Ch-14

All of the following are considered related parties for purposes of Sec.
1239 recapture with the exception of
A) an individual and a partnership where the individual has a onefourth interest in the partnership.
B) an individual and a corporation where the individual owns more
than 50% of the value of the outstanding stock of the corporation.
C) an individual and a corporation where the individual's spouse owns
more than 50% of the value of the outstanding stock of the
corporation.
D) an individual and a partnership where the individual owns more
than 50% of the capital of the partnership.
Explanation: A) With regard to individuals and partnerships, they are considered related if the
individual owns more than 50% (not more than 25% as listed in the first answer choice) of the
partnership.

All of the following statements are true regarding Sec. 1245 are true
except
A) Sec. 1245 does not apply to any buildings placed in service after
1986.
B) Sec. 1245 applies to assets sold or exchanged at a gain or at a
loss.
C) Sec. 1245 property includes nonresidential real estate that
qualified as recovery property under the ACRS rules unless the
taxpayer elected to use the straight-line method of cost recovery.
D) Sec. 1245 ordinary applies to total depreciation or amortization
allowed or allowable but not more than the realized gain.
B) Sec. 1245 applies to assets sold or exchanged at a gain or at a loss.
(Sec. 1245 does not apply to assets sold at a loss.)

Blair, whose tax rate is 28%, sells one tract of land at a gain of
$29,000 and another tract of land at a gain of $11,000. Both tracts of
land are Sec. 1231 property. She has never had any other Sec. 1231
transactions. How are the gains taxed? (NEW)
A) ordinary income of $40,000 taxed at 28%
B) a net capital gain of $40,000 which is not taxed
C) a net capital gain of $40,000 taxed at 15%
D) ordinary income of $40,000 taxed at 25%
C) a net capital gain of $40,000 taxed at 15%

Ch-14

41) Blair, whose tax rate is 35%, sells one tract of land at a gain of $29,000 and another
tract of land at a gain of $11,000. Both tracts of land are Sec. 1231 property. She has never
had any other Sec. 1231 transactions. How are the gains taxed? (Old)
A) ordinary income of $40,000 taxed at 35%
B) a net capital gain of $40,000 which is not taxed
C) a net capital gain of $40,000 taxed at 15%
D) ordinary income of $40,000 taxed at 25%

Explanation: C) The 1231 gains are treated as LTCG taxed at a maximum of 15%. ($29,000 +
$11,000 = $40,000).

A building used in a business for more than a year is sold. Sec. 1250
will not cause depreciation recapture if
A) the building is fully depreciated.
B) the building was placed in service after 1986.
C) straight-line depreciation was used.
D) all of the above.
D) all of the above.

Cassie owns equipment ($45,000 basis and $30,000 FMV) and a

building ($152,000 basis and $158,000 FMV), which are used in
Cassie's business. Cassie has used straight-line depreciation for both
assets, which were acquired two years ago. Both the equipment and
the building are destroyed in a fire, and Cassie collects insurance
proceeds equal to the assets' FMV. The tax result to Cassie for this
transaction is a
A) $15,000 Sec. 1231 loss and a $6,000 ordinary gain.
B) $15,000 ordinary loss and a $6,000 ordinary gain.
C) $15,000 ordinary loss and a $6,000 Sec. 1231 gain.
D) $15,000 Sec. 1231 loss and a $6,000 Sec. 1231 gain.
B) $15,000 ordinary loss and a $6,000 ordinary gain.

Clarise bought a building three years ago for $180,000 to use in her
business. The straight-line method of depreciation was used and
2

Ch-14

$15,000 of depreciation deductions were allowed. During the current

year, Clarise sells the building to her wholly-owned corporation for
$235,000. The tax results to Clarise are
A) $70,000 ordinary income.
B) $70,000 of Sec. 1231 gain.
C) $55,000 ordinary income and $15,000 Sec. 1231 gain.
D) $15,000 of ordinary income and $55,000 Sec. 1231 gain.
Explain: A) All gain recognized on the sale or exchange of property between
related parties is ordinary income if the property is subject to
depreciation in the hands of the transferee.

