Third determine the normal 1250 recapture amount cost

Third, determine the normal § 1250 recapture amount:
Cost recovery taken $287,492
Less straight-line cost recovery (287,492)
§ 1250 ordinary income $ –0–
Fourth, determine the additional § 291 amount:
§ 1245 recapture potential $287,492
Less § 1250 recapture amount (–0–)
Excess § 1245 recapture potential $287,492
Apply § 291 percentage 20%
Additional ordinary income under § 291 $ 57,498
Heron Corporation’s recognized gain of $487,492 is accounted for as follows:
Ordinary income under § 1250 $ –0–
Ordinary income under § 291 57,498
§ 1231 gain 429,994
Total recognized gain $487,492

b. Heron Company, as a sole proprietorship, is not subject to § 291; instead, the
normal depreciation recapture rules apply with respect to the gain recognized on
the sale of the realty. The realty is § 1250 property and there is no recapture of
depreciation under that provision when straight-line depreciation is used. As
such, the entire gain of $487,492 is treated as § 1231 gain on the tax return of the
proprietor of Heron.
Example 15
47. a. A closely held C corporation that is a personal service corporation is subject to the
passive activity loss rules and, as a result, Plum cannot deduct any of the $75,000
passive activity loss in the current year. Therefore, Plum’s taxable income is
$430,000 ($410,000 net active income + $20,000 portfolio income – $0 passive
activity loss).
b. A closely held C corporation that is not a personal service corporation is subject to
the passive loss rules, but it can deduct a passive activity loss against net active
income (but not portfolio income). Thus, Plum’s taxable income is $355,000
[$410,000 (net active income) + $20,000 (portfolio income) – $75,000 (passive
activity loss)].
Example 16
48. The total amount of Aquamarine’s charitable contributions for the year is $118,500. The
painting is capital gain property, but it is tangible personal property which was not used
for a purpose related to the qualified organization’s exempt function. Thus, the amount
of the contribution is limited to the painting’s basis, or $15,000. The Apple stock is
capital 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 qualifies
for the enhanced deduction for corporate contributions of 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 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 22
49. Hoffman, Raabe, Smith, and Maloney, CPAs
5191 Natorp Boulevard
Mason, OH 45040
December 3, 2013
Mr. Joseph Thompson
Jay Corporation
1442 Main Street
Freeport, ME 04032
Dear Mr. Thompson:
I have evaluated the proposed alternatives for your 2013 year-end contribution to the
University of Maine. I recommend that you sell the Brown Corporation stock and donate
the proceeds to the University. 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 result in only a $140,000 charitable contribution deduction.

Contribution of the stock will result in a less desirable outcome from a tax perspective.