Deck 14: Property Transactions: Capital Gains and Losses

Question 1

When a patent is sold,a common form of payment received by the transferor is a periodic payment.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

The tax law does not require that capital gains and losses be separated from other types of gains and losses because there is no alternative tax calculation when taxable income includes net long-term capital gain.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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.

Question 8

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.

Question 9

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.

Question 10

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.

Question 11

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

Question 12

The only things that the grantee of an option may do with an option are to exercise it or sell or to exchange it.

Question 13

An individual taxpayer received a valuable antique vase from his aunt,a famous collector.The collector purchased the vase.After the taxpayer held the vase for two years,he sold it for a $400,000 gain.The gain is a long-term capital gain.

Question 14

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

Question 15

Real property subdivided for resale into lots,even when substantial physical improvements have been made to the property,always causes the gain from sale of the lots to be treated as capital gain.

Question 16

The tax law does not require that capital gains and losses be separated from other types of gains and losses because there are no limitations on the deduction of net capital losses.

Question 17

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

Question 18

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

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.

Question 20

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.

Question 21

If § 1231 asset casualty gains and losses net to a gain,the gain is treated as a § 1231 loss.

Question 22

Section 1231 property generally does not include notes receivable arising in the ordinary course of business.

Question 23

A personal use property casualty loss is generally deductible only to the extent it exceeds 10% of taxable income.

Question 24

Section 1231 property includes nonpersonal use property where casualty gains exceed casualty losses for the taxable year.

Question 25

Nonrecaptured § 1231 losses from the six prior tax years may cause current year net § 1231 gain to be treated as ordinary income.

Question 26

If there is a net § 1231 loss,it is treated as a long-term capital loss.

Question 27

Casualty gains and losses from nonpersonal use assets are netted against casualty gains and losses from personal use assets to determine the net casualty gain or loss.

Question 28

Rental use depreciable real estate held more than 15 months is an example of a § 1231 asset.

Question 29

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

Question 30

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

Question 31

The Code contains two major depreciation recapture provisions-§§ 1243 and 1248.

Question 32

In the "General Procedure for § 1231 Computation: Step 2.§ 1231 Netting," if the gains exceed the losses,the net gain is offset by the "lookback" nonrecaptured § 1231 losses.

Question 33

Section 1231 property generally includes certain intangible assets (such as patents and goodwill)that are developed by the taxpayer and that are not eligible for amortization,but are held for more than one year.

Question 34

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% net long-term capital gain.

Question 35

Personal use property casualty gains and losses are not subject to the § 1231 rules.

Question 36

Section 1231 applies to the sale or exchange of business properties,but not to personal use activity casualties.

Question 37

An individual taxpayer with 2011 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2012.

Question 38

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

Question 39

Section 1231 property generally does not include paintings of artistic value held by the creator.

Question 40

Involuntary conversion gains may not be deferred if the proceeds of the involuntary conversion are not reinvested.

Question 41

Lea purchased for $1,310 a $2,000 bond when it was issued three years ago.Lea amortized $200 of the original issue discount and then sold the bond for $1,800.Which of the following statements is correct?

A) Lea has $290 of long-term capital gain.
B) Lea has $490 of long-term capital gain.
C) Lea has no capital gain or loss.
D) Lea has $490 of long-term capital loss.
E) None of the above.

Question 42

Section 1245 depreciation recapture potential carries over from the deceased taxpayer to the beneficiary taxpayer.

Question 43

Section 1245 may apply to amortizable § 197 intangible assets.

Question 44

A business taxpayer sells inventory for $60,000.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:

A) No gain or loss.
B) Sold a long-term capital asset.
C) Sold a short-term capital asset.
D) An ordinary gain.
E) None of the above.

Question 45

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

A) The securities he buys and sells each day in the normal course of his business.
B) The securities he designates as held for investment at the end of the day of acquisition.
C) The securities he holds more than 12 months.
D) All the securities he owns.
E) b., c., and d.

Question 46

Depreciation recapture under § 1245 and § 1250 is reported on Form 4797.

