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2006 Income Tax Forms

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2006 Income Tax Forms

2006 income tax forms 8. 2006 income tax forms   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. 2006 income tax forms Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. 2006 income tax forms Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. 2006 income tax forms Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. 2006 income tax forms Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. 2006 income tax forms This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. 2006 income tax forms A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. 2006 income tax forms An exchange is a transfer of property for other property or services. 2006 income tax forms Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. 2006 income tax forms If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. 2006 income tax forms If the adjusted basis of the property is more than the amount you realize, you will have a loss. 2006 income tax forms Basis and adjusted basis. 2006 income tax forms   The basis of property you buy is usually its cost. 2006 income tax forms The adjusted basis of property is basis plus certain additions and minus certain deductions. 2006 income tax forms See chapter 6 for more information about basis and adjusted basis. 2006 income tax forms Amount realized. 2006 income tax forms   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. 2006 income tax forms The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. 2006 income tax forms   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. 2006 income tax forms Amount recognized. 2006 income tax forms   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. 2006 income tax forms A recognized gain is a gain you must include in gross income and report on your income tax return. 2006 income tax forms A recognized loss is a loss you deduct from gross income. 2006 income tax forms However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. 2006 income tax forms See Like-Kind Exchanges next. 2006 income tax forms Also, a loss from the disposition of property held for personal use is not deductible. 2006 income tax forms Like-Kind Exchanges Certain exchanges of property are not taxable. 2006 income tax forms This means any gain from the exchange is not recognized, and any loss cannot be deducted. 2006 income tax forms Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. 2006 income tax forms The exchange of property for the same kind of property is the most common type of nontaxable exchange. 2006 income tax forms To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. 2006 income tax forms Qualifying property. 2006 income tax forms Like-kind property. 2006 income tax forms These two requirements are discussed later. 2006 income tax forms Multiple-party transactions. 2006 income tax forms   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. 2006 income tax forms Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. 2006 income tax forms Receipt of title from third party. 2006 income tax forms   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. 2006 income tax forms Basis of property received. 2006 income tax forms   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. 2006 income tax forms See chapter 6 for more information. 2006 income tax forms Money paid. 2006 income tax forms   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. 2006 income tax forms The basis of the property received is the basis of the property given up, increased by the money paid. 2006 income tax forms Example. 2006 income tax forms You traded an old tractor with an adjusted basis of $15,000 for a new one. 2006 income tax forms The new tractor costs $300,000. 2006 income tax forms You were allowed $80,000 for the old tractor and paid $220,000 cash. 2006 income tax forms You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). 2006 income tax forms If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. 2006 income tax forms In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. 2006 income tax forms Reporting the exchange. 2006 income tax forms   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. 2006 income tax forms The Instructions for Form 8824 explain how to report the details of the exchange. 2006 income tax forms   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. 2006 income tax forms You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. 2006 income tax forms See chapter 9 for more information. 2006 income tax forms Qualifying property. 2006 income tax forms   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. 2006 income tax forms Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. 2006 income tax forms Nonqualifying property. 2006 income tax forms   The rules for like-kind exchanges do not apply to exchanges of the following property. 2006 income tax forms Property you use for personal purposes, such as your home and family car. 2006 income tax forms Stock in trade or other property held primarily for sale, such as crops and produce. 2006 income tax forms Stocks, bonds, or notes. 2006 income tax forms However, see Qualifying property above. 2006 income tax forms Other securities or evidences of indebtedness, such as accounts receivable. 2006 income tax forms Partnership interests. 2006 income tax forms However, you may have a nontaxable exchange under other rules. 2006 income tax forms See Other Nontaxable Exchanges in chapter 1 of Publication 544. 2006 income tax forms Like-kind property. 2006 income tax forms   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. 2006 income tax forms Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. 2006 income tax forms Generally, real property exchanged for real property qualifies as an exchange of like-kind property. 2006 income tax forms For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. 2006 income tax forms   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. 2006 income tax forms An exchange of a tractor for acreage, however, is not an exchange of like-kind property. 2006 income tax forms The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. 2006 income tax forms For example, the exchange of a bull for a cow is not a like-kind exchange. 2006 income tax forms An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. 2006 income tax forms    Note. 2006 income tax forms Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. 2006 income tax forms Personal property. 2006 income tax forms   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. 2006 income tax forms Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. 2006 income tax forms Property classified in any General Asset Class may not be classified within a Product Class. 2006 income tax forms Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. 2006 income tax forms General Asset Classes. 2006 income tax forms   General Asset Classes describe the types of property frequently used in many businesses. 2006 income tax forms They include, but are not limited to, the following property. 2006 income tax forms Office furniture, fixtures, and equipment (asset class 00. 2006 income tax forms 11). 2006 income tax forms Information systems, such as computers and peripheral equipment (asset class 00. 2006 income tax forms 12). 2006 income tax forms Data handling equipment except computers (asset class 00. 2006 income tax forms 13). 2006 income tax forms Automobiles and taxis (asset class 00. 2006 income tax forms 22). 2006 income tax forms Light general purpose trucks (asset class 00. 2006 income tax forms 241). 2006 income tax forms Heavy general purpose trucks (asset class 00. 2006 income tax forms 242). 2006 income tax forms Tractor units for use over-the-road (asset class 00. 2006 income tax forms 26). 2006 income tax forms Trailers and trailer-mounted containers (asset class 00. 2006 income tax forms 27). 2006 income tax forms Industrial steam and electric generation and/or distribution systems (asset class 00. 2006 income tax forms 4). 2006 income tax forms Product Classes. 2006 income tax forms   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). 2006 income tax forms The latest version of the manual can be accessed at www. 2006 income tax forms census. 2006 income tax forms gov/eos/www/naics/. 2006 income tax forms Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. 2006 income tax forms ntis. 2006 income tax forms gov/products/naics. 2006 income tax forms aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. 2006 income tax forms A CD-ROM version with search and retrieval software is also available from NTIS. 2006 income tax forms    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. 2006 income tax forms Partially nontaxable exchange. 2006 income tax forms   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. 2006 income tax forms You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. 2006 income tax forms A loss is not deductible. 2006 income tax forms Example 1. 2006 income tax forms You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. 2006 income tax forms You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). 2006 income tax forms However, only $10,000, the cash received, is recognized (included in income). 2006 income tax forms Example 2. 2006 income tax forms Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. 2006 income tax forms Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). 2006 income tax forms Example 3. 2006 income tax forms Assume in Example 1 that the FMV of the land you received was only $15,000. 2006 income tax forms Your $5,000 loss is not recognized. 2006 income tax forms Unlike property given up. 2006 income tax forms   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. 2006 income tax forms The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. 2006 income tax forms Like-kind exchanges between related persons. 2006 income tax forms   Special rules apply to like-kind exchanges between related persons. 2006 income tax forms These rules affect both direct and indirect exchanges. 2006 income tax forms Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 2006 income tax forms The gain or loss on the original exchange must be recognized as of the date of the later disposition. 2006 income tax forms The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. 2006 income tax forms Related persons. 2006 income tax forms   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. 2006 income tax forms ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. 2006 income tax forms   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. 2006 income tax forms Example. 2006 income tax forms You used a grey pickup truck in your farming business. 2006 income tax forms Your sister used a red pickup truck in her landscaping business. 2006 income tax forms In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. 2006 income tax forms At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. 2006 income tax forms The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. 2006 income tax forms You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). 2006 income tax forms Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). 2006 income tax forms However, because this was a like-kind exchange, you recognized no gain. 2006 income tax forms Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). 2006 income tax forms She recognized gain only to the extent of the money she received, $200. 2006 income tax forms Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). 2006 income tax forms In 2013, you sold the red pickup truck to a third party for $7,000. 2006 income tax forms Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 2006 income tax forms On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. 2006 income tax forms You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). 2006 income tax forms In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. 2006 income tax forms Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). 2006 income tax forms Exceptions to the rules for related persons. 2006 income tax forms   The following property dispositions are excluded from these rules. 2006 income tax forms Dispositions due to the death of either related person. 2006 income tax forms Involuntary conversions. 2006 income tax forms Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. 2006 income tax forms Multiple property exchanges. 2006 income tax forms   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. 2006 income tax forms However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. 2006 income tax forms Transfer and receive properties in two or more exchange groups. 2006 income tax forms Transfer or receive more than one property within a single exchange group. 2006 income tax forms   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. 2006 income tax forms Deferred exchange. 2006 income tax forms   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. 2006 income tax forms A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. 2006 income tax forms The property you receive is replacement property. 2006 income tax forms The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. 2006 income tax forms In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. 2006 income tax forms   For more information see Deferred Exchanges in chapter 1 of Publication 544. 2006 income tax forms Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. 2006 income tax forms This rule does not apply if the recipient is a nonresident alien. 2006 income tax forms Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. 2006 income tax forms Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. 2006 income tax forms The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. 2006 income tax forms This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. 2006 income tax forms This rule applies for determining loss as well as gain. 2006 income tax forms Any gain recognized on a transfer in trust increases the basis. 2006 income tax forms For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. 2006 income tax forms Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). 2006 income tax forms You may also have a capital gain if your section 1231 transactions result in a net gain. 2006 income tax forms See Section 1231 Gains and Losses in  chapter 9. 2006 income tax forms To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). 2006 income tax forms Your net capital gains may be taxed at a lower tax rate than ordinary income. 2006 income tax forms See Capital Gains Tax Rates , later. 2006 income tax forms Your deduction for a net capital loss may be limited. 2006 income tax forms See Treatment of Capital Losses , later. 2006 income tax forms Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. 2006 income tax forms The following items are examples of capital assets. 2006 income tax forms A home owned and occupied by you and your family. 2006 income tax forms Household furnishings. 2006 income tax forms A car used for pleasure. 2006 income tax forms If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. 2006 income tax forms Stocks and bonds. 2006 income tax forms However, there are special rules for gains on qualified small business stock. 2006 income tax forms For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. 2006 income tax forms Personal-use property. 2006 income tax forms   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. 2006 income tax forms Loss from the sale or exchange of personal-use property is not deductible. 2006 income tax forms You can deduct a loss relating to personal-use property only if it results from a casualty or theft. 2006 income tax forms For information on casualties and thefts, see chapter 11. 2006 income tax forms Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. 2006 income tax forms The time you own an asset before disposing of it is the holding period. 2006 income tax forms If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. 2006 income tax forms Report it in Part I of Schedule D (Form 1040). 2006 income tax forms If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. 2006 income tax forms Report it in Part II of Schedule D (Form 1040). 2006 income tax forms Holding period. 2006 income tax forms   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. 2006 income tax forms The day you disposed of the property is part of your holding period. 2006 income tax forms Example. 2006 income tax forms If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. 2006 income tax forms If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. 2006 income tax forms Inherited property. 2006 income tax forms   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. 2006 income tax forms This rule does not apply to livestock used in a farm business. 2006 income tax forms See Holding period under Livestock , later. 2006 income tax forms Nonbusiness bad debt. 2006 income tax forms   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. 2006 income tax forms See chapter 4 of Publication 550. 2006 income tax forms Nontaxable exchange. 2006 income tax forms   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. 2006 income tax forms That is, it begins on the same day as your holding period for the old property. 2006 income tax forms Gift. 2006 income tax forms   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. 2006 income tax forms Real property. 2006 income tax forms   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. 2006 income tax forms   However, taking possession of real property under an option agreement is not enough to start the holding period. 2006 income tax forms The holding period cannot start until there is an actual contract of sale. 2006 income tax forms The holding period of the seller cannot end before that time. 2006 income tax forms Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. 2006 income tax forms Net short-term capital gain or loss. 2006 income tax forms   Combine your short-term capital gains and losses. 2006 income tax forms Do this by adding all of your short-term capital gains. 2006 income tax forms Then add all of your short-term capital losses. 2006 income tax forms Subtract the lesser total from the greater. 2006 income tax forms The difference is your net short-term capital gain or loss. 2006 income tax forms Net long-term capital gain or loss. 2006 income tax forms   Follow the same steps to combine your long-term capital gains and losses. 2006 income tax forms The result is your net long-term capital gain or loss. 2006 income tax forms Net gain. 2006 income tax forms   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. 2006 income tax forms However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. 2006 income tax forms See Capital Gains Tax Rates , later. 2006 income tax forms Net loss. 2006 income tax forms   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. 2006 income tax forms But there are limits on how much loss you can deduct and when you can deduct it. 2006 income tax forms See Treatment of Capital Losses next. 2006 income tax forms Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. 2006 income tax forms For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). 2006 income tax forms If your other income is low, you may not be able to use the full $3,000. 2006 income tax forms The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). 2006 income tax forms Capital loss carryover. 2006 income tax forms   Generally, you have a capital loss carryover if either of the following situations applies to you. 2006 income tax forms Your net loss on Schedule D (Form 1040), is more than the yearly limit. 2006 income tax forms Your taxable income without your deduction for exemptions is less than zero. 2006 income tax forms If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. 2006 income tax forms    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). 2006 income tax forms Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. 2006 income tax forms These lower rates are called the maximum capital gains rates. 2006 income tax forms The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. 2006 income tax forms See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). 2006 income tax forms Also see Publication 550. 2006 income tax forms Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. 2006 income tax forms A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). 2006 income tax forms Property held for sale in the ordinary course of your farm business. 2006 income tax forms   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. 2006 income tax forms Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). 2006 income tax forms The treatment of this property is discussed in chapter 3. 2006 income tax forms Land and depreciable properties. 2006 income tax forms   Land and depreciable property you use in farming are not capital assets. 2006 income tax forms Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. 2006 income tax forms However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. 2006 income tax forms The sales of these business assets are reported on Form 4797. 2006 income tax forms See chapter 9 for more information. 2006 income tax forms Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. 2006 income tax forms Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. 2006 income tax forms A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. 2006 income tax forms The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. 2006 income tax forms A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. 2006 income tax forms Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. 2006 income tax forms Hedging transactions. 2006 income tax forms Transactions that are not hedging transactions. 2006 income tax forms Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. 2006 income tax forms There is a limit on the amount of capital losses you can deduct each year. 2006 income tax forms Hedging transactions are not subject to the mark-to-market rules. 2006 income tax forms If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. 2006 income tax forms They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. 2006 income tax forms The gain or loss on the termination of these hedges is generally ordinary gain or loss. 2006 income tax forms Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. 2006 income tax forms Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. 2006 income tax forms Examples include fuel and feed. 2006 income tax forms If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. 2006 income tax forms Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. 2006 income tax forms It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. 2006 income tax forms Retain the identification of each hedging transaction with your books and records. 2006 income tax forms Also, identify the item(s) or aggregate risk that is being hedged in your records. 2006 income tax forms Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. 2006 income tax forms For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. 2006 income tax forms Accounting methods for hedging transactions. 2006 income tax forms   The accounting method you use for a hedging transaction must clearly reflect income. 2006 income tax forms This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. 2006 income tax forms There are requirements and limits on the method you can use for certain hedging transactions. 2006 income tax forms See Regulations section 1. 2006 income tax forms 446-4(e) for those requirements and limits. 2006 income tax forms   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. 2006 income tax forms Cash method. 2006 income tax forms Farm-price method. 2006 income tax forms Unit-livestock-price method. 2006 income tax forms   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. 2006 income tax forms   Your books and records must describe the accounting method used for each type of hedging transaction. 2006 income tax forms They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. 2006 income tax forms You must make the additional identification no more than 35 days after entering into the hedging transaction. 2006 income tax forms Example of a hedging transaction. 2006 income tax forms   You file your income tax returns on the cash method. 2006 income tax forms On July 2 you anticipate a yield of 50,000 bushels of corn this year. 2006 income tax forms The December futures price is $5. 