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Solutions to HW

Chapter 8

7. a. Sales price (6 lots $30,000) $180,000Sales expenses (6 lots $500) (3,000)

Amount realized $177,000Less: Basis (6 lots $15,000) (90,000)Realized and recognized gain $ 87,000

b. The entire $87,000 is long-term capital gain from the sale of the first fivelots. Contiguous or adjacent lots sold to a single purchaser are consideredto be one lot. Thus, under 1237, five lots (not six) were sold.

c. If the two lots sold to the fifth purchaser were not contiguous, the total lotssold would be six rather than five. Since Eagle has now sold six or morelots, 5% of the total selling price of all the lots sold in 2013 is treated asordinary income. This ordinary income is offset by any selling expensesassociated with selling the lots.

5% of the sale price ofall the lots $9,000Sales expenses (3,000)Ordinary income $6,000

The remaining $81,000 recognized gain is long-term capital gain.

pp. 8-6, 8-7, and Example 7

9. Even though Carlas vacant land is a capital asset, the expiration of the option isnota capital gain. Since the land is not a security, stock, commodities, or commodities

futures, the expiration of the option results in 2013 ordinary income of $836,000for Carla. p. 8-9

11. If the transaction was the transfer of a franchise, it is generally not the sale orexchange of a capital asset. Section 1253 provides that a transfer of a franchiseis not a transfer of a capital asset when the transferor (Blue) retains any significantpower, right, or continuing interest in the property transferred. Significant powers,rights, or continuing interests include control over assignment, quality of productsand services, and sale or advertising of other products or services, and the right torequire that substantially all supplies and equipment be purchased from thetransferor. Also included are the right to terminate the franchise at will and theright to substantial contingent payments. None of these seem to have been

retained by Blue. Therefore, it appears that Blue has not sold all rights to thename, DateSiteForSeniors (because Blue is still able, apparently, to license thatname to companies other than Fuchsia), but also has not given Fuchsia afranchise. There may have been a sale of a portion of the DateSiteForSeniorsname and that may possibly be the sale of a capital asset by Blue. pp. 8-11 and8-12

14. Thrasher Corporation has not engaged in a short sale against the box because itdid not own substantially identical stock on the date of the short sale. Also, since

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Thrasher did not own substantially identical stock at the date of the short sale, anygain or loss from closing the short sale is short-term.

a. The price of the shares rose after Thrasher made the short sale. It lost $5per share for a total of $500 short-term capital loss from closing the shortsale.

b. The holding period for the remaining 100 shares begins with the closingdate of the short sale (May 2, 2013). Because the remaining shares wereacquired after the short sale date (January 15, 2013), they have a holdingperiod which commences with the earlier of the closing date of the shortsale or the sale date of the remaining shares.

c. Thrasher has a $2 per share gain (total of $200) when it sells the remainingshares on January 20, 2013. This gain is short-term because the holdingperiod did not start until the short sale closing date (May 2, 2013). Thrashermust hold the stock more than one year to receive long-term treatment.

p. 8-15

17. Platinum, Inc. has a net long-term capital loss of $23,000 [($39,000 STCG $24,000 STCL) $38,000 LTCL]. A corporation cannot deduct a net capital lossfrom current year ordinary income. Therefore, Platinums taxable income is$215,000. Platinum has a short-term capital loss carryover of $23,000 because allcapital loss carryovers of corporations are treated as short-term. p. 8-23

21. The process that Harriet is selling is an intangible asset with a zero tax basis toHarriet. It is in the nature of goodwill and is probably a capital asset. If the processis copyrighted, it is not a capital asset. A copyright is specifically defined as notbeing a capital asset by 1221. If the process is patented, the payment mightautomatically be long-term capital gain under 1235. But the process is notpatented. The specific exclusions from capital asset status of 1221 do not seemto include this situation. Therefore, the conclusion is that the process is a capitalasset. The covenant not to compete payments are ordinary income to Harriet asthey are received and will be taxed at ordinary income rates. Consequently,Harriet should take the $650,000 for the process, treat it as long-term capital gain,and pay tax on it of 15%. The $65,000 per year should be taken as a covenant notto compete payment and be treated as ordinary income when it is received. Forthe acquirer, both payments are 197 intangible assets that have to be capitalizedand amortized over 15 years. pp. 8-3 and 8-10

23. To properly handle this transaction, Sissie must determine the following:

The tax status of the property ( 1231 asset, capital asset, or ordinary asset).

The applicability of 1245 depreciation recapture.

The outcome of the 1231 netting process.

Both assets are 1231 assets. Section 1245 depreciation recapture causes theentire gain of $22,510 ($60,000 $37,490) to be taxed as ordinary income sincethe selling price does not exceed the $100,000 original cost of the asset. Sincethe loss of $14,490 ($23,000 $37,490) on the other asset is the only 1231 gain

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or loss, there is a net loss of $14,490 that is treated as an ordinary loss.Consequently, Sissie is partially correct, the $22,510 gain from one of the itemsdoes offset the $14,490 loss from the other item. However, these transactions arereported separately from her 2012 business income. The $8,020 net gainincreases adjusted gross income on her 2012 tax return. pp. 8-25 to 8-32

25. Net 1231 gains must jump a final hurdle before being netted with capitaltransactions. The net 1231 gain must exceed the sum of nonrecaptured net 1231 losses recognized in the five most recent preceding years. The years 2008through 2010 have a combined nonrecaptured net 1231 loss of $93,000. The$93,000 nonrecaptured 1231 loss is partially absorbed by the 2011 $41,000 1231 gain and the 2012 $30,000 1231 gain. Thus, $22,000 of the nonrecaptured 1231 loss remains for offset against the 2013 $41,000 1231 gain.

Net Sec.Net Sec. Before Look- 1231 Gain

1231 Loss back: Current Treated as

Subject to Year NetSec. Ordinary Long-Term

Recapture1231 Gain Income Capital

Gain20082010 ($93,000)2011 41,000 $ 41,000 $41,000 $ 0Remainingpotential

($52,000)

recapture2012 30,000 30,000 30,000 0Remainingpotential

($22,000)

recapture

2013 22,000 41,000 22,000 19,000Totals $ 0 $112,000 $93,000 $19,000

pp. 8-27 and 8-28

31. Death eliminates all recapture potential and the inheritor of the property gets abasis for the property equal to its value at the date of the decedents death. Thus,

Alvin would have a $173,000 basis for the equipment. p. 8-37