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Chapter 3 Tax - capital gain of each later $1,000 payment...

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Problem 3 a) Under §331, $10,000 is classified as a long term capital gain ($20,000 received less $10,000 cost basis). In addition, E&P is not relevant for this transaction. b) The $10,000 is received in two consecutive years. Rev. Rul. 85-48 permits full recovery of tax basis before reporting any gain (i.e., “open transaction” treatment appears available). §453(j)(2) states that a ratable tax basis recovery is required, even when the selling price is not readily ascertainable. c) The gain of $10,000 is realized on the liquidation. In addition, the shareholder may report gain on the installment note under §453(h)(1). The following is the installment sales reporting treatment: 1) $4,000 long term capital gain of the $8,000 cash payment and 2) $500 long term
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Unformatted text preview: capital gain of each later $1,000 payment. As for the alternative income tax reporting treatment: There is a basis recovery for $8,000 and a remainder of the transaction reported on installment basis. Publicly traded stock: §453 is not available; §453(k)(2)(A). $10,000 is the immediate gain. d) The installment obligation was received two years ago and no payment has been made on the obligation. Furthermore, sale within 12 months of liquidation limit is applicable - §453(h)(1)(A). Installment method is not available. A would: (1) recognize 10,000 LTCG (20,000 less 10,000 basis) and (2) take a $12,000 basis in the installment obligation under §334(a)....
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