2006 income tax forms 75 a bushel, but there are indications that by harvest time the price will drop. 2006 income tax forms To protect yourself against a drop in the price, you enter into the following hedging transaction. 2006 income tax forms You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. 2006 income tax forms 75 a bushel. 2006 income tax forms   The price did not drop as anticipated but rose to $6 a bushel. 2006 income tax forms In November, you sell your crop at a local elevator for $6 a bushel. 2006 income tax forms You also close out your futures position by buying ten December contracts for $6 a bushel. 2006 income tax forms You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. 2006 income tax forms   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. 2006 income tax forms Your loss on the hedge is 25 cents a bushel. 2006 income tax forms In effect, the net selling price of your corn is $5. 2006 income tax forms 75 a bushel. 2006 income tax forms   Report the results of your futures transactions and your sale of corn separately on Schedule F. 2006 income tax forms See the instructions for the 2013 Schedule F (Form 1040). 2006 income tax forms   The loss on your futures transactions is $13,900, figured as follows. 2006 income tax forms July 2 - Sold December corn futures (50,000 bu. 2006 income tax forms @$5. 2006 income tax forms 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 2006 income tax forms @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. 2006 income tax forms   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. 2006 income tax forms × $6). 2006 income tax forms Report it on Schedule F, Part I, line 2, as income from sales of products you raised. 2006 income tax forms   Assume you were right and the price went down 25 cents a bushel. 2006 income tax forms In effect, you would still net $5. 2006 income tax forms 75 a bushel, figured as follows. 2006 income tax forms Sold cash corn, per bushel $5. 2006 income tax forms 50 Gain on hedge, per bushel . 2006 income tax forms 25 Net price, per bushel $5. 2006 income tax forms 75       The gain on your futures transactions would have been $11,100, figured as follows. 2006 income tax forms July 2 - Sold December corn futures (50,000 bu. 2006 income tax forms @$5. 2006 income tax forms 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 2006 income tax forms @$5. 2006 income tax forms 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. 2006 income tax forms   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. 2006 income tax forms Livestock This part discusses the sale or exchange of livestock used in your farm business. 2006 income tax forms Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. 2006 income tax forms However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. 2006 income tax forms See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. 2006 income tax forms The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. 2006 income tax forms The sale of this livestock is reported on Schedule F. 2006 income tax forms See chapter 3. 2006 income tax forms Also, special rules apply to sales or exchanges caused by weather-related conditions. 2006 income tax forms See chapter 3. 2006 income tax forms Holding period. 2006 income tax forms   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). 2006 income tax forms Livestock. 2006 income tax forms   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. 2006 income tax forms Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. 2006 income tax forms Livestock used in farm business. 2006 income tax forms   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. 2006 income tax forms The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. 2006 income tax forms An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. 2006 income tax forms However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. 2006 income tax forms Example 1. 2006 income tax forms You discover an animal that you intend to use for breeding purposes is sterile. 2006 income tax forms You dispose of it within a reasonable time. 2006 income tax forms This animal was held for breeding purposes. 2006 income tax forms Example 2. 2006 income tax forms You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. 2006 income tax forms These young animals were held for breeding or dairy purposes. 2006 income tax forms Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. 2006 income tax forms See Sales Caused by Weather-Related Conditions in chapter 3. 2006 income tax forms Example 3. 2006 income tax forms You are in the business of raising hogs for slaughter. 2006 income tax forms Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. 2006 income tax forms You sell the brood sows after obtaining the litter. 2006 income tax forms Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. 2006 income tax forms Example 4. 2006 income tax forms You are in the business of raising registered cattle for sale to others for use as breeding cattle. 2006 income tax forms The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. 2006 income tax forms Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. 2006 income tax forms Such use does not demonstrate that you are holding the cattle for breeding purposes. 2006 income tax forms However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. 2006 income tax forms The same applies to hog and sheep breeders. 2006 income tax forms Example 5. 2006 income tax forms You breed, raise, and train horses for racing purposes. 2006 income tax forms Every year you cull horses from your racing stable. 2006 income tax forms In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. 2006 income tax forms These horses are all considered held for sporting purposes. 2006 income tax forms Figuring gain or loss on the cash method. 2006 income tax forms   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. 2006 income tax forms Raised livestock. 2006 income tax forms   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. 2006 income tax forms Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. 2006 income tax forms The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. 2006 income tax forms However, see Uniform Capitalization Rules in chapter 6. 2006 income tax forms Purchased livestock. 2006 income tax forms   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. 2006 income tax forms Example. 2006 income tax forms A farmer sold a breeding cow on January 8, 2013, for $1,250. 2006 income tax forms Expenses of the sale were $125. 2006 income tax forms The cow was bought July 2, 2009, for $1,300. 2006 income tax forms Depreciation (not less than the amount allowable) was $867. 2006 income tax forms Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. 2006 income tax forms Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. 2006 income tax forms Any loss on the disposition of such property is treated as a long-term capital loss. 2006 income tax forms Converted wetland. 2006 income tax forms   This is generally land that was drained or filled to make the production of agricultural commodities possible. 2006 income tax forms It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. 2006 income tax forms   A wetland (before conversion) is land that meets all the following conditions. 2006 income tax forms It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. 2006 income tax forms It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. 2006 income tax forms It supports, under normal circumstances, mostly plants that grow in saturated soil. 2006 income tax forms Highly erodible cropland. 2006 income tax forms   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. 2006 income tax forms Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. 2006 income tax forms Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. 2006 income tax forms Successor. 2006 income tax forms   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. 2006 income tax forms Timber Standing timber you held as investment property is a capital asset. 2006 income tax forms Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. 2006 income tax forms If you held the timber primarily for sale to customers, it is not a capital asset. 2006 income tax forms Gain or loss on its sale is ordinary business income or loss. 2006 income tax forms It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). 2006 income tax forms See the Instructions for Schedule F (Form 1040). 2006 income tax forms Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. 2006 income tax forms Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. 2006 income tax forms , are ordinary farm income and expenses reported on Schedule F. 2006 income tax forms Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. 2006 income tax forms Timber considered cut. 2006 income tax forms   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. 2006 income tax forms This is true whether the timber is cut under contract or whether you cut it yourself. 2006 income tax forms Christmas trees. 2006 income tax forms   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. 2006 income tax forms They qualify for both rules discussed below. 2006 income tax forms Election to treat cutting as a sale or exchange. 2006 income tax forms   Under the general rule, the cutting of timber results in no gain or loss. 2006 income tax forms It is not until a sale or exchange occurs that gain or loss is realized. 2006 income tax forms But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. 2006 income tax forms Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. 2006 income tax forms Any later sale results in ordinary business income or loss. 2006 income tax forms See the example below. 2006 income tax forms   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. 2006 income tax forms Making the election. 2006 income tax forms   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. 2006 income tax forms You do not have to make the election in the first year you cut the timber. 2006 income tax forms You can make it in any year to which the election would apply. 2006 income tax forms If the timber is partnership property, the election is made on the partnership return. 2006 income tax forms This election cannot be made on an amended return. 2006 income tax forms   Once you have made the election, it remains in effect for all later years unless you revoke it. 2006 income tax forms Election under section 631(a) may be revoked. 2006 income tax forms   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. 2006 income tax forms The prior election (and revocation) is disregarded for purposes of making a subsequent election. 2006 income tax forms See Form T (Timber), Forest Activities Schedule, for more information. 2006 income tax forms Gain or loss. 2006 income tax forms   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. 2006 income tax forms   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. 2006 income tax forms Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. 2006 income tax forms 611-3. 2006 income tax forms   Depletion of timber is discussed in chapter 7. 2006 income tax forms Example. 2006 income tax forms   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. 2006 income tax forms It had an adjusted basis for depletion of $40 per MBF. 2006 income tax forms You are a calendar year taxpayer. 2006 income tax forms On January 1, 2013, the timber had a FMV of $350 per MBF. 2006 income tax forms It was cut in April for sale. 2006 income tax forms On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. 2006 income tax forms You report the difference between the FMV and your adjusted basis for depletion as a gain. 2006 income tax forms This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. 2006 income tax forms You figure your gain as follows. 2006 income tax forms FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. 2006 income tax forms Outright sales of timber. 2006 income tax forms   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). 2006 income tax forms However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). 2006 income tax forms Cutting contract. 2006 income tax forms   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. 2006 income tax forms You are the owner of the timber. 