Question 1

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 2

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

Accepted Answer

To calculate the holding period, start counting on the day after acquisition and include the day of disposition.

Question 3

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

Since the taxpayer is on an accrual basis, they must recognize the full amount of the note receivable even if they are unsure if they will be able to collect the full amount. When they sell the note for less than its stated value, they will recognize an ordinary loss equal to the difference between the book value of the note and the selling price.

Question 4

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 typically considered a capital asset, and when it is canceled, the payment received by the lessee is treated as an exchange.

Question 5

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 6

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 7

For tax purposes,there is no original issue discount on a bond unless the bond is issued for less than its face value and the difference between the face value and the bond issue price is at least one-fourth of 1 percent of the redemption price at maturity multiplied by the number of years to maturity.

Accepted Answer

This statement is true according to IRS regulations. If the bond is issued at a discount but the difference between the face value and issue price is less than one-fourth of 1 percent of the redemption price at maturity multiplied by the number of years to maturity, then there is no original issue discount for tax purposes.

Question 8

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

This transaction results in a capital loss of $8,000, but it is not deductible for a business taxpayer.

Question 9

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

This is true because § 1244 stock allows individuals to treat losses on small business stock as ordinary losses instead of capital losses, which are subject to limitations on the amount of loss that can be claimed in a given year. If the stock qualifies as § 1244 and becomes worthless, the individual taxpayer can claim an ordinary loss deduction of up to $50,000 ($100,000 for married filing jointly) per year. In this case, since the loss is $30,000 and the taxpayer is single, the full amount of the loss can be claimed as an ordinary loss deduction.

Question 10

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 because the definition of "capital asset" in the Code only excludes certain things from being considered capital assets, but it does not provide a positive definition of what is a capital gain or loss. Other Code sections, such as 26 U.S. Code § 1222, provide more specific guidance on what constitutes a capital gain or loss.

Question 11

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 12

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 as per the IRS tax law. The tax rates for long-term capital gains are lower than those for ordinary income, and a separate alternative tax calculation may apply when net long-term capital gain is included in taxable income.

Question 13

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 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

The IRS allows individuals who are not professional real estate developers to receive capital gain treatment for the sale of their real property if they engage only in limited development activities.

Question 15

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. The transfer of a patent can involve payment in the form of a lump sum or periodic payments to the transferor.

Question 16

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 17

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

Accepted Answer

This is the basic definition of franchising – the franchisor provides the franchisee with a license to use its system of doing business.

Question 18

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 statement is true. Net capital losses can only be deducted up to $3,000 per year and must be carried forward to future tax years if they exceed this amount. Separating capital gains and losses allows for proper tracking and reporting of these losses for tax purposes.

Question 19

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 treated as ordinary income because they are a substitute for the rental payments that the lessor would have received had the lease not been cancelled.

Question 20

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

Accepted Answer

The holding period of a capital asset determines the tax rate applied to any gain made upon its sale. If the asset is held for more than one year, it is considered a long-term capital gain and may be subject to a lower tax rate than short-term capital gains. Therefore, the holding period is important in determining the tax implications of selling a capital asset at a gain.

Quiz 16: Property Transactions Capital Gains and Losses