Question 1

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

Accepted Answer

Franchising is a business model where a franchisor grants the rights to use its brand, products, and services to a franchisee in exchange for an initial fee and royalties. The franchisor also provides the franchisee with support and training to run the business according to the franchisor's established system and standards.

Question 2

The only things that the grantee of an option may do with the option are exercise it or let it expire.

Accepted Answer

The grantee of an option can also sell or transfer the option to another party before it expires, in addition to exercising it or letting it expire.

Question 3

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

The statement is correct. The alternative tax calculation, known as the capital gains tax rates, applies a lower tax rate to long-term capital gains compared to ordinary income. Therefore, it is important to separate capital gains and losses from other types of gains and losses to determine the correct tax calculation.

Question 4

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 painting is considered a collectible, and gains from the sale of collectibles are subject to a maximum tax rate of 28%, not the standard long-term capital gains rate.

Question 5

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 as compensation for the loss of rental income and therefore are treated as ordinary income.

Question 6

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 for less than its stated value, it results in a loss. As the taxpayer is on accrual basis, the loss would be considered ordinary loss.

Question 7

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 are not professional real estate developers may be eligible for capital gain treatment for sale of their real property if they engage only in limited development activities, such as subdividing a single property into smaller lots or improving the property by adding utilities or roadways. However, if the individual is engaged in a continuous business of buying and selling real estate, they may not be eligible for capital gain treatment and may instead be subject to ordinary income tax rates.

Question 8

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 9

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 is calculated by counting the number of days between the day after the property was acquired and the day of disposition, including both days in the count.

Question 10

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

The statement accurately describes the conditions for an original issue discount on a bond to be considered for tax purposes.

Question 11

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 $8,000 loss is an ordinary loss, not a capital loss, because the property is depreciable business property, which is subject to Section 1231 rules.

Question 12

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

Accepted Answer

The holding period determines the tax rate that will be applied to the gain, with short-term gains being taxed at a higher rate than long-term gains.

Question 13

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 typically considered an exchange because the lease being cancelled is usually a capital asset. The lessee is essentially giving up their ownership of the asset in exchange for the payment.

Question 14

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. The definition of a "capital asset" in the tax code is based on what is not included, so other sections of the code are used to determine if a gain or loss is a capital gain or loss.

Question 15

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 16

Confusingly, §1221 defines what is not a capital asset.

Accepted Answer

Section 1221 of the Internal Revenue Code defines what is not considered a capital asset, including inventory, property used in a trade or business, and certain types of copyrights and commodities.

Question 17

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. When a patent is transferred, the transferor may receive a lump sum payment, periodic payments, or a combination of both as forms of compensation.

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. The tax law does require that capital gains and losses be separated from other types of gains and losses for the purpose of calculating net capital gains or losses. There are limitations on the amount of net capital losses that can be deducted from other income, so it is important to keep track of these separately.

Question 19

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 20

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

§ 1244 stock losses are treated as ordinary losses, even if the taxpayer is not engaged in a trade or business. Therefore, the loss of $30,000 would be treated as an ordinary loss for the individual taxpayer.

Quiz 14: Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions