HOMEWORK WEEK 4

1. T, a single taxpayer, has a salary of $200,000 in the current year. T also has
the following transactions all involving the sale of capital assets: (1) a gain
of $15,000 on a “collectible” held for 2 years; and (2) a gain of $20,000 on
stock held for 15 months.
(a) Determine the amount of T’s net capital gain.

Long-Term Capital Gain on collectible $15,000

Long-Term Capital Gain on Stock $20,000
NET LONG-TERM CAPITAL GAIN/ LOSS $35,000
Short-Term Capital Gain $0
Short-Term Capital Loss $0
NET SHORT-TERM CAPITAL GAIN/LOSS $0
Net Long-Term Capital Gain $35,000
Net Short-Term Capital Loss ($0)
NET CAPITAL GAIN $ 35000

(b) At what rate will the components of T’s net capital gain be taxed?
TAX INCOME TAX
RATE
28% $15,000 $ 4,200
15% $20,000 $ 3,000
TOTAL $7,200

(c) Assuming there is a flat 30% tax on ordinary income and disregarding
any deductions (including the standard deduction and personal
exemption), what is T’s tax liability in the current year?
TAX RATE INCOME TAX

28% $15,000 4,200

15% $20,000 3,000

30% 200,000 60,000

TOTAL 67,200
2. Taxpayer, who is in the highest federal tax bracket in the current year, has a
$5,000 gain from a collectible and a $5,000 gain from stock, both held long-
term.
(a) What is Taxpayer’s net capital gain and how is it taxed if Taxpayer also
has a $5,000 loss from a collectible held long-term?
Long-Term Capital Gain on collectible $5,000
Long-Term Capital Gain on Stock $5,000
Long-Term Capital Loss on collectible ($5,000)
NET LONG-TERM CAPITAL GAIN/LOSS $5,000
Short-Term Capital Gain $0
Short-Term Capital Loss ($0)
NET SHORT-TERM CAPITAL GAIN/ LOSS ($0)
Net Long-Term Capital Gain $5,000
Net Short-Term Capital Loss ($0)
NET CAPITAL GAIN $ 5000
Rate 20%
Tax Liability $1,000

(b) What results in (a), above, if instead Taxpayer’s $5,000 loss is from stock
held long-term?
Long-Term Capital Gain on collectible $5,000
Long-Term Capital Gain on Stock $5,000
Long-Term Capital loss on Stock $5,000
NET LONG-TERM CAPITAL GAIN /LOSS $5,000
Short-Term Capital Gain $0
Short-Term Capital Loss ($0)
NET SHORT-TERM CAPITAL GAIN/ LOSS ($0)
Net Long-Term Capital Gain $5,000
Net Short-Term Capital Loss ($0)
NET CAPITAL GAIN $ 5000
Rate 28%
Tax Liability $1,400

(c) What results in (a), above, if instead Taxpayer’s $5,000 loss is from stock
held for 9 months rather than from the collectible?

Long-Term Capital Gain on collectible $5,000

Long-Term Capital Gain on Stock $5,000
 NET LONG-TERM CAPITAL GAIN/LOSS $10,000
Short-Term Capital Gain $0
Short-Term Capital Loss on stock $5,000
NET SHORT-TERM CAPITALGAIN/ LOSS ($5,000
Net Long-Term Capital Gain $10,000
Net Short-Term Capital Loss $ 5,000
NET CAPITAL GAIN $ 5000
Rate 20%
Tax Liability $1,000

(d) What is Taxpayer’s net capital gain and how is it taxed if Taxpayer has a
$5,000 gain from a collectible, a $5,000 unrecaptured § 1250 gain, a
$5,000 gain from stock, and a $10,000 loss from stock, all held long-
term?

Long-Term Capital Gain on collectible $5,000

Long-Term Capital Gain on Stock $5,000
Long-Term Capital Gain § 1250 $5,000
Long-Term Capital Loss on Stock ($10,000)
NET LONG-TERM CAPITAL GAIN/LOSS $5,000
Short-Term Capital Gain $0
Short-Term Capital Loss ($0)
NET SHORT-TERM CAPITAL GAIN/ $0
LOSS
Net Long-Term Capital Gain $5,000
Net Short-Term Capital Loss ($0)
NET CAPITAL GAIN $ 5000
Rate 25%
Tax Liability $1,250

3. Landlord L owns two contiguous parcels of land. L leases both parcels to

Tenant T for $1,000 per month per parcel or a total of $24,000 per year; the
rent is payable at the end of each year. The lease is for a 10 year period.
Upon the following events, which occur more than one year after the lease is
signed, what are the results:
(a) To L if L sells the right to the rents on both parcels, prior to any rental
payments being due or paid to a third party for $200,000?
 Where the Landlord sells their right to the rents prior to any rental
payments to third party, then the amount received would amount to
ordinary income. This principle was clearly illustrated in Hort v
Commissioner 313 U.S. 28, 61 S.Ct. 757.

Therefore, L would realize $200,000 would be ordinary income.

(b) To L if T pays L $20,000 to cancel the leases on both parcels?

The amount received by petitioner for cancellation of the lease must be

included in his gross income in its entirety. Section 22(a), copied in the
margin,1 expressly defines gross income to include “gains, profits, and
income derived from * * * rent, * * * or gains or profits and income
derived from any source whatever.” Plainly this definition reached the
rent paid prior to cancellation just as it would have embraced subsequent
payments if the lease had never been canceled. It would have included a
prepayment of the discounted value of unmatured rental payments
whether received at the inception of the lease or at any time thereafter.
See: Hort v Commissioner 313 U.S. 28, 61 S.Ct. 757.

Therefore, the lease cancellation payment of $20,000 would form part of

the L’s ordinary income.
(c) ….

(d) To T, if after subleasing one of the parcels of land to S for $1200 per
month for a five year period, S pays T $10,000 for all T’s rights in the
lease on that parcel and L releases T from the lease and accepts S as the
new tenant?

In Metropolitan Bldg. Co. v. Commissioner 282 F.2d 592. The Ninth

Circuit Court held that: In the case before us, the sums paid to
Metropolitan were not simply a discharge of Olympic’s obligation to pay
rental. They were paid for the purchase of Metropolitan’s entire leasehold
interest. The case is not one of a liquidation of a right to future income as
is Hort, but rather it is one of a disposition of income-producing property
itself. The giving up of a lease by a tenant fits the legal requirements of a
sale or exchange under Internal Revenue Code 1939, 117(j) 26 U.S.C.A.
§ 117(j) and a gain realized by the tenant on such a transaction is capital
gain.
In line with the holding in the Metropolitan case, T realizes a Capital gain
upon partial disposition of his right to lease to the parcel of land.