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

The taxpayer has an ordinary loss because they sold the note for less than its stated value. This loss is deductible on the taxpayer's tax return.

Question 2

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.

Accepted Answer

True

Question 3

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

False

Question 4

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.

Accepted Answer

The subdivision of real property into lots for resale can cause the gain from the sale of the lots to be treated as ordinary income, especially if the activity is considered to be in the nature of a trade or business, such as a real estate dealer's activities, regardless of whether substantial physical improvements have been made.

Question 5

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 6

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

Accepted Answer

When a lessee receives a lease cancellation payment, it is considered an exchange because the lease that is being canceled is typically a capital asset. As a result, the payment will generally be treated as a gain or loss on the exchange of a capital asset.

Question 7

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

Accepted Answer

This statement is true. When a patent is transferred, the transferor may receive a lump sum payment and/or periodic payments as agreed upon in the transfer agreement.

Question 8

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

Accepted Answer

The holding period determines whether the gain is long-term or short-term, which can affect the amount of taxes owed on the sale.

Question 9

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 capital loss.

Accepted Answer

The answer of A business taxpayer sells depreciable business property...

Question 10

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. The tax code mandates that capital gains and losses be treated separately from other gains and losses, and they are subject to specific tax rules and limitations, including restrictions on the deduction of net capital losses.

Question 11

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 considered as income earned from the leasing activity and are in lieu of rental payments, hence they are considered ordinary income for the lessor.

Question 12

A security that was purchased by an individual and qualifies as § 1244 stock becomes worthless.The taxpayer is single and the loss is $30,000.The loss is treated as an ordinary loss.

Accepted Answer

Section 1244 allows individual taxpayers to treat losses from the sale of small business stock as ordinary losses, rather than capital losses subject to limitation. If the security qualifies as § 1244 stock and becomes worthless, the taxpayer can deduct the entire loss as an ordinary loss, up to a limit of $50,000 for a single taxpayer or $100,000 for a married couple filing jointly. Therefore, the loss of $30,000 in this scenario would be treated as an ordinary loss.

Question 13

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

Accepted Answer

This is the basic definition of franchising, where the franchisor allows the franchisee to use their business model, branding, and support in exchange for fees and royalties.

Question 14

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.

Accepted Answer

According to Section 1221 of the IRS code, individuals who engage in limited development activities may still receive capital gain treatment for the sale of their real property, even if they are not professional real estate developers. However, if the development activities are substantial, the property may be considered inventory and capital gain treatment may not apply.

Question 15

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 16

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

Accepted Answer

The answer of Short-term capital losses are netted against long-term...

Question 17

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.

Accepted Answer

This is true. While the definition of a capital asset is explicitly stated in the tax code, other sections provide guidance on what qualifies as a capital gain or loss, such as the rules for calculating basis or the treatment of certain types of income.

Question 18

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

Accepted Answer

The holding period is computed by starting to count from the day after the property was acquired and including the day of disposition.

Question 19

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

This is true. The alternative tax calculation, known as the net capital gain tax rate, applies a lower tax rate to net long-term capital gains than to ordinary income. Therefore, it is important to separate capital gains and losses from other types of gains and losses for tax purposes.

Question 20

If the holder of an option fails to exercise the option,the lapse of the option is considered a sale or exchange on the option expiration date.

Accepted Answer

The answer of If the holder of an option fails...

Quiz 8: Property Transactions: Capital Gains and Losses, section 1231, and Recapture Provisions