WFT Ch17 Solutions

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3d Date: 15th April 2006 Time: 17:29 User ID: 40223
CHAPTER 17 PROPERTY TRANSACTIONS: SECTION 1231 AND RECAPTURE PROVISIONS SOLUTIONS TO PROBLEM MATERIALS
Question/ Problem 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Topic 1231 assets 1231 assets: application 1231 assets: losses 1231 assets: history 1231 assets: requirements to qualify 1231 assets: offsetting gains and losses Section 1231 netting and casualty loss Section 1231: realized versus recognized Section 1231: business use property condemnation Section 1231 netting: gains versus losses Property gains and adjusted gross income Section 1231 loss and 1245 recapture Section 1231 gain from disposition with 1245 depreciation recapture Section 1231 netting and depreciation recapture Section 1245 recapture and short-term holding period Section 1231 and 1245 property Section 1245 recapture and single purpose agricultural structure Residential real estate and 1250 recapture Unrecaptured 1250 gain Unrecaptured 1250 gain Unrecaptured 1250 gain Unrecaptured 1250 gain Unrecaptured 1250 gain Depreciation recapture and gifts Depreciation recapture and death 17-1
Status: Present Edition New New New New New New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged
Q/P in Prior Edition
7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Path: K:/TL-WFT-05-0802/Application/TL-WFT-05-0802-017_V1-SM.3d Date: 15th April 2006 Time: 17:29 User ID: 40223
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2007 Individual Volume/Solutions Manual Status: Present Edition Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Modified Modified Unchanged Unchanged Unchanged Unchanged Unchanged Modified Modified Unchanged Unchanged Unchanged New New Unchanged Unchanged Unchanged New New Unchanged Unchanged Modified Q/P in Prior Edition 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 47 48 49 52 54 53
Question/ Problem 26 27 28 29 30 *31 *32 33 *34 35 *36 *37 *38 *39 *40 *41 *42 43 44 45 46 47 48 49 50 51 *52 *53 *54 Research Problem 1 2 3 4 5 6 7
Topic Depreciation recapture for corporation: property distributions Related party transactions Reporting procedure: 1231 loss Reporting procedure: business land and 1231 gain Reporting procedure: 1231 lookback Section 1231: timber Section 1231 computation and farm assets Section 1231 nonpersonal use property casualty Section 1231 lookback Section 1231 gain and loss planning Section 1245 recapture Section 1245 recapture Section 1245 recapture and 1231 lookback Section 197 amortization and 1245 recapture Section 1231 loss, 1250 recapture, and unrecaptured 1250 gain Section 1231 gain and 1250 recapture Comprehensive 1231, 1245, and 1250 Section 1231 gain and unrecaptured 1250 gain Recapture and gifts Section 1245 and gifts Section 1245 and inheritance Section 1245 and charitable contributions Section 1245 and like-kind exchanges Section 1245 and property distributions Reporting procedure Reporting procedure Sections 1245 and 1231 gain and sales price allocation Cumulative Cumulative
Section 1245 recapture Section 1250 recapture Alternative tax rates Section 1245 recapture and 197 intangibles Internet activity Internet activity Internet activity
Unchanged Unchanged Unchanged New Unchanged Modified Unchanged
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*The solution to this problem is available on a transparency master.
Property Transactions: Section 1231 and Recapture Provisions CHECK FIGURES 31.a. 31.b. 31.c. 31.d. 2004 $0 recognized; 2005 $10,000 recognized gain; 2006 $32,000 recognized loss. 2005 1231; 2006 ordinary loss. 2005 $32,000 recognized ordinary loss. 2004 $0 recognized; 2005 $52,000 recognized 1231 loss, $1,000 recognized ordinary gain; 2006 no gain or loss. AGI $55,450. $13,000 net 1231 gain. 2005 $30,000 ordinary gain; 2006 $9,000 ordinary gain, $30,000 1231 gain treated as a long-term capital gain. Sell the 1231 gain asset this year and the 1231 loss asset next year. Rack $35,000 ordinary gain; forklift $7,000 1231 loss; bin $7,000 ordinary gain. $0. Rack $60,000 ordinary gain, $35,000 1231 gain; forklift $7,000 1231 loss; bin $7,000 ordinary gain. $23,000 capital gain and $5,000 ordinary income. Rack $5,000 ordinary gain; forklift $7,000 1231 loss; bin $3,000 1231 loss. $0 capital gain. $4,500 ordinary gain; $29,500 1231 gain. 40.a. 40.b. 41.a. 41.b. 42.b. 43.a. 45.a. 45.b. 46.a. 46.b. 47. 48. 49. 50. 51. 53. 54.
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32. 33. 34.
35. 36.a. 36.b. 37.a.
37.b. 38.a. 38.b. 39.
$41,032 cost recovery; $358,968 adjusted basis of building. $73,968 1231 loss. $0 1250 ordinary gain and $345,000 1231 gain. $400,000 1231 gain. AGI $461,108. $51,000 1231 gain. $3,000 adjusted basis at date of sale. $33,000 recognized gain; $8,000 ordinary income and $25,000 1231 gain. $17,000 adjusted basis at date of sale. $19,000 recognized gain; $5,500 ordinary income and $13,500 1231 gain. No recognized gain or loss; $34,000 charitable contribution. The entire $45,000 gain is ordinary income due to 1245 depreciation recapture. Brown has $4,500 1245 ordinary income; Emily has a $4,500 qualifying dividend. Section 1231 loss reported in Part I, line 2 of Form 4797. Ordinary gain not carried to Schedule D. AGI is $539,513; taxable income is $531,760; tax refund is $2,772. AGI is $159,800; taxable income is $126,586; tax refund is $638.
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2007 Individual Volume/Solutions Manual
DISCUSSION QUESTIONS 1. Involuntary conversions of nonpersonal use assets qualify for 1231 treatment. These conversions otherwise would not qualify for capital gain treatment because an involuntary conversion is not a sale or exchange. pp. 17-3, 17-6, and 17-7 Section 1231 treatment does not apply to all business property. The property must be held for the long-term holding period and be either depreciable property or real estate used in a trade or business. p. 17-3 If the disposition of depreciable business property results in a net loss, 1231 treats the loss as an ordinary loss rather than as a capital loss. p. 17-3 At the beginning of World War II, two developments in particular forced Congress to reexamine the situation regarding business assets. First, the sale of business assets at a gain was discouraged because the gain would be ordinary income. Gains were common because the war effort had inflated prices. Second, taxpayers who did not want to sell their assets often were required to do so because of government acquisitions through condemnation. p. 17-4 The taxpayer must address the following issues:
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2.
3. 4.
5.
Was the painting used in a trade or business? Was the painting depreciable (not held for sale in the ordinary course of the taxpayers business and not held for investment)?
If the answer to both questions is yes, the property is a 1231 asset because it has been held more than a year. p. 17-4 6. The vacant land would have to be a 1231 asset for the gain on the land to offset the 1231 loss. Consequently, the land would have to have been used in a trade or business and held more than 12 months rather than held for investment or personal use activity. pp. 17-3, 17-4, and 17-8 The tax issues that Sally must properly handle are:
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7.
Should the two casualty items be netted against one another? If the items are netted, what type of gain or loss results from the netting? How are the results of the netting integrated with Sallys other gains and losses (if any)? Should Sally postpone the gain by reinvesting in similar property?
pp. 17-8, 17-9, and Chapter 15 8. Section 1231 has no effect on whether or not realized gain or loss is recognized. Instead, 1231 merely dictates how such recognized gain or loss is classified (ordinary, capital, or 1231) under certain conditions. p. 17-8 Since the property was used in a trade or business and held more than a year, it was a 1231 asset. Disposition by condemnation (unlike disposition by casualty or theft) is not
9.
Property Transactions: Section 1231 and Recapture Provisions
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subject to any special netting rules. The loss is a 1231 loss initially. Personal use property condemnation gains and losses are not subject to the 1231 rules, but the property here was business use property. pp. 17-6 and 17-7 10. The factors that will influence whether any of the 2006 net 1231 amount is treated as long-term capital gain are:
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What is the amount of the 2003 net 1231 loss? What is the amount of the 2004 net 1231 gain, and after reducing the 2003 net 1231 loss by the 2004 net 1231 gain, does any of the 2003 net 1231 loss remain? If any of the 2003 net 1231 loss remains, what is the amount of the 2005 net 1231 gain, and after reducing the remaining 2003 net 1231 loss by the 2005 net 1231 gain, does any of the 2003 net 1231 loss remain? If any of the 2003 net 1231 loss remains, what is the amount of the 2006 net 1231 gain? After reducing the 2006 net 1231 gain by the remaining 2003 net 1231 loss, does any of the 2006 net 1231 gain remain?
pp. 17-8 and 17-9 11. In both Examples 4 and 6, the taxpayers adjusted gross income is $129,400 because there is no difference in the amount of gains and losses which are present. The $700 of nonrecaptured 1231 loss from 2005 is only used to recharacterize part of the 2006 net 1231 gain as ordinary gain. p. 17-8 If the taxpayer owns depreciable business equipment held for the long-term holding period, the equipment would have to be disposed of for less than its adjusted basis to generate a 1231 loss. Section 1245 depreciation recapture would not be applicable because there has to be a gain for there to be depreciation recapture. p. 17-12 The machine would have to be sold for more than the amount that was paid for it. p. 17-12 To properly handle this transaction, Sylvia must determine the following:
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12.
13. 14.
The tax status of the property ( 1231 asset, capital asset, or ordinary asset). The applicability of 1245 depreciation recapture. The outcome of the 1231 netting process.
Both assets are 1231 assets. Section 1245 depreciation recapture causes the entire gain of $2,510 ($40,000 $37,490) to be taxed as ordinary income since the selling price does not exceed the $100,000 original cost of the asset. Since the loss of $14,490 ($23,000 $37,490) on the other asset is the only 1231 gain or loss, there is a net loss of $14,490 that is treated as an ordinary loss. Consequently, Sylvia is partially correct, the $2,510 gain from one of the items does offset the $14,490 loss from the other item. However, these transactions are reported separately from her 2006 business income. The $11,980 net loss is deductible for adjusted gross income on her 2006 tax return. pp. 17-3, 17-8, and 17-12 15. Section 1245 depreciation recapture generally applies to 1231 assets; in this case depreciable equipment held more than one year. This asset was held one year or less; so it
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2007 Individual Volume/Solutions Manual was an ordinary asset rather than a 1231 asset. Since the asset is ordinary, the gain from disposition is also ordinary and 1245 does not apply. pp. 17-3 and 17-12
16.
The team should consider the following issues:

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The holding period of the contract. The amortization of the contract. The fact that the amortization is subject to 1245 depreciation recapture. Whether the gain exceeds this 1245 depreciation recapture. If the gain exceeds the 1245 depreciation recapture, then the excess gain is 1231 gain.
p. 17-13 17. 18. The gain is all 1245 depreciation recapture ordinary income because the gain is less than or, in this case, equal to the depreciation taken ($40,000). p. 17-13 The real estate would have to have been acquired before 1987 (ACRS property) and accelerated depreciation taken on it to be subject to the 1250 depreciation recapture rules. However, for 2006, there would be no 1250 depreciation recapture because the adjusted basis at the beginning of the tax year would be $0. p. 17-14 The maximum amount of unrecaptured 1250 gain is equal to the depreciation taken on the property. It will be less than this maximum amount if the 1231 gain is less than the depreciation taken. p. 17-17 Since the building was sold at a loss, there is no unrecaptured 1250 gain. p. 17-17 None of the gain is taxed as unrecaptured 1250 gain because there is a net 1231 loss for the year of $31,000 ($25,000 $56,000). p. 17-18 Abigails maximum unrecaptured 1250 gain is the amount of the depreciation she took on the real estate. If the $45,000 recognized gain is less than the depreciation taken, that would be the maximum. She would have no 1250 depreciation recapture because she acquired the real estate after 1986. Therefore, only straight-line depreciation was taken on the property. pp. 17-16 to 17-19 The maximum amount of the unrecaptured 1250 gain is the depreciation taken on real property sold at a recognized gain. When the depreciation taken on real estate is greater than the recognized gain, all of the gain is unrecaptured 1250 gain. Since there was only one 1231 transaction here, all of the net 1231 gain treated as long-term capital gain is unrecaptured 1250 gain. The short-term capital loss reduces the unrecaptured 1250 gain/long-term capital gain, but the net long-term capital gain is all subject to tax at the lower of the regular tax rate or 25%. p. 17-18 The 1245 depreciation recapture potential carries over to the donee. p. 17-19 The 1245 depreciation recapture potential does not carry over to the beneficiary. p. 17-19 The distribution of the truck is a taxable transaction for the corporation to the extent of the excess of the fair market value of the truck over the adjusted basis. All of the gain is 1245
19.
20. 21. 22.
23.
24. 25. 26.
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gain because the truck is a 1231 asset and the fair market value is less than the original cost. pp. 17-13 and 17-21 27. The distribution of the truck is a taxable transaction for the corporation to the extent of the excess of the fair market value of the truck over the adjusted basis. All of the gain is ordinary gain due to 1239 because the shareholder is a related taxpayer and will use the truck in a business. Therefore, the truck is depreciable by the shareholder and 1239 makes all the gain of the transferor ordinary gain. p. 17-21 The 1231 loss is entered in Part I, line 2. p. 17-26 The 1231 gain from the sale of land goes in Part I, line 2. It does not go in Part III because there was no depreciation on the land. p. 17-26 The 1231 lookback loss is entered in Part I, line 8. p. 17-26
28. 29. 30.
PROBLEMS 31. Since Sue-Jen elected to treat the cutting as a sale, the recognized gain and loss are calculated as follows: a. and b. 2004: 2005: $0 recognized gain or loss. A 1231 gain of $10,000 is recognized. The contract had been held for the long-term holding period when the timber was cut in November 2005. FMV at January 1, 2005 Adjusted basis 1231 gain recognized 2006: A loss of $32,000 is recognized. FMV at January 30, 2006 FMV at January 1, 2005 Ordinary loss recognized $ 110,000 (100,000) $ 10,000 $ 78,000 (110,000) ($ 32,000)
c. d.
The $32,000 ordinary loss would be recognized in 2005 if the sale occurred in 2005. 2004: 2005: $0 recognized gain or loss. A 1231 loss of $52,000 and an ordinary gain of $1,000 are recognized. FMV at January 1, 2005 Adjusted basis 1231 loss recognized FMV at sale in December 2005 FMV at January 1, 2005 Ordinary gain recognized No gain or loss realized or recognized. $ 48,000 (100,000) ($ 52,000) $ 49,000 (48,000) $ 1,000
2006:
pp. 17-3, 17-5, and Example 3
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32.
Cattle and horses must be held 24 months or more to qualify as 1231 assets. Since the cow was held only 15 months, it is an ordinary asset and the $3,000 loss ($15,000 sales price $18,000 adjusted basis) is an ordinary loss. The workhorse was held 66 months, so it is a 1231 asset. The $3,650 gain ($4,000 sales price $350 adjusted basis) is a 1231 gain. Since there is only a 1231 gain for the year, the net 1231 gain is $3,650 and that gain is treated as an ordinary gain because the $4,000 of prior nonrecaptured losses causes application of the 1231 lookback rule. None of the $3,650 net 1231 gain is treated as a long-term capital gain; so the $200 long-term capital loss is deductible for AGI. Section 1231 gain from sale of horse (treated as an ordinary gain) Long-term capital loss from corporate stock sale Ordinary loss from sale of milk cow Other adjusted gross income Adjusted gross income p. 17-6 and Concept Summary 17-1 $ 3,650 (200) (3,000) 55,000 $55,450
33.
Kwan has had two nonpersonal use property casualties. The $30,000 gain is netted against the $17,000 loss and results in a $13,000 net gain. The $13,000 net gain is treated as a 1231 gain. Since there are no other property transaction gains or losses, and because Kwan has no lookback losses, he has a $13,000 net 1231 gain for the year. That gain is treated as a long-term capital gain since both assets had been held more than 12 months when the flood occurred. p. 17-6 and Concept Summary 17-1 Hoffman, Smith, and Willis, CPAs 5191 Natorp Boulevard Mason, OH 45040 November 23, 2006 Mr. Kwan Lee 2367 Meridian Road Hannibal Point, MO 34901 Dear Mr. Lee: Thank you for the opportunity to discuss the tax effect of the two casualties you suffered this year. Both the painting and the vase were assets you were holding for investment. The painting casualty resulted in a $30,000 gain because it was insured. The vase casualty resulted in a $17,000 loss because it was not insured. The $30,000 gain is netted against the $17,000 loss and results in a $13,000 net gain. The $13,000 net gain is treated as a 1231 gain a special type of gain for tax purposes. Since there are no other property transaction gains or losses this year, and because you had no 1231 losses in prior years, the $13,000 net 1231 gain for the year is treated as a long-term capital gain. That gain is eligible for a tax rate of no more than 15%. If you have any questions concerning these transactions or other tax matters, please feel free to telephone me. Thank you. Sincerely, Sheila Dailey, CPA Partner p. 17-6
Property Transactions: Section 1231 and Recapture Provisions 34.
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Net 1231 gains must jump a final hurdle before being netted with capital transactions. The net 1231 gain must exceed the sum of nonrecaptured net 1231 losses recognized in the five most recent preceding years. The years 2001 through 2003 have a combined nonrecaptured net 1231 loss of $81,000. The $81,000 nonrecaptured 1231 loss is partially absorbed by the 2004 $42,000 1231 gain and the 2005 $30,000 1231 gain. Thus, $9,000 of the nonrecaptured 1231 loss remains for offset against the 2006 $39,000 1231 gain. Net Sec. 1231 Loss Subject to Recapture 20012003 2004 Remaining potential recapture 2005 Remaining potential recapture 2006 Totals pp. 17-8 to 17-10 ($81,000) 42,000 ($39,000) 30,000 ($ 9,000) 9,000 $ 0 Before Lookback: Current Year Net Sec. 1231 Gain $ 42,000 30,000 39,000 $111,000 Net Sec. 1231 Gain Treated as Long-Term Capital Gain $ 0 0 30,000 $30,000
Ordinary Income $42,000 30,000 9,000 $81,000
35.
Yoshida should sell the 1231 gain asset this year and the 1231 loss asset next year. This year, Yoshida would have $40,000 net 1231 gain; there would be no lookback nonrecaptured 1231 loss; the net 1231 gain would be treated as a long-term capital gain, and the $25,000 short-term capital loss carryover would be offset against this capital gain. For this year, Yoshida would have a $15,000 net long-term capital gain which would be taxed at a maximum rate of 15%. Next year, Yoshida could sell the 1231 loss asset; the $30,000 loss would generate a net 1231 loss, and that loss would be an ordinary loss deductible for AGI. By selling the 1231 gain asset the year before the 1231 loss asset, Yoshida avoids having the 1231 loss taint the 1231 gain, converting that gain into ordinary gain. pp. 17-8, 17-9, and Example 25 a. Gray has $42,000 ($35,000 + $7,000) of ordinary income due to 1245 recapture and $7,000 of 1231 loss. Asset Rack Forklift Bin Sold For $75,000 $5,000 $60,000 Less Adjusted Basis Gain or Loss $40,000 ($100,000 $60,000) $12,000 ($35,000 $23,000) $53,000 ($87,000 $34,000) $35,000 ($7,000) $7,000 Character All ordinary income due to 1245 recapture 1231 loss All ordinary income due to 1245 recapture
36.
b.
Since Gray does not have a net 1231 gain, none of the gains are treated as capital gains.
pp. 17-2 to 17-14
17-10 37. a.
2007 Individual Volume/Solutions Manual Green has $67,000 ($60,000 + $7,000) of ordinary income due to 1245 recapture and $28,000 ($35,000 $7,000) of net 1231 gain. Asset Rack Sold For $135,000 Less Adjusted Basis Gain or Loss $40,000 ($100,000 $60,000) $95,000 Character $60,000 ordinary income due to 1245 recapture; $35,000 1231 gain 1231 loss All ordinary income due to 1245 recapture
Forklift Bin
$5,000 $60,000
$12,000 ($35,000 $23,000) $53,000 ($87,000 $34,000)
($7,000) $7,000
b.
Green has a $28,000 net 1231 gain, but only $23,000 is treated as capital gain because the $5,000 of nonrecaptured prior years 1231 loss causes $5,000 of the current year net 1231 gain to be treated as ordinary income.
pp. 17-8 and 17-11 to 17-14 38. a. Magenta has $5,000 of ordinary income due to 1245 recapture and $10,000 of 1231 loss. Asset Rack Forklift Bin Sold For $55,000 $15,000 $60,000 Less Adjusted Basis Gain or Loss Character $50,000 ($110,000 $5,000 All ordinary income $60,000) due to 1245 recapture $22,000 ($45,000 ($7,000) 1231 loss $23,000) $63,000 ($97,000 ($3,000) 1231 loss $34,000)
b.
Since Magenta has a $10,000 net 1231 loss, there is no gain to be treated as capital gain. The $5,000 1245 depreciation recapture gain is treated as ordinary income and the $10,000 net 1231 loss is treated as an ordinary loss deduction for AGI.
pp. 17-11 to 17-14 39. The patent amortization is subject to 1245 recapture as ordinary income. The balance of the gain is 1231 gain. pp. 17-5 and 17-14 Selling price Cost Amortization (20 months $225) Adjusted basis Recognized gain 1245 ordinary gain 1231 gain $ 70,000 $40,500 (4,500) (36,000) $ 34,000 $ 4,500 $ 29,500
Property Transactions: Section 1231 and Recapture Provisions Hoffman, Smith, and Willis, CPAs 5191 Natorp Boulevard Mason, OH 45040 November 23, 2006 Mr. Siddim Sadatha, Controller Gray Manufacturing Company 6734 Grover Street Back Bay Harbor, ME 23890 Dear Mr. Sadatha:
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Thank you for the opportunity to respond to your question concerning the tax treatment of the gain from the disposition of the patent. As you know, amortization of $225 per month has been taken on this patent since it was acquired on December 1, 2004. That amortization totaled $4,500 when you disposed of the patent on July 30, 2006. The $4,500 is taxable as ordinary income because it is recaptured by 1245. The balance of the gain ($29,500) is a 1231 gain. That gain will be taxed as long-term capital gain as no other business property dispositions have occurred this year. If you have any questions concerning this transaction or other tax matters, please feel free to telephone me. Thank you. Sincerely, Rose Goodwin, CPA Partner p. 17-13 40. a. Store cost 2002 cost recovery rate 2003 cost recovery rate 2004 cost recovery rate 2005 cost recovery rate 2006 cost recovery rate (.02564 5.5/12) Total recovery rate Total cost recovery Adjusted basis ($400,000 $41,032) of building b. Selling price Adjusted basis ($358,968 + $100,000) Recognized loss $ 400,000 .01391 .02564 .02564 .02564 .01175 .10258 $ 41,032 $ 358,968 $ 385,000 (458,968) $ (73,968)
Since the store was real estate used in business, it is a 1231 asset. None of the loss is 1250 gain because only straight-line cost recovery was used and the property was sold for a loss. Therefore, all of the loss is 1231 loss, and there is no unrecaptured 1250 gain. pp. 17-15 to 17-18
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2007 Individual Volume/Solutions Manual The gain on the sale of the building is subject to 1250 depreciation recapture because it is residential rental real estate acquired after 1975 and before January 1, 1987, on which accelerated depreciation was taken. The gain from the sale is $345,000, $0 is ordinary income due to 1250, and the $345,000 balance of the gain is 1231 gain. Selling price of building Cost of building 19862005 depreciation (1.000 $350,000) 2006 depreciation Jan. 20, 2006 adjusted basis Gain on sale 19862005 straight-line depreciation ($350,000 1.0) 2006 straight-line depreciation Additional depreciation ($350,000 $350,000) = 1250 ordinary income Balance of gain = 1231 gain b. $345,000 $ 350,000 (350,000) (0) (0) $345,000 $ 350,000 0 (0) $345,000
The land is also a 1231 asset because it was part of the residential rental real estate. However, there is no 1250 recapture because it was not depreciated. The 1231 gain from the sale of the land is $400,000 ($500,000 selling price $100,000 adjusted basis). pp. 17-16 to 17-18 Land: Condemnation proceeds Allocable basis Realized and recognized 1231 loss Truck: Depreciation taken: $3,491 ($6,000 $2,509). Adjusted basis: $2,509. Realized gain: $3,500 $2,509 = $991. Recognized gain: $991 ordinary income under 1245. Rowing machine: Realized and recognized gain = Amount realized Adjusted basis of machine on date of sale = $3,900 $0 = $3,900. Section 1245 recapture = Amount of depreciation claimed ($5,200) or gain recognized ($3,900), whichever is less = $3,900. Apartment building: Realized gain = Amount realized Adjusted basis = $200,000 $124,783 = $75,217. Section 1231 gain recognized = $75,217. No 1250 recapture is recognized because the taxpayer used the straight-line method of depreciation. Of the $75,217 1231 gain, $25,217 is unrecaptured 1250 gain because the depreciation taken of $25,217 ($150,000 cost $124,783 basis) is less than the $75,217 recognized gain. Yacht: Personal casualty loss (without regard to the 10% of AGI limitation) = Fair market value at date of theft Insurance proceeds Floor = $20,000 $12,500 $100 = $7,400. $ 25,000 (40,000) ($ 15,000)
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a.
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Auto: Realized loss = Amount realized Adjusted basis = $9,600 $20,800 = $11,200. The loss relates to a personal use asset. Therefore, it is not recognized. Trampoline: $6,000 business casualty loss is deductible for AGI. The casualty loss is measured by the adjusted basis of the property at the time of the theft. There is no $100 or 10% of AGI floor for a business casualty. Recognized Gain/Loss ($15,000) 991 3,900 75,217 (7,400) 0 (6,000) Section 1245 Recapture $ 991 3,900 75,217 ($ 7,400) (6,000) $4,891 Ordinary income $6,000 Net business loss for AGI; No Net personal loss from AGI* $60,217 Gain: Receives LTCG treatment** Casualty and Theft Loss Section 1231 Gain ($15,000)
b.
Item Land Truck Rowing machine Building Yacht Auto Trampoline
Adjusted gross income computation: Other sources Ordinary income from depreciation recapture, as above Long-term capital gain, as above Business casualty loss, as above Adjusted gross income
$402,000 4,891 60,217 (6,000) $461,108
* None of the personal use activity property casualty loss is deductible from AGI because 10% of the $461,108 AGI is greater than the casualty loss of $7,400. ** Of the $60,217 1231 gain, $25,217 is unrecaptured 1250 gain because according to the 2005 Form 1040, Schedule D instructions, if the net 1231 gain is greater than the potential unrecaptured 1250 gain, all of the unrecaptured 1250 gain is in the 1231 gain that is carried from Form 4797 to line 11 of the 2005 Form 1040 Schedule D. Thus, the $60,217 1231 gain is comprised of $25,217 of unrecaptured 1250 gain and $35,000 of 5%/15% gain. References are to the 2005 tax forms because the 2006 forms were not yet available. pp. 17-6 to 17-9 and 17-11 to 17-18 43. a. If the property is residential real property, the gain is 1231 gain. Selling price Adjusted basis Recognized 1231 gain $89,000 (38,000) $51,000
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2007 Individual Volume/Solutions Manual Of the $51,000 1231 gain, $12,000 is unrecaptured 1250 gain because the $12,000 of depreciation taken is less than the $51,000 1231 gain. b. Hoffman, Smith, and Willis, CPAs 5191 Natorp Boulevard Mason, OH 45040 March 17, 2006 Ms. Cora Hassant 2345 Westridge Street #23 Homer, MT 67342 Dear Ms. Hassant: The purpose of this letter is to answer the tax question which we discussed last week. Below you will find the specific question restated and the answer to it. Question: What difference is there between the recapture rules for residential rental real estate acquired in 1986 as opposed to residential rental real estate acquired in 1987 and thereafter? Answer: Residential rental real estate acquired in 1986 was eligible for accelerated depreciation. If accelerated depreciation was used, the gain upon disposition of the property may be partially taxable as ordinary income due to a special tax rule called 1250 recapture. However, starting in 2006, there is no depreciation recapture since the adjusted basis is $0. Residential rental real estate acquired in 1987 (and later years) is not eligible for accelerated depreciation. Therefore, there is no depreciation recapture applicable to the gain from disposition of such property. All of the gain is potentially taxable as capital gain. Thank you for your inquiry. If we can be of any further service, please contact us. Sincerely, Walter Smith, CPA Tax Partner pp. 17-15 and 17-16
44.
Joanne has two alternatives for helping Susan:

