Portfolio Management- 1-4

Question 1

What tax issues relate to the acquisition and disposition of investment vehicles?

Answer 1

a) Basis (including the at-risk rules)
b) Business, energy, and rehabilitation tax
credits
c) Timing of reporting gain or loss upon
disposition
d) Character of gain or loss upon disposition

Question 2

What is the starting point for determining the amount of gain or loss in aquisition and disposition of an investment vehicle. It can either be the cash paid or the sum of any asset purchased plus the fair market value of property exchanged for different property.

Answer 2

Basis

Question 3

What is the effect of having the gain from the sale of the property treated as a capital gain rather than ordinary income.

Answer 3

The character of gain or loss upon disposition

Question 4

Investors can use capital losses only
to offset capital gains and a limited amount of ordinary income (no more than _________ although
unused capital losses may be carried forward and utilized in future years indefinitely.

Answer 4

$3,000 per year
($1,500 in the case of married
taxpayers filing separately).

Question 5

Investors determine the amount of capital gain or
loss upon a taxable sale or exchange by computing the difference between _______________
and the __________________.

Answer 5

sales price or proceeds received

and the

investor’s tax basis (usually his cost) in the
capital asset.

Question 6

What provisions of the tax law require
taxpayers, to treat part of the gain on the sale of an investment vehicle as ordinary income instead of a capital gain?

Answer 6

provisions dealing with the original issue
discounts and depreciation recapture

Question 7

True or False
With certain limited exceptions, all securities held by investors are considered capital assets.

Answer 7

True

Question 8

What is the excess of long-term capital gains over short-term capital losses?

Answer 8

Net capital gain

Question 9

How is net capital gain calculated?

Answer 9

Separate the long-term capital gains and losses into three tax-rate groups:

(a) the 28 percent group, which generally includes collectibles gain and IRC Section 1202 gain

(b) the 25 percent group (i.e., IRC Section 1250 gain); and

(c) the remainder group, consisting of longterm
capital gains and losses not falling under
(a) or (b).

Any net short-term capital losses are
then applied to reduce any net gain from the 28
percent group, 25 percent group, and the remainder of the group in that order.

Question 10

How is adjusted net capital gain calculated?

Answer 10

Net capital gain is reduced, but not below zero) by the sum of the unrecaptured IRC Section 1250 gain plus the 28 percent rate gain. The reduced capital gains tax rate applies only to the adjusted net capital gain.

Question 11

What determines whether a capital asset falls into its category of short-term or long-term?

Answer 11

The time the investor holds it.

Question 12

When does the calculation of the holding period begin?

Answer 12

On the day after the investor acquires the property

Question 13

When is the same date
in each successive month considered the first day of
a new month?

Answer 13

6/1/2023, 7/1/2023, 8/1/2023

Question 14

The holding period includes __________. If property is acquired on the last day of a month, the holding period begins ________________________________

Answer 14

The date on
which the property is sold or exchanged.

On the first day of the following month.

Question 15

The specific holding periods are as follows:

Answer 15

(1) short-term—held for one year or less
(2) long-term— held for more than one year.

Question 16

Aside from real estate investments, the at-risk rules
apply to the following examples of activities engaged
in by an individual for the production of income:

Answer 16

1. Holding, producing, or distributing motion
   picture films or videotapes.
2. Farming.
3. Exploring for or exploiting oil and gas reserves
   or geothermal deposits.
4. Leasing of depreciable personal property.

Question 17

Special holding period rules apply for which types of investment vehicle transaction?

Answer 17

1) regulated futures contracts
(2) nonequity option contracts
(3) foreign currency contracts
(4) short sales
(5) wash sales
(6) tax straddles
(7) constructive sales
(8) constructive ownership transactions.

Question 18

An investor is considered at risk to the extent of:

Answer 18

1. cash invested; plus
2. the basis of property invested; plus
3. amounts borrowed for use in the investment
   that are secured by the investor’s assets (other
   than the property used in the investment
   activity); plus
4. amounts borrowed to the extent the investor is
   personally liable for repayment; plus
5. when the investment is made in partnership
   form—
   a) the investor-partner’s
   undistributed share
   of partnership income; plus
   b) the investor-partner’s
   proportionate share
   of partnership debt, to the
   extent he is personally liable
   for its repayment.

Question 19

A legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future.

Answer 19

1) regulated futures contracts

Question 20

a derivative contract with an underlying asset of instruments other than equities. Typically, that means a stock index, physical commodity, or futures contract, but almost any asset is optionable in the over-the-counter (OTC) market.

