Question 1

Lana purchased for $1,410 a $2,000 bond when it was issued two years ago.Lana amortized $200 of the original issue discount and then sold the bond for $1,800.Which of the following statements is correct?
A)Lana has $10 of long-term capital loss.
B)Lana has $190 of long-term capital gain.
C)Lana has no capital gain or loss.
D)Lana has $190 of long-term capital loss.
E)None of the above.

Accepted Answer

Lana purchased the bond for $1,410, amortized $200 of the original issue discount, which brings the adjusted basis to $1,610. When she sold it for $1,800, she had a long-term capital gain of $190 ($1,800 - $1,610). Therefore, choice B is correct.

Question 2

Short-term capital losses are netted against long-term capital gains and long-term capital losses are netted against short-term capital gains.

Accepted Answer

The answer of Short-term capital losses are netted against long-term...

Question 3

A lessor is paid $45,000 by its commercial tenant as a lease cancellation fee.The tenant wanted to get out of its lease so it could move to a different building.The lessor had held the lease for three years before it was canceled.The lessor had a zero tax basis for the lease.The lessor has received:
A)Ordinary income of $45,000.
B)Long-term capital gain of $45,000.
C)Short-term capital gain of $45,000.
D)Neither gain nor loss.
E)None of the above.

Accepted Answer

Since the lessor had a zero tax basis for the lease, the entire amount of $45,000 is considered as ordinary income. Additionally, since the lessee paid the amount as a lease cancellation fee, it is considered taxable income for the lessor. Therefore, the correct answer is A) Ordinary income of $45,000.

Question 4

Virgil was leasing an apartment from Marple,Inc.Marple paid Virgil $1,000 to cancel his lease and move out so that Marple could demolish the building.As a result:
A)Virgil has a $1,000 capital gain.
B)Virgil has a $1,000 capital loss.
C)Marple has a $1,000 capital loss.
D)Marple has a $1,000 capital gain.
E)None of the above.

Accepted Answer

The $1,000 payment that Virgil received from Marple is considered a capital gain because it is a profit from the sale or exchange of capital assets. In this case, Virgil is giving up his leasehold interest in the apartment building in exchange for money, which is a capital asset. Therefore, Virgil has a $1,000 capital gain.

Question 5

Hiram is a computer engineer and,while unemployed,invents a switching device for computer networks.He patents the device,but does not reduce it to practice.Hiram has a zero tax basis for the patent.In consideration of $800,000 plus a $1 royalty per device sold,Hiram assigns the patent to a computer manufacturing company.Hiram assigned all substantial rights in the patent.Which of the following is correct?
A)Hiram automatically has long-term capital gain from the lump sum payment,but not from the royalty payments.
B)Hiram automatically has long-term capital gain from the royalty payments,but not from the lump sum payment.
C)Hiram automatically has long-term capital gain from both the lump sum payment and the royalty payments.
D)Hiram does not have automatic long-term capital gain from either the lump sum payment or the royalty payments.
E)None of the above.

Accepted Answer

According to the tax code, the sale of a patent results in long-term capital gain. Since Hiram assigned all substantial rights to the patent, the lump sum payment and royalty payments are both considered payments for the sale of the patent. Therefore, Hiram automatically has long-term capital gain from both the lump sum payment and the royalty payments.

Question 6

Tan,Inc. ,sold a forklift on April 12,2016,for $8,000 (its FMV)to its 100% shareholder,Ashley.Tan's adjusted basis for the forklift was $12,000.Ashley's holding period for the forklift:
A)Includes Tan's holding period for the forklift.
B)Begins on April 12,2016.
C)Begins on April 13,2016.
D)Does not begin until Ashley sells the forklift.
E)None of the above.

Accepted Answer

The answer of Tan,Inc. ,sold a forklift on April 12,2016,for...

Question 7

On June 10,2016,Ebon,Inc.acquired an office building as a result of a like-kind exchange.Ebon had given up a factory building that it had owned for 26 months as part of the like-kind exchange.Which of the statements below is correct?
A)The holding period of the factory building includes the holding period of the office building.
B)The holding period of the office building starts on June 11,2016.
C)The holding period of the office building starts on June 10,2016.
D)The holding period of the office building includes the holding period of the factory building.
E)None of the above.

Accepted Answer

According to tax law, the holding period of the property received in a like-kind exchange includes the holding period of the property given up. Therefore, the holding period of the factory building is added to the holding period of the office building received in the exchange.

Question 8

A business taxpayer sells inventory for $80,000.The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year.The taxpayer has:
A)No gain or loss.
B)Sold a long-term capital asset.
C)Sold a short-term capital asset.
D)An ordinary gain.
E)None of the above.

Accepted Answer

Since the inventory was held for more than one year and was sold in the course of the taxpayer's business, the gain is classified as an ordinary gain, not a capital gain. The amount of the gain is $22,000 ($80,000 - $58,000).

Question 9

The possible holding periods for capital assets include:
A)Short-term = held 14 months or less.
B)Long-term = greater than six months.
C)Long-term = greater than 12 months.
D)Short-term = greater than 12 months.
E)None of the above.

Accepted Answer

The holding periods for capital assets are classified into short-term and long-term. Short-term capital assets are those that are held for 12 months or less, while long-term capital assets are those that are held for more than 12 months. Therefore, choice C is the most accurate option provided.

Question 10

Stanley operates a restaurant as a sole proprietorship.Which of the following items are capital assets in the hands of Stanley?
A)The restaurant's tables and chairs.
B)A portable sound system used to play "theme music" for the restaurant.
C)The restaurant building that is an asset of the sole proprietorship.
D)An interest-bearing savings account used to keep the restaurant's excess cash.
E)None of the above.

Accepted Answer

The answer of Stanley operates a restaurant as a sole...

Question 11

A worthless security had a holding period of 6 months when it became worthless on December 10,2016.The investor who had owned the security had a basis of $20,000 for it.Which of the following statements is correct?
A)The investor has a long-term capital loss of $20,000.
B)The investor has a short-term capital loss of $20,000.
C)The investor has a nondeductible loss of $20,000.
D)The investor has a short-term capital gain of $20,000.
E)None of the above.

Accepted Answer

Since the holding period of the security was 6 months or less, it is considered a short-term capital loss. The investor can claim a deduction of $3,000 per year against ordinary income and carryover any remaining losses to future years. Therefore, the investor has a short-term capital loss of $20,000.

Question 12

Short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.

Accepted Answer

Short-term capital gain is always taxed at a higher rate than long-term capital gain, regardless of the amount. Therefore, it is false that short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.

Question 13

On June 1,2016,Brady purchased an option to buy 1,000 shares of General,Inc.at $40 per share.He purchased the option for $3,000.It was to remain in effect for five months.The market experienced a decline during the latter part of the year,so Brady decided to let the option lapse as of December 1,2016.On his 2016 tax return,what should Brady report?
A)A $3,000 long-term capital loss.
B)A $3,000 short-term capital loss.
C)A $3,000 § 1231 loss.
D)A $3,000 ordinary loss.
E)None of the above.

Accepted Answer

Since Brady did not exercise his option to buy the shares and instead let it lapse, he incurred a loss of the entire amount spent on the option - $3,000. This loss is considered a short-term capital loss because the option was held for less than one year. Therefore, Brady should report a $3,000 short-term capital loss on his 2016 tax return.

Question 14

All collectibles short-term gain is subject to a potential alternative tax rate of 28%.

Accepted Answer

The answer of All collectibles short-term gain is subject to...

Question 15

Which of the following events causes the purchaser of an option to add the cost of the option to the basis of the property to which the option relates?
A)The option is exercised.
B)The option is sold.
C)The option lapses.
D)The option is rescinded.
E)None of the above.

Accepted Answer

When the option is exercised, the cost of the option can be added to the basis of the property to which the option relates. This is because the cost of the option essentially becomes part of the purchase price of the property.

Question 16

An individual taxpayer with 2016 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2017.

Accepted Answer

This is correct according to the IRS rules. The taxpayer can deduct up to $3,000 of the net short-term capital loss for AGI in 2016 and carry forward any remaining amount to future years.

Question 17

A net short-term capital loss first offsets any 28% net long-term capital gain before it offsets either 25% net long-term capital gain or 0%/15%/20% net long-term capital gain.

Accepted Answer

This is correct according to the IRS rules.

Question 18

Stella purchased vacant land in 2009 that she subdivided for resale as lots.All 10 of the lots were sold during 2016.The lots had a tax basis of $12,000 each and sold for $35,000 each.Stella made no substantial improvements to the lots.She acted as her own real estate broker;so there were no sales expenses for selling the lots.Which of the following statements is correct?
A)Stella must hold the lots for at least 10 years before she is eligible for the special capital gain treatment of § 1237.
B)The $230,000 gain from the sale of the ten lots is all ordinary income.
C)All of the $230,000 gain from the sale of the ten lots is long-term capital gain.
D)To be eligible for the special capital gain treatment of § 1237,Stella must be a real estate dealer.
E)None of the above.

Accepted Answer

The answer of Stella purchased vacant land in 2009 that...

Question 19

Gold Company signs a 13-year franchise agreement with Silver.Silver retained significant powers,rights,and a continuing interest.Gold Company (the franchisee)makes noncontingent payments of $18,000 per year for the first four years of the franchise.Gold Company also pays a contingent fee of 2% of gross sales every month.Which of the following statements is correct?
A)Gold Company may deduct the $18,000 per year noncontingent payments in full as they are made.
B)Gold Company may deduct the monthly contingent fee as it is paid.
C)Gold Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
D)Gold Company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
E)None of the above.

Accepted Answer

Gold Company may deduct the monthly contingent fee of 2% of gross sales as it is paid. However, the noncontingent payments of $18,000 per year for the first four years of the franchise are not deductible until the end of the 13-year franchise agreement. Therefore, statement A is incorrect and statement C is partially incorrect. Statement D is also incorrect as the monthly contingent fees are deductible.

Question 20

Recognized gains and losses from disposition of a capital asset may occur as a result of a:
A)Sale.
B)Exchange.
C)Casualty.
D)Condemnation.
E)All of the above.

Accepted Answer

All of the given scenarios can result in recognized gains or losses from the disposition of a capital asset.

A Sale occurs when the asset is sold to a buyer in a transaction. The difference between the sale price and the asset's adjusted basis (usually the cost of the asset plus any improvements) determines the recognized gain or loss.

An Exchange occurs when the asset is exchanged for another property. The recognized gain or loss is calculated by comparing the fair market value of the property received in the exchange to the adjusted basis of the property given up.

A Casualty occurs when the asset is lost or destroyed due to a sudden, unexpected event such as a fire or natural disaster. The recognized loss is calculated by comparing the adjusted basis of the property before the casualty to the amount of reimbursement received from insurance or other sources.

A Condemnation occurs when the government takes the property for public use through eminent domain. The recognized gain or loss is calculated by comparing the amount of compensation received for the condemned property to the adjusted basis of the property.

Quiz 16: Property Transactions Capital Gains and Losses

Lana purchased for $1,410 a $2,000 bond when it was issued two years ago.Lana amortized $200 of the original issue discount and then sold the bond for $1,800.Which of the following statements is correct?

Short-term capital losses are netted against long-term capital gains and long-term capital losses are netted against short-term capital gains.

A lessor is paid $45,000 by its commercial tenant as a lease cancellation fee.The tenant wanted to get out of its lease so it could move to a different building.The lessor had held the lease for three years before it was canceled.The lessor had a zero tax basis for the lease.The lessor has received:

Virgil was leasing an apartment from Marple,Inc.Marple paid Virgil $1,000 to cancel his lease and move out so that Marple could demolish the building.As a result:

Tan,Inc. ,sold a forklift on April 12,2016,for $8,000 (its FMV) to its 100% shareholder,Ashley.Tan's adjusted basis for the forklift was $12,000.Ashley's holding period for the forklift:

On June 10,2016,Ebon,Inc.acquired an office building as a result of a like-kind exchange.Ebon had given up a factory building that it had owned for 26 months as part of the like-kind exchange.Which of the statements below is correct?

A business taxpayer sells inventory for $80,000.The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year.The taxpayer has:

The possible holding periods for capital assets include:

Stanley operates a restaurant as a sole proprietorship.Which of the following items are capital assets in the hands of Stanley?

A worthless security had a holding period of 6 months when it became worthless on December 10,2016.The investor who had owned the security had a basis of $20,000 for it.Which of the following statements is correct?

Short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.

All collectibles short-term gain is subject to a potential alternative tax rate of 28%.

Which of the following events causes the purchaser of an option to add the cost of the option to the basis of the property to which the option relates?

An individual taxpayer with 2016 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2017.

A net short-term capital loss first offsets any 28% net long-term capital gain before it offsets either 25% net long-term capital gain or 0%/15%/20% net long-term capital gain.

Recognized gains and losses from disposition of a capital asset may occur as a result of a: