Question

Problem 1 Four Friends Forever (FFF), opened several years ago and reports the following net §1231 gains and losses since it began business.

Year	Net §1231 Gains/(Losses)
Year 1	($11,000)
Year 2	8,000
Year 3	(15,000)
Year 4	(22,000)
Year 5	20,000
Year 6	(27,000)
Year 7 (current year)	107,000

Character  of the year 7 $107,000 gain (Basically Professor want to know what the character (short, long, 1245. 1250, 1231, etc) of the gain in year 7 is)

PROBLEM 2

Tracy started his sole proprietorship business two years ago and has never sold a §1231 asset. Tracy owned each of the assets for the entire 2 years he has been in business. In the current year, he sold the following business assets:

Asset	Original Cost	Accumulated Depreciation	Gain/Loss
Desks	$8,000	$2,000	($2,000)
Truck	12,000	6,000	(6,000)
Equipment	18,000	12,000	13,500
Building	150,000	10,000	25,000

Assuming Tracy’s marginal ordinary income tax rate is 30 percent, what is the character of Tracy’s gains and/or losses for the current year? What effect do the various gains or losses have on Tracy’s tax liability?

Answer 1

Ans

Following assumptions will be made

• The non recaptured §1231 losses from during Year 1 to year 6 is $47,000 ( $-11,000 +$8000+($-15,000) +($-22,000)+$20,000+($-27,000)
• The net §1231 gain for year 7 is $107,000

The $ 47,000 will be treated as ordinary income and $ 60,000 will be treated as §1231 gain

s.no	description	amount	explanation
1	Current gain (year 7) §1231	$   107,000	year 7 gain given
2	non recaputred losses §1231	$47,000	total from year 1 to year 6
3	ordinary income	$     47,000	lesser of S.no 1 or 2
4	§1231 gain	$     60,000	current gain - ordinary income