Question 1

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

Section 1231 gains and losses are first netted together for the year. If there is a net Section 1231 gain, it is characterized as long-term capital gain. If there is a net Section 1231 loss, it is characterized as an ordinary loss, up to $3,000 per year. Any excess net Section 1231 losses are carried forward to future years as a net operating loss (NOL). In this case, since Milton recognized a net Section 1231 loss in 2015, any net Section 1231 gain recognized in 2016 will be subject to recapture of up to $1,300 as ordinary income.

Question 2

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 taxable income is calculated as follows: 
Ordinary income = $798,000
Net Section 1231 loss = ($13,000)
Net capital loss = ($6,000)
Taxable income = Ordinary income + Net Section 1231 loss + Net capital loss = $798,000 - $13,000 - $6,000 = $779,000
Therefore, option A is correct as taxable income is $785,000, which is higher than the calculated taxable income of $779,000.

Question 3

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 can deduct the capital loss against the Section 1231 gain for taxable income of $516,600.

Question 4

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 can be used to offset ordinary income, resulting in a taxable income of $690,000.

Question 5

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

Accepted Answer

Net Section 1231 gain or loss is calculated only at the end of the taxable year based on the total gains and losses from the sale or exchange of Section 1231 assets during the year.

Question 6

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

The post-1986 tax depreciation was computed under the straight-line method, so there is no Section 1250 recapture.

Question 7

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 gain is ordinary income.

Accepted Answer

According to IRS regulations, if the accumulated MACRS depreciation on the equipment is equal to or greater than the gain on sale, then the entire gain is considered ordinary income. In this case, Milton's accumulated MACRS depreciation is equal to the gain, so the entire gain would be considered ordinary income.

Question 8

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

Just the opposite!

Question 9

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

Accepted Answer

Because an abandonment loss is not a sale or exchange, any realized loss is ordinary.

Question 10

Both corporate and individual taxpayers can deduct capital losses to the extent of capital gains.

Accepted Answer

According to the IRS, both corporate and individual taxpayers can deduct capital losses to the extent of capital gains. If the losses exceed the gains, a portion of the excess can be deducted against ordinary income, up to a certain limit depending on the taxpayer's filing status.

Question 11

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

Accepted Answer

If the taxpayer is a corporation, 20% recapture will treat part of the gain as ordinary.

Question 12

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

CBM must recapture $62,360 ($311,800 × 20%) as ordinary income.

Question 13

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 can recognize a $43,790 capital loss under the tax rule for worthless securities.

Question 14

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

Accepted Answer

Only individual taxpayers have preferential capital gain tax rates.

Question 15

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

Accepted Answer

When a business sells its inventory, it generates ordinary income or loss. This is because inventory is considered a normal part of a business's operations, and the sale of inventory is therefore treated as regular income or loss rather than a capital gain or loss.

Question 16

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 business equipment is not a capital asset or a Section 1231 asset (because Verno did not hold it for more than 12 months).

Question 17

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

Accepted Answer

Land held as inventory is an ordinary asset, and land used in a trade or business is a Section 1231 asset.

Question 18

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

When stock is deemed worthless, an ordinary loss can be recognized equal to the stock's basis. In this case, Abada has a basis of $925,000 in AbWest Inc. stock, so if it is determined to be worthless, Abada can recognize a $925,000 ordinary loss.

Question 19

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

Accepted Answer

Only corporate taxpayers can use a net capital loss as a carryback.

Question 20

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 loss is a Section 1231 loss. Depreciation recapture only applies to gains.

Quiz 8: Property Dispositions