Question 1

Gain on sale of a patent by an inventor generally is ordinary income.

Accepted Answer

When an inventor sells a patent, the gain is usually considered ordinary income and is subject to ordinary income tax rates. However, there are certain circumstances where the gain could be considered capital gain and subject to lower capital gains tax rates. It is recommended to consult with a tax professional for specific advice on your situation.

Question 2

Everest Inc.is a corporation in the 35% marginal tax bracket.It sold two stockholdings this year,resulting in a long-term capital gain of $15,000 on stock A and a short-term capital loss of $5,000 on stock B.What is the extra tax that Everest will pay due to the sales of these stocks?

Accepted Answer

A)A corporation can reduce its NLTCG by its NSTCL,but corporations do have a preferential tax rate for ANCG.35% × ($15,000 - $5,000)= $3,500.

Question 3

On January 31 of the current year,Sophia pays $1,000 for an option to acquire 100 shares of Texas Corporation common stock for $105 per share at any time prior to December 31.As of December 31,Sophia had not exercised the option or sold it.Which of the following statements is correct?

Accepted Answer

The answer of On January 31 of the current year,Sophia...

Question 4

Purchase of a bond at a significant discount will result in the investor recognizing a capital gain when the bond matures.

Accepted Answer

The answer of Purchase of a bond at a significant...

Question 5

Because of the locked-in effect,high capital gains tax rates may discourage taxpayer's from selling appreciated capital assets.

Accepted Answer

The locked-in effect refers to the tendency of taxpayers to hold on to appreciated capital assets because selling them would trigger a capital gains tax liability, which can be substantial at high tax rates. This can lead to a reduction in economic efficiency and liquidity in the capital markets.

Question 6

Stock purchased on December 15,2015,which becomes worthless in March 2016,produces a STCL since the holding period is one year or less.

Accepted Answer

The holding period is not one year or less, as it spans across two tax years (2015 and 2016). Therefore, it would produce a long-term capital loss (LTCL) if it became worthless in March 2016.

Question 7

Rita died on January 1,2016 owning an asset with a FMV of $730,000 that she purchased in 2010 for $600,000.Bert inherited the asset from Rita.When Bert sells the asset for $800,000 on August 20,2016,he must recognize a

Accepted Answer

The answer of Rita died on January 1,2016 owning an...

Question 8

Galvin Corporation has owned all of the stock of Rialto Corporation for five years.Rialto Corporation has been actively engaged in manufacturing in Kansas,but it is now bankrupt,and the stock is worthless.Galvin Corporation will recognize a long-term capital loss.

Accepted Answer

The answer of Galvin Corporation has owned all of the...

Question 9

How long must a capital asset be held to qualify for long-term treatment?

Accepted Answer

In order for an asset to qualify for long-term treatment, it must be held for more than one year. However, it must also be held for at least one day in addition to that year. Therefore, the correct answer is C: one year and one day.

Question 10

Rana purchases a 5%,$100,000 corporate bond at issuance on January 1,2016 for $91,500.The bond matures in five years.In 2016 Rana will recognize interest income of

Accepted Answer

Rana will recognize interest income greater than $5,000 because the bond was purchased at a discount. The interest income includes both the coupon payment and the amortization of the discount over the bond's life.

Question 11

Sergio acquires a $100,000 Ternco Corporation bond (5%,20-year bond)on January 1,2016 for $75,000.The bond had been issue on January 1,2014.If Sergio hold the bond to maturity,at redemption he will recognize

Accepted Answer

The answer of Sergio acquires a $100,000 Ternco Corporation bond...

Question 12

On January 31 of this year,Mallory pays $800 for an option to acquire 100 shares of Mesa Corporation common stock for $85 per share.As a result of an increase in the market value of the Mesa stock,the market price of the option increases and Mallory sells the option for $1,000 on August 4.As a result of the sale,Mallory must recognize

Accepted Answer

The answer of On January 31 of this year,Mallory pays...

