REG: Post Assessment III.1 Flashcards
Fred Zorn died on January 5, 2018, bequeathing his entire $2,000,000 estate to his sister, Ida.
The alternate valuation date was validly elected by the executor of Fred’s estate. Fred’s estate included 2,000 shares of listed stock for which Fred’s basis was $380,000.
This stock was distributed to Ida nine months after Fred’s death.
Fair market values of this stock were:
At the date of Fred’s death $400,000
Six months after Fred’s death 450,000
Nine months after Fred’s death 480,000
Ida’s basis for the stock is:
$380,000
$400,000
$450,000
$480,000
$450,000
When the alternate valuation date is elected, the basis of the property becomes its fair market value on the date that is six months after the date of death.
Hall, a divorced person and custodian of her 12-year-old child, files her 2018 federal income tax return as head of a household. She submits the following information to the CPA, who prepares her 2018 return:
In 2018, Hall sells an antique that she bought in 1996 to display in her home. Hall pays $800 for the antique and sells it for $1,400, using the proceeds to pay a court-ordered judgment.
The $600 gain that Hall realizes on the sale of the antique should be treated as
Ordinary income.
Long-term capital gain.
An involuntary conversion.
A non-taxable antiquities transaction.
Long-term capital gain.
Property held for personal use is a capital asset and any gain from the sale or exchange of such an asset is reported as a capital gain. Capital gains must be classified as long- or short-term, depending on the holding period. A gain is classified as short-term if the property sold or exchanged is held for one year or less and as long-term if the property sold or exchanged is held for more than one year.
Hall purchased the antique in 1996 for personal use. Hence, the antique would be a capital asset and, owing to her holding the asset for more than one year, any gain from the sale of the antique would be long-term in nature. Therefore, Hall must report a long-term capital gain of $600 from the sale of her antique.
In the current year, Fitz, a single taxpayer, sustained a $48,000 loss on Code Sec. 1244 stock in JJJ Corp., a qualifying small business corporation, and a $20,000 loss on Code Sec. 1244 stock in MMM Corp., another qualifying small business corporation. What is the maximum amount of loss that Fitz can deduct for the current year?
$50,000 capital loss
$68,000 capital loss
$18,000 ordinary loss and $50,000 capital loss
$50,000 ordinary loss and $18,000 capital loss
$50,000 ordinary loss and $18,000 capital loss
If Section 1244 stock is sold at a loss the loss is treated as an ordinary loss up to the applicable limit. The limit applies per calendar year and is $50,000 for single taxpayers and $100,000 for those filing as married-joint. Fitz’s total Section 1244 losses are $68,000 but only $50,000 of the loss is characterized as ordinary. The remaining $18,000 is treated as a capital loss since investments are a capital asset.
Individual Lark’s year 2 brokerage account statement listed the following capital gains and losses from the sale of stock investments:
Short-term capital gain $ 6,000 Long-term capital gain 14,000 Short-term capital loss 4,000 Long-term capital loss 8,000 In addition, two stock investments became worthless in year 2. Public Company X stock was purchased in December, year 1, for $5,000, and formal notification was received by Lark on July, year 2, that it was worthless. Private company Section 1244 stock was issued to Lark for $10,000 in January, year 1, and was determined to be worthless in December, year 2. What is Lark's year 2 net capital gain or loss before any capital loss limitation?
$3,000 short-term capital gain
$2,000 short-term capital gain and $1,000 long-term capital gain
$7,000 net capital loss
$2,000 short-term capital gain and $6,000 long-term capital gain
$2,000 short-term capital gain and $1,000 long-term capital gain
The Section 1244 loss is an ordinary loss so it is not included in the computation of the net capital gain or loss. The worthless stock of Company X results in a $5,000 long-term capital loss because worthless securities are deemed to become worthless on the last day of the tax year (December 31, Year 2).
Lark has a net short-term capital gain of $2,000 ($6,000 STCG − $4,000 STCL). There is a net long-term capital gain of $1,000 ($14,000 LTCG − $8.000 LTCL − $5,000 LTCL).
Lee qualifies as head of a household for 2018 tax purposes. Lee’s 2018 taxable income is $100,000, exclusive of capital gains and losses. Lee has a net long-term loss of $8,000 in 2018.
