Chapter 14 Flashcards
The tax law requires _____ _____ and ____ ____ to be separated from other types of gains and losses.
capitals gains and capital losses
Long term capital gains may be ____ at lower rates than ordinary gains.
taxed
The Code requires a separate reporting of gains and losses and a determination of their tax character is that a ___ ___ ___ is only deductible up to $___ per year.
net capital loss
$3,000
Excess loss over the annual limit carries over and may be deductible in a ____ ____ ____.
future tax year
Recognized gains and losses must be properly classified. Proper classification depends upon three characteristics:
- The tax status of the property
- The manner of the property’s disposition
- The holding period of the property
The three possible tax statuses are:
- capital asset
- § 1231 asset
- ordinary asset
Property disposition may be by 5 ways:
- sale
- exchange
- casualty
- theft
- condemnation
There are two holding periods:
- short term
2. long term
The short-term holding period is ____ or ____.
one year or less
The long term holding period is ____.
more than one year
§1221a defines ____.
what is not a capital asset
What constitutes inventory is determined by ____.
the taxpayer’s business
As a general rule, securities (stocks, bonds, and other financial instruments) held by a dealer are considered to be inventory and are therefore not subject to _____.
capital gain and loss treatment
A ____ is a merchant that regularly engages in the purchase and resale of securities to customers.
dealer in securities
The dealer must identify any securities being ____ for ____.
held for investment
If a dealer clearly identifies certain securities as held for investment purposes by the close of business on the acquisition date, gain from the securities sale will be ____.
capital gain
The gain will not be capital gain if the dealer ceases to hold the security for investment ____.
prior to the sale
A loan not made in the ordinary course of business is classified as a ____.
nonbusiness receivable
In the year the receivable becomes completely worthless, it is a blank and is treated as short term capital loss.
(Even if the receivable was outstanding for more than one year the loss is still a short term capital loss)
nonbusiness bad debt
Recognition of capital gain or loss usually requires ____.
the sale or exchange of a capital asset
An involuntary conversion is not a ____.
sale or exchange
Occasionally securities such as stock and bonds may become worthless due to their insolvency of the ____.
If such a security is a capital asset, the loss is to have occurred as a result of a sale or exchange on the ____.
issuer
last day of the tax year
Bankruptcy does not make a security ____.
worthless
If a security becomes worthless, it qualifies as an exchange or sale, so it is classified as a ____.
capital loss
§1244 allows an ordinary deduction on disposition of stock at a loss. The stock must be that of a small business company, and the ordinary deduction is limited to ____.
(to encourage people to invest in small businesses)
$50,000 ($100,000 for married individuals filing jointly per year)
If the debt obligation was issues to a human being prior to June 9, 1997, and or purchased by the taxpayer prior to June 9, 1997, the collection of the debt obligation is not a ____.
If before June 9. 1997, it will be a ____.
sale or exchange
ordinary gain or loss
When you redeem bonds, it is treated as ____.
sale or exchange
Original issue discount is offered ____.
when originally sold from a corporation
OID arrises when the issue price of a debt obligation is less than the ____.
maturity value of the obligation
The OID must generally be amortized over the life of the ____ using the effective interest method.
debt obligation
OID will be recorded as ____ every year.
