M3-Gains and Losses

Question 1

Capital assets include property (real and personal) held by the taxpayer, such as:

Answer 1

• personal automobile of individual taxpayer
• furniture and fixtures in the home of the individual taxpayer
• Stocks and securities of all types (except those held by dealers)
• Personal property of a taxpayer not used in a trade or business
• Real property not used in a trade or business
• Interest in a partnership
• Goodwill of a corporation
• Copyrights, literary, musical, or artistic compositions that have been purchased
• Other assets held for investment

Investments assets of a taxpayer that are not inventory are capital assets. The manufacturing company would have capital assets including an investment in US treasury bonds

A/R generated from the sale of inventory are excluded from the statutory definition of capital assets.

Depreciable property used in a trade or business is excluded from the statutory definition of capital assets.

Land is usually a capital asset, but when it is effectively inventory, as when it is used by a developer to be subdivided, it is excluded from the statutory definition of capital assets.

Question 2

An investment in a capital asset (e.g., stock) results in the income being capital (either a capital loss or a capital gain). (true or false)

Answer 2

true

Question 3

Items that are NOT capital assets include:

Answer 3

• Property normally included in inventory or held for sale to customers in the ordinary course of business
• Depreciable personal property and real estate used in a trade or business
• Accounts and notes receivable arising from sales or services in the taxpayer’s business
• Copyrights, literary, musical, or artistic compositions held by the ORIGINAL artist (with the exception of musical compositions held by the original artist)
• Treasury stock (not an ordinary asset and not subject to capital gains treatment)

Question 4

Under the installment method, revenue is reported over the period in which the cash payments are received. (true or false)

Answer 4

true

The amount of cash received is multiplied by the gross profit percentage on the sale to determine the revenue (which retains its character as capital gain or ordinary income, depending on the transaction).

Step 1: Find gross Profit
Sale Price
(Cost)
--------------
Total gross profit

Step 2: Find gross profit percentage
Gross Profit/Sale on installment

Step 3: Find taxable gross profit:
Collections x Gross Profit Percentage

Question 5

1231 assets are all depreciable assets and all real property used in a trade or business and held over 12 months. (true or false)

Answer 5

true

Question 6

Installment sale treatment of gains is allowed between related parties. (true or false)

Answer 6

true

Installment sale treatment of gains from DEPRECIABLE property is generally disallowed between related parties. However in this example it is a dad selling LAND to a son. Land is not a depreciable property so its okay.

Question 7

If a security becomes worthless in the current taxable year, it is treated as sold or exchanged on what date?

Answer 7

The last day of the current taxable year

Question 8

Section 1245 only requires that the lesser of the depreciation taken or the gain recognized be recaptured. (true or false)

Answer 8

true

Question 9

Under Section 1245 (office furniture qualifies as section 1245 property because it is not real property), the total depreciation deducted will be recaptured as ordinary income, and the remainder will be section 1231 gain (taxed as long-term capital gain). (true or false)

Answer 9

true

Question 10

Upon disposition of tangible depreciable property used in a business, ordinary income is recognized to the extent of the lesser of the amount of gain realized or the depreciation which was allowed or allowable. (true or false)

Answer 10

true