ACC344 Exam 3 Ch 16

For corporations there is a net capital gain alternative tax rate of ...

35 percent.

realized gain depends on

amount realized and basis

For noncorporate taxpayers, an net capital loss (NCL) is deductible from gross income to the extent of ...

$3,000 per tax year.

Picco Company has accounts receivable of $50,000. Because Picco needs immediate cash, it sells the receivables for $40,000 to a financial institution. If Picco is a cash basis taxpayer, it has $ ________ of ___________ income.

$40,000 ordinary

ON EXAM just being a capital asset doesn't get you the special tax rate, you must meet 2 criteria:

test is cunjunctive and held long term (greater than a year = one year and a day)

If you're in the 10 or 15% bracket, your tax on capital gains is

0%

What are the 2 reasons for separating capital gains and losses from other types of gains and losses?

1. long term CAPITAL gains may be taxed at a lower rate than ordinary gains 2. net capital loss is subject to DEDUCTION LIMITATIONS

Roger inherited 100 shares of Periwinkle stock when his mother, Emily, died. Emily had acquired the stock for a total of $60,000 on November 15, 2013. She died on August 10, 2017, and the shares were worth a total of $55,000 at that time. Roger sold the shares for $36,000 on December 22, 2017. How much gain or loss does Roger recognize? What is the nature of that gain or loss?

11/15/13 = mom purchased for $60,000 Aug 10/17 = mom died FMV on date of death $55,000 12/22/17 = roger sold for $36,000 roger realized 36,000-55,000 = 19,000 loss realized recognized all of the loss inherited property = long term automatically

If you're in the bracket higher than 15% but lower than 39.6%, you're tax on capital gain is

15%

taxable income taxed at 39.6% gets you a capital gain tax rate of...

20%

Noncorporate taxpayers are allowed to deduct up to how much per year on a net capital loss?

3000 but can carry over any excess loss over the annual limit so it can be deducted in a future year

Corporations may carry back net capital losses as short-term capital losses for ____________ years; if losses still remain after the carryback, the remaining losses may carry forward ____________ years

3; 5.

Alison owns a painting that she received as a gift from her aunt 10 years ago. The aunt created the painting. Alison has displayed the painting in her home and has never attempted to sell it. Recently, a visitor noticed the painting and offered Alison $5,000 for it. If Alison decides to sell the painting, what tax issues does she face?

BASIS rec'd property as gift so must compute basis gift basis = donor's basis unless if date of gift the property was depreciated, then it depends on gain or loss - loss = basis is lower FMV gain = original basis of donor NEED PROOF from donor to find out basis, and appraisal for FMV/appreciated or depreciated holding period = donor's holding period = 10 years Realized gain/loss amt realized = 5000 basis = aunt's basis held for 10 yrs long term capital recognized gain character of gain/loss = ordinary or capital? depends on holding period

OID Original issue discount (OID)

Definition: The difference between the issue price of a debt obligation (e.g., a corporate bond) and the maturity value of the obligation when the issue price is less than the maturity value. OID represents interest and must be amortized over the life of the debt obligation using the effective interest method. The difference is not considered to be original issue discount for tax purposes when it is less than one-fourth of 1 percent of the redemption price at maturity multiplied by the number of years to maturity. §§ 1272 and 1273(a)(3).

Options

Definition: The sale or exchange of an option to buy or sell property results in capital gain or loss if the property is a capital asset. Generally, the closing of an option transaction results in short-term capital gain or loss to the writer of the call and the purchaser of the call option. § 1234.

T/F All substantial rights are considered transferred when the transfer is limited geographically within the issuing country or when the transfer is for a period less than the remaining life of the patent.

False

T/F Capital assets that are collectibles are eligible for the 0%/15%/20% alternative tax rate.

False

T/F In order for a transfer to meet the capital assets requirements, the holder of a patent does not need to be an individual; therefore the creator's employer qualifies as a holder

False

T/F Property disposition may only be by sale or exchange.

False

T/F The contingent franchise payments are capital gain income for the franchisor and an ordinary deduction for the franchisee when the transferor retains a significant power, right, or continuing interest.

