Adjustments to Asset Basis and Capital Gains and Losses Flashcards

Question

Harold Crowe had the following capital transactions for the year: $3,000 long-term capital loss $9,000 long-term capital gain $2,000 net short-term capital gain What is the amount of Crowe’s reportable capital gain net income in the Schedule D summary? A. $4,400 B. $6,000 C. $11,000 D. $8,000

Answer 1

$8,000 Answer (D) is correct. Schedule D is used to report capital gains and losses, and the summary combines the long-term gains (losses) with the short-term gains (losses). When these capital gains and losses all net to a gain, it is called “capital gain net income” [Sec. 1222(9)]. This has occurred in the question and is computed below. Net long-term capital gain ($9,000 – $3,000) $6,000 Net short-term capital gain 2,000 Capital gain net income $8,000 Do not confuse the term “capital gain net income” with the term “net capital gain.” A “net capital gain” is the excess of net long-term capital gains over net short-term capital losses. It does not include net short-term capital gains. The difference is important because the net capital gain term is used in applying the 0%, 15%, and 20% maximum tax rates on capital gains. The 0%, 15%, and 20% maximum tax rates for individuals do not apply to net short-term capital gains.

Answer 2

$3,100 capital improvements and $400 repairs expense. Answer (C) is correct. Initial basis is adjusted consistent with tax-relevant events. Basis must be increased for expenditures that substantially prolong the life of the property or materially increase its value. Examples include major improvements (e.g., new roof, addition to building) and zoning changes. Maintenance, repair, and operating costs are not capitalized but are expensed in the period in which they are incurred. Thus, $3,100 is the cost to replace the appliances and should be capitalized, and the $400 used to resurface the tub is considered a repair and should be expensed.

Answer 3

$5,000 long-term gain taxed at 15%. Answer (B) is correct. The short-term capital loss is first used to offset the $20,000 collectible long-term capital gain that would be taxed at 28%. The remaining $20,000 of the short-term capital loss is then offset against the $25,000 long-term capital gain taxed at 15%. The $5,000 remaining long-term capital gain taxed at 15% is reported on the return and is subject to tax.

Answer 4

Albina has a short-term capital loss of $10,500 in 2019 and can deduct $3,000 on her tax return. She can carry forward a short-term loss of $7,500 to 2020. Answer (D) is correct. A short-term capital loss is defined as a loss on a capital asset that has a holding period of less than a year. In addition, the maximum amount of capital loss that can be deducted per year is $3,000. Any additional capital loss may be carried forward to subsequent years. For individuals, if you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. If you hold the property 1 year or less as Albina did, any capital gain or loss is a short-term capital gain or loss. However, in the case of corporations, all losses that are carried forward, whether they are long-term or short-term, become short-term capital losses for the subsequent year. Albina’s short-term capital loss is ``` Amount realized $ 4,500 (1,000 shares × $4.50/share) + Adjusted basis (15,000) (1,000 shares × $15/share) Loss $(10,500) She can deduct $3,000 on the 2019 tax return and carry forward $7,500 ($10,500 – $3,000) to 2020. ```

Answer 5

$4,000 long-term capital gain and $20,000 ordinary income. Answer (A) is correct. A copyright; a literary, musical, or artistic composition; a letter or memorandum; or similar property created by one’s personal efforts is an ordinary income asset. Coin collections are listed as capital assets. Thus, it must be recognized as a capital gain or loss at its sale.

Answer 6

$5,000 long-term capital gain. Answer (C) is correct. Publication 551 states that the taxpayer’s basis in property inherited from a decedent is generally the FMV of the property at the date of the individual’s death. The holding period for inherited property is automatically long-term. Therefore, the gain is a $5,000 [1,000 × ($25 – $20)] long-term capital gain.

Answer 7

June 20, Year 2. Answer (B) is correct. For assets acquired after 1987, long-term capital gain or loss treatment is provided if the asset is held for more than 1 year. The general rule is that the date the property is acquired is excluded and the date that the property is disposed of is included in this computation of the holding period. Since Mr. J bought the asset on June 19, Year 1, his holding period is treated as beginning June 20, Year 1. Exactly 1 year is considered to have expired on June 19, Year 2. Therefore, on June 20, Year 2, more than 1 year has passed, which would satisfy the long-term holding period requirement.

Answer 8

``` $60,000 Answer (D) is correct. A shareholder recognizes no gain on the voluntary contribution of capital to a corporation. The contribution of capital merely increases the shareholder’s basis in the corporation (Reg. 1.118-1). The shareholder’s basis is increased by the basis in the property contributed, not by the fair market value. Feld will recognize no gain on the contribution and his basis for the Maki stock is Cost of stock $50,000 Contribution of property (basis) 10,000 Adjusted basis in stock $60,000 ```

Answer 9

$3,000 loss; $1,000 carryover. Answer (B) is correct. Individuals and other noncorporate taxpayers may deduct up to $3,000 of a capital loss against ordinary income. Any excess capital loss may be carried over for an unlimited time period until the loss is exhausted. Therefore, $3,000 of James and Annie’s capital loss may be deducted, and $1,000 may be carried over.

Answer 10

39 years for the building and 7 years for the used office furnishings. Answer (C) is correct. Depreciation may be taken on property that is depreciable under MACRS. Such property must be appropriately classified and depreciation taken over the recovery period prescribed by the IRC. Nonresidential real property is Sec. 1250 property. It includes office buildings, stores, or warehouses that are not classified as residential real property and are not otherwise specified to have a life less than 27 1/2 years. The recovery period of this property is 39 years. Seven-year property includes office furniture and fixtures (such as desks, files, and safes), agricultural machinery and equipment, and any property that does not have a class life and has not been designated by law as being in any other class. Thus, the building will have a recovery life of 39 years and the office furniture a recovery life of 7 years.

Answer 11

When the basis of your stock has been reduced to zero, you should report any additional return of capital as a capital loss. Answer (A) is correct. A return of capital is a tax-free distribution that reduces a stock’s basis by the amount of the distribution. If a shareholder’s basis has been reduced to zero because of a tax-free return of capital, any excess amounts received are treated as a capital gain.

Answer 12

$7,000 Answer (A) is correct. Individuals and other noncorporate taxpayers may deduct up to $3,000 of a capital loss against ordinary income. Any excess capital loss may be carried over for an unlimited time period until the loss is exhausted. A capital loss carried over to a later tax year retains its long-term or short-term character for the year to which it is carried. A short-term capital loss carryover offsets short-term gain first in the carryover year. If a net short-term capital loss results, this loss offsets long-term capital gain and up to $3,000 of ordinary income on a dollar-for-dollar basis. Therefore, $3,000 of Mr. Brown’s capital loss may be deducted against ordinary income in the current year, and $7,000 ($10,000 – $3,000) can be carried over.

Answer 13

