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Exam 14: Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions

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Question 41

Multiple Choice

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Hiram is a computer engineer and, while unemployed, invents a switching device for computer networks. He patents the device, but does not reduce it to practice. Hiram has a zero tax basis for the patent. In consideration of $800,000 plus a $1 royalty per device sold, Hiram assigns the patent to a computer manufacturing company. Hiram assigned all substantial rights in the patent. Which of the following is correct?

A) Hiram automatically has long-term capital gain from the lump sum payment, but not from the royalty payments.
B) Hiram automatically has long-term capital gain from the royalty payments, but not from the lump sum payment.
C) Hiram automatically has long-term capital gain from both the lump sum payment and the royalty payments.
D) Hiram does not have automatic long-term capital gain from either the lump sum payment or the royalty ????????.
E) None of the above.

F) A) and B)
G) B) and D)

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Question 42

Multiple Choice

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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.

F) B) and D)
G) B) and C)

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Question 43

True/False

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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.

Which of the following comparisons is correct?

On January 10, 2018, Wally sold an option for $2,000 on vacant land he held as an investment. He had purchased the land in 2014 for $76,000. The option allowed the option holder to purchase the property for $122,000 plus the cost of the option. On March 1, 2018, the option holder exercised the option. What is the amount and nature of Wally's gain or loss from disposition of the land?

A painting is acquired by an individual for use in his home. The painting is not of investment quality. It is later sold at a loss of $45. Which of the following statements is correct?

Depreciable personal property was sold at a gain in 2017. On what 2017 form would this transaction be reported, where initially in that form, and what will the form most likely do with the gain?

An individual had the following gains and losses during 2018 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?

The Code contains two major depreciation recapture provisions: § 1245 and § 1250.

Which of the following statements is correct?

When an individual taxpayer has a net long-term capital gain that includes both 28% gain and 0%/15%/20% gain, which of these gains will be taxed first when the alternative tax on net long-term capital gain method is used and what difference does it make?

An individual taxpayer with 2018 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2019.

Business equipment is purchased on March 10, 2017, used in the business until September 29, 2017, and sold at a $23,000 loss on October 10, 2017. The equipment was not suitable for the work the business had purchased it for. The loss on the disposition should have been reported in the 2017 Form 4797, Part:

Part III of Form 4797 is used to report gains from the sale of depreciable business equipment sold at a gain and held more than one year.

Stella purchased vacant land in 2011 that she subdivided for resale as lots. All 10 of the lots were sold during 2018. 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?

Property is acquired in a qualifying like-kind exchange. The acquired property is sold three months after it is acquired. Which of the following is correct?

On June 10, 2018, 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?

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

Samuel, head of household with two dependents, has 2018 wages of $26,000, paid alimony of $3,000, has taxable interest income of $2,000, and a $12,000 0%/15%/20% net long-term capital gain. Samuel uses the standard deduction and is age 38. What is his 2018 taxable income and the tax on the taxable income?

Section 1250 depreciation recapture will apply when accelerated depreciation was used on property used outside the United States and the property is sold at a gain.