Tax Ch 11 Taxation of Capital Assets

Question 1

ASSET CATEGORIZATION

Answer 1

ASSET CATEGORIZATION

All assets are capital assets except:

• Accounts receivable
• Creative works in hands of the creator
• Inventory
• Depreciable real or personal property held for use in a trade
  or business or for the production of income, held long-term

Question 2

When a taxpayer sells an asset in exchange for cash, a realization event occurs.

a. True b. False

Answer 2

a. True

Question 3

The amount realized on a sale includes cash and the fair market value of any other property received.

a. True b. False

Answer 3

a. True

Question 4

Unrecaptured Section 1250 depreciation applies to all depreciable property.

a. True b. False

Answer 4

b. False

Question 5

Capital gains are taxed at the same rate under the AMT system as they are under the regular income tax system.

a. True b. False

Answer 5

a. True

Question 6

$3,000 of net capital losses may be recognized against other income each year.

a. True b. False

Answer 6

a. True

Question 7

A single taxpayer can deduct up to $50,000 of the loss from a small business stock as an ordinary loss if certain requirements are met.

a. True b. False

Answer 7

a. True

Question 8

Which of the following statements concerning the taxation of assets is correct?

a. Ordinary income may qualify for a special 0% rate.

b. Capital gains are always taxed at the taxpayer’s marginal tax rate

c. Gains on Section 1231 assets are taxed at ordinary rates, and losses are taxed at capital rates.

d. Gains on Section 1231 assets are taxed at long-term capital gains tax rates, and losses are taxed at ordinary income tax rates

Answer 8

The correct answer is d.

When an asset is classified as a Section 1231 asset, gains are capital (and are subject to the long-term capital gains rate due to the holding period requirement) and losses are ordinary.

Ordinary income is taxed at ordinary rates, and capital gains can qualify for a special 0% capital gains tax rate if the taxpayer
held the asset for more than one year, and the taxpayer’s taxable income is below the threshold amount.

Question 9

Which of the following statements correctly identifies when income is subject to tax?

a. Capital gains must be realized before they can be recognized on a tax return.

b. Realization occurs when the gain on an asset is reflected on the taxpayer’s return.

c. As a general rule, realized gains are not recognized unless a provision in the IRC requires recognition.

d. Recognition occurs when an asset has been sold or exchanged.

Answer 9

The correct answer is a.

Before capital gains can be recognized on the tax return, they must be realized.

Realization occurs when an asset is sold or exchanged, and recognition occurs when the gain on the asset is included on the
taxpayer’s return.

As a general rule, realized gains must be recognized unless a provision in the IRC exempts the gain from taxation, or defers the gain to a future tax period.

Question 10

All of the following are included in the amount realized upon disposition of an asset except:

a. The cash received.

b. The fair market value of property received in the exchange.

c. A transfer of obligation to pay debt from the seller to the buyer.

d. The taxpayer’s adjusted basis.

Answer 10

The correct answer is d.

The taxpayer’s adjusted basis is subtracted from the amount realized to calculate gain or loss

. The amount realized includes the cash received, plus the fair market value of property received in the exchange, plus any liabilities shed in the transaction

Question 11

Anastasia purchased a home in Connecticut three years ago for $300,000. She had been working in Connecticut for the past 10 years. Yesterday, her employer decided to transfer her to the San Diego, California branch, effective next month. Unfortunately, the real estate market has weakened over the past few years, and Anastasia is only able to sell her home for $270,000. Which of the following statements correctly identifies her tax consequences of the sale:

a. Anastasia is not permitted to deduct the loss on her income tax return.
b. Anastasia’s loss will be reflected as a long-term capital loss on her tax return.
c. Anastasia’s loss will be reflected as a short-term capital loss on her tax return.
d. Anastasia will recognize an ordinary loss of $30,000

Answer 11

The correct answer is a.

The loss on the sale of the home was a personal loss, which is not deductible. Only losses associated with
the active conduct of a trade or business, or with the production of income may be deducted by individual
taxpayers

Question 12

Gus purchased a home for $300,000 three years ago, and was recently transferred by his employer to an office located across the country. He made $20,000 of improvements to the residence, but if he sold the home today, he would only be able to receive $260,000 for the house due to a weak real estate market.
Instead of selling the home and realizing a loss, Gus rents the home to a tenant.

