tax chapter 16

An individual has the following recognized gains and losses from disposition of § 1231 assets (all the assets were vacant land): $15,000 gain, $10,000 loss, $25,000 gain, and $2,000 loss. The individual has a $5,500 § 1231 lookback loss. The individual also has a $16,000 net short-term capital loss from the disposition of stock. Which of the following statements is correct? a. The taxpayer has $5,500 ordinary gain and $6,500 net long-term capital gain. b. The taxpayer has $12,000 net long-term capital gain. c. The taxpayer has $28,000 ordinary gain and $16,000 net short-term capital loss. d. The taxpayer has $5,500 ordinary loss and $6,500 net long-term capital gain. e. None of the above.

A

Blue Company sold machinery for $45,000 on December 23, 2016. The machinery had been acquired on April 1, 2014, for $69,000 and its adjusted basis was $34,200. The § 1231 gain, § 1245 recapture gain, and § 1231 loss from this transaction are: a. $0 § 1231 gain, $10,800 § 1245 recapture gain, $0 § 1231 loss. b. $0 § 1231 gain, $0 § 1245 recapture gain, $14,800 § 1231 loss. c. $0 § 1231 gain, $34,200 § 1245 recapture gain, $0 § 1231 loss. d. $0 § 1231 gain, $10,800 § 1245 recapture gain, $34,200 § 1231 loss. e. None of the above.

A

Copper Corporation sold machinery for $47,000 on December 31, 2016. The machinery had been purchased on January 2, 2013, for $60,000 and had an adjusted basis of $41,000 at the date of the sale. For 2016, what should Copper Corporation report? a. Ordinary income of $6,000. b. A § 1231 gain of $3,000 and $3,000 of ordinary income. c. A § 1231 gain of $6,000. d. A § 1231 gain of $6,000 and $3,000 of ordinary income. e. None of the above.

A

Which of the following comparisons is correct? a. Corporations may carryback capital losses; individuals may not. b. Both corporation and individual long-term capital losses carryover as short-term capital losses. c. Corporations may carryforward capital losses indefinitely; individuals may only carryforward capital losses for five years. d. Both corporations and individuals may use an alternative tax rate on net capital gains. e. None of the above.

A

Which of the following creates potential § 1245 depreciation recapture and potential § 1231 gain? a. Depreciable office furniture held more than one year and sold for more than its original cost. b. Amortizable goodwill held more than one year and disposed of for less than its adjusted basis. c. Land held more than one year and sold for more than was paid for it. d. A note receivable held more than one year and sold for less than was paid for it. e. None of the above.

A

Which of the following events causes the purchaser of an option to add the cost of the option to the basis of the property to which the option relates? a. The option is exercised. b. The option is sold. c. The option lapses. d. The option is rescinded. e. None of the above.

A

A lessor is paid $45,000 by its commercial tenant as a lease cancellation fee. The tenant wanted to get out of its lease so it could move to a different building. The lessor had held the lease for three years before it was canceled. The lessor had a zero tax basis for the lease. The lessor has received: a. Ordinary income of $45,000. b. Long-term capital gain of $45,000. c. Short-term capital gain of $45,000. d. Neither gain nor loss. e. None of the above.

A (Payments received by a lessor as lease cancellation payments are always ordinary income because they are considered to be received in lieu of rent.)

Vertigo, Inc., has a 2016 net § 1231 loss of $64,000 and had a $32,000 net § 1231 gain in 2015. For 2016, Vertigo's net § 1231 loss is treated as: a. Ordinary loss. b. Ordinary gain. c. Capital loss. d. Capital gain. e. None of the above.

A (Since there is a 2016 net § 1231 loss, the loss is treated as an ordinary loss. Section 1231 lookback applies only if there is a current year § 1231 gain.)

Ryan has the following capital gains and losses for 2016: $6,000 STCL, $5,000 28% gain, $2,000 25% gain, and $6,000 0%/15%/20% gain. Which of the following is correct: 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 $5,000 28% gain and $2,000 0%/15%/20% gain. c. The net capital gain is composed of $3,000 28% gain, $2,000 25% gain, and $2,000 0%/15%/20% gain. d. The net capital gain is composed of $1,000 28% gain and $6,000 0%/15%/20% gain. e. None of the above.

