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Third, determine the normal § 1250 recapture amount:Cost recovery taken$287,492Less straight-line cost recovery(287,492)§ 1250 ordinary income$ –0–Fourth, determine the additional § 291 amount:§ 1245 recapture potential$287,492Less § 1250 recapture amount(–0–)Excess § 1245 recapture potential$287,492 Apply § 291 percentage20%Additional ordinary income under § 291$ 57,498Heron 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$487,492
b.Heron Company, as a sole proprietorship, is not subject to § 291; instead, thenormal depreciation recapture rules apply with respect to the gain recognized onthe sale of the realty. The realty is § 1250 property and there is no recapture ofdepreciation under that provision when straight-line depreciation is used. Assuch, the entire gain of $487,492 is treated as § 1231 gain on the tax return of theproprietor of Heron.Example 1547.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 $75,000passive activity loss in the current year. Therefore, Plum’s taxable income is$430,000 ($410,000 net active income + $20,000 portfolio income – $0 passiveactivity loss).b.A closely held C corporation that isnota personal service corporation is subject tothe passive loss rules, but it can deduct a passive activity loss against net activeincome (but not portfolio income). Thus, Plum’s taxable income is $355,000[$410,000 (net active income) + $20,000 (portfolio income) – $75,000 (passiveactivity loss)].Example 1648.The total amount of Aquamarine’s charitable contributions for the year is $118,500. Thepainting is capital gain property, but it is tangible personal property which was not usedfor a purpose related to the qualified organization’s exempt function. Thus, the amountof the contribution is limited to the painting’s basis, or $15,000. The Apple stock iscapital gain property and the amount of the contribution is the stock’s fair market value,or $90,000. The canned groceries are ordinary income property but the donation qualifiesfor the enhanced deduction for corporate contributions of inventory. As such, the amountof the contribution of the inventory is equal to the lesser of (1) the sum of the property’sbasis plus 50% of the appreciation on the property, or (2) twice the property’s basis.Thus, the amount of the contribution of the canned groceries is $13,500 [$10,000 (basis)+ .5($17,000 – $10,000)]. pp. 2-14, 2-15, and Example 2249.Hoffman, Raabe, Smith, and Maloney, CPAs5191 Natorp BoulevardMason, OH 45040December 3, 2013Mr. Joseph ThompsonJay Corporation1442 Main StreetFreeport, ME 04032Dear Mr. Thompson:I have evaluated the proposed alternatives for your 2013 year-end contribution to theUniversity of Maine. I recommend that you sell the Brown Corporation stock and donatethe proceeds to the University. The four alternatives are discussed below.Donation of cash, the unimproved land, or the Brown Corporation stock each will resultin a $200,000 charitable contribution deduction. Donation of the Maize Corporation stockwill result in only a $140,000 charitable contribution deduction.
Contribution of the stock will result in a less desirable outcome from a tax perspective.