Tax chapter 16

Georgia purchased for $1,610 a $2,000 bond when it was issued two years ago. Georgia amortized $200 of the original issue discount and then sold the bond for $1,800. Which of the following statements is true? a.Georgia has $10 of long-term capital loss. b.Georgia has $190 of long-term capital loss. c.Georgia has $390 of long-term capital loss. d.Georgia has $190 of long-term capital gain. e.Georgia has no capital gain or loss.

A Georgia's original basis of $1,610 is increased by the $200 of original issue discount amortization. Her basis is $1,810 when she sells the bond for $1,800; her loss is $10 and is long term. ($1,610 + $200) - $1,800 = $10.

A worthless security had a holding period of 11 months when it became worthless on November 10, 2019. Gladys, who has owned the security, has a basis of $10,000 for it. Which of the following statements is true? a.Gladys has a long-term capital loss of $10,000. b.Gladys has a long-term capital gain of $10,000. c.Gladys has a capital loss carryover of $7,000. d.Gladys has a short-term capital loss of $10,000. e.Gladys has a nondeductible loss of $10,000.

A Section 165(g)(1) provides that if a security becomes worthless during the tax year, the loss is treated as if it occurred on the last day of the tax year. On the last day of the tax year, the security would have been held for more than a year.

Joseph has the following capital gains and losses for 2019: $6,000 STCL, $5,000 28% gain, $2,000 25% gain, and $6,000 0%/15%/20% gain. Which of the following statements is true? a.The net capital gain is composed of $1,000 25% gain and $6,000 0%/15%/20% gain. b.The net capital gain is composed of $1,000 28% gain and $6,000 0%/15%/20% gain. c.The net capital gain is composed of $5,000 28% gain, $2,000 25% gain, and $2,000 0%/15%/20% gain. d.The net capital gain is composed of $5,000 28% gain and $2,000 0%/15%/20% gain. e.The net capital gain is composed of $3,000 28% gain, $2,000 25% gain, and $2,000 0%/15%/20% gain.

A The $6,000 STCL first offsets the highest tax rate gain, then any remaining loss offsets the next highest tax rate gain. Thus, $6,000 STCL - $5,000 28% gain - $1,000 25% gain leaves $1,000 25% gain and $6,000 0%/15%/20% gain.

Sanchez Corporation has ordinary income from operations of $40,000, net long-term capital gain of $12,000, and net short-term capital loss of $18,000. What is the taxable income for 2019? a.$40,000 b.$46,000 c.$47,000 d.$34,000 e.$49,000

A The net capital loss is $6,000 ($18,000 NSTCL - $12,000 NLTCG). However, corporate taxpayers are not permitted to deduct net capital losses against ordinary income. Therefore, the taxable income of $40,000 consists of the ordinary income from operations.

Clover, Inc., has a 2019 $50,000 long-term capital gain included in its $185,000 taxable income. Which of the following statements is true? a.Clover will benefit from an alternative tax on net capital gains computation. b.Clover's regular tax on taxable income will be greater than its tax using an alternative tax on net capital gain approach. c.Clover's regular tax on taxable income will be less than its tax using an alternative tax on net capital gain approach. d.Clover's regular tax on taxable income will be the same as its tax using an alternative tax on net capital gains approach. e.Clover's $50,000 net capital gain is not taxable.

D Although there is an alternative tax on net capital gains for corporations, it yields the same tax result as the regular computation method. This unusual result is caused by the fact that the alternative tax rate and the maximum regular tax rate are both 35%.

A worthless security had a holding period of 11 months when it became worthless on November 10, 2019. Gladys, who has owned the security, has a basis of $10,000 for it. Which of the following statements is true? a.Gladys has a nondeductible loss of $10,000. b.Gladys has a capital loss carryover of $7,000. c.Gladys has a long-term capital gain of $10,000. d.Gladys has a long-term capital loss of $10,000. e.Gladys has a short-term capital loss of $10,000.

D Section 165(g)(1) provides that if a security becomes worthless during the tax year, the loss is treated as if it occurred on the last day of the tax year. On the last day of the tax year, the security would have been held for more than a year.

Paul is a mechanical engineer and, while unemployed, invents a switching device for computer networks. He patents the device, but does not reduce it to practice. Paul has a zero tax basis for the patent. In consideration of $300,000 plus a $1 royalty per device sold, Paul assigns the patent to a computer manufacturing company. Paul assigned all substantial rights in the patent. Which of the following statements is true? a.Paul automatically has long-term capital gain from the lump-sum payment, but not from the royalty payments. b.Paul does not have automatic long-term capital gain from either the lump-sum payment or the royalty payments. c.Paul has long-term capital gain from the lump-sum payment, and a short-term capital gain from the royalty payments. d.Paul automatically has long-term capital gain from the royalty payments, but not from the lump-sum payment. e.Paul automatically has long-term capital gain from both the lump-sum payment and the royalty payments.