A corporation owns many acres of timber, which it acquired three

years ago, and which has a $120,000 basis. The timber was cut last
year for use in the corporation's business. The FMV of the timber on
the first day of last year was $270,000. The corporation made the
appropriate election to treat the cutting as a sale or exchange. The
timber is sold for $300,000 this year. The tax result this year is
A) recognition of capital gain of $30,000.
B) recognition of Sec. 1231 gain of $30,000.
C) recognition of ordinary income of $30,000.
D) no income recognized since all recognition occurs in the year of the
cutting of the timber.
Explanation: C) $270,000 - $120,000 = $150,000 section 1231 gain
recognized last year under the timber election provided by Sec 631. This
year recognize the difference between the selling price of $300,000 and
$270,000 = $30,000 as ordinary income.

A corporation owns many acres of timber, which it acquired three

years ago, and which has a $150,000 basis for depletion. The timber
is cut during the current year for use in the corporation's business.
The FMV of the timber on the first day of the current year is $280,000.
If the corporation makes the appropriate election, the tax result is
A) recognition of a Sec. 1231 gain of $130,000.
B) no recognition of gain or loss since the timber is used in the
business.
C) recognition of a gain at the time of sale if the timber is later sold
with the gain equal to the sales price less the basis in the timber.
D) recognition of a gain if the timber is later sold with the gain equal
to the sales price less $280,000 (FMV on the first day of the year of
the cutting).
A) recognition of a Sec. 1231 gain of $130,000.

Daniel recognizes $35,000 of Sec. 1231 gains and $25,000 of Sec.

1231 losses during the current year. The only other Sec. 1231 item
was a $4,000 loss three years ago. This year, Daniel must report
A) NLTCG Ordinary Income
$10,000 $ 0
B) NLTCG Ordinary Income
$ 6,000 $ 4,000
3

Ch-14

C) NLTCG Ordinary Income

$ 4,000 $ 6,000
D) NLTCG Ordinary Income
$ 4,000 $10,000
B) NLTCG Ordinary Income
$ 6,000 $ 4,000
Explain: B) The $4,000 is considered a nonrecaptured net Sec. 1231
loss. Thus, of the net Sec. 1231 gain of $10,000 ($35,000 - $25,000),
$4,000 is ordinary income.

Dinah owned land with a FMV of $130,000 (adjusted basis $120,000)

which is investment property (a capital asset). Dinah owned a second
tract of land, a 1231 asset, with a FMV of $46,000 (adjusted basis
$50,000). Both tracts were acquired in 2001 and condemned by the
state this year. The state paid an amount equal to FMV. If there are no
other transactions involving capital assets or 1231 assets, Dinah must
report on her current year return
A) $6,000 net ordinary income.
B) $6,000 net section 1231 gain treated as a net capital gain.
C) a LTCG of $10,000 and a 1231 loss of $4,000.
D) a LTCG of $10,000 and a nondeductible loss of $4,000.
Explanation: B) The $10,000 gain on the condemnation of the land held for
investment is considered a Sec. 1231 gain and the $4,000 loss due to the
condemnation of the business land is a Sec. 1231 loss. Since the 1231
gains exceed the 1231 losses, both are treated as capital gains and
losses.

Douglas bought office furniture two years and four months ago for
$25,000 to use in his business and elected to expense all of it under
Sec. 179. Depreciation of $3,500 would have been taken under the
MACRS rules. If Douglas converts the furniture to nonbusiness use
today, Douglas must
A) amend the prior two years tax returns.
B) include $3,500 in gross income in year of conversion.
C) include $21,500 in gross income in year of conversion.
D) include $25,000 in gross income in year of conversion.
Explanation: C) $25,000 depreciation taken - $3,500 depreciation that would
have been taken = $21,500 must be recaptured.

