Deck 16: Property Transactions: Capital Gains and Losses

Question 1

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.

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

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

Question 5

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.

Question 6

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.

Question 7

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

Question 8

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.

Question 9

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.

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

The only things that the grantee of an option may do with the option are exercise it or let it expire.

Question 15

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 16

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.

Question 17

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.

Question 18

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 19

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

Question 20

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 21

The three tax statuses are:

A) Ordinary asset, capital asset, § 1237 asset.
B) Capital asset, ordinary asset, § 1231 asset.
C) § 1237 asset, investment asset, ordinary asset.
D) Investment asset, § 1231 asset, ordinary asset.
E) None of the above.

Question 22

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 23

Laura purchased for $1,610 a $2,000 bond when it was issued two years ago.Laura amortized $200 of the original issue discount and then sold the bond for $1,800.Which of the following statements is correct?

A) Laura has $10 of long-term capital loss.
B) Laura has $190 of long-term capital gain.
C) Laura has no capital gain or loss.
D) Laura has $190 of long-term capital loss.
E) None of the above.

Question 24

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 25

A business taxpayer sells inventory for $40,000.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 loss.
E) None of the above.

Question 26

Suzy purchased vacant land in 2005 that she subdivided for resale as lots.All 10 of the lots were sold during 2012.The lots had a tax basis of $9,000 each and sold for $45,000 each.Suzy 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) Suzy must hold the lots for at least 10 years before she is eligible for the special capital gain treatment of § 1237.
B) The $360,000 gain from the sale of the ten lots is all ordinary income.
C) All of the $360,000 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, Suzy must be a real estate dealer.
E) None of the above.

Question 27

A worthless security had a holding period of 11 months when it became worthless on December 10,2012.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 short-term capital gain of $10,000.
E) None of the above.

Question 28

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?

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

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

An individual taxpayer with 2012 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2013.

Question 31

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 lower 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) a. and c.
E) None of the above.

Question 32

On June 1,2012,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 1,2012.On his 2012 tax return,what should Brady report?

A) A $3,000 long-term capital loss.
B) A $3,000 short-term capital loss.
C) A $3,000 § 1231 loss.
D) A $3,000 ordinary loss.
E) None of the above.

Question 33

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

Question 34

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 35

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

A) The store's counters and display cases.
B) A portable music player 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 36

Marvin is in the business of song writing.He writes jingles for web ads.He writes a song 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 37

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

Question 38

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:

A) Ordinary income of $45,000.
B) Long-term capital gain of $45,000.
C) Short-term capital gain of $45,000.
D) Neither gain nor loss.
E) None of the above.

Question 39

Mauve Company signs a 13-year franchise agreement with Mauve Too.Mauve Too retained significant powers,rights,and a continuing interest.Mauve Company (the franchisee)makes noncontingent payments of $16,000 per year for the first five years of the franchise.Mauve Company also pays a contingent fee of 1% of gross sales every month.Which of the following statements is correct?

A) Mauve Company may deduct the $16,000 per year noncontingent payments in full as they are made.
B) Mauve Company may deduct the monthly contingent fee as it is paid.
C) Mauve Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
D) Mauve Company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
E) None of the above.

Question 40

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

A) The tax status of the property.
B) The manner of the property's disposition.
C) The holding period of the property.
D) a., b., and c.
E) None of the above.

Question 41

Theresa and Oliver,married filing jointly,and both over 65 years of age,have no dependents.Their 2012 income tax facts are:
What is their taxable income for 2012?

Question 42

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.

Question 43

In 2011,Jenny had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction.In 2012,Jenny has a $18,000 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 2012 $18,000 net capital gain.
B) Jenny has a 2012 $9,000 net capital gain.
C) Jenny has a 2012 $9,000 net capital loss.
D) Jenny has a 2012 $3,000 capital loss deduction.
E) Jenny has a 2012 $9,000 capital loss deduction.

Question 44

Tan,Inc.,has a 2012 $50,000 long-term capital gain included in its $185,000 taxable income.Which of the following is correct?

A) Tan will benefit from an alternative tax on net capital gains computation.
B) Tan's regular tax on taxable income will be the same as its tax using an alternative tax on net capital gains approach.
C) Tan's $50,000 net capital gain is not taxable.
D) Tan's regular tax on taxable income will be greater than its tax using an alternative tax on net capital gain approach.
E) None of the above.