``` $60,000 Answer (A) is correct. Under Sec. 1001, the gain on the sale or other disposition of property is the excess of the amount realized over the adjusted basis. Any capital repairs, such as a new roof, are added to the adjusted basis. The amount realized is the sum of any money received plus the fair market value of the nonmoney property received. The amount realized includes relief from liabilities and, in this case, the assumption of the mortgage. When calculating the amount realized, the seller does not include the reimbursement for real property taxes treated under Sec. 164(d) as imposed on the purchaser. The property taxes paid by Robert are not included in either the amount realized or the adjusted basis because they are deductible expenses. The full amount of the realized gain is recognized unless all or some portion thereof is specifically excluded by another statute. Cash received $100,000 FMV of other property 20,000 Mortgage assumed 80,000 Amount realized $200,000 Less: Adjusted basis (130,000) Commissions (10,000) ``` $ 60,000

Answer 14

$600 short-term capital gain and $200 long-term capital loss. Answer (C) is correct. Under Reg. 1.1012-1(c), the basis and holding period of stock that was acquired in several different transactions is determined by specific identification of the stock sold. If the stock sold cannot be identified to any purchase or lot, it is assumed to be the first stock purchased or acquired; i.e., the FIFO (first-in, first-out) rule is applied. In this transaction, the number of shares sold equals the number purchased. So, the issue is determining the amount and character of gain. The first 40 shares were purchased on June 1, Year 1, for $25 per share. The sale produces a long-term capital loss of $200 ($800 – $1,000). The remaining 60 shares were purchased on January 2, Year 2, for $10 per share. Their sale results in a short-term capital gain of $600 ($1,200 – $600).

Answer 15

$1,300 short-term; $1,100 long-term. Answer (C) is correct. The deduction for any capital loss is the excess of capital losses over capital gains (Sec. 1211). The capital loss deduction, however, is limited to $3,000 in any year. Unused capital losses may be carried forward indefinitely. Short-term capital losses are considered first to determine the character of the carryover. Therefore, Jonnie will deduct $3,000 of his short-term capital loss and carry over the remaining $1,300 as short-term loss and $1,100 as long-term loss.

Answer 16

``` $56,000 Answer (C) is correct. Publication 544 calculates the gain on sale as follows: Amount realized: Cash $100,000 FMV of property received 20,000 Real estate taxes assumed by buyer 3,000 Mortgage assumed by buyer 17,000 Minus: Selling expenses (4,000) $136,000 Adjusted basis: Cost of building $ 70,000 Improvements 20,000 Total $ 90,000 Minus: Depreciation (10,000) Adjusted basis $ 80,000 Gain on sale $ 56,000 ```

Answer 17

A long-term capital gain. Answer (D) is correct. If property received in an exchange has the same basis in whole or in part as that of the property given (and if the property given is a capital asset or a Sec. 1231 asset), the holding period of the property received includes the period for which the property given was held [Sec. 1223(1)]. Thus, when the property is sold, the holding period includes the holding period of the property exchanged. And, under Sec. 1222, capital assets held more than 1 year are treated as long-term.

Answer 18

$400,000 Answer (A) is correct. The amount of the realized gain is the amount realized less the adjusted basis. Mr. Wolf realized $700,000 ($600,000 cash + $100,000 debt relief) from the sale of the building. His basis in the building was $300,000 ($400,000 purchase price + $80,000 capital improvements – $180,000 depreciation). His realized gain is therefore $400,000 ($700,000 amount realized – $300,000 adjusted basis).

Answer 19

$0 Answer (D) is correct. Section 316 provides specific rules to determine whether a distribution is taxable as a dividend or is a tax-free return of capital. If a corporation has a distribution that is deemed to be made out of earnings and profits, then the distribution would be taxable as a dividend. If a corporation has no earnings and profits, the distribution is deemed a return of capital and is tax-free until basis is reduced to zero. A return of capital reduces the stock basis while distributions in excess of basis are treated as capital gains and do not reduce basis. Likewise, a taxable dividend has no effect on basis.

Answer 20

``` $2,000 Answer (A) is correct. When a shareholder receives a nontaxable stock dividend, the basis of the new stock must be determined by allocating to it part of the adjusted basis of the old stock (Sec. 307). The new shares (50) represented 10% of the total shares owned (500) after the stock dividend. Therefore, the basis of the new shares is $9,000 ($90,000 × 10%). The holding period of the new shares includes the holding period of the old shares, i.e., from July 1, Year 1 [Sec. 1223(5)]. This results in a $2,000 long-term capital gain as computed below. Sale proceeds $11,000 Less: Allocated basis (9,000) Realized and recognized gain $ 2,000 ```

Answer 21

Long-term capital gain. Answer (B) is correct. If property received in an exchange has the same basis in whole or in part as that of the property given (and if the property given is a capital asset or a Sec. 1231 asset), the holding period of the property received includes the period for which the property given was held [Sec. 1223(1)]. Thus, when the property is sold, the holding period includes the holding period of the property exchanged. And, under Sec. 1222, capital assets held more than 1 year are treated as long-term.

Answer 22

1,005 Answer (B) is correct. The holding period of an asset for purposes of long-term gain treatment is 1 year from the date of acquisition, not including the day of acquisition but including the day of disposition. In this case, the only dividend reinvestment received 1 year away from the date of sale was the one received 12/1/Year 1. The other shares were received less than 1 year from the date of sale.

Answer 23

No gain or loss. Answer (D) is correct. When a taxpayer receives nontaxable stock rights, the cost basis of the rights under Sec. 307 is determined by allocating part of the basis of the stock on which the distribution was made. If the fair market value of the rights at the time of the distribution is less than 15% of the fair market value of the stock held at that time, the allocation is elective, but no allocation is made unless the stock rights are sold or exercised. If stock rights are allowed to expire, no allocation is made and no loss is recognized [Reg. 1.307-1(a)].