During the current year, a corporation sells equipment for $300,000.

The equipment cost $270,000 when purchased and placed in service
two years ago and $60,000 of depreciation deductions were allowed.
The results of the sale are
A) ordinary income of $90,000.
B) Sec. 1231 gain of $90,000.
C) ordinary income of $60,000 and LTCG of $30,000.
D) ordinary income of $60,000 and Sec. 1231 gain of $30,000.
D) ordinary income of $60,000 and Sec. 1231 gain of $30,000.

Ch-14

During the current year, Danika recognizes a $30,000 Section 1231

gain and a $22,000 Section 1231 loss. Prior to this, Danika's only
Section 1231 item was a $15,000 loss two years ago. Danika must
report a(n)
A) $8,000 net LTCG.
B) $8,000 ordinary income.
C) $15,000 ordinary income.
D) $8,000 ordinary income and $7,000 net LTCG.
B) $8,000 ordinary income.

During the current year, George recognizes a $30,000 Section 1231

gain on sale of land and a $18,000 Section 1231 loss on the sale of
land. Prior to this, George's only Section 1231 item was a $14,000 loss
six years ago. George must report a
A) $12,000 net LTCG.
B) $12,000 ordinary income.
C) $14,000 ordinary income.
D) $10,000 ordinary income and $2,000 net LTCG.
Explanation: A) The lookback rule does not apply because the last 1231
loss was six years ago. Thus, the net Section 1231 gain is $12,000
($30,000 - $18,000) to be treated as long-term capital gain.

During the current year, Hugo sells equipment for $150,000. The
equipment cost $175,000 when placed in service two years ago, and
$55,000 of depreciation deductions were allowed. The results of the
sale are
A) LTCG of $30,000.
B) Sec. 1231 gain of $30,000.
C) Sec. 1245 ordinary income $30,000.
D) Sec. 1250 ordinary income of $30,000.
C) Sec. 1245 ordinary income $30,000.

During the current year, Kayla recognizes a $40,000 Section 1231

gain on sale of land and a $22,000 Section 1231 loss on the sale of
land. Prior to this, Kayla's only Section 1231 item was a $10,000 loss
six years ago. Kayla is in the 28% marginal tax bracket. The amount
of tax resulting from these transactions is
A) $2,700.
B) $3,600.
C) $4,000.
D) $5,040.
Explanation: A) The lookback rule does not apply because the last 1231
loss was six years ago. Therefore, the entire amount is LTCG and is taxed
at 15%. 15% $18,000 = $2,700.

Emily, whose tax rate is 28%, owns an office building which she
purchased for $900,000 on March 18 of last year. The building is sold
for $950,000 on February 20 of this year when the adjusted basis of
the building was $876,000. The tax results to Emily are
5

Ch-14

A) $74,000 1231 gain taxed at 15%.

B) $74,000 ordinary income taxed at 28%.
C) $24,000 1250 unrecaptured gain taxed at 25% and $50,000 1231
gain taxed at 15%.
D) $24,000 1231 gain taxed at 15% and $50,000 ordinary income
taxed at 28%.
Explanation: B) The gain realized is $950,000 - $876,000 = $74,000. The
gain is neither Sec. 1231 gain nor Sec. 1250 gain because the holding
period is not more than one year. Thus, the gain is taxed at ordinary
income rates, in this case, 28%.

Emma owns a small building ($120,000 basis and $123,000 FMV) and
equipment ($35,000 basis and $22,000 FMV). Both assets were
acquired three years ago, are used in Emma's business, and are
depreciated using straight-line depreciation. Both are destroyed by
fire. Insurance proceeds were equal to their FMVs. Only one other
transfer of an asset occurs during the year, and a $3,000 LTCL is
recognized. After considering all transactions, the tax result to Emma
is a
A) $13,000 NLTCL.
B) $13,000 ordinary loss.
C) $3,000 LTCG; $3,000 LTCL; and $13,000 ordinary loss.
D) $10,000 net ordinary loss and a $3,000 NLTCL.
Explanation: D) If the losses from involuntary conversion arising from fire
exceed the gains, the gains and losses are treated as ordinary gains and
losses which is the case in this problem. $123,000 - $120,000 = $3,000
gain; $22,000 - $35,000 = $13,000 loss. The condemnations result in an
ordinary net loss of $10,000.

Eric purchased a building in 2003 that he uses in his business.

Eric uses the straight-line method for the building. Eric's original cost
for the building is $420,000 and cost-recovery deductions are
$120,000. Eric is in the top tax bracket and has never sold any other
business assets. If the building is sold for $560,000, the tax results
are
A) $260,000 Sec. 1231 gain, all taxable at 20%.
B) $260,000 unrecaptured Sec. 1250 gain, all taxable at 25%.
C) $260,000 Sec. 1231 gain, of which $120,000 is unrecaptured Sec.
1250 gain taxable at 25% and the $140,000 balance is taxable at
20%.
D) $120,000 Sec. 1245 ordinary income, $140,000 Sec. 1231 gain
taxable at 20%.
C) $260,000 Sec. 1231 gain, of which $120,000 is unrecaptured Sec.
1250 gain taxable at 25% and the $140,000 balance is taxable at 20%.

For a business, Sec. 1231 property does not include

A) timber, coal, or domestic iron ore.
B) inventory purchased 24 months ago.
6

Ch-14

C) an office building purchased five years ago.

D) land used in the business that was purchased two years ago.
B) inventory purchased 24 months ago.

For livestock to be considered Section 1231 property,

A) the livestock must be held for draft, breeding or dairy purposes,
but not for sport.
B) cattle and horses must be held for at least 12 months from the
date of acquisition.
C) cattle and horses must be held for at least 24 months from the
date of acquisition.
D) livestock other than cattle and horses must be held for at least 24
months from the date of acquisition.
C) cattle and horses must be held for at least 24 months from the date
of acquisition.

Harry owns equipment ($50,000 basis and $38,000 FMV) and a

building ($140,000 basis and $156,000 FMV), which are used in his
business. Harry uses straight-line depreciation for both assets, which
were acquired several years ago. Both the equipment and the building
are destroyed in a fire, and Harry collects insurance proceeds equal to
the assets' FMV. The tax result to Harry for this transaction is
A) the involuntary conversions are treated as ordinary gains and
losses.
B) the involuntary conversions are treated as Sec. 1231 gains and
losses.
C) the loss on involuntary conversion is treated as a Sec. 1231 loss
while the gain is treated as an ordinary gain.
D) the loss on involuntary conversion is treated as an ordinary loss
while the gain is treated as a Sec. 1231 gain.
Explanation: B) If the gains from involuntary conversions resulting from fire (and other
casualties) exceed the losses, which are the case here, all are classified as Sec. 1231 gains and
losses. $38,000 - $50,000 = $12,000 loss; $156,000 - $140,000 = $16,000 gain.

If Section 1231 applies to the sale or exchange of an unharvested

crop sold with land, the costs of producing the crop are
A) capitalized.
B) deducted as an expense of operations when incurred and also
deducted from the sales price at the time of the sale.
C) deducted when incurred if the land is sold but capitalized if the
land is exchanged.
D) deducted as an expense of operations when incurred.
Explanation: A) Costs of producing the crop must be capitalized.

Ch-14

In 1980, Mr. Lyle purchased a factory building to use in business for

$480,000. When Mr. Lyle sells
the building for $580,000, he has taken depreciation of $470,000.
Straight-line depreciation would have been $400,000. Mr. Lyle must
report
A) $570,000 of ordinary gain.
B) $570,000 of Sec. 1231 gain.
C) $70,000 of ordinary income and $500,000 of Sec. 1231 gain.
D) $470,000 of ordinary gain and $100,000 of Sec. 1231 gain.
C) $70,000 of ordinary income and $500,000 of Sec. 1231 gain.

In order to be considered Sec. 1231 property, all of the following

livestock must be held for 12 months or more from date of acquisition
except
A) goats.
B) hogs.
C) sheep.
D) cattle.
D) cattle.

Jeremy has $18,000 of Section 1231 gains and $23,000 of Section

1231 losses. The gains and losses are characterized as
A) Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $23,000
B) Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $23,000
C) Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $23,000
D) Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $3,000 $20,000
A) Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $23,000
Explain: If, when netted, Sec. 1231 losses exceed Sec. 1231 gains, both
are treated as ordinary.

Marta purchased residential rental property for $600,000 on January

1, 1985. Total ACRS deductions for 1985 through the date of sale
amounted to $600,000. If the straight-line method of depreciation had
been used, depreciation would have been $600,000. The property is
sold for $750,000 on January 1 of the current year. The amount and
character of the gain is
A) $750,000 Sec. 1231 gain.
B) $150,000 Sec. 1231 gain and $600,000 ordinary income.
C) $750,000 ordinary gain due to Sec 1245.
D) $750,000 ordinary gain due to Sec. 1250
8

Ch-14

A) $750,000 Sec. 1231 gain.

Maura makes a gift of a van to a local food bank run by a charity.

Maura had used the van in her trade or business. The van has a FMV
of $6,500; a cost of $31,000; and $27,000 depreciation claimed. What
is the amount of Maura's charitable contribution deduction?
A) $6,500
B) $31,000
C) $4,000
D) $2,500
C) $4,000

Pierce has a $16,000 Section 1231 loss, a $12,000 Section 1231 gain,
and a salary of $50,000. What is the treatment of these items in
Pierce's AGI?
A) Pierce has a LTCG of $12,000 and a net ordinary income of
$34,000.
B) The 1231 gains and losses are treated as ordinary gains and losses
making Pierce's AGI for the year $46,000.
C) Pierce has a $3,000 LTCL which is deductible for AGI making AGI
$47,000. He also has a $1,000 LTCL carryover.
D) Pierce has net LTCG of $9,000 and $37,000 of net ordinary income.
Explain: Sec. 1231 losses exceed Sec. 1231 gains, both are treated as
ordinary. Therefore, AGI is $50,000 + ($12,000 - $16,000) = $46,000.

Ross purchased a building in 1985, which he uses in his

manufacturing business. Ross uses the ACRS statutory rates to
determine the cost-recovery deduction for the building. Ross's original
cost for the building is $500,000 and cost-recovery deductions
allowed are $500,000. If the building is sold for $340,000, the tax
results to Ross are
A) $340,000 LTCG.
B) $340,000 Sec. 1231 gain.
C) $340,000 Sec. 1245 ordinary income.
D) $340,000 Sec. 1250 ordinary income.
Explain: C) Section 1245 ordinary income recapture applies to non-residential real estate

placed in service after December 31, 1980, and before January 1, 1987. This property
qualifies as such. Gain realized is considered 1245 ordinary income to the extent of all
depreciation taken$500,000 in this case. Because the gain was a lesser amount, all of
the gain realized is 1245 ordinary income.

Ch-14

Section 1231 property will generally have all the following

characteristics except
A) real or depreciable property.
B) used in trade or business.
C) held for sale to customers.
D) held for more than one year.
C) held for sale to customers.

Section 1245 recapture applies to all the following except

A) depreciable personal property.
B) assets sold or exchanged at a loss.
C) total depreciation or amortization allowed or allowable.
D) amortizable intangible personal property.
B) assets sold or exchanged at a loss. (Section 1245 does not apply to
losses.)

