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Federal Inc. Taxation > Ch 5 > Flashcards

Ch 5 Flashcards

0
Q

Name 6 other types of dispositions of property where gains and losses are realized?

A 
1 exchanges
2 condemnations
3 casualties
4 thefts
5 bond retirements
6 corporate distributions
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1
Q

Realized gain/loss

A

Amount realized from sale or exchange of property
Compared with adjusted basis of that property

Gain, when greater than basis
Loss, when less than basis

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2
Q

The terms realized gain and recognized gain are often…

A

Different dollar amounts for the sale of the asset

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3
Q

Amount realized, from sale or disposition of property

A

Sum of any money received, FMV of all other property

received and debt assumed by the buyer

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4
Q

Fair market value (FMV)

A

Price at which property would change hands between
Willing buyer and willing seller

Neither being under compulsion to buy or sell

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5
Q

What does the adjusted basis depend on?

A

How the property is acquired (purchase, gift, inheritance)

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6
Q

Adjusted basis for purchase of property

A

Cost of the property

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7
Q

Adjusted basis: when property is acquired from a decendent

A

Basis to estate or heir is its FMV at date of death or Alternative valuation date elected 6 months from date of death

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8
Q

Capital additions AKA Capital expenditures

A

Add value/prolong life of property

Or adapt property to new or different use

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9
Q

Equation for property’s adjusted basis

A

Adjusted basis =
Initial basis
+ capital additions
- capital recoveries

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10
Q

Capital recoveries, what 3 things do they include?

A

Reduce basis of property

Include deductions for casualty losses, cost recovery,
Depreciation

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11
Q

Recovery basis doctrine

A

Taxpayers are allowed to recover basis of asset without
Being taxed because such amounts are return of capital
Taxpayer invested in property

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12
Q

Recognized gain or loss

A

Amount of gain or loss actually reported on tax return

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13
Q

When are deductions for depreciation allowed with an asset held for either of 3 things?

A

1 If asset is used in trade

2 business

3 held for production of income

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14
Q

Cost

A

Amount paid for property in cash

Or FMV of other property given in exchange

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15
Q

Funds borrowed and used to pay for asset…

A

Are included in the cost

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16
Q

Uniform capitalization rules (for financial accounting purposes)

A

Businesses must capitalize inventory costs of direct
materials, direct labor and overhead

Taxes paid or accrued in connection with acquisition or
Disposition of property are part of cost of property

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17
Q

Capitalization of interest

A

Interest on debt paid or incurred during production period
To finance expenditures (construct, build, install, manufacture,
Develop, improve) must be capitalized

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18
Q

Property received as gifts: if FMV of property is equal or greater than donor’s basis, the donee’s basis is…

A

The same as the donor’s basis

Will increase if donor paid gift tax

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19
Q

Property received as gifts: if the FMV is less than the donor’s
Basis, the donee has a dual basis for the property: 1)what is the basis for a loss? 2) basis for a gain

A

1) donee transfers at loss: donee’s basis is property’s FMV
at time of gift

2 donee transfers property at gain: donee’s basis same
As donor’s basis

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20
Q

Effect of gift tax on basis

A

Increase of basis only if FMV of property exceeds donor’s

Basis on date of gift

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21
Q

Gift tax addition to basis equation

A

Donor’s basis +
[Gift tax paid x (FMV at time of gift- donor’s basis)/ amount of gift]

Note amount of gift =
fair market value - amount of annual exclusion

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22
Q

Property received from decedent: alternative valuation date (AVD)

A

Generally 6 months after the date of death, basis equal to
FMV on date of distribution

Only used when estate is subject to estate tax and assets
Decrease in the 6 month period (reduces estate tax)

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23
Q

Property converted from personal use to business use

A

Properties basis must be Determined

Basis: lower of FMV or adjusted basis of property when
Asset is transferred from personal use to business use

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24
Q

Allocation of Basis

A

If more than one asset is acquired in single purchases

Cost must be allocated on basis of relative FMVs

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25
Q

Allocation of basis: because no depreciation deduction is allowed for land, taxpayer’s tend to favor a…

A

Liberal allocation to total purchase price of the building

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26
Q

Common costs

A

Common costs occurred for obtaining or preparing asset
For service must be capitalized and allocated to individual
Assets

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27
Q

Stock rights AKA preemptive right

A

Represent rights to acquire shares of specified Corporation’s stock at specific exercise price if certain conditions are met

Maintain proportional ownership of corporation

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28
Q

Basis for no taxable stock dividend

A

Basis of stock dividend shares includes pro rata portion

Of adjusted basis of underlying shares owned

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29
Q

Non taxable stock right

A

If FMV of rights is less than 15% of stock’s FMV, the basis
Of rights is 0 unless election is made to allocate basis

Basis of underlying stock is allocated to rights based on
Respective FMVs of stock and rights

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30
Q

5 items that aren’t considered capital assets for tax purposes

A 
1 inventory/ to be sold to customers
2 property used in trade or business
3 A/R, N/R
4 supplies usually consumed
5 letter of memorandum, copyrights
31
Q

1) When is an automobile considered a capital asset?

2) when is it not considered a capital asset?

A

1 when it’s held for personal use

2 when it’s held for business use

32
Q

6 assets that qualify as capital assets

A 
1 personal residence
2 land held for personal use
3 investment in stocks
4 investment in bonds
5 patents
6 franchises
33
Q

Sale of Futures contracts related to purchase of raw materials, how are they treated?