Question 13

Adam purchased 1,000 shares of Airco Inc.common stock for $22,000 on February 3,2014.On April 1,2016,Adam received 100 new shares in a nontaxable stock dividend.As of April 1,the stock was trading at $25 per share.Adam sells the 100 new shares on June 15,2016 for $2,400.Due to the stock sale,Adam will recognize a

Accepted Answer

The answer of Adam purchased 1,000 shares of Airco Inc.common...

Question 14

On January 31 of this year,Jennifer pays $700 for an option to acquire 100 shares of Lifetime Corporation common stock for $70 per share.Jennifer exercises the option on June 2.Jennifer sells the stock on April 30 of next year for $10,000.Jennifer's basis for the stock immediately before the sale is

Accepted Answer

Jennifer's initial cost for the option was $700.
When she exercises the option on June 2, she pays an additional $70 per share (the strike price) for 100 shares, or $7,000 total.
Therefore, Jennifer's total cost basis for the 100 shares is $7,700 ($700 for the option + $7,000 to exercise the option).
When she sells the shares for $10,000 on April 30 of the following year, her capital gain will be $2,300 ($10,000 - $7,700).

Question 15

If property received as a gift has a basis of the fair market value of the property on the date of the gift,the donee's holding period starts on the day after the date of the gift.

Accepted Answer

This is known as the "carryover basis" rule and it applies to most gifts of property. The donee's basis is the same as the donor's basis (usually the cost of the property), unless the fair market value of the property on the date of the gift is higher. In that case, the donee's basis is the fair market value of the property on the date of the gift. The holding period for the property also starts on the day after the date of the gift.

Question 16

On July 25,2015,Marilyn gives stock with a FMV of $7,500 and a basis of $5,000 to her nephew Darryl.Marilyn had purchased the stock on March 18,2015.Darryl sold the stock on April 18,2016 for $7,800.As a result of the sale,what will Darryl report on his 2016 tax return?

Accepted Answer

Darryl will report a long-term capital gain of $2,800 ($7,800 - $5,000 basis). Although Marilyn held the stock for less than a year, the holding period "tacks on" to Darryl's holding period due to the gift. Therefore, since Darryl held the stock for over a year before selling it, the gain is considered long-term.

Question 17

The holding period of property received from a decedent is based on the actual time the property is held by the decedent.

Accepted Answer

The answer of The holding period of property received from...

Question 18

On July 25,2015,Karen gives stock with a FMV of $7,500 and a basis of $8,000 to her nephew Bill.Karen had purchased the stock on March 18,2015.Bill sold the stock on April 18,2016 for $6,000.As a result of the sale,what must Bill report on his 2016 tax return?

Accepted Answer

Bill's basis in the stock is $7,500 (the FMV at the time of the gift), but the selling price is only $6,000, resulting in a $1,500 loss. Since Bill held the stock for less than one year before selling it, the loss is considered a short-term capital loss (STCL). Therefore, Bill will report a ($1,500) STCL on his 2016 tax return.

Question 19

Margaret died on September 16,2016,when she owned securities with a basis of $50,000 and a FMV of $60,000.Caroline inherited the property and sold it on December 19,2016 for $67,000.What is Caroline's reported gain on this sale?

Accepted Answer

Caroline's basis in the inherited property is the FMV at the date of Margaret's death, which is $60,000. The gain is the selling price ($67,000) minus the basis ($60,000), resulting in a $7,000 gain. Since inherited property is considered long-term, the gain is a long-term capital gain (LTCG).

Question 20

The gain or loss on an asset purchased on March 31,2015,and sold on March 31,2016,is classified as short-term.

Accepted Answer

The holding period for a short-term gain or loss is one year or less. In this case, the asset was held for one year (from March 31, 2015 to March 31, 2016), so any gain or loss would be classified as short-term.

Quiz 5: Property Transactions: Capital Gains and Losses