Question 45

Willie is the owner of vacant land that he purchased in 2008 for $1,400,000 and held for investment.On January 22,2011,he was paid $145,000 for a thirteen-month option on the land by Susan.Susan could buy the land for an additional $1,200,000 by exercising the option.Susan had hoped to build a luxury home on the land,but was unable to get approval to build a big enough home to satisfy her needs.Consequently,Susan did not exercise her option and the option expired on February 22,2012.(1)What is Willie's basis,gain or loss,and type of gain or loss from these events? (2)What is Susan's basis,gain or loss,and type of gain or loss from these events?

Question 46

In 2012,Satesh has $5,000 short-term capital loss,$13,000 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 $13,000 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 $15,000 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 47

Carol had the following transactions during 2012: a painting held for two years and sold at a gain of $65,000; 100 shares of Gray stock held six months and sold for a loss of $6,000; 50 shares of Yellow stock held 18 months and sold for a gain of $36,000.Carol also had $264,000 of taxable income from other sources than these property transactions.What is Carol's net capital gain or loss and what is her taxable income?

Question 48

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:

A) Virgil has a $1,000 capital gain.
B) Virgil has a $1,000 capital loss.
C) Marple has a $1,000 capital loss.
D) Marple has a $1,000 capital gain.
E) None of the above.

Question 49

Ryan has the following capital gains and losses for 2012: $6,000 STCL,$5,000 28% gain,$2,000 25% gain,and $6,000 0%/15% gain.Which of the following is correct:

A) The net capital gain is composed of $1,000 25% gain and $6,000 0%/15% gain.
B) The net capital gain is composed of $5,000 28% gain and $2,000 0%/15% gain.
C) The net capital gain is composed of $3,000 28% gain, $2,000 25% gain, and $2,000 0%/15% gain.
D) The net capital gain is composed of $1,000 28% gain and $6,000 0%/15% gain.
E) None of the above.

Question 50

In 2012,Mark has $18,000 short-term capital loss,$7,000 28% gain,and $6,000 0%/15% gain.Which of the statements below is correct?

A) Mark has a $5,000 capital loss deduction.
B) Mark has a $3,000 capital loss deduction.
C) Mark has a $13,000 net capital gain.
D) Mark has a $5,000 net capital gain.
E) Mark has a $18,000 net capital loss.

Question 51

On January 10,2012,Wally sold an option for $2,000 on vacant land he held as an investment.He had purchased the land in 2008 for $76,000.The option allowed the option holder to purchase the property for $122,000 plus the cost of the option.On March 1,2012,the option holder exercised the option.What is the amount and nature of Wally's gain or loss from disposition of the land?

Question 52

Magenta,Inc.,sold a forklift on April 12,2012,for $3,000 (its FMV)to its 100% shareholder,Anna.Magenta's adjusted basis for the forklift was $8,000.Anna's holding period for the forklift:

A) Includes Magenta's holding period for the forklift.
B) Begins on April 12, 2012.
C) Begins on April 13, 2012.
D) Does not begin until Anna sells the forklift.
E) None of the above.

Question 53

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 2012?

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

Question 54

The 2011 "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 55

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 56

On June 10,2012,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 factory building includes the holding period of the office building.
B) The holding period of the office building starts on June 11, 2012.
C) The holding period of the office building starts on June 10, 2012.
D) The holding period of the office building includes the holding period of the factory building.
E) None of the above.

Question 57

Seamus had $16,000 of net short-term capital loss in 2011.In 2012,Seamus has $17,000 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 2012.
B) Seamus has an $9,000 2012 net long-term capital gain.
C) Seamus has a $4,000 2012 net short-term capital loss.
D) a. and c.
E) None of the above.

Question 58

Cason is filing as single and has 2012 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) $598.
C) $5,530.
D) $5,600.
E) None of the above.

Question 59

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 60

Sara is filing as head of household and has 2012 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) $4,050.
C) $2,980.
D) $3,615.
E) None of the above.

Question 61

When an individual taxpayer has a net long-term capital gain that includes both 25% gain and 0%/15% gain,which of these gains will be taxed first when the alternative tax on net long-term capital gain method is used and what difference does it make?

Question 62

Harold is a head of household,has $27,000 of taxable income in 2012 from non-capital gain or loss sources,and has the following capital gains and losses:
What is Harold's taxable income and the tax on that taxable income?

Question 63

Phil's father died on January 10,2012.The father had owned stock for 20 years with a basis of $45,000 that was transferred to Phil as a gift on August 10,2011,when the stock was worth $430,000.His father paid gift tax of $31,000.This stock was worth $566,000 at the date of the father's death.Phil sold the stock for $545,000 net of commissions on February 23,2012.What is the amount and nature of Phil's gain or loss from disposition of this property?