What is Gus’s basis for depreciation purposes?

a. $260,000.
b. $270,000.
c. $300,000.
d. $320,000.

Answer 12

The correct answer is a.

When an asset is converted from a personal use to a production of income use, the basis for purposes of depreciation is the lower of the fair market value on the date of conversion or the taxpayer’s adjusted basis in the home.

Gus’s adjusted basis in the home is $320,000 ($300,000 cost basis plus $20,000 in improvements), but the fair market value of the home on the date it was converted was $260,000.

The difference of $60,000 is deemed to be a personal expense and will not qualify for depreciation deductions.

Question 13

Which of the following statements concerning the taxation of assets is correct?

Ordinary income may qualify for a special 0% rate.

Capital gains are always taxed at the taxpayers marginal tax rate.

Gains on Section 1231 assets are taxed at ordinary rates, and losses are taxed at capital rates.

Gains on Section 1231 assets are taxed at long-term capital gains tax rates, and losses are taxed at ordinary income tax rates.

Answer 13

Gains on Section 1231 assets are taxed at long-term capital gains tax rates, and losses are taxed at ordinary income tax rates.

Rationale

When an asset is classified as a Section 1231 asset, gains are capital (and are subject to the long-term capital gains rate due to the holding period requirement) and losses are ordinary. Ordinary income is taxed at ordinary rates, and capital gains can qualify for a special 0% capital gains tax rate if the taxpayer held the asset for more than one year, and the taxpayer’s taxable income is below the threshold amount.

Question 14

Tatum loaned $10,000 to her close friend and business associate, Channing, so that Channing could start up a home-based business. Tatum is not in the business of money lending. Channing agreed to pay interest on the loan annually at a rate of 6 percent, and the principal was due in a lump sum on maturity 10 years later. After 4 years of making payments, Channing informs Tatum in year 5 that he has filed for bankruptcy and will not be able to make any future interest ($600 per year) or principal payment, causing the debt to become wholly worthless.

What is the income tax consequence for Tatum?

Tatum will recognize an ordinary income tax loss of $10,000 for Year 5.

Tatum will recognize an ordinary income tax loss of $10,600 for Year 5.

Tatum will recognize a short-term capital loss of $10,000 for Year 5.

Tatum will recognize a long-term capital loss of $10,000 for Year 5.

Answer 14

Tatum will recognize a short-term capital loss of $10,000 for Year 5.

Rationale

This is a personal debt that has become wholly worthless.

Therefore, Tatum can deduct the amount of the outstanding debt, $10,000, as a short-term capital loss.

All personal debts that become worthless must be deducted as a short-term capital loss.

Tatum cannot deduct the $600 of lost interest for year 5. Since she is a cash basis taxpayer, she never received the interest payment, and therefore never included it in her income. Recall that, generally, deductions are only allowed for items that are already included in the taxpayer’s income.

Question 15

Gus purchased a home for $300,000 three years ago, and was recently transferred by his employer to an office located across the country. He made $20,000 of improvements to the residence, but if he sold the home today, he would only be able to receive $260,000 for the house due to a weak real estate market. Instead of selling the home and realizing a loss,
Gus rents the home to a tenant. What is Gus’s basis for depreciation purposes?

$260,000.
$270,000.
$300,000.
$320,000

Answer 15

$260,000.

Rationale

When an asset is converted from a personal use to a production of income use, the basis for purposes of depreciation is the lower of the fair market value on the date of conversion or the taxpayer’s adjusted basis in the home.

Gus’s adjusted basis in the home is $320,000 ($300,000 cost basis plus $20,000 in improvements), but the fair market value of the home on the date it was converted was $260,000.

The difference of $60,000 is deemed to be a personal expense and will not qualify for depreciation deductions.

Question 16

Elton is in the 32% marginal tax bracket. He recently sold a gold coin for $12,000 that he purchased six months ago for $2,000.
How much federal income tax will Elton pay on this transaction (assume that his income is below the threshold for the 3.8% net investment income tax)?

