Federal Income Tax: Quiz 5

In 20122012​, ElizabethElizabeth purchased a house for $ 110 comma 000$110,000 to use as her personal residence. She paid $ 22 comma 000$22,000 and borrowed $ 88 comma 000$88,000 from the local savings and loan company. In 20142014​, she paid $ 18 comma 000$18,000 to add a room to the house. In 20162016​, she paid $ 1 comma 400$1,400 to have the house painted and $ 1 comma 700$1,700 for​ built-in bookshelves. As of January 1 of the current​ year, she has reduced the $ 88 comma 000$88,000 mortgage to $ 79 comma 200$79,200. What is her basis for the​ house?

Worked Solution

Cost of the house

$110,000

Cost of the room added to the house

18,000

Cost of built-in bookshelf

1,700

Basis of house

$129,700

SergioSergio

owns 200200 shares of PalmPalm Corporation common​ stock, purchased during the prior​ year: 100100 shares on July​ 5, for $ 9 comma 000$9,000​; and 100100 shares on October​ 15, for $ 12 comma 000$12,000. When SergioSergio sells 5050 shares for $ 8 comma 000$8,000 on July 18 of the current​ year, he does not identify the particular shares sold. Determine the amount and character of the gain. ​(Assume the​ first-in, first-out​ (FIFO) method is used to identify the​ stock.)

3,500

Andy owns an appliance store where he has merchandise such as refrigerators for sale.​ Roger, a​ bachelor, owns a​ refrigerator, which he uses in his apartment for personal use. For which individual is the refrigerator a capital​ asset?

​Roger's refrigerator is a capital asset since it is not included in the list of properties that are not capital assets.

Four years​ ago, Susan loaned​ $7,000 to her friend Joe. During the current​ year, the​ $7,000 loan is considered worthless. Explain how Susan should treat the worthless debt for tax purposes.

The debt is a nonbusiness bad​ debt; therefore, the loss is treated as a​ short-term capital loss.

How might the current treatment of capital losses discourage an individual investor from purchasing stock of a​ high-risk, start-up​ company?

If the individual taxpayer does not have capital​ gains, only​ $3,000 of capital losses may be deducted annually. It may take many years before an investor with a large capital loss is allowed to deduct all of the losses.

Nancy and the Minor Corporation own bonds of the East Corporation. Minor Corporation owns​ 80% of the stock of East Corporation. East Corporation has declared bankruptcy this​ year, and bondholders will receive only​ 26% of the face value of the debt. Explain why the loss is a capital loss for Nancy but an ordinary loss for the Minor Corporation.

Nancy held the bonds of the East Corporation as an

investment

.

For Minor​ Corporation, the securities of the East Corporation are as an

affiliated corporation

.

​Thus, Minor's loss due to the worthless securities is an ordinary loss.

Judy just obtained a patent on a new product she has developed. Bell Corporation wishes to market the product and will pay​ 12% of all future sales of the product to Judy. How can she be sure that the payments received will be treated as a​ long-term capital​ gain?

She should transfer all substantial rights to the patent.

What is the first day that an individual could sell a capital asset purchased on March​ 31,

20232023

and have a holding period of more than one​ year?

April​ 1, 2024.