Chapter 14 Post Test 1. Gabriel has the following capital gains and losses for 2013: $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 $5,000 28% gain and $2,000 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 $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 25% gain and $6,000 0%/15%/20% gain. | | | e. None of these choices are correct. | | | | Incorrect. 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. | 2. Which of the following assets held by an accrual basis accounting firm is a § 1231 asset? a. A desk used in the business and held more than one year. | | | b. A computer used in the business, held more than one year, but fully depreciated under § 179 when acquired. | | | c. An investment in Orange Company common stock. | | | d. An account receivable from a client. | | | e. "A desk used in the business and held more than one year" and "A computer used in the business, held more than one year, but fully depreciated under § 179 when acquired". | | | | Incorrect. An account receivable is an ordinary asset "An account receivable from a client". A stock investment is a capital asset "An investment in Orange Company common stock". Depreciable equipment held more than a year is a § 1231 asset; so "A desk used in the business and held more than one year" and "A computer used in the business, held more than one year, but fully depreciated under § 179 when acquired." | 3. Herald 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: a. sold an ordinary asset. | | | b. an ordinary gain. | | | c. no gain or loss. | | | d. sold a capital asset. | | | e. "sold an ordinary asset" and "an ordinary gain." | | | | Incorrect. Since Herald is in the business of writing songs, the jingle is an ordinary asset and he has ordinary gain from its sale. |
4. On July 1, 2013, Jeffrey 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 Jeffrey decided to let the option lapse as of December 1, 2013. On his 2013 tax return, what should Jeffrey report? a. a $2,000 short-term capital loss. | | | b. a $2,000 ordinary loss. | | | c. a $2,000 § 1231 loss. | | | d. a $2,000 long-term capital loss. | | | e. None of these choices are correct. | |

5. Mountain, Inc., has a 2013 net § 1231 gain of $67,000 and had a $22,000 net § 1231 loss in 2012. For 2013, Mountain's net § 1231 gain is treated as: a. $67,000 ordinary gain. | | | b. $67,000 capital gain. | | | c. $45,000 long-term capital gain and $22,000 ordinary gain. | | | d. $45,000 long-term capital gain and $22,000 ordinary loss. | | | e. None of these choices are correct. | | | | Incorrect. The 2012 § 1231 loss is a lookback loss and converts $22,000 of the 2013 net § 1231 gain into ordinary gain. The $45,000 remaining of the $67,000 2013 net § 1231 gain is treated as long-term capital gain. | 6. Brad 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 statements below is correct? a. Brad's holding period for the residence includes his mother's holding period for the residence. | | | b. Brad's holding period for the residence does not include his mother's holding period for the residence. | | | c. Brad's holding period for the residence is automatically long term. | | | d. "Brad's holding period for the residence does not include his mother's holding period for the residence" and "Brad's holding period for the residence is automatically long term." | | | e. None of these choices are correct. | | | | Incorrect. Brad 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. |
7. Section 1239 (relating to the sale of certain property between related taxpayers) does not apply unless the property: a. is depreciable in the hands of the transferee. | | | b. is equipment. | | | c. is an ordinary asset. | | | d. was depreciated by the transferor. | | | e. None of these choices are correct. | |

8. Sunflower Company signs a 12-year franchise agreement with Crispy Chicken. Crispy Chicken retained significant powers, rights, and a continuing interest. Sunflower (the franchisee) makes noncontingent payments of $15,000 per year for the first five years of the franchise. Sunflower Company also pays a contingent fee of 2% of gross sales every month. Which of the following statements is correct? a. Sunflower Company may deduct the monthly contingent fee as it is paid. | | | b. Sunflower Company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid. | | | c. Sunflower Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid. | | | d. Sunflower Company may deduct the $15,000 per year noncontingent payments in full as they are made. | | | e. None of these choices are correct. | |

