Question 1

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

When the option is exercised, the cost of the option is added to the basis of the property to which the option relates. This is because the purchaser has ultimately acquired the property and the cost of the option is considered as part of the cost of acquiring the property. None of the other options listed (selling the option, letting it lapse, or rescinding it) would result in the option cost being added to the basis of the property.

Question 2

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

Since the inventory was held for one year or less, it would be considered a short-term capital asset if it had been sold at a gain. However, since it has been sold at a gain and is inventory related to the taxpayer's trade or business, it is classified as ordinary income and not taxed as a capital gain. Therefore, the taxpayer has an ordinary gain.

Question 3

Ryan has the following capital gains and losses for 2018: $6,000 STCL, $5,000 28% gain, $2,000 25% gain, and $6,000 0%/15%/20% gain. Which of the following is correct:

Accepted Answer

The net capital gain is composed of $1,000 25% gain and $6,000 0%/15%/20% gain.

Question 4

Hank inherited Green stock from his mother when she died. The mother had a tax basis of $366,000 for the Green stock when she died and the Green stock was worth $437,000 at the date of her death. Which of the statements below is correct?

Accepted Answer

The answer of Hank inherited Green stock from his mother...

Question 5

Stella purchased vacant land in 2011 that she subdivided for resale as lots. All 10 of the lots were sold during 2018. 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

The answer of Stella purchased vacant land in 2011 that...

Question 6

A worthless security had a holding period of 6 months when it became worthless on December 10, 2018. The investor who had owned the security had a basis of $20,000 for it. Which of the following statements is correct?

Accepted Answer

The investor has a short-term capital loss of $20,000 because the holding period of the security was less than one year. The loss can be used to offset other capital gains in the same year and up to $3,000 of ordinary income. Any remaining loss can be carried forward to future years.

Question 7

On June 1, 2018, 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, 2018. On his 2018 tax return, what should Brady report?

Accepted Answer

Since Brady decided to let the option lapse and did not exercise it, he incurred a short-term capital loss equal to the amount paid for the option, which is $3,000. The holding period for an option is always short-term. Therefore, the correct answer is B, a $3,000 short-term capital loss. The other options (A, C, D, and E) do not apply to this scenario.

Question 8

Ramon is in the business of buying and selling securities. Which of the following is a capital asset for Ramon?

Accepted Answer

A capital asset is typically an investment held for the long-term, which is not held for sale in the ordinary course of business. Option B specifically designates securities held for investment, which would qualify as a capital asset. Options A, C, D, and E all include securities that may be held for sale in the ordinary course of business, and therefore would not necessarily qualify as capital assets.

Question 9

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 fee of 2% of gross sales is deductible as it is paid because it is a regular business expense. However, the noncontingent payments are considered capital expenditures and must be amortized over the life of the franchise agreement.

Question 10

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

The $45,000 lease cancellation fee is considered ordinary income for the lessor, as they had a zero tax basis for the lease. As such, they will need to pay taxes on this amount as if it were regular income. Therefore, choice A is the correct answer.

Question 11

On June 10, 2018, 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

According to the tax rules for like-kind exchanges, the holding period of the property received in the exchange includes the holding period of the property given up. Therefore, the holding period of the factory building is added to the holding period of the office building. Option D correctly reflects this rule, and is therefore the correct answer. Option A is incorrect because it implies that only the factory building's holding period matters. Option B is incorrect because the holding period starts on the day of acquisition, which was June 10, 2018. Option C is also incorrect for the same reason as option B. Option E is incorrect because one of the other options is correct.

Question 12

Michael is in the business of creating posters (display art) for the movie industry. He creates a poster and sells it for a lump sum. He has:

Accepted Answer

Michael has sold an ordinary asset and realized an ordinary gain because the posters are inventory in his business, not capital assets.

Question 13

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

Accepted Answer

The answer of Stanley operates a restaurant as a sole...

Question 14

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

Hiram assigned all substantial rights in the patent, which means he transferred ownership of the patent. As a result, he received a lump sum payment and a royalty per device sold. The lump sum payment is considered a sale of a capital asset, which results in long-term capital gain since Hiram held the patent for more than one year. The royalty payments are also considered capital gain since they are payments for the use of a capital asset (the patent) and were received after the transfer of the patent ownership. Therefore, Hiram automatically has long-term capital gain from both the lump sum payment and the royalty payments.

Question 15

The possible holding periods for capital assets include:

Accepted Answer

According to IRS regulations, a capital asset is considered long-term if it is held for more than 12 months. Therefore, choice C is the correct answer. Choices A, B, and D do not accurately reflect the holding period requirements for capital assets.

Question 16

Tan, Inc., sold a forklift on April 12, 2018, 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

The answer of Tan, Inc., sold a forklift on April...

Question 17

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

To calculate the gain or loss on the sale of the bond, we need to determine Lana's adjusted basis in the bond.

The original purchase price of the bond was $1,410, and Lana amortized $200 of the original issue discount. So her adjusted basis in the bond is $1,610 ($1,410 + $200).

Lana sold the bond for $1,800, resulting in a long-term capital gain of $190 ($1,800 - $1,610).

Question 18

Which of the following is correct concerning short sales of stock?

Accepted Answer

The answer of Which of the following is correct concerning...

Question 19

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

Virgil received $1,000 from Marple to cancel his lease and move out, which is considered a capital gain.

Question 20

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

Accepted Answer

Recognized gains and losses can occur as a result of a sale, exchange, casualty, or condemnation. In a sale, the gain or loss is recognized based on the difference between the sale price and the adjusted basis of the asset. In an exchange, the gain or loss is recognized based on the difference between the fair market value of the asset received and the adjusted basis of the asset given up. In a casualty or condemnation, the gain or loss is recognized based on the difference between the amount of compensation received and the adjusted basis of the asset.

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