2006 income tax forms You held the timber longer than 1 year before its disposal. 2006 income tax forms You kept an economic interest in the timber. 2006 income tax forms   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. 2006 income tax forms   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. 2006 income tax forms Include this amount on Form 4797 along with your other section 1231 gains or losses. 2006 income tax forms Date of disposal. 2006 income tax forms   The date of disposal is the date the timber is cut. 2006 income tax forms However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. 2006 income tax forms   This election applies only to figure the holding period of the timber. 2006 income tax forms It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). 2006 income tax forms   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. 2006 income tax forms The statement must identify the advance payments subject to the election and the contract under which they were made. 2006 income tax forms   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). 2006 income tax forms Attach the statement to the amended return and write “Filed pursuant to section 301. 2006 income tax forms 9100-2” at the top of the statement. 2006 income tax forms File the amended return at the same address the original return was filed. 2006 income tax forms Owner. 2006 income tax forms   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. 2006 income tax forms You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. 2006 income tax forms Tree stumps. 2006 income tax forms   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. 2006 income tax forms Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. 2006 income tax forms However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. 2006 income tax forms Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. 2006 income tax forms   See Form T (Timber) and its separate instructions for more information about dispositions of timber. 2006 income tax forms Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). 2006 income tax forms If you have a gain from the sale, you may be allowed to exclude the gain on your home. 2006 income tax forms For more information, see Publication 523, Selling Your Home. 2006 income tax forms The gain on the sale of your business property is taxable. 2006 income tax forms A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. 2006 income tax forms Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. 2006 income tax forms See chapter 9. 2006 income tax forms Losses from personal-use property, other than casualty or theft losses, are not deductible. 2006 income tax forms If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. 2006 income tax forms See chapter 10 for information about installment sales. 2006 income tax forms When you sell your farm, the gain or loss on each asset is figured separately. 2006 income tax forms The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. 2006 income tax forms Each of the assets sold must be classified as one of the following. 2006 income tax forms Capital asset held 1 year or less. 2006 income tax forms Capital asset held longer than 1 year. 2006 income tax forms Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). 2006 income tax forms Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). 2006 income tax forms Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. 2006 income tax forms Allocation of consideration paid for a farm. 2006 income tax forms   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. 2006 income tax forms The residual method is required only if the group of assets sold constitutes a trade or business. 2006 income tax forms This method determines gain or loss from the transfer of each asset. 2006 income tax forms It also determines the buyer's basis in the business assets. 2006 income tax forms For more information, see Sale of a Business in chapter 2 of Publication 544. 2006 income tax forms Property used in farm operation. 2006 income tax forms   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. 2006 income tax forms Recognized gains and losses on business property must be reported on your return for the year of the sale. 2006 income tax forms If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). 2006 income tax forms Example. 2006 income tax forms You sell your farm, including your main home, which you have owned since December 2001. 2006 income tax forms You realize gain on the sale as follows. 2006 income tax forms   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. 2006 income tax forms All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. 2006 income tax forms Treat the balance as section 1231 gain. 2006 income tax forms The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . 2006 income tax forms Partial sale. 2006 income tax forms   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. 2006 income tax forms You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. 2006 income tax forms For a detailed discussion on installment sales, see Publication 544. 2006 income tax forms Adjusted basis of the part sold. 2006 income tax forms   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. 2006 income tax forms , on the part sold. 2006 income tax forms If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . 2006 income tax forms Example. 2006 income tax forms You bought a 600-acre farm for $700,000. 2006 income tax forms The farm included land and buildings. 2006 income tax forms The purchase contract designated $600,000 of the purchase price to the land. 2006 income tax forms You later sold 60 acres of land on which you had installed a fence. 2006 income tax forms Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. 2006 income tax forms Use this amount to determine your gain or loss on the sale of the 60 acres. 2006 income tax forms Assessed values for local property taxes. 2006 income tax forms   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. 2006 income tax forms Example. 2006 income tax forms Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. 2006 income tax forms However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. 2006 income tax forms The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. 2006 income tax forms Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. 2006 income tax forms The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). 2006 income tax forms Sale of your home. 2006 income tax forms   Your home is a capital asset and not property used in the trade or business of farming. 2006 income tax forms If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. 2006 income tax forms Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. 2006 income tax forms   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. 2006 income tax forms For more information on basis, see chapter 6. 2006 income tax forms More information. 2006 income tax forms   For more information on selling your home, see Publication 523. 2006 income tax forms Gain from condemnation. 2006 income tax forms   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. 2006 income tax forms However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. 2006 income tax forms Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. 2006 income tax forms The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. 2006 income tax forms This is true even if you voluntarily return the property to the lender. 2006 income tax forms You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. 2006 income tax forms Buyer's (borrower's) gain or loss. 2006 income tax forms   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. 2006 income tax forms The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. 2006 income tax forms See Determining Gain or Loss , earlier. 2006 income tax forms Worksheet 8-1. 2006 income tax forms Worksheet for Foreclosures andRepossessions Part 1. 2006 income tax forms Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. 2006 income tax forms Complete this part only if you were personally liable for the debt. 2006 income tax forms Otherwise, go to Part 2. 2006 income tax forms   1. 2006 income tax forms Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. 2006 income tax forms Enter the Fair Market Value of the transferred property   3. 2006 income tax forms Ordinary income from cancellation of debt upon foreclosure or repossession. 2006 income tax forms * Subtract line 2 from line 1. 2006 income tax forms If zero or less, enter -0-   Part 2. 2006 income tax forms Figure your gain or loss from foreclosure or repossession. 2006 income tax forms   4. 2006 income tax forms If you completed Part 1, enter the smaller of line 1 or line 2. 2006 income tax forms If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. 2006 income tax forms Enter any proceeds you received from the foreclosure sale   6. 2006 income tax forms Add lines 4 and 5   7. 2006 income tax forms Enter the adjusted basis of the transferred property   8. 2006 income tax forms Gain or loss from foreclosure or repossession. 2006 income tax forms Subtract line 7  from line 6   * The income may not be taxable. 2006 income tax forms See Cancellation of debt . 2006 income tax forms    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. 2006 income tax forms Amount realized on a nonrecourse debt. 2006 income tax forms   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. 2006 income tax forms The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. 2006 income tax forms Example 1. 2006 income tax forms Ann paid $200,000 for land used in her farming business. 2006 income tax forms She paid $15,000 down and borrowed the remaining $185,000 from a bank. 2006 income tax forms Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. 2006 income tax forms The bank foreclosed on the loan 2 years after Ann stopped making payments. 2006 income tax forms When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. 2006 income tax forms The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. 2006 income tax forms She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). 2006 income tax forms She has a $20,000 deductible loss. 2006 income tax forms Example 2. 2006 income tax forms Assume the same facts as in Example 1 except the FMV of the land was $210,000. 2006 income tax forms The result is the same. 2006 income tax forms The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. 2006 income tax forms Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. 2006 income tax forms Amount realized on a recourse debt. 2006 income tax forms   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. 2006 income tax forms   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. 2006 income tax forms The amount realized does not include the canceled debt that is your income from cancellation of debt. 2006 income tax forms See Cancellation of debt , later. 2006 income tax forms Example 3. 2006 income tax forms Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). 2006 income tax forms In this case, the amount she realizes is $170,000. 2006 income tax forms This is the canceled debt ($180,000) up to the FMV of the land ($170,000). 2006 income tax forms Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). 2006 income tax forms She has a $30,000 deductible loss, which she figures on Form 4797, Part I. 2006 income tax forms She is also treated as receiving ordinary income from cancellation of debt. 2006 income tax forms That income is $10,000 ($180,000 − $170,000). 2006 income tax forms This is the part of the canceled debt not included in the amount realized. 2006 income tax forms She reports this as other income on Schedule F, line 8. 2006 income tax forms Seller's (lender's) gain or loss on repossession. 2006 income tax forms   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. 2006 income tax forms For more information, see Repossession in Publication 537, Installment Sales. 2006 income tax forms Cancellation of debt. 2006 income tax forms   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. 2006 income tax forms This income is separate from any gain or loss realized from the foreclosure or repossession. 2006 income tax forms Report the income from cancellation of a business debt on Schedule F, line 8. 