In Year 1, Riley is a little into the 37% tax bracket with her salary from her job as a hedge fund manager. During the taxable year, she enters into the following transactions. She disposed of General Electric stock for $100,000 that she had purchased for $50,000 three years earlier.

She sold a specialized military medals collection for $50,000 that she had received as a gift from her Uncle Joe12 years earlier (Uncle Joe had a basis of $8,000 in the collection, and the fair market value at the date of transfer was $20,000). She also disposed of Amazon stock for $50,000 that she had purchased 9 months earlier for $40,000, and BP stock that she had purchased for $20,000, held for 10 months and was sold for $25,000.

She sold an investment wine collection for $2,000 that she had purchased for $70,000 two years earlier (improper storage turned many of the vintage bottles skunky, a true wine tragedy). Finally, she received $15,000 in dividends from the GE stock, which is Qualified Dividend Income for Code purposes.

1. What is the first step needed to be taken in order to analyze this fact pattern?

a) Calculate the income from each asset.

b) Determine what tax bracket Riley is in.

c) Sort assets into categories.

d) Determine what is ordinary income, and what is capital gain.

e) Determine what is and is not income.

f) Determine allowable losses.

g) Calculate the gain from each asset.

h) Sort assets into capital and non-capital assets.

i) Sort gain into categories.

j) None of the above. Explain: ____________________________________

2. What is the second step?

a) Calculate the income from each asset.

b) Calculate the tax bracket Riley is in.

c) Sort assets into categories.

d) Determine what is ordinary income, and what is capital gain.

e) Determine what is and is not income.

f) Determine allowable losses.

g) Calculate the gain from each asset.

h) Sort assets into capital and non-capital assets.

i) Sort gain into categories.

j) None of the above. Explain: ____________________________________

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3. What is the third step?

a) Calculate the income from each capital asset.

b) Determine what tax bracket Riley is in.

c) Sort assets into categories.

d) Determine what is ordinary income, and what is capital gain.

e) Characterize the income as ordinary or capital gain for 1(h)(11).

f) Determine allowable losses.

g) Establish if any of the transactions involve capital assets.

h) A & B.

i) E & G.

j) None of the above. Explain: ____________________________________

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4. How much is Riley’s Gross Income?

a) 100,000

b) 32,000

c) 17,000

d) 105,000

e) 95,000

f) 110,000

g) 107,000

h)122,000

i) 120,000

j) None of the above. Explain: ______________________________________

5. How much is the gain on the GE Stock?

a) 100,000

b)50,000

c)122,000

d)98,000

e)105,000

f) 102,000

g) 102,500

h) None of the above. Explain: her gain is 65000 because 15,000 dividends and her 50000 gained in selling the stuck

6. How much is the gain on the medals?

a) 8,000

b) 20,000

c) 42,000

d) 50,000

e) 10,000

f) 32,000

g) None of the above. Explain: __________________________________

7. What is the basis of the medals collection, and on what Code section is your answer based?

a) 8,000

b) 20,000

c) 42,000

d) 50,000

e) 10,000

f) 18,000

g) None of the above. Explain: _________________________________

Code Section ___________________________

8. What is the gain on the Amazon Stock?

a) 50,000

b) 10,000

c) 40,000

d) 25,000

e) 20,000

f) 22,000

g) None of the above. Explain: __________________________________

9. What is the gain on the BP stock?

a) 20,000

b) 25,000

c) 15,000

d) 30,000

e) 5,000

f) 10,000

g) None of the above. Explain: _________________________________

10. What is the gain on the wine collection?

a) 20,000

b) 68,000

c) 70,000

d) 2,000

e) 72,000

f) 74,000

g) None of the above. Explain: actually it is a lost since she is origionally paid 70,000 and only sold it for 2000

11. Are there any capital assets in these transaction?

a) GE stock

b) medals collection

c) Amazon stock

d) BP stock

e) wine collection

f) Qualified Dividends

g) A, B, C, D, E, & F

h) A, B, C,D, E

i) A, B, C, D

j) A, C, D

12. What is the significance of a capital asset?

a) It generates income under 61(a)(3)

b) A capital gain or loss is generated from the sale of a capital asset

c) Ordinary income excludes gains from capital assets

d) It triggers the application of 1(h)

e) It excludes the application of 1(h)

f) It signals gross income

g) It disallows losses from personal consumption

h) It generates ordinary income

i) All of the above.

j) None of the above: Explain: _____________________________________

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13. Once you have determined you have a capital asset, to what code section do you need to go?

a) 1212

b) 1211

c) 1222

d) 408(m)

e) 1(h)

f) 121

g) 1224

h) 1001(a)

i) 1001(b)

j) None of the above. Explain: 1221

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14. What do you do in this section?

a) Apply definitions to various types of income.

b) Determine the amount of gain or loss on an asset.

c) Sort each asset by tax rate applicable to it.

d) Determine which gains and losses are short-term or long-term

e) Calculate net capital gain.

f) a & b

g) c& d

h) d & e

i) None of the above: Explain _______________________________________

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15. Does Riley get to use 1(h), on the facts of this question? Why or why not?

a) Yes. There is an NCG.

b) No. There is no NCG.

c) What is this 1(h) of which you speak??

d) Yes. There is a capital asset.

e) No. There is no capital asset.

f) No. The QDI cancels out the rest of the income.

g) Yes. There is an ANCG.

h) No. There is no ANCG.

i) None of the above.

