Recapture gain is recognized in year of sale

Recapture gain is recognized in year of sale regardless of whether gain is otherwise recognized under the
installment method
• Property Dividends
 A corporation generally recognizes gain on the distribution of appreciated property to shareholders
 Recapture applies to the extent of the lower of the recapture potential or the excess of the property’s FMV
over its adjusted basis
• Sales between related parties
 Sales of depreciable assets between related parties can cause the total gain to be recognized as ordinary
income
- Applies to related party sales or exchanges of property that is depreciable in hands of transferee
Section 1231 Netting Procedure – Figure (AT BOTTOM)

The Big Picture
• Maurice has come to you for tax advice regarding his investments
 He inherited $750,000 from his Uncle Joe and, following the advice of a financial adviser, made the
following investments 9 months ago
• $5,000 for 100 shares of Eagle Company stock
• $50,000 for a 50% interest in a patent that Kevin, an unemployed inventor, had obtained for a special battery
he had developed to power ‘‘green’’ cars
 To date, Kevin has been unable to market the battery to an auto manufacturer or supplier
• $95,000 to purchase a franchise from Orange, Inc
• $200,000 in the stock of Purple, a publicly held bank that follows a policy of occasionally paying dividends
 At one time, the stock had appreciated to $300,000, but now it is worth only $210,000
- Maurice is considering unloading this stock
• $50,000 in tax-exempt bonds
 The interest rate is only 3%
 Maurice is considering moving this money into taxable bonds that pay 3.5%
• $100,000 for a 10% limited partnership interest in a real estate development
 Lots in the development are selling well
• Maurice read an article that talked about the beneficial tax rates for capital assets and dividends
 He really liked the part about ‘‘costless’’ capital gains, although he did not understand it
• Maurice has retained his job as a toll booth operator at the municipal airport
 His annual compensation is $35,000
• Respond to Maurice’s inquiries
 Read the chapter and formulate your response
Example 14 – Options
• On February 1, 2018, Maurice purchases 100 shares of Eagle Company stock for $5,000
 On April 1, 2018, he writes a call option on the stock, giving the grantee the right to buy the stock for
$6,000 during the following six-month period
 Maurice (the grantor) receives a call premium of $500 for writing the call
• If the call is exercised by the grantee on August 1, 2018, Maurice has $1,500 of short-term capital gain from
the sale of the stock [$6,000 + $500 − $5,000 = $1,500]
 The grantee has a $6,500 basis for the stock [$500 option premium + $6,000 purchase price]
• Assume that Maurice decides to sell his stock prior to exercise for $6,000 and enters into a closing transaction
by purchasing a call on 100 shares of Eagle Company stock for $5,000
 Because the Eagle stock is selling for $6,000, Maurice must pay a call premium of $1,000
• He recognizes a $500 short-term capital loss on the closing transaction
 $1,000 (call premium paid) − $500 (call premium received)
• On the actual sale of the Eagle stock, Maurice has a short-term capital gain of $1,000
 $6,000 (selling price) − $5,000 (cost)
•