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Capital Versus Non-capital Assets

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Ms. Z is a cash basis taxpayer who owns and operates a clothing store as a sole proprietor. She wishes to retire after holding a liquidation sale. She would like to avoid ordinary income from the sale of the inventory.

Ms. Z shuts her store for one month and then begins the sale. She then suggests to her tax preparer that he should report the proceeds of the sale as capital gains.

Ms. Z's logic is that she was no longer using those assets in a business at the time of the sale, but rather was holding them for investment.

What do you think about Ms. Z's approach?

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Solution Summary

Ms. Z is a cash basis taxpayer who owns and operates a clothing store as a sole proprietor. She wishes to retire after holding a liquidation sale. She would like to avoid ordinary income from the sale of the inventory.

Ms. Z shuts her store for one month and then begins the sale. She then suggests to her tax preparer that he should report the proceeds of the sale as capital gains.

Ms. Z's logic is that she was no longer using those assets in a business at the time of the sale, but rather was holding them for investment.

What do you think about Ms. Z's approach?

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Ms. Z will not prevail with her line of reasoning. IRC Section 443(a)(2) states that "A return for a period of less than 12 months (referred to in this section as "short period") shall be made under any of the following circumstances:
... When the taxpayer is in existence during only part of what would otherwise ...

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