$1,000.
$1,500.
$2,800.
$3,200.

Answer 16

$3,200.

Rationale

While a coin is a collectible, and collectibles with long-term holding periods are taxed at a 28% capital gains tax rate, Elton had a short-term holding period for the coin, and therefore the transaction will be classified as a short-term capital gain to which his marginal tax bracket will apply. Elton will therefore pay $3,200 [32% x ($12,000 - $2,000)] on the gain

Question 17

On September 20 of Year 1, Henry purchased 1,000 shares of Tudor Enterprises, Inc. common stock for $25,000. He sold the shares for $35,000 on September 20 of Year 2.

Which of the following statements correctly identifies the tax consequences of this transaction?

Henry will recognize a $10,000 ordinary gain on the sale.

Henry will recognize a $10,000 short-term capital gain on the sale.

Henry will recognize a $10,000 long-term capital gain on the sale.

Henry will not be required to recognize the gain on the transaction.

Answer 17

Henry will recognize a $10,000 short-term capital gain on the sale.

Rationale

Henry’s holding period equals one year. Since it is not more than one year, it does not qualify for long-term capital gain treatment.

Question 18

Wilson gave his granddaughter, Monique, stock worth $500,000 this year in addition to a previous gift equal to the annual gift tax exclusion. He purchased the stock for $250,000 several years earlier, and felt that the value would increase substantially in the near future.
Since he had already used up his lifetime gift-tax exemption in prior tax years, Wilson paid $200,000 in gift taxes on the transfer. If Monique sells the stock for $750,000 six months after the transfer, which of the following statements is correct?

Monique will realize a $400,000 long-term capital gain.
Monique will realize a $250,000 long-term capital gain.
Monique will realize a $500,000 long-term capital gain.
Monique will realize a $250,000 short-term capital gain.

Answer 18

Monique will realize a $400,000 long-term capital gain.

Rationale

Monique received the stock by gift, so she qualifies for a carryover basis.
Wilson’s original basis in the property was $250,000.
Since Wilson paid gift tax on the transfer of appreciated property, Monique is permitted to increase her basis by the portion of the gift tax paid that represents gain.

The portion of the gift that represents gain is 50% ($250,000 appreciation in the property divided by $500,000 fair market value of the property as of the date of gift). 50% of the gift taxes paid equals $100,000.

Monique’s basis, therefore, is $350,000.

If she sells the stock six months after the transfer for $750,000, she will realize a $400,000 gain.

Because Wilson transferred appreciated property to Monique, his holding period is added to Monique’s holding period for the asset, transforming the gain into a long-term capital gain.

Question 19

Two years ago, Belinda purchased 100 shares of Pennsylvania Railroad, Inc. for $15,000. Unfortunately, the value of the shares has dropped to $10,000. Belinda’s daughter, Carli, was heading off to college, and Belinda was tired of waiting for a return on the stock. Belinda gave the stock to Carli when it was worth $10,000 to help fund Carli’s education. If Carli sells the shares for $12,000 three months after the transfer, what is the amount and character of her gain or loss?

$0.
$2,000 short-term capital gain.
$3,000 long-term capital loss.
$3,000 short-term capital loss

Answer 19

$0.

Rationale

Belinda gave loss property to her daughter. When a taxpayer gifts property with a loss to someone else, and the recipient sells the property for an amount between the donor’s adjusted basis and the fair market value of the stock on the date of the gift, no gain or loss is recognized.

In this example, the no-gain, no-loss corridor is from $10,000 (the fair market value of the stock on the date of the gift) to $15,000 (the adjusted basis in the hands of the donor).

If Carli sold the stock for any amount between $10 and $15 thousand dollars, she is not required to recognize any gain, and she is prohibited from recognizing any loss on the transaction.

Since there is no gain or loss, there is no need to categorize the tax result as either long-term or short-term.

Question 20

Several years before his marriage to Kelsey, Sterling purchased a vacation home in a remote shoreline community for $250,000. After their marriage, Sterling needed some cash to invest in a new business opportunity, so he sold the house to his wife, Kelsey, for its current fair market value, $750,000. Nine months after purchasing the house, Kelsey sold it for $1 million.