False

T/F When a business is being sold, the buyer would prefer that the residual portion of the selling price be allocated to goodwill—a capital asset.

False

As a general rule, securities held by a dealer are considered to be ________________.

Inventory

On July 15, 2017, Wesley exchanges a business automobile he acquired on January 23, 2015 for another automobile in a qualifying like-kind exchange. The new automobile's holding period begins on:

January 23, 2015

c. Gabriel acquires land for $75,000 on February 5, 2014. He transfers the land by gift to Gilmore on July 31, 2017 when the land is worth $50,000. Gilmore sells the land on August 31, 2017 for $48,000. Gilmore's holding period for the land begins on:

July 31, 2017

if you acquire property by inheritance it's automatically...

Long term

Is an artistic composition held by a taxpayer whose efforts created the property considered a capital asset?

No

Is depreciable property or real estate used in a business a capital asset?

No

Is inventory a capital asset?

No

T/F Transfer of a patent is treated as the sale or exchange of a long-term capital asset when all substantial rights to the patent (or an undivided interest that includes all such rights) are transferred by a holder.

True

Ch 16

Property Transactions: Capital Gains and Losses

TOTAL taxable income $10 less capital gain $2 = non capital gain taxable income $8

STEP 1: Find out what TAX BRACKET you fall under based on your TOTAL taxable income STEP 2: Separate long term capital gains, net, apply special tax rate (less than bracket) STEP 3: Non CGTI taxed at ordinary rate

b. Zola acquires 250 shares of stock for $4,000 on September 7, 2012. She transfers the shares by gift to Mariana on April 28, 2017 when the stock is worth $12,000. Mariana's holding period for the stock begins on:

September 7, 2012

T/F A short-term capital loss carryover to the current year retains its character as short-term and is combined with the short-term items of the current year.

True

T/F Both the short and long-term capital losses retain their character when carried over.

True

T/F Dividends paid from current or accumulated earnings and profits of domestic and certain foreign corporations are eligible to be taxed at the 0%/ 15% / 20% long-term capital gain rates if they are qualified dividend income.

True

T/F Individuals who can receive income in the form of long-term capital gains or qualified dividend income have an advantage over taxpayers who cannot receive income in these forms.

True

T/F Section 1253 provides that a transfer of a franchise, trademark, or trade name is not a transfer of a capital asset when the transferor retains any significant power, right, or continuing interest in the property transferred.

True

T/F The alternative tax computation allows the taxpayer to receive the lower of the regular tax or the alternative tax on each layer of net capital gain or portion of each layer of net capital gain.

True

T/F The disposition of those assets by their creators usually results in ordinary gain or loss (unless the exception for musical compositions applies).

True

T/F The franchisee capitalizes the payments and amortizes them over 15 years.

True

T/F The long-term holding period is more than one year

True

T/F The three possible tax statuses are capital asset, § 1231 asset, or ordinary asset.

True

Hubert purchases all of the rights in a patent from the inventor who developed the patented product. After holding the patent for two years, Hubert sells all of the rights in the patent for a substantial gain. What issues does Hubert face if he wants to treat the gain as a long-term capital gain?

We need to know if the patent was reduced to practice before sold

Is a personal residence a capital asset?

Yes

Is an investment in mutual fund a capital asset?

Yes

is your home a capital asset?

Yes

is a car a capital asset?

Yes, assuming it's not used in business

long-term capital asset holding period

a year and a day = more than a year Aug 12 bought = must hold until Aug. 13 next day

If a dealer clearly identifies certain securities as held for investment purposes by the close of business on the ___________________ date, gain from the securities' sale will be _____________ capital

acquisition capital gain

You can only deduct up to 3000 per year of net capital loss against your other income

any loss you don't claim this year carries over indefinitely and it becomes a capital loss next year until you die or until you use it up

Who can be a holder of the patent? Rule

before it's introduced to practice original person who invented it or PERSON not entity or person who bought it from the inventor before put into practice

patents special rule

can get long term capital gain only if original inventor of patent owns all substantial rights to the patent

