Exam 16: Property Transactions Capital Gains and Losses

Larry was the holder of a patent on a video game.During 2016,he sold all substantial rights in the patent for $365,000 in cash and a 3% royalty on the purchaser's first $10,200,000 of sales each year related to the product in which the patent is incorporated.Larry had not reduced the patent to practice.He had a $86,000 basis for the patent.During 2016,he received $30,000 in royalties.What is the nature and amount of Larry's gain?

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Question 1

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Larry was the holder of a patent and transferred all substantial rights to it.Consequently,§ 1235 grants automatic long-term capital gain treatment to both the cash received and the royalties received.Larry recovers his $86,000 basis and has a $309,000 ($365,000 + $30,000 - $86,000)0%/15%/20% long-term capital gain.

Phil's father died on January 10,2016.The father had owned stock for 20 years with a basis of $45,000 that was transferred to Phil as a gift on August 10,2015,when the stock was worth $430,000.His father paid gift tax of $31,000.This stock was worth $566,000 at the date of the father's death.Phil sold the stock for $545,000 net of commissions on February 23,2016.What is the amount and nature of Phil's gain or loss from disposition of this property?

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Phil had a tax basis for the stock equal to its $45,000 basis at the date of his father's gift of the stock increased by the gift tax paid on the stock's unrealized appreciation in his father's hands.He also had a long-term holding period because the father's 20-year holding period is added to Phil's holding period.Consequently,he had a $471,310 ($545,000 - $73,690)long-term capital gain when he sold the stock.

In early 2015,Wanda paid $33,000 for an option on a parcel of land she intended to hold as an investment.After a survey of the land (paid for by the grantor)determined that the parcel was much smaller than the grantor said it was,she let the option lapse when it expired in 2016 after 14 months.How should Wanda treat these events in 2015? 2016?

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Question 3

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If an option holder (grantee)fails to exercise the option,the lapse of the option is considered a sale or exchange on the option expiration date.Thus,the loss is a capital loss if the property subject to the option is (or would be)a capital asset in the hands of the grantee.Wanda has no gain or loss in 2015 because the option had not yet expired.Wanda has a $33,000 long-term capital loss in 2016 when the option expires because the land would have been a capital asset if Wanda had exercised the option.

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.

(True/False)

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Question 4

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?

(Multiple Choice)

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Question 5

Carol had the following transactions during 2016: a painting held for two years and sold at a gain of $85,000;100 shares of Gray stock held six months and sold for a loss of $6,000;50 shares of Yellow stock held 18 months and sold for a gain of $36,000.Carol also had $264,000 of taxable income from other sources than these property transactions.What is Carol's net capital gain or loss and what is her taxable income?

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Question 6

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

(True/False)

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Question 7

Judith (now 37 years old)owns a collection of porcelain dolls that she acquired when she was a grade schooler.She had forgotten about them until her mother sent them to her.Her mother had discovered them in a box in her attic while she was cleaning out her house before selling it.Judith had originally acquired all the dolls as gifts from her parents,so she has no way to establish a basis for the dolls.Using information from the Internet,she prepares a careful inventory of the dolls that includes their name,when they were first available for sale,their current value,and other pertinent information.She then lists them for sale on the Internet.To her surprise,she quickly gets an offer of $5,000 for all of them and sells them.Judith has no other gain or loss transactions for the year and is in the 28% marginal tax bracket.What issues do these facts create?

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Question 8

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

(True/False)

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Question 9

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.

(True/False)

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Question 10

Lease cancellation payments received by a lessor are always ordinary income because they are considered to be in lieu of rental payments.

(True/False)

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Question 11

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.

(True/False)

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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.

(True/False)

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Question 13

When an individual taxpayer has a net long-term capital gain that includes both 28% gain and 0%/15%/20% gain,which of these gains will be taxed first when the alternative tax on net long-term capital gain method is used and what difference does it make?

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Question 14

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:

(Multiple Choice)

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Question 15

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?

(Multiple Choice)

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Question 16

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?

(Multiple Choice)

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Question 17

On January 10,2016,Wally sold an option for $2,000 on vacant land he held as an investment.He had purchased the land in 2012 for $76,000.The option allowed the option holder to purchase the property for $122,000 plus the cost of the option.On March 1,2016,the option holder exercised the option.What is the amount and nature of Wally's gain or loss from disposition of the land?

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Question 18

Which of the following comparisons is correct?

(Multiple Choice)

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Question 19

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

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Question 20

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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.

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?

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

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

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.

Lease cancellation payments received by a lessor are always ordinary income because they are considered to be in lieu of rental payments.

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.

A lease cancellation payment received by a lessee is generally treated as an exchange because the lease extinguished is usually a capital asset.

When an individual taxpayer has a net long-term capital gain that includes both 28% gain and 0%/15%/20% gain,which of these gains will be taxed first when the alternative tax on net long-term capital gain method is used and what difference does it make?

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:

Which of the following comparisons is correct?

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

An Introduction to Taxation and Understanding the Federal Law

Working With the Tax Law

Tax Formula and Tax Determination an Overview of Property Transactions

Gross Income Concepts and Inclusions

Gross Income Exclusions

Deductions and Losses in General

Deductions and Losses Certain Business Expenses and Losses

Depreciation Cost Recovery Amortization and Depletion

Deductions Employee and Self Employed Related Expenses

Deduction and Losses Certain Itemized Deductions

Investor Losses

Alternative Minimum Tax

Tax Credits and Payment Procedures

Property Transactions Determination of Gain and Loss and Basic Considerations

Property Transactions Nontaxable Exchanges

Property Transactions Section 1231 and Recapture Provisions

Accounting Periods and Methods

Deferred Compensation

Corporations and Partnerships

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