Question 1

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 because the tax rate on long-term capital gains is different than the tax rate on ordinary income. The alternative tax calculation, the capital gains tax rate, may be used to calculate the tax owed on the net long-term capital gain.

Question 2

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

False

Question 3

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

True

Question 4

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 5

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

According to the IRS, individuals who engage only in limited development activities may be eligible for capital gain treatment on the sale of their real property, even if they are not professional real estate developers. The determination of whether an individual's activities are considered limited is based on various factors, such as the extent and nature of the development activities, the time and effort expended, and the individual's intent.

Question 6

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. The tax law does require 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. Net capital losses can only offset up to $3,000 of ordinary income in a given tax year, but any excess can be carried forward to future years. Therefore, it is important to keep track of capital gains and losses separately from other types of gains and losses.

Question 7

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

The answer of The holding period of property given up...

Question 8

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 9

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

Accepted Answer

The holding period determines whether the gain is considered short-term or long-term, and the tax rate applied to the gain varies depending on the holding period.

Question 10

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

It is true that when a patent is transferred, the transferor usually receives either a lump sum payment or periodic payments as forms of compensation for transferring the patent rights.

Question 11

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 true because the definition of "capital asset" in the Code only excludes certain types of property, and other Code sections provide guidance on how to determine what is a capital gain or loss based on the nature of the property and the circumstances of the transaction.

Question 12

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

When a lessee receives a lease cancellation payment, it is generally treated as an exchange because the lease that is being extinguished is usually a capital asset. The payment is considered a form of consideration for the transfer of the asset, and therefore, treated as an exchange transaction.

Question 13

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 considered to be in lieu of rental payments, and as such, they are treated as ordinary income when received by a lessor.

Question 14

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

Accepted Answer

The holding period includes the day after the property was acquired and the day of disposition.

Question 15

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

The taxpayer has a capital loss of $8,000, but since they sold the property for less than their adjusted basis, they also have a loss on the sale of the property. The amount of the loss on the sale of the property is $8,000 (adjusted basis of $40,000 minus sale price of $32,000) which is treated as an ordinary loss. The taxpayer cannot offset their capital gain or ordinary income with this loss.

Question 16

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 correct according to the IRS guidelines for determining original issue discount on bonds. The threshold for OID is based on the difference between the face value and issue price, as a percentage of the redemption price and years to maturity. If the threshold is met or exceeded, the bond will be treated as having OID for tax purposes.

Question 17

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

According to section 1244 of the Internal Revenue Code, losses from the sale of § 1244 stock are treated as ordinary losses instead of capital losses, up to a maximum of $50,000 for an individual taxpayer or $100,000 for a married couple filing jointly. Therefore, if the security purchased by the individual qualifies as § 1244 stock and becomes worthless, the loss of $30,000 would be treated as an ordinary loss.

Question 18

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

Accepted Answer

This is the fundamental concept of a franchise system where the franchisor provides the franchisee with the business model, brand name, operating procedures, and ongoing support in exchange for a fee or royalty.

Question 19

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 20

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

When the taxpayer sells the note receivable for less than its stated value, they will realize an ordinary loss. This is because the difference between the book value of the note and the sale price represents a loss on the taxpayer's books. As an accrual basis taxpayer, the taxpayer must recognize this loss in the current tax year.

Quiz 14: Property Transactions, capital Gains and Losses, sec1231, and Recapture Provisions