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)

Virgil was leasing an apartment from Marple, Inc. Marple paid Virgil $1,000 to cancel his lease and move out so that Marple could demolish the building. As a result: a. Virgil has a $1,000 capital gain. b. Virgil has a $1,000 capital loss. c. Marple has a $1,000 capital loss. d. Marple has a $1,000 capital gain. e. None of the above.

A (since the apartment was Virgil's personal residence, Virgin will have a capital gain. Virgil has a zero basis for the lease. Therefore, the entire payment is capital gain. Whether the gain is long-term or short-term depends upon how long Virgil has held the lease. Marple has an ordinary deduction of $1,000.)

Lynne owns depreciable residential rental real estate which has accumulated depreciation (all from straight-line) of $65,000. If Lynne sold the property, she would have a $53,000 gain. The initial characterization of the gain would be: a. Section 1245 gain. b. Section 1231 gain. c. Section 1250 gain. d. Section 1239 gain. e. None of the above.

B ( because SL was used, it's not 1250 )

Assume a building is subject to § 1250 depreciation recapture because § 168(k) was used. The building is destroyed in a hurricane and this is the taxpayer's only casualty or theft for the year. In which of the following situations could there be a § 1250 depreciation recapture gain? a. There is a loss because the insurance recovery is less than the adjusted basis. b. There is a gain because the insurance recovery exceeds the adjusted basis. c. Because of the length of time the building has been held, there is no remaining additional depreciation. d. There is no insurance recovery and the adjusted basis of the building is greater than zero. e. None of the above.

B

Ramon is in the business of buying and selling securities. Which of the following is a capital asset for Ramon? a. The securities he buys and sells each day in the normal course of his business. b. The securities he designates as held for investment at the end of the day of acquisition. c. The securities he holds more than 12 months. d. All the securities he owns. e. b., c., and d.

B

Section 1239 (relating to the sale of certain property between related taxpayers) does not apply unless the property: a. Was depreciated by the transferor. b. Is depreciable in the hands of the transferee. c. Is a capital asset. d. Is real property. e. None of the above.

B

Spencer has an investment in two parcels of vacant land. Parcel 1 is a capital asset and parcel 2 is a § 1231 asset. Spencer already has short-term capital loss for the year he would like to offset with capital gain. Spencer has § 1231 lookback loss that exceeds the gain from the disposition of either land parcel. Spencer only wants to sell one land parcel and each of them would yield the same amount of gain. The gain that would be recognized exceeds the short-term capital loss Spencer already has. Which of the statements below is correct? a. Spencer will have a net capital loss no matter which land parcel he sells. b. Spencer will have a net capital loss if he sells parcel 2. c. Spencer will have a net capital loss if he sells parcel 1. d. Spencer will have a net capital gain if he sells either parcel 1 or parcel 2. e. None of the above.

B

Violet, Inc., has a 2016 $80,000 long-term capital gain included in its $285,000 taxable income. Which of the following is correct? a. Violet will benefit from an alternative tax on net capital gains computation. b. Violet's regular tax on taxable income will be the same as its tax using an alternative tax on net capital gains approach. c. Violet's $80,000 net capital gain is not taxable. d. Violet's regular tax on taxable income will be greater than its tax using an alternative tax on net capital gain approach. e. None of the above.

B

Which of the following is correct concerning short sales of stock? a. At the time the short sale is made, the taxpayer does not deliver to the purchaser the shares sold short. b. At the time the short sale is made, the taxpayer delivers to the purchaser the shares sold short. c. At the time the short sale is made, the taxpayer may already own the shares sold short. d. At the time the short sale is made, the taxpayer always already owns the shares sold short. e. None of the above.

B

Which of the following statements is correct? a. When depreciable property is gifted to another individual taxpayer, the depreciation recapture potential is extinguished. b. When depreciable property is inherited by a taxpayer, the depreciation recapture potential is extinguished. c. When corporate depreciable property is distributed as a dividend, the depreciation recapture potential is generally not recognized. d. When depreciable property is contributed to charity, the depreciation recapture potential has no effect on the amount of the charitable contribution deduction. e. All of the above are correct.

