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III. Section 1231: Some Limited Mismatching
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- IV. Some Basis Transfer Transactions: §§ 1031, 1033
III. Section 1231: Some Limited MismatchingDuring World War II, the nation moved to a war economy. The Government seized many of the nation’s productive assets in order to convert them to production of items critical to the war effort. The Fifth Amendment to the Constitution of course requires that the owners of such properties be justly compensated. However, the owners of businesses may not have particularly wished to sell their assets to the Government and then to pay income tax (at wartime rates) on the taxable gains they were forced to recognize. Congress responded by enacting § 1231 – a sort of “heads-I-win-tails-you-lose” measure for taxpayers who found themselves with (substantial amounts of) unplanned-for taxable income. Basically, net gains from such transactions would be treated as capital gains; net losses from such transactions would be treated as ordinary losses. World War II ended a long time ago, but § 1231 is still with us. It has become a very important provision in the sale of a business’s productive assets. Section 1231 applies to “property used in the trade or business” and to any capital asset held for more than one year in connection with a trade or business or a transaction entered into for profit. § 1231(a)(3). Section 1231(b) provides a definition of “property used in the trade or business.” Such property is essentially “property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year[.]” § 1231(b)(1). Such property is the same as the property that § 1221(a)(2) describes – with the caveats that it does not encompass property that § 1221(a)(1, 3, and 5) describes, and the taxpayer must have held the property for more than one year. § 1231(b)(1). Section 1231 initially adopts the “heads-I-win-tails-you-lose” principle for “involuntary conversions” and casualty losses. If a taxpayer’s gains and losses from “involuntary conversions” and casualty losses net to a loss, then § 1231 does not apply to any such gains and losses. § 1231(a)(4)(carryout paragraph). The upshot of this “inapplicability” is that such gains and losses are treated as realized on the disposition of non-capital assets, so the net loss will be an ordinary loss. Some writers refer to this “preliminary” netting of casualty gains and losses and involuntary conversion gains and losses as the “firepot.” Section 1231 requires a netting of “section 1231 gains” and “section 1231 losses.” “Section 1231 gain” is gain recognized on the sale or exchange of “property used in the trade or business” plus gain recognized on the compulsory or involuntary conversion, or casualty of “property used in the trade or business” or a “capital asset held for more than 1 year” that “is held in connection with a trade or business or a transaction entered into for profit.” § 1231(a)(3)(A). Such gain does not include depreciation recapture. § 1245(d), § 1250(h), Reg. § 1.1245-6(a), Reg. § 1.1250-1(e)(1). “Section 1231 loss” is loss recognized on such conversions. Some writers refer to this netting as the “hotchpot.” •If the “preliminary firepot” produces a net gain, gains and losses from compulsory or involuntary conversions, or from casualties will figure into the determination of section 1231 gains or losses. Section 1231(a)(1 and 2) implements the “heads-I-win-tails-you-lose” principle. •If section 1231 gains for any taxable year exceed section 1231 losses, such gains and losses are treated as LTCG or LTCL as the case may be. § 1231(a)(1). •If section 1231 gains do not exceed197 section 1231 losses for the taxable year, then such gains and losses are not treated as gains and losses derived from sales or exchanges of capital assets. § 1231(a)(2).
Do the CALI Lesson Basic Federal Income Taxation: Property Transactions: Identification of Section 1231 Property Do the CALI Lesson Basic Federal Income Taxation: Property Transactions: Section 1231 Mechanics •Note: the author of this casebook disagrees with Question 14. IV. Some Basis Transfer Transactions: §§ 1031, 1033Congress has identified some transactions in which it does not want taxpayers to “recognize” gain even though a taxpayer may have “realized” gain. The “technique” by which Congress accomplishes this is the basis transfer. Taxpayer simply keeps as the basis in the asset he/she/it acquires the basis in the asset he/she/it gave up. Some examples include – •Like-kind exchanges under § 1031: Under certain defined conditions, taxpayer does not recognize gain or loss upon the exchange of property for other property of like kind. Instead, taxpayer has the same basis in the acquired property as he/she/it had in the property exchanged. § 1031(d) (with adjustments for receipt of and taxation of non-like kind property received). •Involuntary conversions under § 1033: If taxpayer’s property is compulsorily or involuntarily converted because of theft, seizure, requisition or condemnation, taxpayer may, by complying with the rules of § 1033, elect to spend money received because of such conversion on replacement property. Taxpayer does not recognize the gain realized on such a conversion. Instead, taxpayer has the same basis in the replacement property that he/she/it had in the property compulsorily or involuntarily converted. § 1033(b) (with various adjustments). •The gain or loss that a partner “realizes” upon contributions of property to a partnership in exchange for a partnership interest are not “recognized.” § 721. The partner’s basis in his/her/its partnership interest is the basis he/she/it had in the property contributed. § 722. •The gain or loss that a shareholder “realizes” upon contributing property to a corporation in exchange for shares of stock in the corporation are not “recognized” if the conditions of § 351(a) are met. Shareholder’s basis in his/her/its shares is the basis of the property he/she/it contributed. § 358(a). In these transactions and many more, tax on gain is not forgiven. It is merely deferred until the time when taxpayer disposes of the asset acquired in a taxable transaction. Directory: sites -> default -> files files -> Answer True False 2 points Question 2 files -> Northern England’s set-jetting locations files -> Nstructions for Acquiring Excess Equipment online, through the 1033 Program files -> Occupational health and safety files -> The Black Panther Party’s Ten Point Program files -> International programs roel profile files -> Fermi Questions a guide for Teachers, Students, and Event Supervisors Lloyd Abrams, Ph. D. DuPont Company, cr&D/ccas experimental Station Wilmington, de 19880 files -> Personal Information Name: Maha Al-Ammari Nationality: Saudi Relationship Status Download 2.56 Mb. Share with your friends:
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