tax chap 8

In computing current taxable income for a corporate taxpayer, capital losses

can only be deducted against capital gains.

The installment sale method

cannot be used to defer gains on the sale of inventory items.

In the case of an installment sale, the seller's tax basis in the purchaser's note equals the face amount of the note

reduced by deferred gain.

In most cases, gains or losses must be recognized before it can be realized.

Blank 1: fair Blank 2: market Blank 3: value

The amount realized on a property disposition equals cash received plus the of any other property received.

Blank 1: fair Blank 2: market Blank 3: value

Mega Inc. sold an office building this year, generating $50,000 of gain. The building had $400,000 of accumulated depreciation for tax purposes, computed using the straight-line method. How much depreciation recapture does Mega recognize on the sale?

$10,000

This year, Allen Company incurred the following capital gains and losses: $(5,000) loss, $8,000 gain, $(12,000) loss. Allen's book/tax difference this year related to capital losses is

$9,000 unfavorable.

Evan Company sold a depreciable asset this year for $100,000. The asset had a book basis of $65,000 and a tax basis of $53,000. Evan's book/tax difference from this sale is

$12,000 unfavorable.

ABC sold land on an installment basis this year. The sale generated a realized gain of $400,000, with $50,000 recognized this year for tax purposes. ABC's book/tax difference from this sale is

$350,000 favorable.

ABC sold land on an installment basis last year. The sale generated a realized gain of $400,000, with $50,000 recognized this year for tax purposes. ABC's book/tax difference this year from this sale is

$50,000 unfavorable. Reason: $50,000 tax gain - $0 book gain this year

Which of the following statements regarding the character of accounts receivable for tax purposes is false?

Accounts receivable arising from the performance of services are Section 1231 assets.

Which of the following is the correct calculation of realized gain or loss?

Amount realized minus adjusted tax basis

Which of the following statements regarding book/tax differences related to asset dispositions is false?

Asset dispositions typically result in permanent book/tax differences.

Ben sold two Section 1231 assets this year. The first generated a $5,000 gain of which $3,000 is depreciation recapture. The second generated a $1,500 loss. Which of the following is the correct characterization of Ben's $3,500 net gain?

Ben recognizes $3,000 of ordinary income and a $500 net capital gain.

Jane sold stock to her brother, Bill, at a loss of $10,000. Because they are related parties, Jane was not permitted a tax deduction for the loss. If Bill subsequently sells the stock with a realized gain of $12,000,

Bill is permitted to offset Jane's disallowed loss against his gain, recognizing only a $2,000 gain on his tax return.

Realized gain or loss on a property disposition equals amount realized minus the of the property.

Blank 1: adjusted Blank 2: tax Blank 3: basis

If a depreciable asset is sold at a gain and accumulated tax depreciation on the asset is greater than accumulated book depreciation, the tax gain on sale will be than the book gain on sale.

Blank 1: greater or more

Which of the following is the correct formula for calculating gain recognized under the installment sale method?

Cash payments received x (gain realized/sales price)

Which of the following are included in amount realized on a property disposition? (Select all that apply.)

Cash received Fair market value of property received Purchaser's promissory note

Which of the following is considered a capital asset? (Select all that apply.)

Corporate stock Partnership interests Self-created goodwill

Which of the following statements regarding depreciation recapture is false?

Depreciation recapture creates additional gain on the sale of depreciable property that is characterized as ordinary gain.

Ella sold three Section 1231 assets this year, producing the following gains and losses: $(6,000) loss, $2,000 gain, $11,000 gain. In the past five years, Ella reported $4,000 of net Section 1231 losses. Which of the following is a correct application of the Section 1231 netting process?

Ella's $7,000 net Section 1231 gain is treated as a $4,000 ordinary gain and a $3,000 capital gain.

Ella sold three Section 1231 assets this year, producing the following gains and losses: $(6,000) loss, $2,000 gain, $11,000 gain. Which of the following is a correct application of the Section 1231 netting process?

Ella's $7,000 net Section 1231 gain is treated as a capital gain.

Which of the following transactions results in a capital gain or loss? (Select all that apply.)

Exchange of a capital asset for inventory Sale of a capital asset on an installment basis

Which of the following is considered a Section 1231 asset? (Select all that apply.)

Factory building held for 10 years Machinery used in a business and held for five years

True or false: In periods of inflation, the calculation of gain or loss for tax purposes understates the true return on investment in assets held long-term.