What is the amount and nature of Kelsey’s taxable gain on the sale of the home?

$250,000 short-term capital gain.
$250,000 long-term capital gain.
$750,000 short-term capital gain.
$750,000 long-term capital gain.

Answer 20

750,000 long-term capital gain.

Rationale

Even though Sterling sold the home to Kelsey for its full fair market value, at the time of the sale Sterling and Kelsey were married.
IRC Section 1041 requires all transfers between spouses to be treated as gifts for income tax purposes, and when a gift of appreciated property is made, a carry-over basis results.

Consequently, even though Kelsey paid $750,000 for the home, her basis in the home is $250,000.

When Kelsey sells the house for $1 million, her gain is $750,000 ($1 million - $250,000), and the gain is characterized as a long-term capital gain.

The holding period of both the husband and wife are added together to determine whether the holding period is long-term or short-term. If this were their principal residence they may get relief under IRC Section 121.

Question 21

Andy gave 1,000 shares of Meade Productions, Inc. to his son, Woody. Andy paid $15,000 for the shares, and they were worth $12,000 at the time he transferred them to Woody.

If Woody sells the shares for $13,000, how much capital has the family lost on a permanent basis?

$1,000.
$2,000.
$13,000.
$15,000.

Answer 21

$2,000.

Rationale

Since loss basis property was given away, and the asset was sold for less than the donor’s cost basis, the difference between the donor’s cost basis and the sales price represents a permanent loss of capital for the family.

Andy should have sold the shares and given the proceeds to Woody.

If he did this, he would have been able to recognize a loss, recouping capital for tax purposes, while still giving the same benefit to his son.

Question 22

Assume that Ajamu, a 32% bracket taxpayer, held original issue stock in a qualified small business, which he acquired on October 5, 2011, and sold in November of 2024. His adjusted basis in the 1,000 shares is $10,000. He sells all the shares to an unrelated party for $20,000.

How much federal income tax will he pay on this transaction?

$0.
$1,500.
$2,000.
$3,200

Answer 22

0.
Rationale

This is a small stock acquired after September 27, 2010, which the taxpayer held for at least 5 years. His gain is $10,000 and the entire gain is excluded.

Question 23

As the end of the year was approaching, Trixie reviewed her stock portfolio and decided to sell her holdings in Windsor Industries on December 28th of Year 1. The shares were purchased two years ago. Her basis in the shares was $20,000 and the market value of the shares was $18,000. Trixie wanted to use the $2,000 loss to help her minimize taxes for Year 1. On January 10th, Year 2, Windsor Industries announced new initiatives, and Trixie has second guessed her decision to sell the shares in the company. She buys back the 1,000 shares for $17,000 on January 11th.
Assuming that Trixie had no other capital transactions for Year 1, what is the impact of this transaction on Trixie’s Year 1 income tax return?

The sale of Windsor Enterprises will not impact Trixie’s AGI for Year 1.
The sale will generate a $2,000 short-term capital loss that will reduce Trixie’s AGI.

The sale will generate a $2,000 long-term capital loss that will reduce Trixie’s AGI.

The sale will trigger an ordinary loss deduction for $2,000.

Answer 23

???

Question 24

Clarabelle sold a farm with an adjusted basis of $200,000 to Horace for $500,000. In addition, Horace agreed to assume the note on the farm, which had a remaining balance of $50,000.
Not taking into consideration any potential depreciation recapture, what is the amount realized in the transaction from Clarabelle’s perspective?

$200,000.
$350,000.
$500,000.
$550,000.

Answer 24

$550,000.

Question 25

All of the following are included in the amount realized upon disposition of an asset except:

The cash received.

The fair market value of property received in the exchange.

A transfer of obligation to pay debt from the seller to the buyer.

The taxpayer’s adjusted basis.

Answer 25

The taxpayer’s adjusted basis.

Rationale

The taxpayer’s adjusted basis is subtracted from the amount realized to calculate gain or loss.

The amount realized includes the cash received, plus the fair market value of property received in the exchange, plus any liabilities shed in the transaction.