A taxpayer purchased a factory building in 1985 for $800,000. After

claiming ACRS-accelerated depreciation of $800,000, she sells the
asset for $1,000,000 during the current year. No payment is received
during the current year, and the $1,000,000 balance to be paid with
interest at the interest rate in four annual payments beginning one
year from date of sale. The installment sales method is adopted. How
much ordinary income is recognized in the current year?
A) $ 0
B) $200,000
C) $800,000
D) $1,000,000
C) $800,000

Terry has sold equipment used in her business. She acquired the
equipment three years ago for $50,000 and has recognized $30,000
of depreciation across the years in use. In order to recognize any Sec.
1231 gain, she must sell the equipment for more than
A) $0.
B) $20,000.
C) $30,000.
D) $50,000.

Explanation: D) Any sales price of $50,000 or less will result in the full gain being
recaptured as ordinary income under the depreciation recapture provisions of Sec. 1245.

An unincorporated business sold two warehouses during the current

year. The straight-line depreciation method was used for the first
building and the accelerated method (ACRS) was used for the second
building. Information about those buildings is presented below.
10

Ch-14

Building No. 1 Building No. 2

Date acquired 1986 1986
Cost $800,000 $900,000
Accum. Depreciation
Straight-line 800,000
ACRS depreciation 900,000
Selling Price 80,000 400,000
How much gain from these sales should be reported as section 1231
gain and ordinary income due to depreciation recapture by the owner
of the business?
A)
Section 1231 Gain Ordinary Income
$480,000 $0
B)
Section 1231 Gain Ordinary Income
$ 80,000 $400,000
C)
Section 1231 Gain Ordinary Income
$ 0 $480,000
D)
Section 1231 Gain Ordinary Income
$400,000 $ 80,000
B)
Section 1231 Gain Ordinary Income
$ 80,000 $400,000

Which of the following assets is 1231 property?

A) a machine used in the company's manufacturing operations
B) an investment in corporate stock
C) land held for investment
D) items held for resale by a retailer
Explanation: A) Corporate stock and land held for investment are capital
assets, while inventory is an ordinary asset. Only machinery used in a
business will qualify under Sec. 1231.

Why did Congress establish favorable treatment for 1231 assets?

A) to encourage the mobility of capital
B) to allow a larger deduction for losses
C) to help business owners replace assets which had declined in value
D) All of the above
D) All of the above

11

Ch-14

With regard to noncorporate taxpayers, all of the following

statements are true regarding Sec. 1250 recapture except
A) Sec. 1250 affects the character of the gain, not the amount of the
gain.
B) Sec. 1250 applies to assets sold or exchanged at either a gain or a
loss.
C) Sec. 1250 ordinary income does not exist if the straight-line
method of depreciation is used.
D) Sec. 1250 ordinary income is never more than the additional
depreciation allowed.
Explanation: B) Sec. 1250 does not apply to assets sold or exchanged at a
loss.

With respect to residential rental property

A) 80% or more of the gross rental income from the building or
structure must be rental income from dwelling units in order for it to
be classified as residential rental property.
B) hotels are not included in this category if less than half of the units
are used on a transient basis.
C) 80% or more of the net rental income from the building or structure
must be rental income from dwelling units in order for it to be
classified as residential rental property.
D) gain is not subject to the depreciation recapture provisions if the
property is held more than one year.
Explanation: A) For a building or structure to qualify as residential
rental property, 80% or more of the gross rental income from the property
must be rental income from dwelling units.
-------------------------------------------------------------1) During the current year, Danika recognizes a $30,000 Section 1231 gain and a $22,000
Section 1231 loss. Prior to this, Danika's only Section 1231 item was a $15,000 loss two years
ago. Daniel must report a(n)
A) $8,000 net LTCG.
B) $8,000 ordinary income.
C) $15,000 ordinary income.
D) $8,000 ordinary income and $7,000 net LTCG.
Explanation: B) $8,000 (from the total $15,000) of the non-recaptured Sec. 1231 loss is
recaptured as ordinary income.
2) Cassie owns equipment ($45,000 basis and $30,000 FMV) and a building ($152,000 basis and
$158,000 FMV), which are used in Cassie's business. Cassie has used straight-line depreciation
for both assets, which were acquired two years ago. Both the equipment and the building are
destroyed in a fire, and Cassie collects insurance proceeds equal to the assets' FMV. The tax
result to Cassie for this transaction is a
A) $15,000 Sec. 1231 loss and a $6,000 ordinary gain.
12