False

Gretchen sold business machinery this year for $10,000. The machinery had an adjusted tax basis of $3,500. Which of the following recapture rules applies to this sale?

Full recapture

George sold three Section 1231 assets this year, producing the following gains and losses: $(27,000) loss, $3,000 gain, $12,000 gain. Which of the following is a correct application of the Section 1231 netting process?

George's $(12,000) net Section 1231 loss is treated as an ordinary loss.

The Section 1231 netting process treats: (Select all that apply.)

net Section 1231 gains as capital gains. net Section 1231 losses as ordinary losses.

Which of the following is an advantage of capital gains treatment for tax purposes? (Select all that apply.)

Individual taxpayers qualify for preferential tax rates on net capital gains. Capital gains permit the deduction of capital losses.

By definition, which of the following are not capital assets? (Select all that apply.)

Inventory Artistic compositions held by their creator Depreciable property used in a business

Which of the following is considered a capital asset? (Select all that apply.)

Investment land Bonds

Which of the following cannot be deferred using the installment sale method? (Select all that apply.)

Loss on the sale of investment land Gain on the sale of inventory items Depreciation recapture on sale of business assets

Which of the following are characteristics of inventory? (Select all that apply.)

Manufactured or distributed for sale to customers Tangible property Sold as part of firm's everyday operations

Which of the following is not considered a Section 1231 asset?

New delivery truck purchased this year

Robert sold business machinery this year for $10,000. The machinery had an adjusted tax basis of $11,500. Which of the following recapture rules applies to this sale?

No recapture required

Which of the following actions could result in gain on the sale of land being characterized as ordinary income rather than capital gain? (Select all that apply.)

Subdividing and improving the land prior to sale Advertising the availability of the land to the public

Which of the following items related to properly dispositions are included in a net cash flow calculation? (Select all that apply.)

Tax savings from recognized losses increase cash flow Cash sales proceeds increase cash flow

Individual taxpayers with excess capital losses are

allowed an indefinite carry forward of such losses for deduction against future capital gains.

Raven Company owns a piece of land in a dangerous area. It has agreed to give up ownership of the land to the county government. This abandonment results in

an ordinary loss equal to the tax basis of the land.

When a corporation owns stock in an affiliated corporation and such stock becomes worthless,

an ordinary loss is recognized equal to the tax basis of the shares.

If a business chooses to formally relinquish ownership of a Section 1231 asset,

an ordinary loss is recognized, equal to the adjusted tax basis of the asset.

Business supplies

are considered a noncapital asset.

Interest payments received by a seller associated with an installment sale

are recognized by the seller as ordinary income.

Book/tax differences related to the installment sale method: (Select all that apply.)

are typically favorable in the year of the sale. reverse over time as the installment note is collected.

Individuals incurring capital losses

can deduct such losses against capital gains and up to $3,000 per year in excess of capital gains.

The ultimate character of Section 1231 gains and losses: (Select all that apply.)

depends on whether there are net gains or net losses for the year. cannot be determined until the end of the tax year. is either ordinary or capital.

True or false: Annual interest payments received by a seller in an installment sale are generally taxable with the sale character as the underlying property sold.

false

A capital gain or loss arises

from the sale or exchange of a capital asset.

Under the installment sale method of accounting,

gain is recognized as payments are received from the purchaser, proportionate to the gain realized.

Under the realization principle of accounting: (Select all that apply.)

gain or loss is realized when an asset is converted to a different asset through an external transaction with another party. increases and decreases in the value of assets are not included in current income.

The effect of depreciation recapture on the characterization of gains and losses is to change the character of some Section 1231

gains to ordinary gains.

The capital loss limitation: (Select all that apply.)

generally results in a temporary book/tax difference. produces a favorable difference when losses are used through carry forward in the future.

The capital loss limitation applies

if the taxpayer has capital losses in excess of capital gains.

If a seller defers gain on receipt of a note in an installment sale transaction, the conversion of that note to cash

immediately triggers recognition of the remaining deferred gain.

The amount realized on a property disposition

includes the amount of any debt on the property from which the seller is relieved of liability.

When a seller of property accepts a buyer's promissory note as part of the sales proceeds, the amount realized on the sale

includes the principal amount of the note.

For purposes of the loss disallowance on related party sales, an individual is a related party to a corporation if that individual owns

more than 50 percent of the value of the corporation's stock.

