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Chapter 14 Property Transactions: Capital Gains And Losses, § 1231, And Recapture Provisions
51. LO.3 Freys, Inc., sells a 12-year franchise to Reynaldo. The franchise contains many restrictions on how Reynaldo may operate his store. For instance, Reynaldo cannot use less than Grade 10 Idaho potatoes, must fry the potatoes at a constant
410 degrees, must dress store personnel in Freys-approved uniforms, and must have a Freys sign that meets detailed specifications on size, color, and construction. When the franchise contract is signed, Reynaldo makes a noncontingent $160,000 payment to Freys. During the same year, Reynaldo pays Freys $300,000—14% of Reynaldo’s sales. How does Freys treat each of these payments? How does Reynaldo treat each of the payments?
52. LO.3 Angie owns numerous strip malls. A major tenant of one of the strip malls wanted to cancel its lease because it was moving to another city. After lengthy negotiations, the tenant paid Angie $60,000 to cancel its obligations under the lease. If the tenant had fulfilled the lease terms, Angie would have received rent of $700,000. What factors should Angie consider to determine the amount and character of her income from these circumstances?
53. LO.3 Consuela was a tenant in a campus apartment. She is a student at State University.
Her lease began on August 1, 2016, and was due to expire on July 31, 2017. However, her landlord sold the building, and the new owner wanted to demolish it to build a retail building. Consuela’s landlord paid her $1,000 to cancel the lease. Consuela received the $1,000 on November 30, 2016; moved out; and rented another apartment. How should Consuela treat the $1,000?
54. LO.4 Maria held vacant land that qualified as an investment asset. She purchased the vacant land on April 10, 2012. She exchanged the vacant land for a rental house in a qualifying like-kind exchange on January 22, 2016. Maria was going to hold the house for several years and then sell it. However, she got an “offer she could not refuse” and sold it on November 22, 2016, for a substantial gain. What was Maria’s holding period for the house?
55. LO.4 Roger inherited 100 shares of Periwinkle stock when his mother, Emily, died.
Emily had acquired the stock for a total of $60,000 on November 15, 2012.
She died on August 10, 2016, and the shares were worth a total of $55,000 at that time. Roger sold the shares for $36,000 on December 22, 2016. How much gain or loss does Roger recognize? What is the nature of that gain or loss?
56. LO.4 Sarah received a gift of farmland from her father. The land was worth $4 million at the date of the gift, had been farmed by her father for 40 years, and had a tax basis for her father of $30,000. Sarah never farmed the land and sold it eight months after receiving it from her father for $4.2 million. What is Sarah’s holding period for the farmland? What is the nature of the gain from its disposition?
57. LO.4 Dennis sells short 100 shares of ARC stock at $20 per share on January 15, 2016. He buys 200 shares of ARC stock on April 1, 2016, at $25 per share. On
May 2, 2016, he closes the short sale by delivering 100 of the shares purchased on
April 1.
a. What are the amount and nature of Dennis’s loss upon closing the short sale?
b. When does the holding period for the remaining 100 shares begin?
c. If Dennis sells (at $27 per share) the remaining 100 shares on January 20, 2017, what will be the nature of his gain or loss?
58. LO.5 Elaine Case (single with no dependents) has the following transactions in
2016:
AGI (exclusive of capital gains and losses) $240,000
Long-term capital gain 22,000
Long-term capital loss (8,000)
Short-term capital gain 19,000
Short-term capital loss (23,000)
What is Elaine’s net capital gain or loss? Draft a letter to Elaine describing how the net capital gain or loss will be treated on her tax return. Assume that Elaine’s income from other sources puts her in the 39.6% bracket. Elaine’s address is 300 Ireland Avenue,
Shepherdstown, WV 25443.
59. LO.3, 5 In 2016, Bertha Jarow (head of household with three dependents) had a $28,000 loss from the sale of a personal residence. She also purchased from an individual inventor for $7,000 (and resold in two months for $18,000) a patent on a rubber bonding process. The patent had not yet been reduced to practice. Bertha purchased the patent as an investment. In addition, she had the following capital gains and losses from stock transactions:
Long-term capital loss ($ 6,000)
Long-term capital loss carryover from 2015 (12,000)
Short-term capital gain 21,000
Short-term capital loss (7,000)
What is Bertha’s net capital gain or loss? Draft a letter to Bertha, explaining the tax treatment of the sale of her personal residence. Assume that Bertha’s income from other sources puts her in the 28% bracket. Bertha’s address is 1120 West Street,
Ashland, OR 97520.
60. LO.2, 4, 5 Bridgette is known as the “doll lady.” She started collecting dolls as a child, always received one or more dolls as gifts on her birthday, never sold any dolls, and eventually owned 600 dolls. She is retiring and moving to a small apartment and has decided to sell her collection. She lists the dolls on an Internet auction site and, to her great surprise, receives an offer from another doll collector of $45,000 for the entire collection. Bridgette sells the entire collection, except for five dolls she purchased during the last year. She had owned all of the dolls sold for more than a year. What tax factors should Bridgette consider in deciding how to report the sale?
61. LO.5 Phil and Susan are married taxpayers filing a joint return. The couple have two dependent children. Susan has wages of $34,000 in 2016. Phil does not work due to a disability, but he is a buyer and seller of stocks on the Internet. He generally buys and holds for long-term gain, but occasionally gets in and out of a stock quickly.
The couple’s 2016 stock transactions are detailed below. In addition, they have $2,300 of qualifying dividends.
Item Date Acquired Date Sold Cost Sales Price
Blue stock 11/10/15 03/12/16 $ 3,000 $ 6,000
Puce stock 12/13/14 05/23/16 36,000 32,000
Beige stock 12/14/11 07/14/16 13,000 14,500
Red stock 06/29/15 05/18/16 26,000 27,000
Black stock 05/15/15 10/18/16 67,000 67,800
Gray stock 04/23/14 10/18/16 89,000 88,200
What is Phil and Susan’s AGI?
62. LO.5 Paul has the following long-term capital gains and losses for 2016: $62,000
28% gain, $21,000 28% loss, $18,000 25% gain, and $64,000 0%/15%/20% gain. He also has a $53,000 short-term loss and a $5,000 short-term gain. What is
Paul’s AGI from these transactions? If he has a net long-term capital gain, what is its makeup in terms of the alternative tax rates?
63. LO.5 Helena has the following long-term capital gains and losses for 2016: $65,000
28% gain, $53,000 28% loss, $28,000 25% gain, and $24,000 0%/15%/20% loss. She also has a $33,000 short-term loss and a $65,000 short-term gain. What is
Helena’s AGI from these transactions? If she has a net long-term capital gain, what is its makeup in terms of the alternative tax rates?
64. LO.5 For 2016, Ashley has gross income of $8,500 and a $5,000 long-term capital loss.
She claims the standard deduction. Ashley is 35 years old and unmarried with two dependent children. How much of Ashley’s $5,000 capital loss carries over to 2017?
65. LO.5 Jane and Blair are married taxpayers filing jointly and have 2016 taxable income of $97,000. The taxable income includes $5,000 of gain from a capital asset held five years, $2,100 of gain from a capital asset held seven months, and $13,000 of gain from a capital asset held four years. All of the capital assets were stock in publicly traded corporations. Jane and Blair also have qualified dividend income of $3,000. What is the couple’s tax on taxable income?