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Flashcards in REG 7 Deck (20):
1

Individual Lark's year 2 brokerage account statement listed the following capital gains and losses from the sale of stock investments:
Short-term capital gain $ 6,000
Long-term capital gain 14,000
Short-term capital loss 4,000
Long-term capital loss 8,000
In addition, two stock investments became worthless in year 2. Public Company X stock was purchased in December, year 1, for $5,000, and formal notification was received by Lark on July, year 2, that it was worthless. Private company Section 1244 stock was issued to Lark for $10,000 in January, year 1, and was determined to be worthless in December, year 2. What is Lark's year 2 net capital gain or loss before any capital loss limitation?

The Section 1244 loss is an ordinary loss so it is not included in the computation of the net capital gain or loss. The worthless stock of Company X results in a $5,000 long-term capital loss because worthless securities are deemed to become worthless on the last day of the tax year (December 31, Year 2).
Lark has a net short-term capital gain of $2,000 ($6,000 STCG − $4,000 STCL). There is a net long-term capital gain of $1,000 ($14,000 LTCG − $8.000 LTCL − $5,000 LTCL). Thus, his total net capital gain is $3,000 ($2,000 + $1,000). Note that only the LTCG is eligible to be taxed at preferential rates.

2

In the current year, Fitz, a single taxpayer, sustained a $48,000 loss on Code Sec. 1244 stock in JJJ Corp., a qualifying small business corporation, and a $20,000 loss on Code Sec. 1244 stock in MMM Corp., another qualifying small business corporation. What is the maximum amount of loss that Fitz can deduct for the current year?

If Section 1244 stock is sold at a loss the loss is treated as an ordinary loss up to the applicable limit. The limit applies per calendar year and is $50,000 for single taxpayers and $100,000 for those filing as married-joint. Fitz's total Section 1244 losses are $68,000 but only $50,000 of the loss is characterized as ordinary. The remaining $18,000 is treated as a capital loss since investments are a capital asset.

3

Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Code Sec. 1245?

Personalty is subject to the Section 1245 depreciation recapture rules which indicate that gain will be taxed as ordinary income up to the amount of depreciation claimed on the property. Since there was $60,000 of depreciation on the equipment, $60,000 of the gain is taxed as ordinary income and the remaining $40,000 is taxed as Section 1231 gain.

4

A taxpayer purchased five acres of land for $200,000 and placed in service other tangible business assets that cost $450,000. Disregarding business income limitations and assuming that the annual Section 179 (Election to Expense Certain Depreciable Business Assets) limit is $500,000, what maximum amount of cost recovery can the taxpayer claim this year?

Land is not depreciable. Section 179 can be elected to expense the $450,000 of business assets since it does not exceed the maximum Section 179 limit of $500,000 as given in the problem.

5

Kaitlin owns a computer that she uses for business, investment, and personal use, as follows:
Personal use. 25%
Investment use. 30%
Business use. 45%
Will Kaitlin's use qualify her to use accelerated or straight-line depreciation, and what percentage of the asset's basis qualifies to be depreciated?

A computer qualifies as listed property, and MACRS accelerated depreciation can be claimed for listed property only if the business use of the asset exceeds 50% of the total use. Since Kaitlin's business use is 45%, she does not meet the 50% test and must use straight-line (ADS) depreciation. However, she can depreciate both the business and investment use of the asset, so 75% of the asset's basis qualifies to be depreciated.

6

On August 1, 2015, Graham purchases and places into service an office building costing $264,000, including $30,000 for the land. What was Graham's MACRS deduction for the office building in 2015?

Under MACRS, the office building is considered non-residential real property. Land cannot be depreciated. Its class life is 39 years. MACRS requires that the straight-line method be used to compute the depreciation of 39-year class life property. Therefore, the office building would be depreciated at a rate of $6,000 per year ([$264,000 building cost, less $30,000 cost of land]/39 years). However, the mid-month convention applies to 39-year class life property. This convention requires that, regardless of when realty is placed into service, it is considered to be placed into service at mid-month. Therefore, for August 2015 (the first month of service), Graham could deduct $250 (= $6,000/12 months x one-half of a month). For the period of September 2015 to December 2015 (the remainder of the tax year), Graham could deduct $2,000 (= $6,000 x 4/12 months). Hence, Graham's MACRS deduction for the office building in 2015 would be $2,250, the sum of the two periods.

