Chapter 14 Property Transactions: Capital Gains And Losses, § 1231, And Recapture Provisions

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Discussion Questions
1. LO.2, 4, 5 Sheila inherited 300 shares of stock, 100 shares of Magenta and 200 shares of Purple. She has a stockbroker sell the shares for her, uses the proceeds for personal expenses, and thinks nothing further about the transactions.
What issues does she face when she prepares her Federal income tax return?
2. LO.2 An individual taxpayer sells some used assets at a garage sale. Why are none of the proceeds taxable in most situations?
3. LO.2, 4 Alison owns a painting that she received as a gift from her aunt 10 years ago. The aunt created the painting. Alison has displayed the painting in her home and has never attempted to sell it. Recently, a visitor noticed the painting and offered Alison $5,000 for it. If Alison decides to sell the painting, what tax issues does she face?
4. LO.2 Is a note receivable that arose in the ordinary course of the taxpayer’s retail business a capital asset? Why or why not?
5. LO.2 Anwar owns vacant land that he purchased many years ago as an investment.
After getting approval to subdivide it into 35 lots, he made minimal improvements and then sold the entire property to a real estate developer. Anwar’s recognized gain on the sale was $1.2 million. Is this transaction eligible for the “real property subdivided for sale” provisions? Why or why not?
6. LO.3 Hubert purchases all of the rights in a patent from the inventor who developed the patented product. After holding the patent for two years, Hubert sells all of the rights in the patent for a substantial gain. What issues does Hubert face if he wants to treat the gain as a long-term capital gain?
7. LO.3 Blue Corporation and Fuchsia Corporation are engaged in a contract negotiation over the use of Blue’s trademarked name, DateSiteForSeniors. For a onetime payment of $45,000, Blue licensed Fuchsia to use the name DateSiteForSeniors, and the license requires that Fuchsia pay Blue a royalty every time a new customer signs up on Fuchsia’s website. Blue is a developer of “website ideas” that it then licenses to other companies such as Fuchsia. Did Fuchsia purchase a franchise right from Blue, or did Fuchsia purchase the name DateSiteForSeniors from Blue?
8. LO.4 At the date of a short sale, Sylvia has held substantially identical securities for more than 12 months. What is the nature of any gain or loss from the close of her short sale?
9. LO.5 After netting all of her short-term and long-term capital gains and losses, Misty has a net short-term capital loss and a net long-term capital loss. Can she net these against each other? Why or why not?
10. LO.2, 5 Charlie sells his antique farm tractor collection at a loss. He had acquired all of the tractors for his personal pleasure and sold all of them for less than he paid for them. What is the tax status of the tractors? Is his gain a 28% loss?
Explain.
11. LO.7, 8 Hakim’s rental building was not insured when it was destroyed by a hurricane.
His adjusted basis for the building was substantial, but was less than he had paid for the building in 2012. The building was Hakim’s only asset that was damaged by the hurricane. How should Hakim handle this situation?
12. LO.8 An individual taxpayer had a net § 1231 loss in 2016. Could any of this loss be treated as a long-term capital loss? Why or why not?
13. LO.8 Steven established a sole proprietorship in 2011. He sold § 1231 assets at a loss in 2014 and 2015. He had only sold § 1231 assets at a gain before 2014.
In 2016, he could sell a § 1231 asset at a gain and would like to have the gain taxed as a long-term capital gain. What issue is Steven facing?
14. LO.8 Review Examples 50 and 52 in the text. In both examples, the taxpayer’s AGI is $129,400 even though in Example 52 there is $700 of nonrecaptured § 1231 loss from 2015. Explain why the two AGI amounts are the same.
15. LO.8 A depreciable business dump truck has been owned for four years and is no longer useful to the taxpayer. What would have to be true for the disposition of the dump truck to generate at least some § 1231 loss?
16. LO.7, 9 If depreciable equipment used in a business is sold at a recognized gain on
July 10, 2016, and it was purchased on August 21, 2015, does § 1245 depreciation recapture apply to the asset? Explain.
17. LO.9 A retailer’s store is destroyed by a tornado, but is insured for its replacement cost. Consequently, the retailer has a $40,000 gain after receiving the insurance proceeds. The store is not replaced because the retailer spends the insurance proceeds on additional inventory. What is the nature of the gain if the store originally cost $100,000 three years ago and had an adjusted basis of $82,000 at the time of its destruction?
18. LO.10 In the current year, an individual taxpayer has net long-term capital gain from disposition of capital assets and has unrecaptured § 1250 gain. What would the circumstances have to be for the unrecaptured § 1250 gain to be taxed at 25%?
19. LO.9, 11 Mary receives tangible personal property as a gift. The property was depreciated by the donor, and Mary will also depreciate it. At the date of the gift, the property was worth more than the donor’s adjusted basis. What is the impact of these facts on Mary when she sells the property at a gain several years after she acquired it?
20. LO.9, 11 Thomas receives tangible personal property as an inheritance from a decedent who died in 2016. The property was depreciated by the deceased, and Thomas will also depreciate it. At the date of the deceased’s death, the property was worth more than the deceased’s adjusted basis. What is the impact of these facts on Thomas when he sells the property at a gain several years after he acquired it?
21. LO.9, 11 Dino contributes to charity some tangible personal property that he had used in his business and depreciated. At the date of the donation, the property has a fair market value greater than its adjusted basis, but less than the original cost. What is the impact of these facts on Dino’s charitable contribution?
22. LO.9, 11 A corporation distributes a truck it has owned for three years to its sole shareholder. The shareholder will use the truck for personal use activity.
The truck’s fair market value at the time of the distribution is greater than its adjusted basis, but less than its original cost. Does the corporation recognize a gain? If so, what is the character of the gain?
23. LO.12 A corporation distributes a truck it has owned for three years to its sole shareholder.
The shareholder will use the truck for business activity. The truck’s fair market value at the time of the distribution is greater than its adjusted basis, but less than its original cost. Does the corporation recognize a gain? If so, what is the character of the gain?