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Heron Corporation’s recognized gain of $487,492 is accounted for as follows:Ordinary income under § 1250$ –0–Ordinary income under § 29157,498§ 1231 gain429,994Total recognized gain$487,492b.Heron Company, as a sole proprietorship, is not subject to § 291; instead, the normaldepreciation recapture rules apply with respect to the gain recognized on the sale of therealty. The realty is § 1250 property and there is no recapture of depreciation under thatprovision when straight-line depreciation is used. As such, the entire gain of $487,492 istreated as § 1231 gain on the tax return of the proprietor of Heron.47.a.A closely held C corporation that is a personal service corporation is subject to thepassive activity loss rules and, as a result, Plum cannot deduct any of the $75,000 passiveactivity loss in the current year. Therefore, Plum’s taxable income is $430,000 ($410,000net active income + $20,000 portfolio income – $0 passive activity loss).b.A closely held C corporation that isnota personal service corporation is subject to thepassive loss rules, but it can deduct a passive activity loss against net active income (butnot portfolio income). Thus, Plum’s taxable income is $355,000 [$410,000 (net activeincome) + $20,000 (portfolio income) – $75,000 (passive activity loss)].48.The total amount of Aquamarine’s charitable deduction for the year is $118,500. The painting iscapital gain property, but it is tangible personal property which was not used for a purpose relatedto the qualified organization’s exempt function. Thus, the amount of the contribution is limited tothe painting’s basis, or $15,000. The Apple stock is capital gain property and the amount of thecontribution is the stock’s fair market value, or $90,000. The canned groceries are ordinaryincome property but the donation qualifies for the enhanced deduction for corporate contributionsof inventory. As such, the amount of the contribution of the inventory is equal to the lesser of (1)the sum of the property’s basis plus 50% of the appreciation on the property, or (2) twice theproperty’s basis. Thus, the amount of the contribution of the canned groceries is $13,500 [$10,000(basis) + 0.5($17,000 – $10,000)]. 49.Hoffman, Raabe, Maloney, Young, & Smith, CPAs5191 Natorp BoulevardMason, OH 45040December 10, 2014Mr. Joseph ThompsonJay Corporation1442 Main StreetFreeport, ME 04032
Dear Mr. Thompson:I have evaluated the proposed alternatives for your 2014 year-end contribution to the Universityof Maine. I recommend that you sell the Brown Corporation stock and donate the proceeds to theUniversity. The four alternatives are discussed below.Donation of cash, the unimproved land, or the Brown Corporation stock each will result in a$200,000 charitable contribution deduction. Donation of the Maize Corporation stock will resultin only a $140,000 charitable contribution deduction.Contribution of the stock will result in a less desirable outcome from a tax perspective. However,you will benefit in two ways if you sell the stock and give the $200,000 in proceeds to theUniversity. Donation of the proceeds will result in a $200,000 charitable contribution deduction.