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) •
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- Spring '16