(1)
Joanne could sell the equipment, but probably not to Susan since she could not afford it. Joanne would have a taxable ordinary gain of $50,000 [$85,000 sale price ($135,000 cost $100,000 depreciation)] due to depreciation recapture under 1245. After paying her tax of $17,500 ($50,000 35%), Joanne would have $67,500 ($85,000 sale price $17,500 tax) to give to Susan. That may not be enough cash for Susan to buy the equipment she needs. It would not be beneficial for Joanne to sell the equipment on the installment basis because all the gain would be immediately recognized since all the gain is recapture gain. p. 17-20 Joanne could give the equipment to Susan. The $100,000 depreciation recapture potential would carry over to Susan and Susan would take Joannes basis ($35,000) for the property. Any depreciation which Susan takes on the property would increase the depreciation recapture potential. However, it appears that Susan may not sell the property for quite a while and is probably in a lower tax bracket than Joanne. p. 17-19
(2)
Property Transactions: Section 1231 and Recapture Provisions 45. Depreciation recapture potential carries over to the recipient of a gift. a. b.
17-15
Carolines adjusted basis at the time of the sale is $3,000, the $5,000 basis at the date of the gift (carryover basis from Paul) less the $2,000 depreciation she took. Carolines recognized gain is $33,000 ($36,000 $3,000) of which $8,000 (Pauls depreciation of $6,000 plus Carolines depreciation of $2,000) is ordinary income due to 1245 depreciation recapture. The remaining $25,000 gain is 1231 gain.
p. 17-20 and Example 17 46. Depreciation recapture potential does not carry over to the recipient of an inheritance. a. b. Tonjis adjusted basis at the time of the sale is $17,000, the $22,500 fair market value at the date of Sekos death less the $5,500 depreciation Tonji took. Tonjis recognized gain is $19,000 ($36,000 $17,000) of which $5,500 (Tonjis depreciation) is ordinary income due to 1245 depreciation recapture. The remaining $13,500 gain is 1231 gain.
p. 17-20 and Example 18 47. The fair market value ($67,000) of the donated equipment is reduced by the potential $33,000 1245 depreciation recapture; so the charitable contribution is limited to $34,000 ($67,000 $33,000). p. 17-19 The 1245 depreciation recapture potential carries over from property relinquished in a like-kind exchange to the replacement property. Consequently, the total 1245 depreciation recapture potential on the property sold was $60,000 ($27,000 + $33,000). Since that is more than the gain from the disposition of the replacement equipment, the entire $45,000 gain is ordinary income due to 1245 depreciation recapture. p. 17-20 Brown has a taxable disposition of the machine. The gain equals the machines $4,500 value because the machine had a zero tax basis. The entire gain is ordinary income due to 1245 depreciation recapture. Emily has a $4,500 qualifying dividend eligible for the 5%/ 15% alternative tax rate because the corporation had earnings and profits exceeding the amount of the dividend. p. 17-21 and Chapter 16 Since the property was depreciable equipment used in rental real estate and was held more than one year, it is a 1231 asset. The loss is a 1231 loss and is reported in Part I, line 2 of Form 4797. pp. 17-4 and 17-24 Gain reported on Form 4797, Part II, line 18(b) is ordinary gain. Therefore, it is not reported on Schedule D because it is not a capital gain or a 1231 gain treated as a capital gain. The gain is included in adjusted gross income. Example 4 and p. 17-26 The key to this problem is that all equipment depreciation taken is subject to recapture as ordinary income due to 1245. However, if the equipment is sold for more than was paid for it, the excess of the selling price over the original cost is 1231 gain. There appears to be three ways to allocate the purchase price:
(1)
48.
49.
50.
51.
52.
Subtract the $100,000 total adjusted basis from the $300,000 selling price to yield a $200,000 gain. Since total depreciation on the three assets exceeds $200,000, all of the gain is 1245 gain.
17-16
(2)
2007 Individual Volume/Solutions Manual Allocate the $300,000 selling price to each asset based on its relative original cost. For instance, the driller would be sold for $37,113 ($120,000/$970,000 $300,000). The gains and losses using this approach are shown below. Asset Skidder Driller Platform Totals Alloc. S.P. $ 71,134 37,113 191,753 $300,000 Adj. Basis $ 40,000 60,000 0 $100,000 Gain $ 31,134 (22,887) 191,753 $200,000
The $31,134 gain would all be 1245 gain because the skidder cost $230,000 and was sold for $71,134. The $22,887 loss on the driller would be a 1231 loss. The $191,753 gain on the platform would all be 1245 gain because it cost $620,000 and was sold for $191,753.
(3)
Allocate the $300,000 selling price to each asset based on its relative adjusted basis. For instance, the driller would be sold for $180,000 ($60,000/$100,000 $300,000). The gains using this approach are shown below. Asset Skidder Driller Platform Totals Alloc. S.P. $120,000 180,000 0 $300,000 Adj. Basis $ 40,000 60,000 0 $100,000 Gain $ 80,000 120,000 0 $200,000
The $80,000 skidder gain would all be 1245 gain because the skidder cost $230,000 and was sold for $120,000. The $120,000 gain on the driller would be a $60,000 1245 gain (equals depreciation taken) and $60,000 1231 gain (equals excess of sale price over original cost of $120,000). The sale of the platform would generate no gain or loss because it was sold for nothing and the adjusted basis was $0. p. 17-13 CUMULATIVE PROBLEMS 53. Justin qualifies as a head of household. He has $539,513 of adjusted gross income, $531,760 of taxable income, $107,228 of Federal income tax on that taxable income, and would have a net tax refund of $2,772. The computations appear below and are followed by the completed 2005 Form 1040 and its Schedules A, B, D, and E, and Forms 4562 and 4797. Wages Unemployment compensation (Note 1) Interest incomeBlue Interest incomeState Bank Rent incomeBuilding (Note 2) Equipment sale ordinary income (Note 3) Net long-term capital gain (Notes 4 and 5) Adjusted gross income Itemized deductions: State income taxes $ 4,300 Real estate taxes 5,600 Home mortgage interest 8,900 Charitable contributions 760 Phaseout (11,807) Total itemized deductions (Note 6) $187,000 14,000 5,000 3,000 8,455 14,000 308,058 $539,513
(7,753)
Property Transactions: Section 1231 and Recapture Provisions Taxable income before exemption deduction Personal and dependency exemptions (Note 7) Taxable income Tax on taxable income (Note 8) Child tax credit (phased out) Net tax due after credits Federal income tax withholding Federal estimated tax payments Total Federal income tax payments Net tax payable (or refund due) for 2005
17-17 $531,760 (0) $531,760 $107,228 (0) $107,228
$ 15,000 95,000 (110,000) ($ 2,772)
See the tax return solution beginning on page 17-20 of the Solutions Manual. Note 1: Note 2: Unemployment compensation is includible in gross income. Rent revenuebuilding Repairs Interest Miscellaneous Depreciation ($125,000 .03636 10.5/12) Total expenses Net income $ 30,000 ($ 4,568) (12,000) (1,000) (3,977) (21,545) $ 8,455
Note 3: Note 4:
$14,000 equipment sale price $0 adjusted basis = $14,000 1245 ordinary gain because $25,000 of depreciation was taken on the property. $400,000 building sale price ($125,000 cost $27,081 pre-2005 depreciation $3,977 2005 depreciation) = $306,058 1231 gain. $31,058 of the gain is potential 25% gain (equals depreciation taken) and the $275,000 balance of the gain is potential 5%/15% gain. $2,000 capital gain distribution + $306,058 1231 gain treated as a long-term capital gain = $308,058 net long-term capital gain. $277,000 is potential 5%/15% gain and $31,058 is potential 25% gain. The itemized deduction reduction applies since AGI exceeds $145,950. Itemized deductions total $19,560, but only $7,753 {$19,560 [($539,513 $145,950) .03]} is deductible. Since AGI exceeds $182,450, the personal and dependency exemption deduction is subject to a phaseout. The $6,400 (2 $3,200) deduction is reduced to $0. $539,513 AGI $182,450 head of household phaseout threshold = $357,063/$2,500 = 142.8252; rounded up to 143; 143 2% = 286% phaseout. The alternative tax on taxable income yields a lower tax because of the net long-term capital gains. The tax is $107,228. This is the sum of the tax on ordinary taxable income of $223,702 [($531,760 TI $308,058 net LTCG)] of $57,913; the tax on the 25% gain portion of the $308,058 net LTCG [($31,058 .25) = $7,765]; and the tax on the 15% gain portion of the net LTCG [($277,000 .15) = $41,550].
Note 5:
Note 6:
Note 7:
Note 8:
Note to Instructor: The alternative minimum tax is ignored in this solution.
17-18 54.
2007 Individual Volume/Solutions Manual Federal income tax liability: Wages: Glens wages Dianes wages Qualified dividends Ordinary loss (Note 5) Net long-term capital gain (Note 1) Adjusted gross income Less: Itemized deductions (Note 2) Less: Personal and dependency exemptions (Note 3) Taxable income $ 97,000 68,000 $165,000 3,000 (13,200) 5,000 $159,800 (20,014) (13,200) $126,586 $ 23,962 (600) (0) (24,000) ($ 638)
Federal income tax (Note 6) Less: Child care credit [$3,000 (maximum eligible expenses for one child) .20 (rate for Okumuras AGI level)] Child tax credit (2 $1,000) (Phased out) Federal prepayments (Note 4) Net tax payable (or refund due) for 2006 Notes
(1)
Short-term capital loss Long-term capital gain Net capital gain Medical expense Less: 7.5% $159,800 Deductible medical expense State income taxes Property taxes on realty Qualified residence interest Investment-related expenses Employee business expense Total investment-related & employee expense Less: 2% $159,800 Net deductible investment-related and employee expenses Itemized deductions before phaseout Itemized deduction reduction [($159,800 $150,500) .03 2/3] Total itemized deductions $ 11,000 (11,985)
($2,000) 7,000 $5,000
(2)
0 2,700 10,500 7,000
535 1,500 $ 2,035 (3,196) 0 $20,200 (186) $20,014 $13,200 $13,000 11,000 $24,000
(3) (4)
Personal exemptions and dependency deductions (4 $3,300) Federal income tax withholding: Glen Federal income tax withholding: Diane Total Federal income tax prepaid

