CHAPTER 8

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School

University of Utah *

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5310

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Accounting

Date

Feb 20, 2024

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Uploaded by beeanh777

CHAPTER 8 -~ - 5. I.O4 Elliott has the following capital gain and loss transactions for 2023: Short-term capital gain $ 1,500 Short-term capital loss (3,600) Long-term capital gain (28%) 12,000 Long-term capital gain (25%) 4,800 Long-term capital gain (15%) 6,000 Long-term capital loss (28%) (4,500) Long-term capital loss (15%) (9,000) After the capital gain and loss netting process, what is the amount and character of Elliott’s net capital gain or loss? Problem 5 Elliott first nets the short-term gains and losses against each other and the long-term gains and losses against each other. There is a net short-term capital loss of $2,100 ($1,500 - $3,600). The 28% long-term items are netted and leave a net $7,500 28% gain. The 0%/15%/20% items are netted and leave a $3,000 loss. That loss is netted against the $7,500 28% gain, leaving a $4,500 28% gain. That gain is offset against the $2,100 short-term capital loss, leaving a $2,400 28% gain and a $4,800 25% gain for a total long-term capital gain of $7,200. STCG 1,500 LTCG 28% 12,000 STCL (3,600) LTCL 28% (4,500) (2,100) 7,500 4,500 2,400 LTCG 25% 4,800 LTCG 15% 6,000 LTCL 15% (9,000) (3,000)

6. [LO.6,7 Renata Corporation purchased equipment in 2021 for $180,000 and has taken $83,000 of regular MACRS depreciation. Renata Corporation sells the equipment in 2023 for $110,000. What is the amount and character of Renata’s gain or loss? Problem 6 Renata’s equipment gain is subject to § 1245 depreciation recapture. The property had an adjusted basis of $97,000 ($180,000 cost - $83,000 depreciation). The gain is $13,000 ($110,000 selling price — $97,000 adjusted basis) and is all ordinary gain due to recapture because the gain is less than or equal to the depreciation taken. 10. [HO.7 In a § 1031 like-kind exchange, Rafael exchanges a business building that originally cost $200,000. On the date of the exchange, the building given up has an adjusted basis of $85,000 and a fair market value of $110,000. Rafael pays $15,000 and receives a building with a fair market value of $125,000. What is the amount and character of Rafael’s gain or loss? Problem 10 Rafael has no recognized gain or loss. There was a realized gain of $25,000 ($110,000 value - $85,000 adjusted basis) on the property relinquished, but because no boot was received, none of the gain is recognized. However, the unrecaptured § 1250 gain (25% gain) potential of $115,000 (equal to the depreciation taken) carries over to the replacement property.

12. [HO.1 Alison owns a painting that she received as a gift from her aunt 10 years ago. The aunt created the painting. Alison has displayed the painting in her home and has never attempted to sell it. Recently, a visitor noticed the painting and offered Alison $5,000 for it. If Alison decides to sell the painting, what tax issues does she face? Problem 12 Because Alison received the property by gift, her tax basis is determined by whether the fair market value of the painting exceeded her aunt’s tax basis at the time of the gift. If this is the case, Alison has a carryover basis for the painting equal to her aunt’s basis for the painting. Most likely, her aunt had a zero tax basis for the painting because none of the costs of creating the painting were capitalized. Therefore, the painting was worth more than the donor’s basis at the time of the gift and Alison has a zero tax basis for it. Her aunt’s holding period also carries over to Alison. But because Alison has held the painting more than one year, the holding period for Alison is more than one year regardless of her aunt’s holding period. The painting is an ordinary asset, not a capital asset, for Alison because she received a creative work from its creator, her aunt. Consequently, Alison will have ordinary gain equal to the $5,000 selling price if she decides to sell the painting.

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25. B0 4 Liana Amiri (single with no dependents) has the following transactions in 2023: AGI (exclusive of capital gains and losses) $240,000 Long-term capital gain 22,000 Long-term capital loss (8,000) Short-term capital gain 19,000 Short-term capital loss (23,000) What is Liana’s net capital gain or loss? Draft a letter to Liana describing how the net capital gain or loss will be treated on her tax return. Assume that Liana's income from other sources puts her in the 37% bracket. Liana’s address is 300 Ireland Avenue, Shepherdstown, WV 25443, Problem 25 STCG 19,000 LTCG 15% 22,000 STCL (23,000) LTCL 15% (8,000) [ (4,000) ) 14,000 10,000 The $10,000 net long-term capital gain and the details of your stock transactions will be reported on Form 8949; then a summary will be carried to the Schedule D attached to your Form 1040. The $10,000 net capital gain qualifies for the alternative tax on capital gains and will be taxed at a 20% rate rather than at your marginal tax rate of 37%. 26. (EOM Sally is single and has taxable income of $170,000 as of November 30 of this year. She wants to sell a Rodin sculpture that has appreciated $90,000 since she purchased it six years ago, but she does not want to pay more than $15,000 of additional tax on the transaction. Sally also owns various stocks, some of which are currently worth less than their basis. How can she achieve her desired result? Problem 26 Sally’s sculpture is a “collectible” and, as such, is taxable at a maximum rate of 28%. Since Sally is already in the 32% tax bracket, the 28% rate will apply. A 28% tax of $15,000 translates into a taxable gain of $53,571 ($15,000/0.28). Therefore, Sally should sell enough stock to generate a capital loss of $36,429 ($90,000 gain on the sculpture — $53,571 desired gain). This loss can be any combination of short-term, 28% property, and long-term capital losses.

27. JBOS Platinum, Inc., has determined its taxable income as $215,000 before consider- ing the results of its capital gain or loss transactions. Platinum has a short-term capital loss of $24,000, a long-term capital loss of $38,000, and a short-term capital gain of $39,000. What is Platinum’s taxable income? What (if any) are the amount and nature of its capital loss carryover? Problem 27 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 loss from current year ordinary income. Therefore, Platinum’s taxable income is $215,000. Platinum has a short-term capital loss carryover of $23,000 because all capital loss carryovers of corporations are treated as short-term.

43. lBOW Heron Company purchases commercial realty on November 13, 2005, for $650,000. Straight-line depreciation of $287 492 is claimed before the property is sold on February 22, 2023, for $850,000. What are the tax consequences of the sale of realty if Heron is: a. A C corporation? b. A sole proprietorship? Problem 43 Under § 291, a corporation will incur an additional amount of depreciation recapture (ordinary income) upon a disposition of § 1250 property for a gain. The § 291 adjustment is equal to 20% of the excess of the amount of depreciation recapture that would arise if the property was § 1245 property over the amount of deprecation recapture computed under § 1250 (without regard to § 291). $287,492 (cost recovery claimed). Sec. 1231 gain Sales Price 850,000 Less Adjusted Basis: Cost of property 650,000 Accum. Depr. (287,492) (362,508) Gain 487,492 Determine the § 1245 recapture potential. This is the lesser of $487,492 (recognized gain) or Depreciation taken 287,492 Less straight line depr (287,492) Gain Subject to Sec. 1250 - Sec 1245 Recapture Depreciation taken 287,492 Less Sec. 1250 gain - Excess 1245 recapture potential 287,492 Sec 291 percentage 20% Sec 291 Gain as Ordinary 57,498 Summary Sec. 1250 gain - Ordinary gain Sec. 291 gain 57,498 Ordinary gain 429,994 Capital gain 487,492

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