What amount of this capital loss can Lee offset against 2018 ordinary income?
$0
$3,000
$4,000
$8,000
$3,000
Noncorporate taxpayers may deduct capital losses to the extent of capital gains. However, if the taxpayer’s capital losses exceed his/her capital gains, the deduction of the loss is limited to the lower of $3,000 or the amount by which capital losses exceed capital gains. Lee has no capital gains with which to offset the capital loss and, as a result, capital losses exceed capital gains. Therefore, the deduction of the loss is limited to the lower of $3,000 and the amount by which capital losses exceed capital gains.
Lee’s capital losses exceed capital gains by $8,000, the amount of Lee’s capital loss. Hence, Lee may offset ordinary income by a capital loss of $3,000.
When a corporation has an unused net capital loss that is carried back or carried forward to another tax year,
It retains its original identity as short term or long term.
It is treated as a short-term capital loss, whether or not it was short term when sustained.
It is treated as a long-term capital loss, whether or not it was long term when sustained.
It can be used to offset ordinary income, up to the amount of the carryback or carryover.
It is treated as a short-term capital loss, whether or not it was short term when sustained.
Whether or not a net capital loss was short term when sustained, the carryover (five years) and carryback (three years) is treated as a short-term capital loss.
Kaitlin owns a computer that she uses for business, investment, and personal use, as follows:
Personal use. 25%
Investment use. 30%
Business use. 45%
Will Kaitlin’s use qualify her to use accelerated or straight-line depreciation, and what percentage of the asset’s basis qualifies to be depreciated?
Straight-line, 45%.
Accelerated, 45%.
Straight-line, 75%.
Accelerated, 75%.
Straight-line, 75%
A computer qualifies as listed property, and MACRS accelerated depreciation can be claimed for listed property only if the business use of the asset exceeds 50% of the total use. Since Kaitlin’s business use is 45%, she does not meet the 50% test and must use straight-line (ADS) depreciation. However, she can depreciate both the business and investment use of the asset, so 75% of the asset’s basis qualifies to be depreciated.
In the current year Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered by a $70,000 mortgage. Each party assumed the other’s mortgage. What is the amount of Tatum’s recognized gain?
$0
$ 50,000
$100,000
$150,000
$50,000
This transaction qualifies as a like-kind exchange because farmland (realty) was exchanged for an office building (realty). The realized gain on the property transaction is computed as follows:
Amount Realized: Office building received $350,000
Debt relief 120,000
Debt assumed (70,000)
$400,000
Adjusted Basis in farmland (250,000)
Realized Gain $150,000
The recognized gain is the lower of the realized gain ($150,000) or the boot received ($50,000). Note that debt relief ($120,000) is considered boot for a like-kind exchange, but the debt relief can be reduced (but not below zero) by any debt assumed ($70,000) in the exchange.
Browne, a self-employed taxpayer, has 2018 business net income of $15,000 prior to any expense deduction for equipment purchases. In 2018, Browne purchases and places into service, for business use, office machinery costing $20,000. This is Browne’s only 2018 capital expenditure.
Browne’s business establishment is not in an economically distressed area. Browne makes a proper and timely expense election to deduct the maximum amount (ignoring bonus depreciation). Browne is not a member of any pass-through entity.
What is Browne’s deduction under the election?
$4,000
$10,000
$15,000
$20,000
$15,000
Property purchased for use in active trade or business is considered Code-Section 1245 property. Code-Section 1245 property is eligible for the Code-Section 179 election. Under this election, taxpayers may expense a statutory amount of the cost of property used by the taxpayers in active trade or business. The statutory amount is $520,000 for 2018. The Code-Section 179 deduction is limited to the amount of taxable income originating from the trade or business in which the property is used and is reduced dollar-for-dollar when the taxpayer places qualifying tangible personal property in service that exceeds $2,070,000. Since Browne purchases the equipment for use in business, the property qualifies as Code-Section 1245 property and, therefore, is eligible for the Code-Section 179 deduction. Browne’s income could limit the amount of the deduction, because the statutory amount, $520,000, is more than Browne’s business income of $15,000. Hence, Browne may elect under Code Section 179 to deduct $15,000. The remaining $5,000 of the cost of $20,000 can be carried over to future years.