If an asset is held for personal use or investment use, or is of investment quality, it is a(n) ________________ asset

capital

Masahiko sells his personal computer at a $500 gain. Masahiko's gain is a _________________ gain.

capital

character of gain

capital or ordinary? depends on the holding period

netting rules for gains/losses

compute your taxable income separate into ordinary and capital set aside ordinary and compute normal tax rates for that within capital, netting process 6-20 Group the gains into subgroups depending on 0, 15, or 20 depends on tax rate/taxable income then net gains and losses within each subgroup netting long against long and short against short in both gains and losses offset results against 0,15,20% amounts If gains are greater than losses, either net long term capital gain or net short term capital gain or both If losses are greater than the gains,

If the NCL includes both long-term and short-term capital loss, the short-term capital loss is...

counted first toward the annual limitation.

Sarah received a gift of farmland from her father. The land was worth $4 million at the date of the gift, had been farmed by her father for 40 years, and had a tax basis for her father of $30,000. Sarah never farmed the land and sold it eight months after receiving it from her father for $4.2 million. What is Sarah's holding period for the farmland? What is the nature of the gain from its disposition?

donor's basis = 30,000 sold for 4.2 mil gain = 4,170,000 long term because tacks donor's holding period

holding period for gift

donor's holding period is tacked on to the recipient's holding period

holding period for property received as gift

donor's holding period tacked onto recipient's holding period

31. Mac, an inventor, obtained a patent on a chemical process to clean old aluminum siding so that it can be easily repainted. Mac has a $50,000 tax basis in the patent. Mac does not have the capital to begin manufacturing and selling this product, so he has done nothing with the patent since obtaining it two years ago. Now a group of individuals has approached him and offered two alternatives. Under one alternative, they will pay Mac $600,000 (payable evenly over the next 15 years) for the exclusive right to manufacture and sell the product. Under the other, they will form a business and contribute capital to it to begin manufacturing and selling the product; Mac will receive 20% of the company's shares of stock in exchange for all of his patent rights. Discuss which alternative is better for Mac.

has to be a holder, has to sell before reduced to practice, held for more than a year, and must dispose of all substantial rights mac is the holder, hasn't been reduced to practice holding period longer than a year owns all substantial rights because "exclusive"

What is meant by investment quality?

if the asset is expected to appreciate in value

What is a capital asset NOT?

inventory or property held primarily for sale to customers accounts and notes receivable generated from sale of goods depreciable property or real estate used in BUSINESS copyrights, patents, literary, musical, or artistic compositions US gov publications supplies used in a business

An individual taxpayer sells some used assets at a garage sale. Why are none of the proceeds taxable in most situations?

most tangible personal property you're selling it for more than you paid for it and you can't deduct personal losses

If a friend doesn't pay you back on a loan you gave, you can deduct that as a short term capital loss up to 3000/year

non business bad debts as long as it's not business related

Fred is an investor in vacant land. When he thinks he has identified property that would be a good investment, he approaches the landowner, pays the landowner for a "right of first refusal" to purchase the land, records this right in the property records, and then waits to see if the land increases in value. The right of first refusal is valid for four years. Fourteen months ago, Fred paid a landowner $9,000 for a right of first refusal. The land was selected as the site of a new shopping center, and the landowner was offered $1 million for the land. In its title search on the land, the buyer discovered Fred's right of first refusal and involved him in the purchase negotiations. Ultimately, the landowner paid Fred $220,000 to give up his right of first refusal; the landowner then sold the land to the buyer for $4,220,000. Fred has a marginal tax rate of 39.6%. What difference does it make whether Fred treats the right of first refusal as an option to purchase the land? What difference does it make whether Fred is a "dealer" in land?

normal option includes price which you can buy something, right of first refusal says if you sell it i get to buy it at whatever you sell it option is you get to buy it before X price if this was an option and he sold it he would get long term capital gain (since it's not a part of a business it's a capital asset) gain would be 220000-9000 if not an option, it could be ordinary income

The short sale gain is long-term when:

on the short sale date, the substantially identical property has been held for more than one year and is used to close the short sale.

