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Chapter 11
No net Section 1231 losses have been deducted as ordinary losses in prior years. How much of the 2015 Section 1231
gains and losses are recognized as long-term capital gains?
a.
$- 0 -
b.
$1,000
c.
$3,000
d.
$4,000
e.
$6,000
77. Benjamin has a $15,000 Section 1231 gain from the sale of business-use real estate and a $3,500 long-term capital
gain from the sale of Rhyne Corporation stock. Also, he suffers an $18,000 (net of insurance reimbursements and the
$100 floor) personal-use property casualty loss. No net Section 1231 losses have been deducted as ordinary losses in prior
years. Benjamin's current-year adjusted gross income will increase (decrease) by what amount?
a.
$500
b.
$3,500
c.
$15,000
d.
$15,800
e.
$18,500
78. Hank realizes Section 1231 losses of $12,000 and Section 1231 gains of $7,000 during the current year. Hank's
current-year adjusted gross income will increase (decrease) by what amount?
a.
$(12,000)
b.
$(5,000)
c.
$(3,000)
d.
$7,000
79. Trojan Inc. was incorporated in 2012. In 2012, it had no Section 1231 transactions. In 2013, Trojan had a net Section
1231 loss of $35,000. In 2014, Trojan had a Net Section 1231 gain of $10,000. In 2015 Trojan has a $50,000 net Section
1231 gain. Trojan should treat the 2015 gain as
a.
An ordinary gain of $40,000.
b.
A long-term capital gain of $50,000.
c.
An ordinary gain of $35,000 and a long-term capital gain of $15,000.
d.
An ordinary gain of $25,000 and a long-term capital gain of $25,000.
e.
An ordinary gain of $15,000 and a long-term capital gain of $35,000.
80. During 2015, Thomas has a net Section 1231 gain of $57,000. In 2014, Thomas reported a net Section 1231 loss of
$60,000. What is the character of the 2015 gain?
a.
$60,000 long-term capital gain.
b.
$60,000 ordinary gain.
c.
$57,000 ordinary gain.
d.
$57,000 long-term capital loss.
e.
$57,000 long-term capital gain.
81. During 2015, Ester recognizes a $10,000 Section 1231 gain, a $25,000 Section 1231 loss, and ordinary income of
$20,000. What are the results of Ester's netting of these items?
a.
$5,000 capital loss.
b.
$5,000 Section 1231 gain.
c.
$5,000 ordinary income.
d.
$17,000 ordinary income and $12,000 capital loss.
e.
$20,000 ordinary income and $15,000 capital loss.
82. Johnson Corporation's 2015 business operating income is $200,000. Johnson also recognizes an $8,000 Section 1231
loss, an $11,000 Section 1231 gain, and a $5,000 long-term capital loss from the sale of investment securities. What is
Johnson Corporation's 2015 taxable income?
a.
$195,000
b.
$198,000
c.
$200,000
d.
$203,000
e.
$211,000
83. Ramona recognizes a $50,000 Section 1231 loss, a $30,000 Section 1231 gain, and ordinary income of $35,000 in
2015. Before 2015, Ramona's only Section 1231 transaction was a $15,000 loss reported in 2011. How should Ramona
report her 2015 transactions?
a.
$20,000 capital loss and $35,000 ordinary income.
b.
$15,000 net Section 1231 gain.
c.
$15,000 capital loss.
d.
$15,000 ordinary income.
e.
$15,000 capital gain.
84. Fillmore's net Section 1231 gains and losses reported for the past five years is presented below.
2010
$15,000
2011
12,000
2012
5,000
2013
(28,000)
2014
(13,000)
In 2015, Fillmore has a $15,000 net Section 1231 gain. What amounts and character of income will Fillmore ultimately
report in 2015 as a result of this net Section 1231 gain?
a.
$6,000 LTCG; $9,000 ordinary income
b.
$15,000 ordinary income
c.
$15,000 Section 1231 gain
d.
$9,000 LTCG; $6,000 ordinary income
e.
None of the above.
