Question 1

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?

Accepted Answer

When an option expires, the cost of the option is treated as a short-term capital loss. In this case, Brady purchased the option in June and let it lapse in December, which is less than a year, so it is a short-term loss. Therefore, the correct answer is B) A $3,000 short-term capital loss.

Question 2

The possible holding periods for capital assets include:

Accepted Answer

The IRS classifies a holding period of greater than 12 months as long-term for capital assets. Therefore, choice C is the best option as it correctly identifies the holding period for long-term assets.

Question 3

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?

Accepted Answer

Gold Company may deduct the monthly contingent fee of 2% of gross sales every month as it is paid. The noncontingent annual fees cannot be deducted in full at the time they are paid, but must be capitalized and deducted over the 13-year term of the franchise agreement.

Question 4

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

Accepted Answer

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

Question 5

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?

Accepted Answer

When an asset is acquired through a like-kind exchange, the holding period of the asset given up (in this case, the factory building) is tacked onto the holding period of the asset received (the office building). Therefore, the holding period of the office building includes the holding period of the factory building.

Question 6

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:

Accepted Answer

Virgil received $1,000 as a result of canceling the lease and moving out. Since this amount is more than Virgil's adjusted basis in the lease (presumably $0), it results in a capital gain. Neither Marple nor the demolition of the building is relevant in determining Virgil's tax consequences.

Question 7

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?

Accepted Answer

When Hiram assigns all substantial rights in the patent, it is considered a sale or exchange of a capital asset. Hiram's lump sum payment of $800,000 is considered a sale of the patent and qualifies for long-term capital gain treatment since he held the patent for more than one year. The royalty payments are also considered a sale or exchange of a capital asset, but the tax treatment depends on how the assignment agreement is structured. In this case, the $1 royalty per device sold is likely a percentage of sales and not considered a rent or license. Therefore, the royalty payments also qualify for long-term capital gain treatment since Hiram held the patent for more than one year.

Question 8

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

Accepted Answer

All of the above options (sale, exchange, casualty, and condemnation) can result in recognized gains or losses from disposition of a capital asset.

Question 9

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 taxed at the ordinary income tax rate, while long-term capital gain is eligible for a special tax rate that is generally lower than the ordinary income tax rate. Therefore, it is the long-term capital gain that must exceed the short-term capital gain for the special tax rate to apply.

Question 10

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?

Accepted Answer

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

Question 11

Michael is in the business of creating posters (display art) for the movie industry. He creates a poster and sells it for a lump sum. He has:

Accepted Answer

The answer of Michael is in the business of creating...

Question 12

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?

Accepted Answer

Since the holding period of the security was less than one year, the loss is considered a short-term capital loss. The investor can use this loss to offset any other short-term capital gains and up to $3,000 of ordinary income. Any remaining loss can be carried forward to future tax years.

Question 13

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:

Accepted Answer

This is an ordinary gain because it is from the sale of inventory held for sale in the course of a taxpayer's business. It is not a capital asset.

Question 14

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:

Accepted Answer

Since the lessor had a zero tax basis for the lease, the entire $45,000 received as a lease cancellation fee would be considered ordinary income.

Question 15

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 16

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?

Accepted Answer

When Lana purchased the bond, she paid $1,410 for a $2,000 bond, which means she bought it at a discount of $590 ($2,000 - $1,410).

Lana then amortized $200 of the original issue discount. This means that she gradually reduced the discount by $200 over the two-year period until the bond matured.

At the time of sale, Lana sold the bond for $1,800. Since she bought it for $1,410 and amortized $200 of the original discount, her adjusted basis was $1,610 ($1,410 + $200).

Lana has a long-term capital gain of $190 ($1,800 - $1,610). This is because she held the bond for more than one year before selling it, and as a result, the gain or loss is considered long-term.

Question 17

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 guidelines. The individual taxpayer can deduct up to $3,000 of the net short-term capital loss and carry forward the remaining $2,000 to the next taxable year.

Question 18

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 19

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?

Accepted Answer

When the purchaser of an option exercises the option, they add the cost of the option to the basis of the property to which the option relates.

Question 20

Ramon is in the business of buying and selling securities. Which of the following is a capital asset for Ramon?

Accepted Answer

According to the capital asset definition in the tax code, capital assets are generally those held for investment purposes. Therefore, the securities Ramon designates as held for investment at the end of the day of acquisition would be considered capital assets. The securities he buys and sells each day in the normal course of his business would not be considered capital assets, as they are not held for investment. The securities held for more than 12 months would also be considered capital assets, but this is not the best choice since it is more restrictive than choice B. Choice D and E are incorrect because not all securities owned by Ramon would necessarily be considered capital assets.

Quiz 8: Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions