Chapter 14 - Test Bank PDF

Preview

Summary

Download Chapter 14 - Test Bank PDF

Description

CHAPTER 14 Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions 1822. 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:

1823. Recognized gains and losses must be properly classified. Proper classification depends upon:

1824. The three tax statuses are:

1825. A business taxpayer sells inventory for $60,000. 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:

1826. Sam operates a retail hardware store as a sole proprietorship. Which of the following items are capital assets in the hands of Sam?

1827. Monty is in the business of painting. He paints for wealthy investors. He paints a portrait and sells it for a lump sum. He has:

1828. Ramon is in the business of buying and selling securities. Which of the following is a capital asset for Ramon?

1829. Sean purchased vacant land in 2005 that she subdivided for resale as lots. All 10 of the lots were sold during 2011. The lots had a tax basis of $7,000 each and sold for $45,000 each. Sean 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?

CHAPTER 14 Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions 1830. A worthless security had a holding period of 10 months when it became worthless on November 10, 2011. The investor who had owned the security had a basis of $10,000 for it. Which of the following statements is correct?

1831. Lea purchased for $1,310 a $2,000 bond when it was issued three years ago. Lea amortized $200 of the original issue discount and then sold the bond for $1,800. Which of the following statements is correct?

1832. On June 1, 2011, Bruce purchased an option to buy 1,000 shares of General, Inc. at $30 per share. He purchased the option for $2,000. It was to remain in effect for six months. The market experienced a decline during the latter part of the year, so Bruce decided to let the option lapse as of December 1, 2011. On his 2011 tax return, what should Bruce report?

1833. 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?

1834. Hidasu is a mechanical engineer and, while unemployed, invents a switching device for computer networks. He patents the device, but does not reduce it to practice. Hidasu has a zero tax basis for the patent. In consideration of $600,000 plus a $2 royalty per device sold, Hidasu assigns the patent to a computer manufacturing company. Hidasu assigned all substantial rights in the patent. Which of the following is correct?

1835. Cyan Company signs a 13-year franchise agreement with Fast Taco. Fast Taco retained significant powers, rights, and a continuing interest. Cyan Company (the franchisee) makes noncontingent payments of $17,000 per year for the first five years of the franchise. Cyan Company also pays a contingent fee of 1% of gross sales every month. Which of the following statements is correct?

CHAPTER 14 Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions 1836. A lessor is paid $5,000 by its residential tenant as a lease cancellation fee. The tenant wanted to get out of her lease so she could move to a different city. The lease had been in force for two years before it was canceled. The lessor had a zero tax basis for the lease. The lessor has received:

1837. Spiro was leasing an apartment from Grey, Inc. Grey paid Spiro $11,000 to cancel his lease and move out so that Grey could demolish the building. As a result:

1838. On June10, 2011, 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?

1839. Yellow, Inc. sold a forklift on April 12, 2011, for $3,000 (its FMV) to its 100% shareholder, Anibal. Yellow’s adjusted basis for the forklift was $7,000. Anibal’s holding period for the forklift:

1840. 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?

1841. Which of the following is correct concerning short sales of stock?

1842. Ronald has the following capital gains and losses for 2011: $8,000 STCL, $6,000 28% gain, $4,000 25% gain, and $16,000 0%/15% gain. Which of the following is correct? 1843. In 2011, Manuelo has $29,000 short-term capital loss, $10,000 28% gain, and $6,000 0%/15% gain. Which of the statements below is correct?

CHAPTER 14 Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions 1844. In 2010, Jenny had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction. In 2011, Jenny has a $16,000 0%/15% long-term capital gain and no other capital gain or loss transactions. Which of the statements below is correct?

1845. In 2011, Satesh has $4,000 short-term capital loss, $14,000 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?

1846. Cason is filing as single and has 2011 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?

1847. Sara is filing as head of household and has 2011 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?

1848. Seamus had $16,000 of net short-term capital loss in 2010. In 2011, Seamus has $15,000 of long-term capital loss and $26,000 of long-term capital gain. Which of the following statements is correct?

1849. The 2010 “Qualified Dividends and Capital Gain Worksheet” is used:

1850. Martha has both long-term and short-term 2010 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 2010 taxable income puts her in the 28% tax bracket. Which of the following is correct?

CHAPTER 14 Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions 1851. Which of the following comparisons is correct?

1852. 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 2011?

1853. Tan, Inc., has a 2011 $50,000 long-term capital gain included in its $185,000 taxable income. Which of the following is correct?

1854. Blue Company acquires a used machine for $45,000 and uses it in Blue’s manufacturing operations. A few months after Blue places the machine in service, it discovers that the machine is not suitable for Blue’s business. Blue had fully expensed the machine in the year of acquisition using § 179. Blue sells the machine for $5,000 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?