85. In 2012, Jim had a $5,000 net Section 1231 gain. In 2014, Jim reported a Section 1231 loss of $12,000. In 2015, Jim
has a $15,000 net Section 1231 gain. He had no other sales of property in 2015. What is Jim's ordinary income from his
Chapter 11
2015 property transactions?
a.
$- 0 -
b.
$7,000
c.
$3,000
d.
$12,000
e.
$15,000
86. Phillip owns rental real estate with an adjusted basis of $200,000. During the current year, he sells the property for
$170,000.
I.
If Phillip's rental activity is a trade or business, the loss is a Section 1231 loss.
II.
If Phillip's rental activity is a production-of-income (investment) activity, the loss is a
capital loss.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
87. Depreciation recapture provisions
I.
are reclassification provisions.
II.
apply to depreciable assets sold at a gain.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
88. "Recapture of depreciation" refers to:
a.
Downward adjustments of past depreciation charges by IRS review.
b.
Increasing depreciation charges by changing accounting method.
c.
Filing an amended return where less than maximum depreciation charges have been claimed as deductions.
d.
Taxing the smaller of past depreciation or gain as ordinary income on the disposition of equipment.
89. Troy Company purchased a printing press on April 13, 2012 at a cost of $30,000. Troy sells the printing press on
January 3, 2015 for $16,000. Regular MACRS depreciation on the printing press would be $18,500, while straight-line
MACRS depreciation would total $12,000.
I.
If Troy used straight-line depreciation, it would have a Section 1231 loss of $2,000.
II.
If Troy used regular MACRS depreciation, it would have Section 1245 ordinary income of
$4,500.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
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90. Benson Company purchased a drill press on November 13, 2011, at a cost of $30,000. Benson sells the drill press on
January 3, 2014, for $16,000. Regular MACRS depreciation on the drill press would be $18,500, while straight-line
MACRS depreciation would total $12,000.
I.
If Benson used regular MACRS depreciation, it would have a Section 1231 gain of $4,500.
II.
If Benson used straight-line depreciation, it would have a Section 1231 loss of $2,000.
III.
If Benson used regular MACRS depreciation, it would have Section 1245 ordinary income
of $4,500.
IV.
If Benson used straight-line depreciation, it would have an ordinary loss of $4,500.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Statements I and II are correct.
d.
Statements I and IV are correct.
e.
Statements II and III are correct.
91. Olive Company sells factory equipment with an adjusted basis of $30,000 for $33,000. Allowable depreciation of
$8,000 had been deducted as of the sale date. What is the amount and character of the gain or (loss) on the sale of the
equipment?
a.
$- 0 -
b.
$3,000 Section 1245 ordinary income.
c.
$8,000 Section 1245 ordinary income.
d.
$3,000 long-term capital gain, and $8,000 Section 1245 ordinary income.
e.
$3,000 long-term capital gain.
92. Karl paid $200,000 for business-use equipment. Using straight-line depreciation, his deduction would have been
$22,000, but Karl uses MACRS depreciation and deducts $37,500 for the first two years of usage. At the beginning of the
third year, Karl sells the equipment for $190,000. How much of the gain is recaptured under Section 1245 as ordinary
income?
a.
$- 0 -
b.
$5,500
c.
$22,000
d.
$27,500
e.
$37,500
93. Dallas Wildcat Drilling Co. sells an oil-drilling rig for $3,000,000. The drilling rig was purchased in 2007 for
$2,000,000. Depreciation deductions of $1,200,000 have been taken up to the time of sale. What amount and character of
gain will Dallas report from the sale of this asset?
a.
$2,200,000 Section 1245 ordinary income.
b.
$2,200,000 long-term capital gain.
c.
$1,200,000 Section 1245 ordinary income, $1,000,000 Sec 1231 gain.
d.
$1,200,000 Section 1245 ordinary income, $1,000,000 long-term capital gain.
94. Which of the following best describes the tax treatment of a taxpayer's net Section 1231 loss that resulted from the
sale of depreciable equipment used in a business activity?
a.
Such losses are not deductible.
b.
