Deck 8: Property Transactions: Capital Gains and Losses, section 1231, and Recapture Provisions

Question 1

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.

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

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.

Question 5

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.

Question 6

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

Question 7

When a patent is transferred,the most common forms of payment received by the transferor are a lump sum and/or periodic payment.

Question 8

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

Question 9

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.

Question 10

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.

Question 11

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

Question 12

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.

Question 13

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

Question 14

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.

Question 15

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

Question 16

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

Question 17

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.

Question 18

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

Question 19

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.

Question 20

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.

Question 21

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

Question 22

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

Question 23

Section 1245 may apply to amortizable § 197 intangible assets.

Question 24

In the "General Procedure for § 1231 Computation: Step 2.§ 1231 Netting," if the gains exceed the losses,the net gain is offset by the "lookback" nonrecaptured § 1231 losses.

Question 25

Section 1231 property generally includes certain purchased intangible assets (such as patents and goodwill)that are eligible for amortization and held for more than one year.

Question 26

Section 1231 property includes nonpersonal use property where casualty gains exceed casualty losses for the taxable year.

Question 27

If there is a net § 1231 loss,it is treated as an ordinary loss.

Question 28

An individual taxpayer with 2013 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2014.

Question 29

Casualty gains and losses from nonpersonal use assets are not netted against casualty gains and losses from personal use assets.

Question 30

The maximum § 1245 depreciation recapture generally equals the accumulated depreciation.

Question 31

Section 1231 property generally does not include artistic compositions.

Question 32

Section 1231 applies to the sale or exchange of business properties,but not to personal use activity casualties.

Question 33

If § 1231 asset casualty gains and losses net to a gain,the gain is treated as a § 1231 gain.

Question 34

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.

Question 35

Nonrecaptured § 1231 losses from the six prior tax years may cause current year net § 1231 gain to be treated as ordinary income.

Question 36

Section 1231 property generally does not include accounts receivables arising in the ordinary course of business.

Question 37

The Code contains two major depreciation recapture provisions-§§ 1245 and 1250.

Question 38

Rental use depreciable machinery held more than 12 months is an example of a § 1231 asset.

Question 39

Involuntary conversion gains may be deferred if the proceeds of the involuntary conversion are reinvested.

Question 40

Personal use property casualty gains and losses are not subject to the § 1231 rules.

Question 41

For § 1245 recapture to apply,accelerated depreciation must have been taken on the property.

Question 42

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.

Question 43

The maximum amount of the unrecaptured § 1250 gain (25% gain)is the depreciation taken on real property sold at a recognized gain.

Question 44

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:

A)Sold a capital asset.
B)Sold an ordinary asset.
C)No gain or loss.
D)An ordinary gain.
E)b.and d.

Question 45

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

A)The securities he buys and sells each day in the normal course of his business.
B)The securities he designates as held for investment at the end of the day of acquisition.
C)The securities he holds more than 12 months.
D)All the securities he owns.
E)b.,c.,and d.

Question 46

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.

Question 47

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.

Question 48

Section 1245 depreciation recapture potential does not carryover from the deceased taxpayer to the beneficiary taxpayer.

Question 49

The tax law requires that capital gains and losses be separated from other types of gains and losses.Among the reasons for this treatment are:

A)Long-term capital gains may be taxed at a lower rate than ordinary gains.
B)Capital losses that are short-term are not deductible.
C)Net capital loss is deductible only up to $3,000 per year for individual taxpayers.
D)a.and c.
E)None of the above.

Question 50

Section 1250 depreciation recapture will apply when accelerated depreciation was used on property used outside the United States and the property is sold at a gain.

Question 51

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.

Question 52

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.

Question 53

The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.

Question 54

On June 1,2013,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 1,2013.On his 2013 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.

Question 55

Stella purchased vacant land in 2006 that she subdivided for resale as lots.All 10 of the lots were sold during 2013.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.

Question 56

A worthless security had a holding period of 6 months when it became worthless on December 10,2013.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.

Question 57

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.

Question 58

Section 1231 lookback losses may convert some or all of § 1245 gain into ordinary income.

Question 59

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.

Question 60

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.

Question 61

Robin Corporation has ordinary income from operations of $30,000,net long-term capital gain of $10,000,and net short-term capital loss of $15,000.What is the taxable income for 2013?

A)$25,000.
B)$27,000.
C)$28,500.
D)$30,000.
E)None of the above.

Question 62

Which of the following comparisons is correct?

A)Corporations may carryback capital losses; individuals may not.
B)Both corporation and individual long-term capital losses carryover as short-term capital losses.
C)Corporations may carryforward capital losses indefinitely; individuals may only carryforward capital losses for five years.
D)Both corporations and individuals may use an alternative tax rate on net capital gains.
E)None of the above.

Question 63

In 2013,an individual taxpayer has $863,000 of taxable income that includes $48,000 of 0%/15%/20% long-term capital gain.Which of the following statements is correct?

A)All of the LTCG will be taxed at 0%.
B)All of the LTCG will be taxed at 15%.
C)All of the LTCG will be taxed at 20%.
D)Some of the LTCG will be taxed at 15% and some at 20%.
E)None of the above.

Question 64

Seamus had $16,000 of net short-term capital loss in 2012.In 2013,Seamus has $17,000 of long-term capital loss and $26,000 of long-term capital gain.Which of the following statements is correct?

A)Seamus had a $13,000 short-term capital loss carryover to 2013.
B)Seamus has an $9,000 2013 net long-term capital gain.
C)Seamus has a $4,000 2013 net short-term capital loss.
D)a.and c.
E)None of the above.

Question 65

Which of the following assets held by a manufacturing business is a § 1231 asset?