1855. Which of the following assets held by a wholesale business is an ordinary asset?

1856. Which of the following assets held by a wholesale business is an ordinary asset?

1857. A silo held more than one year and used in a business is destroyed in an earthquake. The silo originally cost $356,000 and was fully depreciated using straightline depreciation. The silo was insured for its $543,000 replacement cost minus a deductible of $1,000. Which of the statements below is correct concerning these facts?

1858. Which of the following would not be included in the netting of § 1231 gains and losses?

CHAPTER 14 Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions 1859. Velvet, Inc., has a 2011 net § 1231 loss of $74,000 and had a $12,000 net § 1231 gain in 2010. For 2011, Velvet’s net § 1231 loss is treated as:

1860. Verdum, Inc., has a 2011 net § 1231 gain of $57,000 and had a $12,000 net § 1231 loss in 2010. For 2011, Verdum’s net § 1231 gain is treated as:

1861. Orange, Inc., has a 2011 net § 1231 gain of $45,000 and had a $72,000 net § 1231 loss in 2010. For 2011, Orange’s net § 1231 gain is treated as:

1862. The following assets in Jack’s business were sold in 2011: Asset Office Furniture Automobile XYZ Stock (capital asset)

Holding Period 2 years 8 months 2 years

Gain/(Loss) $3,100 ($ 800) $1,400

The office furniture had a zero adjusted basis and was purchased for $8,000. The automobile was purchased for $2,000 and sold for $1,200. The XYZ stock was purchased for $1,800 and sold for $3,200. In 2011 (the year of sale), Jack should report what amount of net capital gain and net ordinary income?

1863. An individual had the following gains and losses during 2011 on property held for the long-term holding period: sale of Magenta common stock ($8,000 gain); sale of real property used in the taxpayer’s business ($1,800 loss); destruction of real property used in the taxpayer’s business by flood ($1,000 loss). Which of the following is correct?

1864. Which of the following is correct?

CHAPTER 14 Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions 1865. Spencer has an investment in two parcels of vacant land. Parcel 1 is a capital asset and parcel 2 is a § 1231 asset. Spencer already has short-term capital loss for the year he would like to offset with capital gain. Spencer has § 1231 lookback loss that exceeds the gain from the disposition of either land parcel. Spencer only wants to sell one land parcel and each of them would yield the same amount of gain. The gain that would be recognized exceeds the short-term capital loss Spencer already has. Which of the statements below is correct?

1866. Bronze Corporation sold machinery for $27,000 on December 31, 2011. The machinery had been purchased on January 2, 2008, for $40,000 and had an adjusted basis of $21,000 at the date of the sale. For 2011, what should Bronze Corporation report?

1867. Which of the following creates potential § 1245 depreciation recapture and potential § 1231 gain?

1868. Cyan Company sold machinery for $55,000 on December 23, 2011. The machinery had been acquired on April 1, 2009, for $69,000 and its adjusted basis was $14,200. The § 1231 gain, § 1245 recapture gain, and § 1231 loss from this transaction are:

1869. Ebon Company had an involuntary conversion on December 23, 2011. The machinery had been acquired on April 1, 2009, for $69,000 and its adjusted basis was $14,200. The machinery was completely destroyed by fire and Ebon received $10,000 of insurance proceeds for the machine and did not replace it. This was Ebon’s only casualty or theft event for the year. As a result of this event, Ebon initially has:

1870. Opaque Company had machinery destroyed by a flood on December 23, 2011. The machinery had been acquired on April 1, 2009, for $69,000 and its adjusted basis was $14,200. The machinery was completely destroyed and Opaque received $30,000 of insurance proceeds for the machine and did not replace it. This was Opaque’s only casualty or theft event for the year. As a result of this event, Opaque has:

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

1871. Which of the following events could result in § 1250 depreciation recapture?

1872. Which of the following real property could be subject to § 1250 depreciation recapture?

1873. Assume a building is subject to § 1250 depreciation recapture because it was acquired before 1987 and accelerated depreciation was used to depreciate it. The building is destroyed in a fire and this is the taxpayer’s only casualty or theft for the year. In which of the following situations could there be a § 1250 depreciation recapture gain?

1874. Lynne owns depreciable residential rental real estate which has accumulated depreciation (all from straight-line) of $45,000. If Lynne sold the property, she would have a $53,000 gain. The initial characterization of the gain would be:

1875. A retail building used in the business of a sole proprietor is sold on March 10, 2011, for $322,000. The building was acquired in 2001 for $400,000 and straight-line depreciation of $104,000 had been taken on the building. What is the maximum unrecaptured § 1250 gain from the disposition of this building?