Question 47

Sean purchased vacant land in 2005 that she subdivided for resale as lots.All 10 of the lots were sold during 2011.The lots had a tax basis of $7,000 each and sold for $45,000 each.Sean 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?

A) Sean must hold the lots for at least 10 years before she is eligible for the special capital gain treatment of § 1237.
B) The $380,000 gain from the sale of the ten lots is all ordinary income.
C) All of the $380,000 gain from the sale of the ten lots is long-term capital gain.
D) To be eligible for the special capital gain treatment of § 1237, Sean must be a real estate dealer.
E) None of the above.

Question 48

The maximum § 1245 depreciation recapture generally equals the accumulated depreciation.

Question 49

The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.

Question 50

The three tax statuses are:

A) Ordinary asset, capital asset, § 1251 asset.
B) Capital asset, ordinary asset, § 1231 asset.
C) § 1251 asset, investment asset, ordinary asset.
D) Investment asset, § 1231 asset, ordinary asset.
E) None of the above.

Question 51

The maximum amount of the unrecaptured § 1250 gain (25% gain)is the depreciation taken on real property sold at a recognized gain.

Question 52

The tax law requires that capital gains and losses be separated from other types of gains and losses.Among the reasons for this treatment are:

A) Long-term capital gains may be taxed at a higher rate than ordinary gains.
B) Capital losses that are short term are not deductible.
C) Net capital loss is deductible only up to $3,000 per year for individual taxpayers.
D) Short-term capital gains may be taxed at a lower rate than ordinary gains.
E) None of the above.

Question 53

Section 1250 depreciation recapture will apply when accelerated depreciation was used on property used outside the United States and the property is sold at a gain.

Question 54

For § 1245 recapture to apply,accelerated depreciation must have been taken on the property.

Question 55

Monty is in the business of painting.He paints for wealthy investors.He paints a portrait and sells it for a lump sum.He has:

A) Sold a capital asset.
B) Sold an ordinary asset.
C) No gain or loss.
D) An ordinary gain.
E) b. and d.

Question 56

Recognized gains and losses must be properly classified.Proper classification depends upon:

A) The tax status of the property.
B) The type of transferor and transferee when the property is disposed of.
C) The holding period of the property.
D) a. and c.
E) None of the above.

Question 57

A worthless security had a holding period of 10 months when it became worthless on November 10,2011.The investor who had owned the security had a basis of $10,000 for it.Which of the following statements is correct?

A) The investor has a long-term capital loss of $10,000.
B) The investor has a short-term capital loss of $10,000.
C) The investor has a nondeductible loss of $10,000.
D) The investor has a long-term capital gain of $10,000.
E) None of the above.

Question 58

Section 1231 lookback losses may convert some or all of § 1250 gain into ordinary income.

Question 59

Sam operates a retail hardware store as a sole proprietorship.Which of the following items are capital assets in the hands of Sam?

A) The store's counters and display cases.
B) A portable workbench that has been in the store's inventory for over a year.
C) The store building that is an asset of the sole proprietorship.
D) An interest-bearing savings account used to keep the store's excess cash.
E) None of the above.

Question 60

Property sold to a related party purchaser that is depreciable by the purchaser may cause the seller to have ordinary gain.

Question 61

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?

A) The option is exercised.
B) The option is sold.
C) The option lapses.
D) The option is rescinded.
E) None of the above.

Question 62

A lessor is paid $5,000 by its residential tenant as a lease cancellation fee.The tenant wanted to get out of her lease so she could move to a different city.The lease had been in force for two years before it was canceled.The lessor had a zero tax basis for the lease.The lessor has received:

A) Ordinary income of $5,000.
B) Long-term capital gain of $5,000.
C) Short-term capital gain of $5,000.
D) Neither gain nor loss.
E) None of the above.

Question 63

Cason is filing as single and has 2011 taxable income of $38,000 which includes $36,000 of 0%/15% net long-term capital gain.What is his tax on taxable income using the alternative tax method?

