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H&r Block

H&r block Internal Revenue Bulletin:  2010-9  March 1, 2010  Rev. H&r block Proc. H&r block 2010-18 Table of Contents SECTION 1. H&r block PURPOSE SECTION 2. H&r block BACKGROUND SECTION 3. H&r block SCOPE SECTION 4. H&r block APPLICATION SECTION 5. H&r block EFFECTIVE DATE SECTION 6. H&r block DRAFTING INFORMATION SECTION 1. H&r block PURPOSE This revenue procedure provides: (1) limitations on depreciation deductions for owners of passenger automobiles first placed in service by the taxpayer during calendar year 2010, including a separate table of limitations on depreciation deductions for trucks and vans; and (2) the amounts to be included in income by lessees of passenger automobiles first leased by the taxpayer during calendar year 2010, including a separate table of inclusion amounts for lessees of trucks and vans. H&r block The tables detailing these depreciation limitations and lessee inclusion amounts reflect the automobile price inflation adjustments required by § 280F(d)(7) of the Internal Revenue Code. H&r block SECTION 2. H&r block BACKGROUND . H&r block 01 For owners of passenger automobiles, § 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year. H&r block Section 280F(d)(7) requires the amounts allowable as depreciation deductions to be increased by a price inflation adjustment amount for passenger automobiles placed in service after 1988. H&r block The method of calculating this price inflation amount for trucks and vans placed in service in or after calendar year 2003 uses a different CPI “automobile component” (the “new trucks” component) than that used in the price inflation amount calculation for other passenger automobiles (the “new cars” component), resulting in somewhat higher depreciation deductions for trucks and vans. H&r block This change reflects the higher rate of price inflation for trucks and vans since 1988. H&r block . H&r block 02 Section 280F(c) requires a reduction in the deduction allowed to the lessee of a leased passenger automobile. H&r block The reduction must be substantially equivalent to the limitations on the depreciation deductions imposed on owners of passenger automobiles. H&r block Under § 1. H&r block 280F-7(a) of the Income Tax Regulations, this reduction requires a lessee to include in gross income an inclusion amount determined by applying a formula to the amount obtained from a table. H&r block One table applies to lessees of trucks and vans and another table applies to all other passenger automobiles. H&r block Each table shows inclusion amounts for a range of fair market values for each taxable year after the passenger automobile is first leased. H&r block SECTION 3. H&r block SCOPE . H&r block 01 The limitations on depreciation deductions in section 4. H&r block 01(2) of this revenue procedure apply to passenger automobiles (other than leased passenger automobiles) that are placed in service by the taxpayer in calendar year 2010, and continue to apply for each taxable year that the passenger automobile remains in service. H&r block . H&r block 02 The tables in section 4. H&r block 02 of this revenue procedure apply to leased passenger automobiles for which the lease term begins during calendar year 2010. H&r block Lessees of these passenger automobiles must use these tables to determine the inclusion amount for each taxable year during which the passenger automobile is leased. H&r block See Rev. H&r block Proc. H&r block 2005-13, 2005-1 C. H&r block B. H&r block 759, for passenger automobiles first leased before calendar year 2006; Rev. H&r block Proc. H&r block 2006-18, 2006-1 C. H&r block B. H&r block 645, for passenger automobiles first leased during calendar year 2006; Rev. H&r block Proc. H&r block 2007-30, 2007-1 C. H&r block B. H&r block 1104, for passenger automobiles first leased during calendar year 2007; Rev. H&r block Proc. H&r block 2008-22, 2008-12 I. H&r block R. H&r block B. H&r block 658, for passenger automobiles first leased during calendar year 2008; and Rev. H&r block Proc. H&r block 2009-24, 2009-17 I. H&r block R. H&r block B. H&r block 885, for passenger automobiles first leased during calendar year 2009. H&r block SECTION 4. H&r block APPLICATION . H&r block 01 Limitations on Depreciation Deductions for Certain Automobiles. H&r block (1) Amount of the inflation adjustment. H&r block (a) Passenger automobiles (other than trucks or vans). H&r block Under § 280F(d)(7)(B)(i), the automobile price inflation adjustment for any calendar year is the percentage (if any) by which the CPI automobile component for October of the preceding calendar year exceeds the CPI automobile component for October 1987. H&r block The term “CPI automobile component” is defined in § 280F(d)(7)(B)(ii) as the “automobile component” of the Consumer Price Index for all Urban Consumers published by the Department of Labor. H&r block The new car component of the CPI was 115. H&r block 2 for October 1987 and 137. H&r block 851 for October 2009. H&r block The October 2009 index exceeded the October 1987 index by 22. H&r block 651. H&r block Therefore, the automobile price inflation adjustment for 2010 for passenger automobiles (other than trucks and vans) is 19. H&r block 66 percent (22. H&r block 651/115. H&r block 2 x 100%). H&r block The dollar limitations in § 280F(a) are multiplied by a factor of 0. H&r block 1966, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations applicable to passenger automobiles (other than trucks and vans) for calendar year 2010. H&r block This adjustment applies to all passenger automobiles (other than trucks and vans) that are first placed in service in calendar year 2010. H&r block (b) Trucks and vans. H&r block To determine the dollar limitations for trucks and vans first placed in service during calendar year 2010, the new truck component of the CPI is used instead of the new car component. H&r block The new truck component of the CPI was 112. H&r block 4 for October 1987 and 140. H&r block 897 for October 2009. H&r block The October 2009 index exceeded the October 1987 index by 28. H&r block 497. H&r block Therefore, the automobile price inflation adjustment for 2010 for trucks and vans is 25. H&r block 35 percent (28. H&r block 497/112. H&r block 4 x 100%). H&r block The dollar limitations in § 280F(a) are multiplied by a factor of 0. H&r block 2535, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations for trucks and vans. H&r block This adjustment applies to all trucks and vans that are first placed in service in calendar year 2010. H&r block (2) Amount of the limitation. H&r block Tables 1 and 2 contain the dollar amount of the depreciation limitation for each taxable year for passenger automobiles a taxpayer places in service in calendar year 2010. H&r block Use Table 1 for a passenger automobile (other than a truck or van) and Table 2 for a truck or van placed in service in calendar year 2010. H&r block REV. H&r block PROC. H&r block 2010-18 TABLE 1 DEPRECIATION LIMITATIONS FOR PASSENGER AUTOMOBILES (THAT ARE NOT TRUCKS OR VANS) PLACED IN SERVICE IN CALENDAR YEAR 2010 Tax Year Amount 1st Tax Year $3,060 2nd Tax Year $4,900 3rd Tax Year $2,950 Each Succeeding Year $1,775 REV. H&r block PROC. H&r block 2010-18 TABLE 2 DEPRECIATION LIMITATIONS FOR TRUCKS AND VANS PLACED IN SERVICE IN CALENDAR YEAR 2010 Tax Year Amount 1st Tax Year $3,160 2nd Tax Year $5,100 3rd Tax Year $3,050 Each Succeeding Year $1,875 . H&r block 02 Inclusions in Income of Lessees of Passenger Automobiles. H&r block A taxpayer must follow the procedures in § 1. H&r block 280F-7(a) for determining the inclusion amounts for passenger automobiles first leased in calendar year 2010. H&r block In applying these procedures, lessees of passenger automobiles other than trucks and vans should use Table 3 of this revenue procedure, while lessees of trucks and vans should use Table 4 of this revenue procedure. H&r block REV. H&r block PROC. H&r block 2010-18 TABLE 3 DOLLAR AMOUNTS FOR PASSENGER AUTOMOBILES (THAT ARE NOT TRUCKS OR VANS) WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2010 Fair Market Value of Passenger Automobile Tax Year During Lease Over Not Over 1st 2nd 3rd 4th 5th & Later $16,700 $17,000 3 7 10 11 14 17,000 17,500 4 8 13 15 16 17,500 18,000 5 10 16 19 21 18,000 18,500 6 13 18 23 26 18,500 19,000 7 15 22 26 31 19,000 19,500 8 17 25 30 35 19,500 20,000 9 19 29 34 39 20,000 20,500 10 21 32 38 44 20,500 21,000 11 23 35 42 48 21,000 21,500 12 26 38 45 53 21,500 22,000 13 28 41 50 57 22,000 23,000 14 31 46 56 63 23,000 24,000 16 36 52 63 73 24,000 25,000 18 40 59 71 81 25,000 26,000 20 44 66 78 90 26,000 27,000 22 49 71 86 100 27,000 28,000 24 53 78 94 108 28,000 29,000 26 57 85 101 118 29,000 30,000 28 61 92 109 126 30,000 31,000 30 66 97 117 135 31,000 32,000 32 70 104 125 144 32,000 33,000 34 74 111 132 153 33,000 34,000 36 79 117 140 161 34,000 35,000 38 83 123 148 171 35,000 36,000 40 87 130 156 179 36,000 37,000 42 92 136 163 188 37,000 38,000 44 96 143 170 198 38,000 39,000 46 100 149 179 206 39,000 40,000 48 105 155 186 215 40,000 41,000 50 109 162 194 224 41,000 42,000 52 113 169 201 233 42,000 43,000 54 118 174 210 241 43,000 44,000 56 122 181 217 251 44,000 45,000 58 126 188 225 259 45,000 46,000 60 131 194 232 269 46,000 47,000 61 135 201 240 277 47,000 48,000 63 140 207 248 286 48,000 49,000 65 144 213 256 295 49,000 50,000 67 148 220 263 304 50,000 51,000 69 153 226 271 313 51,000 52,000 71 157 232 279 322 52,000 53,000 73 161 239 287 331 53,000 54,000 75 166 245 294 340 54,000 55,000 77 170 252 302 348 55,000 56,000 79 174 258 310 358 56,000 57,000 81 178 265 318 366 57,000 58,000 83 183 271 325 375 58,000 59,000 85 187 278 333 384 59,000 60,000 87 191 284 341 393 60,000 62,000 90 198 294 352 406 62,000 64,000 94 207 306 368 424 64,000 66,000 98 215 320 382 443 66,000 68,000 102 224 332 398 460 68,000 70,000 106 232 346 413 478 70,000 72,000 110 241 358 429 496 72,000 74,000 114 250 371 444 513 74,000 76,000 118 258 384 460 531 76,000 78,000 122 267 396 476 549 78,000 80,000 126 276 409 491 566 80,000 85,000 132 291 432 518 598 85,000 90,000 142 313 464 556 643 90,000 95,000 152 334 497 594 687 95,000 100,000 162 356 528 634 731 100,000 110,000 177 388 577 691 798 110,000 120,000 196 432 641 768 887 120,000 130,000 216 475 705 846 976 130,000 140,000 236 518 770 922 1,065 140,000 150,000 256 561 834 1,000 1,154 150,000 160,000 275 605 898 1,077 1,243 160,000 170,000 295 648 963 1,153 1,333 170,000 180,000 315 691 1,027 1,231 1,421 180,000 190,000 334 735 1,091 1,308 1,510 190,000 200,000 354 778 1,155 1,386 1,599 200,000 210,000 374 821 1,220 1,462 1,688 210,000 220,000 393 865 1,284 1,539 1,777 220,000 230,000 413 908 1,348 1,617 1,866 230,000 240,000 433 951 1,413 1,693 1,956 240,000 and up 453 995 1,476 1,771 2,044 REV. H&r block PROC. H&r block 2010-18 TABLE 4 DOLLAR AMOUNTS FOR TRUCKS AND VANS WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2010 Fair Market Value of Passenger Automobile Tax Year During Lease Over Not Over 1st 2nd 3rd 4th 5th & Later 17,000 17,500 3 6 9 10 11 17,500 18,000 4 8 12 14 16 18,000 18,500 5 10 15 18 21 18,500 19,000 6 12 19 22 24 19,000 19,500 7 15 21 26 29 19,500 20,000 8 17 25 29 34 20,000 20,500 9 19 28 33 38 20,500 21,000 10 21 31 37 43 21,000 21,500 11 23 35 41 47 21,500 22,000 12 25 38 45 51 22,000 23,000 13 29 42 51 58 23,000 24,000 15 33 49 58 67 24,000 25,000 17 37 56 66 76 25,000 26,000 19 42 62 73 85 26,000 27,000 21 46 68 82 93 27,000 28,000 23 50 75 89 103 28,000 29,000 25 55 81 97 111 29,000 30,000 27 59 88 104 121 30,000 31,000 29 63 94 113 129 31,000 32,000 31 68 100 120 138 32,000 33,000 33 72 107 127 148 33,000 34,000 35 76 114 135 156 34,000 35,000 37 81 119 143 165 35,000 36,000 39 85 126 151 174 36,000 37,000 41 89 133 158 183 37,000 38,000 43 94 139 166 191 38,000 39,000 45 98 145 174 201 39,000 40,000 47 102 152 182 209 40,000 41,000 49 106 159 189 218 41,000 42,000 51 111 164 198 227 42,000 43,000 53 115 171 205 236 43,000 44,000 55 119 178 213 245 44,000 45,000 57 124 184 220 254 45,000 46,000 59 128 190 228 263 46,000 47,000 60 133 197 235 272 47,000 48,000 62 137 203 244 280 48,000 49,000 64 142 209 251 290 49,000 50,000 66 146 216 259 298 50,000 51,000 68 150 223 266 308 51,000 52,000 70 154 229 275 316 52,000 53,000 72 159 235 282 325 53,000 54,000 74 163 242 290 334 54,000 55,000 76 167 249 297 343 55,000 56,000 78 172 254 305 352 56,000 57,000 80 176 261 313 361 57,000 58,000 82 180 268 320 370 58,000 59,000 84 185 274 328 378 59,000 60,000 86 189 280 336 388 60,000 62,000 89 195 291 347 401 62,000 64,000 93 204 303 363 418 64,000 66,000 97 213 315 379 436 66,000 68,000 101 221 329 394 454 68,000 70,000 105 230 341 410 472 70,000 72,000 109 239 354 424 490 72,000 74,000 113 247 367 440 508 74,000 76,000 117 256 380 455 526 76,000 78,000 121 264 393 471 543 78,000 80,000 125 