Answer 24

$500 short-term; $3,200 long-term. Answer (A) is correct. For property acquired after 1987, long-term capital gain or loss is the gain or loss from the sale or exchange of a capital asset held for more than 1 year (Sec. 1222). If the capital gain or loss is not long-term, it is short-term. A net long-term capital gain is the excess of long-term capital gains over long-term capital losses. The two long-term transactions (the JMC and JP stock) resulted in a net long-term capital gain of $3,200. A net short-term capital gain is the excess of short-term capital gains over short-term capital losses. There were two short-term transactions: the ABX and CCC stock, resulting in a net short-term capital gain of $500.

Answer 25

In the case of a gift with FMV greater than AB, the holding period begins on the day after you receive the gift. Answer (D) is correct. Under Sec. 1015, the basis of property acquired by gift is generally (i.e., for a gain) the same as the basis in the hands of the donor. Under Sec. 1223(2), the holding period of property that has a carryover basis (the same basis as the prior holder’s) includes the holding period of the prior owner.

Answer 26

The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Answer (B) is correct. Capital transactions are separated into long-term and short-term gains and losses and are netted separately before being combined and reported on Schedule D.

Answer 27

$14,600 Answer (A) is correct. A taxpayer’s distributive shares of capital gains and losses from a partnership or an S corporation must be combined with the taxpayer’s personal capital gains and losses. Mr. Opal has a net short-term capital gain of $18,100 ($4,300 + $22,500 – $3,000 – $5,700). Mr. Opal has long-term gains of $7,500 and long-term losses of $11,000. The $11,000 of losses first offsets the $7,500 of long-term gains. The remaining long-term capital loss of $3,500 is then applied against the short-term capital gain of $18,100. The remaining $14,600 of net capital gain is included in taxable income and is taxed as a short-term capital gain.

Answer 28

$3,100 as improvements to be capitalized and $400 as repairs. Answer (D) is correct. Basis must be increased for expenditures that substantially prolong the life of the property or materially increase its value. Examples include major improvements (e.g., new roof, addition to building) and zoning changes. Maintenance, repair, and operating costs are not capitalized; $3,100 ($2,000 + $500 + $600) is capitalized. The $400 incurred to resurface the tub is considered repairs and is expensed when incurred. The amount incurred to replace the cabinets is not expensed because it is part of a project that materially appreciates the value of the property.

Answer 29

$2,400 $2,000 Answer (C) is correct. If a shareholder purchases stock in different lots and at different times and it is impossible to definitely identify the shares subject to a return of capital, the basis of the earliest shares purchased is reduced first [Reg. 1.1012-1(c)]. Therefore, the $1,600 return of capital is applied entirely against Block A, the stock purchased in 2013. The dividend is taxable and does not reduce the stock basis.

Answer 30

``` $900 $500 Answer (B) is correct. For property acquired after 1987, long-term capital gain or loss is the gain or loss from the sale or exchange of a capital asset held for more than 1 year (Sec. 1222). If the capital gain or loss is not long-term, it is short-term. A net long-term capital gain is the excess of long-term capital gains over long-term capital losses. The two long-term transactions (the sales in June and August) resulted in a net long-term capital gain of $900. A net short-term capital gain is the excess of short-term capital gains over short-term capital losses. There were two short-term transactions: the sales in July and December, resulting in a net short-term capital gain of $500. Date of Sale Long-Term Short-Term 07/15/19 $700 08/02/19 $1,200 12/15/19 (200) 06/15/19 (300) $ 900 $500 ```

Answer 31

All of the answers are correct. Answer (C) is correct. Basis must be reduced by the larger of the amount of depreciation allowed or allowable (even if not claimed). A return of capital is a tax-free distribution that reduces a stock’s basis by the amount of the distribution. If a shareholder’s basis has been reduced to zero because of a tax-free return of capital, any excess amounts received are treated as a capital gain. Under Sec. 1033(b), the basis of the replacement property from an involuntary conversion is reduced by any gain not recognized.

Answer 32

$1,000 long-term capital gain. Answer (D) is correct. A capital gain or loss on the sale of property held more than 1 year is a long-term capital gain or loss. Both stock and land are classified as capital assets. However, under Sec. 267, losses are not allowed on sales or exchanges of property between related parties.

Answer 33

``` $54,000 Answer (B) is correct. The amount realized under Sec. 1001 includes money received, fair market value of other property received, and any liabilities of which the seller is relieved. Mr. Brock realized $108,000 ($60,000 cash + $36,000 fair market value equipment + $12,000 liability relieved). Under Reg. 1.263(a)-2, commissions reduce the amount realized. Section 1001(a) provides that the gain from the sale of property is the excess of the amount realized over the adjusted basis. Therefore, Mr. Brock recognized a gain of $54,000. Amount realized $108,000 Less: Commissions paid (6,000) Net proceeds $102,000 Less: Adjusted basis (48,000) Realized and recognized gain $ 54,000 ```

Answer 34

No Schedule D is required, and the amount is put directly on Form 1040. Answer (C) is correct. Publication 550 states, “If you received capital gain distributions, you report them directly on Form 1040 or 1040-SR, line 6; or on Schedule D (Form 1040 or 1040-SR), line 13, depending on your situation.”