B

Cason is filing as single and has 2016 taxable income of $36,000 which includes $34,000 of 0%/15%/20% net long-term capital gain. What is his tax on taxable income using the alternative tax method? Note: Use the tax rate schedule rather than the tax table. a. $0 b. $200 c. $300 d. $4,936 e. None of the above

B (since his tax income does not put him out of the 15% tax bracket, the $34,000 is taxed at 0%. MEaning what's left is only 10% of the 2000 = $200) *15% tax bracket limit: $37 K

Which of the following real property could be subject to § 1250 depreciation recapture? a. Property placed in service after 1986 on which straight-line depreciation was taken. b. A building on which § 168(k) depreciation was taken. c. Equipment on which accelerated depreciation was taken. d. Land which was not depreciated. e. a. and b.

B (Section 1250 depreciation recapture requires a sale at a gain and additional depreciation that exceeds straight-line depreciation. A building on which § 168(k) additional first-year depreciation was taken could have depreciation that exceeds straight-line depreciation. A building acquired after 1986 is a MACRS building (i.e., straight-line method must be used)

A worthless security had a holding period of 6 months when it became worthless on December 10, 2016. The investor who had owned the security had a basis of $20,000 for it. Which of the following statements is correct? a. The investor has a long-term capital loss of $20,000. b. The investor has a short-term capital loss of $20,000. c. The investor has a nondeductible loss of $20,000. d. The investor has a short-term capital gain of $20,000. e. None of the above.

B (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 less than a year._

Verway, Inc., has a 2016 net § 1231 gain of $55,000 and had a $62,000 net § 1231 loss in 2015. For 2016, Verway's net § 1231 gain is treated as: a. $55,000 ordinary loss. b. $55,000 ordinary gain. c. $55,000 capital loss. d. $55,000 capital gain. e. None of the above.

B (Since the 2016 $55,000 net § 1231 gain is less than the $62,000 2015 § 1231 lookback loss, the entire $55,000 is treated as ordinary gain.)

Orange Company had machinery destroyed by a fire on December 23, 2016. The machinery had been acquired on April 1, 2014, for $49,000 and its adjusted basis was $14,200. The machinery was completely destroyed and Orange received $30,000 of insurance proceeds for the machine and did not replace it. This was Orange's only casualty or theft event for the year. As a result of this event, Orange has: a. $4,200 ordinary loss. b. $15,800 § 1245 recapture gain. c. $14,200 § 1245 recapture gain. d. $30,000 § 1231 gain. e. None of the above.

B (Since the machine was held more than 12 months and was depreciated, it was a § 1231 asset. However, since it was disposed of at a $15,800 gain ($30,000 insurance proceeds - $14,200 adjusted basis), all of the gain is initially § 1245 depreciation recapture gain and not casualty gain.)

White Company acquires a new machine for $75,000 and uses it in White's manufacturing operations. A few months after White places the machine in service, it discovers that the machine is not suitable for White's business. White had fully expensed the machine in the year of acquisition using § 179. White sells the machine for $60,000 in the tax year after it was acquired, but held the machine only for a total of 10 months. What was the tax status of the machine when it was disposed of and the amount of the gain or loss? a. A capital asset and $60,000 gain. b. An ordinary asset and $60,000 gain. c. A § 1231 asset and $60,000 gain. d. A § 1231 asset and $60,000 loss. e. None of the above.

B (The machine was depreciable property used in a business and held one year or less; so it was an ordinary asset. Since there was a zero basis, all of the $60,000 proceeds is taxable gain.)

In 2016, Mark has $18,000 short-term capital loss, $7,000 28% gain, and $6,000 0%/15%/20% gain. Which of the statements below is correct? a. Mark has a $5,000 capital loss deduction. b. Mark has a $3,000 capital loss deduction. c. Mark has a $13,000 net capital gain. d. Mark has a $5,000 net capital gain. e. Mark has a $18,000 net capital loss.

B (There is a net short-term capital loss of $5,000 ($18,000 short-term capital loss - $7,000 28% gain - $6,000 0%/15%/20% gain) of which $3,000 is deductible for AGI as a capital loss deduction.)

On June 1, 2016, Brady purchased an option to buy 1,000 shares of General, Inc. at $40 per share. He purchased the option for $3,000. It was to remain in effect for five months. The market experienced a decline during the latter part of the year, so Brady decided to let the option lapse as of December 1, 2016. On his 2016 tax return, what should Brady report? a. A $3,000 long-term capital loss. b. A $3,000 short-term capital loss. c. A $3,000 § 1231 loss. d. A $3,000 ordinary loss. e. None of the above.