2006 income tax forms Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 2006 income tax forms    You can use Worksheet 8-1 to figure your income from cancellation of debt. 2006 income tax forms   However, income from cancellation of debt is not taxed if any of the following apply. 2006 income tax forms The cancellation is intended as a gift. 2006 income tax forms The debt is qualified farm debt (see chapter 3). 2006 income tax forms The debt is qualified real property business debt (see chapter 5 of Publication 334). 2006 income tax forms You are insolvent or bankrupt (see  chapter 3). 2006 income tax forms The debt is qualified principal residence indebtedness (see chapter 3). 2006 income tax forms   Use Form 982 to report the income exclusion. 2006 income tax forms Abandonment The abandonment of property is a disposition of property. 2006 income tax forms You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. 2006 income tax forms Business or investment property. 2006 income tax forms   Loss from abandonment of business or investment property is deductible as a loss. 2006 income tax forms Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. 2006 income tax forms If your adjusted basis is more than the amount you realize (if any), then you have a loss. 2006 income tax forms If the amount you realize (if any) is more than your adjusted basis, then you have a gain. 2006 income tax forms This rule also applies to leasehold improvements the lessor made for the lessee. 2006 income tax forms However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . 2006 income tax forms   If the abandoned property is secured by debt, special rules apply. 2006 income tax forms The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). 2006 income tax forms For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). 2006 income tax forms The abandonment loss is deducted in the tax year in which the loss is sustained. 2006 income tax forms Report the loss on Form 4797, Part II, line 10. 2006 income tax forms Personal-use property. 2006 income tax forms   You cannot deduct any loss from abandonment of your home or other property held for personal use. 2006 income tax forms Canceled debt. 2006 income tax forms   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. 2006 income tax forms This income is separate from any loss realized from abandonment of the property. 2006 income tax forms Report income from cancellation of a debt related to a business or rental activity as business or rental income. 2006 income tax forms Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 2006 income tax forms   However, income from cancellation of debt is not taxed in certain circumstances. 2006 income tax forms See Cancellation of debt earlier under Foreclosure or Repossession . 2006 income tax forms Forms 1099-A and 1099-C. 2006 income tax forms   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. 2006 income tax forms However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. 2006 income tax forms The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. 2006 income tax forms For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. 2006 income tax forms Prev  Up  Next   Home   More Online Publications

The 2006 Income Tax Forms

2006 income tax forms 5. 2006 income tax forms   Excise Taxes Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Prohibited Tax Shelter TransactionsEntity Level Tax Excess Benefit TransactionsTax on Disqualified Persons Tax on Organization Managers Excess Benefit Transaction Excess Business Holdings Taxable Distributions of Sponsoring Organizations Exception. 2006 income tax forms A donor advised fund does not include: Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Excise Taxes on Private Foundations Excise Taxes on Black Lung Benefit Trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements Introduction An excise tax may be imposed on certain tax-exempt organizations. 2006 income tax forms Topics - This chapter discusses: Prohibited tax shelter transactions Excess benefit transactions Excess business holdings Taxable distributions of sponsoring organizations Taxes on prohibited benefits distributed from donor advised funds Excise taxes on private foundations Excise taxes on 501(c)(21) black lung benefit trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements of Hospitals Useful Items - You may want to see: Forms (and Instructions) 4720 Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code See chapter 6 for more information about getting Form 4720. 2006 income tax forms Prohibited Tax Shelter Transactions Section 4965 imposes an excise tax on: Certain tax-exempt entities that are party to prohibited tax shelter transactions, and Any entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows or has reason to know that the transaction is a prohibited tax shelter transaction. 2006 income tax forms  Additionally, section 6033 provides new disclosure requirements on a tax-exempt entity that is a party to a prohibited tax shelter transaction. 2006 income tax forms Tax-exempt entities. 2006 income tax forms   Tax-exempt entities that are subject to section 4965 include: Entities described in section 501(c), including but not limited to the following common types of entities: Instrumentalities of the United States described in section 501(c)(1); Churches, hospitals, museums, schools, scientific research organizations, and other charities described in section 501(c)(3); Civic leagues, social welfare organizations, and local associations of employees described in section 501(c)(4); Labor, agricultural, or horticultural organizations described in section 501(c)(5); Business leagues, chambers of commerce, trade associations, and other organizations described in section 501(c)(6); Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9); Credit unions described in section 501(c)(14); Insurance companies described in section 501(c)(15); and Veterans' organizations described in section 501(c)(19). 2006 income tax forms Religious or apostolic associations or corporations described in section 501(d). 2006 income tax forms Entities described in section 170(c), including states, possessions of the United States, the District of Columbia, political subdivisions of states and political subdivisions of possessions of the United States (but not including the United States). 2006 income tax forms Indian tribal governments within the meaning of section 7701(a)(40). 2006 income tax forms Entity manager. 2006 income tax forms    An entity manager is any person with authority or responsibility similar to that exercised by an officer, director, or trustee, and, for any act, the person that has authority or responsibility with respect to the prohibited transaction. 2006 income tax forms Prohibited tax shelter transaction. 2006 income tax forms   A prohibited tax shelter transaction is any listed transaction, within the meaning of section 6707A(c)(2), and any prohibited reportable transactions. 2006 income tax forms A prohibited reportable transaction is a confidential transaction within the meaning of Regulations section 1. 2006 income tax forms 6011-4(b)(3), and a transaction with contractual protection within the meaning of Regulations section 1. 2006 income tax forms 6011-4(b)(4). 2006 income tax forms See the Instructions for Form 8886 for more information on listed transactions and prohibited reportable transactions. 2006 income tax forms Subsequently listed transaction. 2006 income tax forms   Any transaction to which the tax-exempt entity is a party and is later determined to be a listed transaction after the entity has become a party to it, is a subsequently listed transaction. 2006 income tax forms Entity Level Tax Section 4965(a)(1) imposes an entity level excise tax on any tax-exempt entity described in 1, 2, 3, or 4 above that becomes a party to a prohibited tax shelter transaction or is a party to a subsequently listed transaction (defined earlier). 2006 income tax forms The excise tax imposed on a tax-exempt entity applies to tax years in which the entity becomes a party to the prohibited tax shelter transaction and any subsequent tax years. 2006 income tax forms The amount of the excise tax depends on whether the tax-exempt entity knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time it became a party to the transaction. 2006 income tax forms To figure and report the excise tax imposed on a tax-exempt entity for being a party to a prohibited tax shelter transaction, file Form 4720. 2006 income tax forms For more information about this excise tax, including information about how it is figured, see the Instructions for Form 4720. 2006 income tax forms Manager Level Tax Section 4965(a)(2) imposes an excise tax on any tax-exempt entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows (or has reason to know) that the transaction is a prohibited tax shelter transaction. 2006 income tax forms The excise tax, in the amount of $20,000, is assessed for each approval or other act causing the organization to be a party to the prohibited tax shelter transaction. 2006 income tax forms To report this tax, file Form 4720. 2006 income tax forms Excess Benefit Transactions Excise tax on excess benefit transactions. 2006 income tax forms   A disqualified person who benefits from an excess benefit transaction, such as compensation, fringe benefits, or contract payments from certain section 501(c)(3), 501(c)(4), or 501(c)(29) organizations, must correct the transaction and may have to pay an excise tax under section 4958. 2006 income tax forms A manager of the organization may also have to pay an excise tax under section 4958. 2006 income tax forms These taxes are reported on Form 4720. 2006 income tax forms   The excise taxes are imposed if an applicable tax-exempt organization provides an excess benefit to a disqualified person and that benefit exceeds the value of the benefit received in exchange. 2006 income tax forms   There are three taxes under section 4958. 2006 income tax forms Disqualified persons are liable for the first two taxes and certain organization managers are liable for the third tax. 2006 income tax forms    Taxes imposed on excess benefit transactions do not apply to a transaction under a written contract that was binding on September 13, 1995, and at all times thereafter before the transaction occurred. 2006 income tax forms Tax on Disqualified Persons An excise tax equal to 25% of the excess benefit is imposed on each excess benefit transaction between an applicable tax-exempt organization and a disqualified person. 2006 income tax forms The disqualified person who benefited from the transaction is liable for the tax. 2006 income tax forms See definition of Disqualified person, later at Disqualified person. 2006 income tax forms Additional tax on the disqualified person. 2006 income tax forms   If the 25% tax is imposed and the excess benefit transaction is not corrected within the taxable period, an additional excise tax equal to 200% of the excess benefit is imposed on any disqualified person involved. 2006 income tax forms   If a disqualified person makes a payment of less than the full correction amount, the 200% tax is imposed only on the unpaid portion of the correction amount. 2006 income tax forms If more than one disqualified person received an excess benefit from an excess benefit transaction, all such disqualified persons are jointly and severally liable for the taxes. 2006 income tax forms   To avoid the 200% tax, a disqualified person must correct the excess benefit transaction during the taxable period. 2006 income tax forms The 200% tax is abated (refunded if collected) if the excess benefit transaction is corrected within a 90-day correction period beginning on the date a statutory notice of deficiency is issued. 2006 income tax forms Taxable period. 2006 income tax forms   The taxable period means the period beginning with the date on which the excess benefit transaction occurs and ending on the earlier of: The date a notice of deficiency was mailed to the disqualified person for the initial tax on the excess benefit transaction, or The date on which the initial tax on the excess benefit transaction for the disqualified person is assessed. 