Deck 16: Property Transactions: Capital Gains and Losses

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

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% of the redemption price at maturity multiplied by the number of years to maturity.

Question 5

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

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

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 8

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 9

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 10

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

Question 11

The only thing that the grantee of an option may do with the option is to exercise it or let it expire.

Question 12

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 13

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 14

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 and has an $8,000 capital loss.

Question 15

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

Question 16

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 17

An individual taxpayer received a valuable painting from his uncle, a famous artist who painted it.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 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

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

Question 20

Individuals who are not professional real estate developers may get capital gain treatment for the sale of their real property if they engage only in limited development activities.

Question 21

Stella purchased vacant land in 2012 that she subdivided for resale as lots.All 10 of the lots were sold during 2019. Each lot had a tax basis of $12,000 and sold for $35,000.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 10 lots is all ordinary income.
C)All of the $230,000 gain from the sale of the 10 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 these.

Question 22

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 these.

Question 23

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

Question 24

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

Question 25

Which of the following events causes the purchaser of an option to add its cost 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 these.

Question 26

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

Question 27

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 these.

Question 28

On June 1, 2019, 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, 2019.On his 2019 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 these.

Question 29

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

Question 30

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

Question 31

A worthless security had a holding period of six 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 these.

Question 32

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

Question 33

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

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 these.

Question 34

Lana purchased for $1,410 a $2,000 bond when it was issued two years ago.She 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 these.

Question 35

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

Question 36

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 37

A net short-term capital loss first offsets any 28% net long-term capital gain before it offsets either 25% of net long- term capital gain or 0%/15%/20% of net long-term capital gain.

Question 38

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

Question 39

An individual taxpayer with 2019 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2020.

Question 40

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

A)Sale.
B)Exchange.
C)Casualty.
D)Condemnation.
E)All of these.

Question 41

Tan, Inc., sold a forklift on April 12, 2019, 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, 2019.
C)Begins on April 13, 2019.
D)Does not begin until Ashley sells the forklift.
E)None of these.

Question 42

Which of the following is correct concerning short sales of stock at the time the short sale is made?

A)The taxpayer does not deliver to the purchaser the shares sold short.
B)The taxpayer delivers to the purchaser the shares sold short.
C)The taxpayer may already own the shares sold short.
D)The taxpayer always already owns the shares sold short.
E)None of these.

Question 43

Which of the following is not a tax status for an asset?

A)Capital loss asset.
B)Capital asset.
C)Section 1231 asset.
D)Ordinary asset.
E)All of these.

Question 44

In 2019, Mark has $18,000 short-term capital loss, $7,000 28% gain, and $6,000 0%/15%/20% gain.Which of the following statements 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 45

In 2018, Jenny had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction.In 2019, 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 for 2019?

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

Question 46

Gold Company signs a 13-year franchise agreement with Silver.Silver retained significant powers, rights, and a continuing interest.Gold (the franchisee) makes noncontingent payments of $18,000 per year for the first four years of the franchise.Gold also pays a contingent fee of 2% of gross sales every month.Which of the following statements is correct?

A)Gold may deduct the $18,000 per year noncontingent payments in full as they are made.
B)Gold may deduct the monthly contingent fee as it is paid.
C)Gold may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
D)Gold may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
E)None of these.

Question 47

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 these.

Question 48

Cason is filing as single and has 2019 taxable income of $36,000 which includes $34,000 0%/15%/20% net long-term capital gain.What is his tax on taxable income using the alternative tax method? Note: Use the tax rate schedule rather than the tax table.

A)$0
B)$200
C)$300
D)$4,924
E)None of these.

Question 49

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 2019?

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

Question 50

Violet, Inc., has a 2019 $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 is computed because there is no corporate 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 these.

Question 51

Emilio owns vacant land he is holding for investment.Two years ago he granted an option to purchase the land.The option grantee paid $25,000 for the option.This year the option expired unexercised.As a result, Emilio has:

A)A $25,000 long-term capital gain.
B)A $25,000 short-term capital gain.
C)A $25,000 ordinary gain.
D)No recognized gain or loss.
E)None of these.

Question 52

Martha has both long-term and short-term 2019 capital gains and losses.The result of netting these gains and losses is a net long-term capital loss.Martha has no qualified dividend income.Also, her 2019 taxable income puts her in the 24% tax bracket.Which of the following is correct?

