Chapter 19             p.1103
Capital Gains & Losses

Preliminary inquiries:

Have a % deduction for capital gains?

Have a maximum rate for cap. gains?

Capital Losses (and Limitation)

Including for short-term capital losses

§1231 – trade or business property

Cf., §1245 – depreciation recapture.

5)  “Qualified dividend” & cap. gains rate.

6)  Definitional ? – what are capital assets?

Why provide a Preferential Capital Gains Rate?

1) Historical differences of income vs.

holding a remainder interest in property?

2) Potential impact of inflation over a

longer holding period?  But what about asset held for only one year and one day?

3) Capital gains are (assumed) not to be used for consumption purposes.

4) Note: Capital gains go mostly to the rich.

Quest for a Concept Business Sale      p.1116

Williams v. McGowan - Sale of a sole proprietorship (or ptnship interests?) after purchase of deceased partner’s interest.

Sale of a “business” as one (capital) asset or bifurcated into its multiple components?

Held:  Divided into its parts, e.g., cash, accounts receivable, inventory, equipment, intangibles and goodwill – and for the determination of income/loss (and tax characterization) for each asset.  Continued

 

Cf., sale of shares of a corporation             p.1120

Why a difference?  Characterization of the sale as a disposition of only one “capital” asset – or multiple components ?

Note:  Cf., when a share sale occurs no impact results to the tax basis of the assets held by the corporation itself (& the purchaser gets the embedded future tax liability in those corporate assets, i.e., no income tax basis adjustments).

Result of Proprietorship or Asset Sale              p.1120

Various income tax characterizations and income tax result:

Inventory – ordinary income.

Accounts receivable – ord. income.

Machinery & equipment - §§1231/1245

Intangibles  (other than goodwill; e.g., patent or license) - §§1231/1245.

5)  Goodwill/going concern value - §1231.

Gillette Motor Transport     Capital gain?          p.1121

Temporary taking – wartime takeover of taxpayer’s transportation equipment, but its later return to the taxpayer.

Subsequent claim for compensation – compensation paid for a temporary taking. 

What tax categorization of the proceeds received, i.e., from (1) disposition of a capital asset or (2) right to use property (i.e., rent)?Govt. took only right to use on a temporary basis.  Result:  ordinary income.

Midland-Ross Corp. p.1125

OID notes purchased and then sold (before maturity) for (1) less than face amount but (2) more than the issue price.  Was the gain classified as (a) cap. gain or (b) ordinary?

Held: the gain is not capital gain but is attributable to accrual of the original issue discount (& therefore, is ordinary income). Note:  §1271 – interest income is only that gain attributable to the accrued OID.

Note, also: §1276 re market discount/gain.

 

Problem 2               p.1130

A incurs loss – capital loss.

Under §1276  has 5 income at maturity.

A sells at premium and has capital gain.

Bond is sold in distress situation and A has loss;  subsequent recovery and B is paid – ordinary income under §1276.

e)  Maturity same as a disposition – and no capital gains treatment.

Purchased Remainder Interests              p.1131

Jones v. Commissioner – purchase of remainder interests in trusts and prior to distribution.  Objective:  to obtain capital gains treatment for the gains.

Query:  Does the gain constitute capital gains or ordinary income?  Accrued interest (equivalent) or appreciation in the underlying property?

On remand:  Allocate between CG & OI.

Property Held Primarily for Sale to Customers

Curtis case, P. 1131

More difficult to distinguish the functions of a trader and an investor in the real estate context.

But, real estate trader can realize inventory gain, rather than capital gains.