interest income
the income will increase the basis of the bond every year
An option is considered a _______ to the grantee
capital asset
If an option holder (grantee) fails to exercise the option, the lapse of the option is considered a ______ on the expiration date
sale or exchange
- **if you are the grantee you treat it as if you sold it, will either have a capital loss or ordinary loss
- *if the options were to purchase securities, you will recognize STCG
If the option is exercised, the amount paid for the option is added to the optioned property’s _____
selling price
**this is the basis
Transfer of a patent is a sale or exchange of a _______, when all substantial rights to the patent are transferred by a holder
long term capital asset
2 qualifications to determine that all substantive rights have been transferred
- cannot limit the patent geographically
2. transfer period cannot be less than the remaining life of the patent
The holder of a patent must be an _____ and is usually the _____
individual
invention’s creator
A holder may be an individual who purchases the patent rights from the creator before the patented invention is _____
reduced to practice
** payments can either be contingent or non-contingent, treatment will be the same
The creator’s employer and certain parties related to the creator _____
do not qualify as holder
A ______ includes the grant of a franchise, a transfer by one franchisee to another person, or the renewal of a franchise
franchise transfer
§ 1253 provides that a transfer of a franchise, trademark, or trade name is not a ________when the transferor retains any significant power, right, or continuing interest in the property transferred
Transfer of a capital asset
When the transferor retains a significant power, right, or continuing interest, the transferee’s non-contingent payments to the transferor are _______The tranchisee capitalizes the payments and amortizes them over ___
Ordinary income
15 years
When the transferor retained a significant power, right, or continuing interest, contingent franchise payments are _____ for the franshisor and ____ for the franchisee
ordinary income
ordinary deduction
Lease cancellation payments received by a lessee are treated as ____. These payments are _____ if the lease is a _____
an exchange
capital gain
capital asset
A lessee’s lease is a _____ if the property is used for the lessee’s personal use
capital asset
A lessee’s lease is _____ if the property is used in the lessee’s trade of business and the lease has existed for one year or less when it is canceled.
ordinary asset
A lessee’s lease is _______ if the property is used in the lessee’s trade or business and the lease has existed for more than a year when it is canceled
§1231 asset
Payments received by a lessor for a lease cancellation are always _____ because they are considered to be in lieu of rental payments
ordinary income
Property must be held more than one year to qualify for _______ or _____
Long term capital gain
loss treatment
To be held for more than one year, a capital asset acquired on the last day of any month must not be disposed of until or after _____
the first day of the 13th succeeding month
The holding period of property received in a like-kid exchange includes the holding period of the former asset if the property that has been exchanged is a ______ or _____
capital asset
§1231 asset
A former owner’s holding period is tacked on to the present owner’s holding period if the transaction is _____ and ____
nontaxable
the former owner’s basis carries over to the present owner
Losses can be disallowed under _____ and _____ as well as other Code Sections
§267 (sale or exchange between related parties)
§262 (sale or exchange of personal use assets)
Taxpayers who acquire property in a disallowed loss transaction will have a _____ and ____
new holding period begin
will have a basis equal to the purchase price
the holding period for inherited property is treated as ______ no matter how long the property is actually held by the heir
long term
What 6 possibilities for the result of all possible netting?
NTLCG NSTCG NLTCL NSTCL Both NLTCG, NSTCG Both NLTCL, NSTCL
THe ____ portion of netting results is eligible for alternative tax calculations
NLTCG
Niether NLTCLs nor NSTCLs are treated as _______.
ordinary losses
Treatment as an ______ generally is preferable to capital loss treatment because ordinary losses are deductible in full while the deductibility of capital losses is subject to certain limitations.
ordinary loss
An individual taxpayer may deduct a maximum of ______ of net capital losses for a taxable year
$3,000
_____ is not eligible for a special tax rate. It is taxed at ____
Net short term capital gain
the same rate as the taxpayer’s other taxable income
___ is eligible for one of four alternative tax rates, 0,15,25,28
Net long term capital gain
The _____ is technically called the unrecaptured §1250 gain and is related to gain from disposition of §1231 assets
25% gain
The _____ portion of the 0/15% gain applies when the taxable income before taxing the 0/15% gain does not put the taxpayer out of the ____
15% bracket
When the long-term capital gain exceeds the short term capital loss a _____ exists
Net capital gain
Net capital gain qualifies for ____
beneficial alternative tax treatment
A short term loss carryover to the current year retains its character as short term and is combined with the short term items of the current year. A long term net capital loss carries over as a long term capital loss and is combined with the current year long term items
.
Capital assets that are collectibles, eben though they are held long term, are not eligible fore the 0/15% alternative tax rate. Instead a ____ applies
28% tax rate
Dividends paid from current accuulated earnings and profits of domestic and certain foreign corporations are eligible to be taxed at the 0/15% long term capital gain rates if they are ____
qualified dividend income
After the net capital gain or loss has been determined, the qualified dividend income is added to the net long term capital gain portion of the net capital gain and is taxed as ______. If there is a net capital loss, the net capital loss is still deductible _____
0/15% gain
for AGI up to $3000 per year with the remainder of the loss carrying forward
The alternative tax applies only if taxable incoem includes some ____
Long term capital gain
Taxable income includes all of the ______ unless taxable income is less than the net capital gain.