Ch-14
B) $15,000 ordinary loss and a $6,000 ordinary gain.
C) $15,000 ordinary loss and a $6,000 Sec. 1231 gain.
D) $15,000 Sec. 1231 loss and a $6,000 Sec. 1231 gain.

Explanation: B) If the losses from involuntary conversion arising from fire exceed the
gains, the gains and losses are treated as ordinary gains and losses which is the case in
this problem. $30,000 - $45,000 = $15,000 loss; $158,000 - $152,000 = $6,000 gain.
3) In 1980, Mr. Lyle purchased a factory building to use in business for $480,000. When Mr. Lyle
sells the building for $580,000, he has taken depreciation of $470,000. Straight-line depreciation
would have been $400,000. Mr. Lyle must report
A) $570,000 of ordinary gain.
B) $570,000 of Sec. 1231 gain.
C) $70,000 of ordinary income and $500,000 of Sec. 1231 gain.
D) $470,000 of ordinary gain and $100,000 of Sec. 1231 gain.

Remainder of gain ($570,000 - $70,000 = $500,000) is Sec. 1231 gain.

3) In 1980, Artima Corporation purchased an office building for $400,000 for use in its business.
The building is sold during the current year for $550,000. Total depreciation allowed for the
building was $350,000; straight-line would have been $320,000. As result of the sale, how much
section 1231 gain will Artima Corporation report?
A) $350,000

C) $320,000

B) $406,000

D) $500,000

Answer: B

13

Ch-14
4) Octet Corporation placed a small storage building in service in 1993. Octet's original cost for
the building is $800,000 and the cost recovery deductions are $300,000. This year the building is
sold for $1,100,000. The amount and character of the gain are
A) Ordinary gain of $60,000 and Sec. 1231 gain of $540,000.
B) Ordinary gain of $300,000 and Sec. 1231 gain of $300,000.
C) Ordinary gain of $600,000.
D) Sec. 1231 gain of $600,000.
Explain: A) The Sec. 291 recapture equals 20% of the recapture that would have been required if
Sec. 1245 had applied less the amount recaptured under Sec. 1250 [20% of (300,000 - 0)].
5) Millicent makes a gift of an organ to a church. Millicent uses the organ in her trade or
business. The organ has a FMV of $6,500; a cost of $11,000; and $7,000 depreciation claimed.
What is the amount of Millicent's charitable contribution deduction?
A) $2,500
B) $4,000
C) $6,500
D) 11,000
Explanation: B) If the organ had been sold for $6,500, the realized and recognized gain would be
$2,500 and all of the gain would be ordinary income due to the recapture of depreciation under
Sec. 1245. The charitable contribution deduction is limited to $4,000 ($6,500 - $2,500) because
none of the $2,500 gain would be taxed as a LTCG if the organ was sold.
6) A taxpayer purchased a factory building in 1985 for $800,000. After claiming ACRSaccelerated depreciation of $800,000, she sells the asset for $1,000,000 during the current year.
14

Ch-14
No payment is received during the current year, and the $1,000,000 balance to be paid with
interest at the interest rate in four annual payments beginning one year from date of sale. The
installment sales method is adopted. How much ordinary income is recognized in the current
year?
A) $ -0-

C) $800,000

B) $200,000

D) $1,000,000

15

Explanation: C) $800,000 of the $1,000,000 ($1,000,000 amount realized - $-0- adjusted basis)
gain is Sec. 1245 ordinary income and must be recognized in the year of sale.