Question 1

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

Accepted Answer

Section 1221 excludes all of the listed items from being capital assets except the investment in the savings account.

Question 2

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

Accepted Answer

If the option is exercised,the cost of the option becomes part of the basis of the property.Otherwise,the lapse of the option is treated as a sale or exchange.

Question 3

36.	On June 1, 2014, 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, 2014. On his 2014 tax return, what should Brady report?

Accepted Answer

The lapse of the option is treated as a sale or exchange by § 1234(a)(2).Therefore,a short­term capital loss of $3,000 is reported on his tax return.

Question 4

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

Accepted Answer

Short-term capital gain may offset short-term capital losses and any remaining short-term capital gain may offset any net long-term capital loss,but net short-term capital gain is treated as ordinary income and is not eligible for any special tax rate.

Question 5

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.Hiram assigned all substantial rights in the patent.Which of the following is correct?

Accepted Answer

Since Hiram meets the definition of a holder,he receives automatic long-term capital gain treatment for both the lump sum payment and the royalty payments.

Question 6

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

Accepted Answer

The disposition may also occur by theft.

Question 7

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

Accepted Answer

The contingent payments are deductible as they are made.The noncontingent payments must be capitalized and amortized over 15 years.

Question 8

Stella purchased vacant land in 2007 that she subdivided for resale as lots.All 10 of the lots were sold during 2014.The lots had a tax basis of $12,000 each and sold for $35,000 each.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?

Accepted Answer

Stella must hold the land at least five years to be eligible for § 1237 treatment and must not be a dealer in lots.Since Stella satisfies this requirement,all of the gain is long-term capital gain except for $17,500 (5% of the selling price reduced by $0 selling expenses).

Question 9

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:

Accepted Answer

Inventory is an ordinary asset and,therefore,the gain from its sale is an ordinary gain.

Question 10

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

Accepted Answer

This is correct according to the IRS tax code. Net short-term capital losses are first applied against any 28% net long-term capital gains, then against 25% net long-term capital gains, and finally against 0%/15%/20% net long-term capital gains.

Question 11

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:

Accepted Answer

Payments received by a lessor as lease cancellation payments are always ordinary income because they are considered to be received in lieu of rent.

Question 12

On June 10,2014,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 statements below is correct?

Accepted Answer

The holding period of property received in a like-kind exchange (the office building)includes the holding period of the property given up in the exchange (the factory building).

Question 13

A worthless security had a holding period of 6 months when it became worthless on December 10,2014.The investor who had owned the security had a basis of $20,000 for it.Which of the following statements is correct?

Accepted Answer

Section 165(g)(1)provides that if a security becomes worthless during the tax year,the loss is treated as if it occurred on the last day of the tax year.On the last day of the tax year,the security would have been held for less than a year.

Question 14

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:

Accepted Answer

Since the apartment was Virgil's personal residence,the lease on the apartment was a capital asset because all personal use assets are capital assets.Virgil has a zero basis for the lease.Therefore,the entire payment is capital gain.Whether the gain is long-term or short-term depends upon how long Virgil has held the lease.Marple has an ordinary deduction of $1,000.

Question 15

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

Accepted Answer

Lana's original basis of $1,410 is increased by the $200 of original issue discount amortization.Her basis is $1,610 when she sells the bond for $1,800;so her gain is $190 and is long-term.

Question 16

An individual taxpayer with 2014 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2015.

Accepted Answer

This is correct according to the IRS rules for deducting capital losses. The taxpayer can deduct up to $3,000 of their net short-term capital loss against ordinary income in 2014, and the remaining $2,000 can be carried over to the next tax year.

Question 17

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

Accepted Answer

Collectibles that are capital assets may be held short-term or long-term.Only long-term capital gains from collectibles are subject to a potential alternative tax rate of 28%.Net short-term capital gain from collectibles is treated as ordinary income.

Question 18

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

Accepted Answer

Short-term capital losses are netted against short-term capital gains and long-term capital losses are netted against long-term capital gains first.If these two nettings are of opposite sign (one is a gain and the other is a loss),they are netted against each other.

Question 19

The possible holding periods for capital assets include:

Accepted Answer

The short-term holding period is 12 months or less and the long-term holding period is greater than 12 months.

Question 20

Tan,Inc. ,sold a forklift on April 12,2014,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:

Accepted Answer

When a loss is disallowed in a related party transaction,there is no carryover of holding period.Tan has a $4,000 realized loss on the sale of the forklift to Ashley and the loss is disallowed because Ashley is a related taxpayer.Ashley's holding period begins on the day after the property is acquired.

Quiz 16: Property Transactions: Capital Gains and Losses