Question 1

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

Accepted Answer

Lease cancellation payments are considered substitutes for rental payments under the tax law, and therefore are classified as ordinary income.

Question 2

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.

Accepted Answer

False

Question 3

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

Accepted Answer

The holding period of a capital asset impacts the tax treatment of any gains or losses from its sale. Assets held for more than one year are subject to long-term capital gains or losses, which have different tax rates than short-term gains or losses from assets held for less than a year. Therefore, the holding period is important in determining the tax consequences of selling a capital asset at a loss.

Question 4

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

Accepted Answer

According to IRS rules, individuals who are not professional real estate developers may still qualify for capital gain treatment if their development activities are considered limited. This means they must not have developed more than a certain number of properties in the past three years and must not have held the property for sale to customers in the ordinary course of trade or business.

Question 5

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.

Accepted Answer

This is true. The alternative tax calculation, known as the capital gains tax, applies a lower tax rate to net long-term capital gains. By separating capital gains and losses from other types of gains and losses, individuals are able to calculate their capital gains tax accurately.

Question 6

The only things that the grantee of an option may do with the option are exercise it or let it expire.

Accepted Answer

The answer of The only things that the grantee of...

Question 7

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

Accepted Answer

A lease is generally considered a capital asset, and if the lessee receives a payment for canceling the lease, it is treated as an exchange.

Question 8

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 a capital loss.

Accepted Answer

The answer of An accrual basis taxpayer accepts a note...

Question 9

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.

Accepted Answer

This statement is true. The tax law does require that capital gains and losses be separated from other types of gains and losses for tax reporting purposes. This is because there are specific rules surrounding the deduction of net capital losses, and separating them from other types of losses helps to facilitate accurate tax reporting and compliance with those rules.

Question 10

Original issue discount is amortized over the life of the bond.

Accepted Answer

Original issue discount refers to the difference between the face value of a bond and its issue price. This amount is considered to be part of the bond's interest and must be amortized, or spread out, over the life of the bond. Therefore, the statement is true.

Question 11

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

Accepted Answer

This statement is true. The transferor of a patent can receive a lump sum and/or periodic payment as part of the transfer agreement.

Question 12

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

Accepted Answer

The answer of To compute the holding period, start counting...

Question 13

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. The taxpayer has an $8,000 § 1231 loss.

Accepted Answer

The answer of A business taxpayer sells depreciable business property...

Question 14

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.

Accepted Answer

This statement is true. The definition of a capital asset in the tax code only tells us what is not a capital asset. To determine what qualifies as a capital gain or loss, we must look to other sections of the tax code.

Question 15

An individual taxpayer received a valuable painting from his uncle, a famous painter. The painter did not create the painting, but had purchased it from another artist. 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.

Accepted Answer

The painting is considered a capital asset and the taxpayer held it for more than one year, making the gain a long-term capital gain. The fact that the uncle did not create the painting is irrelevant for tax purposes.

Question 16

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.

Accepted Answer

The answer of Tom has owned 40 shares of Orange...

Question 17

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

Accepted Answer

This is the basic definition of franchising. The franchisor allows the franchisee to use its business model, branding, and support systems in exchange for fees and royalties.

Question 18

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.

Accepted Answer

The subdivision of real property into lots for resale can cause the gain from the sale of the lots to be treated as ordinary income, especially if the activity is considered to be in the nature of a trade or business, such as a real estate dealer's activities, regardless of whether substantial physical improvements have been made.

Question 19

A security that is a capital asset becomes worthless.The loss is deemed to have occurred on the day that the security was declared worthless.

Accepted Answer

The answer of A security that is a capital asset...

Question 20

As a general rule, the sale or exchange of an option to buy or sell property results in capital gain or loss if the property subject to the option is (or would be) a capital asset in the hands of the option holder.

Accepted Answer

This is true according to the IRS. If the property subject to the option is (or would be) a capital asset in the hands of the option holder, any sale or exchange of the option would result in capital gain or loss.

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