273 406 486 561 80,000 85,000 131 289 428 513 592 85,000 90,000 141 310 461 552 636 90,000 95,000 151 332 492 591 681 95,000 100,000 161 353 525 629 726 100,000 110,000 176 386 573 686 793 110,000 120,000 195 430 637 763 882 120,000 130,000 215 473 701 841 971 130,000 140,000 235 516 766 918 1,059 140,000 150,000 255 559 830 995 1,149 150,000 160,000 274 603 894 1,072 1,238 160,000 170,000 294 646 958 1,150 1,326 170,000 180,000 314 689 1,023 1,226 1,416 180,000 190,000 333 733 1,087 1,303 1,505 190,000 200,000 353 776 1,151 1,381 1,594 200,000 210,000 373 819 1,216 1,457 1,683 210,000 220,000 392 863 1,280 1,534 1,772 220,000 230,000 412 906 1,344 1,612 1,861 230,000 240,000 432 949 1,409 1,689 1,949 240,000 and up 452 992 1,473 1,766 2,039 SECTION 5. H&r block EFFECTIVE DATE This revenue procedure applies to passenger automobiles that a taxpayer first places in service or first leases during calendar year 2010. H&r block SECTION 6. H&r block DRAFTING INFORMATION The principal author of this revenue procedure is Bernard P. H&r block Harvey of the Office of Associate Chief Counsel (Income Tax & Accounting). H&r block For further information regarding this revenue procedure, contact Mr. H&r block Harvey at (202) 622-4930 (not a toll-free call). H&r block Prev  Up  Next   Home   More Internal Revenue Bulletins
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H&r block 2. H&r block   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. H&r block Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. H&r block Sales and Exchanges Between Related PersonsGain Is Ordinary Income Nondeductible Loss Other DispositionsSale of a Business Dispositions of Intangible Property Subdivision of Land Timber Precious Metals and Stones, Stamps, and Coins Coal and Iron Ore Conversion Transactions Introduction 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). H&r block You must do this to figure your net capital gain or loss. H&r block For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. H&r block See Capital Gains Tax Rates in chapter 4. H&r block Your deduction for a net capital loss may be limited. H&r block See Treatment of Capital Losses in chapter 4. H&r block Capital gain or loss. H&r block   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. H&r block You also may have a capital gain if your section 1231 transactions result in a net gain. H&r block Section 1231 transactions. H&r block   Section 1231 transactions are sales and exchanges of property held longer than 1 year and either used in a trade or business or held for the production of rents or royalties. H&r block They also include certain involuntary conversions of business or investment property, including capital assets. H&r block See Section 1231 Gains and Losses in chapter 3 for more information. H&r block Topics - This chapter discusses: Capital assets Noncapital assets Sales and exchanges between  related persons Other dispositions Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 4797 Sales of Business Property 8594 Asset Acquisition Statement Under Section 1060 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. H&r block Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. H&r block For exceptions, see Noncapital Assets, later. H&r block The following items are examples of capital assets. H&r block Stocks and bonds. H&r block A home owned and occupied by you and your family. H&r block Timber grown on your home property or investment property, even if you make casual sales of the timber. H&r block Household furnishings. H&r block A car used for pleasure or commuting. H&r block Coin or stamp collections. H&r block Gems and jewelry. H&r block Gold, silver, and other metals. H&r block Personal-use property. H&r block   Generally, property held for personal use is a capital asset. H&r block Gain from a sale or exchange of that property is a capital gain. H&r block Loss from the sale or exchange of that property is not deductible. H&r block You can deduct a loss relating to personal-use property only if it results from a casualty or theft. H&r block Investment property. H&r block   Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. H&r block This treatment does not apply to property used to produce rental income. H&r block See Business assets, later, under Noncapital Assets. H&r block Release of restriction on land. H&r block   Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset. H&r block Noncapital Assets A noncapital asset is property that is not a capital asset. H&r block The following kinds of property are not capital assets. H&r block Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. H&r block Inventories are discussed in Publication 538, Accounting Periods and Methods. H&r block But, see the Tip below. H&r block Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above. H&r block Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). H&r block Sales of this type of property are discussed in chapter 3. H&r block Real property used in your trade or business or as rental property, even if the property is fully depreciated. H&r block A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs): Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. H&r block But, see the Tip below. H&r block U. H&r block S. H&r block Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price. H&r block Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. H&r block It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. H&r block The instrument is clearly identified in the dealer's records as meeting (a) by the end of the day on which it was acquired, originated, or entered into. H&r block Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into. H&r block Supplies of a type you regularly use or consume in the ordinary course of your trade or business. H&r block You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. H&r block See chapter 4 of Publication 550 for details. H&r block Property held mainly for sale to customers. H&r block   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. H&r block Inventories are discussed in Publication 538. H&r block Business assets. H&r block   Real property and depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later under Dispositions of Intangible Property) are not capital assets. H&r block The sale or disposition of business property is discussed in chapter 3. H&r block Letters and memoranda. H&r block   Letters, memoranda, and similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs) are not treated as capital assets (as discussed earlier) if your personal efforts created them or if they were prepared or produced for you. H&r block Nor is this property a capital asset if your basis in it is determined by reference to the person who created it or the person for whom it was prepared. H&r block For this purpose, letters and memoranda addressed to you are considered prepared for you. H&r block If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. H&r block Commodities derivative financial instrument. H&r block   A commodities derivative financial instrument is a commodities contract or other financial instrument for commodities (other than a share of corporate stock, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract) the value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code). H&r block Commodities derivative dealer. H&r block   A commodities derivative dealer is a person who regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business. H&r block Hedging transaction. H&r block   A hedging transaction is any transaction you enter into in the normal course of your trade or business primarily to manage any of the following. H&r block Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. H&r block Risk of interest rate or price changes or currency fluctuations for borrowings you make or will make, or ordinary obligations you incur or will incur. H&r block Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. H&r block If these rules apply, gains may be treated as ordinary income and losses may not be deductible. H&r block See Transfers to Spouse in chapter 1 for rules that apply to spouses. H&r block Gain Is Ordinary Income If a gain is recognized on the sale or exchange of property to a related person, the gain may be ordinary income even if the property is a capital asset. H&r block It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. H&r block Depreciable property transaction. H&r block   Gain on the sale or exchange of property, including a leasehold or a patent application, that is depreciable property in the hands of the person who receives it is ordinary income if the transaction is either directly or indirectly between any of the following pairs of entities. H&r block A person and the person's controlled entity or entities. H&r block A taxpayer and any trust in which the taxpayer (or his or her spouse) is a beneficiary unless the beneficiary's interest in the trust is a remote contingent interest; that is, the value of the interest computed actuarially is 5% or less of the value of the trust property. H&r block An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest (a bequest for a sum of money). H&r block An employer (or any person related to the employer under rules (1), (2), or (3)) and a welfare benefit fund (within the meaning of section 419(e) of the Internal Revenue Code) that is controlled directly or indirectly by the employer (or any person related to the employer). H&r block Controlled entity. H&r block   A person's controlled entity is either of the following. H&r block A corporation in which more than 50% of the value of all outstanding stock, or a partnership in which more than 50% of the capital interest or profits interest, is directly or indirectly owned by or for that person. H&r block An entity whose relationship with that person is one of the following. H&r block A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. H&r block Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 50%” is substituted for “at least 80%” in that definition. H&r block Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. H&r block Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. H&r block Controlled partnership transaction. H&r block   A gain recognized in a controlled partnership transaction may be ordinary income. H&r block The gain is ordinary income if it results from the sale or exchange of property that, in the hands of the party who receives it, is a noncapital asset such as trade accounts receivable, inventory, stock in trade, or depreciable or real property used in a trade or business. H&r block   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. H&r block A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. H&r block Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. H&r block Determining ownership. H&r block   In the transactions under Depreciable property transaction and Controlled partnership transaction, earlier, use the following rules to determine the ownership of stock or a partnership interest. H&r block Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. H&r block (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. H&r block ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. H&r block Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. H&r block For purposes of applying (1) or (2), above, stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. H&r block But stock or a partnership interest constructively owned by an individual under (2) is not treated as owned by the individual for reapplying (2) to make another person the constructive owner of that stock or partnership interest. H&r block Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. H&r block This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. H&r block For the list of related persons, see Related persons next. H&r block If a sale or exchange is between any of these related persons and involves the lump-sum sale of a number of blocks of stock or pieces of property, the gain or loss must be figured separately for each block of stock or piece of property. H&r block The gain on each item is taxable. H&r block The loss on any item is nondeductible. H&r block Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. H&r block Related persons. H&r block   The following is a list of related persons. H&r block Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. H&r block ), and lineal descendants (children, grandchildren, etc. H&r block ). H&r block An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. H&r block Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. H&r block A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. H&r block A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. H&r block Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. H&r block A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family. H&r block