Answer 35

``` $1,500 taxable gain. Answer (C) is correct. All realized gains must be recognized unless the IRC expressly provides otherwise. Only if this were an involuntary conversion would Jack be able to defer the gain. The amount of gain to be recognized is equal to the amount realized on the sale less the adjusted basis of the bike. Cash $ 500 Payments 5,000 Accessories 1,000 Basis $6,500 Amount realized $8,000 Less: Basis 6,500 Gain realized $1,500 ```

Answer 36

Replacing a 20-year-old roof. Answer (D) is correct. Basis must be increased for expenditures that substantially prolong the life of the property or materially increase its value. Examples of capital improvements include a new roof, addition to a building, etc.

Answer 37

$2,000 Answer (C) is correct. Under Sec. 1016(a)(2), an adjustment is made to the basis of an asset for the amount of depreciation allowed in previous years, but the adjustment cannot be less than the amount allowable under Sec. 167. The amount of depreciation allowable on this asset was $5,000. Mr. A must reduce his basis by this amount. The adjusted basis of the asset when sold was $2,000 ($7,000 – $5,000).

Answer 38

The cost of painting the interior of the building. Answer (A) is correct. Capital expenditures add to the value of property or adapt the property to a new or different use. (Reg. 1.263). Capital expenditures increase the basis of property. The cost of painting the interior of the building is not a capital expenditure. Rather, it is a cost that is deductible as an ordinary and necessary business expense. Therefore, the cost of painting does not increase the basis of the building.

Answer 39

Began January 2, Year 2. Answer (D) is correct. In determining how long the asset was held, the taxpayer begins counting on the date after the day the property was exchanged. Thus, the property was exchanged on January 1, Year 2, and the holding period begins on January 2, Year 2.

Answer 40

105 Answer (C) is correct. The holding period of an asset for purposes of long-term gain treatment is 1 year from the date of acquisition, not including the day of acquisition but including the day of disposition. In this case, the only dividend reinvestment received more than 1 year away from the date of sale was the one received April 1, 2018. The other shares were received less than 1 year from the date of sale.

Answer 41

$3,800 Answer (A) is correct. Section 316 provides specific rules to determine whether a distribution is taxable as a dividend or is a tax-free return of capital. If a corporation has a distribution that is deemed to be made out of earnings and profits, then the distribution would be taxable as a dividend. If the corporation has no earnings and profits, then the distribution is deemed a return of capital and is tax-free. While a return of capital reduces the stock’s basis, a taxable dividend has no effect on basis.

Answer 42

No gain or loss. Answer (B) is correct. For the purpose of computing gain, a donee’s basis is the same as the donor’s basis. For computing loss, the donee takes the lower of the donor’s basis or the fair market value of the property (Sec. 1015). Beech has no gain or loss, as shown below. ``` Gain Loss Amount realized $36,000 $36,000 Less: Basis (40,000) (30,000) Gain (loss) No gain No loss ```

Answer 43

Personal property tax. Answer (B) is correct. Under Sec. 1016, expenditures, receipts, losses, or other items properly chargeable to capital result in an adjustment in the basis of the property. However, there is no adjustment for deductible taxes. A personal property tax is deductible and does not reduce the basis of the asset.

Answer 44

``` $121,000 Answer (B) is correct. Under Sec. 1001, the gain on the sale or other disposition of property is the excess of the amount realized over the adjusted basis. Any capital repairs, such as a new roof, are added to the adjusted basis. The amount realized is the sum of any money received plus the fair market value of the nonmoney property received. The amount realized includes relief from liabilities and, in this case, the assumption of the mortgage and real estate taxes by the buyer. The full amount of the realized gain is recognized unless all or some portion thereof is specifically excluded by another statute. The realized gain is equal to the recognized gain in an outright sale. Ms. Benoit’s realized gain is calculated as follows: Cash received $160,000 Plus: Real estate taxes assumed 5,000 ``` ``` Mortgage assumed 30,000 Amount realized $195,000 Minus: Adjusted basis of building (70,000) Selling expenses (4,000) Realized and recognized gain $121,000 ```

Answer 45

In the case of stocks and bonds, the holding period begins on the day after the trading date. Answer (D) is correct. For a security that is purchased and sold on a registered security exchange, the holding period begins on the day after the taxpayer purchases the security.

Answer 46

$40,000 long-term capital gain taxed at 25%. Answer (A) is correct. A residential building purchased in 1985 is a Sec. 1250 asset. Only the excess depreciation of $10,000 is recaptured as ordinary income. The unrecaptured Sec. 1250 gain is the amount of depreciation that would be recaptured if the asset were a Sec. 1245 asset or $200,000 ($300,000 purchase price minus $100,000 basis) less the $10,000 that has already been recognized as ordinary income. Thus, the unrecaptured Sec. 1250 gain is $190,000. The remaining $50,000 gain from the sale of the building is a long-term capital gain taxed at 15% ($250,000 gain minus $10,000 ordinary income minus $190,000 unrecaptured Sec. 1250 gain). The $200,000 long-term capital loss subject to the 15% tax rate is combined with the $50,000 gain taxed at 15% from the sale of the building, leaving a $150,000 loss. The net $150,000 loss in the 15% category is then offset against the $190,000 gain in the 25% category, leaving a $40,000 gain taxed at the 25% rate.

Answer 47

$310 Answer (A) is correct. Under Sec. 1015(a), since Ralph received this stock as a gift, he retains his father’s basis of $10 per share. Since Ralph cannot adequately identify the shares he disposed of, he is required to use the FIFO method of identification. Therefore, Ralph is considered to have sold the shares his father gave him and the 10 shares Ralph subsequently purchased. In addition, Ralph must add half of the transaction fee to his adjusted basis. Therefore, Ralph’s basis in his shares is $310 (10 shares × $30 + $10 transaction fee).

Answer 48

All long-term. Answer (D) is correct. A long-term holding period constitutes a period of more than 1 year. A short-term holding period constitutes a holding period of 365 (or 366 in a leap year) days or less. The Flora stock is long-term because it was held for more than 1 year. The copy machine is long-term because it was held more than 1 year. The Fauna Laboratory stock is classified as long-term property because it was inherited and, according to Sec. 1223(11), inherited property qualifies as long-term.

Answer 49

When you carry over any capital loss, its character will be long-term. Answer (B) is correct. Excess capital losses retain their identity as either long-term or short-term losses in the year to which they are carried. This is true for individuals only, not for corporations.

Answer 50

39 years for the building and 7 years for the office furniture. Answer (D) is correct. Under MACRS depreciation, buildings are depreciated over a 39-year period on the mid-month convention. The mid-month convention assumes that the building was purchased halfway through the month of purchase. Office furniture, however, is depreciated over a 7-year period on the half-year convention. The half-year convention assumes that the property was purchased halfway through the year of purchase.

Answer 51

$30,000 ordinary gain. Answer (C) is correct. When a taxpayer holds property for sale to customers in the ordinary course of a trade or business, such property cannot be considered a capital asset. John’s gain from the sale equals the amount realized less his adjusted basis in the property. The amount realized equals the selling price, $90,000. The adjusted basis in the property equals the purchase price, $50,000, plus the renovations made to the property, $10,000. Thus, John’s gain equals $30,000 [$90,000 – ($50,000 + $10,000)] and is ordinary.

Answer 52

12 months. Answer (A) is correct. For property acquired after 1987, long-term capital gain or loss is the gain or loss from the sale or exchange of a capital asset held for more than 1 year (Sec. 1222). The long-term gain is eligible for preferential tax rates of 28%, 25%, or 0%, 15%, or 20%, depending on the length of time held and the type of asset.

Answer 53

Short-term capital loss on Schedule D. Answer (A) is correct. If a nonbusiness bad debt becomes totally worthless within the tax year, it is treated as a short-term capital loss. Short-term capital losses are reported on Schedule D of Form 1040.