A

As ordinary income

34
Q

Dealers in securities

A

Unless they specify it as an investment, securities held be

Dealers are taxed as ordinary income

35
Q

Non corporate dealers that subdivide real property into lots can treat sale as…

A

A capital gain, if held for 5 years and improvements are made

36
Q

Non business bad debt losses

A

Are only deductible as short term capital losses and only

In year debt becomes totally worthless

37
Q

Short term capital gain/loss

A

If asset held less than 1 year

38
Q

Longterm capital gain/loss

A

Asset held over 1 year

39
Q

Net capital gains (NCG)

A

Excess of net long term capital gain over net short term

Capital loss

40
Q

Adjusted net capital gain (ANCG)

A

Subject to lower rates of 0, 15%, 20%

Only include gains from sale of financial securities

41
Q

Net short term capital gains may be offset by…

A

Net long term capital losses

42
Q

Name 2 Longterm capital gains (LTCG) that get taxed at 28%

A

1 collectibles gains

2 part of gain (50%) from sale or exchange of qualified small
Business stock

43
Q

What category of Longterm capital gains (LTCG) get taxed at a maximum rate of 25%?

When does this type of gain occur?

A

Unrecaptured sec. 1250 gain

Generally occurs when buildings are sold

44
Q

One can not have a loss connected with a…

A

Unrecaptured sec 1250 gain

45
Q

Collectibles gain, what items are included

A

Artwork, rugs, antiques, stamps, most coins

46
Q

Capital loss

A

Sell or exchange capital asset for amount less than adjusted

Basis

47
Q

Net short term capital loss

A

Offset against NSTCG and NLTCG

if exceeds capital gains may be offset against non corporate
Taxpayer’s ordinary income up to $3,000/year

48
Q

Capital loss carry forward AKA capital loss carryover

A

If capital losses exceed capital gains by more than $3,000
The remainder may be carried over for indefinite # of years

Expires when the tax payer dies

49
Q

Qualified dividend tax rates

A

Taxed the same as long term capital gains

50
Q

Net investment income tax (NII), define, what are the thresholds and when does it apply?

A

Affordable care act new 3.8% Medicare tax on interest,
NSTCG, NLTCG, Dividends, rental, royalty income

Tax is on lesser of net investment income or modified AGI

MAGI threshold is $200,000 single/head of household
$250k married

51
Q

MAGI

A

Sum of AGI + net foreign earned income excluded

52
Q

2 Significant differences between tax treatment of capital gains btw/ individuals and corporations

A

1 lower tax rates of %15, 20, 25, 28% don’t apply for
Corporations

2 can’t deduct $3,000 for capital losses

53
Q

Corporations and capital loss carryovers

A

May carry capital losses back to the 3 proceeding tax years
And used in the 5 subsequent tax years

Treated as a short term capital loss

54
Q

If a corporation uses a capital loss for its previous 3 years…

A

it receives a refund in the current year

55
Q

What tax rate do corporations pay on capital gains?

A

35%

56
Q

Sale

A

Transaction where one receives cash or equivalent

Including assumption of one’s debt

57
Q

Exchange

A

Transaction where one receives reciprocal transfer of

Property

58
Q

Worthless securities

A

If securities becomes worthless over year, it’s treated as

A loss from sale at the end of that tax year

59
Q

Affiliated corporations, tax treatment in loss?

A

Own 80% or more of the company’s stock and engage in
Active conduct of operating business

Treated as loss in ordinary income in loss

60
Q

Treatment of retirement of debt

A

If debt is retired, it’s treated like a sale or exchange

61
Q

If an option is held for more than a year at a gain, the gain is considered?

A

Still considered a short term gain

62
Q

Patents tax treatment

A

As long term capital gains for inventor or acquirer if

acquired before patent is put in use

63
Q

Substantial rights of patent

A

Inventor gives rights of patent with no restrictions to
company for money

Treated as long term capital gain

64
Q

Franchises, trademarks and trade names

A

are only recognized As capital gains when completely
transferred

Income from their use is treated as ordinary income

65
Q

Holding period, when is gain/loss considered longterm

A

Length if time asset is held before it is disposed

Must be held 1 day longer than a year to be considered
Long term

66
Q

When determining the holding period for marketable

Securities it is important to use..

A

The trade dates, not the settlement dates

67
Q

Property received as a gift

A

Donor’s basis and holding period are used

68
Q

When is the donee’s basis the FMV of the property on the date of the gift? 2) when does the holding period start?

A

Occurs when FMV is less than donor’s basis on date of gift
And the property is subsequently sold at a loss

2) donee’s holding period starts day after date of gift

69
Q

Holding period for property received from decedent

A

Always treated as long term

70
Q

Mobility of capital

A

Without preferential treatment of capital gains, tax payers
Who own appreciated capital are unwilling to sell assets

Instead of pursuing other profitable investments

71
Q

Reasons for preferential treatment of capital gains

A

1 mobility of capital
2 mitigation of inflation
3 lowers cost of capital

72
Q

Lowers cost of capital

A

Reducing capital gains tax rate makes investors more
Willing to provide businesses with capital

Important for formation of growth for small business

73
Q

Maximum non taxable gift

A

$14,000

74
Q

It is not advantageous to make gift where…

A

Basis exceeds the FMV, because Donee must use FMV

as their basis for loss

75
Q

Why is it advantageous to gift appreciated property for

The donee?

A

The donee has a higher basis as a result of gift taxes

Paid

Federal Inc. Taxation (11 decks)

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