A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. H&r block Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. H&r block Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. H&r block An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. H&r block Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. H&r block A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. H&r block Partnership interests. H&r block   The nondeductible loss rule does not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or (13) above. H&r block Controlled groups. H&r block   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. H&r block   For more information, see section 267(f) of the Internal Revenue Code. H&r block Ownership of stock or partnership interests. H&r block   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership for a loss on a sale or exchange, the following rules apply. H&r block Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. H&r block (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. H&r block ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. H&r block Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. H&r block An individual owning (other than by applying (2)) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. H&r block For purposes of applying (1), (2), or (3), stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. H&r block But stock or a partnership interest constructively owned by an individual under (2) or (3) is not treated as owned by the individual for reapplying either (2) or (3) to make another person the constructive owner of that stock or partnership interest. H&r block Indirect transactions. H&r block   You cannot deduct your loss on the sale of stock through your broker if under a prearranged plan a related person or entity buys the same stock you had owned. H&r block This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. H&r block Property received from a related person. H&r block   If, in a purchase or exchange, you received property from a related person who had a loss that was not allowable and you later sell or exchange the property at a gain, you recognize the gain only to the extent it is more than the loss previously disallowed to the related person. H&r block This rule applies only to the original transferee. H&r block Example 1. H&r block Your brother sold stock to you for $7,600. H&r block His cost basis was $10,000. H&r block His loss of $2,400 was not deductible. H&r block You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). H&r block Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. H&r block Example 2. H&r block Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. H&r block Your recognized loss is only $700 ($7,600 − $6,900). H&r block You cannot deduct the loss not allowed to your brother. H&r block Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. H&r block Sale of a Business The sale of a business usually is not a sale of one asset. H&r block Instead, all the assets of the business are sold. H&r block Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. H&r block A business usually has many assets. H&r block When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. H&r block The gain or loss on each asset is figured separately. H&r block The sale of capital assets results in capital gain or loss. H&r block The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction (discussed in chapter 3). H&r block The sale of inventory results in ordinary income or loss. H&r block Partnership interests. H&r block   An interest in a partnership or joint venture is treated as a capital asset when sold. H&r block The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. H&r block For more information, see Disposition of Partner's Interest in Publication 541. H&r block Corporation interests. H&r block   Your interest in a corporation is represented by stock certificates. H&r block When you sell these certificates, you usually realize capital gain or loss. H&r block For information on the sale of stock, see chapter 4 in Publication 550. H&r block Corporate liquidations. H&r block   Corporate liquidations of property generally are treated as a sale or exchange. H&r block Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. H&r block Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. H&r block   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. H&r block For more information, see section 332 of the Internal Revenue Code and the related regulations. H&r block Allocation of consideration paid for a business. H&r block   The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. H&r block Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method (explained later) to allocate the consideration to each business asset transferred. H&r block This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. H&r block It also determines the buyer's basis in the business assets. H&r block Consideration. H&r block   The buyer's consideration is the cost of the assets acquired. H&r block The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. H&r block Residual method. H&r block   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. H&r block This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b) of the Internal Revenue Code. H&r block Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. H&r block   A group of assets constitutes a trade or business if either of the following applies. H&r block Goodwill or going concern value could, under any circumstances, attach to them. H&r block The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. H&r block   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). H&r block The consideration remaining after this reduction must be allocated among the various business assets in a certain order. H&r block See Classes of assets next for the complete order. H&r block Classes of assets. H&r block   The following definitions are the classifications for deemed or actual asset acquisitions. H&r block Allocate the consideration among the assets in the following order. H&r block The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. H&r block The amount you can allocate to an asset also is subject to any applicable limits under the Internal Revenue Code or general principles of tax law. H&r block Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). H&r block Class II assets are certificates of deposit, U. H&r block S. H&r block Government securities, foreign currency, and actively traded personal property, including stock and securities. H&r block Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. H&r block However, see section 1. H&r block 338-6(b)(2)(iii) of the regulations for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. H&r block Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. H&r block Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. H&r block    Note. H&r block Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. H&r block Class VI assets are section 197 intangibles (other than goodwill and going concern value). H&r block Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). H&r block   If an asset described in one of the classifications described above can be included in more than one class, include it in the lower numbered class. H&r block For example, if an asset is described in both Class II and Class IV, choose Class II. H&r block Example. H&r block The total paid in the sale of the assets of Company SKB is $21,000. H&r block No cash or deposit accounts or similar accounts were sold. H&r block The company's U. H&r block S. H&r block Government securities sold had a fair market value of $3,200. H&r block The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. H&r block Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. H&r block S. H&r block Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. H&r block Agreement. H&r block   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. H&r block This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. H&r block Reporting requirement. H&r block   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. H&r block Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. H&r block Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. H&r block See the Instructions for Form 8594. H&r block Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. H&r block It includes such items as patents, copyrights, and the goodwill value of a business. H&r block Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. H&r block The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. H&r block See chapter 8 of Publication 535, Business Expenses, for information on amortizable intangible property and chapter 1 of Publication 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. H&r block Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. H&r block The following discussions explain special rules that apply to certain dispositions of intangible property. H&r block Section 197 Intangibles Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. H&r block They include the following assets. H&r block Goodwill. H&r block Going concern value. H&r block Workforce in place. H&r block Business books and records, operating systems, and other information bases. H&r block Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. H&r block Customer-based intangibles. H&r block Supplier-based intangibles. H&r block Licenses, permits, and other rights granted by a governmental unit. H&r block Covenants not to compete entered into in connection with the acquisition of a business. H&r block Franchises, trademarks, and trade names. H&r block See chapter 8 of Publication 535 for a description of each intangible. H&r block Dispositions. H&r block   You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. H&r block Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. H&r block If you retain more than one section 197 intangible, increase each intangible's adjusted basis. H&r block Figure the increase by multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible's adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of all retained intangibles on the date of the loss. H&r block   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. H&r block For example, a corporation cannot deduct a loss on the sale of a section 197 intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in the same transaction as the intangible sold. H&r block Covenant not to compete. H&r block   A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. H&r block Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business. H&r block Anti-churning rules. H&r block   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. H&r block However, these rules do not apply to part of the basis of property acquired by certain related persons if the transferor elects to do both the following. H&r block Recognize gain on the transfer of the property. H&r block Pay income tax on the gain at the highest tax rate. H&r block   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. H&r block But each partner or shareholder must pay the tax on his or her share of gain. H&r block   To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. H&r block You must file the tax return by the due date (including extensions). H&r block You must also notify the transferee of the election in writing by the due date of the return. H&r block   If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). H&r block Attach the statement to the amended return and write “Filed pursuant to section 301. H&r block 9100-2” at the top of the statement. H&r block File the amended return at the same address the original return was filed. H&r block For more information about making the election, see Regulations section 1. H&r block 197-2(h)(9). H&r block For information about reporting the tax on your income tax return, see the Instructions for Form 4797. H&r block Patents The transfer of a patent by an individual is treated as a sale or exchange of a capital asset held longer than 1 year. H&r block This applies even if the payments for the patent are made periodically during the transferee's use or are contingent on the productivity, use, or disposition of the patent. H&r block For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. H&r block This treatment applies to your transfer of a patent if you meet all the following conditions. H&r block You are the holder of the patent. H&r block You transfer the patent other than by gift, inheritance, or devise. H&r block You transfer all substantial rights to the patent or an undivided interest in all such rights. H&r block You do not transfer the patent to a related person. H&r block Holder. H&r block   You are the holder of a patent if you are either of the following. H&r block The individual whose effort created the patent property and who qualifies as the original and first inventor. H&r