Question 1

Stock purchased on December 15,2016,which becomes worthless in March 2017,produces a STCL since the holding period is one year or less.

Accepted Answer

If a security that is a capital asset becomes worthless during the year,any loss is treated as a loss from the sale or exchange of a capital asset on the last day of the tax year.Therefore,the holding period in this case is December 15,2016 through December 31,2017 resulting in a LTCL.

Question 2

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 stock of Rialto Corporation will meet the criteria of worthless securities in an affiliated corporation so Galvin Corporation will be able to treat the loss as an ordinary loss.

Question 3

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

D)(100 shares × $70)+ $700 = $7,700

Question 4

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 5

Sergio acquires a $100,000 Ternco Corporation bond (5%,20-year bond)on January 1,2017 for $75,000.The bond had been issue on January 1,2015.If Sergio holds the bond to maturity,at redemption he will recognize

Accepted Answer

B)This is a market discount bond.Gain at disposition is ordinary income to the extent of the accrued market discount.The entire gain is ordinary income if the bond is held to maturity.

Question 6

On July 25,2016,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 18,2016.Darryl sold the stock on April 18,2017 for $7,800.As a result of the sale,what will Darryl report on his 2017 tax return?

Accepted Answer

D)The basis of the property received as a gift will be that of the donor,and the holding period will include the donor's holding period.

Question 7

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

Accepted Answer

Without some form of preferential treatment,taxpayers with appreciated capital assets may be unwilling to sell them.

Question 8

Rita died on January 1,2017 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 20,2017,he must recognize a

Accepted Answer

B)$800,000 - $730,000 (FMV basis upon inheritance)= $70,000.The holding period for inherited property is automatically long term.

Question 9

On July 25,2016,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 18,2016.Bill sold the stock on April 18,2017 for $6,000.As a result of the sale,what must Bill report on his 2016 tax return?

Accepted Answer

A)$6,000 - $7,500 = ($1,500).The donee's loss basis is the lessor of FMV or adjusted basis on the date of the gift.Since FMV is used,the donee's holding period begins on the date of the gift.

Question 10

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

Accepted Answer

A significant discount on a bond will be treated as original issue discount or market discount,resulting in ordinary income recognition over the life of the bond or at redemption.

Question 11

The gain or loss on an asset purchased on March 31,2016,and sold on March 31,2017,is classified as short-term.

Accepted Answer

To qualify as long-term,the asset must be held more than one year.

Question 12

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

A)Because the option expires,Sophia recognizes a STCL of $1,000 in the current year.

Question 13

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

Accepted Answer

Gain on the sale of a patent is capital if sold by the individual who developed the patent.

Question 14

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

Accepted Answer

C)The holding period is greater than one year.

Question 15

Adam purchased 1,000 shares of Airco Inc.common stock for $22,000 on February 3,2014.On April 1,2017,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 15,2017 for $2,400.Due to the stock sale,Adam will recognize a

Accepted Answer

D)The basis of the 100 new shares will be $2,000 due to an allocation of the $22,000 purchase between old and new shares ($22,000 × 100/1,100).Because the new shares were received through a nontaxable stock dividend,the holding period of the new shares includes the holding period of the original 100 shares.

Question 16

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 holding period of property received from a decedent is always deemed to be long term.

Question 17

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

A)$1,000 - $800 = $200

Question 18

Rana purchases a 5%,$100,000 corporate bond at issuance on January 1,2017 for $91,500.The bond matures in five years.In 2017 Rana will recognize interest income of

Accepted Answer

D)The discount is large enough to be classified as original issue discount.The OID is amortized based on constant interest rate method,resulting in additional interest income added to the $5,000 interest received.

Question 19

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

Normally the donee's holding period includes the donor's holding period,but if the donee's basis is the FMV on the gift date,the holding period starts over.

Question 20

Margaret died on September 16,2017,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 19,2017 for $67,000.What is Caroline's reported gain on this sale?

Accepted Answer

B)$67,000 - $60,000 (FMV basis upon inheritance)= $7,000.Holding period for inherited property is always long-term.

Quiz 21: Property Transactions: Capital Gains and Losses