E Since Paul meets the definition of a holder, he receives automatic long-term capital gain treatment for both the lump-sum payment and the royalty payments.

In 2018, Lilith had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction. In 2019, Lilith has a $16,000 0%/15%/20% long-term capital gain and no other capital gain or loss transactions. Which of the following statements is true? a.Lilith has a 2019 $7,000 net capital loss. b.Lilith has a 2019 $7,000 capital loss deduction. c.Lilith has a 2019 $18,000 net capital gain. d.Lilith has a 2019 $3,000 capital loss deduction. e.Lilith has a 2019 $7,000 net capital gain.

E The 2018 capital loss carryforward is $9,000 ($12,000 2018 net capital loss - 2018 $3,000 capital loss deduction). The $9,000 carries forward as a short-term capital loss and is offset against the $16,000 long-term capital gain.

Corporate taxpayers are not concerned about capital gains and losses, since there is no reduced tax rate available for long-term capital gains. True False

False Corporate taxpayers are concerned about capital gains and losses for a variety of reasons. For example, for corporate taxpayers, capital losses offset only capital gains. No deduction of capital losses is permitted against ordinary taxable income.

Corporations may carry forward unused capital losses indefinitely, but there is no carryback. True False

False Corporations may carry back net capital losses (whether long-term or short-term) as short-term capital losses for three years; if losses still remain after the carryback, the remaining losses may be carried forward five years.

For corporate taxpayers, long-term capital gains may be taxed at a lower rate than ordinary gains. True False

False For corporate taxpayers, there is no net capital gain alternative tax rate.

Goodwill can be allocated to the known assets acquired in a sale when a business is sold. True False

False Goodwill has no basis and represents a residual portion of the selling price that cannot be allocated reasonably to the known assets. As a result, the amount of goodwill represents capital gain. All of the others are factors of goodwill.

Nonbusiness bad debt is treated as a long-term capital loss. True False

False In the year the receivable becomes completely worthless, it is a nonbusiness bad debt, and the bad debt is treated as a short-term capital loss. Even if the receivable was outstanding for more than one year, the loss is still a short-term capital loss.

Individuals may carry unused capital losses back one year and forward indefinitely. True False

False Individuals may carry forward unused capital losses indefinitely, but there is no carryback.

Net short-term capital gain is eligible for one or more of five alternative tax rates: 0%, 15%, 20%, 25%, and 28%. True False

False Net short-term capital gain is not eligible for any special tax rate. It is taxed at the same rate as the taxpayer's other taxable income. The given rates are for net long-term capital gain.

Noncorporate taxpayers that have net capital loss may only deduct up to $3,000 per year. Any excess is carried back and then forward to future tax years. True False

False Noncorporate taxpayers are allowed to carry over unused capital losses indefinitely. The short-term capital loss (STCL) retains its character as STCL. Likewise, the long-term capital loss retains its character as LTCL.

If a capital asset is sold at a loss, the holding period is not important. True False

False The holding period (short- or long-term) is required to determine whether a short- or long-term capital loss has occurred.

Long-term capital gains of noncorporate taxpayers may be taxed at a higher rate than ordinary gains. True False

False The opposite is true. Long-term capital gain should be recognized because it is subject to a lower tax rate

A short sale for the box occurs when the stock is borrowed from a broker by a seller and the seller already owns the substantially identical securities on the short sale date or acquires them before the closing date. True False

False This would be a short sale against the box.

Ordinary losses are generally preferable to capital losses because net capital losses are subject to significant deduction limitations. True False

True For noncorporate taxpayers, a net capital loss is only deductible up to $3,000 per year.

If a capital asset is sold at a loss, the holding period is still important. True False

True The holding period (short- or long-term) is required to determine whether a short- or long-term capital loss has occurred.

An individual taxpayer received a valuable painting from his uncle, a famous painter. The painter created the painting. After the taxpayer held the painting for six months, he sold it for a $400,000 gain. The painting is not a capital asset because it was received from its creator by gift. True False

True The painting is not a capital asset because it was received from its creator by gift. Therefore, the gain is not a capital gain; it is an ordinary gain.

Noncorporate long-term capital gains may be taxed at a lower rate than ordinary gains. True False

True The tax law requires capital gains and capital losses to be separated from other types of gains and losses. There are two reasons for this treatment. First, long-term capital gains may be taxed at a lower rate than ordinary gains. Second, a net capital loss is subject to deduction limitations.

Lavender Company sells inventory for $40,000. The adjusted basis of the property is $58,000 at the time of the sale, and the inventory has been held more than one year. Lavender Company has: a.No gain or loss. b.An ordinary loss. c.A long-term capital loss. d.Sold a long-term capital asset. e.Sold a short-term capital asset.