A)Inventory.
B)Office furniture used in the business and held less than one year.
C)A factory building used in the business and held more than one year.
D)Accounts receivable.
E)All of the above.

Question 66

Sara is filing as head of household and has 2013 taxable income of $57,000 which includes $3,000 of net long-tem capital gain.The net long-term capital gain is made up of $1,000 25% gain and $2,000 0%/15%/20% gain.What is the tax on her taxable income using the alternative tax method?

A)$0.
B)$8,453.
C)$8,753.
D)$8,553.
E)None of the above.

Question 67

White Company acquires a new machine for $75,000 and uses it in White's manufacturing operations.A few months after White places the machine in service,it discovers that the machine is not suitable for White's business.White had fully expensed the machine in the year of acquisition using § 179.White sells the machine for $60,000 in the tax year after it was acquired,but held the machine only for a total of 10 months.What was the tax status of the machine when it was disposed of and the amount of the gain or loss?

A)A capital asset and $60,000 gain.
B)An ordinary asset and $60,000 gain.
C)A § 1231 asset and $60,000 gain.
D)A § 1231 asset and $60,000 loss.
E)None of the above.

Question 68

Tan,Inc.,sold a forklift on April 12,2013,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 12,2013.
C)Begins on April 13,2013.
D)Does not begin until Ashley sells the forklift.
E)None of the above.

Question 69

Hank inherited Green stock from his mother when she died.The mother had a tax basis of $366,000 for the Green stock when she died and the Green stock was worth $437,000 at the date of her death.Which of the statements below is correct?

A)Hank's holding period for the Green stock includes his mother's holding period for the stock.
B)Hank's holding period for the Green stock does not include his mother's holding period for the stock.
C)Hank's holding period for the Green stock is automatically long term.
D)b.and c.
E)None of the above.

Question 70

In 2012,Jenny had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction.In 2013,Jenny has a $18,000 0%/15%/20% long-term capital gain and no other capital gain or loss transactions.Which of the statements below is correct?

A)Jenny has a 2013 $18,000 net capital gain.
B)Jenny has a 2013 $9,000 net capital gain.
C)Jenny has a 2013 $9,000 net capital loss.
D)Jenny has a 2013 $3,000 capital loss deduction.
E)Jenny has a 2013 $9,000 capital loss deduction.

Question 71

Which of the following would be included in the netting of § 1231 gains and losses?

A)Personal use property net casualty gain.
B)Section 1231 loss.
C)Section 1231 gain.
D)All of the above.
E)b.and c.

Question 72

Ryan has the following capital gains and losses for 2013: $6,000 STCL,$5,000 28% gain,$2,000 25% gain,and $6,000 0%/15%/20% gain.Which of the following is correct:

A)The net capital gain is composed of $1,000 25% gain and $6,000 0%/15%/20% gain.
B)The net capital gain is composed of $5,000 28% gain and $2,000 0%/15%/20% gain.
C)The net capital gain is composed of $3,000 28% gain,$2,000 25% gain,and $2,000 0%/15%/20% gain.
D)The net capital gain is composed of $1,000 28% gain and $6,000 0%/15%/20% gain.
E)None of the above.

Question 73

In 2013,Mark has $18,000 short-term capital loss,$7,000 28% gain,and $6,000 0%/15%/20% gain.Which of the statements below is correct?

A)Mark has a $5,000 capital loss deduction.
B)Mark has a $3,000 capital loss deduction.
C)Mark has a $13,000 net capital gain.
D)Mark has a $5,000 net capital gain.
E)Mark has a $18,000 net capital loss.

Question 74

On June 10,2013,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 11,2013.
C)The holding period of the office building starts on June 10,2013.
D)The holding period of the office building includes the holding period of the factory building.
E)None of the above.

Question 75

Which of the following assets held by a cash basis accounting firm is a § 1231 asset?

A)An account receivable from a client.
B)A desk used in the business and held more than one year.
C)An investment in Orange Company common stock.
D)A computer used in the business,held more than one year,but fully depreciated under § 179 when acquired.
E)b.and d.

Question 76

Which of the following is correct concerning short sales of stock?

A)At the time the short sale is made,the taxpayer does not deliver to the purchaser the shares sold short.
B)At the time the short sale is made,the taxpayer delivers to the purchaser the shares sold short.
C)At the time the short sale is made,the taxpayer may already own the shares sold short.
D)At the time the short sale is made,the taxpayer always already owns the shares sold short.
E)None of the above.

Question 77

Cason is filing as single and has 2013 taxable income of $36,000 which includes $34,000 of 0%/15%/20% net long-term capital gain.What is his tax on taxable income using the alternative tax method?

A)$0.
B)$200.
C)$4,954.
D)$300.
E)None of the above.

Question 78

A barn held more than one year and used in a business is destroyed in a tornado.The barn originally cost $356,000 and was fully depreciated using straight-line depreciation.The barn was insured for its $543,000 replacement cost minus a deductible of $1,000.Which of the statements below is correct concerning these facts?

A)The barn was a long-term personal use asset.
B)There is a casualty loss from disposition of the barn.
C)The recognized gain from disposition of the barn is $186,000.
D)The recognized gain from disposition of the barn is subject to special netting rules.
E)c.and d.

Question 79

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.

Question 80

Violet,Inc.,has a 2013 $80,000 long-term capital gain included in its $285,000 taxable income.Which of the following is correct?

A)Violet will benefit from an alternative tax on net capital gains computation.
B)Violet's regular tax on taxable income will be the same as its tax using an alternative tax on net capital gains approach.
C)Violet's $80,000 net capital gain is not taxable.
D)Violet's regular tax on taxable income will be greater than its tax using an alternative tax on net capital gain approach.
E)None of the above.