2006 income tax forms Tax on Organization Managers If tax is imposed on a disqualified person for any excess benefit transaction, an excise tax equal to 10% of the excess benefit is imposed on an organization manager who knowingly participated in an excess benefit transaction, unless such participation was not willful and was due to reasonable cause. 2006 income tax forms This tax cannot exceed $20,000 ($10,000 for transactions entered in a tax year beginning before August 18, 2006), for each transaction. 2006 income tax forms There is also joint and several liability for this tax. 2006 income tax forms A person can be liable for both the tax paid by the disqualified person and the organization manager tax for a particular excess benefit transaction. 2006 income tax forms Organization Manager. 2006 income tax forms   An organization manager is any officer, director, or trustee of an applicable tax-exempt organization, or any individual having powers or responsibilities similar to officers, directors, or trustees of the organization, regardless of title. 2006 income tax forms An organization manager is not considered to have participated in an excess benefit transaction where the manager has opposed the transaction in a manner consistent with the fulfillment of the manager's responsibilities to the organization. 2006 income tax forms For example, a director who votes against giving an excess benefit would ordinarily not be subject to the 10% tax. 2006 income tax forms A person participates in a transaction knowingly if the person: Has actual knowledge of sufficient facts so that, based solely upon those facts, such transaction would be an excess benefit transaction; Is aware that such a transaction under these circumstances may violate the provisions of federal tax law governing excess benefit transactions; and Negligently fails to make reasonable attempts to ascertain whether the transaction is an excess benefit transaction, or the manager is in fact aware that it is such a transaction. 2006 income tax forms Knowing does not mean having reason to know. 2006 income tax forms The organization manager ordinarily will not be considered knowing if, after full disclosure of the factual situation to an appropriate professional, the organization manager relied on the professional's reasoned written opinion on matters within the professional's expertise or if the manager relied on the fact that the requirements for the rebuttable presumption of reasonableness have been satisfied. 2006 income tax forms Participation by an organization manager is willful if it is voluntary, conscious, and intentional. 2006 income tax forms An organization manager's participation is due to reasonable cause if the manager has exercised responsibility on behalf of the organization with ordinary business care and prudence. 2006 income tax forms Excess Benefit Transaction An excess benefit transaction is a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration (including the performance of services) received for providing such benefit. 2006 income tax forms The excess benefit transaction rules apply to all transactions with disqualified persons, regardless of whether the amount of the benefit provided is determined in whole or in part by the revenues of one or more activities of the organization. 2006 income tax forms To determine whether an excess benefit transaction has occurred, all consideration and benefits exchanged between a disqualified person and the applicable tax-exempt organization, and all entities it controls, are taken into account. 2006 income tax forms For purposes of determining the value of economic benefits, the value of property, including the right to use property, is the fair market value. 2006 income tax forms Fair market value is the price at which property, or the right to use property, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy, sell, or transfer property or the right to use property, and both having reasonable knowledge of relevant facts. 2006 income tax forms Donor advised fund transactions occurring after August 17, 2006. 2006 income tax forms   For a donor advised fund, an excess benefit transaction includes a grant, loan, compensation, or other similar payment from the fund to a: Donor or donor advisor, Family member of a donor, or donor advisor, 35% controlled entity of a donor, or donor advisor, or 35% controlled entity of a family member of a donor, or donor advisor. 2006 income tax forms   The excess benefit in this transaction is the amount of the grant, loan, compensation, or other similar payment. 2006 income tax forms For additional information, see the Instructions for Form 4720. 2006 income tax forms Supporting organization transactions occurring after July 25, 2006. 2006 income tax forms   For any supporting organization, defined in section 509(a)(3), an excess benefit transaction includes grants, loans, compensation, or other similar payment provided by the supporting organization to a: Substantial contributor, Family member of a substantial contributor, 35% controlled entity of a substantial contributor, or 35% controlled entity of a family member of a substantial contributor. 2006 income tax forms   Additionally, an excess benefit transaction includes any loans provided by the supporting organization to a disqualified person (other than an organization described in section 509(a)(1), (2), or (4)). 2006 income tax forms   The excess benefit for substantial contributors and parties related to those contributors includes the amount of the grant, loan, compensation, or other similar payment. 2006 income tax forms For additional information, see the Instructions for Form 4720. 2006 income tax forms   Excess benefit transaction rules generally do not apply to transactions between a supporting organization and its supported organization described in section 501(c)(4), (5), or (6) in furtherance of charitable purposes. 2006 income tax forms Date of Occurrence An excess benefit transaction occurs on the date the disqualified person receives the economic benefit from the organization for federal income tax purposes. 2006 income tax forms However, when a single contractual arrangement provides for a series of compensation or other payments to or for the use of a disqualified person during the disqualified person's tax year, any excess benefit transaction with respect to these payments occurs on the last day of the taxpayer's tax year. 2006 income tax forms In the case of benefits provided to a qualified pension, profit-sharing, or stock bonus plan, the transaction occurs on the date the benefit is vested. 2006 income tax forms In the case of the transfer of property subject to a substantial risk of forfeiture, or in the case of rights to future compensation or property, the transaction occurs on the date the property, or the rights to future compensation or property, is not subject to a substantial risk of forfeiture. 2006 income tax forms Where the disqualified person elects to include an amount in gross income in the tax year of transfer under section 83(b), the excess benefit transaction occurs on the date the disqualified person receives the economic benefit for federal income tax purposes. 2006 income tax forms Correcting the excess benefit. 2006 income tax forms   An excess benefit transaction is corrected by undoing the excess benefit to the extent possible, and by taking any additional measures necessary to place the organization in a financial position not worse than what it would have been if the disqualified person were dealing under the highest fiduciary standards. 2006 income tax forms   A disqualified person corrects an excess benefit by making a payment in cash or cash equivalents, excluding payment by a promissory note, equal to the correction amount to the applicable tax-exempt organization. 2006 income tax forms The correction amount equals the excess benefit plus the interest on the excess benefit. 2006 income tax forms The interest rate can be no lower than the applicable federal rate, compounded annually, for the month the transaction occurred. 2006 income tax forms   A disqualified person can, with the agreement of the applicable tax-exempt organization, make a payment by returning the specific property previously transferred in the excess transaction. 2006 income tax forms In this case, the disqualified person is treated as making a payment equal to the lesser of: The fair market value of the property on the date the property is returned to the organization, or The fair market value of the property on the date the excess benefit transaction occurred. 2006 income tax forms   If the payment resulting from the return of property is less than the correction amount, the disqualified person must make an additional cash payment to the organization equal to the difference. 2006 income tax forms   If the payment resulting from the return of the property exceeds the correction amount described above, the organization can make a cash payment to the disqualified person equal to the difference. 2006 income tax forms Exception. 2006 income tax forms   For a correction of an excess benefit transaction (discussed earlier), no amount repaid in a manner prescribed by the Secretary can be held in a donor advised fund. 2006 income tax forms Applicable Tax-Exempt Organization An applicable tax-exempt organization is a section 501(c)(3), 501(c)(4), or 501(c)(29) organization that is tax-exempt under section 501(a), or was such an organization at any time during a 5-year period ending on the day of the excess benefit transaction. 2006 income tax forms An applicable tax-exempt organization does not include: A private foundation as defined in section 509(a), A governmental entity that is: Exempt from (or not subject to) taxation without regard to section 501(a), or Not required to file an annual return, or A foreign organization, recognized by the IRS or by treaty, that receives substantially all of its support (other than gross investment income) from sources outside the United States. 2006 income tax forms An organization is not treated as a section 501(c)(3), 501(c)(4), or 501(c)(29) organization for any period covered by a final determination that the organization was not tax-exempt under section 501(a), but only if the determination was not based on private inurement or one or more excess benefit transactions. 2006 income tax forms Disqualified Person A disqualified person is: Any person (at any time during the 5-year period ending on the date of the transaction) in a position to exercise substantial influence over the affairs of the organization, A family member of an individual described in 1, and A 35% controlled entity. 2006 income tax forms For donor advised funds, sponsoring organizations, and certain supporting organizations occurring after August 17, 2006. 2006 income tax forms   The following persons will be considered disqualified persons along with certain family members and 35% controlled entities associated with them. 2006 income tax forms Donors of donor advised funds, Investment advisors of sponsoring organizations, and Disqualified persons of a section 509(a)(3) supporting organization that supports the applicable tax-exempt organization. 2006 income tax forms For certain supporting organization transactions occurring after July 25, 2006. 2006 income tax forms   Substantial contributors to supporting organizations will also be considered disqualified persons with respect to the supporting organizations, along with their family members and 35% controlled entities. 2006 income tax forms Investment advisor. 2006 income tax forms   Investment advisor means for any sponsoring organization, any person compensated by such organization (but not an employee of such organization) for managing the investment of, or providing investment advice for, assets maintained in donor advised funds owned by such sponsoring organization. 2006 income tax forms Substantial contributor. 2006 income tax forms   In general, a substantial contributor means any person who contributed or bequeathed an aggregate of more than $5,000 to the organization, if that amount is more than 2% of the total contributions and bequests received by the end of the organization's tax year in which the contribution or bequest is received. 2006 income tax forms A substantial contributor includes the grantor of a trust. 2006 income tax forms Family members. 2006 income tax forms   Family members of a disqualified person include a disqualified person's spouse, brothers or sisters (whether by whole or half-blood), spouses of brothers or sisters (whether by whole or half-blood), ancestors, children (including a legally adopted child), grandchildren, great grandchildren, and spouses of children, grandchildren, and great grandchildren (whether by whole or half-blood). 2006 income tax forms 35% controlled entity. 2006 income tax forms   A 35% controlled entity is: A corporation in which disqualified persons own more than 35% of the total combined voting power, A partnership in which such persons own more than 35% of the profits interest, or A trust or estate in which such persons own more than 35% of the beneficial interest. 2006 income tax forms   In determining the holdings of a business enterprise, any stock or other interest owned directly or indirectly shall apply. 2006 income tax forms Persons having substantial influence. 2006 income tax forms   Among those who are in a position to exercise substantial influence over the affairs of the organization are, for example, voting members of the governing body, and persons holding the power of: Presidents, chief executives, or chief operating officers. 2006 income tax forms Treasurers and chief financial officers. 2006 income tax forms Persons with a material financial interest in a provider-sponsored organization. 2006 income tax forms Persons not considered to have substantial influence. 2006 income tax forms   Persons who are not considered to be in a position to exercise substantial influence over the affairs of an organization include: An employee who receives benefits that total less than the highly compensated amount in section 414(q)(1)(B)(i) and who does not hold the executive or voting powers mentioned earlier in the discussion on Disqualified Person, is not a family member of a disqualified person, and is not a substantial contributor, Tax-exempt organizations described in section 501(c)(3), and Section 501(c)(4) organizations with respect to transactions engaged in with other section 501(c)(4) organizations. 2006 income tax forms Facts and circumstances. 2006 income tax forms   The determination of whether a person has substantial influence over the affairs of an organization is based on all the facts and circumstances. 2006 income tax forms Facts and circumstances that tend to show a person has substantial influence over the affairs of an organization include, but are not limited to, the following. 2006 income tax forms The person founded the organization. 2006 income tax forms The person is a substantial contributor to the organization under the section 507(d)(2)(A) definition, only taking into account contributions to the organization for the past 5 years. 2006 income tax forms The person's compensation is primarily based on revenues derived from activities of the organization that the person controls. 2006 income tax forms The person has or shares authority to control or determine a substantial portion of the organization's capital expenditures, operating budget, or compensation for employees. 2006 income tax forms The person manages a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. 2006 income tax forms The person owns a controlling interest (measured by either vote or value) in a corporation, partnership, or trust that is a disqualified person. 2006 income tax forms The person is a nonstock organization controlled directly or indirectly by one or more disqualified persons. 2006 income tax forms   Facts and circumstances tending to show that a person does not have substantial influence over the affairs of an organization include, but are not limited to, the following. 2006 income tax forms The person has taken a bona fide vow of poverty as an employee or agent of a religious organization or on its behalf. 2006 income tax forms The person is an independent contractor whose sole relationship to the organization is providing professional advice (without having decision-making authority) with respect to transactions from which the independent contractor will not economically benefit either directly or indirectly aside from customary fees received for the professional advice rendered. 2006 income tax forms Any preferential treatment the person receives based on the size of the person's donation is also offered to others making comparable widely solicited donations. 2006 income tax forms The direct supervisor of the person is not a disqualified person. 2006 income tax forms The person does not participate in any management decisions affecting the organization as a whole or a discrete segment of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. 2006 income tax forms   In the case of multiple organizations affiliated by common control or governing documents, the determination of whether a person does or does not have substantial influence is made separately for each applicable tax-exempt organization. 2006 income tax forms A person may be a disqualified person with respect to transactions with more than one organization. 2006 income tax forms Reasonable Compensation. 2006 income tax forms    Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. 2006 income tax forms The section 162 standard will apply in determining the reasonableness of compensation. 2006 income tax forms The fact that a bonus or revenue-sharing arrangement is subject to a cap is a relevant factor in determining reasonableness of compensation. 2006 income tax forms   To determine the reasonableness of compensation, all items of compensation provided by an applicable tax-exempt organization in exchange for performance of services are taken into account in determining the value of compensation (except for economic benefits that are disregarded under the discussion Disregarded benefits , later). 2006 income tax forms Items of compensation include: All forms of cash and noncash compensation, including salary, fees, bonuses, severance payments, and deferred noncash compensation, The payment of liability insurance premiums for, or the payment or reimbursement by the organization of penalties, taxes, or certain expenses under section 4958, unless excludable from income as a de minimis fringe benefit under section 132(a)(4), All other compensatory benefits, whether or not included in gross income for income tax purposes, Taxable and nontaxable fringe benefits, except fringe benefits described in section 132, and Foregone interest on loans. 2006 income tax forms    Intent to treat benefits as compensation. 2006 income tax forms An economic benefit is not treated as consideration for the performance of services unless the organization providing the benefit clearly indicates its intent to treat the benefit as compensation when the benefit is paid. 2006 income tax forms   An applicable tax-exempt organization (or entity that it controls) is treated as clearly indicating its intent to provide an economic benefit as compensation for services only if the organization provides written substantiation that is contemporaneous with the transfer of the economic benefits under consideration. 2006 income tax forms Ways to provide contemporaneous written substantiation of its intent to provide an economic benefit as compensation include: The organization produces a signed written employment contract, The organization reports the benefit as compensation on an original Form W-2, Form 1099, or Form 990, or on an amended form filed before starting an IRS examination, or The disqualified person reports the benefit as income on the person's original Form 1040, or on an amended form filed before starting an IRS examination. 2006 income tax forms Exception. 2006 income tax forms   If the economic benefit is excluded from the disqualified person's gross income for income tax purposes, the applicable tax-exempt organization is not required to indicate its intent to provide an economic benefit as compensation for services. 2006 income tax forms Rebuttable presumption that a transaction is not an excess benefit transaction. 2006 income tax forms   Payments under a compensation arrangement are presumed to be reasonable and the transfer of property (or right to use property) is presumed to be at fair market value, if the following three conditions are met. 2006 income tax forms The transaction is approved in advance by an authorized body of the organization (or an entity it controls) which is composed of individuals who do not have a conflict of interest concerning the transaction. 2006 income tax forms Before making its determination, the authorized body obtained and relied upon appropriate data as to comparability. 2006 income tax forms (There is a special safe harbor for small organizations. 2006 income tax forms If the organization has gross receipts of less than $1 million, appropriate comparability data includes data on compensation paid by three comparable organizations in the same or similar communities for similar services. 2006 income tax forms ) The authorized body adequately documents the basis for its determination concurrently with making that determination. 2006 income tax forms The documentation should include: The terms of the approved transaction and the date approved, The members of the authorized body who were present during debate on the transaction that was approved and those who voted on it, The comparability data obtained and relied upon by the authorized body and how the data was obtained, Any actions by a member of the authorized body having conflict of interest, and Documentation of the basis of the determination before the later of the next meeting of the authorized body or 60 days after the final actions of the authorized body are taken, and approval of records as reasonable, accurate, and complete within a reasonable time thereafter. 2006 income tax forms Disregarded benefits. 2006 income tax forms   The following economic benefits are disregarded for section 4958 purposes. 2006 income tax forms Nontaxable fringe benefits that are excluded from income under section 132. 2006 income tax forms Benefits provided to a volunteer for the organization if the benefit is provided to the general public in exchange for a membership fee or contribution of $75 or less. 2006 income tax forms Benefits provided to a member of an organization due to the payment of a membership fee or to a donor as a result of a deductible contribution, if a significant number of disqualified persons make similar payments or contributions and are offered a similar economic benefit. 2006 income tax forms Benefits provided to a person solely as a member of a charitable class that the applicable tax-exempt organization intends to benefit as part of the accomplishment of its exempt purpose. 2006 income tax forms A transfer of an economic benefit to or for the use of a governmental unit, as defined in section 170(c)(1), if exclusively for public purposes. 2006 income tax forms Special Exception for Initial Contracts      Section 4958 does not apply to any fixed payment made to a person under an initial contract. 2006 income tax forms   A fixed payment is an amount of cash or other property specified in the contract, or determined by a fixed formula that is specified in the contract, which is to be paid or transferred in exchange for the provision of specified services or property. 2006 income tax forms   A fixed formula can, generally, incorporate an amount that depends upon future specified events or contingencies, as long as no one has discretion when calculating the amount of a payment or deciding whether to make a payment (such as a bonus). 2006 income tax forms   An initial contract is a binding written contract between an applicable tax-exempt organization and a person who was not a disqualified person immediately before entering into the contract. 2006 income tax forms   A binding written contract, providing it can be terminated or canceled by the applicable tax-exempt organization without the other party's consent (except as a result of substantial nonperformance) and without substantial penalty, is treated as a new contract, as of the earliest date any termination or cancellation would be effective. 