504 MODULE 34 TAXES: TRANSACTIONS IN PROPERTY

5. Section 291 Recapture

a. The ordinary income element on the disposition of Sec. 1250 property by corporations is
in-
creased by 20% of the additional amount that would have been ordinary income if the property
had instead
EXAMPLE:been Sec. 1245
Assuming property
the same facts as or Sec.
in the 1245
above recovery
example exceptproperty.'
that the building was sold by Corporation X,
the computation of gain would be
Total gain ($350,000 - $200,000) $150,000
Post-1969 additional depreciation recaptured as ordinary income . (30,000)*
Additional ordinary income-20% of $70,000 (the additional amount that
would have been ordinary income if the property were Sec. 1245 property) (]4.000)*
Remainder is Sec. 1231 gain $l.fJ.Q,QQQ
* All $44,000 ($30,000 + $14,000) of recapture is referred to as Sec. 1250 ordinary income.
p. • Summary of Gains and Losses on Business Property. The treatment of gains and losses (other than
personal casualty and theft) on property held for more than one year is summarized in the following
four steps (also enumerated on flowchart at end of this section):

a. Separate all recognized gains and losses into four

categories
(1) Ordinary gain and loss
(2) Sec. 1231 casualty and theft gains and losses
(3) Sec. 1231 gains and losses other than by casualty or theft
(4) Gains and losses on capital assets (other than by casualty or theft)
b. Any
NOTE: gain(3)(casualty
(2) and or other) classifications
are only "temporary on Sec. 1231 andproperty is treated
all gains and as ultimately
losses will ordinaryreceive
income to extent
ordinary of Sec.
or capi-
tal treatment.
c. 1245, 1250, and 291 depreciation recapture.

After depreciation recapture, any remaining Sec. 1231 casualty. and theft gains and losses on busi-
ness property are netted.

(1) If losses exceed gains-the losses and gains receive ordinary treatment
(2) If gains exceed losses-the net gain is combined with other Sec. 1231 gains and losses in d.
below

d. After recapture, any remaining Sec. 1231 gains and losses (other than by casualty or theft), are
combined with any net casualty or theft gain from c. above.

(l) Iflosses exceed gains-the losses and gains receive ordinary treatment
$
(2) If gains exceed losses-the net gain receives LTCG treatment (except ordinary income treat- (500)
ment to extent of nonrecaptured net Sec. 1231 losses for the five most recent tax years) (1,000
EXAMPLE: Taxpayer incurred the following transactions during the current taxable year: )
(2;000
Loss on condemnation of land used in business held fifteen months )
Loss on sale of machinery used in business held two months

Bad debt loss on loan made three years ago to friend

Gain from insurance reimbursement for tornado damage to business property held
ten years Sec. 1231 Other Capital 3,000
. Loss on sale of business equipment held three
Ordinary years
Sec. 1231 S-T (4,000)
Gain on sale. of land
$(1,000) heldfour years and used in business
Casualty $(2,000)* 5,000

-
treated as follows: Note$ that
The gains and losses would be$3,000 (500)the loss on machinery is ordinary because it was
not held more than one year. (4,000)
5,000
_ 3.000 $3.500
$!LQf2QJ $3500 $~
$3.500
* A nonbusiness bad debt is always treated as a STCL.