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

10. Which of the following statements is correct? a. When depreciable property is inherited by a taxpayer, the depreciation recapture potential carries over. | | | b. When depreciable property is contributed to charity, the depreciation recapture potential has no effect on the amount of the charitable contribution deduction. | | | c. When corporate depreciable property is distributed as a dividend, the depreciation recapture potential is generally not recognized. | | | d. When depreciable property is gifted to another individual taxpayer, the depreciation recapture potential carries over. | | | e. All of these choices are correct. | | | | Incorrect. Depreciation recapture potential is extinguished when property is received as an inheritance, carries over when the property is received by gift, is recognized by the corporation when property is distributed by a corporation and a gain would have been recognized if the property had been sold, and reduces the charitable contribution deduction amount. | 11. Pumpkin, Inc. sold a forklift on February 12, 2013, for $3,000 (its FMV) to its 100% shareholder, Scarlet. Pumpkin's adjusted basis for the forklift was $7,000. Scarlet's holding period for the forklift: a. begins on February 12, 2013. | | | b. does not begin until Scarlet sells the forklift. | | | c. begins on February 13, 2013. | | | d. includes Pumpkin's holding period for the forklift. | | | e. None of these choices are correct. | | | | Incorrect. When a loss is disallowed in a related party transaction, there is no carryover of holding period. Pumpkin has a $4,000 realized loss on the sale of the forklift to Scarlet and the loss is disallowed because Scarlet is a related taxpayer. Scarlet's holding period begins on the day after the property is acquired. |
12. In 2012, Maureen had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction. In 2013, Maureen has a $16,000 0%/15%/20% long-term capital gain and no other capital gain or loss transactions. Which of the statements below is correct? a. Maureen has a 2013 $7,000 net capital gain. | | | b. Maureen has a 2013 $3,000 capital loss deduction. | | | c. Maureen has a 2013 $7,000 net capital loss. | | | d. Maureen has a 2013 $7,000 capital loss deduction. | | | e. Maureen has a 2013 $18,000 net capital gain. | |

13. Valley Corporation sold machinery for $27,000 on December 31, 2013. The machinery had been purchased on January 2, 2010, for $30,000 and had an adjusted basis of $21,000 at the date of the sale. For 2013, what should Valley Corporation report? a. A § 1231 gain of $3,000 and $3,000 of ordinary income. | | | b. A § 1231 gain of $6,000 and $3,000 of ordinary income. | | | c. A § 1231 gain of $6,000. | | | d. Ordinary income of $6,000. | | | e. None of these choices are correct. | | | | Incorrect. The recognized gain from the disposition of the machinery is $6,000 ($27,000 sale price – $21,000 adjusted basis). Since the recognized gain is less than the depreciation taken of $9,000 ($30,000 cost – $21,000 adjusted basis) and the asset is depreciable equipment used in a business, § 1245 depreciation recapture applies. | 14. Omari was leasing an apartment from Saffron, Inc. Saffron paid Omari $1,000 to cancel his lease and move out so that Saffron could demolish the building. As a result: a. Omari has a $1,000 capital loss. | | | b. Saffron has a $1,000 capital gain. | | | c. Saffron has a $1,000 capital loss. | | | d. Omari has a $1,000 capital gain. | | | e. None of these choices are correct. | | | | Incorrect. Since the apartment was Omari's personal residence, the lease on the apartment was a capital asset because all personal use assets are capital assets. Omari 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 Omari has held the lease. Saffron has an ordinary deduction of $1,000. | 15. A retail building used in the business of a sole proprietor is sold on March 10, 2013, for $350,000. The building was acquired in 2003 for $400,000 and straight-line depreciation of $108,000 had been taken on the building. What is the maximum unrecaptured § 1250 gain from the disposition of this building? a. $350,000 | | | b. $26,000 | | | c. $108,000 | | | d. $400,000 | | | e. None of these choices are correct. | | | | Incorrect. The maximum unrecaptured § 1250 gain is the $108,000 depreciation taken. That maximum is reduced to the $58,000 gain from the disposition [$350,000 sale price – ($400,000 cost – $108,000 depreciation taken)]. |
16. Shamrock, Inc., has a 2013 $50,000 long-term capital gain included in its $185,000 taxable income. Which of the following is correct? a. Shamrock's regular tax on taxable income will be the same as its tax using an alternative tax on net capital gains approach. | | | b. Shamrock's regular tax on taxable income will be greater than its tax using an alternative tax on net capital gain approach. | | | c. Shamrock's $50,000 net capital gain is not taxable. | | | d. Shamrock will benefit from an alternative tax on net capital gains computation. | | | e. None of these choices are correct. | |