block The individual who bought an interest in the patent from the inventor before the invention was tested and operated successfully under operating conditions and who is neither related to, nor the employer of, the inventor. H&r block All substantial rights. H&r block   All substantial rights to patent property are all rights that have value when they are transferred. H&r block A security interest (such as a lien), or a reservation calling for forfeiture for nonperformance, is not treated as a substantial right for these rules and may be kept by you as the holder of the patent. H&r block   All substantial rights to a patent are not transferred if any of the following apply to the transfer. H&r block The rights are limited geographically within a country. H&r block The rights are limited to a period less than the remaining life of the patent. H&r block The rights are limited to fields of use within trades or industries and are less than all the rights that exist and have value at the time of the transfer. H&r block The rights are less than all the claims or inventions covered by the patent that exist and have value at the time of the transfer. H&r block Related persons. H&r block   This tax treatment does not apply if the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes. H&r block Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. H&r block Substitute “25% or more” ownership for “more than 50%. H&r block ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. H&r block For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. H&r block The brother-sister exception does not apply because the trust relationship is independent of family status. H&r block Franchise, Trademark, or Trade Name If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive generally is treated as an amount realized from the sale of a noncapital asset. H&r block A franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services, or facilities within a specified area. H&r block Significant power, right, or continuing interest. H&r block   If you keep any significant power, right, or continuing interest in the subject matter of a franchise, trademark, or trade name that you transfer or renew, the amount you receive is ordinary royalty income rather than an amount realized from a sale or exchange. H&r block   A significant power, right, or continuing interest in a franchise, trademark, or trade name includes, but is not limited to, the following rights in the transferred interest. H&r block A right to disapprove any assignment of the interest, or any part of it. H&r block A right to end the agreement at will. H&r block A right to set standards of quality for products used or sold, or for services provided, and for the equipment and facilities used to promote such products or services. H&r block A right to make the recipient sell or advertise only your products or services. H&r block A right to make the recipient buy most supplies and equipment from you. H&r block A right to receive payments based on the productivity, use, or disposition of the transferred item of interest if those payments are a substantial part of the transfer agreement. H&r block Subdivision of Land If you own a tract of land and, to sell or exchange it, you subdivide it into individual lots or parcels, the gain normally is ordinary income. H&r block However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. H&r block See section 1237 of the Internal Revenue Code. H&r block Timber Standing timber held as investment property is a capital asset. H&r block Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. H&r block If you held the timber primarily for sale to customers, it is not a capital asset. H&r block Gain or loss on its sale is ordinary business income or loss. H&r block It is reported in the gross receipts or sales and cost of goods sold items of your return. H&r block 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. H&r block These sales constitute a very minor part of their farm businesses. H&r block In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. H&r block , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. H&r block Different rules apply if you owned the timber longer than 1 year and elect to either: Treat timber cutting as a sale or exchange, or Enter into a cutting contract. H&r block Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. H&r block This is true whether the timber is cut under contract or whether you cut it yourself. H&r block Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. H&r block See chapter 3. H&r block Gain or loss is reported on Form 4797. H&r block Christmas trees. H&r block   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. H&r block They qualify for both rules discussed below. H&r block Election to treat cutting as a sale or exchange. H&r block   Under the general rule, the cutting of timber results in no gain or loss. H&r block It is not until a sale or exchange occurs that gain or loss is realized. H&r block 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 the timber is cut. H&r block 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. H&r block Any later sale results in ordinary business income or loss. H&r block See Example, later. H&r block   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 for use in your trade or business. H&r block Making the election. H&r block   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 the gain or loss. H&r block You do not have to make the election in the first year you cut timber. H&r block You can make it in any year to which the election would apply. H&r block If the timber is partnership property, the election is made on the partnership return. H&r block This election cannot be made on an amended return. H&r block   Once you have made the election, it remains in effect for all later years unless you cancel it. H&r block   If you previously elected to treat the cutting of timber as a sale or exchange, you may revoke this election without the consent of the IRS. H&r block The prior election (and revocation) is disregarded for purposes of making a subsequent election. H&r block See Form T (Timber), Forest Activities Schedule, for more information. H&r block Gain or loss. H&r block   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its fair market value on the first day of your tax year in which it is cut. H&r block   Your adjusted basis for depletion of cut timber is based