A)Martha will use Parts I, II, and III of 2019 Form 1040 Schedule D.
B)Martha will not benefit from the special treatment for long-term capital gains.
C)Martha will have a capital loss deduction.
D)All of these.
E)None of these.

Question 53

In 2019, Satesh has $5,000 short-term capital loss, $13,000 0%/15%/20% long-term capital gain, and $7,000 qualified dividend income.Satesh is single and has other taxable income of $15,000.Which of the following statements is correct?

A)No more than $13,000 of Satesh's taxable income is taxed at 0%.
B)No more than $7,000 of Satesh's taxable income is taxed at 0%.
C)No more than $15,000 of Satesh's taxable income is taxed at 0%.
D)None of Satesh's taxable income is taxed at 0%.
E)All of Satesh's taxable income is taxed at 0%.

Question 54

Ryan has the following capital gains and losses for 2019: $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 these.

Question 55

In 2019, 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 these.

Question 56

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.He assigns 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 these.

Question 57

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 following statements 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 these.

Question 58

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 these.

Question 59

Which of the following comparisons is correct?

A)Corporations may carry back capital losses; individuals may not.
B)Both corporation and individual long-term capital losses carry over as short-term capital losses.
C)Corporations may carry forward capital losses indefinitely; individuals may carry forward capital losses for only five years.
D)Both corporations and individuals may use an alternative tax rate on net capital gains.
E)None of these.

Question 60

Sara is filing as head of household and has 2018 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? Note: Use the tax rate schedule rather than the tax table.

A)$0
B)$6,978.
C)$6,868.
D)$6,838.
E)None of these.

Question 61

Theresa and Oliver, both over 65 years of age and married filing jointly, have no dependents.Their 2019 income tax facts are: $$\begin{array} { l r } \text { Theresa's wages } & \$ 165,000 \\\text { Oliver's wages } & 33,000 \\\text { Short-term capital gain } & 36,000 \\\text { Long-term capital loss } & ( 41,000 )\end{array}$$ What is their taxable income for 2018?

Question 62

Carol had the following transactions during 2019: 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?

Question 63

Property is acquired in a qualifying like-kind exchange.The acquired property is sold three months after it is acquired. Which of the following is correct?

A)Since the holding period of the property given up in the exchange tacks to the holding period of the acquired property, the holding period of the acquired property could be long-term.
B)The holding period of the acquired property is short-term.
C)The holding period of property acquired in a like-kind exchange is always long-term.
D)When property acquired in a like-kind exchange is disposed of, the holding period is not relevant.
E)None of these.

Question 64

The following chart details Sheen's 2017, 2018, and 2019 stock transactions.What is the capital loss carryover to
2019 and what is the net capital gain or loss for 2019? $$\begin{array} { r r r r r } \underline{\text { TaxYear }} & \begin{array} { r } \text { Short-Term } \\\underline{\text { CapitalGains }}\end{array} & \begin{array} { r } \text { Short-Term } \\\underline{\text { CapitalLosses }}\end{array} & \begin{array} { r } \text { Long-Term } \\\underline{\text { CapitalGains }}\end{array} & \begin{array} { r } \text { Long-Term } \\\underline{\text { CapitalLosses }}\end{array} \\2017 & \$ 4,000 & \$ 6,000 & \$ 2,000 & \$ 13,000 \\2018 & \$ 16,000 & \$ 14,000 & \$ 23,000 & \$ 28,000 \\2019 & \$ 55,000 & \$ 52,000 & \$ 67,000 & \$ 33,000\end{array}$$

Question 65

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 them.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, which she accepts.Judith has no other gain or loss transactions for the year and is in the 24% marginal tax bracket.What issues do these facts create?

Question 66

Mike is a self-employed TV technician.He is usually paid as soon as he completes repairs but occasionally bills a customer with payment expected within 30 days.At the end of the year, he has $2,500 of receivables outstanding.He expects to collect $1,200 of this and write off the remainder.Mike is a cash basis taxpayer and had net earnings from his business (not including the effect of the items above) of $55,000.He also had $3,500 interest income and $200 gambling winnings, and he sold corporate stock for $7,000.The stock had been purchased in 2015 for $8,200.Mike is single and claims the standard deduction.What is his 2019 taxable income? (Ignore the self-employment tax deduction.)

Question 67

Samuel, head of household with two dependents, has 2019 wages of $26,000, paid alimony of $3,000, has taxable interest income of $2,000, and a $12,000 0%/15%/20% net long-term capital gain.Samuel uses the standard deduction and is age 38.What is his 2019 taxable income and the tax on the taxable income?

