Sheila inherited 300 shares of stock, 100 shares of magenta and 200 shares of purple. She has a stockbroker sell the shares for her, use the proceeds for personal expenses, and thinks nothing further about her transactions. What issues does she face when she prepares her Federal income tax return? Sheila needs to treat the sale of her shares as a capital gain because she had the stock for investment purposes, and not as inventory . Alison owns a painting that she received as a gift from her aunt 10 years ago.
The aunt created the painting. Allison has displayed the painting in her home and has never attempted to sell it. Recently, visitor noticed the painting and offered Allison $5,000 for it. Is Allison decides to sell the painting, what tax issues does she face? The painting is a ordinary asset, and she needs to treat the sale of it as a ordinary gain, unless she wants to treat it as a capital gain . Is a note receivable that arose in the ordinary course of the taxpayer’s retail business capital asset? Why or why not?
A note receivable is not a capital asset; it is an ordinary asset and generates ordinary income . Michael is a “bond trader” who buys and sells bonds regularly for his own account. His cousin, who purports to be a tax expert but is not a CPA, has told Michael that because the bonds Michael holds are inventory, they are ordinary assets and not capital assets. Is this always true? Explain. This is not always true. If the bonds are held for his own account as an investment, they are a capital asset .
If they are inventory, then they would be an ordinary asset. Michael should know because he “must designate the investment purpose by the close of business on the acquisition date” . Tricia owns numerous office buildings. A major tenant of one of the buildings wanted to cancel its lease because it was moving to another city. After lengthy negotiations, the tenant paid Tricia $500,000 to cancel its obligations under the lease. If the tenant had fulfilled the lease terms, Tricia would have received rent of one point eight million dollars.
What factors should be considered to determine the amount and character of her income from the circumstances? The factors that should be considered are the terms and purpose of the lease. The payments that Tricia received for the lease cancellation should be considered “ordinary income because they are considered to be in lieu of rental payments” .
References
- Hoffman, W. (2013). South-western federation taxation 2013: individual income taxes.. Cincinnati: South-Western