2006 income tax forms Also, if the parties make a material change to a contract, which includes an extension or renewal of the contract (except for an extension or renewal resulting from the exercise of an option by the disqualified person), or a more than incidental change to the amount payable under the contract, it is treated as a new contract as of the effective date of the material change. 2006 income tax forms More information. 2006 income tax forms   For more information, see the Instructions to Forms 990 and 4720. 2006 income tax forms Excess Business Holdings Private foundations are generally not permitted to hold more than a 20% interest in an unrelated business enterprise. 2006 income tax forms They may be subject to an excise tax on the amount of any excess business holdings. 2006 income tax forms For purposes of section 4943, for tax years beginning after August 17, 2006, donor advised funds and certain supporting organizations are considered private foundations. 2006 income tax forms Donor advised fund. 2006 income tax forms   In general, a donor advised fund is a fund or account separately identified by reference to contributions of a donor or donors that is owned and controlled by a sponsoring organization and for which the donor has or expects to have advisory privileges concerning the distribution or investment of the funds. 2006 income tax forms Supporting organizations. 2006 income tax forms   Only certain supporting organizations are subject to the excess business holdings tax under section 4943. 2006 income tax forms These include (1) Type III supporting organizations that are not functionally integrated and (2) Type II supporting organizations that accept any gift or contribution from a person who by himself or in connection with a related party controls the supported organization that the Type II supporting organization supports. 2006 income tax forms Taxes. 2006 income tax forms   A private foundation that has excess holdings in a business enterprise may become liable for an excise tax based on the amount of holdings. 2006 income tax forms The initial tax is 10% (5% for tax years beginning before August 18, 2006) of the value of the excess holdings and is imposed on the last day of each tax year that ends during the taxable period. 2006 income tax forms The excess holdings are determined on the day during the tax year when they were the largest. 2006 income tax forms   A foundation that fails to correct the excess business holdings becomes liable for an additional tax of 200% of the remaining excess business holdings as of the earlier of tax assessment or mailing of a notice of deficiency. 2006 income tax forms   For more information on the tax on excess business holdings, see the Instructions for Form 4720. 2006 income tax forms Taxable Distributions of Sponsoring Organizations An excise tax is imposed on a sponsoring organization for each taxable distribution it makes from a donor advised fund. 2006 income tax forms An excise tax is also imposed on any fund manager of the sponsoring organization who agreed to the making of a distribution, knowing that it is a taxable distribution. 2006 income tax forms Taxable distribution. 2006 income tax forms   A taxable distribution is any distribution from a donor advised fund to any natural person or to any other person if: The distribution is for any purpose other than one specified in section 170(c)(2)(B), or The sponsoring organization maintaining the donor advised fund does not exercise expenditure responsibility with respect to the distribution in accordance with section 4945(h). 2006 income tax forms    However, a taxable distribution does not include a distribution from a donor advised fund to: Any organization described in section 170(b)(1)(A) (other than a disqualified supporting organization), The sponsoring organization of the donor advised fund, or Any other donor advised fund. 2006 income tax forms The tax on taxable distributions applies to distributions occurring in tax years beginning after August 17, 2006. 2006 income tax forms Sponsoring organization. 2006 income tax forms   A sponsoring organization is a section 170(c) organization that is neither a government organization (as referred to in section 170(c)(1) and (2)(A)) nor a private foundation. 2006 income tax forms Donor advised fund. 2006 income tax forms    A donor advised fund is a fund or account: Which is separately identified by reference to contributions of a donor or donors, Which is owned and controlled by a sponsoring organization, and For which the donor (or any person appointed or designated by the donor) has or expects to have advisory privileges concerning the distribution or investment of the funds held in the donor advised funds or accounts because of the donor's status as a donor. 2006 income tax forms Exception. 2006 income tax forms A donor advised fund does not include:    A fund or account that makes distributions only to a single identified organization or governmental entity, or Any fund or account for a person described in 3 above that gives advice about which individuals receive grants for travel, study, or similar purposes, if the following three requirements are met: The person's advisory privileges are performed exclusively by such person in their capacity as a committee member of which all the committee members are appointed by the sponsoring organization, No combination of persons with advisory privileges, described in 3 above, or persons related to those in 3 above directly or indirectly control the committee, and All grants from the fund or account are awarded on an objective and nondiscriminatory basis according to a procedure approved in advance by the board of directors of the sponsoring organization. 2006 income tax forms The procedure must be designed to ensure that all grants meet the requirements of section 4945(g)(1), (2), or (3). 2006 income tax forms Disqualified supporting organization. 2006 income tax forms   A disqualified supporting organization includes (1) a Type III supporting organization that is not functionally integrated and (2) any supporting organization where the donor or donor advisor (and any related parties) directly or indirectly controls a supported organization of the supporting organization. 2006 income tax forms Tax on sponsoring organization. 2006 income tax forms   A tax of 20% of the amount of each taxable distribution is imposed on the sponsoring organization. 2006 income tax forms Tax on fund manager. 2006 income tax forms   If a tax is imposed on a taxable distribution of the sponsoring organization, a tax of 5% of the distribution will be imposed on any fund manager who agreed to the distribution knowing that it was a taxable distribution. 2006 income tax forms Any fund manager who took part in the distribution and is liable for the tax must pay the tax. 2006 income tax forms The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. 2006 income tax forms If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. 2006 income tax forms   For more information on the tax on taxable distributions of sponsoring organizations, see the Instructions for Form 4720. 2006 income tax forms Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Prohibited benefit. 2006 income tax forms   If any donor, donor advisor, or related party advises the sponsoring organization about making a distribution which results in a donor, donor advisor, or related party receiving (either directly or indirectly) a more than incidental benefit, then such benefit is a prohibited benefit. 2006 income tax forms The tax on prohibited benefits applies to distributions occurring in tax years beginning after August 17, 2006. 2006 income tax forms Donor advisor. 2006 income tax forms   A donor advisor is any person appointed or designated by a donor to advise a sponsoring organization on the distribution or investment of amounts held in the donor's fund or account. 2006 income tax forms Related party. 2006 income tax forms   A related party includes any family member or 35% controlled entity. 2006 income tax forms See the definition of those terms under Disqualified Person , earlier. 2006 income tax forms Tax on donor, donor advisor, or related person. 2006 income tax forms    A tax of 125% of the benefit resulting from the distribution is imposed on both the party who advised as to the distribution (which might be a donor, donor advisor, or related party) and the party who received such benefit (which might be a donor, donor advisor, or related party). 2006 income tax forms The advisor and the party who received the benefit are jointly and severally liable for the tax. 2006 income tax forms Tax on fund managers. 2006 income tax forms   If a tax is imposed on a prohibited benefit received by a donor, donor advisor, or related person, a tax of 10% of the amount of the prohibited benefit is imposed on any fund manager who agreed to the distribution knowing that it would confer a prohibited benefit. 2006 income tax forms Any fund manager who took part in the distribution and is liable for the tax must pay the tax. 2006 income tax forms The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. 2006 income tax forms If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. 2006 income tax forms Exception. 2006 income tax forms   If a person engaged in an excess benefit transaction and received a prohibited benefit for the same transaction, the person is taxed under section 4958, and no tax is imposed under section 4967 for a prohibited benefit. 2006 income tax forms   For more information on taxes on prohibited benefits distributed from donor advised funds, see the Instructions for Form 4720. 2006 income tax forms Excise Taxes on Private Foundations There is an excise tax on the net investment income of most domestic private foundations. 2006 income tax forms Capital gains from appreciation are included in the tax base on private foundation net investment income. 2006 income tax forms This tax must be reported on Form 990-PF and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year (section 4940 tax minus credits) is $500 or more. 2006 income tax forms Form 990-W is used to calculate the estimated tax. 2006 income tax forms In addition, there are several other rules that apply to excise taxes on private foundations. 2006 income tax forms These include: Restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons, Requirements that the foundation annually distribute income for charitable purposes, Limits on their holdings in any business enterprise (see Excess Business Holdings, earlier), Provisions that investments must not jeopardize the carrying out of exempt purposes, and Provisions to assure that expenditures further the organization's exempt purposes. 2006 income tax forms Violations of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons. 2006 income tax forms For more information on the excise taxes imposed on private foundations, see the Instructions for Form 4720 and the Instructions for Form 990-PF. 2006 income tax forms Excise Taxes on Black Lung Benefit Trusts A black lung benefit trust that makes any expenditures, payments, or investments other than those described in chapter 4 under 501(c)(21) - Black Lung Benefit Trusts must pay a tax equal to 10% of the amount of such expenditures. 2006 income tax forms If there are any acts of self-dealing between the trust and a disqualified person, a tax equal to 10% of the amount involved is imposed on the disqualified person. 2006 income tax forms Both of these excise taxes are reported on Schedule A (Form 990-BL). 2006 income tax forms See the Form 990-BL instructions for more information on these taxes and what has to be filed, even if the trust is excepted from filing. 2006 income tax forms Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements For tax years beginning after March 23, 2012, new section 4959 imposes an excise tax on hospital organizations which fail to meet certain section 501(r) requirements for each of their hospital facilities. 2006 income tax forms These entities must meet section 501(r)(3) requirements at all times during their tax year. 2006 income tax forms Section 501(r)(3) requirements pertain to a hospital organization preparing a community health needs assessment (CHNA). 2006 income tax forms See Schedule H, Hospitals (Form 990), for details. 2006 income tax forms Prev  Up  Next   Home   More Online Publications