Question 68

Martha is unmarried with one dependent and files as head of household.She had 2019 taxable income of $45,000, which included $16,000 of 0%/15%/20% net long-term capital gain.What is her tax on taxable income using the alternative tax on net long-term capital gain method?

Question 69

Jambo invented a new flexible cover for a popular brand of cell phone, but did not have the finances to produce it.
Instead, he sold all his rights to the invention (after patenting it) for $450,000 plus $0.10 for each cover sold by the company that purchased the patent.Jambo had a zero tax basis for the invention.What is the character of his gain from disposition of the patent?

Question 70

Ranja acquires $200,000 face value corporate bonds for $186,000 when the bonds are issued.He holds the bonds as an investment for two years and then sells them for $198,000.He amortizes $2,000 of the OID.What tax issues does Ranja have with respect to these bonds?

Question 71

On January 10, 2019, Wally sold an option for $2,000 on vacant land he held as an investment.He had purchased the land in 2015 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, 2019, the option holder exercised the option.What is the amount and nature of Wally's gain or loss from disposition of the land?

Question 72

Harold is a head of household, has $27,000 of taxable income in 2019 from noncapital gain or loss sources, and has the following capital gains and losses: $$\begin{array} { l r } 28 \% \text { long-term capital gain } & \$ 4,300 \\28 \% \text { long-term capital loss } & ( 2,000 ) \\0 \% / 15 \% / 20 \% \text { long-term capital gain } & 19,000 \\\text { Short-term capital loss } & ( 1,700 )\end{array}$$ What is Harold's taxable income and the tax on that taxable income (ignore the standard deduction)?

Question 73

Willie is the owner of vacant land that he purchased in 2015 for $1,400,000 and held for investment.On January 22, 2018, he was paid $145,000 for a 13-month option on the land by Susan.She could buy the land for an additional $1,200,000 by exercising the option.Susan had hoped to build a luxury home on the land but was unable to get approval to build a big enough home to satisfy her needs.Consequently, Susan did not exercise her option, which expired on February 22, 2019.(1) What is Willie's basis, gain or loss, and type of gain or loss from these events? (2) What is Susan's basis, gain or loss, and type of gain or loss from these events?

Question 74

Hilda lent $2,000 to a close personal friend to help the friend avoid overdrawing the friend's checking account.The friend was supposed to repay the $2,000 within a month.Instead, the friend declared personal bankruptcy and Hilda will never recover any of the $2,000.What are the tax implications of these events for Hilda?

Question 75

Sharon has the following results of netting her short-term and long-term capital gains and losses for 2019: $56,000 short-term capital loss and $82,000 net long-term capital gain ($21,000 0%/15%/20% long-term capital gain and
$61,000 25% long-term capital gain).
a.What is her net capital gain or loss for 2019?
b.If there is a net capital loss, how much and what type of the loss carries over to 2020?
c.If there is a net long-term capital gain, what is it made up of?

Question 76

Larry was the holder of a patent on a video game.During 2019, 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
2019, he received $30,000 in royalties.What is the nature and amount of Larry's gain?

Question 77

On January 18, 2018, Martha purchased 200 shares of Blue Corporation stock for $2,000.On November 11, 2019, she sold short 200 shares of Blue stock, which she borrowed from her broker for $2,300.On February 10, 2020, Martha closed the short sale by delivering the 200 shares of Blue stock which she had acquired in 2018.On that date, Blue stock had a market price of $4 per share.What is Martha's recognized gain or loss and its character in 2019? In
2020?

Question 78

Phil's father who died on January 10, 2019 had owned stock for 20 years with a basis of $45,000 that was transferred to Phil as a gift on August 10, 2018, when the stock was worth $430,000.Phil's father had paid no gift taxes.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, 2019.What is the amount and nature of his gain or loss from disposition of this property?

Question 79

Thoren has the following items for the year: $4,000 of short-term capital gain, $5,000 of 0%/15%/20% long-term capital gain, and $1,500 of 28% capital loss.Which of the following is correct?

A)The $1,500 loss will first be offset by the $4,000 short-term gain.
B)The $1,500 loss will first be offset by the $5,000 long-term gain.
C)The $4,000 short-term gain will first be offset by the $5,000 long-term gain.
D)The taxpayer will have a net short-term capital loss.
E)None of these.

Question 80

In early 2018, 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 2019 after 14 months.How should Wanda treat these events in 2018? 2019?