B. Shares/ stock are capital

Which of the following assets held by a manufacturing business is a § 1231 asset? a. Inventory. b. Office furniture used in the business and held less than one year. c. A factory building used in the business and held more than one year. d. Accounts receivable. e. All of the above.

C

Vertical, Inc., has a 2016 net § 1231 gain of $67,000 and had a $22,000 net § 1231 loss in 2015. For 2016, Vertical's net § 1231 gain is treated as: a. $45,000 long-term capital gain and $22,000 ordinary loss. b. $67,000 ordinary gain. c. $45,000 long-term capital gain and $22,000 ordinary gain. d. $67,000 capital gain. e. None of the above.

C (The 2015 § 1231 loss is a lookback loss and converts $22,000 of the 2016 net § 1231 gain into ordinary gain. The $45,000 remaining of the $67,000 2016 net § 1231 gain is treated as long-term capital gain.)

A retail building used in the business of a sole proprietor is sold on March 10, 2016, for $342,000. The building was acquired in 2006 for $400,000 and straight-line depreciation of $104,000 had been taken on the building. What is the maximum unrecaptured § 1250 gain from the disposition of this building? a. $400,000 b. $322,000 c. $104,000 d. $26,000 e. None of the above

C (The maximum unrecaptured § 1250 gain is the $104,000 depreciation taken. That maximum is reduced to the $46,000 gain from the disposition [$342,000 sale price - ($400,000 cost - $104,000 depreciation taken)].)

In 2016, Satesh has $5,000 short-term capital loss, $13,000 0%/15%/20% long-term capital gain, and $7,000 qualified dividend income. Satesh is single and has other taxable income of $15,000. Which of the following statements is correct? a. No more than $13,000 of Satesh's taxable income is taxed at 0%. b. No more than $7,000 of Satesh's taxable income is taxed at 0%. c. No more than $15,000 of Satesh's taxable income is taxed at 0%. d. None of Satesh's taxable income is taxed at 0%. e. All of Satesh's taxable income is taxed at 0%.

C (The net long-term capital gain is $8,000 ($13,000 0%/15%/20% long-term capital gain - $5,000 short-term capital loss). The $7,000 qualified dividend income is added to the 0%/15%/20% net long-term capital gain and the $15,000 total is eligible for the 0%/15%/20% alternative tax rate)

The following assets in Jack's business were sold in 2016: Asset Holding Period Gain/(Loss) Office Equipment 6 years $1,100 Automobile 8 months ($ 800) ABC Stock (capital asset) 2 years $1,400 The office equipment had a zero adjusted basis and was purchased for $8,000. The automobile was purchased for $2,000 and sold for $1,200. The ABC stock was purchased for $1,800 and sold for $3,200. In 2016 (the year of sale), Jack should report what amount of net capital gain and net ordinary income? a. $1,700 LTCG. b. $600 LTCG and $300 ordinary gain. c. $1,400 LTCG and $300 ordinary gain. d. $2,500 LTCG and $800 ordinary loss. e. None of the above.

C (The sale of the office equipment results in a $1,100 § 1245 gain. The sale of the auto results in an ordinary loss of $800 because the auto was not held for the long-term holding period. The § 1245 gain of $1,100 offsets the $800 ordinary loss for a net ordinary gain of $300. The sale of the stock results in a $1,400 LTCG.)

Tan, Inc., sold a forklift on April 12, 2016, for $8,000 (its FMV) to its 100% shareholder, Ashley. Tan's adjusted basis for the forklift was $12,000. Ashley's holding period for the forklift: a. Includes Tan's holding period for the forklift. b. Begins on April 12, 2016. c. Begins on April 13, 2016. d. Does not begin until Ashley sells the forklift. e. None of the above.

C (When a loss is disallowed in a related party transaction, there is no carryover of holding period. Tan has a $4,000 realized loss on the sale of the forklift to Ashley and the loss is disallowed because Ashley is a related taxpayer. Ashley's holding period begins on the day after the property is acquired.)