Answer 20

(2) nonequity option contracts

Question 21

contractual agreements between two parties to exchange a pair of currencies at a specific time in the future

Answer 21

(3) foreign currency contracts

Question 22

A transaction that occurs when investors agree to sell the property they do not own (or own but do not wish to sell).

They make this type of sale in two steps.
1. They sell short. They borrow property and
deliver it to a buyer.

2. They close the sale. At a later date, they either
   buy the identical property and deliver it to the
   the lender or make delivery out of property that
   they held at the time of the sale.

Answer 22

(4) short sales

Question 23

A transaction that occurs when investors sell or trade stock or securities at a loss and within thirty days before or after the sale investors:

1. buy substantially identical stock or securities;
2. acquire substantially identical stock or securities
   in a fully taxable trade; or
3. acquire a contract or option to buy substantially
   identical stock or securities.

Answer 23

(5) wash sales

Question 24

Wash-sale rule

Answer 24

It states that a taxpayer cannot claim a loss on the sale or trade of a security if it is replaced with a substantially identical security within 30 days. This rule is intended to prevent investors from manufacturing losses for tax purposes on securities that they are essentially continuing to hold. It prohibits an investor from taking a tax deduction if they sell an investment at a loss and repurchase the same investment, or a substantially identical one, within 30 days before or after the sale.

Question 25

neutral options strategy that involves simultaneously buying both a put option and a call option for the underlying security with the same strike price and same expiration date

Answer 25

(6) tax straddles

Question 26

making short sales against similar or identical positions and entering into futures or forward contracts that call for the delivery of an already-held asset

Investors are treated as doing so if they:
1. enter into a short sale of the same or substantially identical property;
2. enter into an offsetting notional principal
contract relating to the same or substantially
identical property;
3. enter into a futures or forward contract to
deliver the same or substantially identical
property (including a forward contract that
provides for cash settlement); or
4. acquire the same or substantially identical
property (if the appreciated financial position
is a short sale, an offsetting notional principal
contract, or a futures or forward contract).

Answer 26

(7) constructive sales

Question 27

If 50% or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such corporation is treated as owning the stock owned, directly or indirectly, by or for such person.

Answer 27

(8) constructive ownership transactions.

Question 28

When must the investor recapture some or all of the investment credit
(i.e., report as an additional tax).

Answer 28

If the investor holds the property for less than five years from the date he placed it in service

Question 29

What is a credit?

Answer 29

a dollar-for-dollar reduction in the investor’s tax

Question 30

What tax credits have been Congressional incentives to encourage
investment in certain types of property used in a trade
or business, including rental property?

Answer 30

Energy, rehabilitation, and low-income tax
credits

Question 31

The energy credit
has been set as a ______________ of the taxpayer’s qualified
investment in energy property

Answer 31

percentage

Question 32

The investor must reduce the property’s basis by:

Answer 32

1. 50 percent of the business energy tax credit.
2. 100 percent of the rehabilitation credits.

Question 33

When is the investor not subject to recapturing some or all of the investment credit
(i.e., report as an additional tax).

Answer 33

If an investor
holds the property for at least five full years from the
the date he placed it in service

If an investor dies or transfers investment in a tax-free transfer to a corporation for its stock.

Question 34

The rehabilitation
credit is available for expenditures incurred to _____________or were initially placed in service before 1936.

Answer 34

Rehabilitate buildings that are certified historic structures

Question 35

How much credit are rehabilitation expenditures for buildings that
qualify as certified historic structures eligible for?

Answer 35

20%

Question 36

How much credit are rehabilitation expenditures for buildings that do not qualify as certified historic structures eligible for?

Answer 36

10%

Question 37

This recapture has the effect of ______ the investor’s basis in the property.

Answer 37

increasing

Question 38

True or False: The energy credit is limited to some maximum

Answer 38

True

Question 39

True or False: The ability to time the reporting of gain or loss is critical to enhancing the success of the investor.

Answer 39

True

Question 40

True or False: The seller has to receive payments in the year of sale

Answer 40

False

Question 41

One such limitation is that taxpayers may not use the installment sale method for the sale
of stock or securities that are traded on a(n) ________________.

Answer 41

established securities market.

Question 42

When is a transaction closed?

Answer 42

A transaction is closed when the seller transfers title to the property in exchange
for cash or other proceeds.

