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

Question 1

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 1

True

Question 2

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

Answer 2

True

Question 3

An individual taxpayer received a valuable painting from his uncle, a famous painter. The painter did not create the painting, but had purchased it from another artist. 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.

Answer 3

True

Question 4

A security that is a capital asset becomes worthless.The loss is deemed to have occurred on the day that the security was declared worthless.

Question 5

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

Question 6

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 7

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

Question 8

As a general rule, the sale or exchange of an option to buy or sell property results in capital gain or loss if the property subject to the option is (or would be) a capital asset in the hands of the option holder.

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 § 1231 loss.

Question 10

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

Question 11

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 12

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

Question 13

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 14

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

Question 15

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 16

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 a capital loss.

Question 17

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

Question 18

Original issue discount is amortized over the life of the bond.

Question 19

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 20

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 21

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

Question 22

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

Question 23

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

Question 24

If there is a net § 1231 loss, it is treated as a long-term capital loss.

Question 25

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

Question 26

Section 1231 property generally does not include musical compositions.

Question 27

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

Question 28

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

Question 29

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

Question 30

A personal use property casualty loss is generally deductible only to the extent it exceeds 10% of AGI.

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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% net long-term capital gain.

Question 36

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

Question 37

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

Question 38

An individual taxpayer with 2012 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2013.

Question 39

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

Question 40

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 41

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 42

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

Question 43

Marvin is in the business of song writing.He writes jingles for web ads. He writes a song 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 44

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

Question 45

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

Question 46

A worthless security had a holding period of 11 months when it became worthless on December 10, 2012.The investor who had owned the security had a basis of $10,000 for it.Which of the following statements is correct?

A)The investor has a long-term capital loss of $10,000.
B)The investor has a short-term capital loss of $10,000.
C)The investor has a nondeductible loss of $10,000.
D)The investor has a short-term capital gain of $10,000.
E)None of the above.

Question 47

The three tax statuses are:

A)Ordinary asset, capital asset, § 1237 asset.
B)Capital asset, ordinary asset, § 1231 asset.
C)§ 1237 asset, investment asset, ordinary asset.
D)Investment asset, § 1231 asset, ordinary asset.
E)None of the above.

Question 48

Recognized gains and losses must be properly classified. Proper classification depends upon:

A)The tax status of the property.
B)The manner of the property's disposition.
C)The holding period of the property.
D)a., b., and c.
E)None of the above.

Question 49

Suzy purchased vacant land in 2005 that she subdivided for resale as lots.All 10 of the lots were sold during 2012.The lots had a tax basis of $9,000 each and sold for $45,000 each.Suzy 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)Suzy must hold the lots for at least 10 years before she is eligible for the special capital gain treatment of § 1237.
B)The $360,000 gain from the sale of the ten lots is all ordinary income.
C)All of the $360,000 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, Suzy must be a real estate dealer.
E)None of the above.

Question 50

Section 1245 generally recaptures as ordinary income the portion of the gain that is equal to the sale price minus the original cost.

Question 51

A business taxpayer sells inventory for $40,000.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 loss.
E)None of the above.

Question 52

Laura purchased for $1,610 a $2,000 bond when it was issued two years ago.Laura amortized $200 of the original issue discount and then sold the bond for $1,800.Which of the following statements is correct?

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

Question 53

Section 1245 may apply to depreciable farm equipment.

Question 54

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 55

Siva operates a retail music store as a sole proprietorship.Which of the following items are capital assets in the hands of Siva?

A)The store's counters and display cases.
B)A portable music player that has been in the store's inventory for over a year.
C)The store building that is an asset of the sole proprietorship.
D)An interest-bearing savings account used to keep the store's excess cash.
E)None of the above.

Question 56

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

Question 57

Section 1231 lookback losses may convert some or all of § 1250 gain into ordinary income.

Question 58

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 59

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

Question 60

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

Question 61

Sara is filing as head of household and has 2012 taxable income of $27,000 which includes $13,000 of net long-tem capital gain. The net long-term capital gain is made up of $10,000 25% gain and $3,000 0%/15% gain. What is the tax on her taxable income using the alternative tax method?