(5)
17-19
Sale of apartment building: Sales price Cost Less: Cost recovery deducted Adjusted basis Total loss Character of loss: 1231 loss $ 199,980 $300,000 (86,820) (213,180) ($ 13,200)
(6)
Federal income tax (alternative tax calculation): Regular tax on ordinary taxable income of $118,586 ($126,586 taxable income $5,000 LTCG $3,000 qualified dividend) $8,000 net capital gain 15% Total alternative tax $ $ 22,762 1,200 23,962
The regular tax liability on $126,586 using the Tax Rate Schedule is $24,762. Therefore, the alternative tax saves $800 ($24,762 $23,962). Hoffman, Smith, and Willis, CPAs 5191 Natorp Boulevard Mason, OH 45040 November 23, 2006 Glen and Diane Okumura 39 Kaloa Street Honolulu, HI 56790 Dear Glen and Diane: Thank you for the opportunity to respond to your question concerning the tax treatment of the loss from disposition of the apartment building you owned. As you know, depreciation of $86,820 was taken on the apartment building while you owned it. That depreciation reduced your tax basis for the property to $213,180 ($300,000 $86,820) at the time of the sale. Since the sales price was $199,980, you sustained a loss of $13,200 ($199,980 $213,180) on the sale of the building. This loss is treated as a deductible ordinary loss in determining your 2006 adjusted gross income. This result occurs because it was the only 1231 gain or loss recognized during the year. Consequently, your adjusted gross income was substantially reduced. If you have any questions concerning these transactions or other tax matters, please feel free to telephone me. Thank you. Sincerely, William Henson, CPA Partner
The answers to the Research Problems are incorporated into the 2007 Individual Volume of the Instructor s Guide with Lecture Notes to Accompany WEST FEDERAL TAXATION: INDIVIDUAL INCOME TAXES.
17-20 53.
Form
1040
Department of the Treasury Internal Revenue Service
U.S. Individual Income Tax Return

For the year Jan 1 - Dec 31, 2005, or other tax year beginning
Your first name MI Last name
2005
, 2005, ending
(99)
IRS Use Only Do not write or staple in this space.
, 20
Label
(See instructions.)
OMB No. 1545-0074 Your social security number
JUSTIN
If a joint return, spouses first name MI
STONE
Last name
567-89-1234
Spouses social security number
Use the IRS label. Otherwise, please print or type. Presidential Election Campaign
Home address (number and street). If you have a P.O. box, see instructions.
Apartment no.
112 GREEN ROAD

City, town or post office. If you have a foreign address, see instructions. State ZIP code
You must enter your social security number(s) above. Checking a box below will not change your tax or refund. You Spouse
SANDUSKY
1 2 3 6a b Single Married filing jointly (even if only one had income) Married filing separately. Enter spouses SSN above & full name here 5 4
ID 45623 X
Check here if you, or your spouse if filing jointly, want $3 to go to this fund? (see instructions)
Filing Status
Check only one box.
Head of household (with qualifying person). (See instructions.) If the qualifying person is a child but not your dependent, enter this childs name here Qualifying widow(er) with dependent child (see instructions)
Boxes checked on 6a and 6b
Exemptions
Yourself. If someone can claim you as a dependent, do not check box 6a Spouse (2) Dependents (3) Dependents c Dependents: social security relationship number to you (1) First name Last name
1 1
(4) if qualifying child for child tax credit (see instrs)
No. of children on 6c who: lived with you
FLINT STONE
If more than four dependents, see instructions.
098-77-6543 Son
did not live with you due to divorce or separation (see instrs)
Dependents on 6c not entered above Add numbers on lines above
Income
Attach Form(s) W-2 here. Also attach Forms W-2G and 1099-R if tax was withheld. If you did not get a W-2, see instructions.
Enclose, but do not attach, any payment. Also, please use Form 1040-V.
Adjusted Gross Income
9b 10 Taxable refunds, credits, or offsets of state and local income taxes (see instructions) 11 Alimony received 12 Business income or (loss). Attach Schedule C or C-EZ 13 Capital gain or (loss). Att Sch D if reqd. If not reqd, ck here 14 Other gains or (losses). Attach Form 4797 15 a IRA distributions 15 a b Taxable amount (see instrs) 16 a Pensions and annuities 16 a b Taxable amount (see instrs) 17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 18 Farm income or (loss). Attach Schedule F 19 Unemployment compensation 20 a Social security benefits 20 a b Taxable amount (see instrs) 21 Other income 22 Add the amounts in the far right column for lines 7 through 21. This is your total income 23 Educator expenses (see instructions) 23 24 Certain business expenses of reservists, performing artists, and fee-basis government officials. Attach Form 2106 or 2106-EZ 24 25 Health savings account deduction. Attach Form 8889 25 26 Moving expenses. Attach Form 3903 26 27 One-half of self-employment tax. Attach Schedule SE 27
d Total number of exemptions claimed 7 Wages, salaries, tips, etc. Attach Form(s) W-2 8 a Taxable interest. Attach Schedule B if required b Tax-exempt interest. Do not include on line 8a 9 a Ordinary dividends. Attach Schedule B if required b Qualfd divs (see instrs)
7 8a 8b 9a 10 11 12 13 14 15 b 16 b 17 18 19 20 b 21 22
2 187,000. 8,000.
308,059. 14,000.
8,455. 14,000.
539,514.
28 Self-employed SEP, SIMPLE, and qualified plans 28 29 Self-employed health insurance deduction (see instructions) 29 30 Penalty on early withdrawal of savings 30 31 a Alimony paid b Recipients SSN 31 a 32 IRA deduction (see instructions) 32 33 Student loan interest deduction (see instructions) 33 34 Tuition and fees deduction (see instructions) 34 35 Domestic production activities deduction. Attach Form 8903 35 36 Add lines 23 - 31a and 32 - 35 37 Subtract line 36 from line 22. This is your adjusted gross income BAA For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see instructions.
36 37
FDIA0112 11/07/05
539,514.
Form 1040 (2005)
Property Transactions: Section 1231 and Recapture Provisions 53. continued

Form 1040 (2005)
17-21
JUSTIN STONE
Blind. Total boxes Blind. checked 39 a b If your spouse itemizes on a separate return, or you were a dual-status alien, see instructions and check here 39 b 40 Itemized deductions (from Schedule A) or your standard deduction (see left margin) 41 Subtract line 40 from line 38 42 43 44 45 46 47 48 49 50 51 52 53 54 55 If line 38 is over $109,475, or you provided housing to a person displaced by Hurricane Katrina, see instructions. Otherwise, multiply $3,200 by the total number of exemptions claimed on line 6d Taxable income. Subtract line 42 from line 41. If line 42 is more than line 41, enter -0Tax (see instrs). Check if any tax is from: a Form(s) 8814 b Form 4972 Alternative minimum tax (see instructions). Attach Form 6251 Add lines 44 and 45 Foreign tax credit. Attach Form 1116 if required Credit for child and dependent care expenses. Attach Form 2441 Credit for the elderly or the disabled. Attach Schedule R Education credits. Attach Form 8863 47 48 49 50 38 Amount from line 37 (adjusted gross income) 39 a Check You were born before January 2, 1941, if: Spouse was born before January 2, 1941,
Tax and Credits

Standard Deduction for People who checked any box on line 39a or 39b or who can be claimed as a dependent, see instructions. All others: Single or Married filing separately, $5,000 Married filing jointly or Qualifying widow(er), $10,000 Head of household, $7,300
567-89-1234 Page 2 38 539,514.
40 41 42 43 44 45 46
7,753. 531,761. 0. 531,761. 107,228. 107,228.
Other Taxes
Payments
If you have a qualifying child, attach Schedule EIC.
Retirement savings contributions credit. Attach Form 8880 51 Child tax credit (see instructions). Attach Form 8901 if required 52 Adoption credit. Attach Form 8839 53 Credits from: a Form 8396 b Form 8859 54 Other credits. Check applicable box(es): a Form 3800 Form c b Form 55 8801 56 Add lines 47 through 55. These are your total credits 57 Subtract line 56 from line 46. If line 56 is more than line 46, enter -058 Self-employment tax. Attach Schedule SE 59 Social security and Medicare tax on tip income not reported to employer. Attach Form 4137 60 Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required 61 Advance earned income credit payments from Form(s) W-2 62 Household employment taxes. Attach Schedule H 63 Add lines 57-62. This is your total tax 64 Federal income tax withheld from Forms W-2 and 1099 64 65 2005 estimated tax payments and amount applied from 2004 return 65 66 a Earned income credit (EIC) 66 a b Nontaxable combat pay election 66 b 67 Excess social security and tier 1 RRTA tax withheld (see instructions) 67 68 Additional child tax credit. Attach Form 8812 68 69 Amount paid with request for extension to file (see instructions) 69 70 Payments from: a Form 2439 b Form 4136 c Form 8885 70 71 Add lines 64, 65, 66a, and 67 through 70.
These are your total payments
56 57 58 59 60 61 62 63
107,228.
107,228.
15,000. 95,000.
Refund
Direct deposit? See instructions and fill in 73b, 73c, and 73d.
72 If line 71 is more than line 63, subtract line 63 from line 71. This is the amount you overpaid 73 a Amount of line 72 you want refunded to you b Routing number c Type: Checking XXXXXXXXX d Account number XXXXXXXXXXXXXXXXX 74 Amount of line 72 you want applied to your 2006 estimated tax 74 75 Amount you owe. Subtract line 71 from line 63. For details on how to pay, see instructions 76 Estimated tax penalty (see instructions) 76 Do you want to allow another person to discuss this return with the IRS (see instructions)?
Designees name Phone no.
71 72 73 a Savings
110,000. 2,772. 2,772.
Amount You Owe Third Party Designee Sign Here

Joint return? See instructions. Keep a copy for your records.
75 Yes. Complete the following.

Personal identification number (PIN)
No
Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Your signature Date Your occupation Daytime phone number
EXECUTIVE
Spouses signature. If a joint return, both must sign. Date Spouses occupation
Date
Preparers SSN or PTIN Check if self-employed
Paid Preparers Use Only
Preparers signature Firms name (or yours if self-employed), address, and ZIP code
Self-Prepared
EIN Phone no.
Form 1040 (2005)

FDIA0112 11/07/05
17-22 53. continued

SCHEDULE A
(Form 1040)
Department of the Treasury Internal Revenue Service Name(s) shown on Form 1040 (99)
Itemized Deductions
Attach to Form 1040. See Instructions for Schedule A (Form 1040).
OMB No. 1545-0074
Attachment Sequence No. Your social security number
2005
07
JUSTIN STONE
Medical and Dental Expenses 1 2 3 4 5 Caution. Do not include expenses reimbursed or paid by others. Medical and dental expenses (see instructions) Enter amount from Form 1040, line 38 2 Multiply line 2 by 7.5% (.075) Subtract line 3 from line 1. If line 3 is more than line 1, enter -0State and local (check only one box): a X Income taxes, or b General sales taxes (see instructions) Real estate taxes (see instructions) Personal property taxes Other taxes. List type and amount Add lines 5 through 8 Home mtg interest and points reported to you on Form 1098 Home mortgage interest not reported to you on Form 1098. If paid to the person from whom you bought the home, see instructions and show that persons name, identifying number, and address 10 1 3
567-89-1234
4 5 6 7 8
4,300. 5,600.
Taxes You Paid (See instructions.)
6 7 8 9
9,900.
Interest You Paid
10 11
8,900.
(See instructions.) Note. Personal interest is not deductible. Gifts to Charity If you made a gift and got a benefit for it, see instructions. 11 12 13 14 15 a
12 13 14
Points not reported to you on Form 1098. See instrs for spcl rules Investment interest. Attach Form 4952 if required. (See instrs.) Add lines 10 through 13
8,900.
15 a Total gifts by cash or check. If you made any gift of $250 or more, see instrs b Gifts by cash or check after August 27, 2005, that you elect to treat as qualified contributions (see instructions) 15 b 16 Other than by cash or check. If any gift of $250 or more, see instructions. You must attach Form 8283 if over $500 17 Carryover from prior year 18 Add lines 15a, 16, & 17 Casualty or theft loss(es). Attach Form 4684. (See instructions.) Unreimbursed employee expenses job travel, union dues, job education, etc. Attach Form 2106 or 2106-EZ if required. (See instructions.)
760.
16 17 18 19
760.
Casualty and Theft Losses
19 Job Expenses 20 and Certain Miscellaneous Deductions
(See instructions.)
21 22
Tax preparation fees Other expenses investment, safe deposit box, etc. List type and amount Add lines 20 through 22 Enter amount from Form 1040, line 38 24 Multiply line 24 by 2% (.02) Subtract line 25 from line 23. If line 25 is more than line 23, enter -0Other from list in the instructions. List type and amount
20 21
Other Miscellaneous Deductions Total Itemized Deductions
23 24 25 26 27
22 23 25 26
27 28 Is Form 1040, line 38, over $145,950 (over $72,975 if MFS)? No. Your deduction is not limited. Add the amounts in the far right column for lines 4 through 27. Also, enter this amount on Form 1040, line 40. Yes. Your deduction may be limited. See instructions for the amount to enter.
28
7,753.
X
29
If you elect to itemize deductions even though they are less than your standard deduction, check here
Itemized Deductions Limited per IRC Sec. 68.

BAA For Paperwork Reduction Act Notice, see Form 1040 instructions.
FDIA0301 11/18/05
Schedule A (Form 1040) 2005

Schedule B (Form 1040) 2005
Name(s) shown on Form 1040. OMB No. 1545-0074 Your social security number
17-23
Page 2
JUSTIN STONE
567-89-1234
Schedule B Interest and Ordinary Dividends

Part I Interest
(See instructions for Form 1040, line 8a.) 1 List name of payer. If any interest is from a seller-financed mortgage and the buyer used the property as a personal residence, see the instructions and list this interest first. Also, show that buyers social security number and address
Attachment Sequence No.
08
Amount
BLUE CORPORATION STATE BANK CD
5,000.00 3,000.00
Note. If you received a Form 1099-INT, Form 1099-OID, or substitute statement from a brokerage firm, list the firms name as the payer and enter the total interest shown on that form.
2 3
Add the amounts on line 1
2 3 4
8,000.00
Excludable interest on series EE and I U.S. savings bonds issued after 1989. Attach Form 8815 4 Subtract line 3 from line 2. Enter the result here and on Form 1040, line 8a Note. If line 4 is over $1,500, you must complete Part III. 5 List name of payer
8,000.00
Amount
Part II Ordinary Dividends

(See instructions for Form 1040, line 9a.)
Note. If you received a Form 1099-DIV or substitute statement from a brokerage firm, list the firms name as the payer and enter the ordinary dividends shown on that form.
6 Add the amounts on line 5. Enter the total here and on Form 1040, line 9a Note. If line 6 is over $1,500, you must complete Part III.
Part III Foreign Accounts and Trusts

(See instructions.)
You must complete this part if you (a) had over $1,500 of taxable interest or ordinary dividends; or (b) had a foreign account; or (c) received a distribution from, or were a grantor of, or a transferor to, a foreign trust. 7 a At any time during 2005, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? See instructions for exceptions and filing requirements for Form TD F 90-22.1 b If Yes, enter the name of the foreign country 8
Yes
No
During 2005, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If Yes, you may have to file Form 3520. See instructions X FDIA0401 07/29/05 Schedule B (Form 1040) 2005 BAA For Paperwork Reduction Act Notice, see Form 1040 instructions.
17-24 53. continued

SCHEDULE D
(Form 1040)
OMB No. 1545-0074
Capital Gains and Losses

(99) Attach to Form 1040. See Instructions for Schedule D (Form 1040). Use Schedule D-1 to list additional transactions for lines 1 and 8.
2005
12
Name(s) shown on Form 1040
Your social security number
JUSTIN STONE Part I Short-Term Capital Gains and Losses Assets Held One Year or Less
(a) Description of property (Example: 100 shares XYZ Co) 1 (b) Date acquired
(Mo, day, yr)
567-89-1234
(c) Date sold

(Mo, day, yr)
(d) Sales price (see instructions)
(e) Cost or other basis

(see instructions)
(f) Gain or (loss) Subtract (e) from (d)
2 3 4 5 6
Enter your short-term totals, if any, from Schedule D-1, line 2
Total short-term sales price amounts. Add lines 1 and 2 in column (d) 3 Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684, 6781, and 8824 Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 Short-term capital loss carryover. Enter the amount, if any, from line 8 of your Capital Loss Carryover Worksheet in the instructions
4 5 6 7
7 Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f)
Part II
Long-Term Capital Gains and Losses Assets Held More Than One Year
(a) Description of property (Example: 100 shares XYZ Co) (b) Date acquired
(Mo, day, yr)
(c) Date sold

(Mo, day, yr)
(d) Sales price (see instructions)
(e) Cost or other basis

(see instructions)
(f) Gain or (loss) Subtract (e) from (d)
9 10 11 12 13 14
Enter your long-term totals, if any, from Schedule D-1, line 9 Total long-term sales price amounts. Add lines 8 and 9 in column (d)
9 10 11 12 13 14 15 308,059. Schedule D (Form 1040) 2005
Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or (loss) from Forms 4684, 6781, and 8824 Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 Capital gain distributions. See instrs Long-term capital loss carryover. Enter the amount, if any, from line 13 of your Capital Loss Carryover Worksheet in the instructions
306,059.
2,000.
15 Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f). Then go to Part III on page 2 BAA For Paperwork Reduction Act Notice, see Form 1040 instructions.
FDIA0612
05/18/05

Schedule D (Form 1040) 2005
17-25
JUSTIN STONE
567-89-1234
Page 2
Part III
Summary
16
Combine lines 7 and 15 and enter the result. If line 16 is a loss, skip lines 17 through 20, and go to line 21. If a gain, enter the gain on Form 1040, line 13, and then go to line 17 below Are lines 15 and 16 both gains?
16
308,059.
17
X Yes. Go to line 18.

No. Skip lines 18 through 21, and go to line 22. 18 Enter the amount, if any, from line 7 of the 28% Rate Gain Worksheet in the instructions 18
19
Enter the amount, if any, from line 18 of the Unrecaptured Section 1250 Gain Worksheet in the instructions Are lines 18 and 19 both zero or blank? Yes. Complete Form 1040 through line 43, and then complete the Qualified Dividends and Capital Gain Tax Worksheet in the Instructions for Form 1040. Do not complete lines 21 and 22 below.
19
31,059.
20
X No. Complete Form 1040 through line 43, and then complete the Schedule D Tax Worksheet in the
instructions. Do not complete lines 21 and 22 below. 21 If line 16 is a loss, enter here and on Form 1040, line 13, the smaller of: The loss on line 16 or ($3,000), or if married filing separately, ($1,500) 21
Note. When figuring which amount is smaller, treat both amounts as positive numbers. 22 Do you have qualified dividends on Form 1040, line 9b? Yes. Complete Form 1040 through line 43, and then complete the Qualified Dividends and Capital Gain Tax Worksheet in the Instructions for Form 1040. No. Complete the rest of Form 1040. Schedule D (Form 1040) 2005
FDIA0612
05/18/05
17-26 53. continued

SCHEDULE E
(Form 1040)
Department of the Treasury Internal Revenue Service Name(s) shown on return
Supplemental Income and Loss

(99) (From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc) Attach to Form 1040 or Form 1041. See Instructions for Schedule E (Form 1040).
OMB No. 1545-0074
2005
13
Your social security number
Note. If you are in the business of renting personal property, use Schedule C or C-EZ (see instructions). Report farm rental income or loss from Form 4835 on page 2, line 40. 2 For each rental real estate 1 List the type and location of each rental real estate property: Yes No property listed on line 1, did you A RENTAL BUILDING or your family use it during the A SANDUSKY, ID X tax year for personal purposes for more than the greater of: B 14 days, or B 10% of the total days C rented at fair rental value? (See instructions.) C Properties Totals Income: A B C (Add columns A, B, and C.) 3 Rents received 3 3 30,000. 30,000. 4 Royalties received 4 4
JUSTIN STONE Part I Income or Loss From Rental Real Estate and Royalties
567-89-1234
Expenses:
5 6 7 8 9 10 11 12 13 14 15 16 17 18 Advertising Auto and travel (see instructions) Cleaning and maintenance Commissions Insurance Legal and other professional fees Management fees Mortgage interest paid to banks, etc (see instructions) Other interest Repairs Supplies Taxes Utilities Other (list) 5 6 7 8 9 10 11 12 13 14 15 16 17
12,000. 4,568.
12
12,000.
Miscellaneous exp.
1,000.
18
19 20 21 22
Add lines 5 through 18 Depreciation expense or depletion (see instructions) Total expenses. Add lines 19 and 20 Income or (loss) from rental real estate or royalty properties. Subtract line 21 from line 3 (rents) or line 4 (royalties). If the result is a (loss), see instructions to find out if you must file Form 6198
19 20 21
17,568. 3,977. 21,545.
19 20
17,568. 3,977.
22
8,455.
Deductible rental real estate loss. Caution. Your rental real estate loss on line 22 may be limited. See instructions to find out if you must file Form 8582. Real estate professionals must complete line 43 on page 2 23 24 Income. Add positive amounts shown on line 22. Do not include any losses 25 Losses. Add royalty losses from line 22 and rental real estate losses from line 23. Enter total losses here 26 Total rental real estate and royalty income or (loss). Combine lines 24 and 25. Enter the result here. If Parts II, III, IV, and line 40 on page 2 do not apply to you, also enter this amount on Form 1040, line 17. Otherwise, include this amount in the total on line 41 on page 2 BAA For Paperwork Reduction Act Notice, see instructions.
FDIZ2301 11/14/05
23
24 25
8,455.
26 8,455. Schedule E (Form 1040) 2005
17-27
Form (Rev. January 2006)
4562
Depreciation and Amortization