The short sale gain or loss is short-term when:

on the short sale date, the substantially identical property has been held for one year or less.

Asset held for business use is a(n) ______________ asset

ordinary

If the asset is inventory for a business, it is a(n) _______________ asset

ordinary

Tobo Company buys and sells computers. Any gains from the sale of the computer are ______________ gains

ordinary

Assume Sari gives the painting to her aunt. The painting is an __________________ asset for the aunt. However, if the aunt inherits the painting from Sari, the painting is considered a _______________ asset.

ordinary capital

Sari is a part-time artist composer. A local art dealer purchases one of her paintings for $1,500. Sari has a $1,500 ____________ gain from the sale. However, if Sari makes the election, she will have a ____________ gain.

ordinary capital

sell something short term and recognize a gain on it it's considered...

ordinary income, no special tax treatment

No deduction of capital losses is permitted against...

ordinary taxable income.

holding period for an acquired asset in a non taxable exchange

original person's (who acquired the asset) holding period gets tacked on to yours, or the period you held the former property onto yours

You have to be a holder to get long term capital gain treatment

owner has to be own of all those rights for it to work

franchises trademarks and trade names special rule

person who transfers the asset if they retain any rights or powers then it's not a capital asset

what is a short sale? NOT ON EXAM

sell a stock short means need to have brokerage account and a margin brokerage account with credit selling something before yuo own it they give you proceeds of that sale it's an open transaction and doesn't close until you buy it sell it first, then wait a while and then you buy it you're betting that the price will go down shorting a stock means you're betting the stock price will fall can't do this until you have credit/ other securities in your account as collateral

If the substantially identical property is not used to close the short sale, the short sale gain is...

short-term

You cannot depreciate personal use assets or stock/investment assets, and inventory is not depreciable. Therefore, if an asset depreciates, it is evidence that...

the asset is held for business use and is an ordinary asset

Generally, a lessee's lease is a capital asset if

the property (either personalty or realty) is used for the lessee's personal use.

A lessee's lease is an ordinary income asset if

the property is used in the lessee's trade or business and the lease has existed for one year or less when it is canceled.

Payments received by a lessor for a lease cancellation are ordinary income because

they are considered to be in lieu of rental payments.

Anwar owns vacant land that he purchased many years ago as an investment. After getting approval to subdivide it into 35 lots, he made minimal improvements and then sold the entire property to a real estate developer. Anwar's recognized gain on the sale was $1.2 million. Is this transaction eligible for the "real property subdivided for sale" provisions? Why or why not?

to be treated as capital gain or loss, must satisfy holding period (long term yes) can't assume that he is a real estate dealer no substantial improvements made (says minimal so not substantial) taxpayer satisfies criteria so can claim capital gain rate automatically 39.6 % bracket no matter what filing status because the sale of 1.2mil

12. Dexter owns a large tract of land and subdivides it for sale. Assume that Dexter meets all of the requirements of § 1237 and during the tax year sells the first eight lots to eight different buyers for $22,000 each. Dexter's basis in each lot sold is $15,000, and he incurs total selling expenses of $900 on each sale. What is the amount of Dexter's capital gain and ordinary income?

total gain or loss amount realized 22,000 x 8 lots = 176,000 less selling expenses = 900 x 8 lots = 7200 net amount realized = 168800 Basis = 15,000 x 8 lots = 120000 Gain/loss realized = 48,800 gain must recognize - check character treat 5% of revenue as ordinary = 8800 reduce by all selling expenses 7200 = 1600 ordinary difference of gain realized 48800 - 1600 = 47200 capital

Noncorporate taxpayers are allowed to carry over ...

unused capital losses indefinitely.

8. At the date of a short sale, Sylvia has held substantially identical securities for more than 12 months. What is the nature of any gain or loss from the close of her short sale? NOT ON EXAM

when you hold identical sales for more than a year, her gain on the short sale will be long-term if sells at a loss.

holding period for short sale NOT ON EXAM

whether taxpayer holds substantially identical property same class of stock traded on exchange