Answer 54

Everything you receive for the property. Answer (C) is correct. When computing the gain or loss from a transaction, the taxpayer must compute the amount realized from the transaction. The amount realized equals the sum of money received, the FMV of property received, and liability relief, less selling expenses and liabilities assumed.

Answer 55

$0 net capital gain. Answer (D) is correct. For individuals, net capital gain (NCG) is the excess of net LTCG over net STCL. Net STCG is not included in NCG. Under Sec. 1222(11), the term “net capital gain” means the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for such year. Net LTCG/L = $0 ($10,000 – $10,000) Net STCG/L = $9,000 gain ($15,000 – $6,000) Thus, NCG = $0 – $0 = $0. Net STCG is treated as ordinary income for individuals. Net capital gain rates do not apply to net STCG. The net STCG is $9,000.

Answer 56

Starts in Year 1. Answer (D) is correct. Under Sec. 1015, the basis of property acquired by gift is generally the same as the basis in the hands of the donor. Under Sec. 1223(2), the holding period of property that has a carryover basis (the same basis as the prior holder’s) includes the holding period of the prior owner. Ruth’s holding period therefore begins in Year 1 when Ivana purchased the necklace.

Answer 57

$2,000 $200 Answer (A) is correct. If a shareholder purchases stock in different lots and at different times and it is possible to definitely identify the shares subject to a return of capital, the specific identification method should be used. Therefore, the $800 return of capital is applied entirely against Block B, the stock purchased in 2011. The dividend represents a return on capital and does not reduce the stock basis.

Answer 58

$50,000 Answer (B) is correct. A noncorporate taxpayer may elect to roll over the capital gain from the sale of qualified small business stock held for more than 6 months if other small business stock is purchased by the individual during the 60-day period beginning on the date of the sale. Gain on the sale is recognized only to the extent that the sales price exceeds the cost of the stock purchased (less any portion of the cost previously taken into account under this rule). Any gain not recognized reduces the basis of the stock purchased. The holding period of the stock purchased generally includes the holding period of the stock sold, except for purposes of determining whether the 6-month holding period is met. Therefore, Doug recognizes a $50,000 gain on the sale of Noah stock. His basis in the Thomas stock is $100,000. The holding period of his Noah stock is tacked onto the holding period of his Thomas stock for all purposes except determining whether Thomas Corporation stock meets the 6-month holding period. For applying the 100% exclusion of Sec. 1202 and other purposes, the holding period for the Thomas stock began on September 20, 2014. A gain must be recognized to the extent the cost of the newly purchased stock does not exceed the sales price of the previously held stock.

Answer 59

They can deduct $3,000 in long-term capital loss and carry over a capital loss of $200. Answer (C) is correct. An individual may offset a net capital loss with net capital gains. If the individual does not have net capital gains, (s)he recognizes a net capital loss in the current year up to the lesser of $3,000 ($1,500 for married filing separately) or ordinary income. An individual may carry forward any excess CLs indefinitely. Yousef and Ramina have a capital gain of $800 from the sale of the Tray shares. They also have a capital loss of $4,000 from the sale of the shares of Delta Company.

Answer 60

$10 capital gain, zero stock basis. Answer (D) is correct. A return of capital is a tax-free distribution that reduces a stock’s basis by the amount of the distribution. If a shareholder’s basis is reduced to zero because of a tax-free return of capital, any excess amounts received are treated as a capital gain.

Answer 61

$40,000 ordinary loss and $60,000 capital loss. Answer (B) is correct. An individual taxpayer is entitled to recognize the loss on Sec. 1244 stock as an ordinary loss, subject to a maximum amount of $50,000 per year ($100,000 per year for a husband and wife filing a joint return). To qualify for Sec. 1244 treatment, the stock must have been issued directly from the corporation. Therefore, the $60,000 of stock which Martha purchased from a shareholder is not subject to Sec. 1244 treatment. The $40,000 loss on the original shares is an ordinary loss under Sec. 1244. The remaining $60,000 loss is treated as a capital loss.

Answer 62

$17,000 $5,000 Answer (A) is correct. Section 1222 states that gains and losses resulting from the sale or exchange of capital assets less than 1 year are characterized as short-term. All other gains are characterized as long-term. A capital gain distribution is taxed as a long-term transaction regardless of how long the shareholder has owned stock in the mutual fund. The ABC stock and automobile were the two short-term transactions resulting in a net gain of $17,000 ($15,000 + $2,000). The XYZ stock, land, and mutual fund distribution are all long-term transactions and result in a net long-term gain of $5,000 [($4,000) + $8,000 + $1,000].

Answer 63

$4,000 Answer (C) is correct. An individual may offset a net capital loss with net capital gains. If the individual does not have net capital gains, (s)he recognizes a net capital loss in the current year up to the lesser of $3,000 ($1,500 for married filing separately) or ordinary income. An individual may carry forward any excess capital losses indefinitely. Since Bill and Gladys had a capital loss of $7,000, the amount of carryover is the difference between this amount and the maximum loss that can be deducted in 1 year. This results in a carryover of $4,000 ($7,000 – $3,000).

Answer 64

$2,500 ordinary loss and $500 capital loss. Answer (C) is correct. Losses on the sale, trade, or worthlessness of Sec. 1244 stock can be treated as an ordinary loss. However, if the basis of Sec. 1244 stock has increased through contributions to capital or otherwise, it must be treated as an increase applying to stock that is not Sec. 1244 stock when you figure an ordinary loss on its sale. Sec. 1244 stock $3,000 × (10,000 ÷ 12,000) = $2,500 ordinary loss Not Sec. 1244 stock $3,000 × (2,000 ÷ 12,000) = $500 capital loss