16. What did you have to determine with regard to the wine collection, in getting to your answer in # 15?

a) 1211(b) allowed the full amount of the loss to be used.

b) Since the wine was for investment, it was bought for profit.

c) The loss was allowed under 165(a)&(c).

d) The loss was allowed by 165(f).

e) Since the wine was sold at a loss, no profit motive can be found.

f) a & b.

g) a, b & c.

h) a,b,c,d.

i) None of the above. Explanation: _________________________________

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17. Once you get to 1(h), on the facts presented, what is the first thing to be done?

a) Sort NCG into 28% rate gain category, 25% rate category, and residual rate category.

b) Apply losses “like to like”.

c) Determine if losses can be deducted.

d) Modify NCG by adding QDI under 1(h)(11).

e) Determine if losses can offset gain, and by how much.

f) Reduce NCG by removing QDI.

g) Use QDI to offset capital losses.

h) a & b.

i) c & f.

j) None of the above. Explain: ___________________________________

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18. After the step(s) in #17, what is next in your analysis?

a) Compute ANCG by removing 28% rate category & 25% rate category.

b) Divide your assets into rate categories.

c) Apply losses like to like, to the rate categories to come up with the appropriate amount in each category.

d) Use QDI to offset capital losses.

e) Reduce NCG by removing QDI

f) b, c & d

g) b, c & e

h) b & c

i) b, c, d & e

j) None of the above. Explain: ______________________________________

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19. After the step(s) in #18, what order does the following happen?

1. Calculate marginal rate on ordinary income.

2. Determine ANCG amount under 1(h)(3).

3. Remove 25% & 28% rate gain category.

4. Add QDI back to NCG.

5. Determine how much room is left in the bracket below 25%.

a) 1,2,3,4 then 5.

b) 3, 2, 4, 1, then 5.

c) 3, 4, 2, 1 then 5

d) 5, 4, 1, 2 then 3

e) 2, 3, 4, 1 then 5.

f) 4, 3, 2, 1, then 5

g) 4, 3, 2, 5 then 1.

h) 5, 1, 4, 2 then 2.

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20. How much is the ANCG?

a) 0

b) 24,000

c) 15,000

d) 39,000

e) 9,000

f) 25,000

g) 6,000

h)5,000

i) 10,000

j) None of the above. Explain: ______________________________________

21. What is the next step after determining the amount of ANCG?

a) Establish Riley’s marginal tax rate.

b) Calculate the deductions Riley has coming.

c) Determine if Riley is in a trade or business.

d) Figure out the tax rate that applies to Riley’s ANCG.

e) a & d

f) b & c

g) all of the above

h) None of the above: Explain: _____________________________________

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22. What is the outcome of the task set in #21?

a) Since she is already in the 37% rate category, no 0 rate is available to her, so all her ANCG is taxed at 15%.

b) Riley gets to reduce her income by a further $48,000 in deductions.

c) Riley gets to deduct $102,000 in expenses.

d) Riley is in the trade or business of managing her own stocks, so she gets to take the ordinary and necessary expenses attached to her trade or business.

e) b & d

f) c & d

g) all of the above.

h) None of the above. Explain: _____________________________________

__________________________________________________________________

i) Insert pithy comment here: ______________________________________

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23. To summarize Riley’s tax consequences, please fill in the following chart:

Ordinary Progressive Rates:___________________________________

Amount taxed at 0%: _________________________________

Amount taxed at 15%: _________________________________

Amount taxed at 20%: ________________________________

Amount taxed at maximum 25%: ____________________________

Amount taxed at maximum 28%: ___________________________

24. Using the same facts listed above, add in that Riley also sold XYZ stock in the same year. She had purchased it as an investment for $160,000, sold it for $20,000, and held it for 13 months.

Calculate:

Ordinary Progressive Rates:___________________________________

Amount taxed at 0%: _________________________________

Amount taxed at 15%: _________________________________

Amount taxed at 20%: ________________________________

Amount taxed at maximum 25%: _____________________________

Amount taxed at maximum 28%: _____________________________

Additional tax consequence and explanation:

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

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25. What does your answer look like if you amend the original fact pattern to say that Riley earns no salary or other income during the year except the listed transactions?

Ordinary Progressive Rates:___________________________________

Amount taxed at 0%: _________________________________

Amount taxed at 15%: _________________________________

Amount taxed at 20%: ________________________________

Amount taxed at maximum 25%: _____________________________

Amount taxed at maximum 28%: ______________________________