A) $0.
B) $725.
C) $5,700.
D) $5,625.
E) None of the above.

Question 64

The 2010 "Qualified Dividends and Capital Gain Worksheet" is used:

A) To calculate the tax using the alternative tax method on 0%/15% net capital gain and qualified dividends.
B) To calculate the tax using the alternative tax method on 0%/15% net capital gain, but not on qualified dividends.
C) To calculate the tax using the alternative tax method on 0%/15% capital gain, 25% capital gain, and 28% capital gain, but not on qualified dividends.
D) To calculate the tax using the alternative tax method on 0%/15% capital gain, 25% capital gain, 28% capital gain, and qualified dividends.
E) None of the above.

Question 65

In 2011,Satesh has $4,000 short-term capital loss,$14,000 0%/15% long-term capital gain,and $7,000 qualified dividend income.Satesh is single and has other taxable income of $15,000.Which of the following statements is correct?

A) No more than $14,000 of Satesh's taxable income is taxed at 0%.
B) No more than $7,000 of Satesh's taxable income is taxed at 0%.
C) No more than $17,000 of Satesh's taxable income is taxed at 0%.
D) None of Satesh's taxable income is taxed at 0%.
E) All of Satesh's taxable income is taxed at 0%.

Question 66

In 2011,Manuelo has $29,000 short-term capital loss,$10,000 28% gain,and $6,000 0%/15% gain.Which of the statements below is correct?

A) Manuelo has a $13,000 capital loss deduction.
B) Manuelo has a $3,000 capital loss deduction.
C) Manuelo has a $13,000 net capital gain.
D) Manuelo has a $3,000 net capital gain.
E) Manuelo has a $18,000 net capital loss.

Question 67

Spiro was leasing an apartment from Grey,Inc.Grey paid Spiro $11,000 to cancel his lease and move out so that Grey could demolish the building.As a result:

A) Spiro has an $11,000 capital gain.
B) Spiro has an $11,000 capital loss.
C) Grey has an $11,000 capital loss.
D) Grey has an $11,000 capital gain.
E) None of the above.

Question 68

Robin Corporation has ordinary income from operations of $30,000,net long-term capital gain of $10,000,and net short-term capital loss of $15,000.What is the taxable income for 2011?

A) $25,000.
B) $27,000.
C) $28,500.
D) $30,000.
E) None of the above.

Question 69

Yellow,Inc.sold a forklift on April 12,2011,for $3,000 (its FMV)to its 100% shareholder,Anibal.Yellow's adjusted basis for the forklift was $7,000.Anibal's holding period for the forklift:

A) Includes Yellow's holding period for the forklift.
B) Begins on April 12, 2011.
C) Begins on April 13, 2011.
D) Does not begin until Anibal sells the forklift.
E) None of the above.

Question 70

Hidasu is a mechanical engineer and,while unemployed,invents a switching device for computer networks.He patents the device,but does not reduce it to practice.Hidasu has a zero tax basis for the patent.In consideration of $600,000 plus a $2 royalty per device sold,Hidasu assigns the patent to a computer manufacturing company.Hidasu assigned all substantial rights in the patent.Which of the following is correct?

A) Hidasu automatically has long-term capital gain from the lump sum payment, but not from the royalty payments.
B) Hidasu automatically has long-term capital gain from the royalty payments, but not from the lump sum payment.
C) Hidasu automatically has long-term capital gain from both the lump sum payment and the royalty payments.
D) Hidasu does not have automatic long-term capital gain from either the lump sum payment or the royalty payments.
E) None of the above.

Question 71

Ronald has the following capital gains and losses for 2011: $8,000 STCL,$6,000 28% gain,$4,000 25% gain,and $16,000 0%/15% gain.Which of the following is correct?

A) The net capital gain is composed of $2,000 25% gain and $16,000 0%/15% gain.
B) The net capital gain is composed of $6,000 28% gain and $12,000 0%/15% gain.
C) The net capital gain is composed of $6,000 28% gain, $4,000 25% gain, and $8,000 0%/15% gain.
D) The net capital gain is composed of $2,000 28% gain and $16,000 0%/15% gain.
E) None of the above.

Question 72

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

A) At the time the short sale is made, the taxpayer does not deliver to the purchaser the shares sold short.
B) At the time the short sale is made, the taxpayer delivers to the purchaser the shares sold short.
C) At the time the short sale is made, the taxpayer may already own the shares sold short.
D) At the time the short sale is made, the taxpayer always already owns the shares sold short.
E) None of the above.

Question 73

Which of the following comparisons is correct?

A) Corporations may carryback capital losses; individuals may not.
B) Both corporation and individual long-term capital losses carryover as short-term capital losses.
C) Corporations may carryforward capital losses indefinitely; individuals may only carryforward capital losses for five years.
D) Both corporations and individuals may use an alternative tax rate on net capital gains.
E) None of the above.

Question 74

Cyan Company signs a 13-year franchise agreement with Fast Taco.Fast Taco retained significant powers,rights,and a continuing interest.Cyan Company (the franchisee)makes noncontingent payments of $17,000 per year for the first five years of the franchise.Cyan Company also pays a contingent fee of 1% of gross sales every month.Which of the following statements is correct?

A) Cyan Company may deduct the $17,000 per year noncontingent payments in full as they are made.
B) Cyan Company may deduct the monthly contingent fee as it is paid.
C) Cyan Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
D) Cyan Company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
E) None of the above.

Question 75

Sara is filing as head of household and has 2011 taxable income of $27,000 which includes $13,000 of net long-tem capital gain.The net long-term capital gain is made up of $10,000 25% gain and $3,000 0%/15% gain.What is the tax on her taxable income using the alternative tax method?

A) $0.
B) $3,993.
C) $2,993.
D) $3,443.
E) None of the above.

Question 76

In 2010,Jenny had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction.In 2011,Jenny has a $16,000 0%/15% long-term capital gain and no other capital gain or loss transactions.Which of the statements below is correct?

A) Jenny has a 2011 $18,000 net capital gain.
B) Jenny has a 2011 $7,000 net capital gain.
C) Jenny has a 2011 $7,000 net capital loss.
D) Jenny has a 2011 $3,000 capital loss deduction.
E) Jenny has a 2011 $7,000 capital loss deduction.

Question 77

On June10,2011,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?

A) The holding period of the office building does not include the holding period of the factory building.
B) The holding period of the factory building starts on June 11, 2011.
C) The holding period of the factory building starts on June 10, 2011.
D) The holding period of the office building includes the holding period of the factory building.
E) None of the above.

Question 78

Seamus had $16,000 of net short-term capital loss in 2010.In 2011,Seamus has $15,000 of long-term capital loss and $26,000 of long-term capital gain.Which of the following statements is correct?

A) Seamus had a $13,000 short-term capital loss carryover to 2011.
B) Seamus has an $11,000 2011 net long-term capital gain.
C) Seamus has a $2,000 2011 net short-term capital loss.
D) a. and c.
E) None of the above.

Question 79

On June 1,2011,Bruce purchased an option to buy 1,000 shares of General,Inc.at $30 per share.He purchased the option for $2,000.It was to remain in effect for six months.The market experienced a decline during the latter part of the year,so Bruce decided to let the option lapse as of December 1,2011.On his 2011 tax return,what should Bruce report?

A) A $2,000 long-term capital loss.
B) A $2,000 short-term capital loss.
C) A $2,000 § 1231 loss.
D) A $2,000 ordinary loss.
E) None of the above.

Question 80

Harry inherited a residence from his mother when she died.The mother had a tax basis of $566,000 for the residence when she died and the residence was worth $433,000 at the date of her death.Which of the statements below is correct?

A) Harry's holding period for the residence includes his mother's holding period for the residence.
B) Harry's holding period for the residence does not include his mother's holding period for the residence.
C) Harry's holding period for the residence is automatically long term.
D) b and c
E) None of the above.