Net capital gain
Net capital gain is taxed ____, after other taxable income
last
The rate layers are taxed in what order?
25%
28%
0% portion of the 0/15
15% portion
As a result of layering, the taxpayer will benefit from the 0% portion of the net capital gain if the taxpayer is still in the 10% or 15% regular rate bracket after taxing other taxable income and the 25% and 28% portions of the net capital gain
.
The alternative tax computation allows the taxpayer to receive the ____ of regular tax or the alternative tax on ___ of net capital gain or __ of net capital gain
lower
each layer
portion of each layer
A ______ results if capital losses exceed capital gains for the year
Net capital loss
An ___ may be all long term, all short term, or part long and part short term.
net capital loss
The characterization of a ___ as long term or short term is important in determining the capital loss deduction
net capital loss
A ____ is deductible from gross income to the extent of $3000 per yax year
net capital loss
_____ exceeding the loss deduction limits carry forward indefinitely
Capital losses
*thus although there may or may not be beneficial treatment for capital gains, there is unfavorable treatment for capital losses in terms of the $3000 annual limitations on deducting NCL against ordinary income
If the _____ includes both long term and short term capital loss, the short term capital loss is counted first toward the $3000 annual limitation
net capital loss
Taxpayers are allowed to carry over _____ indefinitely
unused capital losses
When a taxpayer has both a capital loss deduction and negative taxable income, a special computation of the _____ is required
Capital loss carryover
The capital loss carryover is the Net capital loss minus the lesser of:
- the capital loss deduction claimed on the return
- the negative taxable income increased by the capital loss deduction claimed on the return and the personal and dependency exemption deduction
**With out this provision, some of the tax benefit of the capital loss deduction would be wasted when the deduction drives taxable income below zero. The capital loss deduction is not reduced if taxable income before the exemption deduction is a positive number or zero. In that situation, it is the exemption deduction and not the capital loss deduction that is creating the negative taxable income
Corporation: Capital losses offset only _____. No deduction of capital losses is permitted against_____
capital gains
ordinary taxable income
Corporations may carry back net capital losses, whether long term or short term, as short term capital losses for ___ years; if losses still remain after the carryback the remaining losses may be carried forward ____ years
3
5
Business properties are not _____ because they are depreciable and are real property used in business for the production of income.
not capital assets
Depreciable property and real property used in business are not _______
capital assets
*thus, the recognized gain from the disposition of such property (principally machinery, equipment, buildings, land) would appear to be ordinary income rather than capital gain.
Due to §1231 however, net gain from the disposition of such property is sometimes treated as ______
long term capital gain
Requirements for §1231
- long term holding period
- disposition must generally be from a sale, exchange, or involuntary conversion
- certain recapture provisions must be satisfied
§1231 must also apply to ____ of capital assets
involuntary conversions
If the disposition of depreciable property and real property used in business results in a net loss §1232 treats the loss as an _____ rather than as a capital loss
ordinary loss
Ordinary losses are fulling deductible _____
for AGI
Capital losses are offset by ____ and if any loss remains the loss is deductible to the extent of $3000 per year for individuals and currently is not deductible at all by regular corporations
capital gains
§1231 provides the best of both potential results
- net gains may be treated as long term capital gain
2. Net loss treated as ordinary loss
When do ordinary assets become $1231 assets>
when they’ve been held for more than a year
The Code contains 2 major recapture provisions
these provisions cause gain to be treated initially as __
§1245 and §1250
ordinary gain
*thus what may appear to be §1231 gain is ordinary gain instead
§1245 requires taxpayers to treat all gain as ordinary gain unless the property is _____
disposed of for more than what was paid for it
All gains must be treated as ordinary gain to the extent of the ____ taken on the property disposed of when dealing with §1245
depreciation
§1245 applies primarily to ____ such as machinery, trucks and office furniture
non real estate property
§1245 does not apply if property is disposed of at a _____
loss