A)$0.
B)$4,050.
C)$2,980.
D)$3,615.
E)None of the above.

Question 62

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 63

In 2012, Satesh has $5,000 short-term capital loss, $13,000 0%/15% 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 64

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 65

Magenta, Inc., sold a forklift on April 12, 2012, for $3,000 (its FMV) to its 100% shareholder, Anna. Magenta's adjusted basis for the forklift was $8,000.Anna's holding period for the forklift:

A)Includes Magenta's holding period for the forklift.
B)Begins on April 12, 2012.
C)Begins on April 13, 2012.
D)Does not begin until Anna sells the forklift.
E)None of the above.

Question 66

The 2011 "Qualified Dividends and Capital Gain Worksheet" is used:

A)To calculate the tax using the alternative tax method on 0%/15% net capital gain and qualified dividends.
B)To calculate the tax using the alternative tax method on 0%/15% net capital gain, but not on qualified dividends.
C)To calculate the tax using the alternative tax method on 0%/15% capital gain, 25% capital gain, and 28% capital gain, but not on qualified dividends.
D)To calculate the tax using the alternative tax method on 0%/15% capital gain, 25% capital gain, 28% capital gain, and qualified dividends.
E)None of the above.

Question 67

Mauve Company signs a 13-year franchise agreement with Mauve Too.Mauve Too retained significant powers, rights, and a continuing interest.Mauve Company (the franchisee) makes noncontingent payments of $16,000 per year for the first five years of the franchise.Mauve Company also pays a contingent fee of 1% of gross sales every month.Which of the following statements is correct?

A)Mauve Company may deduct the $16,000 per year noncontingent payments in full as they are made.
B)Mauve Company may deduct the monthly contingent fee as it is paid.
C)Mauve Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
D)Mauve Company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
E)None of the above.

Question 68

Ryan has the following capital gains and losses for 2012: $6,000 STCL, $5,000 28% gain, $2,000 25% gain, and $6,000 0%/15% gain.Which of the following is correct:

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

Question 69

Harry inherited a residence from his mother when she died.The mother had a tax basis of $566,000 for the residence when she died and the residence was worth $433,000 at the date of her death.Which of the statements below is correct?

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

Question 70

On June 1, 2012, 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, 2012.On his 2012 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 71

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 72

Cason is filing as single and has 2012 taxable income of $38,000 which includes $36,000 of 0%/15% net long-term capital gain. What is his tax on taxable income using the alternative tax method?

A)$0.
B)$598.
C)$5,530.
D)$5,600.
E)None of the above.

Question 73

Seamus had $16,000 of net short-term capital loss in 2011. In 2012, 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 2012.
B)Seamus has an $9,000 2012 net long-term capital gain.
C)Seamus has a $4,000 2012 net short-term capital loss.
D)a.and c.
E)None of the above.

Question 74

In 2012, Mark has $18,000 short-term capital loss, $7,000 28% gain, and $6,000 0%/15% 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 75

On June 10, 2012, 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, 2012.
C)The holding period of the office building starts on June 10, 2012.
D)The holding period of the office building includes the holding period of the factory building.
E)None of the above.

Question 76

Martha has both long-term and short-term 2011 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, Martha's 2011 taxable income puts her in the 28% tax bracket. Which of the following is correct?

A) Martha will use Parts I, II, and III of 2011 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 the above.
E) None of the above.

Question 77

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 78

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 79

In 2011, Jenny had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction.In 2012, Jenny has a $18,000 0%/15% long-term capital gain and no other capital gain or loss transactions.Which of the statements below is correct?

A)Jenny has a 2012 $18,000 net capital gain.
B)Jenny has a 2012 $9,000 net capital gain.
C)Jenny has a 2012 $9,000 net capital loss.
D)Jenny has a 2012 $3,000 capital loss deduction.
E)Jenny has a 2012 $9,000 capital loss deduction.

Question 80

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.