Answer 65

``` $350 $2,435 $4,657 Answer (C) is correct. A capital gain dividend is a distribution by a regulated investment company, or mutual fund, of capital gains realized from the sale of investments in the fund. Capital gain distributions are long-term regardless of how long the shareholder has owned the stock of the regulated investment company. ```

Answer 66

$9,500 Answer (B) is correct. A mutual fund is a regulated investment company, the taxation of which is determined by Sec. 852. Dividends paid by the mutual fund to shareholders are taxed. Undistributed capital gains must be included in income by shareholders, but a credit is allowed for their proportionate share of any tax on the capital gain paid by the mutual fund. Therefore, the Ables must report the full $9,500 as a long-term capital gain.

Answer 67

$3,000 Answer (C) is correct. Under Sec. 1202(a), an individual may exclude from gross income 50% of any gain from the sale or exchange of qualified small business stock held for more than 5 years. Angela has met all of the requirements of Sec. 1202(a). Therefore, of the $6,000 ($8,000 – $2,000) gain, only $3,000 ($6,000 × 50%) is taxable.

Answer 68

Sue is allowed a credit for the federal tax paid on her behalf of $2,000. Answer (A) is correct. A mutual fund is a regulated investment company, the taxation of which is determined by Sec. 852. Dividends paid by the mutual fund to shareholders are taxed. Undistributed capital gains must be included in income by shareholders, but a credit is allowed for their proportionate share of any tax on the capital gain paid by the mutual fund. Therefore, Sue must report the full $5,000 as a long-term capital gain and a credit of $2,000.

Answer 69

LTCG, $10,000; STCL, $6,000. Answer (C) is correct. Long-term capital gain or loss is the gain or loss from the sale or exchange of a capital asset held for more than 1 year (Sec. 1222). If the capital gain or loss is not long-term, it is short-term. A net long-term capital gain is the excess of long-term capital gains over long-term capital losses. The two long-term transactions (Music Corp. and Play Corp.) resulted in a net long-term capital gain of $10,000. A net short-term capital gain is the excess of short-term capital gains over short-term capital losses. There were two short-term transactions (Fun Corp. and Book Corp.), resulting in a net short-term capital loss of $6,000.

Answer 70

The amount realized is $10,000, and the amount of gain is $3,000. Answer (B) is correct. All realized gains must be recognized unless the IRC expressly provides otherwise. Conversely, no deduction is allowed for a realized loss unless the IRC expressly provides for it. The amount realized in most cases is the money received, plus the FMV of other property received, and liability relief, minus money or other property given up, selling expenses, and liabilities assumed. The gain (loss) realized is the amount realized less the adjusted basis. Thus, Maggie has realized $10,000 on this exchange, of which her gain is $3,000 ($10,000 – $7,000).

Answer 71

$30 capital gain, zero stock basis. Answer (A) is correct. A return of capital is a tax-free distribution that reduces a stock’s basis by the amount of the distribution. If a shareholder’s basis is reduced to zero because of a tax-free return of capital, any excess amounts received are treated as a capital gain. The $240 return of capital and $60 of the $90 return of capital reduce the $300 stock basis to zero. The $30 excess return of capital is treated as a capital gain.

Answer 72

$0 Answer (C) is correct. If a noncorporate investor purchases qualified small business stock and holds it for more than 5 years, up to 50% of the gain realized on the disposition of such stock may be excluded from gross income. The exclusion is 100% if purchased after September 27, 2010. The gain eligible for exclusion is limited to the greater of $10 million (reduced by the aggregate amount of eligible gain excluded by the taxpayer with respect to investments in the corporation whose stock is being sold during all prior tax years) or 10 times the aggregate adjusted bases of qualified small business stock issued by such corporation and disposed of by the taxpayer during the tax year (Sec. 1202). Since Mr. Cole held the stock for more than 5 years, he may exclude all $80,000 from his gross income ($80,000 realized gain × 100%). Alternatively, Mr. Cole can roll over the gain on the sale of his qualified small business stock if the proceeds are used to purchase other qualified small business stock within 60 days of the sale.

Answer 73

$50 ordinary and $750 capital. Answer (A) is correct. Under Sec. 1244(d)(1)(A), when property having a basis in excess of its value is exchanged for Sec. 1244 stock, the basis taken in the stock is the basis of the property exchanged. When there is a loss on the sale of the Sec. 1244 stock, however, the basis is reduced by the difference between the basis and the fair market value at the time of the original exchange. In this case, the difference was $750 ($1,000 – $250). This $750 is a capital loss. The new basis is $250 [$1,000 basis – ($1,000 – $250)]. So, the ordinary loss is $50 ($200 sales price – $250 basis).

Answer 74

Heather has short-term capital loss deduction of $3,000 on her Year 2 tax return and will have to carry forward a short-term loss of $1,250 to her Year 3 return. Answer (D) is correct. A short-term capital gain or loss is realized if the asset was held 1 year or less. An individual may offset a net capital loss with net capital gains. If the individual does not have net capital gains, (s)he recognizes a net capital loss in the current year up to the lesser of $3,000 ($1,500 for married filing separately) or ordinary income. An individual may carry forward any excess CLs indefinitely. The carryforward is treated as a CL incurred in the subsequent year. Net STCL is treated as having been deductible in the preceding year before net LTCL. There can be no carryover from a decedent to his or her estate. Therefore, Heather may recognize $3,000 of the $4,250 [500 shares × ($10 purchase price – $1.50 sale price)] short-term capital loss on her Year 2 tax return. Heather may carry forward the remaining $1,250 of short-term capital loss.

Answer 75

Deduct $4,737 as ordinary loss and $4,263 as capital loss subject to limitations. Answer (C) is correct. If an owner of Sec. 1244 stock invests additional capital but is not issued additional shares of stock, the amount of the additional investment is added to the basis of the originally issued stock, but this subsequent increase to the basis of the originally issued stock does not qualify for ordinary loss treatment. Any resulting loss must then be apportioned between the qualifying Sec. 1244 stock and the nonqualifying additional capital interest (Sec. 1244). Since the additional capital interest of $9,000 is 9/19 of the total basis of $19,000, the $9,000 loss is apportioned as follows: $4,263 of capital loss (9/19 of $9,000) and $4,737 of qualifying ordinary loss.

Answer 76

Short-term capital loss reduces the basis of the investment. Answer (D) is correct. Publication 550 states, “. . . a sale or trade of a capital asset results in a capital gain or loss.” A short-term capital loss is the result of selling the investment at an FMV less than the basis of the investment.

Answer 77

$100,000 ordinary; $40,000 capital. Answer (C) is correct. Unlike losses on most capital assets held long-term, part of the loss from the sale or exchange of Sec. 1244 stock is treated as ordinary loss. Under Sec. 1244(b), the aggregate amount treated by the taxpayer by reason of Sec. 1244 as an ordinary loss shall not exceed $100,000 in the case of a husband and wife filing a joint return. The aggregate Sec. 1244 loss, in this case, is $140,000 ($120,000 from Corporation X + $20,000 from Corporation Y). Subject to the Sec. 1244(b) limitation, $100,000 is allowed as ordinary loss; the remaining $40,000 is treated as a capital loss.

Answer 78

