Question 1

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

True

Question 2

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 payment in the form of a lump sum payment, periodic payments, or a combination of both.

Question 3

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

Since the taxpayer held the painting for two years before selling it, the gain from the sale is considered a long-term capital gain. The fact that the original painter did not create the painting is not relevant for determining the tax treatment of the sale.

Question 4

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 loss is deemed to have occurred on the last day of the tax year in which the security became worthless, not the day it was declared worthless.

Question 5

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

Accepted Answer

This is the basic definition of franchising where the franchisor permits a franchisee to use their business model, trademark, and product or service offerings for a fee or percentage of revenue.

Question 6

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 statement is true. When calculating taxes for net long-term capital gain, an alternative tax calculation called the capital gains tax is used, which has separate tax rates and rules from other types of income or gains. Therefore, it is important to separate capital gains and losses from other types of gains and losses to accurately apply the correct tax calculation method.

Question 7

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

Accepted Answer

The holding period of a capital asset is important when calculating the amount of the loss that can be deducted for tax purposes. If the asset has been held for one year or less, the loss is classified as a short-term capital loss and can only be used to offset other short-term gains. However, if the asset has been held for more than one year, the loss is classified as a long-term capital loss and can be used to offset both short-term and long-term gains, and up to $3,000 in ordinary income each year.

Question 8

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 correct according to IRS regulations. If the property subject to the option is (or would be) a capital asset in the hands of the option holder, then the sale or exchange of the option will result in 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. The taxpayer has an $8,000 § 1231 loss.

Accepted Answer

Section 1231 losses occur when depreciable business property is sold for less than its adjusted basis, and the property was held for more than a year. The loss is calculated as the adjusted basis ($40,000) minus the sale price ($32,000), resulting in an $8,000 loss.

Question 10

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 11

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 12

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 cancellation payment is received when a lease is terminated before its scheduled ending date. Since the lease being canceled is usually a capital asset, the payment received by the lessee is treated as an exchange rather than income or a gain.

Question 13

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

The answer of The holding period of property given up...

Question 14

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 treated as a substitute for rental payments and are therefore considered to be ordinary income for the lessor.

Question 15

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 is because if the Code section defining "capital asset" only says what is not a capital asset, then other Code sections must provide guidance on what is considered a capital asset for the purpose of calculating capital gains or losses.

Question 16

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 taxpayer has an ordinary loss, not a capital loss, because the note receivable is considered an ordinary business asset, not a capital asset.

Question 17

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 18

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

Accepted Answer

Original issue discount represents the difference between the face value of a bond and the price at which it is initially sold. This discount is amortized over the life of the bond, which means that it is gradually deducted from the bond's book value as time passes. This amortization process reduces interest expense for the issuer and reflects the true cost of borrowing for the investor. Therefore, the statement is true.

Question 19

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 is true because the tax law specifies that net capital losses can only offset up to $3,000 of ordinary income per year. Any excess capital losses can be carried forward to future tax years, but they cannot be used to offset other types of income such as wages or interest. Therefore, it is important to separate capital gains and losses from other types of gains and losses to properly calculate and maximize tax deductions.

Question 20

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 the IRS rules, individuals who are not professional real estate developers may qualify for capital gain treatment for the sale of their real property if they engage only in limited development activities. This is because, for tax purposes, the IRS distinguishes between an individual who is engaged in the business of real estate development (whose profits would be taxed as ordinary income) and an individual who engages in occasional and limited development activities (who may still qualify for capital gain treatment on the sale of their real property).

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