Chapter 2

Question 1

What are the three main domains of income tax law?

Answer 1

income, deductions, property transactions

Question 2

Every transaction fits into one three categories, which are?

Answer 2

business, investment, personal

Question 3

Every asset is categorized these four categories:

Answer 3

ordinary or capital

personalty or realty

Question 4

How many times can you recover the basis in a asset?

Answer 4

once

Question 5

Basis can be less than 0. T/F

Answer 5

False

Question 6

Every time you receive income you must receive __________

Answer 6

basis in an amount equal to the income

Question 7

Expenses are deductible if they are ________, ____________, and ___________

Answer 7

ordinary, necessary, reasonable

Question 8

A trade or business can be defined as:

Answer 8

an activity engaged to earn a profit

Question 9

What are hobbies not a business?

Answer 9

there is not enough effort exerted to try to earn a profit

Question 10

Investment activities are defined as:

Answer 10

an acquisition of an asset with expectation that it will increase in value or produce an income stream that does not require effort.

Question 11

What are ordinary assets?

Answer 11

asset that produces ordinary loss or gain

Question 12

What is a section 1231 asset?

Answer 12

depreciable property and realty used in business that has been owned for over a year.

Question 13

what is a capital asset?

Answer 13

any non-ordinary or non-section 1231 asset

Question 14

When does a copyright become a capital asset?

Answer 14

when it is not held by it creator

Question 15

Land or any structure permanently attached to land is called:

Answer 15

realty

Question 16

What are the three categories of personalty assets?

Answer 16

tangible, intangible, natural

Question 17

What are the requirements for income to be taxable?

Answer 17

taxpayer’s wealth has increased, they recognize the increase, there is no law excluding this type of income

Question 18

What is realized income?

Answer 18

all event occured to complete the earnings process

Question 19

What is recognized income?

Answer 19

realized income included in the computation of taxable income

Question 20

When exchanging services, what is recorded as income?

Answer 20

the value of the service you receive

Question 21

What makes a business transaction deductible?

Answer 21

it is ordinary, necessary, and reasonable

Question 22

What makes an investment transaction deductible?

Answer 22

it is ordinary, necessary, and resonable, and related to: production of income, management of property held for income

Question 23

What makes a personal transaction deductible

Answer 23

its charity, home mortgage interest expense, state & local taxes, medical expenses

Question 24

When must a gain or loss be calculated?

Answer 24

every time you sell or dispose of property

Question 25

What is amount realized?

Answer 25

value owner receives from disposition

Question 26

How is amount realized calculated?

Answer 26

cash + FMV + liabilities assumed by buyer - selling expenses

Question 27

When are repairs deductible?

Answer 27

is asset is for business

Question 28

How do you calculated realized G/L?

Answer 28

amount realized - adjusted basis

Question 29

When is excluded gain or loss included in taxable income?

Answer 29

never

Question 30

When is deferred gain or loss included in taxable income?

Answer 30

in a later year

Question 31

What is a boot?

Answer 31

property exchanged that is not qualified property for a particular deferral transaction

Question 32

Which is recognized: realized gain/loss or FMV

Answer 32

which ever is lower

Question 33

How do you calculate deferred gain/loss?

Answer 33

realized g/l - recognized g/l

Question 34

What is excluded in gains or losses?

Answer 34

boot, basis, holding period