Question 1

Lease cancellation payments received by a lessor are always ordinary income because they are considered to be in lieu of rental payments.

Accepted Answer

Lease cancellation payments received by a lessor are always ordinary income because they are considered to be compensation for the loss of rental income.

Question 2

A franchisor licenses its mode of business operation to a franchisee.

Accepted Answer

This is the definition of franchising, where the franchisor allows the franchisee to use their brand name, business model, and other trademarks or proprietary information in exchange for a fee or royalties.

Question 3

The subdivision of real property into lots for resale when no substantial physical improvements have been made to the property never causes the gain from sale of the lots to be treated as ordinary income.

Accepted Answer

The subdivision of real property into lots for resale can cause the gain from the sale of the lots to be treated as ordinary income, especially if the activity is considered to be in the nature of a trade or business, such as a real estate dealer's activities, regardless of whether substantial physical improvements have been made.

Question 4

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% of the redemption price at maturity multiplied by the number of years to maturity.

Accepted Answer

This statement is true. The Internal Revenue Service (IRS) specifies that a bond must be issued for less than the face value, and the difference between the face value and the bond issue price must be at least 0.25% of the redemption price at maturity multiplied by the number of years to maturity for it to be considered as having original issue discount for tax purposes.

Question 5

To compute the holding period, start counting on the day after the property was acquired and include the day of disposition.

Accepted Answer

To compute the holding period, you start counting from the day after the property was acquired and include the day of disposition, which means the holding period is calculated based on the number of calendar days the property was held.

Question 6

An accrual basis taxpayer accepts a note receivable from a retail customer with a weak credit rating.The taxpayer immediately sells the note to a bank for less than the note's stated value.The taxpayer has an ordinary loss.

Accepted Answer

When a taxpayer sells a note receivable for less than its stated value, they have incurred a loss which is treated as an ordinary loss for tax purposes. This is because the note receivable is considered a capital asset held for investment or trade, and any loss from its sale is therefore treated as an ordinary loss under the tax code.

Question 7

The holding period of property given up in a like-kind exchange includes the holding period of the asset received if the property that has been exchanged is a capital asset.

Accepted Answer

The answer of The holding period of property given up...

Question 8

Since the Code section that defines capital asset says what is not a capital asset, other Code sections have to help determine what is and what is not a capital gain or loss.

Accepted Answer

The Code section that defines capital asset excludes certain types of property, such as inventory or accounts receivable, from being considered a capital asset. Therefore, other Code sections must be consulted to determine whether a gain or loss on a particular asset qualifies as a capital gain or loss.

Question 9

A security that was purchased by an individual and qualifies as § 1244 stock becomes worthless.The taxpayer is single and the loss is $30,000.The loss is treated as an ordinary loss.

Accepted Answer

If stock qualifies as § 1244 stock and becomes worthless, the taxpayer may treat the loss as an ordinary loss up to a maximum of $50,000 ($100,000 if married filing jointly). Since the loss in this scenario is $30,000 and the taxpayer is single, it would be treated as an ordinary loss.

Question 10

If a capital asset is sold at a gain, the holding period is important.

Accepted Answer

The holding period determines whether the gain is considered a short-term or long-term capital gain, which affects the tax rate that will be applied to the gain.

Question 11

The only thing that the grantee of an option may do with the option is to exercise it or let it expire.

Accepted Answer

The grantee of an option can also sell the option to another party before it expires, in addition to exercising it or letting it expire.

Question 12

Tom has owned 40 shares of Orange Corporation stock for five years.He sells the stock short for a total of $1,100.
One month later, he closes the short sale by purchasing and delivering 40 shares of Orange Corporation stock for a total of $600.Tom has a $500 short-term capital gain.

Accepted Answer

Tom sold the stock short for $1,100 and later bought it back for $600, resulting in a profit of $500. Since the transaction was completed within a month, it is considered a short-term capital gain.

Question 13

The tax law requires that capital gains and losses be separated from other types of gains and losses because an alternative tax calculation may be used when taxable income includes net long-term capital gain.

Accepted Answer

Net long-term capital gain can be subject to a different tax rate than other types of income, so it is necessary to separate them in order to calculate the alternative tax accurately.

Question 14

A business taxpayer sells depreciable business property with an adjusted basis of $40,000 for $32,000.The taxpayer held the property for more than a year and has an $8,000 capital loss.

Accepted Answer

This is not possible. The adjusted basis of the property cannot be higher than the selling price.

Question 15

When a patent is transferred, the most common forms of payment received by the transferor are a lump sum and/or a periodic payment.

Accepted Answer

Lump sum and periodic payments are indeed the most common forms of payment received by the transferor when a patent is transferred.

Question 16

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.

Accepted Answer

The lapse of an option is considered a sale or exchange on the option expiration date because the holder of the option has the right to sell or exchange the option for the underlying asset. If the holder of the option does not exercise the option, the option will expire and the holder will lose the right to sell or exchange the option for the underlying asset.

Question 17

An individual taxpayer received a valuable painting from his uncle, a famous artist who painted it.After the taxpayer held the painting for two years, he sold it for a $400,000 gain.The gain is a long-term capital gain.

Accepted Answer

The answer of An individual taxpayer received a valuable painting...

Question 18

The tax law requires that capital gains and losses be separated from other types of gains and losses because there are limitations on the deduction of net capital losses.

Accepted Answer

This statement is true. Net capital losses can only be deducted up to $3,000 per year against ordinary income. Any excess capital losses can be carried over to future years. Therefore, separating capital gains and losses from other types of gains and losses is important for tax purposes.

Question 19

A lease cancellation payment received by a lessee is generally treated as an exchange because the lease extinguished is usually a capital asset.

Accepted Answer

When a lessee receives a lease cancellation payment, it is typically treated as an exchange because the lease that is being cancelled is considered a capital asset. Therefore, the payment received in exchange for giving up the lease is also considered a capital transaction.

Question 20

Individuals who are not professional real estate developers may get capital gain treatment for the sale of their real property if they engage only in limited development activities.

Accepted Answer

According to IRS guidelines, individuals who engage in only limited development activities (such as subdividing a single property into a few lots) may still qualify for capital gain treatment on the sale of their real property, even if they are not professional real estate developers. However, if the activities go beyond what is considered "limited" (such as developing an entire subdivision), they may be subject to different tax rules.

Quiz 16: Property Transactions: Capital Gains and Losses