Question 64

Mike is a self-employed TV technician.He is usually paid as soon as he completes repairs,but occasionally bills a customer with payment expected within 30 days.At the end of the year he has $2,500 of receivables outstanding.He expects to collect $1,200 of this and write off the remainder.Mike is a cash basis taxpayer and had net earnings from his business (not including the effect of the items above)of $55,000.He also had $3,500 interest income,$200 gambling winnings,and sold corporate stock for $7,000.The stock had been purchased in 2009 for $8,200.Mike is single,has no dependents,and claims the standard deduction.What is his 2012 taxable income? (Ignore the self-employment tax deduction.)

Question 65

Sandy has the following results of netting her short-term and long-term capital gains and losses for 2012: $48,000 short-term capital loss,$22,000 net long-term capital gain ($21,000 0%/15% long-term capital gain,and $1,000 28% long-term capital gain).What is her net capital gain or loss for 2012 and,if there is a net capital loss,how much of the loss and what type of loss carries over to 2013?

Question 66

The chart below details Sheen's 2010,2011,and 2012 stock transactions.What is the capital loss carryover to 2012 and what is the net capital gain or loss for 2012?

Question 67

Larry was the holder of a patent on a video game.During 2012,he sold all substantial rights in the patent for $345,000 in cash and a 3% royalty on the purchaser's first $10,200,000 of sales each year related to the product in which the patent is incorporated.Larry had not reduced the patent to practice.He had a $56,000 basis for the patent.During 2012,he received $10,000 in royalties.What is the nature and amount of Larry's gain?

Question 68

What characteristics must the seller of a patent have in order to be classified as a holder?

Question 69

Martha is single with one dependent and files as head of household.She had 2012 taxable income of $45,000 which included $16,000 of 0%/15% net long-term capital gain.What is her tax on taxable income using the alternative tax on net long-term capital gain method?

Question 70

In early 2011,Wendy paid $66,000 for an option on a parcel of land she intended to hold as an investment.After a survey of the land (paid for by the grantor)determined that the parcel was much smaller than the grantor said it was,she let the option lapse when it expired in 2012 after 14 months.How should Wendy treat these events in 2011? 2012?

Question 71

On January 18,2011,Martha purchased 200 shares of Blue Corporation stock for $2,000.On November 11,2012,she sold short 200 shares of Blue Corporation stock which she borrowed from her broker for $2,300.On February 10,2013,Martha closed the short sale by delivering the 200 shares of Blue Corporation stock which she had acquired in 2011.On that date,Blue Corporation stock had a market price of $4 per share.What is Martha's recognized gain or loss and its character in 2012? In 2013?

Question 72

Judith (now 37 years old)owns a collection of porcelain dolls that she acquired when she was a grade schooler.She had forgotten about them until her mother sent them to her.Her mother had discovered them in a box in her attic while she was cleaning out her house before selling it.Judith had originally acquired all the dolls as gifts from her parents,so she has no way to establish a basis for the dolls.Using information from the Internet,she prepares a careful inventory of the dolls that includes their name,when they were first available for sale,their current value,and other pertinent information.She then lists them for sale on the Internet.To her surprise,she quickly gets an offer of $5,000 for all of them and sells them.Judith has no other gain or loss transactions for the year and is in the 28% marginal tax bracket.What issues do these facts create?

Question 73

Hilda lent $2,000 to a close personal friend to help the friend avoid overdrawing the friend's checking account.The friend was supposed to repay the $2,000 within a month.Instead,the friend declared personal bankruptcy and Hilda will never recover any of the $2,000.What are the tax implications of these events for Hilda?

Question 74

"Collectibles" held long-term and sold at a gain are subject to maximum tax rate of 28%.An individual taxpayer recently sold a baseball card for $400.The card had been held for several years and $40 was originally paid for it.The card depicts a famous baseball player (who hit 73 home runs in a recent season)when he was a rookie in the major leagues.Explain why the baseball card is or is not a collectible.

Question 75

Ranja acquires $200,000 face value corporate bonds for $186,000 when the bonds are issued.He holds the bonds as an investment for two years and then sells them for $198,000.He amortizes $2,000 of the OID.What tax issues does Ranja have with respect to these bonds?

Question 76

Samuel,head of household with two dependents,has 2012 wages of $26,000,paid alimony of $3,000,has taxable interest income of $2,000,and a $12,000 0%/15% net long-term capital gain.Samuel uses the standard deduction and is age 38.What is his 2012 taxable income and the tax on the taxable income?