Question 1

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.

Accepted Answer

Since the taxpayer is on the accrual basis, they would have recognized income when they accepted the note receivable. By selling the note at a loss, they can claim an ordinary loss for tax purposes.

Question 2

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

Accepted Answer

Original issue discount (OID) is the difference between the face value of a bond and its issue price. It is considered as interest expense for tax purposes, and therefore, it needs to be amortized over the life of the bond. This means that the bondholder reduces the carrying value of the bond each year by the amount of OID allocated to that year, resulting in an increase of the bond discount amortization expense.

Question 3

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 ordinary income because they are considered a substitute for rental payments that would have otherwise been received by the lessor.

Question 4

Franchising may involve one business obtaining a license to use a mode of operation belonging to another business.

Accepted Answer

This is the basic concept of franchising - a franchisor grants a franchisee the right to use their business model, processes, and brand in exchange for certain fees and obligations.

Question 5

Real property subdivided for resale into lots,even if no substantial physical improvements have been made to the property,always causes the gain from sale of the lots to be treated as ordinary income.

Accepted Answer

The gain from the sale of subdivided lots is not always treated as ordinary income; it depends on factors such as the taxpayer's intent, the frequency of sales, and the level of development and improvements made.

Question 6

An individual taxpayer received a valuable painting from his uncle,a famous painter.The painter created the painting.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 answer of An individual taxpayer received a valuable painting...

Question 7

A lease cancellation payment received by a lessee is generally not treated as an exchange because the lease extinguished is not a capital asset.

Accepted Answer

The answer of A lease cancellation payment received by a...

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 because the transaction would be treated as a disposition of the underlying capital asset, which would result in a capital gain or loss.

Question 9

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

The statement is true. The tax law allows for a different tax calculation to be used for taxable income that includes net long-term capital gains, which is why capital gains and losses must be separated from other types of gains and losses.

Question 10

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 long-term capital loss.

Accepted Answer

The taxpayer has a long-term capital loss of $8,000, but since the selling price is lower than the adjusted basis, the taxpayer would actually have a capital loss of $8,000 + the difference between the selling price and the adjusted basis, which is $8,000 + ($40,000 - $32,000) = $16,000.

Question 11

If a capital asset is sold at a loss,the holding period is not important.

Accepted Answer

The holding period is important when calculating the tax implications of a capital asset sale. If the asset was held for less than a year, it is considered a short-term capital loss and can only be used to offset short-term capital gains or up to $3,000 of ordinary income. If the asset was held for more than a year, it is considered a long-term capital loss and can be used to offset long-term capital gains or up to $3,000 of ordinary income. So, the holding period is important in determining the tax implications of a capital asset sale.

Question 12

A security that is a capital asset becomes worthless.The loss is deemed to have occurred on the first day of the tax year that the security becomes worthless.

Accepted Answer

The loss is deemed to have occurred on the last day of the tax year in which the security becomes worthless, not the first day.

Question 13

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 14

Since the Code defines what a capital asset is not,often the courts have to help determine what is and what is not a capital asset.

Accepted Answer

The statement is true. The Code provides certain exclusions for capital assets such as inventory, depreciable property used in a trade or business, etc. However, there are still uncertainties as to what constitutes a capital asset, and courts may need to provide guidance and interpret the law in specific cases.

Question 15

Section 1237 allows certain professional real estate developers capital gain treatment if they engage only in limited development activities.

Accepted Answer

The answer of Section 1237 allows certain professional real estate...

Question 16

Tom has owned 20 shares of Burgundy Corporation stock for four years.He sells the stock short for a total of $800.One month later,he closes the short sale by purchasing and delivering 20 shares of Burgundy Corporation stock for a total of $600.Tom has a $200 short-term capital gain.

Accepted Answer

When Tom sells the 20 shares short, he borrows them from someone else and sells them for $800. One month later, he purchases 20 shares for $600 and delivers them back to the lender to close the short sale. Since he sold the shares for $800 and bought them back for $600, he made a $200 profit, which is a short-term capital gain.

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 on...

Question 18

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

Accepted Answer

The most common forms of payment received by the transferor of a patent are a lump sum or periodic payment.

Question 19

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 20

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. Capital gains and losses are subject to specific rules and limitations under the tax code. Net capital losses can only be deducted up to a certain amount each year, with any excess carried forward to future tax years. Therefore, it is important to separate capital gains and losses from other types of gains and losses when filing taxes.

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