Generally the loss will be §1231 loss unless the form of disposition is a ____
casualty
_____ provides in general that the portion of recognized gain from the sale or other disposition of property that represents depreciation is recaptured as ordinary income
§1245 recapture
For §1245 recapture the method of ____ does not matter
depreciation
Any remaining gain after subtracting the amount recaptured as ordinary income will usually be ____
If the property is disposed of in a casualty event the remaining gain will be ___
§1231 gain
casualty gain
Generally, §1245 property includes all _____ and ______
depreciable personal property
(machinery, equipment)
nonresidential real estate
§ 1245 recapture applies regardless of the ____ of the property. Of course the entire recognized gain would be ordinary income if the property were held for less than long term holding period because ___ would not apply
holding period
§1231
§1245 does not apply to _____
losses
Generally, §1250 property is ____
depreciable real property (principally buildings and their structural components)
1250 recapture rarely applies because only the amount of _____ is subject to recapture
additional depreciation
§1250 does not apply if the real property is sold at a _____
loss
_____ is the excess of the Accelerated depreciation actually deducted and the straight line depreciation that could have been deducted
additional depreciation
§1250 recapture may apply when either
- residential rental real property was acquired after ____ and before ____ and ____ was taken
- Nonresidential real property was acquired before ____ and accelerated depreciation was taken after _____
1975 1987 accelerated depr 1981 Dec 31, 1969
For §1250 property other than residential rental property, the potential recapture is equal to the amount of____ taken since _____
additional depr
12/31/69
*this nonresidential real property included buildings such as offices, warehouses, factories, stores
Stock is generally considered a _____.
The gain or loss from disposition of the stock is a _____.
capital asset
capital gain or loss
Losses on personal use assets are not deductible and the proceeds of the sale are a return of capital, the transactions are not _____ .
taxable
The lyrics to a song owned and copyrighted by their creator is normally an ____.
However, an election can be made which allows the creator to treat the song lyrics copyright as a _____.
ordinary asset
capital asset
A note receivable that arises in the ordinary course of the taxpayer’s business of selling inventory or performing services is an ____.
ordinary asset
Generally, the securities (stock, bonds, etc.) held by a trader of securities are ____, and, thus are ordinary assets, if by the end of each business day, the trader designates which securities acquired during that day are to be held for investment rather than as inventory, these securities are treated as _____.
inventory
capital assets
In order to be eligible for the ____ provisions, substantial improvements cannot be made to the lots.
Substantial generally means more than a ____ increase in the value of a lot and include hard surface roads, utility, water, gas, and sewer lines.
“real property subdivided for sale”
10%
Acceptable substantial improvements:
clearing, leveling, draining, filling, field office setup, survey land, non-paved road
Unacceptable substantial improvements:
Hard road, sewers, water, gas, electrical lines
*Aren’t acceptable unless you hold for 10 years
A ____ is a stock or bond that has become worthless due to the insolvency of the issuer.
If such a security is a capital asset, the capital loss is deemed to have occurred as the result of a ____ on the last day of the tax year.
worthless security
sale or exchange
____ allows a limited ordinary deduction for the losses from disposition of certain small business stock (but not bonds).
Section 1244
The _____ of a patent must be an individual and is usually the invention’s creator; may also be an individual who purchases the patent from the creator before the patented invention is reduced to practice.
holder
With gifts, a former owner’s holding period is tacked on to the present owner’s holding period if the transaction is ____ and the former owner’s ____ carries over to the present owner.
nontaxable
basis
Hakim’s rental building was a § 1231 asset. Hakim has a casualty loss equal to the adjusted basis of the building. Since this is his only casualty gain or loss, the loss is an ordinary deduction for AGI.
….
The holding period of property received in a like-kind exchange includes the holding period of the property given up if the property given up is a ___ or a _____.
capital asset
§ 1231 asset
If the franchisor retains rights then it is _____.
If the franchisor doesn’t retain rights, than it is ____ if it’s an ordinary asset, or a ____ if it’s a capital asset.
ordinary income
ordinary income
capital gain