Such losses are deducted as ordinary losses.
c.
Such losses are deducted as long-term capital losses.
d.
Such losses are deductible as short-term capital losses.
e.
Such losses are deducted as ordinary losses only to the extent that the business activity produces other
ordinary net income.
95. Mountainview Corporation sells depreciable residential real estate for $525,000. The property cost $675,000, and
$200,000 of accelerated depreciation was deducted on the property. Allowable straight-line depreciation for the same
period would have been $180,000. Which of the following correctly states the character of the gain from the sale of the
property?
a.
$ 50,000 ordinary gain.
b.
$ 50,000 Section 1231 gain.
c.
$ 30,000 Section 1231 gain and $20,000 Section 1250 ordinary income.
d.
$ 20,000 Section 1231 gain and $30,000 Section 1250 ordinary income.
e.
$150,000 Section 1231 gain and $20,000 Section 1250 ordinary gain.
96. Elizabeth paid $400,000 for a warehouse. Using 39-year straight-line depreciation, Elizabeth deducts $24,868 for the
first two years of usage. At the beginning of the third year, Elizabeth sells the warehouse for $380,000. How much of the
gain is recaptured as Section 1250 ordinary income?
a.
$- 0 -
b.
$4,868
c.
$24,868
d.
$380,000
e.
$400,000
97. Marybelle paid $400,000 for a warehouse. Using 39-year straight-line depreciation, Marybelle deducts $24,868 for the
first two years of usage. At the beginning of the third year, Marybelle sells the warehouse for $380,000. What is the
character of the gain.
a.
Long-term capital gain.
b.
Section 1250 gain.
c.
Ordinary income.
d.
Unrecaptured section 1250 gain.
e.
Section 1245 gain.
98. Unrecaptured Section 1250 gain
I.
applies to real property owned by individuals and corporations.
II.
is the gain on the sale of real estate not already classified as ordinary income if the
property were Section 1245 property.
a.
Only statement I is correct.
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b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
99. Unrecaptured Section 1250 gain
I.
is subject to a maximum tax rate of 25%.
II.
applies only to real property owned by individuals.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
100. George purchased a commercial building in 1999 for $900,000. During 2015, the building is sold for $700,000. The
actual accelerated depreciation on the building as of the sale date was $400,000. Straight-line depreciation for the same
period would have been $350,000. What is the amount and character of the gain recognized on the sale?
a.
$200,000 Section 1250 ordinary income.
b.
$50,000 Section 1250 ordinary income.
c.
$50,000 Section 1250 ordinary income, and $150,000 unrecaptured Section 1250 gain.
d.
$200,000 unrecaptured Section 1250 gain.
101. Philip purchased an apartment building in 2001 for $1,000,000. During 2015, the building is sold for $800,000. The
accumulated depreciation on the building as of the sale date was $300,000. What is the amount and character of the gain
recognized on the sale?
a.
$100,000 Section 1250 ordinary income.
b.
$100,000 Section 1231 long term capital gain.
c.
$100,000 unrecaptured Section 1250 gain.
d.
$100,000 ordinary income.
102. Wilshire Corporation purchased a commercial building in 2001 for $975,000. During 2015, the building is sold for
$775,000. The actual depreciation on the building as of the sale date was $300,000. What is the amount and character of
the gain recognized on the sale?
a.
$100,000 Section 1250 ordinary income.
b.
$100,000 Section 1231gain.
c.
$100,000 Unrecaptured Section 1250 gain.
d.
$100,000 Section 1245 gain.
103. Kate bought residential rental property for $500,000. She reported a total of $100,000 of straight-line depreciation.
Kate sells the building in 2015 for $425,000. What are the immediate tax consequences of the sale? (Do not consider
Kate's other transactions).
I.
If Kate's rental activity is a production-of-income (investment) activity, she will report a
$25,000 long-term capital gain.
II.