``` $350 loss. Answer (D) is correct. A gain or loss is determined by subtracting the adjusted basis of the property from the amount realized. To calculate adjusted basis you begin with the unadjusted basis of the property, which is usually its cost. The unadjusted basis is then adjusted for any expenditure, receipt, loss, or other item that is chargeable to the capital account. The amount realized is the money received on the sale or exchange of property plus the fair market value of any property or services received in the exchange. The 200 shares of DEF received in a stock split are not taxable. These additional shares get added in with Rose’s other DEF shares and then her basis is reallocated to her new share total. The decrease in the value of Rose’s GHI mutual fund is also not a taxable event. A gain or loss is not recognized until sale or exchange has occurred (securities that become worthless during the year are deemed sold on the last day of the year). Rose’s net loss claimed on Schedule D is computed as follows: Rose’s Gain or Loss ACB Stock JKL Stock Amount realized $ 800 $ 0 – Adjusted basis (400 + 50) 450 (700) Gain (loss) $ 350 $(700) Net loss $(350) ```

Answer 79

$1,900 Answer (C) is correct. The original basis in Kiran’s stock is $2,000, the original purchase. Kiran must adjust the basis for the return of capital distribution of $100. Therefore, Kiran’s basis at the time of disposition equals $1,900 ($2,000 – $100)

Answer 80

$8,500 Answer (D) is correct. A mutual fund is a regulated investment company, the taxation of which is determined by Sec. 852. Dividends paid by the mutual fund to shareholders are taxed. Undistributed capital gains must be included in income by shareholders, but a credit is allowed for their proportionate share of any tax on the capital gain paid by the mutual fund. Therefore, the Cones must report the full $8,500 as a long-term capital gain.

Answer 81

$2,000 net capital gain. Answer (D) is correct. The term “net long-term capital gain” means the excess of long-term capital gains for the taxable year over the long-term capital losses for such year (IRC Sec. 1222). Section 1222 states that gains and losses resulting from the sale or exchange of capital assets held 1 year or less are characterized as short-term. All other gains are characterized as long-term. The first and third stock sales are short-term and equal a net $1,000 loss. The second and fourth stock sales are long-term and equal a net $3,000 gain. The NCG is $2,000 ($3,000 net LTCG – $1,000 net STCL).

Answer 82

$20 loss. Answer (A) is correct. Since the distribution is nontaxable, it is considered a return of capital that reduces the basis of the stock. The basis of the stock cannot be decreased below zero. Karen’s basis in the stock is reduced because of the distribution from $475 to $320 ($475 – $155 distribution). When it is sold for $300, the recognition of a $20 loss occurs ($300 realized – $320 adjusted basis).

Answer 83

$1,500 as long-term capital gain income. Answer (A) is correct. A return of capital is a tax-free distribution that reduces a stock’s basis by the amount of the distribution. If a shareholder’s basis is reduced to zero because of a tax-free return of capital, any excess amounts received are treated as a capital gain.

Answer 84

$2,500 $200 Answer (C) is correct. Long-term capital gain or loss is the gain or loss from the sale or exchange of a capital asset held for more than 1 year (Sec. 1222). If the capital gain or loss is not long-term, it is short-term. A net long-term capital gain is the excess of long-term capital gains over long-term capital losses. The long-term transaction resulted in a net long-term capital gain of $200. A net short-term capital gain is the excess of short-term capital gains over short-term capital losses. There were three short-term transactions: TBT, LAT, and MMT sales, resulting in a net short-term capital gain of $2,500.

Answer 85

A specialized small business investment company includes any partnership or corporation licensed by the Small Business Administration under Sec. 301(d) of the Small Business Investment Act of 1958. Answer (B) is correct. A partnership and a corporation licensed under Sec. 301(d) are the two types of entities into which a qualifying specialized small business investment company investment can be made [Sec. 1044(c)(3)].

Answer 86

$400 Answer (B) is correct. L’s gain will be the amount realized ($700) less the adjusted basis of the stock. The adjusted basis is L’s original basis of $500 reduced by the return of capital ($200), or $300 [Sec. 1016(a)(4)]. The $400 gain ($700 – $300) is long-term because the stock had been held for more than 1 year.

Answer 87

$650,000 as long-term capital gain. Answer (A) is correct. A capital gain or loss is realized on the sale or exchange of a capital asset, unless expressly excluded. Property held either for personal use or for the production of income is a capital asset, but dealer property is not. Inherited assets are considered held long-term. Yang and May Ling realize a long-term capital gain on the sale of their rare coin collection. The Lings must also recognize a long-term capital gain on the sale of their stock that was purchased in 2017. In total, the Lings must recognize a $650,000 long-term capital gain.

Answer 88

The AMT preference on the small business stock is 50% of the excluded gain. Answer (A) is correct. An alternative minimum tax (AMT) preference is equal to 7% of the excluded gain for stock purchased after August 10, 1993 and before September 28, 2010. Since this is an exclusion preference, there is no minimum tax credit allowed. The amount of the exclusion depends on when the stock was purchased.

Answer 89

Paula will not report any gain because nothing was paid to her. Answer (D) is correct. A mutual fund is a regulated investment company, the taxation of which is determined by Sec. 852. Dividends paid by the mutual fund to shareholders are taxed. Undistributed capital gains must be included in income by shareholders, but a credit is allowed for their proportionate share of any tax on the capital gain paid by the mutual fund. Therefore, Paula must report the full $3,500 as a long-term capital gain.

Answer 90

$50 net capital loss, but she can add $200 to her new stock basis. Answer (D) is correct. The wash sale rules under Sec. 1091 apply when a taxpayer acquires substantially identical securities within a period beginning 30 days before the date of sale and ending 30 days after the date of sale. The rules provide that the realized loss is disallowed, but the amount of realized loss may be added to the basis of the stock. Thus, although Yasmin realized a $250 loss ($750 amount realized minus $1,000 cost basis), she could only recognize a $50 loss on her tax return. Because she only replaced 80% of Tele Company stock, she can deduct 20% of the $250 loss. Yasmin may, however, add the $200 loss to the cost basis of the new shares.

