and a net long-term capital loss (NLTCL), these are not netted against each other in the second stage. Instead, they are treated separately to determine the overall tax treatment.

Quiz 16: Property Transactions: Capital Gains and Losses