UNIT 02.03-001 Flashcards
In the prior year, your customer realized a $17,000 short-term capital loss and a $6,000 long-term capital gain. What are the tax results of these transactions?
A $3,000 reduction in income and $8,000 in carry forward losses
The customer netted $11,000 in losses, of which $3,000 may be used to reduce income and $8,000 may be carried forward into the following years.
The conduit theory of taxation helps mutual funds reduce the impact of
triple taxation.
The conduit (or pipeline) theory eliminates one level of the three that impact dividends. The money used to pay a mutual fund dividend is still taxed at the original corporate level and again at the individual taxpayer level (double taxation) but provides a break at the fund level, thus avoiding triple taxation.
In order to be considered a long-term gain a position must be held for how long?
MORE than one year
In order to be treated as long-term a position must be held for MORE than one year.
Note that a holding period of EXACTLY one year is still short-term.
In order for an investor to realize a capital gain or loss, a ____ must take place.
sale
In order for a capital gain or loss to be realized, a sale must occur. The holding period will define the gain or loss as long or short-term.
Your customer has sold 300 shares of ABC Semiconductor, Inc., common stock for a loss. Fifteen days later they enter a buy order. Which of the following purchases would NOT trigger a wash sale?
NOT buying the SAME security
Buy 300 shares of LMN Semiconductor, Inc.
A wash sale may be triggered by re-establishing a position in the SAME security (regardless of the account) or a security that may be converted or exercised into the same security.
SEC rules require that OPEN-END management companies DISTRIBUTE DIVIDENDS to their investors FROM the FIRM’S ___ investment income.
net investment income.
Dividends must be paid from the net investment income.
Under the IRC Subchapter M, if WWF fund only distributes 85% of its net investment income to its shareholders, then
the fund must pay taxes on ___% of the net investment income.
the shareholder must pay taxes if the income is received in ____ or _____
the fund must pay taxes on 100% of the net investment income.
the shareholder must pay taxes if the income is received in cash or reinvested.
To avoid triple taxation according to the IRC Subchapter M, an investment company must distribute at least 90% of its net investment income. Because WWF fund only distributed 85% of its net investment income, it must pay taxes on 100% of the net investment income. Shareholders always pay taxes on taxable income, whether received in cash or reinvested.
The COST BASIS of INHERITED SHARES are based upon which of the following?
The ______ of the stock on the ____ of the decedent’s death
The VALUE of the stock on the DAY of the decedent’s death
The cost basis of an inherited security is based on the value on the day of death.
If you invest in a front-end load mutual fund and choose automatic reinvestment, you should expect that
dividend distributions will be reinvested at __________.
capital gains distributions will be reinvested at __________.
dividend distributions will be reinvested at net asset value.
capital gains distributions will be reinvested at net asset value.
Mutual funds that offer automatic reinvestment of dividends and gains distributions must do so at net asset value.
Amy bought 300 shares of Cooper Advanced Research, Inc., at a price of $72 per share. After holding the shares for THREE months, Amy sold the stock for $73 per share.
From this transaction Amy realizes a $_____ _____-term capital _____.
a $300 short-term capital gain.
Amy sold the stock for one dollar more than she bought it, so generating a one dollar gain. With a holding period of three months, the gain will be taxed as a short-term gain.
An open-end investment company that does not distribute at least 90% of its net income
is liable for federal taxes on its net investment income.
Investment companies that do not distribute at least 90% of their net investment income become liable for federal income taxes on all the net investment income.
Shareholders would also be responsible for taxes on any distributions received. By distributing 90% of investment income, open-end companies can avoid double taxation.
Your customer uses the FIFO method to determine his capital gains. What does this mean?
The first shares purchased are the first shares redeemed.
FIFO means first in, first out. This is also what the IRS assumes if the method of redemption is not specified.
Which of the following statements is true of mutual fund dividend distributions?
The fund pays dividends from _______
The fund pays dividends from net investment income.
Mutual funds pay dividends from net investment income, and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash.
The Windmill Balanced Fund holds a mix of stocks and bonds. In the current year they received $500,000 in dividends from stocks and $600,000 in interest from bonds. Over the year they have had $100,000 in expenses. What is the fund’s net investment income?
$1 million
The formula for net investment income is dividends + interest – expenses. $500,000 + $600,000 = $1.1 million. $1.1 million – 100,000 = $1 million.
