Federal Income Taxation Class 20 Worksheet 1.

Professor Winchester Fall 2011

Under what circumstances will a loss sustained on the sale or exchange of a capital asset be deductible by an individual? (What are the ifs?) See IRC 165(c). A loss sustained on the sale or exchange of a capital asset will be deductible by an individual if the (1) losses incurred in a trade or business; (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and (3) except as provided in subsection (h), losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft.

2.

What limitation applies to an individuals ability to utilize deductible losses sustained on the sale or exchange of a capital asset? See IRC 1211(b). The limitations that apply to an individuals ability to utilize deductible losses sustained on the sale or exchange of a capital asset are: the losses shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of (1) $3,000 ($1,500 in the case of a married individual filing a separate return), or (2) the excess of such losses over such gains.

3.

What happens when an individual is not able to utilize all the deductible losses on the sale or exchange of capital assets that are available to them in any given year? See IRC 1212(b) (1). If an individual is not able to utilize all the deductible losses on the sale or exchange of capital assets that are available to them in any given year then (A) the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss in the succeeding taxable year, and (B) the excess of the net long-term capital loss over the net shortterm capital gain for such year shall be a long-term capital loss in the succeeding taxable year.

4.

What is a capital asset? See , e.g., IRC 1221(a)(1) and (2). A capital asset is All tangible property which cannot easily be converted intocash and which is usually held for a long period, including real estate, equipment, etc.

5.

Why were the land parcels sold by the taxpayer in the Mauldin case not treated as capital assets? The Appellate Court found that there is no rule of thumb for when property sales amount to a trade or business. Evidence the courts should consider includes: The purposes for which the property was acquired; Whether acquisition was for resale or for investment; The continuity and frequency of sales. In this case, the Court found that the evidence weighed in favor of Maudlin being engaged in a trade or business.

6.

What did the taxpayer sell in the Hort case? Why was the entire amount received from the tenant treated as ordinary income? Hort owned an office building that was being leased by Irving Trust. They had a fifteen-year lease, but decided to close that office. By mutual agreement, they paid Hort $140k to break the lease. Hort calculated the difference between the present value of the future unpaid rent and the $140k, and figured that he had lost $21.4k. The entire amount received from the tenant was treated as ordinary income because The US Supreme Court looked to the relevant part of the tax code (then 26 U.S.C. 22(a), now 61(a)), and found that rent was explicitly included in the things that are gross income.

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Federal Income Taxation Class 20 Worksheet

Professor Winchester Fall 2011

7.

What did the taxpayer sell in the Metropolitan Building case? Why was it treated as a capital asset? Metropolitan subleased land to another company (Olympic) to build a hotel. In this case, Metropolitan was selling their entire property interest (a capital asset) so thus a capital gain.

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