Question 1

Gain on sale of a patent by an inventor generally is ordinary income.

Accepted Answer

According to IRS guidelines, gain on the sale of a patent by an inventor is generally treated as ordinary income, rather than capital gain. However, there may be certain circumstances where the gain could be classified as capital gain, such as if the inventor was not actively involved in the development and marketing of the patent. It is recommended to consult with a tax professional for specific advice on individual situations.

Question 2

On January 31 of the current year, Sophia pays $1,000 for an option to acquire 100 shares of Texas Corporation common stock for $105 per share at any time prior to December 31. As of December 31, Sophia had not exercised the option or sold it. Which of the following statements is correct?

Accepted Answer

The answer of On January 31 of the current year,...

Question 3

How long must a capital asset be held to qualify for long- term treatment?

Accepted Answer

A capital asset must be held for more than one year, which is typically interpreted as one year and one day, to qualify for long-term capital gains tax treatment.

Question 4

On July 25, 2017, Marilyn gives stock with a FMV of $7,500 and a basis of $5,000 to her nephew Darryl. Marilyn had purchased the stock on March 18, 2017. Darryl sold the stock on April 18, 2018 for $7,800. As a result of the sale, what will Darryl report on his 2018 tax return?

Accepted Answer

Darryl will report a $2,800 LTCG on his 2018 tax return because the stock was held for more than one year before it was sold.

Question 5

Because of the locked- in effect, high capital gains tax rates may discourage taxpayer's from selling appreciated capital assets.

Accepted Answer

The locked-in effect is the phenomenon in which an investor is hesitant to sell an asset with unrealized capital gains because the sale would trigger a tax liability. High capital gains tax rates would further discourage taxpayers from selling such assets.

Question 6

Rana purchases a 5%, $100,000 corporate bond at issuance on January 1, 2018 for $91,500. The bond matures in five years. In 2018 Rana will recognize interest income of

Accepted Answer

Rana will recognize interest income greater than $5,000 because the bond was purchased at a discount. The interest income includes both the coupon payment ($5,000) and the amortization of the discount over the bond's life.

Question 7

Topaz Corporation had the following income and expenses during the current year:  What is Topaz's taxable income?

Accepted Answer

The answer of Topaz Corporation had the following income and...

Question 8

The holding period of property received from a decedent is based on the actual time the property is held by the decedent.

Accepted Answer

The answer of The holding period of property received from...

Question 9

On January 31 of this year, Mallory pays $800 for an option to acquire 100 shares of Mesa Corporation common stock for $85 per share. As a result of an increase in the market value of the Mesa stock, the market price of the option increases and Mallory sells the option for $1,000 on August 4. As a result of the sale, Mallory must recognize

Accepted Answer

Mallory's gain from selling the option is $200 ($1,000 - $800), which is considered a short-term capital gain (STCG) because the holding period for the option was less than a year.

Question 10

Everest Inc. reports taxable income of $900,000 before considering sales of stock. Everest Inc. sold two stockholdings this year, resulting in a long- term capital gain of $15,000 on stock A and a short- term capital loss of $5,000 on stock B. What is the extra tax that Everest will pay due to the sales of these stocks?

Accepted Answer

The answer of Everest Inc. reports taxable income of $900,000...

Question 11

On July 25, 2017, Karen gives stock with a FMV of $7,500 and a basis of $8,000 to her nephew Bill. Karen had purchased the stock on March 18, 2017. Bill sold the stock on April 18, 2018 for $6,000. As a result of the sale, what must Bill report on his 2018 tax return?

Accepted Answer

Bill must report a short-term capital loss (STCL) of $1,500. Since the stock was held for less than a year from the date Karen purchased it, the holding period is short-term. The loss is calculated based on the FMV at the time of the gift ($7,500) minus the sale price ($6,000).

Question 12

Stock purchased on December 15, 2017, which becomes worthless in March 2018, produces a STCL since the holding period is one year or less.

Accepted Answer

The answer of Stock purchased on December 15, 2017, which...

Question 13

Galvin Corporation has owned all of the stock of Rialto Corporation for five years. Rialto Corporation has been actively engaged in manufacturing in Kansas, but it is now bankrupt, and the stock is worthless. Galvin Corporation will recognize a long- term capital loss.

Accepted Answer

The answer of Galvin Corporation has owned all of the...

Question 14

Rita died on January 1, 2018 owning an asset with a FMV of $730,000 that she purchased in 2010 for $600,000. Bert inherited the asset from Rita. When Bert sells the asset for $800,000 on August 20, 2018, he must recognize a

Accepted Answer

The asset was held for more than one year by both Rita and Bert, so the gain is long-term. The gain is $800,000 - $600,000 = $200,000. However, Rita's basis in the asset is stepped up to $730,000 at her death, so Bert's basis is also $730,000. Therefore, Bert's gain is $800,000 - $730,000 = $70,000.

Question 15

A taxpayer sells a patent on a new algorithm for a gain. Which taxpayer will be allowed capital gain treatment for the sale? Assume that the patent had not been placed in service as of the acquisition date.

Accepted Answer

The answer of A taxpayer sells a patent on a...

Question 16

Sergio acquires a $100,000 Ternco Corporation bond (5%, 20- year bond) on January 1, 2018 for $75,000. The bond had been issued on January 1, 2016. If Sergio holds the bond to maturity, at redemption he will recognize

Accepted Answer

The answer of Sergio acquires a $100,000 Ternco Corporation bond...

Question 17

If property received as a gift has a basis of the fair market value of the property on the date of the gift, the donee's holding period starts on the day after the date of the gift.

Accepted Answer

This is true according to the IRS. The donee takes on the same basis and holding period as the donor had, but the holding period for the donee starts on the day after the date of the gift. This is important for determining capital gains taxes if the property is sold in the future.

Question 18

The gain or loss on an asset purchased on March 31, 2017, and sold on March 31, 2018, is classified as short- term.

Accepted Answer

The holding period for short-term capital gains or losses is one year or less. Since the asset was held exactly one year, it is classified as short-term.

Question 19

Purchase of a bond at a significant discount will result in the investor recognizing a capital gain when the bond matures.

Accepted Answer

The answer of Purchase of a bond at a significant...

Question 20

On January 31 of this year, Jennifer pays $700 for an option to acquire 100 shares of Lifetime Corporation common stock for $70 per share. Jennifer exercises the option on June 2. Jennifer sells the stock on April 30 of next year for $10,000. Jennifer's basis for the stock immediately before the sale is

Accepted Answer

Jennifer's basis for the stock is the exercise price of the option plus the cost of the option itself. She paid $70 per share for 100 shares, totaling $7,000, plus the $700 option cost, making her total basis $7,700.

Quiz 16: Tax Deductions and Travel Expenses for Employees and Self-Employed Individuals