STUDY UNIT SIX PROPERTY TRANSACTIONS Flashcards
Which of the following costs is includible in inventory under the uniform capitalization rules for merchandise manufactured by a company for sale to its customers? A Advertising. B General legal fees. C Selling expenses. D Engineering.
D Engineering.
This answer is correct.
A manufacturer capitalizes costs for construction of real or tangible personal property to be used or sold in a trade or business. Both direct and most allocable indirect costs necessary to prepare the inventory for its intended use must be capitalized. Therefore, the engineering costs are direct costs that are related to the construction or creation of the inventory to be sold by the manufacturer.
On March 1, Year 1, Harry Beech received a gift of income-producing real estate having a donor’s adjusted basis of $50,000 at the date of the gift. Fair market value of the property at the date of the gift was $40,000. Beech sold the property for $46,000 on August 1, Year 1. How much gain or loss should Beech report for Year 1? A $4,000 short-term capital loss. B $4,000 ordinary loss. C No gain or loss. D $6,000 short-term capital gain
C No gain or loss.
This answer is correct.
For the purpose of computing gain, a donee’s basis is the same as the donor’s basis. For computing loss, the donee takes the lower of the donor’s basis or the fair market value of the property (Sec. 1015). Beech has no gain or loss, as shown below.
Gain
Loss
Amount realized
$46,000
$46,000
Less basis
(50,000)
(40,000)
Gain (loss)
No gain
No loss
Harold Crowe had the following capital transactions for Year 1: $3,000 long-term capital loss 9,000 long-term capital gain 2,000 net short-term capital gain What is the amount of Crowe’s reportable capital gain net income in the Year 1 Schedule D summary? A $6,000 B $8,000 C $11,000 D $5,000
B $8,000
This answer is correct.
Schedule D is used to report capital gains and losses, and the summary combines the long-term gains (losses) with the short-term gains (losses). When these capital gains and losses all net to a gain, it is called “capital gain net income.” This has occurred in the question and is computed below.
Net long-term capital gain ($9,000 – $3,000)
$6,000
Net short-term capital gain
2,000
Capital gain net income
$8,000
Do not confuse the term “capital gain net income” with the term “net capital gain.” A “net capital gain” is the excess of net long-term capital gains over net short-term capital losses. It does not include net short-term capital gains. The difference is important because the net capital gain term is used in applying the 28%/25%/15% maximum tax rate on capital gains. The 28%/25%/15% maximum tax rate does not apply to net short-term capital gains.
Capital assets include
A A corporation’s accounts receivable from the sale of its inventory.
B Seven-year MACRS property used in a corporation’s trade or business.
C A corporate real estate developer’s unimproved land that is to be subdivided to build homes, which will be sold to customers.
D A manufacturing company’s investment in U.S. Treasury bonds.
D A manufacturing company’s investment in U.S. Treasury bonds.
This answer is correct.
Capital assets are all property held by a taxpayer not excluded by the IRC. Among the items excluded are accounts receivable, depreciable property, and real property used in a trade or business. The investment in U.S. Treasury bonds is a capital asset
Adjusted basis is the original cost of an asset increased or decreased to reflect fair-market value.
True. False.
False.
Your answer is correct.
Initial basis is adjusted consistent with tax relevant events
Under MACRS, residential rental property has a 27 1/2-year recovery period.
True. False.
Correct
True.
Your answer is correct.
Under MACRS, residential rental property has a straight-line rate based on a 27 1/2-year recovery period. Residential rental property is real property with at least 80% of gross rents coming from dwelling units.
In a qualified like-kind exchange, realized gain is usually recognized only to the extent of boot (cash + FMV of other property + liability relief) received.
True. False.
True.
Your answer is correct.
Gain is recognized equal to the lesser of gain realized or boot received including cash, net liability relief, and other nonqualified property (its FMV).
In Year 1, Rick bought a collectible watch for his own use at a cost of $8,000. In Year 5, when the fair market value was $12,000, Rick gave this watch to his son, Chris. No gift tax was due. What is he holding period and the type of asset?
Starts Year 1
Capital asset
This answer is correct.
The basis of property acquired by gift is generally the same as the basis in the hands of the donor. The holding period of property that has a transferred basis includes the holding period of the prior owner. Chris’s holding period, therefore, begins in Year 1 when Rick purchased the watch. Capital assets include all property held by a taxpayer unless excluded by the IRC. Personal-use property, such as jewelry, is a capital asset.
View Subunit 6.3 Outline
Danielson invested $2,000,000 in DEC, a qualified small business corporation. Six years later, Danielson sold all of the DEC stock for $16,000,000 and purchased an office building with the proceeds. Danielson had not previously excluded any gain on the sale of small business stock. What is Danielson’s taxable gain after the exclusion? A $9,000,000 B $7,000,000 C $0 D $6,000,000
B $7,000,000
This answer is correct.
Taxpayers may exclude 50% of the gain from the sale or exchange of small business stock if the stock was held for more than 5 years. Danielson has realized gain of $14,000,000 ($16,000,000 sales price – $2,000,000 AB), but only needs to recognize $7,000,000 (50% × $14,000,000) as a taxable gain.