1876. Which of the following statements is correct?

1877. Which of the following would extinguish the § 1245 recapture potential?

CHAPTER 14 Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions 1878. Section 1239 (relating to the sale of certain property between related taxpayers) does not apply unless the property:

1879. An individual has a $10,000 § 1245 gain, a $15,000 § 1231 gain, a $13,000 § 1231 loss, a $4,000 § 1231 lookback loss, and a $15,000 long-term capital gain. The net longterm capital gain is:

1880. An individual has the following recognized gains and losses from disposition of § 1231 assets (all the assets were vacant land): $15,000 gain, $10,000 loss, $25,000 gain, and $2,000 loss. The individual has a $5,500 § 1231 lookback loss. The individual also has a $16,000 net short-term capital loss from the disposition of stock. Which of the following statements is correct?

1881. Theresa and Oliver, married filing jointly, and both over 65 years of age, have no dependents. Their 2011 income tax facts are: Theresa’s wages Oliver’s wages Short-term capital gain Long-term capital loss

$145,000 33,000 36,000 (47,000)

What is their taxable income for 2011? Correct Answer: The couple’s taxable income is $153,700. Their long-term capital loss carryover is $8,000 ($11,000 – $3,000).

Wages ($145,000 + $33,000) Short-term capital gain Long-term capital loss Net long-term capital loss Capital loss deduction (limited to $3,000) Adjusted gross income

$178,000 $36,000 (47,000) ($11,000) (3,000) $175,000

CHAPTER 14 Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions Standard deduction Additional standard deduction (2 ´ $1,150) Exemptions (2 ´ $3,700) Taxable income

(11,600) (2,300) (7,400) $153,700

1882. Ann had the following transactions during 2011: a painting held for three years and sold at a gain of $85,000; 100 shares of Gray stock held six months and sold for a loss of $3,000; 50 shares of Yellow stock held 18 months and sold for a gain of $36,000. Ann also had $364,000 of taxable income from other sources than these property transactions. What is Ann’s net capital gain or loss and what is her taxable income? Correct Answer: Ann has taxable income of $482,000. Long-term capital gain from painting Long-term capital gain from Yellow stock Net long-term capital gain Short-term capital loss from Gray stock Net long-term capital gain Other taxable income Total taxable income

$ 85,000 36,000 $121,000 (3,000) $118,000 364,000 $482,000

1883. On January 10, 2011, Wally sold an option for $1,000 on vacant land he held as an investment. He had purchased the land in 2007 for $66,000. The option allowed the option holder to purchase the property for $132,000 plus the cost of the option. On March 1, 2011, the option holder exercised the option. What is the amount and nature of Wally’s gain or loss from disposition of the land? Correct Answer: Wally’s proceeds from selling the land are $133,000 ($1,000 option proceeds + $132,000 sale proceeds). Wally’s gain is $67,000 ($133,000 – $66,000) and is all long-term capital gain because the asset was a capital asset held more than 12 months.

1884. Septa is the owner of vacant land that he purchased in 2006 for $400,000 and held for investment. On January 22, 2010, he was paid $45,000 for an eighteen-month option on the land by Samantha. Samantha could buy the land for an additional $1,200,000 by exercising the option. Samantha had hoped to develop the land into a shopping center, but was unable to get the zoning changed to accommodate building a shopping center on the

CHAPTER 14 Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions land. Consequently, Samantha did not exercise her option and the option expired on August 15, 2011. What is Septa’s basis, gain, and type of gain from these events? Correct Answer: Septa held the land for investment; consequently it was a capital asset. Septa had no recognized gain or loss in 2010 from the receipt of the $45,000 option proceeds. When the option expired in 2011, the $45,000 option price is ordinary income because the option property was not stocks, securities, commodities, or commodity futures.

1885. Lee was the holder of a patent on a wireless modem. During 2011, he sold all substantial rights in the patent for $365,000 in cash and a 2% royalty on the purchaser’s first $10,600,000 of sales each year related to the product in which the patent is incorporated. Lee had not reduced the patent to practice. He had a $56,000 basis for the patent. During 2011, he received $10,000 in royalties. What is the nature and amount of Lee’s gain? Correct Answer: Lee 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. Lee recovers his $56,000 basis and has a $319,000 ($365,000 + $10,000 – $56,000) 0%/15% long-term capital gain. 1886. Phil’s father died on January 10, 2011. 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, 2010, 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, 2011. What is the amount and nature of Phil’s gain or loss from disposition of this property? Correct Answer: 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 $471,447 ($545,000 – $73,553) long-term capital gain when he sold the stock. pr006-1.jpg

1887. On January 18, 2010, Martha purchased 200 shares of Blue Corporation stock for $2,000. On November 11, 2011, she sold short 200 shares of Blue Corporation stock which she borrowed from her broker for $2,300. On February 10, 2012, Martha closed the short sale by delivering the 200 shares of Blue Corporation stock which she had acquired in 2010. On that date, Blue Corporation stock had a market price of $4 per

CHAPTER 14 Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions share. What is Martha’s recognized gain or loss and its character in 2011? In 2012? Correct Answer: Since Martha owned substantially identical stock on the date of the short sale a...