Question 26

Ajamu, a single individual, was an investor in a company that became worthless this year, and suffered an $80,000 capital loss. He initially invested in the company five years ago when it was starting up, and the company had $500,000 in initial capitalization.

Assuming that Ajamu had no other capital transactions this year and has $100,000 of ordinary income, how much will his AGI for this year decline as a result of this loss?

$3,000.
$50,000.
$53,000.
$80,000.

Answer 26

$53,000.
Rationale

He has a Section 1244 loss of $50,000 plus a long-term capital loss of $30,000 of which he can take $3,000 this year.

Thus, his AGI for this year will decline $53,000 as a result of this loss.

The stock that generated the loss qualified as Section 1244 stock, since Ajamu was one of the original investors in a company that was initially capitalized with less than $1 million.

Consequently, the first $50,000 of the loss is treated as an ordinary loss under Section 1244 and the remaining $30,000 loss is treated as a capital loss.

The $50,000 ordinary loss can offset Ajamu’s AGI in full, but the capital loss can only offset AGI by up to $3,000 per year.

This year, therefore, the total reduction in Ajamu’s AGI as a result of this transaction is $53,000, and he can carry forward the additional $27,000 loss and use that against income in future years.

Question 27

As the end of the year was approaching, Trixie reviewed her stock portfolio and decided to sell her holdings in Windsor Industries on December 28th of Year 1. The shares were purchased two years ago. Her basis in the shares was $20,000 and the market value of the shares was $18,000. Trixie wanted to use the $2,000 loss to help her minimize taxes for Year 1. On January 10th, Year 2, Windsor Industries announced new initiatives, and Trixie has second guessed her decision to sell the shares in the company. She buys back the 1,000 shares for $17,000 on January 11th.

Assuming that Trixie had no other capital transactions for Year 1, what is the impact of this transaction on Trixie’s Year 1 income tax return?

The sale of Windsor Enterprises will not impact Trixie’s AGI for Year 1.

The sale will generate a $2,000 short-term capital loss that will reduce Trixie’s AGI.

The sale will generate a $2,000 long-term capital loss that will reduce Trixie’s AGI.

The sale will trigger an ordinary loss deduction for $2,000.

Answer 27

The sale of Windsor Enterprises will not impact Trixie’s AGI for Year 1.

Rationale

Since Trixie purchased and sold the same security within a 30-day period, the sale is considered to be a washsale transaction, and the loss may not be claimed in the current period.

Question 28

Anastasia purchased a home in Connecticut three years ago for $300,000. She had been working in Connecticut for the past 10 years. Yesterday, her employer decided to transfer her to the San Diego, California branch, effective next month. Unfortunately, the real estate market has weakened over the past few years, and Anastasia is only able to sell her home for $270,000.

Which of the following statements correctly identifies her tax consequences of the sale?

Anastasia is not permitted to deduct the loss on her income tax return.

Anastasia’s loss will be reflected as a long-term capital loss on her tax return.

Anastasia’s loss will be reflected as a short-term capital loss on her tax return.

Anastasia will recognize an ordinary loss of $30,000.

Answer 28

Anastasia is not permitted to deduct the loss on her income tax return.

Rationale

The loss on the sale of the home was a personal loss, which is not deductible. Only losses associated with the active conduct of a trade or business, or with the production of income may be deducted by individual taxpayers.

Question 29

Which of the following statements correctly identifies when income is subject to tax?

Capital gains must be realized before they can be recognized on a tax return.

Realization occurs when the gain on an asset is reflected on the taxpayer’s return.

As a general rule, realized gains are not recognized unless a provision in the IRC requires recognition.

Recognition occurs when an asset has been sold or exchanged.

Answer 29

Capital gains must be realized before they can be recognized on a tax return.
Rationale

Before capital gains can be recognized on the tax return, they must be realized. Realization occurs when an asset is sold or exchanged, and recognition occurs when the gain on the asset is included on the taxpayer’s return. As a general rule, realized gains must be recognized unless a provision in the IRC exempts the gain from taxation, or defers the gain to a future tax period.

Question 30

Adele engaged in several capital transactions this year. She had a short-term capital gain of $400; a short-term capital loss of $600; a long-term capital gain of $800 and a long-term capital loss of $500. How will Adele report these items on her income tax return?

