Federal Income Tax Outline – Page 7 Capital Asset

The Meaning of “Capital Asset”

1211(a)

Cases: 

Mauldin v. Commissioner

Helpful facts to determine whether property is a “capital asset” – 1. The purpose(s) for which the property was acquired – sale or investment; 2. Continuity and frequncey of sales as opposed to isolated transactions; 3. Ppurpose for which it was sold (most important)

Malat v. Riddell

Section 1221(1) denies capital gain treatment to profits reaped from the sale of “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;” Primarily means “of first importance” or “principally.”

 

The Holding Period

Cases:

Revenue Ruling 66-7

Calculating a time period; “From” or “after” – excludes the day thus designated and the last day of the prescribed period is included; calendar months and factions thereof, rather than with reference to days; capital assets – the holding period begins to run on the day following the date of acquisition

Statutorily Created Capital Gain and Loss

Section 1231 Recharacterization – Page 751 – Unquestionably the most significant recharacterization

 

Involuntary conversion

1231(c) – Lookback Recapture Rule:

  • If you have a gain, and if in the prior five years you have taken a deduction(s) through 1231
  • Gain Recognized may be different than Gain Realized

Example:

$10,000 loss in Year 1. In Year 2 you take a $7,000 gain. That $7,000 gain would be treated as ordinary income and then there would be $3,000 left in the “filter.” Year 3 you have $5,000 gain, $3,000 would be ordinary income and $2,000 would be LTCG

 

Characterization

1239 – Related Taxpayers – Gain recognized to the transferor is treated as ordinary income
Example:

Corporation owned by A. A sells a $100,000 piece of machinery to the corporation (1231 property). Had an Adjusted Basis of $20,000; therefore, A has a GRealized of $80,000 and GRecognized of $80,000. If the corporation is going to take a business deduction, they would be offsetting ordinary income. Therefore, any gain recognized to the transferor shall be treated as ordinary income.

  • Does not matter if the transferee takes the deduction or not – it is subject to depreciation
  • This is given capital treatment.

 

Federal Tax Outline – Page 6

 

This Federal Tax Outline is keyed to Fundamentals of Federal Income Taxation, 15 edition, Foundation Press.


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