If Kate's rental activity is a trade or business, she will report $25,000 of Unrecaptured
Chapter 11
Section 1250 gain.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
104. During 2002, Trump Corporation bought a factory building for $500,000. It deducted $180,000 of cost recovery
deductions using straight-line depreciation while the building was in service. Trump sells the building in 2015 for
$500,000. What are the tax consequences of the sale? (Do not consider Trump's other transactions).
a.
$180,000 Section 1231 gain.
b.
$180,000 unrecaptured Section 1250 gain.
c.
$180,000 recaptured under Section 1245.
d.
$180,000 Section 1250 gain
e.
$ 90,000 Section 1231 income; and $ 90,000 ordinary income, recaptured under Section 1250.
105. Hurst Company purchased a commercial building in 2001 for $700,000. The building is sold in 2015 for $900,000.
The actual depreciation deducted on the building as of the sale date was $600,000. Straight-line depreciation for the same
period would have been $400,000. What is the amount and character of the gain recognized on the sale?
a.
$900,000 Section 1231 gain.
b.
$200,000 ordinary income, and $100,000 Section 1231 gain.
c.
$400,000 ordinary income, and $400,000 Section 1231 gain.
d.
$200,000 ordinary income, and $400,000 long-term capital gain.
e.
$200,000 ordinary income, and $600,000 Section 1231 gain.
106. Which of the following trade or business assets are Section 1245 properties?
I.
Racehorses.
II.
Livestock held for breeding purposes
III.
Manufacturing equipment.
IV.
Residential rental property placed in service in 2008.
a.
Only statement I is correct.
b.
Statements II and IV are correct.
c.
Statements I, II, and III are correct.
d.
Statements I and IV are correct.
e.
Statements I, II, III, and IV are correct.
107. Pedro sells a building for $170,000 in 2015. He paid $145,000 for the building and it had an adjusted basis of
$110,000 as of the sale date.
I.
If the building was purchased in 1993 and MACRS straight-line depreciation is used,
$35,000 of the gain is recaptured under section 1250.
II.
If the building is an apartment building purchased in 1985, only the gain which is
attributable to excess depreciation is recaptured as ordinary income under Section 1250.
III.
If the building was purchased in 1993, $35,000 of the gain is unrecaptured section 1250
Chapter 11
gain, and $25,000 of the gain is a section 1231 gain.
a.
Statements I and II are correct.
b.
Statements II and III are correct.
c.
Statements I, II, and III are correct.
d.
Only statement III is correct.
108. Warren's 2015 adjusted gross income consists of the following items:
Salary
$150,000
Interest income
15,000
Rental income
18,000
Section 1245 gains
25,000
Section 1231 gains
22,000
Section 1231 losses
(13,000)
LTCG
22,000
LTCL
(8,000)
STCG
2,000
STCL Carryover
(9,000)
Warren's combined §1231 gains and losses recognized over the prior five tax years included a net loss of $10,000. The
STCL carryover arose from a loss reported in 2010.
What net amounts of ordinary income, LTCG income and STCG income will Warren's 2015 adjusted gross income
consist of? (i.e. what amounts are reported after completing the netting process?)
Ordinary
Income LTCG STCG
a.
$208,000 $16,000 $- 0 -
b.
$217,000 $14,000 $(7,000)
c.
$208,000 $23,000 $(7,000)
d.
$217,000 $7,000 $- 0 -
109. Unrecaptured Section 1250 gain
I.
is taxed at a maximum rate of 15%.
II.
is a term that does not apply to corporations.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
110. If an individual sells depreciable real estate at a gain
I.
the entire gain is taxed at a maximum rate of 15%.
II.
the gain due to depreciation is taxed as a long-term capital gain.
a.
Only statement I is correct.
b.
Only statement II is correct.
Chapter 11
c.
Both statements are correct.
d.
Neither statement is correct.
111. Harry sells an apartment building for $117,000. The building was held as an investment, it cost $95,000 and had an
basis of $83,000 at the date of the sale. If Harry is in the 33% marginal tax rate bracket without considering the effect of
the sale, how much tax is paid on the gain on the sale of the apartment building?
a.
$5,100
b.
$6,300
c.
$7,300
d.