A business taxpayer sells inventory for $80,000. The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year. The taxpayer has: a. No gain or loss. b. Sold a long-term capital asset. c. Sold a short-term capital asset. d. An ordinary gain. e. None of the above.

D

Martha has both long-term and short-term 2015 capital gains and losses. The result of netting these gains and losses is a net long-term capital loss. Martha has no qualified dividend income. Also, Martha's 2015 taxable income puts her in the 28% tax bracket. Which of the following is correct? a. Martha will use Parts I, II, and III of 2015 Form 1040 Schedule D. b. Martha will not benefit from the special treatment for long-term capital gains. c. Martha will have a capital loss deduction. d. All of the above. e. None of the above.

D

On June 10, 2016, Ebon, Inc. acquired an office building as a result of a like-kind exchange. Ebon had given up a factory building that it had owned for 26 months as part of the like-kind exchange. Which of the statements below is correct? a. The holding period of the factory building includes the holding period of the office building. b. The holding period of the office building starts on June 11, 2016. c. The holding period of the office building starts on June 10, 2016. d. The holding period of the office building includes the holding period of the factory building. e. None of the above.

D

An individual had the following gains and losses during 2016 on property held for the long-term holding period: sale of Orange common stock ($8,000 gain); sale of real property used in the taxpayer's business ($1,800 loss); destruction of real property used in the taxpayer's business by fire ($1,000 loss). Which of the following statements is correct? a. The fire loss would reduce the real property sale loss. b. The fire loss would reduce the stock sale gain. c. The sale of real property loss would be netted against the stock sale gain. d. The sale of real property is a § 1231 loss. e. None of the above.

D (The sale of the Orange stock produces an $8,000 LTCG, which is fully includible in gross income. The real property sale results in a net §1231 loss of $1,800. The real property $1,000 fire loss is treated as an ordinary loss because there are no casualty gains against which it can be netted.)

The tax law requires that capital gains and losses be separated from other types of gains and losses. Among the reasons for this treatment are: a. Long-term capital gains may be taxed at a lower rate than ordinary gains. b. Capital losses that are short-term are not deductible. c. Net capital loss is deductible only up to $3,000 per year for individual taxpayers. d. a. and c. e. None of the above.

D (Both a net long-term capital gain and a net capital loss are subject to special rules. Consequently, the capital gains and losses must be netted separately from other types of gains and losses.)

An individual has a $40,000 § 1245 gain, a $35,000 § 1231 gain, a $33,000 § 1231 loss, a $3,000 § 1231 lookback loss, and a $15,000 long-term capital gain. The net long-term capital gain is: a. $30,000. b. $40,000. c. $17,000. d. $15,000. e. None of the above.

D (None of the § 1231 gain survives to be treated as long-term capital gain. $33,000 of the $35,000 § 1231 gain is absorbed by the $33,000 § 1231 loss and the remaining $2,000 is treated as ordinary gain because of the $3,000 § 1231 lookback loss. The $40,000 of § 1245 gain is ordinary income.)

Seamus had $16,000 of net short-term capital loss in 2015. In 2016, Seamus has $17,000 of long-term capital loss and $26,000 of long-term capital gain. Which of the following statements is correct? a. Seamus had a $13,000 short-term capital loss carryover to 2016. b. Seamus has an $9,000 2016 net long-term capital gain. c. Seamus has a $4,000 2016 net short-term capital loss. d. a. and c. e. None of the above.

D (Seamus had a $3,000 capital loss deduction in 2015 and carried forward $13,000 of short-term capital loss. His 2016 net long-term capital gain is $9,000 ($26,000 long-term capital gain - $17,000 long-term capital loss). This net long-term capital gain is offset against the $13,000 short-term capital loss carryover and leaves a net $4,000 short-term capital loss.)

Hank inherited Green stock from his mother when she died. The mother had a tax basis of $366,000 for the Green stock when she died and the Green stock was worth $437,000 at the date of her death. Which of the statements below is correct? a. Hank's holding period for the Green stock includes his mother's holding period for the stock. b. Hank's holding period for the Green stock does not include his mother's holding period for the stock. c. Hank's holding period for the Green stock is automatically long term. d. b. and c. e. None of the above.

