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PROBLEM 14

Illustrating Method of Determining Gain or Loss From the Sale of Property Acquired After March 1, 1913

FACTS:

The Conklin Bakery, Inc., purchased an auto truck for $2,500 January 2, 1918. On July 1, 1921, the auto truck was sold for $500. It was found from experience that the average life of auto trucks used by this concern was four years.

QUESTION:

Did the above corporation sustain a loss or derive a profit from the sale of the truck?

ANSWER:

The basis for computing the gain or loss from the sale is the cost less the depreciation to date of sale. Since the truck had an expected life of four years the annual rate of depreciation would be 25%. The taxable income to the corporation from the sale is found by the following computation:

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Sec. 202 (a): "The basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property real, personal, or mixed acquired after February 28, 1913, shall be the cost of such property: .

Art. 1561, Reg. 62: "For the purpose of ascertaining the gain or loss from the sale or exchange of property proper adjustment must be made . . . for any depreciation or depletion sustained."

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PROBLEM 15

Illustrating Basis For Determining Gain or Loss From The Sale of Property Which Should be Included in Inventory

FACTS:

Harris A. Miller, a retail clothier, had a supply of raincoats which he had carried in stock for three years. The raincoats had cost him $17 each. He attempted to sell them in December, 1920, for $15 each. In closing his accounts for the calendar year 1920, which was the basis for the filing of his income tax returns, such raincoats (100) as remained unsold on December 31, 1920, were priced at $15 per coat. Mr. Miller had followed the practice of inventorying on the basis of cost or market, whichever was lower. In October, 1921, Mr. Miller disposed of all his coats at $10 each.

QUESTION:

What is the deductible loss (for tax purposes) as a result of this sale?

ANSWER:

The deductible loss is computed as follows:

100 raincoats inventoried December

31, 1920, at ....

100 raincoats sold October, 1921, for 10 "

Deductible loss on sale

REFERENCE:

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$15 per coat $1500

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Sec. 202 (a): "That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that. (1) In the case of such property, which should be included in the inventory, the basis shall be the last inventory value thereof; ..."

PROBLEM 16

Illustrating Basis of Computing Gain Derived or Loss Sustained from the Sale of Property Acquired by Gift

FACTS:

On or Prior to December 31, 1920

James S. Morton purchased 100 shares of stock of the Interstate Oil Company August 4, 1911, for $25 per share. The March 1, 1913, value of this stock was $50 per share. Mr. Morton donated the above shares to Howard Lewis December 25, 1920, upon which date the market value of these shares was $60 per share. On October 16, 1921, Mr. Lewis sold the above 100 shares of the Interstate Oil Company stock for $75 per share.

QUESTION:

Upon what basis should the taxable profit derived by Mr. Lewis from the sale of the above stock be computed?

ANSWER:

As Mr. Lewis acquired the stock by gift prior to December 31, 1920, the gain from the sale of the stock would be computed by deducting from the selling price the value of the shares at the time acquired from the donor.

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Sec. 202 (a): "That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that... (2) . In the case of such property acquired by gift on or before December 31 1920, the basis for ascertaining gain or loss from a sale or other disposition thereof shall be the fair market price or value of sucn property at the time of such acquisition; . . ."

PROBLEM 17

Illustrating Basis for Computing Gain Derived or Loss Sustained from Sale of Property Acquired by Gift after

FACTS:

December 31, 1920

Mr. Robert Brown, Jr., acquired fifty shares of United States Steel Company common stock by gift from his father January 7, 1921, which shares were acquired by the latter in 1916 at $125 per share. U. S. Steel common was selling for $82.75 per share January 7, 1921. In July, 1921, Mr. Robert Brown, Jr., sold the above stock at $78 per share.

QUESTION:

What is the basis for computing the gain derived or the loss sustained? What, if any, was the amount of the loss?

ANSWER:

The basis for computing the gain derived or the loss sustained is the cost to the donor (having been acquired by him after March 1, 1913), as the stock was acquired by gift after December 31, 1920. Since the stock was acquired at $125 per share by the donor and sold by the donee at $78 per share, the donee sustained a loss equal to the difference, or $47 per share.

REFERENCE:

Sec. 202 (a) (2): "In the case of such property, acquired by gift after December 31, 1920, the basis shall be the same as that which it would have in the hands of the donor or the last preceding owner by whom it was not acquired by gift. . . .

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PROBLEM 18

Illustrating Basis for Determining the Gain Derived or Loss Sustained from the Sale of Property Received by Inheritance after February 28, 1913

FACTS:

Mr. Herman Hodges was the son and sole heir of Mr. William

J. Hodges. On April 10, 1918, Mr. William J. Hodges died intestate. Among the assets in the decedent's estate was an office building which cost $15,000, but which on April 10, 1916, was valued at $20,000. The expected life of the building from April, 1916, was estimated to be 20 years. Mr. Herman Hodges, having inherited the entire estate of his father, held the building until April 10, 1921, when it was sold for $18,000.

QUESTION:

What is the taxable gain or deductible loss to Mr. Herman Hodges as the result of the sale above mentioned?

ANSWER:

Mr. Hodges derived a taxable profit from the above sale represented by the difference between the selling price and the fair market value of the building on the date it was acquired by him by way of inheritance (after making proper provision for depreciation during the entire period the building was held by him, up to the date of sale).

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Sec. 202 (a): "That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that... (3) in the case of such property, acquired by bequest, devise, or inheritance, the basis shall be the fair market price or value of such property at the time of such acquisition. The provisions of this paragraph shall apply to the acquisition of such property interests as are specified in subdivision (c) or (e) of section 402."

Section 402 has reference to the Estate Tax.

Art. 1561, Regulations 62: "... Proper adjustment must be made. . . . for any depreciation or depletion sustained. . . . .”

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