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

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

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.

Answer 3

True

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.

Question 5

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

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.

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.

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.

Question 9

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

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.

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.

Question 12

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

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.

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.

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.

Question 16

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

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.

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.

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.

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.

Question 21

An individual taxpayer with 2018 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2019.

Question 22

Section 1231 property generally does not include artistic compositions.

Question 23

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

Question 24

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

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

There can be three subgroups within the long-term capital gain or loss group - 0%/15%/20%, 25%, and 28%.

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

A corporation has a $50,000 short-term capital loss for the year. The corporation has $1,200,000 of taxable income from other sources. The taxable income for the year is $1,200,000.

Question 32

The "tax status" of an asset refers to whether the asset is a capital asset, a § 1231 asset, or an ordinary asset.

Question 33

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

Question 34

A sheep must be held more than 18 months to qualify as a § 1231 asset.

Question 35

The effect of § 1244 may be to convert a capital loss into an ordinary loss deductible for adjusted gross income.

Question 36

An individual business taxpayer owns land on which he grows trees for logging. The land has been held more than 10 years and the trees growing on the land were planted eight years ago. Normally, the timber would be inventory for this taxpayer, but the tax law allows the taxpayer to elect to treat cutting the timber as the disposition of a § 1231 asset.

Question 37

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

Question 38

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 39

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.

Question 40

In order to be long-term, the holding period must include at least parts of two tax years.

Question 41

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

Question 42

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

Question 43

Property sold to a related party that is depreciable by the purchaser may cause the seller to have ordinary gain.

Question 44

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

Question 45

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 46

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

Question 47

Depreciation recapture under § 1245 and § 1250 is reported on Form 4797.

Question 48

Part III of Form 4797 is used to report gains from the sale of depreciable business equipment sold at a gain and held more than one year.

Question 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

A personal use property casualty loss that occurs in a non federally declared disaster area is deductible only to the extent it exceeds 10% of AGI.

Question 54

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

Question 55

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

Question 56

Once § 1231 gains are netted against § 1231 losses, if the gains exceed the losses, the net gain is offset by the "lookback" nonrecaptured § 1231 losses.

Question 57

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

Question 58

Section 1245 applies to amortizable § 197 intangible assets.

Question 59

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

Question 60

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 61

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 62

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 63

Ryan has the following capital gains and losses for 2018: $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 64

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 65

Stella purchased vacant land in 2011 that she subdivided for resale as lots. All 10 of the lots were sold during 2018. 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 66

A worthless security had a holding period of 6 months when it became worthless on December 10, 2018. 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 67

On June 1, 2018, 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, 2018. On his 2018 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 68

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 69

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 70

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 71

On June 10, 2018, 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, 2018.
C) The holding period of the office building starts on June 10, 2018.
D) The holding period of the office building includes the holding period of the factory building.
E) None of the above.

Question 72

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 73

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 74

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 ????????.
E) None of the above.

Question 75

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 76

Tan, Inc., sold a forklift on April 12, 2018, 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, 2018.
C) Begins on April 13, 2018.
D) Does not begin until Ashley sells the forklift.
E) None of the above.

Question 77

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?

A) Lana has $10 of long-term capital loss.
B) Lana has $190 of long-term capital gain.
C) Lana has no capital gain or loss.
D) Lana has $190 of long-term capital loss.
E) None of the above.

Question 78

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 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

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.