Chapter 10

Chapter 10 - 195 Chapter 10 Property: Basis and Nontaxable...

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© 2010 CCH. All Rights Reserved. Chapter 10 195 Chapter 10 Property: Basis and Nontaxable Exchanges Highlights of 2010 Tax Changes The estate tax has been repealed for 2010. It is scheduled to return to 2001 levels in 2011. Without an estate tax, the stepped-up basis rules that applied in prior years have been replaced with “modi f ed carryover basis” rules for property inherited from decedents dying in 2010. Under carryover basis rules, the heir’s basis is the lesser of (i) the decedent’s adjusted basis in the property or (ii) the FMV of the property on the decedent’s DOD. Under “modi f ed carryover basis” rules, an executor can add up to $1.3 million to the heirs’ basis (plus $3 million more if the heir is a surviving spouse). However, modi f ed carryover basis cannot exceed the FMV of the property on the decedent’s DOD. For purchases of Section 1202 (quali f ed small business) stock made between February 18, 2009 and September 27, 2010, and held for more than f ve years, the exclusion increases to 75% of the gain. The exclusion is 100% of the gain for Section 1202 stock purchased between September 28, 2010 and December 31, 2010, and held for more than f ve years. Teaching Suggestions Students may have an easier time learning some of the nonrecognition rules in Chapter 10 if they understand 1. why these rules were enacted. For example, students might better accept the wash sale rules if they understood the abuses that could take place if those rules did not exist. To illustrate the potential abuse, students could be presented with a taxpayer who owns shares of stock in a company. The taxpayer purchased the shares for $10,000; and towards the end of the year, the shares are worth $8,000. Assume now that the taxpayer sells the shares and immediately repurchases them. Without the wash sale rules, the taxpayer recognizes a $2,000 loss but still owns the same number of shares in the corporation. The taxpayer will have turned a F uctuation in market value into a recognized loss with little or no adverse consequences. Most of the nonrecognition of gain rules stem from the wherewithal-to-pay principle. This principle taxes gain when the taxpayer has the greatest ability to pay the tax. Usually this is when the taxpayer realizes a gain. However, in the case of like-kind exchanges and involuntary conversions, the taxpayer does not always have the wherewithal-to-pay when the gain is realized. To illustrate this point, students could be presented with an involuntary conversion that results in a $100,000 realized gain. If the taxpayer does not reinvest the proceeds, the taxpayer can use those proceeds to pay tax on the gain. However, if the taxpayer reinvests the entire proceeds, then the taxpayer does not have the funds to pay the tax on the gain. If the tax laws required taxpayers to pay the tax on the gain, some taxpayers might be required to sell the (reinvested) property to pay the tax liability. To keep this from happening, taxpayers can elect to postpone the gain from an involuntary
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This note was uploaded on 01/14/2012 for the course ECON 121 taught by Professor Mcdevitt during the Winter '10 term at UCLA.

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Chapter 10 - 195 Chapter 10 Property: Basis and Nontaxable...

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