Question 1

Verno Inc. purchased business equipment in March and sold it in November. Verno's gain or loss recognized on the sale is ordinary.

Accepted Answer

The gain or loss from the sale of business equipment held for less than a year is typically considered ordinary income or loss, as it does not qualify for long-term capital gain treatment.

Question 2

Abada Inc. has a $925,000 basis in 100% of the stock of AbWest Inc., which derives all its income from a manufacturing activity. If Abada determines that the AbWest stock is worthless, it can recognize a $925,000 ordinary loss.

Accepted Answer

According to the tax code, a parent company may recognize a loss on the worthlessness of its subsidiary's stock. The loss is treated as an ordinary loss and is deductible in full in the year the stock becomes worthless. Therefore, if Abada determines that AbWest's stock is worthless, it can recognize a $925,000 ordinary loss.

Question 3

Mr. Jason realized a gain on sale of a residential apartment complex that he had placed in service in 1994. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain.

Accepted Answer

Section 1231 gain applies to the sale of property used in a trade or business or as a rental property. Since the residential apartment complex was placed in service in 1994 and was subject to MACRS depreciation, the gain on its sale would be characterized as Section 1231 gain.

Question 4

Both corporate and individual taxpayers can carry back a net capital loss to the three prior taxable years.

Accepted Answer

Net capital losses can generally only be carried forward to offset capital gains in future years, not carried back to previous years, for both corporate and individual taxpayers.

Question 5

Both corporate and individual taxpayers may be taxed at a preferential rate on net capital gain.

Accepted Answer

The answer of Both corporate and individual taxpayers may be...

Question 6

Milton Inc. recognized a $1,300 net Section 1231 loss in 2015. If Milton recognizes a $5,000 net Section 1231 gain in 2016, it must characterize $1,300 as ordinary income.

Accepted Answer

According to the Section 1231 rules, any net losses from Section 1231 activities are characterized as ordinary losses, while any net gains are characterized as long-term capital gains. However, in situations where there are net losses from previous years that have not yet been fully offset, those losses must be used to offset any current year net gains. In this case, since Milton recognized a net Section 1231 loss of $1,300 in 2015, it must first use that loss to offset $1,300 of the $5,000 net gain recognized in 2016. Therefore, only $3,700 of the 2016 gain will be characterized as a long-term capital gain, while the remaining $1,300 will be characterized as ordinary income.

Question 7

The abandonment of business equipment with a $6,019 adjusted basis results in a $6,019 Section 1231 loss.

Accepted Answer

The answer of The abandonment of business equipment with a...

Question 8

A taxpayer cannot compute its net Section 1231 gain or loss for a taxable year until the year closes.

Accepted Answer

This is because the taxpayer must take into account all Section 1231 gains and losses for the entire year before determining whether there is a net gain or loss.

Question 9

JG Inc. recognized $690,000 ordinary income, $48,000 net Section 1231 gain, and $77,000 net capital loss this year. JG's taxable income is $690,000.

Accepted Answer

The net Section 1231 gain and net capital loss are both taken into account in calculating taxable income, so JG's taxable income would be $690,000 - $77,000 + $48,000 = $661,000. However, the question asks whether JG recognized $690,000 ordinary income, which is a separate issue from taxable income.

Question 10

The general rule is that a net Section 1231 loss is treated as a capital loss and a net Section 1231 gain is treated as ordinary income.

Accepted Answer

The general rule is actually the opposite: a net Section 1231 gain is treated as a capital gain and a net Section 1231 loss is treated as ordinary loss.

Question 11

Stone Company recognized a $7,700 loss on sale of depreciable equipment held for three years. If Stone's accumulated MACRS depreciation on the equipment is $7,700 or more, the entire loss is ordinary.

Accepted Answer

The answer of Stone Company recognized a $7,700 loss on...

Question 12

The sale of business inventory always generates ordinary income or loss.

Accepted Answer

The sale of business inventory is considered ordinary income or loss because it is considered part of the normal operations of the business. This is in contrast to the sale of a capital asset, which may generate capital gains or losses.

Question 13

Langtry Corporation recognized $798,000 ordinary income, $13,000 net Section 1231 loss, and $6,000 net capital loss this year. Langtry's taxable income is $785,000.

Accepted Answer

The net Section 1231 loss and net capital loss can be used to offset the ordinary income, resulting in a taxable income of $785,000.

Question 14

Ms. Cregg has a $43,790 basis in 2,460 shares of ABD Inc. common stock. ABD recently declared bankruptcy and announced that its common stock is worthless. As a result, Ms. Cregg can recognize a $43,790 ordinary loss.

Accepted Answer

Ms. Cregg would recognize a capital loss, not an ordinary loss, from the worthlessness of her ABD Inc. common stock.

Question 15

Netelli Inc. owned a tract of land with a $175,000 basis that was subject to a $228,500 nonrecourse mortgage. Netelli defaulted on the mortgage, and the creditor foreclosed on the land. Netelli must recognize a $53,500 gain on the disposition of the land.

Accepted Answer

When a nonrecourse mortgage is foreclosed, the difference between the outstanding debt and the adjusted basis of the property is treated as a gain. In this case, the outstanding debt is $228,500 and the adjusted basis is $175,000, resulting in a gain of $53,500. As a result, Netelli must recognize this gain on the disposition of the land.

Question 16

Milton Inc. recognized a $16,900 gain on sale of depreciable equipment held for three years. If Milton's accumulated MACRS depreciation on the equipment is $16,900 or more, the entire loss will be treated as ordinary as a result of the full recapture rule.

Accepted Answer

The full recapture rule states that if the accumulated MACRS depreciation on an asset is equal to or greater than the asset's original cost, then any gain on the sale of the asset will be treated as ordinary income. In this case, Milton's accumulated MACRS depreciation on the equipment is $16,900 or more, which is equal to the gain on the sale of the equipment. Therefore, the entire gain will be treated as ordinary income.

Question 17

CBM Inc. realized a $429,000 gain on sale of a commercial office building that the corporation placed in service in 1994. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain.

Accepted Answer

The answer of CBM Inc. realized a $429,000 gain on...

Question 18

If a taxpayer sells business realty that was depreciated using the straightline method, the entire gain is characterized as Section 1231 gain.

Accepted Answer

The correct answer is false because the entire gain is not characterized as Section 1231 gain. Only the portion of the gain attributable to the depreciation taken is characterized as Section 1231 gain. The remaining portion of the gain is characterized as capital gain.

Question 19

Tullia Inc. recognized $500,000 ordinary income, $22,600 net Section 1231 gain, and $6,000 net capital loss this year. Tullia's taxable income is $522,600.

Accepted Answer

Tullia's taxable income would be $516,600 because the $6,000 net capital loss would be subtracted from the sum of the ordinary income and the net Section 1231 gain ($500,000 + $22,600 - $6,000).

Question 20

Because land is nondepreciable, it is always a capital asset.

Accepted Answer

Land is nondepreciable, but not all land qualifies as a capital asset. Land used in a trade or business or held for investment qualifies as a capital asset, but land used for personal purposes does not.

Quiz 8: Property Dispositions