Table of Contents introduction & vocabulary 2

What is a Capital Asset?

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  Code § 1223. Holding period of property.
  
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  Code § 1231. “Capital gains when disposed of at a net gain and ordinary loss when disposed of at a net loss”
  
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    Code § 1231(a)(1). Property used in the trade or business and involuntary conversions—General rule—Gains exceed losses.
    
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    Code § 1231(a)(2). Property used in the trade or business and involuntary conversions—General rule—Gains do not exceed losses.
    
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    Code § 1231(a)(3). Property used in the trade or business and involuntary conversions—General rule—Section 1231 gains and losses.
    
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    Code § 1231(b). Property used in the trade or business and involuntary conversions—Definition of property used in the trade or business.
    
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    Code § 1231(c)(1). Property used in the trade or business and involuntary conversions—Recapture of net ordinary losses—In general.
    
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    Code § 1231(c)(2). Property used in the trade or business and involuntary conversions—Recapture of net ordinary losses—Non-recaptured net section 1231 losses.
    
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  Code § 1245(a). Gain from dispositions of certain depreciable property—General rule.
  
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    Code § 1245(b)(1). Gain from dispositions of certain depreciable property—Exceptions and limitations—Gifts.
    
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    Code § 1245(b)(2). Gain from dispositions of certain depreciable property—Exceptions and limitations—Transfers at death.
    
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    Code § 1245(b)(3). Gain from dispositions of certain depreciable property—Exceptions and limitations—Certain tax-free transactions.
    
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    Code § 1245(b)(8). Gain from dispositions of certain depreciable property—Exceptions and limitations—Disposition of amortizable section 197 intangibles.
    
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  Code § 1250(a). Gain from dispositions of certain depreciable realty—General rule.
  
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    Code § 1250(b). Gain from dispositions of certain depreciable realty—Additional depreciation defined.
    
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    Code § 1250(c). Gain from dispositions of certain depreciable realty—Section 1250 property.
    
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    Code § 1250(d)(1). Gain from dispositions of certain depreciable realty—Exceptions and limitations—Gifts.
    
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    Code § 1250(d)(2). Gain from dispositions of certain depreciable realty—Exceptions and limitations—Transfers at death.
    
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    Code § 1250(d)(3). Gain from dispositions of certain depreciable realty—Exceptions and limitations—Certain tax-free transactions.
    
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    Code § 1250(d)(4)(A). Gain from dispositions of certain depreciable realty—Exceptions and limitations—Like kind exchanges; involuntary conversions, etc.—Recognition limit.
    

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  Code § 1231. “Capital gains when disposed of at a net gain and ordinary loss when disposed of at a net loss”
  
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    Applies to “quasi-capital assets”—real or depreciable property not covered under § 1221(a)(2)—must be held for at least 1 year
    

they want real property held in connection to a trade or business  want § 1221 exception and to fall under § 1231 (? Numbers)  they will get capital gains treatment

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  Do any of these rationales map onto how we actually define capital assets?
  
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    Asks about “primarily”  in real estate provision if you’re holding this like inventory you can’t treat this as a capital asset; if you’re holding this like a capital asset (long term, infrequent transactions)
    
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  How could we improve § 1221?
  
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    There could be a simple 1 year requirement
    
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      BUT many more assets would become capital assets—government could lose revenue
      
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      BUT cherry-picking would incentivize liquidation on day 366—need flexible standard
      

Investors bought land—resold—was the income ordinary or capital gains? Mesquite East would treat land as capital, Town East would treat the land as ordinary income  capital gains flowed through Mesquite East partnership and isolated development risks in limited liability corporation

1. 
   Was the taxpayer engaged in a trade or business, and if so, what business?
   
2. 
   Was the taxpayer holding the property primarily for sale in that business?
   
3. 
   Were the sales contemplated by the taxpayer “ordinary” in the course of that business?
   

1. 
   The nature an purpose of the acquisition of the property
   
2. 
   The extent and nature of the taxpayer’s efforts to sell the property
   
3. 
   The number, extent, continuity and substantiality of the sales
   
4. 
   The extent of subdividing, developing, and advertising to increase sales,
   
5. 
   The use of a business office for the sale of property
   
6. 
   The character and degree of supervision or control exercised by the taxpayer over any representative selling the property, and
   
7. 
   The time and effort the taxpayer habitually devoted to the sales.
   

1. 
   In the current year, Sarah earned $90,000 in salary from her job as an English professor. She also realized the following gains and losses:
   
   1. 
      $9,000 gain on the sale of business inventory (she runs her own discount Internet bookstore in her spare time).
      

2. 
   $12,000 loss on the sale of a personal residence.
   

3. 
   $5,000 loss on Google stock.
   

If you’re a dealer/trader in stock you can earmark the stock as inventory—have to do that upfront—(no authority)

What’s the limit? She can only claim this against capital gains + $3,000 of ordinary income § 1211(b)—even if this is her personal investment

Personal property held for profit § 162 (?)—if it gains you have to pay tax on it, if it loses you can’t deduct it—asymmetry

4. 
   $12,000 gain on the sale of her boat (used for recreational purposes).
   

Rationale for taxing the gains: Congress just wants to get revenue where it can

5. 
   $6,000 loss on the sale of business real estate.
   

2. 
   Sarah’s holding period is over two years for each asset. What is her net capital gain for the year under § 1222(11)? What other gains or losses should she report?
   

Overall net ordinary income: $9,000 gain - $6,000 loss = $3,000 net ordinary income

3. 
   Tim buys a machine for his home renovation business for $200,000 and holds it for five years. He takes $120,000 in depreciation deductions and, at the end of five years, he sells it for $100,000. What income or loss should he report? What if he sells the machine for $220,000 instead?
   

Recapture rules--§ 1231 asset—falls under:

recapturables—if you take depreciation on an asset you get to list your income as a capital gain—started in WW II

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  All of the gains on sale of assets are treated as capital unless they fall in an exception in § 1221
  
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    inventory, property held in a trade or business that is real property or depreciable, copyrights
    
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    Recaptureables
    
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      § 1245—assets other than real property
      
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      § 1250—real property—have to recapture and treat as ordinary income any depreciation you took above straight line—real property is currently straight-line depreciated  this doesn’t apply now
      
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        § 1(h)(6)—depreciation you’ve taken on real property—what you would recapture if this were not real property will be taxed at a 25% rate
        
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  Example:
  
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    $1,000 for building
    
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    ($800) for depreciation deductions
    
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    $200 adjusted basis
    
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    $500 amount realized
    
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    $300 capital gain—if this were a machine this would be ordinary income, BUT since it’s real estate to the extent of all depreciation ($800) we will tax this at a 25% rate under § 1(h)(6)
    
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       if the capital gain was greater than the depreciation the amount of depreciation would be taxed at 25% and the remaining capital gain would be at regular capital gains rate (15%)
      
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        IF personal property § 1245 $800 is recaptured as ordinary, $200 is capital gain
        
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        IF not personal § 1(h)(b)—$800 taxed at 25% and $200 is capital gain—casebook pg 565