Section 291 recapture: (Select all that apply.)

is also referred to as a 20 percent recapture. only applies to corporate taxpayers.

Nonrecourse debt

is typically secured by specific property pledged as collateral for the loan.

In order for a loss on worthless securities to be characterized as ordinary, the: (Select all that apply.)

issuer of the securities must be a domestic corporation. investor must control 80 percent or more of the stock of the issuer of the securities. investor must be a corporation.

A casualty or theft of business assets: (Select all that apply.)

may result in no deductible loss if the assets are insured for more than their tax basis. produces an ordinary loss equal to the excess of the tax basis of the assets over any insurance reimbursement.

The full recapture rule: (Select all that apply.)

treats as ordinary income the lesser of gain recognized or accumulated depreciation/amortization. applies to gains on sale of depreciable personalty and amortizable intangibles.

Two years ago, Delta Company sold an asset on an installment basis. Delta had $250,000 of realized gain on the sale and has recognized $75,000 of such gain over the past two years. This year, Delta sold the installment receivable to a finance company in exchange for cash. How much gain must Delta recognize on the sale of the note?

$175,000

Maxwell sold an office building this year, generating $30,000 of gain. The building had $400,000 of accumulated depreciation for tax purposes. Straight-line depreciation would have been $380,000. What is the character of Maxwell's gain?

$20,000 ordinary income and $10,000 Section 1231 gain

Gamma Company owns investment land with a cost of $300,000 subject to a $250,000 nonrecourse debt. Gamma had not made the required payments on the debt and the lender foreclosed and took ownership of the land. If the value of the land on the day of the foreclosure was $220,000, what are the tax consequences of the foreclosure to the lender?

$30,000 bad debt loss

Beta Company is a cash-basis taxpayer. To generate cash for use in its operations, Beta sold accounts receivable with a face amount of $50,000 to a finance company for $47,000. What is the amount and character of any gain or loss recognized by Beta on the sale?

$47,000 ordinary income

During the current year, Alpha Corporation recognized the following capital gains and losses: $4,000 capital gain, $(15,000) capital loss, $1,000 capital gain. How much of Alpha's capital loss can be deducted in the current year?

$5,000

Maxwell sold an office building this year, generating $50,000 of gain. The building had $500,000 of accumulated depreciation for tax purposes. Straight-line depreciation would have been $440,000. How much depreciation recapture does Maxwell recognize on the sale?

$50,000

This year, ABC sold investment land with a tax basis of $500,000. The purchaser paid $100,000 cash and gave a note with a principal amount of $900,000, payable over 10 years beginning next year. How much gain will ABC recognize this year on this installment sale?

$50,000 Reason: $100,000 cash received x $500,000 gain realized/$1 million sales price.

Gamma Company owns investment land with a cost of $300,000 subject to a $250,000 nonrecourse debt. Gamma had not made the required payments on the debt and the lender foreclosed and took ownership of the land. If the value of the land on the day of the foreclosure was $220,000, what are the tax consequences of the foreclosure to Gamma?

$50,000 capital loss Reason: $250,000 debt relief - $300,000 cost = $50,000 loss. Loss is capital, since the land is held for investment.

ABC sold machinery this year for $10,000. The asset's original cost was $15,000 and accumulated tax depreciation through the date of sale is $12,000. The amount and character of ABC's gain on sale is

$7,000 ordinary income.

During the current year, Adam Smith recognized the following capital gains and losses: $4,000 capital gain, $(15,000) capital loss, $1,000 capital gain. How much of Adam's capital loss can be deducted in the current year?

$8,000

Below, in random order, are the steps for determining the tax consequences of property dispositions. Place these steps in the correct order.

1. calculate realized gain or loss on each property disposition 2. calculate recognized gain or loss on each property disposition 3. determine the character of each recognized gain or loss 4. apply the section 1231 netting rules 5. determine net capital gain or loss 6. apply the capital loss limitations

Grady sold a building with a mortgage of $450,000. The buyer assumed the mortgage and gave Grady cash of $75,000 to purchase the building. Grady's amount realized on the sale is $.

Blank 1: 525,000 or 525000

When land is used in the taxpayer's trade or business, rather than held as an investment, gain on the sale of such land should be characterized as gain instead of gain.

Blank 1: Section or Sec. Blank 2: 1231 Blank 3: capital

Realized gain or loss on a property disposition equals on the disposition minus the adjusted tax basis of the property.