Adele will report a net short-term capital gain of $100.

Adele will report a net long-term capital gain of $100
.
Adele will report a net short-term capital loss of $200 and a net long-term capital gain of $300.

Adele will report ordinary income of $100.

Answer 30

Adele will report a net long-term capital gain of $100.

Rationale

Short-term capital losses can be netted against short-term capital gains, and long-term capital losses can be netted against long-term capital gains. Since there is a net short-term loss of $200 and a net long-term gain of $300, the short and long-term summary results can be netted together. In this case, since the net long-term capital gain was larger on an absolute basis, the character of the resulting net gain is a long-term capital gain.
Short-Term Long-Term
Gains $400 $800
Losses <$600> <$500>
Net <$200> $300

NSTCL <$200>
NLTCG $300
NLTCG $100

Question 31

As the end of the year was approaching, Trixie reviewed her stock portfolio and decided to sell her holdings in Windsor Industries on December 28th of Year 1. The shares were purchased two years ago. Her basis in the shares was $20,000 and the market value of the shares was $18,000. Trixie wanted to use the $2,000 loss to help her minimize taxes for Year 1. On January 10th, Year 2 Windsor Industries announced new initiatives, and Trixie has second guessed her decision to sell the shares in the company.

She buys back the 1,000 shares for $17,000 on January 11th. What is Trixie’s basis in the shares after she buys them back on January 11th?

$0.
$17,000.
$19,000.
$20,000.

Answer 31

$19,000.

Rationale

Since Trixie purchased and sold the same security within a 30-day period, the sale is considered to be a washsale transaction, and the loss may not be claimed.

The disallowed loss is added to Trixie’s basis in the replacement shares.

Trixie paid $17,000 for the replacement shares, and the disallowed loss was $2,000 so her basis in the shares is $19,000.

Question 32

Two years ago, Vernon purchased 100 shares of Stairwell Refitters, Inc., a start-up company, for $12,000. Unfortunately, Stairwell Refitter’s business model did not perform as expected, and the value of the shares has dropped to $8,000. Vernon’s son, Dudley, recently realized a large capital gain on an investment he held, so Vernon gave his shares of Stairwell Refitters, Inc. to Dudley when they were worth $8,000.

If Dudley sells the shares for $5,000 thirteen months after the transfer, what is the amount and character of his gain or loss?

$7,000 long-term capital loss.
$7,000 short-term capital loss.
$3,000 long-term capital loss.
$3,000 short-term capital loss

Answer 32

3,000 long-term capital loss.

Rationale

Vernon gave loss property to his son.

When a taxpayer gifts property with a loss to someone else, and the recipient sells the property for less than the fair market value as of the date of the gift, the basis in the hands of the donee for purposes of calculating loss is the fair market value of the property as of the date of the gift.

This is referred to as the “loss basis” in the property.

When loss basis is used to calculate loss, the holding period is deemed to begin at the date of the gift – the donor’s holding period does not tack on to the donee’s holding period to determine the nature of the loss.

Since the fair market value of the property was $8,000 on the date of the gift, and Dudley sold the property for $5,000 thirteen months after receiving it, Dudley’s loss is a $3,000 long-term capital loss.

Question 33

Two months after Dawson purchased Greenacre for $30,000, he died. The fair market value of Greenacre as of the date of Dawson’s death was $32,000. He left Greenacre to his son, Oliver. Since Oliver was the only beneficiary of the estate and there were no estate taxes due, the title to the property was transferred to Oliver within one month of Dawson’s death. Two weeks after receiving title to the property, Oliver sold Greenacre for $35,000.

What is the amount and type of income that Oliver will report on the sale?

$5,000 short-term capital gain.
$5,000 long-term capital gain.
$3,000 short-term capital gain.
$3,000 long-term capital gain.