Answer 91

$4,000 long-term loss and $500 short-term loss. Answer (B) is correct. A long-term capital gain or loss is realized from a capital asset held for more than 1 year. A short-term capital gain or loss is realized if the asset was held 1 year or less. Since the $500 loss on the sale of stock was held for less than 1 year, it is considered a short-term capital loss. The $5,000 loss on the sale of stock and the $1,000 gain on the sale of a vacant lot were held for more than 1 year; thus, they are classified as long-term, resulting in a long-term capital loss of $4,000 ($5,000 – $1,000). Therefore, Herb will initially report a $4,000 long-term capital loss and a $500 short-term capital loss on his Schedule D.

Answer 92

$7,600 Answer (A) is correct. A mutual fund is a regulated investment company, the taxation of which is determined by Sec. 852. Dividends paid by the mutual fund to shareholders are taxed. Undistributed capital gains must be included in income by shareholders, but a credit is allowed for their proportionate share of any tax on the capital gain paid by the mutual fund. Therefore, the Kanes must report the full $7,600 as a long-term capital gain.

Answer 93

$500 short-term capital gain on 2019 return. Answer (D) is correct. For property acquired after 1987, long-term capital gain or loss is the gain or loss from the sale or exchange of a capital asset held for more than 1 year (Sec. 1222). If the capital gain or loss is not long-term, it is short-term. Whether using the cash or accrual method of accounting, taxpayers who sell stock or securities must recognize gains or losses on the trade date rather than the settlement date (Publication 17).

Answer 94

``` $4,200 $2,800 $(600) $(400) Answer (B) is correct. Generally, positions in regulated futures contracts, foreign currency contracts, nonequity options, and dealer equity options in an exchange using the mark-to-market system are treated as if they were sold on the last day of the year. Any capital gains or losses arising under this rule are treated as if they were 60% long-term and 40% short-term without regard to the holding period (Sec. 1256). Any gain or loss on the contract is taken into account for the tax year, together with the gain or loss on other contracts that were held during the year but closed out before the last business day. As a result, taxpayers’ net gains or losses are approximately equal to the aggregate net amounts that are credited to their margin accounts or that they have had to pay into their accounts during the tax year. However, if a taxpayer holds Sec. 1256 contracts at the beginning of a tax year, any gain or loss subsequently realized on these contracts must be adjusted to reflect any gain or loss taken into account with respect to these contracts in a prior year. Jerry has a realized gain of $7,000 ($37,000 FMV – $30,000 purchase price) in 2018 and will recognize $4,200 ($7,000 × 60%) long-term gain and $2,800 ($7,000 × 40%) short-term gain. In 2019, Jerry will realize a loss of $1,000 ($36,000 selling price – $37,000 carrying value) and will recognize a long-term loss of $600 ($1,000 × 60%) and a short-term loss of $400 ($1,000 × 40%). ```

Answer 95

The Winds will not report a long-term capital gain since no distribution was made. Answer (D) is correct. A mutual fund is a regulated investment company, the taxation of which is determined by Sec. 852. Dividends paid by the mutual fund to shareholders are taxed. Undistributed capital gains must be included in income by shareholders, but a credit is allowed for their proportionate share of any tax on the capital gain paid by the mutual fund. Therefore, the Winds must report the gain of $9,500, may increase the basis of their stock by $9,000, and are allowed the $500 credit for taxes paid.

Answer 96

The stock must be voting common stock. Answer (C) is correct. A loss on Sec. 1244 stock (limited to $50,000, or $100,000 on a joint return) is treated as an ordinary loss instead of a capital loss. Such stock may be common stock or preferred stock, whether voting or nonvoting.

Answer 97

``` $750 Answer (D) is correct. Under Reg. 1.1012-1(c), the basis and holding period of stock acquired in several different transactions are determined by specific identification of the stock sold. If the stock sold cannot be identified to any purchase or lot, it is assumed to be the first stock purchased or acquired; i.e., the FIFO (first-in, first-out) rule is applied. The additional shares received from the stock split are distributed proportionately to the shares purchased at $50 per share and the shares purchased at $80 per share, and the original basis is allocated among the new shares. The new basis for the Year 1 shares is $25 per share ($5,000 ÷ 200). Therefore, the net capital gain is $750. Amount realized $2,000 Basis (50 × $25) 1,250 Net capital gain $ 750 ```

Answer 98

Ordinary loss subject to limitations. Answer (B) is correct. Publication 550 states, “. . . you can deduct as an ordinary loss, rather than as a capital loss, a loss on the sale, trade, or worthlessness of section 1244 stock. . . . The amount you can deduct as an ordinary loss is limited to $50,000 each year. On a joint return, the limit is $100,000, even if only one spouse has this type of loss.”

Answer 99

$1,000 long-term capital gain. Answer (D) is correct. The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death. Basis in the stock is the fair market value (the date of her grandmother’s death). Any asset received from a decedent is considered held long-term no matter how long it is held. Thus, Vanessa has a long-term capital gain of $1,000 (100 × $60 – 100 × $50).

Answer 100

Total gross assets of $100 million or less at all times after August 10, 1993, and before it issued the stock. Answer (D) is correct. Stock qualifies as Section 1202 stock if it is received after August 10, 1993, the corporation is a domestic C corporation, the seller is the original owner of the stock, and the corporation’s gross assets do not exceed $50 million at the time the stock was issued. Additional requirements do exist. However, the total gross assets requirement is $50 million, not $100 million.

Answer 101

Ordinary loss on Form 4797 limited to $50,000 for a single individual and limited to $100,000 for those filing a joint return. Answer (C) is correct. In the case of a loss on Sec. 1244 stock, the loss shall be treated as an ordinary loss limited to a maximum loss of $50,000 ($100,000 for a husband and wife filing jointly) for any taxable year [Sec. 1244(a-b)]. Any loss from the sale or exchange of Sec. 1244 stock should be reported on Form 4797, Sales of Business Property, up to the maximum limit for ordinary loss. Any gain from Sec. 1244 stock should not be used to offset a loss but should be reported as a capital gain on Schedule D of Form 1040 (Publication 550).

Answer 102

Any unused short-term capital loss may be carried back 3 years. Answer (A) is correct. Any short-term capital loss may be carried back 3 years if the taxpayer is a corporation. Individual taxpayers may only carry a capital loss forward, which retains its character during a carry forward (Sec. 1212).

Answer 103

If the stock becomes worthless, they can claim an ordinary loss limited to $50,000 individually or $100,000 together on a joint return, per year. Answer (D) is correct. Taxpayers may deduct losses on Sec. 1244 stock as ordinary up to $50,000 in any 1 year ($100,000 on a joint return).