Question 43

True or False: the seller will receive at least one payment in a year after the year of sale.

Answer 43

True

Question 44

Why must the investor reduce basis when working with energy and tax rehabilitation credits?

Answer 44

To compute both future depreciation deductions and
gain or loss upon the sale or other taxable disposition
of the asset.

Question 45

Who issues energy, rehabilitation, and low-income tax
credits?

Answer 45

Congress

Question 46

The amount of the general
business credit that may offset income taxes in any one
year is _________.

Answer 46

limited

Question 47

The increase in the investor’s basis in the property, as part of the recapture, is treated as if it were made immediately ______ the disposition.

Answer 47

before

Question 48

Types of future contracts

Answer 48

Commodity Futures, Currency Futures, Interest Rate Futures, and Stock Futures

Question 49

Limits an investor’s basis through debt. These rules limit deductions in borrowing money that can be considered “at-risk” for tax purposes.

Answer 49

At-Risk Rules

Question 50

Limits an investor’s basis through debt. These rules limit deductions in borrowing money that can be considered “at-risk” for tax purposes.

Answer 50

At-Risk Rules

Question 51

An investor’s purchased sset is called:

Answer 51

Investor’s original basis

Question 52

The at-risk rules cover essentially all investment activities except

Answer 52

real estate aquired before 1987

Question 53

An investor is considered at risk to the extent of:

Answer 53

1. cash invested; plus
2. the basis of property invested; plus
3. amounts borrowed for use in the investment
   that are secured by the investor’s assets (other
   than the property used in the investment
   activity); plus
4. amounts borrowed to the extent the investor is
   personally liable for repayment; plus
5. when the investment is made in partnership
   form—
   a) the investor-partner’s undistributed share
   of partnership income; plus
   b) the investor-partner’s proportionate share
   of partnership debt, to the extent he is
   personally liable for its repayment.

Question 54

Aside from real estate investments, at-risk rules apply to:

Answer 54

1. Holding, producing, or distributing motion
   picture films or videotapes.
2. Farming.
3. Exploring for or exploiting oil and gas reserves
   or geothermal deposits.
4. Leasing of depreciable personal property.

Question 55

True or False: The ability to time the reporting of gain or loss is critical
to enhancing the success of the investor?

Answer 55

True

Question 56

What are the problems of determining the correct year to
report income or take deductions?

Answer 56

Requirements
that income must be reported on the basis of
annual periods.

Question 57

The mere signing of an agreement to sell does or does not trigger the recognition of gain or loss?

Answer 57

Does not

Question 58

True or False: A transaction is not closed
until the seller transfers title to the property in exchange
for cash or other proceeds?

Answer 58

True

Question 59

What is the key ingredient in an installment
sale?

Answer 59

the seller will receive at least one payment
in a year after the year of sale.

Question 60

Without
the installment sale rules, the investor would incur a
large tax in one year even if __________________________ to pay the tax

Answer 60

he does not have sufficient
cash from the transaction

Question 61

What are the four basic rules for installment sales?

Answer 61

The basic rules for installment sale reporting include
the following:
1. A seller of property can defer as much or as
little as desired and can set payments to fit his financial needs. Even if the seller receives
payments in the year of sale, he may still
use the installment method for the unpaid
balance.
2. The seller does not have to receive any payments
in the year of sale. An investor may
contract to have payments made to him at the
time when it is most advantageous (or the least
disadvantageous).
3. Installment sale treatment is automatic unless
the investor affirmatively elects not to have
installment treatment apply. No special election
is required.
4. The contract may provide that the installment
note receivable is independently secured (such
as with a letter of credit obtained from a bank)
without triggering the recognition of income
when the note is secured.

Question 62

What is a limitation of the installment sale method?

Answer 62

One such limitation is that taxpayers
may not use the installment sale method for the sale
of stock or securities that are traded on an established
securities market.

Question 63

Provide an example of a straddle

Answer 63

may consist of
a purchased option to buy and a purchased option to
sell on the same number of shares of the security, with
the same exercise price and period.

Question 64

What are the two exceptions of stock being includedin the definition of personal property when applying the straddle rules?

Answer 64

The stock is part of a straddle in which at least
one of the offsetting positions is:
a) an option to buy or sell the stock or substantially
identical stock or securities;
b) a securities futures contract on the stock or
substantially identical stock or securities; or
c) a position on substantially similar or
related property (other than stock).
2. The stock is in a corporation formed or availed
of to take positions in personal property that
offset positions taken by any shareholder.

