Exam 14: Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions

Section 1231 property generally includes certain purchased intangible assets (such as patents and goodwill) that are eligible for amortization and held for more than one year.

Recognized gains and losses from the disposition of a capital asset may occur as a result of a:

For tax purposes, there is no original issue discount on a bond unless the bond is issued for less than its face value and the difference between the face value and the bond issue price is at least one-fourth of 1% of the redemption price at maturity multiplied by the number of years to maturity.

An individual business taxpayer owns land on which he grows trees for logging. The land has been held more than 10 years and the trees growing on the land were planted eight years ago. Normally, the timber would be inventory for this taxpayer, but the tax law allows the taxpayer to elect to treat cutting the timber as the disposition of a § 1231 asset.

Short-term capital losses are netted against long-term capital gains, and long-term capital losses are netted against short-term capital gains.

In 2019, an individual taxpayer has $863,000 of taxable income that includes $48,000 of 0%/15%/20% long-term capital gain. Which of the following statements is correct?

A business machine purchased April 10, 2017, for $98,000 was fully depreciated in 2017 using § 179 immediate expensing. On August 15, 2019, the machine was sold for $67,000. What is the amount and nature of the gain or loss from disposition of the machine?

Nonrecaptured § 1231 losses from the six prior tax years may cause current-year net § 1231 gain to be treated as ordinary income.

Property sold to a related party that is depreciable by the purchaser may cause the seller to have ordinary gain.

Samuel, head of household with two dependents, has 2019 wages of $26,000, paid alimony of $3,000, has taxable interest income of $2,000, and a $12,000 0%/15%/20% net long-term capital gain. Samuel uses the standard deduction and is age 38. What is his 2019 taxable income and the tax on the taxable income?

On January 18, 2018, Martha purchased 200 shares of Blue Corporation stock for $2,000. On November 11, 2019, she sold short 200 shares of Blue stock, which she borrowed from her broker for $2,300. On February 10, 2020, Martha closed the short sale by delivering the 200 shares of Blue stock which she had acquired in 2018. On that date, Blue stock had a market price of $4 per share. What is Martha's recognized gain or loss and its character in 2019? In 2020?

Jambo invented a new flexible cover for a popular brand of cell phone, but did not have the finances to produce it.Instead, he sold all his rights to the invention (after patenting it) for $450,000 plus $0.10 for each cover sold by the company that purchased the patent. Jambo had a zero tax basis for the invention. What is the character of his gain from disposition of the patent?

Which of the following is correct?

Vertical, Inc., has a 2019 net § 1231 gain of $67,000 and had a $22,000 net § 1231 loss in 2018. For 2019, Vertical's net § 1231 gain is treated as:

Assume that a building is subject to § 1250 depreciation recapture because bonus depreciation [§ 168(k)] was used. The building is destroyed in a hurricane, which is the taxpayer's only casualty or theft for the year. In which of the following situations could there be a § 1250 depreciation recapture gain?

Once § 1231 gains are netted against § 1231 losses, if the gains exceed the losses, the net gain is offset by the lookback nonrecaptured § 1231 losses.

Lease cancellation payments received by a lessor are always ordinary income because they are considered to be in lieu of rental payments.

Gold Company signs a 13-year franchise agreement with Silver. Silver retained significant powers, rights, and a continuing interest. Gold (the franchisee) makes noncontingent payments of $18,000 per year for the first four years of the franchise. Gold also pays a contingent fee of 2% of gross sales every month. Which of the following statements is correct?

Red Company had an involuntary conversion on December 23, 2019. The machinery had been acquired on April 1, 2017, for $49,000 and its adjusted basis was $14,200. The machinery was completely destroyed by fire and Red received $10,000 of insurance proceeds for the machine and did not replace it. This was Red's only casualty or theft event for the year. As a result of this event, Red initially has:

A personal use property casualty loss that occurs in a nonfederally declared disaster area is deductible only to the extent it exceeds 10% of AGI.