D. (hank's holding period is automatically long term therefore it does not include his mother's holding period)

Which of the following is correct? a. Improperly classifying a § 1231 loss as a capital loss might affect adjusted gross income. b. Improperly classifying a capital loss as a § 1231 loss might affect adjusted gross income. c. Misclassifying a § 1231 gain as a short-term capital gain might affect adjusted gross income. d. Misclassifying a short-term capital gain as a § 1231 gain might affect adjusted gross income. e. All of the above.

E

Which of the following would extinguish the § 1245 recapture potential? a. An exchange of depreciable business equipment for like-kind business equipment with gain realized, but not recognized. b. A nontaxable incorporation under § 351. c. A nontaxable contribution to a partnership under § 721. d. A nontaxable reorganization. e. None of the above.

E

Which of the following assets held by a cash basis accounting firm is a § 1231 asset? a. An account receivable from a client. b. A desk used in the business and held more than one year. c. An investment in Orange Company common stock. d. A computer used in the business, held more than one year, but fully depreciated under § 179 when acquired. e. b. and d.

E (An account receivable is an ordinary asset (option a.). A stock investment is a capital asset (option c.). Depreciable equipment held more than a year is a § 1231 asset (options b. and d.); so choice e.)

Which of the following events could result in § 1250 depreciation recapture? a. Sale at a loss of a depreciable business building held more than one year. b. Sale at a gain of a business building held more than a year on which straight-line depreciation was taken. c. Sale at a loss of a depreciable business building held for 9 months. d. Sale at a gain of depreciable equipment held more than a year on which straight-line depreciation was taken. e. None of the above.

E (Section 1250 recapture can only occur if the sale of real property was at a gain and accelerated depreciation was taken or the property was held a year or less. For § 1231 and § 1250 to apply, the building must be held for more than a year. Depreciable equipment is subject to § 1245 depreciation recapture rather than § 1250.)

Recognized gains and losses from disposition of a capital asset may occur as a result of a: a. Sale. b. Exchange. c. Casualty. d. Condemnation. e. All of the above.

E. (can also occur by theft)

T/F: The only things that the grantee of an option may do with the option are exercise it or let it expire.

False; (A grantee may also sell or exchange the option rather than exercising it or letting it lapse.)

T/F: If the holder of an option fails to exercise the option, the lapse of the option is considered a sale or exchange on the option expiration date.

True

t/f: For tax purposes, there is no original issue discount on a bond unless the bond is issued for less than its face value and the difference between the face value and the bond issue price is at least one-fourth of 1 percent of the redemption price at maturity multiplied by the number of years to maturity.

True

Shelia purchases $50,000 of newly issued Gingo Corporation bonds for $45,000. The bonds have original issue discount (OID) of $5,000. After Shelia amortized $2,300 of OID and held the bonds for four years, she sold the bonds for $48,000. What is the amount of Shelia's capital/ordinary gain?

capital gain; $700 (45,000 + 2,300) - 48,000

Lana purchased for $1,410 a $2,000 bond when it was issued two years ago. Lana amortized $200 of the original issue discount and then sold the bond for $1,800. Which of the following statements is correct? a. Lana has $10 of long-term capital loss. b. Lana has $190 of long-term capital gain. c. Lana has no capital gain or loss. d. Lana has $190 of long-term capital loss. e. None of the above.

b

In 2015, Jenny had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction. In 2016, Jenny has a $18,000 0%/15%/20% long-term capital gain and no other capital gain or loss transactions. Which of the statements below is correct for 2016? a. Jenny has a $18,000 net capital gain. b. Jenny has a $9,000 net capital gain. c. Jenny has a $9,000 net capital loss. d. Jenny has a $3,000 capital loss deduction. e. Jenny has a $9,000 capital loss deduction.

b (The 2015 capital loss carryforward is $9,000 ($12,000 2015 net capital loss - 2015 $3,000 capital loss deduction). The $9,000 carries forward as a short-term capital loss and is offset against the 2016 $18,000 long-term capital gain.)

In 2016, an individual taxpayer has $863,000 of taxable income that includes $48,000 of 0%/15%/20% long-term capital gain. Which of the following statements is correct? a. All of the LTCG will be taxed at 0%. b. All of the LTCG will be taxed at 15%. c. All of the LTCG will be taxed at 20%. d. Some of the LTCG will be taxed at 15% and some at 20%. e. None of the above.

c (Since taxable income without the $48,000 puts the taxpayer in the 39.6% marginal tax bracket, all of the $48,000 0%/15%/20% capital gain is taxed at 20%.)