B Inventory is an ordinary asset; therefore, the loss from its sale is an ordinary loss

Mocha Corporation has ordinary income from operations of $30,000, net long-term capital gain of $10,000, and net short-term capital loss of $15,000. What is the taxable income for 2019? a.$25,000 b.$30,000 c.$37,000 d.$27,000 e.$28,500

B The net capital loss is $5,000 ($15,000 NSTCL - $10,000 NLTCG). However, corporate taxpayers are not permitted to deduct net capital losses against ordinary income. Therefore, the taxable income of $30,000 consists of the ordinary income from operations.

In 2019, Hernando has a $7,000 short-term capital gain, a $50,000 28% long-term capital gain, and a $12,000 0%/15%/20% long-term capital gain. He also has a $1,000 short-term capital loss carryover and a $7,000 long-term capital loss carryover from 2018. What is Hernando's net 0%/15%/20% long-term capital gain? a.$11,000 b.$61,000 c.$12,000 d.$5,000 e.$4,000

C 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. Thus, the $1,000 short-term capital loss carryover is irrelevant to this question. A net long-term capital loss carries over as a long-term capital loss and is combined with the current year long-term items. The long-term loss carryover is first offset with 28% gain of the current year, then 25% gain, and then 0%/15%/20% gain until it is absorbed. Because the $7,000 long-term capital loss carryover is fully absorbed by the $50,000 28% long-term capital gain, the $12,000 0%/15%/20% long-term capital gain is unaffected.

Davis inherited a residence from his mother when she died. The mother had a tax basis of $566,000 for the residence when she died, and the residence was worth $433,000 at the date of her death. Which of the following statements is true? a.Davis may elect to have the holding period be considered short term. b.Davis's holding period for the residence is automatically short term. c.Davis's holding period for the residence includes his mother's holding period for the residence. d.Davis may elect to have the holding period be considered long term. e.Davis's holding period for the residence does not include his mother's holding period for the residence.

E Davis has an automatic long-term holding period because the residence is inherited property. Therefore, his holding period does not include his mother's holding period for the residence.

Liz acquires $2,000 of Ozark Corporation bonds for $1,950 in the open market. If the bonds are held to maturity, how is the gain or loss treated? a.$50 ordinary gain b.$0 gain or loss c.$50 ordinary loss d.$50 § 1231 gain e.$50 capital gain

E If the bonds are held to maturity, the $50 increase ($2,000 - $1,950) is treated as capital gain.

Dwayne is in the business of song writing. He writes jingles for television advertisements. He writes a jingle and sells it for a lump sum plus a royalty each time the jingle is played on TV. He has sold a(n): a.Capital asset for a short-term capital gain. b.Capital asset for a long-term capital gain. c.Capital asset for an ordinary gain. d.Ordinary asset for a capital gain. e.Ordinary asset for an ordinary gain.

E Since Dwayne is in the business of writing songs, the jingle is an ordinary asset and he has ordinary gain from its sale.

On July 1, 2019, Yates purchased an option to buy 1,000 shares of General, Inc., at $30 per share. He purchased the option for $2,000. It was to remain in effect for five months. The market experienced a decline during the latter part of the year, so Yates decided to let the option lapse as of December 1, 2019. On his 2019 tax return, Yates should report: a.A $2,000 § 1231 loss. b.No gain or loss. c.A $2,000 ordinary loss. d.A $2,000 long-term capital loss. e.A $2,000 short-term capital loss

E The lapse of the option is treated as a sale or exchange by § 1234(a)(2). Therefore, a short-term capital loss of $2,000 is recognized.

Capital losses are generally preferable to ordinary losses. True False

Ordinary losses are generally preferable to capital losses because net capital losses are subject to significant deduction limitations. For noncorporate taxpayers, a net capital loss is only deductible up to $3,000 per year.

Net short-term capital gain is not eligible for any special tax rate. True False

True Net short-term capital gain is not eligible for any special tax rate. It is taxed at the same rate as the taxpayer's other taxable income. However, net long-term capital gain is eligible for one or more of five alternative tax rates: 0%, 15%, 20%, 25%, and 28%

Individuals may carry forward unused capital losses indefinitely, but there is no carryback. True False

True Taxpayers are allowed to carry over unused capital losses indefinitely. The short-term capital loss (STCL) retains its character as STCL. Likewise, the long-term capital loss retains its character as LTCL.

Although a net capital gain receives favorable tax treatment, there is unfavorable treatment for capital losses. True False

True Although a net capital gain receives favorable tax treatment, there is unfavorable treatment for capital losses due to the $3,000 annual limitation. If the NCL includes both long-term and short-term capital loss, the short-term capital loss is counted first toward the $3,000 annual limitation.