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MODULE 34 TAXES: TRANSACTIONS IN PROPERTY 517

A.4.h. Involuntary Conversions the number of shares sold. Miller purchased 100
shares of
23. (d) The requirement is to determine the end of the
Maples stock for $10,000 and sold the stock on
replacement period for nonrecognition of gain following the
January 8,
condemnation of real property. For a condemnation of real
2009, for $7,000, resulting in a loss of $3,000.
property held for productive use in a trade or business or for
However,
investment, the replacement period ends three years after the
only half of the loss can be deducted by Miller
close of the taxable year in which the gain is first realized.
because on
Since the gain was realized in 2009, the replacement period
December 24,2008 (within thirty days before
ends December 31,2012.
the January 8,
2009 sale), Miller purchased an additional 50
A.4.c. Sale or Exchange of Residence shares of Ma-
ples stock. Since only $1,500 of the loss can be
24. (c) The requirement is to determine the amount of recognized,
gain from the sale of the former residence that is recognized the $1,500 of loss not recognized is added to the
on Davis' 2009 return. An individual may exclude from basis of
income up to $250,000 of gain that is realized on the sale or Miller's remaining 50 shares resulting in a basis
exchange of a residence, if the individual owned and occu- of $4,000 +
pied the residence as a principal residence for an aggregate $1,500 = $5,500.
of at least two of the five years preceding the sale or ex-
change. Davis' former residence cost $65,000 and he had 28. (a) The requirement is to determine the
made improvements costing $5,000, resulting in a basis of amount of
$70,000. Since Davis sold his former residence for loss from the sale of Core stock that is
$380,000 and paid a real tor commission of $20,000, the net deductible on Smith's
amount realized from the sale was $360,000. Thus, Davis. 2008 and 2009 income tax returns. No loss can
realized a gain of $360,000 - $70,000 = $290,000. Since be deducted
Davis qualifies to exclude $250,000 of the gain from in- on the sale of stock if substantially identical
come; the remaining $40,000 of gain is recognized and in- stock is pur-
cluded in Davis' income for 2009. chased within thirty days before or after the
sale. Any loss
25. (a) The requirement is to determine the amount of that is not deductible because of this rule is
gain to be recognized on the Orans' 2009 joint return from added to the
the sale of their residence. An individual may exclude from basis of the new stock. In this case, Smith
income up to $250,000 of gain that is realized on the sale or purchased 100
exchange ora residence, if the individual owned and occu- shares of Core stock for $15,000 and sold. the
pied the residence as a principal residence for an aggregate stock on Janu-
of at least two of the five years preceding the sale or ex- ary 3, 2009, for $13,000, resulting in a loss of
change. The amount of excludable gain is increased to $2,000.
$500,000 for married individuals filing jointly if either However, the loss cannot be deducted by Smith
spouse meets the ownership requirement, and both spouses because on
meet the use requirement. Here, the Orans realized a gain of December 30,2008 (within thirty days prior to
$760,000 - $170,000 = $590,000, and qualify to exclude the Janu-
$500,000 of the gain from income. The remaining $90,000
of gain is recognized and taxed to the Orans for 2009. ary 3, 2009 sale), Smith purchased an additional
100 shares
26. (b) The requirement is to determine the maximum of Core stock. Smith's disallowed loss of $2,000
exclusion of gain on the sale of Ryan' s principal residence. is added to
An individual may exclude from income up to $250,000 of the $13,000 cost of the 100 Core shares
gain that is realized on the sale or exchange of a residence, if acquired on Decem-
the individual owned and occupied the residence as a princi- ber 30 resulting in a tax basis of $15,000 for
pal residence for an aggregate of at least two of the five those shares.
years preceding the sale or exchange. Since Ryan meets the
ownership and use requirements, and realized a gain of 29. (c) The purchase of substantially identical
$400,000 - $180,000 = $220,000, all of Ryan's gain will be stock
excluded from his gross income. within thirty days of the sale of stock at a loss
is known as a
wash sale. The $800 loss incurred in the wash
A.S. Sales and Exchanges of Securities , sale ($5,000
basis less $4,200 amount realized) is
27. (b) The requirement is to determine Miller's recog- disallowed. The basis
nized loss and the basis for her remaining fifty shares of
of the replacement (substantially identical)
Maples Inc. stock. No loss can be deducted on the sale of
stock is its cost
stock if substantially identical stock is purchased within
($3,600) plus the disallowed wash sale loss
thirty days before or after the sale. Any loss that is not de-
($800). The
ductible because of this rule is added to the basis of the new
holding period of the replacement stock
stock. If the taxpayer acquires less than the number of
includes the holding
shares sold, the amount of loss that cannot be recognized is
period of the wash sale stock. The amount
determined by the ratio of the number of shares acquired to
realized ($6,000)
less the basis ($4,400) results in a long-term
gain of $1,600.

30. (c) Worthless securities generally receive

capital
loss treatment. However, if the loss is incurred
by a corpo-
ration on its investment in an affiliated
corporation (80% or
more ownership), the loss is treated as an
ordinary loss.

A.6. Losses on Deposits in Insolvent Financial

Institu-
tions
31. (d) A loss resulting from a nonbusiness deposit in an
insolvent financial institution is generally treated as a non-
business bad debt deductible as a short-term capital loss.
However, subject to certain limitations, an individual may
elect to treat the loss as a casualty loss or as a miscellaneous
itemized deduction.

A.7. Losses, Expenses, and Interest between Related

Taxpayers
32. (a) The requirement is to determine the amount of
the $10,000 loss that Conner can deduct from the sale of
stock to his daughter.Alice. Losses are disallowed on sales
or exchanges' of property between related taxpayers, includ-
ing members of a family. Por this purpose, the termfamily
includes an individual's spouse, brothers, sisters, ancestors,
and lineal descendants (e.g., children, grandchildren, etc.).
Since Conner sold the stock to his daughter, no loss can be
deducted.

33. (a) The requirement is to determine the recognized

gain or loss on Alice' s sale of the stock that she had pur-
chased from her father. Losses are disallowed on sales or

line depreciation was used, there is no recapture under

Sec. 1250. However, Sec. 291 requires that the amount of
ordinary income on the disposition of Sec. 1250 property by
corporations be increased by 20% of the additional amount
that would have been ordinary income if the property had
instead been Sec. 1245 property. If the building had been
Sec. 1245 property theamount of recapture would have been
$30,000 ($200,000 - $170,000). Thus, the Sec. 291 ordi-
nary income is $30,000 x 20% = $6,000. The remaining
$44,000 is Sec. 1231 gain.
61. (b) The requirement is to determine McEwing Cor-
poration's taxable income given book income plus addi-
tional information regarding items that were included in
book income. The loss on sale of the building ($7,000) and
gain on sale ofthe land ($16,000) are Sec. 1231 gains and
losses. The resulting Sec. 1231 net gain of $9,000 is then
treated as L TCG and will be offset against the L TCL of '
$8,000 resulting from the sale of investments. Since these
items have already been included in book income, McEw-
ing's taxable income is the same as its book income,

$120,000. '
62. (a) The realized gain resulting from the involuntary
conversion ($125,000 insurance proceeds - $86,000 adjusted
basis = $39,000) is recognized only to the extent that the
insurance proceeds are not reinvested in similar property
($125,000 - $110,000 = $15,000). Since the machinery was
Sec. 1245 property, the recognized gain of $15,000 is re-
captured as ordinary income to the extent of the $14,000 of
depreciation previously deducted. The remaining $1,000 is
Sec. 1231 gain.