7

On January 1, Fast, Inc. entered into a covenant not to compete with Swift, Inc. for a period of five years, with an option by Swift to extend it to seven years. What is the amortization period of the covenant for tax purposes?

The statutory amortization period for a covenant not to compete that is related to a business acquisition is 15 years.

8

Gem Corp. purchased all the assets of a sole proprietorship, including the following intangible assets:
Goodwill $50,000
Covenant not to compete 13,000
For tax purposes, what amount of these purchased intangible assets should Gem amortize over the specific statutory cost recovery periods?

Goodwill is always amortizable. Covenants not to compete qualify if acquired in connection with the acquisition of a trade or business. Therefore, $63,000 can be amortized.

9

Mr. N's business building is destroyed by a hurricane. The building had an adjusted basis to Mr. N of $200,000 and a fair market value immediately before the hurricane of $300,000. Mr. N receives a reimbursement of $270,000 from his insurance company and immediately spends $268,000 on a new business building. What amount must Mr. N include in his gross income?.

$2,000 gain

10

In the current year, Essex sold land with a basis of $80,000 to Yarrow for $100,000. Yarrow paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next five years, beginning in the second year. Under the installment method, what gain should Essex include in gross income for the year of sale?

The total gain from the sale is $20,000 ($100,000 - $80,000). Under the installment method, 25% ($25,000 paid first year/$100,000) is of the gain is recognized in the year of sale. 25% x $20,000 = $5,000.

11

Sands purchased 100 shares of Eastern Corp. stock for $18,000 on April 1 of the prior year. On February 1 of the current year, Sands sold 50 shares of Eastern for $7,000. Fifteen days later, Sands purchased 25 shares of Eastern for $3,750. What is the amount of Sand's recognized gain or loss?

Sand's basis per share is $180 ($18,000/100 shares). Sand's realized loss on the 50 shares sold is $2,000 ($7,000 amount realized - $9,000 basis ($180 x 50 shares). This loss is not recognized under the wash sale rule if the same stock is repurchased within 30 days. Since only 25 shares were repurchased during the 30 day period, 50% (25 shares/50 shares) of the loss is not recognized. Therefore, $1,000 of the realized loss is recognized.

12

Conner purchases 300 shares of Zinco stock for $30,000 in 2001.
On May 23, 2014, Conner sells all the stock to his daughter, Alice, for $20,000, its then fair market value. Conner realizes no other gain or loss during 2014. On July 26, 2015, Alice sells the 300 shares of Zinco for $25,000.
What is Alice's recognized gain or loss on her sale?

A taxpayer acquiring property through purchase or exchange from a person who sustained a loss on the transaction that was disallowed owing to related taxpayer rules realizes a gain on the sale or other disposition of the property only to the extent that the gain exceeds the amount of the disallowed loss. Alice acquired the Zinco stock from her father, who sustained a disallowed loss of $10,000 ($20,000 selling price, less $30,000 purchase price). Hence, Alice would have to realize a gain of more than $10,000 for her to recognize a gain, since she now has a right of offset of $10,000.

13

Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common stock for $15,000 on December 15, 2014, and an additional 100 shares for $13,000 on December 30, 2014. On January 3, 2015, Smith sold the shares purchased on December 15, 2014, for $13,000.
What amount of loss from the sale of Core's stock is deductible on Smith's 2014 and 2015 income tax returns

Under wash-sale rules, taxpayers may not recognize losses attributable to the sale of stock or securities if substantially identical stock or securities are purchased 30 days before or after the sale giving rise to the loss. Wash-sale rules do not prevent the recognition of gains from these sales.
Smith sold 100 shares of Core Co. common stock on January 3, 2015 for $13,000. As the stock was purchased for $15,000, Smith sustained a loss of $2,000 on the transaction. However, Smith may not recognize this loss because Smith purchased an additional 100 shares for $13,000 on December 30, 2014, which was within 30 days before or after the January 3, 2015 sale. Thus, Smith may not recognize a loss in either 2014 or 2015.

14

Which of the following statements is correct with regard to an individual taxpayer who has elected in 2015 to amortize the premium on a bond that yields taxable interest?

An individual taxpayer who has elected to amortize the premium on a bond that yields taxable interest may reduce the bond's basis by the amortization of the premium. In addition, the amount of bond premium attributable to the tax year may be used to offset interest received on the bond in computing the taxpayer's taxable income.
This response correctly states that the bond's basis is reduced by the amortization.

