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### Chapter 7 HW Solutions

Course: ACTG 470, Spring 2012
School: Oregon
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Word Count: 661

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Capital 16. Gains Tax Rates Solution: a. 0%. b. 15% unless included gains put the taxpayer in a higher tax bracket; then the gain exceeding the 15% bracket is taxed at 28%. c. 15% unless included gains put the taxpayer in a higher tax bracket; then the gain exceeding the 15% bracket is taxed at 25%. 17. Realized Gain or Loss Solution: a. (\$40,000 + \$19,000 - \$2,000) - \$47,000 = \$10,000 realized gain. b. (\$40,000 +...

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Capital 16. Gains Tax Rates Solution: a. 0%. b. 15% unless included gains put the taxpayer in a higher tax bracket; then the gain exceeding the 15% bracket is taxed at 28%. c. 15% unless included gains put the taxpayer in a higher tax bracket; then the gain exceeding the 15% bracket is taxed at 25%. 17. Realized Gain or Loss Solution: a. (\$40,000 + \$19,000 - \$2,000) - \$47,000 = \$10,000 realized gain. b. (\$40,000 + \$19,000 - \$2,000) - \$67,000 = \$10,000 realized loss. 18. Determination and Character of Gains and Losses Solution: a. \$5,000 + \$15,000 + \$13,000 = \$33,000 amount realized. b. \$33,000 - \$34,000 = \$1,000 loss. c. Long-term capital loss. d. If the property had been used in a business, it would be Section 1231 property and Allan would have a Section 1231 loss. 21. Determination and Character of Gains and Losses Solution: a. DDF has \$507,000 (\$575,000 - \$68,000) Section 1231 gain on the land sale. It has a \$635,000 (\$125,000 - \$760,000) Section 1231 loss on the sale of the equipment. b. The \$635,000 loss is netted against the \$507,000 gain. The result is a \$128,000 net Section 1231 loss that is deducted against DDF Corporations ordinary income. 22. Determination and Character of Gain Solution: \$27,000 - \$17,000 = \$10,000 total gain. \$7,000 (\$24,000 - \$17,000) of the gain is taxed as ordinary income due to Section 1245 recapture; the remaining \$3,000 gain is Section 1231 gain. 24. Determination and Character of Gains and Losses Solution: a. \$680,000 - \$500,000 = \$180,000 Section 1231 gain; \$150,000 (\$650,000 \$500,000) of this gain would be unrecaptured Section 1250 gain subject to a maximum 25% rate. b. \$680,000 - \$500,000 = \$180,000 Section 1231 gain; \$150,000 (\$650,000 \$500,000) of this gain would be unrecaptured Section 1250 gain subject to a maximum 25% rate. c. \$30,000 Section 291 recapture (\$150,000 x 20%); the remaining \$150,000 (\$180,000 - \$30,000) of gain is Section 1231 gain. 25. Determination and Character of Gains and Losses Solution: a. \$19,000 \$16,000 = \$3,000 long-term capital gain. b. \$30,000 \$31,000 = \$1,000 short-term capital loss. 26. Section 1231 Recapture Solution: a. Only \$10,000 of the \$25,000 of Section 1231 gain must be recaptured as ordinary income; Barbara deducted a \$45,000 Section 1231 loss in year 2, and \$35,000 (\$20,000 + \$15,000) was recaptured in years 3 and 4. The remaining \$15,000 (\$25,000 - \$10,000 recaptured) of the gain is simply Section 1231 gain. b. There is no unrecaptured loss remaining after year 5. 27. Recapture Solution: a. \$700,000 (\$600,000 - \$80,000) = \$180,000 total gain. Only of \$80,000 this gain is subject to Section 291 recapture, however, as that is the limit of Section 1245 recapture if that provision applied. Thus, the Section 291 recapture = 20% x \$80,000 = \$16,000. The corporation recognizes \$16,000 of ordinary income due to Section 291 and the remaining \$164,000 (\$180,000 \$16,000) is Section 1231 gain. b. If Angel were a sole proprietorship, there would be no Section 291 recapture. The entire \$180,000 gain would be Section 1231 gain; however, the \$80,000 unrecaptured Section 1250 gain would be subject to the 25% capital gains tax rate when included in the sole proprietors tax return. c. If Angel Corporation has \$43,000 of Section 1231 losses in the prior year, \$43,000 of the \$164,000 Section 1231 gain would be recaptured (under the lookback rules) and included in ordinary income (along with the \$16,000 Section 291 recapture). Only the remaining \$121,000 (\$180,000 - \$16,000 - \$43,000) is Section 1231 gain. 32. Capital Asset Netting Solution: \$65,000. Netting the \$15,000 STCG with the \$24,000 LTCL results in a \$9,000 LTCL. Sharon can deduct only \$3,000 of this capital loss in the current year; thus, her adjusted gross income is \$65,000 (\$68,000 - \$3,000). She can carry the remaining \$6,000 LT capital loss forward. 35. Capital Asset and Section 1231 Netting Solution: Taxable income is reduced by \$2,000. Step 1. Net the \$10,000 Section 1231 gain with the \$6,000 Section 1231 loss; the result is a net Section 1231 gain of \$4,000. Step 2. Net the \$4,000 Section 1231 gain with the long-term capital gains and losses; the result is a net \$1,000 long-term capital gain (\$4,000 + \$4,000 - \$7,000). Step 3. The \$3,000 short-term capital gain is netted with the \$6,000 short-term capital loss; the result is a net \$3,000 short-term capital loss. Step 4. The \$3,000 STCL and \$1,000 LTCG are netted; the result is a \$2,000 STCL. This loss is deducted from the taxpayers other income, reducing taxable income by \$2,000. 44. Related Party Transaction Solution: Marilyns basis in the shares sold = \$10,000 [(200/500) x \$25,000]. She has a realized loss of \$3,000 (\$7,000 - \$10,000) but she can recognize none of it because the sale was to her brother. Her basis in her remaining 300 shares is \$15,000 (\$25,000 - \$10,000 sold). Her brothers basis in the shares he purchased is the purchase price of \$7,000. When he sells the stock for \$12,000, he has a \$5,000 realized gain (\$12,000 \$7,000). He only has to recognize \$2,000 of the gain, however, as he can offset his sisters unrecognized \$3,000 loss against his \$5,000 gain.
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