View Subunit 6.3 Outline
Soft Cream sells franchises to independent operators. In the current year, it sold a franchise to Edward Trent, charging an initial fee of $20,000 and a monthly fee of 2% of sales. Soft Cream retains the right to control such matters as employee and management training, quality control and promotion, and the purchase of ingredients. Mr. Trent’s current-year sales amounted to $200,000. From the transactions with Trent, Soft Cream, an accrual-basis taxpayer, should include in its computation of taxable income
A Long-term capital gain of $4,000, ordinary income of $20,000.
B Long-term capital gain of $20,000, ordinary income of $4,000.
C Ordinary income of $24,000.
D Long-term capital gain of $24,000.
C Ordinary income of $24,000.
This answer is correct.
The transfer of a franchise is not treated as a sale or exchange of a capital asset if the transferor retains significant power, rights, or continuing interest with respect to the franchise. The right to control employee and management training, quality control and promotion, and the purchase of ingredients constitutes significant power, rights, and continuing interest. Therefore, the transfer is not a sale but merely a licensing agreement, and all the income ($20,000 initial fee and $4,000 monthly fee) is ordinary income.
View Subunit 6.3 Outline
Ben Green operates a parking lot that yielded net income of $13,000 during 2014. The only other transactions that Mr. Green had during the year were a gain of $16,000 on the sale of some Westinghouse Corporation stock that he bought 2 years ago, a loss of $10,000 on the sale of 1 acre of the land used in his parking lot business, and a gain of $4,000 on the sale of 1/2 acre of the land used in his parking lot business. All of the land used in his parking lot operations was purchased 7 years ago. Mr. Green’s net capital gain from sale or exchange of capital assets for 2014 is A $16,000 B $20,000 C $6,000 D $10,000
A $16,000
This answer is correct.
Net capital gain is the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for the year. Mr. Green had two Sec. 1231 transactions: the $10,000 loss and the $4,000 gain. Real property (land) used in a trade or business is a Sec. 1231 asset, and land is neither Sec. 1245 nor Sec. 1250 property. These transactions result in a net Sec. 1231 loss of $6,000, so both are treated as ordinary gains and losses. The remaining sale resulted in a $16,000 long-term capital gain. Green’s net capital gain is $16,000.
View Subunit 6.7 Outline
Which one of the following is a capital asset when a business was built by the taxpayer?
A Delivery truck.
B Machinery used in business.
C Land used as a parking lot for customers.
D Goodwill.
D Goodwill.
This answer is correct.
Capital assets include all property held by a taxpayer unless excluded by the IRC. Goodwill is not excluded unless it was acquired in connection with a trade or business. Goodwill acquired is thus treated as amortizable property, which is not a capital asset. Internally generated goodwill, however, is a capital asset.
View Subunit 6.3 Outline
Under the modified accelerated cost recovery system (MACRS) of depreciation for property placed in service after 1986,
A The recovery period for depreciable realty must be at least 27.5 years.
B Salvage value is ignored for purposes of computing the MACRS deduction.
C No type of straight-line depreciation is allowable.
D Used tangible depreciable property is excluded from the computation.
B Salvage value is ignored for purposes of computing the MACRS deduction.
This answer is correct.
Salvage value is treated as zero in computing the amount allowable as a depreciation deduction under the MACRS. Used tangible property is depreciable under MACRS. The straight-line method is required for certain property, e.g., listed property. The 10-, 15-, and 20-year MACRS classes include certain real property, e.g., farm buildings.
View Subunit 6.2 Outline
John Budd is the sole shareholder of Ral Corp., an accrual-basis taxpayer engaged in wholesaling operations. Ral’s retained earnings at January 1, 2014, amounted to $1 million. For the year ended December 31, 2014, Ral’s book income before federal income tax was $300,000. Included in the computation of this $300,000 was the following:
Amortization of cost of acquiring a perpetual dealer’s franchise (Ral paid $48,000 for this franchise on July 1, 2014, and is amortizing it over a 48-month period.)
$6,000 What amount is deductible in Ral’s 2014 return for purchase of the dealer’s franchise? A $0 B $6,000 C $1,200 D $1,600
D $1,600
This answer is correct.
The cost of certain intangibles acquired (not created) in connection with the conduct of a trade or business or income-producing activity is amortized over a 15-year period, beginning with the month in which the intangible is acquired. A franchise is a qualified intangible. Thus, Ral may deduct $1,600 ($48,000 ÷ 15 × 6/12).
View Subunit 6.2 Outline
Which of the following is Sec. 1250 property?
A. Dams.
B. Irrigation system.
C. Land held for investment.
D. Lease on land.
D. Lease on land.
Answer (D) is correct.
Land is not Sec. 1250 property, but leases are Sec. 1250 intangible properties. Certain improvements to land may be treated as land, e.g., dams and irrigation systems. Sec. 1250 property includes depreciable real property acquired after 1986.
(6.7.174)