15

In 2015, Clark filed Form 1040EZ for the 2014 taxable year. In 2015, Clark received a state income tax refund of $900 plus interest of $10, for overpayment of 2014 state income tax.
What amount of the state tax refund and interest is taxable in Clark's 2015 federal income tax return?

Federal and state income tax refunds are excluded from a taxpayer's taxable income to the extent that the refund did not reduce the amount of tax for the earlier year. However, any interest earned on these refunds is considered taxable income.
Thus, Clark's state income tax refund is excluded from taxable income. However, the $10 in interest income from the refund is taxable income and, therefore, included on Clark's 2015 federal income tax return.

16

In 2014, Stewart Corp. properly accrued $5,000 for an income item on the basis of a reasonable estimate. In 2015, after filing its 2014 federal income tax return, Stewart determined that the exact amount was $6,000.
Which of the following statements is correct?

Under the accrual method of accounting, income is reported once all events to establish a taxpayer's right to receive the income have occurred and the amount can be determined with reasonable accuracy.
If an amount of income has been accrued on the basis of a reasonable estimate with the exact amount to be determined at a later date, any difference between the estimate and exact amount is to be included in income or deducted in the year when the exact amount can be determined.

17

Clark bought series EE U.S. Savings Bonds in 2015. Redemption proceeds will be used for payment of college tuition for Clark's dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the

Taxpayers redeeming qualified U.S. Series EE Bonds in the same year that qualified higher education expenses are paid may exclude the interest income on the bonds from gross income. The conditions that must be met for tax exemption of accumulated interest on these bonds is that the purchaser of the bond must have made the purchase after reaching the age of 24 and be the sole owner of the bonds (or joint owner with his or her spouse).
As this response states that one of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse), it is correct.

18

Blake, a single individual age 67, had a 2015 adjusted gross income of $60,000 exclusive of social security benefits. Blake received social security benefits of $8,400 and interest of $1,000 on tax-exempt obligations during 2015. What amount of social security benefits is excludable from Blake's 2015 taxable income?

PI = AGI + tax-exempt interest + 50% (SSB)
PI = $60,000 + $1,000 + 50% (8,400) = $65,200.

Since PI ($65,200) exceeds Base Amount 2 ($34,000), then the taxable amount of SSB is the lesser of:
.85 x SSB ($8,400) = $7,140, or
.85 x [PI - BA2; $65,200 - $34,000) = $26,520, plus the lesser of
amount included based on the 50% formula (50% x $8,400) = $4,200, or
$4,500 (unless married filing joint, then $6,000), which provides $26,520 + $4,200 = $30,720 for part b of the formula.
Thus, the amount included in income is the lower of $7,140 or $30,720, so the amount excluded is $1,260 ($8,400 - $7,140).

19

Fuller was the owner and beneficiary of a $200,000 life insurance policy on a parent. Fuller sold the policy to Decker, for $25,000. Decker paid a total of $40,000 in premiums.
Upon the death of the parent, what amount must Decker include in gross income?

Decker's cost basis is the $25,000 he paid for the policy plus the $40,000 he paid in premiums. $200,000 less $65,000 = $135,000.

20

Lake Corp., an accrual-basis calendar year corporation, had the following 2014 receipts:
2015 advanced rental payments where the lease ends in 2015 $125,000
Lease cancellation payment from a 5-year lease tenant 50,000
Lake had no restrictions on the use of the advanced rental payments and renders no services. What amount of income should Lake report on its 2014 tax return?

For accrual based taxpayers, items generally are included in gross income for the year in which the income is earned. However, for tax purposes, income is earned when 1) all the events have occurred to attach the taxpayer's right to receive the income and 2) the amount of income can be determined with reasonable accuracy. Cash based taxpayers report income when it is actually received or constructively received (i.e., in the taxpayer's control).
Since there are no restrictions on the advance lease payments or the lease cancellation payment and no services need to be rendered, Lake Corp. has a right to receive the advance lease payments and the lease cancellation payments in the current year. The payments also can be determined with reasonable accuracy. Hence, both the advance lease payments and the lease cancellation payments should be reported on Lake Corp.'s tax return.

This response includes both the advance lease payments and the lease cancellation payments in Lake Corp.'s taxable income.