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Taxation for Decision Makers

A number of specific transactions do not necessarily follow the general tax provision applicable to property transactions. Following are a group of transactions that are subject to specific tax provisions. For each of the situations, you are to answer the questions and cite the source for your answer.

59a. Martin, a securities dealer, bought 100 shares of Datacard stock on April 5 of year 5 for $10,500. Before the end of that day, he identified the stock as being held for investment purposes.
1. Never having held the stock for sale to customers, he sold the stock on May 22 of year 6 for $11,500. How much and what kind of gain or loss does he have?
2. Assume that later in year 5 he starts trying to sell the stock to customers and succeeds in selling it on May 1 of year 6 for $9,000. How much and what kind of gain or loss does he have?

59b. Ruth subdivided a piece of real estate she had owned for seven years into 12 lots. Each lot was apportioned a $ 10,000 basis. In year 2, she sold four lots for $ 15,000 a piece with selling expenses of $500 per lot.
1. How much and what kind of gain or loss does Ruth have?
2. If in year 3 she sold two more lots for $20,000 a piece and incurred selling expenses of $500 per lot, how much and what kind of gain or loss does she have?

59c. For 60 years, Shakia owned 1,000 acres of land in Kentucky on which coal was being mined under a royalty arrangement. Shakia received $164,000 in the current tax year in royalties. The coal's adjusted basis for depletion was $37,000. Determine the amount and type of gain Shakia realizes on the income.

59d. Howard owned a large farm on which he raised a variety of farm animals. Determine the type of gain or loss he would realize on the following sales:
1) A six-month old calf
2) A one-and-one-half-year-old foal
3) Six-week-old chickens
4) A 6-year-old bull
5) A 12-year-old mare
6) Six-month-old lambs
7) A 2 year-old ram.

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Solution Preview

59a.1 When Martin clearly identifies a purchase as being held for investment, he is allowed to use the capital gain provisions as any other person who is not a securities dealer. He must make that decision on the day of purchase and his record keeping must define it as investment, never for sale to customers. Read Code Section 1236.

59a.2 When he offers the stock for sale to customers, he is then acting as a dealer and any gains are taxed as ordinary income in the course of his business. http://codes.lp.findlaw.com/uscode/26/A/1/P/IV/1236

59b.1 Code Sec 1237 explains the differences between a real estate investor and a real estate developer. Assuming that Ruth has not been otherwise involved ...

Solution Summary

The cited 412 word solution examines each situation and provides a good explanation together with a reference or cite to support the position.