PROBLEM 19 Illustrating Method of Determining Gain Derived From Sale of Property Acquired by Bequest Prior to March 1, 1913 in Case the Fair Market Value as at March 1, 1913 was in Excess of Value at Date of Acquisition, but Less than the Selling Price FACTS: Charles Dorset purchased an apartment house (together with the land on which it stood) in 1910 for $100,000. He died August 13, 1912, and by the terms of his will bequeathed this property to his son, Frank Dorset. The fair market value of the building on August 13, 1912, was estimated to be $125,000, and the fair market value of the land on this date was estimated to be $25,000. The fair market value of the entire property on March 1, 1913 was estimated to be $210,000. Frank Dorset continued to hold title to this property until August 15, 1921, when he sold it for $250,000 in cash. Engineers estimated that the depreciation on the apartment house was 2% per annum based upon its expected life from March 1, 1913. The value of the land on March 1, 1913, was estimated to be the same as it was on August 13, 1912. QUESTION: What is the profit derived by Frank Dorset as the result of the sale above mentioned? ANSWER: As the fair market value of the property on March 1, 1913, is in excess of its value at the date acquired by Frank Dorset, the taxable profit is the difference between the proceeds from the sale of said property ($250,000) and the depreciated March 1, 1913, value of said property ($178,704). This latter figure as well as the taxable profit is arrived at as follows: Value of entire property March 1, 1913 ...... $210,000 25,000 Depreciation on apartment house for 8 years 31,296 Sec. 202 (b): "The basis for ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, shall be the same as that provided by subdivision (a); but-(1) If its fair market price or value as of March 1, 1913, is in excess of such basis, the gain to be included in the gross income shall be the excess of the amount realized therefor over such fair market price or value; . . ." For quotation of section 202 (a) see Problems 15, 16, 17 and 18. PROBLEM 20 Illustrating Basis of Computing Amount of Loss Sustained FACTS: Under the terms of the will of Robert Clark, 500 shares of P. D. Q. RR. Co. stock were bequeathed to his brother Jerome Clark. Robert Clark died August 6, 1912. The fair market value of the above-mentioned stock on August 6, 1912, was $50,000. The fair market value of the property at March 1, 1913, was $75,000. Subsequently the railroad ceased paying the large dividends it had paid in former years, so Mr. Clark sold the 500 shares August 10, 1921, for $25,000. QUESTION: What was the amount of the deductible loss if any, sustained by Mr. Clark on the sale of the 500 shares of stock? ANSWER: The basis for computing the amount of loss sustained is the fair market value at time of inheritance. Fair market value of the 500 shares of stock $50,000.00 on August 6, 1912 .... Deductible loss on sale of the stock ... .. $25,000.00 Where the fair market value at March 1, 1913, of a bequest received prior to that date is greater than the value at the date of its acquisition and the selling price is less than the value at acquisition, the deductible loss is the amount by which the value at acquisition by bequest exceeds the selling price. REFERENCES: Art. 1563, Reg. 62: "... In the case of property acquired by gift, bequest, devise, or inheritance, prior to March 1, 1913, the taxable gain or deductible loss from the sale or other disposition thereof shall be computed in accordance with article 1561. . . .” Art. 1561, Reg. 62: "... Where the fair market value as at March 1, 1913, is greater than the cost and the selling price is less than the cost, the deductible loss is the amount by which the cost exceeds the selling price. . . ." PROBLEM 21 Illustrating Method of Determining Amount of Taxable FACTS: Mrs. Margaret Smith died on August 19, 1909, and under the terms of her last will and testament she bequeathed to her daughter, Mary Smith, five shares of the capital stock of the Highbridge Coal Company. The market value of this stock in August, 1909, was $60 per share; on March 1, 1913, the market value of the stock was $85 per share. Mary Smith sold the five shares on June 16, 1921, for $75 per share. QUESTION: Did Mary Smith sustain a deductible loss or derive a taxable gain from the sale of the stock? ANSWER: The sale results in neither gain nor loss from a tax standpoint. REFERENCE: Sec. 202 (b): "The basis for ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, shall be the same as that provided by subdivision (a); but . . . (3) If the amount realized therefor is more than such basis but not more than its fair market price or value as of March 1, 1913, or less than such basis but not less than such fair market price or value, no gain shall be included in and no loss deducted from the gross income. For quotation of section 202 (a) see Problems 15, 16, 17 and 18. PROBLEM 22 Illustrating Method of Determining Amount of Taxable Profit Derived or Loss Sustained from the Sale of Property Received as a Bequest Before March 1, FACTS: 1913, in Case the Market Value at March 1, By the will of Andrew Black, who died April 6, 1905, a section of land on the west shore of Lake Champlain was devised to his son William Black. The value of the land in April, 1905, was $25,000. A forest fire in 1912 destroyed the trees on the adjoining properties, greatly marring the scenic beauty of the countryside. The value of the property on March 1, 1913, was appraised at $10,000. In October, 1921, Mr. Black sold the above property for $15,000. QUESTION: Did Mr. Black sustain a deductible loss or did he derive a taxable gain? ANSWER: While the proceeds from the sale of the property were in excess of the March 1, 1913, value thereof, such proceeds were less than the value at the time acquired by William Black and therefore the sale reflects neither a taxable gain nor a deductible loss. REFERENCES: Sec. 202 (a) (3). (Quoted under Problem 18.) PROBLEM 23 Illustrating Basis for Determining Amount of Taxable FACTS: Mrs. Mary A. Johnson purchased 10,000 shares of the capital stock of the Hugo Manufacturing Co. June 16, 1911, paying therefor $90 per share. On March 1, 1913, the market value of the stock was $55 per share. On July 1, 1921, Mrs. Johnson sold these shares receiving therefor $100 per share. QUESTION: What taxable profit did Mrs. Johnson derive from the sale of this stock? |