$8,500
112. Rosalee has the following capital gains and losses during the current year:
Short-term capital loss
$(4,000)
Long-term capital gain
3,000
Unrecaptured Section 1250 gain
6,000
If Rosalee is in the 33% marginal tax rate bracket before considering her capital gains and losses, how much tax does she
pay on her capital gains?
a.
$ 950
b.
$1,100
c.
$1,250
d.
$1,500
113. Dontrell sells a building used in his business at a gain of $20,000. The building was purchased in 2006, and $15,000
of depreciation had been deducted on the building to the date of sale. Dontrell's only other property transaction resulted in
a $5,000 loss on the sale of equipment used in his business. Dontrell's marginal tax rate is 33% without considering these
two transactions. As a result of these transactions
I.
Dontrell will pay additional tax of $2,850.
II.
Dontrell can only deduct $3,000 of the loss on the sale of the equipment and pays a tax
of $3,750 on the sale of the building.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
114. Matt has a substantial portfolio of securities. As of December 2 of the current year, Matt has a net capital gain
position of $22,000. Discuss Matt's optimal tax-planning strategy for capital gains and losses.
115. What incentive provisions or preferential treatments exist for capital gains?
116. Watson sells equipment he used in his business. The equipment cost $50,000 and had an adjusted basis of $32,000 on
the date of sale.
a.
If Watson sells the equipment for $23,000, what is the amount and character of the recognized
gain or loss?
b.
If Watson sells the equipment for $55,000 what is the amount and character of the recognized
gain or loss?
117. Explain why a taxpayer would ever consider using accelerated depreciation methods on personal property, given the
provisions of Section 1245.
118. Discuss the general differences between Section 1245 and Section 1250 recapture provisions.
119. Discuss the general differences between Section 1245 and Section 1250 property.
120. Dragonian Corporation sells a depreciable asset. Dragonian paid $50,000 for the asset. Accelerated depreciation on
the asset is $12,000 up to the date of sale. Straight-line depreciation is $8,000. Determine the amount and character of the
gain (loss) on the sale under each of the following assumptions:
a.
The asset is equipment. Dragonian deducted the maximum depreciation and the sales
price is $44,000.
b.
The asset is an office building purchased in 1984. Dragonian deducted the maximum
depreciation and the sales price is $54,000.
c.
The asset is an office building purchased in 2006. Dragonian deducted straight-line
depreciation and the sales price is $54,000.
121. Nicole has the following transactions related to her investments and her sole proprietorship during 2015:
(1)
Stock that was purchased in 2009 is sold at a loss of $12,000.
(2)
Bonds that were purchased in 2015 are sold at a gain of $6,000.
(3)
A building used in her business is sold at a gain of $17,000. The building was
purchased in 1996 and $24,000 of depreciation had been taken on the building.
(4)
Equipment purchased in 2009 is sold at a loss of $16,000. Depreciation of $25,000 had
been taken prior to the sale.
(5)
A delivery van is destroyed in an accident. Nicole realizes a gain of $5,000 on the van.
She had deducted $3,000 of depreciation on the van prior to the accident. She does not
intend to replace the van.
a.
Determine the character of each gain or loss:
b.
Determine the effect of the gains and losses on Nicole's current-year adjusted gross
income.
122. Milton has the following transactions related to his investments and his business during 2015:
(1)
Stock purchased in 2003 is sold at a gain of $2,000.
(2)
Bonds purchased in 2015 are sold at a loss of $7,000.
(3)
A building used in his business is sold at a loss of $6,000. The building had been
Chapter 11
purchased in 1996 and $18,000 of depreciation had been taken on the building.
(4)
Equipment purchased in 2009 is sold at a gain of $12,000. Depreciation of $9,000 had
been taken before the sale.
(5)
A delivery van is destroyed in an accident. Milton realizes a loss of $5,000 on the van.
He uses the $13,000 of insurance proceeds as a down payment on a new van costing
$28,000.
a.
Determine the amount and character of each gain or loss.
b.
Determine the effect of the gains and losses on Milton's 2014 adjusted gross income.