(Including Information on Listed Property)
See separate instructions. Attach to your tax return.
Business or activity to which this form relates
OMB No. 1545-0172
2005
67
Name(s) shown on return
Identifying number
JUSTIN STONE Sch E RENTAL BUILDING Part I Election To Expense Certain Property Under Section 179 Note: If you have any listed property, complete Part V before you complete Part I.
1 2 3 4 5
567-89-1234
Maximum amount. See the instructions for a higher limit for certain businesses Total cost of section 179 property placed in service (see instructions) Threshold cost of section 179 property before reduction in limitation Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter -0Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If married filing separately, see instructions
(a) Description of property (b) Cost (business use only) (c) Elected cost
1 2 3 4 5
$105,000. $420,000.
6 7 7 Listed property. Enter the amount from line 29 8 8 Total elected cost of section 179 property. Add amounts in column (c), lines 6 and 7 9 9 Tentative deduction. Enter the smaller of line 5 or line 8 10 10 Carryover of disallowed deduction from line 13 of your 2004 Form 4562 11 Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions) 11 12 Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line 11 12 13 Carryover of disallowed deduction to 2006. Add lines 9 and 10, less line 12 13 Note: Do not use Part II or Part III below for listed property. Instead, use Part V.
Part II
14 15 16
Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.)
14 15 16
Special allowance for certain aircraft, certain property with a long production period, and qualified NYL or GO Zone property (other than listed property) placed in service during the tax year (see instructions) Property subject to section 168(f)(1) election Other depreciation (including ACRS)
Part III
17 18
MACRS Depreciation (Do not include listed property.) (See instructions.) 3,977.
Section A 17 MACRS deductions for assets placed in service in tax years beginning before 2005 If you are electing to group any assets placed in service during the tax year into one or more general asset accounts, check here Section BAssets Placed in Service During 2005 Tax Year Using the General Depreciation System
(b) Month and year placed in service (c) Basis for depreciation (business/investment use onlysee instructions) (d) Recovery period (e) Convention (f) Method
(a) Classification of property
(g) Depreciation deduction
19a b c d e f g
3-year 5-year 7-year 10-year 15-year 20-year 25-year
property property property property property property property
h Residential rental property
i Nonresidential real property Section CAssets Placed in Service During 2005 Tax Year Using the Alternative Depreciation System S/L 20a Class life b 12-year 12 yrs. S/L c 40-year 40 yrs. S/L MM
25 yrs. 27.5 yrs. 27.5 yrs. 39 yrs.
MM MM MM MM
S/L S/L S/L S/L S/L
Part IV
21 22 23
Summary (see instructions)

21 22
Listed property. Enter amount from line 28 Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21. Enter here and on the appropriate lines of your return. Partnerships and S corporationssee instr. For assets shown above and placed in service during the current year, enter the portion of the basis attributable to section 263A costs 23
Cat. No. 12906N
3,977.
For Paperwork Reduction Act Notice, see separate instructions.
Form
4562
(2005) (Rev. 1-2006)
17-28 53. continued

Form
4797
(99)
Sales of Business Property

(Also Involuntary Conversions and Recapture Amounts Under Sections 179 and 280F(b)(2)) Attach to your tax return. See separate instructions.
Identifying number
OMB No. 1545-0184
Department of the Treasury Internal Revenue Service Name(s) shown on return
2005
27
JUSTIN STONE
1 Enter the gross proceeds from sales or exchanges reported to you for 2005 on Form(s) 1099-B or 1099-S (or substitute statement) that you are including on line 2, 10, or 20 (see instructions)
567-89-1234
1
Part I
2
Sales or Exchanges of Property Used in a Trade or Business and Involuntary Conversions From Other Than Casualty or Theft Most Property Held More Than 1 Year (see instructions)
(e) Depreciation (a) Description
of property
(b) Date acquired

(month, day, year)
(c) Date sold (month, day, year)
(d) Gross
sales price
allowed or allowable since acquisition
(f) Cost or other basis, plus improvements and expense of sale
(g) Gain or (loss) Subtract (f) from the sum of (d) and (e)
3 4 5 6 7
Gain, if any, from Form 4684, line 42 Section 1231 gain from installment sales from Form 6252, line 26 or 37 Section 1231 gain or (loss) from like-kind exchanges from Form 8824 Gain, if any, from line 32, from other than casualty or theft Combine lines 2 through 6. Enter the gain or (loss) here and on the appropriate line as follows Partnerships (except electing large partnerships) and S corporations. Report the gain or (loss) following the instructions for Form 1065, Schedule K, line 10, or Form 1120S, Schedule K, line 9. Skip lines 8, 9, 11, and 12 below. Individuals, partners, S corporation shareholders, and all others. If line 7 is zero or a loss, enter the amount from line 7 on line 11 below and skip lines 8 and 9. If line 7 is a gain and you did not have any prior year section 1231 losses, or they were recaptured in an earlier year, enter the gain from line 7 as a long-term capital gain on the Schedule D filed with your return and skip lines 8, 9, 11, and 12 below. Nonrecaptured net section 1231 losses from prior years (see instructions) Subtract line 8 from line 7. If zero or less, enter -0-. If line 9 is zero, enter the gain from line 7 on line 12 below. If line 9 is more than zero, enter the amount from line 8 on line 12 below and enter the gain from line 9 as a long-term capital gain on the Schedule D filed with your return (see instructions)
3 4 5 6 7
306,059. 306,059.
8 9
Part II
10
Ordinary Gains and Losses (see instructions)
Ordinary gains and losses not included on lines 11 through 16 (include property held 1 year or less):
11 12 13 14 15 16 17 18
Loss, if any, from line 7 Gain, if any, from line 7 or amount from line 8, if applicable Gain, if any, from line 31 Net gain or (loss) from Form 4684, lines 34 and 41a Ordinary gain from installment sales from Form 6252, line 25 or 36 Ordinary gain or (loss) from like-kind exchanges from Form 8824 Combine lines 10 through 16 For all except individual returns, enter the amount from line 17 on the appropriate line of your return and skip lines a and b below. For individual returns, complete lines a and b below: a If the loss on line 11 includes a loss from Form 4684, line 38, column (b)(ii), enter that part of the loss here. Enter the part of the loss from income-producing property on Schedule A (Form 1040), line 27, and the part of the loss from property used as an employee on Schedule A (Form 1040), line 22. Identify as from Form 4797, line 18a. See instructions
11 12 13 14 15 16 17
14,000.
14,000.
18 a 18 b
b Redetermine the gain or (loss) on line 17 excluding the loss, if any, on line 18a. Enter here and on Form 1040, line 14 BAA For Paperwork Reduction Act Notice, see separate instructions.
14,000.
Form 4797 (2005)
FDIZ1001
10/17/05

Form 4797 (2005)
17-29
Part III
JUSTIN STONE Gain From Disposition of Property Under Sections 1245, 1250, 1252, 1254, and 1255
567-89-1234
Page 2
(see instructions) 19 (a) Description of section 1245, 1250, 1252, 1254, or 1255 property: A B C D These columns relate to the properties on lines 19A through 19D 20 Gross sales price (Note: See line 1 before completing.) 20 21 Cost or other basis plus expense of sale 21 22 Depreciation (or depletion) allowed or allowable 22 23 Adjusted basis. Subtract line 22 from line 21 23 24 Total gain. Subtract line 23 from line 20 24 25 If section 1245 property: a Depreciation allowed or allowable from line 22 25 a b Enter the smaller of line 24 or 25a 25 b 26 If section 1250 property: If straight line depreciation was used, enter -0on line 26g, except for a corporation subject to section 291. a Additional depreciation after 1975 (see instrs) 26 a b Applicable percentage multiplied by the smaller of line 24 or line 26a (see instructions) 26 b c Subtract line 26a from line 24. If residential rental property or line 24 is not more than line 26a, skip lines 26d and 26e d Additional depreciation after 1969 & before 1976 e Enter the smaller of line 26c or 26d f Section 291 amount (corporations only) g Add lines 26b, 26e, and 26f 27 If section 1252 property: Skip this section if you did not dispose of farmland or if this form is being completed for a partnership (other than an electing large partnership). a Soil, water, and land clearing expenses b Line 27a multiplied by applicable percentage (see instructions) c Enter the smaller of line 24 or 27b If section 1254 property: a Intangible drilling and development costs, expenditures for development of mines and other natural deposits, and mining exploration costs (see instructions) Property A Property B Property C Property D (b) Date acquired (mo, day, yr) (c) Date sold (mo, day, yr)
RENTAL BUILDING EQUIPMENT
01/02/1999 07/10/1998
11/22/2005 11/22/2005
400,000. 125,000. 31,059. 93,941. 306,059.
14,000. 25,000. 25,000. 0. 14,000. 25,000. 14,000.
0.
26 c 26 d 26 e 26 f 26 g
306,059.
0.
27 a 27 b 27 c
28
28 a
b Enter the smaller of line 24 or 28a 28 b 29 If section 1255 property: a Applicable percentage of payments excluded from income under section 126 (see instructions) 29 a b Enter the smaller of line 24 or 29a (see instrs) 29 b Summary of Part III Gains. Complete property columns A through D through line 29b before going to line 30. 30 31 32 Total gains for all properties. Add property columns A through D, line 24 Add property columns A through D, lines 25b, 26g, 27c, 28b, and 29b. Enter here and on line 13 Subtract line 31 from line 30. Enter the portion from casualty or theft on Form 4684, line 36. Enter the portion from other than casualty or theft on Form 4797, line 6 (see instructions) (a) Section 179 33 34 35 BAA Section 179 expense deduction or depreciation allowable in prior years Recomputed depreciation. (see instructions) Recapture amount. Subtract line 34 from line 33. See the instructions for where to report
FDIZ1002 10/17/05
30 31
320,059. 14,000.
Part IV
32 306,059. Recapture Amounts Under Sections 179 and 280F(b)(2) When Business Use Drops to 50% or Less (b) Section 280F(b)(2)
33 34 35 Form 4797 (2005)
17-30 53. continued