Blank 1: amount Blank 2: realized

The Internal Revenue Code defines the term by exception -- in other words, by defining what it is not.

Blank 1: capital Blank 2: asset

In characterizing gains as ordinary or capital, taxpayers would generally prefer gains rather than gains.

Blank 1: capital Blank 2: ordinary

Tax costs from recognized gains net cash flow, while tax savings from recognized losses net cash flow.

Blank 1: increase Blank 2: decrease or reduce

In periods of inflation, the true economic gain on sale of of an investment is than the gain recognized for tax purposes.

Blank 1: less or lower

When characterizing gain or loss, accounts receivable arising from sale of inventory items to customers are treated as assets.

Blank 1: ordinary Blank 2: income or gain

In a seller-financed sale, the calculation of amount realized on the sale should include the amount of the buyer's debt obligation.

Blank 1: principal

Under the principle, increases and decreases in asset value are not accounted for as income.

Blank 1: realization

For each property disposed of, the taxpayer must first determine gain or loss on the disposition, then the amount of such gain or loss that is .

Blank 1: realized Blank 2: recognized

In distinguishing between recourse and nonrecourse debt, a(n) debt is one for which the lender can hold the debtor personally liable for repayment, regardless of the value of the property securing the debt.

Blank 1: recourse

A capital gain or loss results when a capital asset is disposed of in a(n) or transaction.

Blank 1: sale Blank 2: exchange

Which of the following is not considered a capital asset?

Business machinery

Which of the following are characteristics of inventory? (Select all that apply.)

Held for sale to customers Noncapital assets

Which of the following statements regarding related party losses is false?

If the related parties can provide evidence that the sale price represents economic value, a loss on a related party sale can be recognized.

Which of the following statements regarding realization and recognition of gains or losses is false?

In most cases, gains or losses must be recognized before it can be realized.

Which of the following are considered related parties for purposes of the disallowance of losses on related party sales? (Select all that apply.)

Two corporations controlled by the same shareholders A corporation and an individual owning more than 50 percent of the corporation's stock Family members

Which of the following is considered a Section 1231 asset? (Select all that apply.)

Warehouse Land on which an office building is located

Alan owns 500 of the 1 million shares outstanding in Mega Corporation. Mega has recently filed for bankruptcy and notified shareholders that their stock is worthless. If Alan's tax basis in the shares is $100,000, he recognizes

a $100,000 capital loss on worthlessness of the stock.

Graham Company's office building was destroyed in a fire. The building had an adjusted tax basis of $5 million, and Graham received $4.5 million from its insurance company in compensation for its loss. For tax purposes, Graham recognizes

a $500,000 ordinary casualty loss.

For tax purposes, gains or losses become gains or losses unless specifically exempt or disallowed.

realized recognized

Identifying the character of recognized gains and losses on property dispositions: (Select all that apply.)

determines whether losses are currently deductible. is a critical step in determining the impact of such dispositions on taxable income. determines whether gains may be taxed at preferential rates.

The rules regarding carry back and carry forward of capital losses

differentiate between individual taxpayers and corporations.

In general, the seller's basis in a purchaser note, received in a seller-financed sale

equals the note's face value.

When a taxpayer has multiple Section 1231 gains and losses for the year,

net Section 1231 gains are treated as capital gains.

Zeta Company is preparing to close its doors. It has a large quantity of unused business supplies which it offers for sale to other local businesses. The sale of these supplies results in

ordinary income or loss.

Corporate taxpayers with excess capital losses are

permitted to carry such losses back 3 years and forward 5 years for deduction against capital gains.

The partial recapture rule: (Select all that apply.)

produces depreciation recapture only if real property has been depreciated using an accelerated method. is also referred to as Section 1250 recapture.

The realization principle

provides that unrealized increases in asset value are not currently taxable.

When stock or securities become worthless, the general rules for tax purposes: (Select all that apply.)

result in a capital loss equal to the tax basis of the asset. treat such assets as sold on the last day of the taxable year for a price of zero.

In theory, losses between related parties should not be deductible because: (Select all that apply.)

such losses may not represent true economic losses to the seller. related parties may not be negotiating at arm's length, thus the loss may be fictitious.

In defining a capital asset,

the Internal Revenue Code provides a list of assets that are not considered capital.

True or false: The amount realized equals the value of the property surrendered.

true