Dr. L. Johnson
Accounting 8540 Ė Taxation of Property
Assignment for April 18, 2000
Section 1231 property

Brief Overview:

This week's assignment continues our discussion of ordinary vs. capital gains/losses by examining the gain/loss on the sale, exchange or other disposition of business property. We also expand the netting process and explore the interaction between net gains and losses on the sale of business property with net capital gains and losses.

Reading Assignment:
 
Chapter 22, pp. 763Ė787; 790Ė791. 
 
 
IRC §1(h) IRC §1211(b)
IRC §64 IRC §1221
IRC §179(d)(10) IRC §1222
IRC §267(b)(3), (10), (11) and (12); §267(c) IRC §1231
IRC §318(a)(3)(B)(i) IRC §1239
IRC §1041(b) IRC §1245(a)(1) - (3), (b)(1) and (2), (c), (d)
IRC §1060
 
Reg. §1.1245-1(a)(1), (b), (c)(1), (d); -2(a)(1) through (3)(i) and (7); -6(a)
 

Homework:

In addition to completing problems 1 and 3 on pages 774-775, and the problems on page 781 (parts (a) through (d) only), 787 (problem  1 only) and 791, complete the following homework problems, providing the proper citation from the Code or regulations to support your answer.

  1. Explain how the gain on the sale or exchange of land could be classified as ordinary income, Section 1231 gain, or a LTCG, depending on the circumstances.
  2. When is a net Section 1231 gain treated as ordinary income?
  3. Why is it unlikely that gains due to the sale of equipment will be treated as Section 1231 gains?
  4. Vicki has AGI of $60,000 without considering the sale of a nondepreciable asset for $19,000. The asset was acquired six years ago and has an adjusted basis of $27,000. She has no other sales or exchanges during the year. Compute Vickiís AGI under each of the following scenarios.

  5. a. The land is used in Vickiís business.
    b. The land is held for investment.
  6. Karen purchased a computer three years ago for $4,500 to use exclusively in her business. She expenses the entire cost of the computer under Section 179. If she sells the computer during the current year for $1,622, what is the amount and character of her recognized gain?
  7. The Pear Corporation owns equipment with a $200,000 adjusted basis. The equipment was purchased six years ago for $650,000. What is the amount and character (Section 1231, Section 1245, capital) of the gain or loss Pear will recognize if the equipment is sold for:

  8. a.    $395,000
    b.    $680,000
    c.    $145,000
  9. For the year, Leslie has a $10,000 business casualty gain and a $4,000 business casualty loss. Leslie also recognizes a $2,000 Section 1231 loss. Compute the effect of these transactions on Leslie's AGI. Compute her net capital gain, if any.
  10. For the year, Clark has a $6,000 business casualty gain and a $13,000 business casualty loss. Clark also recognizes a $5,000 Section 1231 gain. Compute the effect of these transactions on Clark's AGI. Compute his net capital gain, if any.
  11. Vivianís AGI is $40,000 before considering the gains and losses below. She had no Sec. 1231(c)(2) non-recaptured net section 1231 losses. Compute Vivianís AGI under each scenario. How would your answer change if the taxpayer were a corporation? How would your answer to Case A change if Vivian had $2,000 of Sec. 1231(c)(2) non-recaptured net section 1231 losses?
 
Case A
Case B
Case C
Case D
§1231 gain
$15,000
$10,000
$20,000
$5,000
§1231 loss
$5,000
$18,000
$25,000
$12,000
LTCG
-0-
-0-
$4,000
-0-
LTCL
-0-
-0-
-0-
$4,200