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Alvin Gifted Widget

Alvin purchased and put in service a new widget (seven year item for MACRS rules) on December 26, 2006. It was the only item placed in service in 2006. Cost $3.5 million. 2006 was a bad year for Alvin and he had an operating loss before considering MACRS. The widget was used for business purposes only.

In 2008 the widget was damaged in a tornado and Alvin collected $275,000 from his insurance company. He repaired the widget himself using duct tape and plastic sheets which were distributed free by the US Government emergency assistance team. He spent about a week doing the repair. He calculated that his time is worth $50 per hour, for $2000 per week.

A. On Feb 28, 2001 Alvin sold the widget for $1.2 million. Compute gain or loss. Is it capital or ordinary, active or passive, and current or deferred?

B. On June 28, 2011, Alvin traded the widget for a newer model widget. He gave the dealer the old widget and $75,000. Compute gain or loss and basis in the newer widget. If there is gain or loss, is it capital or ordinary, long or short term, and recognized or deferred?

C. In 2012 Alvin gifted the widget to his nephew Bruce, who sold it two weeks later for $2,95,000. Compute gain or loss for both Alvin and Bruce. Is it long or short term, capital or ordinary?

D. January 15, 2012 Alvin died and the widget was left by will to his son Carl. On January 15, 2013 the fair market value of the widget was $2,600,000. On Feb 28, 2013, Carl sold the widget for $2,625,000. Is there any tax treatment for tax purposes? Is any gain or loss, long or short term, capital or ordinary, and deferred or recognized now?

Approach each problem separately.

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The expert examines Alvin Gifted Widget.