You must present the calculations in proper form to receive full credit.
123. Mario is a real estate and financial consultant who owns and operates his own business as a sole proprietor. His
adjusted gross income, excluding the items below is $48,000. The following information relates to his current year
activities and income tax.
a.
Land adjacent to his office was purchased during 2015 for an anticipated expansion. It
cost $10,000 but was sold later in the year for $17,000.
b.
His office building is sold for $250,000 in anticipation of moving to a different location.
The building was purchased in 1994 for $200,000 with 10% of the cost allocated to the
land. Depreciation taken on the building was $100,000.
c.
Office furniture that cost $20,000 and was fully depreciated is sold for $6,000.
d.
A color copier purchased two years ago for $50,000 is traded for 200 shares of Microsoft
stock that were worth $24,000 on the date of the exchange. The copier had a basis to
Mario of $35,000 but is worth only $24,000 on the date of the exchange.
Chapter 11
e.
Mario's automobile, which he used 100% for business and had cost him $18,000 in 2010
is sold for $8,000. Depreciation of $6,000 had been taken on the automobile.
REQUIRED: Fill in the following table by listing the amount and proper treatment of the recognized gain or loss
from each of the above transactions. Identify by letter a-e.
Ordinary
Sec. 1231
Capital Gain (Loss)
Unrecaptured
Income
Gain (Loss)
Short-term/Long
term
Sec. 1250 Gain
a.
b.
c.
d.
e.
What is Mario's net Capital Gain (Loss) for the current year? _____________
124. Maria acquired a personal computer to use 100% in her business for $6,000. She took MACRS deductions of $2,880
before selling it in current year. Determine the amount and character of the gain (loss) recognized on the sale of the
computer, assuming a sales price that differs in each of the three independent situations:
Amount of
Sales Price
Gain (Loss)
Character (1231,1245,1250)
a.
$2,400
_____________
_______________________
b.
$6,350
_____________
_______________________
c.
$4,600
_____________
_______________________
Match each statement with the correct term below.
a.
Stocks, bonds, options.
b.
Depreciable real property.
c.
Taxed at an effective rate of 14%.
Chapter 11
d.
Taxed at a maximum rate of 25%.
e.
Gain or loss on the sale of artwork.
f.
Depreciable tangible personal property.
g.
Subject to full recapture as ordinary income of all depreciation taken.
h.
Gain on real property attributable to excess depreciation is ordinary income.
125. Capital Asset
126. Collectible gain (loss)
127. Qualified Small Business stock gain
128. Section 1231 property
129. Section 1245 property
130. Section 1250 property
131. Section 1250 recapture
132. Unrecaptured Section 1250 gain
Classify the gain or loss on each of George's assets listed below using the following codes. Note: a code may be used
once, more than once, or not at all.
a.
Long-term capital
b.
Short-term capital
c.
Collectible gain
d.
Section 1231
e.
Section 1245
f.
Section 1250
g.
Ordinary income/loss
h.
Nontaxable/nondeductible
133. After using a house as his personal home for 20 years, George converts it in 2006 to an office building for use in his
construction business. He sells the building at a $65,000 loss in 2015.
134. George's construction company completed 5 homes during February 2014. He sells one of the homes in March 2015
at a $37,000 gain.
135. On December 1, 2013, George paid $17,500 for a painting. On October 31, 2015, he sells the painting for $26,750.
136. George regularly invests unneeded business cash in Eli Lilly common stock. He has bought 200 shares of stock on
May 1 of each year from 1986 through 2012. Because of an urgent need for cash, he sells 100 shares of the stock at an
$850 gain on March 28, 2015. Because the stock is held in a brokerage account, he did not have any paper shares of stock
to surrender. He merely told his broker to sell 100 shares.
137. George sells a fully depreciated air compressor that cost $975 for $650. The compressor was used to operate air
tools.
138. George's wife sells stock she purchased 10 months ago at a gain of $212.
139. George sells his personal use automobile at a loss of $4,300.
140. George sells land purchased in 1989 that he used to park construction equipment at a gain of $16,500.