Red Company had an involuntary conversion on December 23, 2016. The machinery had been acquired on April 1, 2014, for $49,000 and its adjusted basis was $14,200. The machinery was completely destroyed by fire and Red received $10,000 of insurance proceeds for the machine and did not replace it. This was Red's only casualty or theft event for the year. As a result of this event, Red initially has: a. $10,000 § 1231 loss. b. $10,000 § 1245 recapture gain. c. $4,200 casualty loss. d. $4,200 § 1231 loss. e. None of the above.

c (Since the machine was held more than 12 months and was depreciated, it was a § 1231 asset. However, since it was disposed of at a $4,200 loss ($10,000 insurance proceeds - $14,200 adjusted basis), all of the loss is initially a casualty loss.)

Stanley operates a restaurant as a sole proprietorship. Which of the following items are capital assets in the hands of Stanley? a. The restaurant's tables and chairs. b. A portable sound system used to play "theme music" for the restaurant. c. The restaurant building that is an asset of the sole proprietorship. d. An interest-bearing savings account used to keep the restaurant's excess cash. e. None of the above.

d

A barn held more than one year and used in a business is destroyed in a tornado. The barn originally cost $356,000 and was fully depreciated using straight-line depreciation. The barn was insured for its $543,000 replacement cost minus a deductible of $1,000. Which of the statements below is correct concerning these facts? a. The barn was a long-term personal use asset. b. There is a casualty loss from disposition of the barn. c. The recognized gain from disposition of the barn is $186,000. d. The recognized gain from disposition of the barn is subject to special netting rules. e. c. and d.

d (Property used in a business is a nonpersonal use asset and the gain due to casualty is not subject to § 1250 depreciation recapture since straight-line depreciation was used. The special netting rule for nonpersonal use property casualty gains and losses applies because there is casualty gain of $542,000 ($542,000 insurance proceeds - $0 adjusted basis).)

Robin 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 2016? a. $25,000 b. $27,000 c. $28,500 d. $30,000 e. None of the above

d (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.)

Sara is filing as head of household and has 2016 taxable income of $57,000 which includes $3,000 of net long-tem capital gain. The net long-term capital gain is made up of $1,000 25% gain and $2,000 0%/15%/20% gain. What is the tax on her taxable income using the alternative tax method? Note: Use the tax rate schedule rather than the tax table. a. $0 b. $8,548 c. $8,248 d. $8,348 e. None of the above

d (since his tax bracket puts him out of 15% the 2000 will be taxed at 15% while the 1000 will be taxed at his actual tax rate which is 25% )

Which of the following would be included in the netting of § 1231 gains and losses? a. Personal use property net casualty gain. b. Section 1231 loss. c. Section 1231 gain. d. All of the above. e. b. and c.

e

Michael is in the business of creating posters (display art) for the movie industry. He creates a poster and sells it for a lump sum. He has: a. Sold a capital asset. b. Sold an ordinary asset. c. No gain or loss. d. An ordinary gain. e. b. and d.

e (Since Michael is in the business of creating posters, the poster is an ordinary asset and he has ordinary gain from its sale. Although unlikely, he could have an ordinary loss instead)

Stella purchased vacant land in 2009 that she subdivided for resale as lots. All 10 of the lots were sold during 2016. The lots had a tax basis of $12,000 each and sold for $35,000 each. Stella made no substantial improvements to the lots. She acted as her own real estate broker; so there were no sales expenses for selling the lots. Which of the following statements is correct? a. Stella must hold the lots for at least 10 years before she is eligible for the special capital gain treatment of § 1237. b. The $230,000 gain from the sale of the ten lots is all ordinary income. c. All of the $230,000 gain from the sale of the ten lots is long-term capital gain. d. To be eligible for the special capital gain treatment of § 1237, Stella must be a real estate dealer. e. None of the above.

e (Stella must hold the land at least five years to be eligible for § 1237 treatment and must not be a dealer in lots. Since Stella satisfies this requirement, all of the gain is long-term capital gain except for $17,500 (5% of the selling price reduced by $0 selling expenses) )