Question 1

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 the IRS, individuals who are not professional real estate developers may qualify for capital gain treatment if their limited development activities do not rise to the level of a trade or business. However, whether an individual's activities constitute a trade or business depends on the facts and circumstances of each case.

Question 2

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 compensation for lost rental income and are therefore treated as ordinary income for the lessor.

Question 3

Confusingly, §1221 defines what is not a capital asset.

Accepted Answer

§1221 of the Internal Revenue Code defines what is not considered a capital asset for tax purposes.

Question 4

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

The answer of Tom has owned 40 shares of Orange...

Question 5

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 of the Internal Revenue Code allows individuals to treat losses from the sale or worthlessness of small business stock as an ordinary loss rather than a capital loss. This is limited to $50,000 for single taxpayers or $100,000 for married taxpayers filing jointly. Therefore, in this scenario, the $30,000 loss can be treated as an ordinary loss since the security qualified as § 1244 stock.

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.

Accepted Answer

The tax law does require 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

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...

Question 8

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 starts on the day after the property was acquired and includes the day of disposition when it is being computed.

Question 9

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 is true, as the transferor may receive a one-time payment or a series of payments over time in exchange for the patent.

Question 10

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

The answer of The holding period of property given up...

Question 11

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

Since the sale price ($32,000) is less than the adjusted basis ($40,000), the taxpayer has incurred a loss, but it is not a capital loss. It is a deductible ordinary loss on the taxpayer's tax return.

Question 12

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

A lease is considered a capital asset, and the cancellation payment received by the lessee is treated as an exchange under tax laws. This means that the cancellation payment is generally taxed as ordinary income or as capital gains, depending on the circumstances.

Question 13

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

Accepted Answer

This is the basic definition of franchising - the franchisor grants a license to the franchisee to operate their business model.

Question 14

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 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

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

When the taxpayer sells the note receivable at a loss, they can claim an ordinary loss on their tax return under the accrual basis of accounting.

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 statement is true. Code sections other than the definition of capital asset section help determine what is and what is not a capital gain or loss.

Question 18

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 19

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

Accepted Answer

The holding period determines the type of capital gain (short-term or long-term) and the applicable tax rate.

Question 20

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 statement is true. The alternative tax computation, known as the capital gains tax, can result in a lower tax liability for taxpayers with net long-term capital gains. Therefore, capital gains and losses need to be separated from other types of gains and losses to properly calculate this tax.

Quiz 8: Property Transactions: Capital Gains and Losses