Answer 33

3,000 long-term capital gain.
Rationale

When Dawson died, the basis of Greenacre qualified for a step-to fair market value under IRC Section 1014. Oliver’s basis in the property is therefore $32,000. Since he sold the property for $35,000 and his basis was $32,000, Oliver’s gain in $3,000. Even though Dawson purchased the property three and a half-months before it was sold, Oliver’s gain will be a long-term capital gain. Any property received through the estate of a decedent automatically qualifies for long-term capital gains treatment

Question 34

Kendra is in the 32% marginal tax bracket. She recently sold a coin for $110,000 that she had purchased eight years earlier for $10,000. How much federal income tax will Kendra pay on this transaction (assume that her income is below the threshold for the 3.8% net investment income tax?

$15,000.
$25,000.
$28,000.
$33,000.

Answer 34

$28,000.

Rationale

A coin is a collectible item, and long-term capital gains on collectibles are subject to a flat capital gains tax rate of 28%.

Therefore, Kendra’s tax on this transaction equals $28,000 [28% x ($110,000 - $10,000)].

Question 35

Shontelle received a gift of income-producing property with an adjusted basis of $50,000 to the donor and fair market value of $40,000 on the date of gift. Gift tax of $6,000 was paid by the donor. Shontelle subsequently sold the property for $45,000.

What is the recognized gain or loss?

A. $0
B. $5,000
C. $4,000
D. ($5,000)
E. ($11,000)

Answer 35

The correct answer is A.

The gain basis for Shontelle is $50,000 and the loss basis is $40,000.

Because the sales price is within this range, no gain or loss is recognized.

In this case, the gift tax paid of $6,000 has no effect on the gain basis.

Question 36

Kate sells property for $120,000. The buyer pays $2,000 in property taxes that had accrued during the year while the property was still legally owned by Kate. In addition, Kate pays $6,000 in commissions and $2,000 in legal fees in connection with the sale.

How much does Kate realize from the sale of her property?

A. $112,000
B. $114,000
C. $116,000
D. $120,000
E. None of the choices.

Answer 36

Solution: The correct answer is B.

The amount realized is calculated as follows:

Sales price $120,000

Taxes paid by buyer on behalf of seller 2,000

Less: Commissions (6,000)

Legal fees (2,000)

Amount realized $114,000

Question 37

Albert purchased a tract of land for $140,000 in 20x1 when he heard that a new highway was going to be constructed through the property and that the land would soon be worth $200,000. Highway engineers surveyed the property and indicated that he would probably get $180,000. The highway project was abandoned in 20x5 and the value of the land fell to $100,000.

What is the amount of loss Albert can claim in 20x5 if the land was sold for $100,000 in 20x6?

A. $40,000
B. $60,000
C. $80,000
D. $100,000
E. None of the choices

Answer 37

Solution: The correct answer is E.

Neither gain nor loss is recognized by Albert associated with the perceived fluctuations in the value of the land.

The requisite identifiable event (i.e., sale or other disposition) has not occurred.

NOTE: the land was sold in year 6, Albert can not claim the loss for year 5.

Editor’s note: the x’s in the year are to denote the passage of time.

Question 38

A famous rock singer/songwriter sells the copyrights to all of his hit songs for $1,200,000 in cash. He has no tax basis for the copyrights and had created all of the copyrights at least 10 years before their sale.
The taxpayer has:

A. No gain or loss.
B. A long-term capital gain of $1,200,000.
C. A short-term capital gain of $1,200,000.
D. Ordinary gain of $1,200,000.
E. None of the above.

Answer 38

Solution: The correct answer is D.

Generally, the person whose efforts led to the copyright or creative work has an ordinary asset, not a capital asset.

Since there was no tax basis for the copyrights, the entire gain of $1,200,000 is ordinary gain.

It would have Capital gains treatment if someone other than the creator owns it.

In the hands of the creator it is inventory = Ordinary Income.

Question 39

Which of the following is a capital asset?

A. The bicycle of a 10-year old child. The child purchased the bicycle with money inherited from an aunt.

B. The tools used by a self-employed carpenter.

C. The lots owned by a company that is in the business of buying and reselling residential building lots.

D. A “mint” set of 1985 coins owned by a coin dealer and that is for sale on his website.

E. None of the choices.

Answer 39

Solution: The correct answer is A.

The bicycle is a personal use asset and, therefore, a capital asset.

The manner in which the child acquired the bicycle is not relevant.

All of the other items are excluded from being a capital asset under § 1221.