on the number of units (feet board measure, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. H&r block 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 of the Internal Revenue Code and the related regulations. H&r block   Timber depletion is discussed in chapter 9 of Publication 535. H&r block Example. H&r block In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. H&r block It had an adjusted basis for depletion of $40 per MBF. H&r block You are a calendar year taxpayer. H&r block On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. H&r block It was cut in April for sale. H&r block On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. H&r block You report the difference between the fair market value and your adjusted basis for depletion as a gain. H&r block This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as capital gain or as ordinary gain. H&r block You figure your gain as follows. H&r block FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000 The fair market value 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. H&r block Outright sales of timber. H&r block   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 below). H&r block 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 below). H&r block Cutting contract. H&r block   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. H&r block You are the owner of the timber. H&r block You held the timber longer than 1 year before its disposal. H&r block You kept an economic interest in the timber. H&r block   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. H&r block   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. H&r block Include this amount on Form 4797 along with your other section 1231 gains or losses to figure whether it is treated as capital or ordinary gain or loss. H&r block Date of disposal. H&r block   The date of disposal is the date the timber is cut. H&r block 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. H&r block   This election applies only to figure the holding period of the timber. H&r block It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). H&r block   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. H&r block The statement must identify the advance payments subject to the election and the contract under which they were made. H&r block   If you timely filed your return for the year you received payment without making the election, you still can make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). H&r block Attach the statement to the amended return and write “Filed pursuant to section 301. H&r block 9100-2” at the top of the statement. H&r block File the amended return at the same address the original return was filed. H&r block Owner. H&r block   The owner of timber is any person who owns an interest in it, including a sublessor and the holder of a contract to cut the timber. H&r block 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. H&r block Tree stumps. H&r block   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. H&r block Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. H&r block However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. H&r block Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. H&r block   See Form T (Timber) and its separate instructions for more information about dispositions of timber. H&r block Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. H&r block , are capital assets except when they are held for sale by a dealer. H&r block Any gain or loss from their sale or exchange generally is a capital gain or loss. H&r block If you are a dealer, the amount received from the sale is ordinary business income. H&r block Coal and Iron Ore You must treat the disposal of coal (including lignite) or iron ore mined in the United States as a section 1231 transaction if both the following apply to you. H&r block You owned the coal or iron ore longer than 1 year before its disposal. H&r block You kept an economic interest in the coal or iron ore. H&r block For this rule, the date the coal or iron ore is mined is considered the date of its disposal. H&r block Your gain or loss is the difference between the amount realized from disposal of the coal or iron ore and the adjusted basis you use to figure cost depletion (increased by certain expenses not allowed as deductions for the tax year). H&r block This amount is included on Form 4797 along with your other section 1231 gains and losses. H&r block You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. H&r block If you own only an option to buy the coal in place, you do not qualify as an owner. H&r block In addition, this gain or loss treatment does not apply to income realized by an owner who is a co-adventurer, partner, or principal in the mining of coal or iron ore. H&r block The expenses of making and administering the contract under which the coal or iron ore was disposed of and the expenses of preserving the economic interest kept under the contract are not allowed as deductions in figuring taxable income. H&r block Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. H&r block If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. H&r block Special rule. H&r block   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. H&r block A related person whose relationship to you would result in the disallowance of a loss (see Nondeductible Loss under Sales and Exchanges Between Related Persons, earlier). H&r block An individual, trust, estate, partnership, association, company, or corporation owned or controlled directly or indirectly by the same interests that own or control your business. H&r block Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. H&r block This applies if substantially all your expected return is attributable to the time value of your net investment (like interest on a loan) and the transaction is any of the following. H&r block An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). H&r block A transaction in which you acquire property and, at or about the same time, you contract to sell the same or substantially identical property at a specified price. H&r block Any other transaction that is marketed and sold as producing capital gain from a transaction in which substantially all of your expected return is due to the time value of your net investment. H&r block For more information, see chapter 4 of Publication 550. H&r block Prev  Up  Next   Home   More Online Publications