Schedule D Line 19
Unrecaptured Section 1250 Gain Worksheet - Line 19

G Keep for your records
2005
Name(s) Shown on Return
Social Security Number
JUSTIN STONE
567-89-1234
If you are not reporting a gain on Form 4797, line 7, skip lines 1 through 9 and go to line 10. 1 If you have a section 1250 property in Part III of Form 4797 for which you made an entry in Part I of Form 4797 (but not on Form 6252), enter the smaller of line 22 or line 24 of Form 4797 for that property. If you did not have any such property, go to line 4. If you had more than one property, see instrs. 1 Enter the amount from Form 4797, line 26g, for the property for which you made an entry on line 1 2 Subtract line 2 from line 1 3 Enter the total unrecaptured section 1250 gain included on lines 26 or 37 of Form(s) 6252 from installment sales of trade or business property held more than 1 year (see instructions) 4 Enter the total of any amounts reported on a Schedule K-1 from a partnership or an S corporation as "unrecaptured section 1250 gain". 5 Add lines 3 through 5 6 Enter the smaller of line 6 or the gain from Form 4797, line 7 7 31,059. Enter the amount, if any, from Form 4797, ln 8 8 Subtract line 8 from line 7. If zero or less, enter -09 Enter the amount of any gain from sale or exchange of an interest in a partnership attributable to unrecaptured section 1250 gain (see instructions) 10 Enter the total of any amounts reported on a Schedule K-1, Form 1099-DIV, or Form 2439 as "unrecaptured section 1250 gain" from an estate, trust, real estate investment trust, or mutual fund (or other regulated investment company.) 11 Enter the total of any unrecaptured section 1250 gain from sales (including installment sales) or other dispositions of section 1250 property held more than 1 year for which you did not make an entry in Part I of Form 4797 for the year of sale (see instructions) 12 Add lines 9 through 12 13 If you had any section 1202 gain or collectibles gain or (loss), enter the total of lines 1 through 4 of the 28% Rate Gain Worksheet. Otherwise, enter -014 0. Enter the (loss), if any, from Schedule D, line 7. If Schedule D, line 7, is zero or a gain, enter -015 0. Enter your long-term capital loss carryovers from Sch. D, line 14, and Schedule K-1 (Form 1041), line 11c 16 Combine lines 14 through 16. If the result is a (loss), enter it as a positive amount. If the result is zero or a gain, enter -0-. 17 Unrecaptured section 1250 gain. Subtract line 17 from line 13. If zero or less, enter -0-. If more than zero, enter the result here and on Schedule D, line 19 18
31,059. 0. 31,059.
2 3 4
5 6 7 8 9 10 11
31,059.
31,059.
12
13 14
31,059.
15 16 17 18
0. 31,059.

Schedule D Tax Worksheet
Keep for your records
Name(s) Shown on Return
17-31
2005
Social Security Number
JUSTIN STONE
567-89-1234
Complete this worksheet only if line 18 or line 19 of Schedule D is more than zero. Otherwise, complete the Qualified Dividends and Capital Gain Tax Worksheet to figure your tax. Exception: Do not use the Qualified Dividends and Capital Gain Tax Worksheet or this worksheet to figure your tax if: Line 15 or line 16 of Schedule D is zero or less and you have no qualified dividends on Form 1040, line 9b, or Form 1040, line 43, is zero or less. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Enter your taxable income from Form 1040, line 43 Enter your qualified dividends from Form 1040, line 9b Enter the amount from Form 4952, line 4g Enter the amount from Form 4952, line 4e* Subtract line 4 from line 3. If zero or less, enter -0Subtract line 5 from line 2. If zero or less, enter -0Enter the smaller of line 15 or line 16 of Schedule D Enter the smaller of line 3 or line 4 Subtract line 8 from line 7. If zero or less, enter -0Add lines 6 and 9 Add lines 18 and 19 of Schedule D Enter the smaller of line 9 or line 11 Subtract line 12 from line 10 Subtract line 13 from line 1. If zero or less, enter -0Enter the smaller of line 1 or: $29,700 if single or married filing separately; or $59,400 if married filing jointly or qualifying widow(er); $39,800 if head of household. Enter the smaller of line 14 or line 15 Subtract line 10 from line 1. If zero or less, enter -0Enter the larger of line 16 or line 17 If lines 15 and 16 are the same, skip lines 19 and 20 and go to line 21. Otherwise, go to line 19. Subtract line 16 from line 15 Multiply line 19 by 5% (.05) If lines 1 and 15 are the same, skip lines 21 through 33 and go to line 34. Otherwise, go to line 21. Enter the smaller of line 1 or line 13 Enter the amount from line 19 (if line 19 is blank, enter -0-) Subtract line 22 from line 21. If zero or less, enter -0Multiply line 23 by 15% (.15) If Schedule D, line 19, is zero or blank, skip lines 25 through 30 and go to line 31. Otherwise, go to line 25. Enter the smaller of line 9 above or Schedule D, line 19 Add lines 10 and 18 Enter the amount from line 1 above Subtract line 27 from line 26. If zero or less, enter -0Subtract line 28 from line 25. If zero or less, enter -0Multiply line 29 by 25% (.25) If Schedule D, line 18, is zero or blank, skip lines 31 through 33 and go to line 34. Otherwise, go to line 31. Add lines 18, 19, 23, and 29 Subtract line 31 from line 1 Multiply line 32 by 28% (.28) Figure the tax on the amount on line 18. Use the Tax Table or Tax Computation Worksheet, whichever applies Add lines 20, 24, 30, 33, 34 Figure the tax on the amount on line 1. Use the Tax Table or Tax Computation Worksheet, whichever applies Tax on all taxable income (including capital gains and qualified dividends). Enter the smaller of line 35 or line 36. Also enter this amount on Form 1040, 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14
531,761.
0. 0. 308,059. 308,059. 308,059. 31,059. 31,059. 277,000. 254,761.
15 16 17 18
39,800. 39,800. 223,702. 223,702.
16 17 18
19 20
19 20
21 22 23 24
21 22 23 24
277,000. 0. 277,000. 41,550. 31,059. 531,761. 531,761. 0. 31,059. 7,765.
25 26 27 28 29 30
25 26 27 28 29 30
31 32 33 34 35 36 37
31 32 33 34 35 36
57,913. 107,228. 163,678. 107,228.
37
* If applicable, enter instead the smaller amount you entered on the dotted line next to line 4e of Form 4952.
17-32
2007 Individual Volume/Solutions Manual NOTES

WFT Ch17 Solutions

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Path: K:/TL-WFT-05-0802/Application/TL-WFT-05-0802-017_V1-SM.

3d Date: 15th April 2006 Time: 17:29 User ID: 40223

Q/P in Prior Edition

Unchanged Unchanged Unchanged New Unchanged Modified Unchanged

*The solution to this problem is available on a transparency master.

32. 33. 34.

35. 36.a. 36.b. 37.a.

37.b. 38.a. 38.b. 39.

2007 Individual Volume/Solutions Manual

Property Transactions: Section 1231 and Recapture Provisions

The team should consider the following issues:

20. 21. 22.

24. 25. 26.

Property Transactions: Section 1231 and Recapture Provisions

28. 29. 30.

pp. 17-3, 17-5, and Example 3

2007 Individual Volume/Solutions Manual

Property Transactions: Section 1231 and Recapture Provisions 34.

Ordinary Income $42,000 30,000 9,000 $81,000

pp. 17-2 to 17-14

$12,000 ($35,000 $23,000) $53,000 ($87,000 $34,000)

Property Transactions: Section 1231 and Recapture Provisions

Item Land Truck Rowing machine Building Yacht Auto Trampoline

$402,000 4,891 60,217 (6,000) $461,108

Joanne has two alternatives for helping Susan:

17-17 $531,760 (0) $531,760 $107,228 (0) $107,228

$ 15,000 95,000 (110,000) ($ 2,772)

Note to Instructor: The alternative minimum tax is ignored in this solution.

($2,000) 7,000 $5,000

0 2,700 10,500 7,000

Property Transactions: Section 1231 and Recapture Provisions

2007 Individual Volume/Solutions Manual

Department of the Treasury Internal Revenue Service

U.S. Individual Income Tax Return

IRS Use Only Do not write or staple in this space.

OMB No. 1545-0074 Your social security number

112 GREEN ROAD

(4) if qualifying child for child tax credit (see instrs)

No. of children on 6c who: lived with you

Adjusted Gross Income

Property Transactions: Section 1231 and Recapture Provisions 53. continued

Tax and Credits

567-89-1234 Page 2 38 539,514.

7,753. 531,761. 0. 531,761. 107,228. 107,228.

110,000. 2,772. 2,772.

Amount You Owe Third Party Designee Sign Here

75 Yes. Complete the following.

Preparers SSN or PTIN Check if self-employed

Paid Preparers Use Only

Form 1040 (2005)

17-22 53. continued

2007 Individual Volume/Solutions Manual

OMB No. 1545-0074

Attachment Sequence No. Your social security number

Taxes You Paid (See instructions.)

Interest You Paid

Casualty and Theft Losses

19 Job Expenses 20 and Certain Miscellaneous Deductions

Other Miscellaneous Deductions Total Itemized Deductions

Itemized Deductions Limited per IRC Sec. 68.

Schedule A (Form 1040) 2005

Property Transactions: Section 1231 and Recapture Provisions 53. continued

Schedule B Interest and Ordinary Dividends