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Income Tax Accounting Scenarios

23. On July 1, 2004, Marco purchased an option to buy 1,000 shares of Surfing, Inc. at $40 per share. He purchased the option for $3,000. It was to remain in effect for five months. The market experienced a decline during the latter part of the year, so Marco decided to let the option lapse as of December 1, 2004. On his 2004 income tax return, what should Marco report?
a. A $3,000 long-term capital loss.
b. A $3,000 short-term capital loss.
c. A $3,000 § 1231 loss.
d. A $3,000 ordinary loss.
e. None of the above.

24. Jesse and Tracy were divorced. Their only marital property was a personal residence with a value of $500,000 and cost of $250,000. Under the terms of the divorce agreement, Tracy would receive the house and Tracy would pay Jesse $100,000 each year for 5 years. If Jesse should die, the remaining payments would be made to his estate. Jesse and Tracy lived apart when the payments were made to Jesse. The divorce agreement did not contain the word "alimony."
a. Jesse must recognize a $62,500 [$250,000 - $125,000)] gain on the sale of his interest in the house.
b. Jesse recognizes alimony income of $100,000 each year.
c. Tracy is allowed to deduct $100,000 each year for alimony paid.
d. Tracy is not allowed any alimony deductions.
e. None of the above.

25. Garnet, Inc., owns a delivery truck which initially cost $30,000. After depreciation of $15,000 had been deducted, the truck was traded-in on a new truck that cost $40,000. Garnet was required to pay the car dealer $20,000 in cash. What is Garnet's basis for the new truck?
a. $0.
b. $35,000.
c. $40,000.
d. $45,000.
e. None of the above.

Solution Preview

23. On July 1, 2004, Marco purchased an option to buy 1,000 shares of Surfing, Inc. at $40 per share. He purchased the option for $3,000. It was to remain in effect for five months. The market experienced a decline during the latter part of the year, so Marco decided to let the option lapse as of December 1, 2004. On his 2004 income tax return, what should Marco report?
a. A $3,000 long-term capital loss.
b. A $3,000 short-term capital loss.
c. A $3,000 § 1231 loss.
d. A $3,000 ordinary loss.
e. None of the above.

Answer: a.

10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
Can I take a long-term capital loss (up to the $3,000 limit) against my ordinary income without any long-term capital gain?
Yes. ...

Solution Summary

This solution is comprised of a detailed explanation to answer income tax return of declining shares, tax deductions as a result of divorce, purchases after depreciation.

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