Question 65

Presumed Offsetting positions are two or more positions that are presumed to be offsetting if (name all 5 conditions)

Answer 65

the positions are established in the same personal
property (or in a contract for this property),
and the value of one or more positions
varies inversely with the value of one or more
of the other positions;
2. the positions are in the same personal property,
even if this property is in a substantially
changed form, and the positions’ values vary
inversely as described in the first condition;
3. the positions are in debt instruments with a
similar maturity, and the positions’ values vary
inversely as described in the first condition;
4. the positions are sold or marketed as offsetting
positions, whether or not the positions
are called a straddle, spread, butterfly, or any
similar name; or
5. the aggregate margin requirement for the
positions is lower than the sum of the margin
requirements for each position if held
separately.

Question 66

How do related persons determine if the positions are offsetting?

Answer 66

To determine if two or more positions
are offsetting, investors will be treated as holding
any position that their spouses hold during the same
period. If investors take into account part or all of the
gain or loss for a position held by a flow-through entity,
such as a partnership or trust, they are also considered
to hold that position.

Question 67

Define personal property

Answer 67

This is any property of a type that
is actively traded. It includes stock options and contracts
to buy stock, but generally does not include stock.

Question 68

What are the conditions for investors to deduct a loss?

Answer 68

Generally, investors can deduct a loss on the disposition
of one or more positions only to the extent that the loss is more than any unrecognized gain they have
on offsetting positions. Unused losses are treated as
sustained in the next tax year.

Question 69

What are the two components of an unrecognized gain

Answer 69

Unrecognized Gain – This is:
1. the amount of gain investors would have had
on an open position if they had sold it on the last
business day of the tax year at its fair market
value; and
2. the amount of gain realized on a position if, as
of the end of the tax year, gain as been realized,
but not recognized.

Question 70

Provide an example of an unrecognized gain

Answer 70

On July 1, Dave entered into a
straddle. On December 16, he closed one position
of the straddle at a loss of $15,000. On
December 31, the end of his tax year, Dave has
an unrecognized gain of $12,750 in the offsetting
open position. On his return for the year,
his deductible loss on the position he closed is
limited to $2,250 ($15,000 - $12,750). He must
carry forward to the following year the unused
loss of $12,750.

Question 71

What are the exceptions of the loss deferral rules? (4)

Answer 71

a straddle that is an identified straddle at the
end of the tax year;
2. certain straddles consisting of qualified covered
call options and the stock to be purchased under
the options;
3. hedging transactions; and
4. straddles consisting entirely of IRC Section
1256 contracts (but see “Identified Straddle,”
next).

Question 72

A straddle is not subject to the loss deferral rules for
straddles if both of the following are true:

Answer 72

All of the offsetting positions consist of one or
more qualified covered call options and the
stock to be purchased from the investor under
the options.
2. The straddle is not part of a larger straddle.
But see “Special Year-End Rule,” later, for an
exception.

Question 73

What is a deep-in-the-money option?

Answer 73

an option with a
strike price lower than the Lowest Qualified Benchmark
(LQB).

Question 74

If the applicable stock price is $25 or less, the LQB will _________________________

If the applicable stock price is $150 or less,
the LQB will be treated as ___________________________________________

Answer 74

be treated as not less than 85 percent of the applicable stock price

not less than an amount that
is $10 below the applicable stock price.

Question 75

What are the exceptions of the loss deferral rules? (4)

Answer 75

a straddle that is an identified straddle at the
end of the tax year;
2. certain straddles consisting of qualified covered
call options and the stock to be purchased under
the options;
3. hedging transactions; and
4. straddles consisting entirely of IRC Section
1256 contracts (but see “Identified Straddle,”
next).

Question 76

Special Year-End Rule – The loss deferral rules for
straddles apply if all of the following are true: (3)

Answer 76

1. The qualified covered call options are closed
   or the stock is disposed of at a loss during any
   tax year.
2. Gain on disposition of the stock or gain on the
   options is includable in gross income in a later
   tax year.
3. The stock or options were held less than thirty
   days after the closing of the options or the
   disposition of the stock

Question 77

What are Alternative Investments?

Answer 77

Almost any asset that is not traditional in nature, from real estate and commodities to rare coins and artwork. They can be made directly or indirectly.

Question 78

What is distressed credit?

Answer 78

It is when a company experiences financial distress (bankruptcy)