01 Jan 4) Capital gain.

Question 1

Stanley operates a restaurant as a sole proprietorship. Which of the following items are capital assets in the hands of Stanley?

1) The restaurant’s tables and chairs.

2) A portable sound system used to play “theme music” for the restaurant.

3) The restaurant building that is an asset of the sole proprietorship.

4) An interest-bearing savings account used to keep the restaurant’s excess cash.

5) None of the above.

Question 2

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

1) Gold Company may deduct the $18,000 per year noncontingent payments in full as they are made.

2) Gold Company may deduct the monthly contingent fee as it is paid.

3) Gold Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.

4) Gold Company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.

5) None of the above.

Question 3

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 percent of the redemption price at maturity multiplied by the number of years to maturity.

1) True

2) False

Question 4

The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.

1) True

2) False

Question 5

Involuntary conversion gains may be deferred if the proceeds of the involuntary conversion are reinvested.

1) True

2) False

Question 6

The subdivision of real property into lots for resale when no substantial physical improvements have been made to the property never causes the gain from sale of the lots to be treated as ordinary income.

1) True

2) False

Question 7

A business taxpayer sells inventory for $80,000. The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year. The taxpayer has:

1) No gain or loss.

2) Sold a long-term capital asset.

3) Sold a short-term capital asset.

4) An ordinary gain.

5) None of the above.

Question 8

Which of the following assets held by a manufacturing business is a § 1231 asset?

1) Inventory.

2) Office furniture used in the business and held less than one year.

3) A factory building used in the business and held more than one year.

4) Accounts receivable.

5) All of the above.

Question 9

Section 1231 applies to the sale or exchange of business properties, but not to personal use activity casualties.

1) True

2) False

Question 10

If a capital asset is sold at a gain, the holding period is important.

1) True

2) False

Question 11

If there is a net § 1231 loss, it is treated as an ordinary loss.

1) True

2) False

Question 12

Since the Code section that defines “capital asset” says what is not a capital asset, other Code sections have to help determine what is and what is not a capital gain or loss.

1) True

2) False

Question 13

The maximum amount of the unrecaptured § 1250 gain (25% gain) is the depreciation taken on real property sold at a recognized gain.

1) True

2) False

Question 14

Vertigo, Inc., has a 2016 net § 1231 loss of $64,000 and had a $32,000 net § 1231 gain in 2015. For 2016, Vertigo’s net § 1231 loss is treated as:

1) Ordinary loss.

2) Ordinary gain.

3) Capital loss.

4) Capital gain.

5) None of the above.

Question 15

Section 1231 property generally does not include accounts receivables arising in the ordinary course of business.

1) True

2) False