Basis of Assets Presentation

Notes de l'éditeur

1. Acquisition of Multiple Assets in a Lump-Sum Purchase . The total cost is allocated among the individual assets . a. The tax motives of the buyer and seller may conflict . Example : Teresa sells land and a building to Paul for a lump-sum amount. Teresa may prefer to allocate a greater amount to the land in order to eliminate or minimize depreciation recapture under § 1245 or § 1250, while Paul prefers to allocate a greater amount to the building in order to maximize future depreciation deductions. b. The lump-sum cost is allocated on the basis of the fair market value of the individual assets . The negotiating abilities of the buyer and the seller can impact the fair market value assigned to individual assets. c. Section 1060 provides a special allocation rule if a business is purchased and goodwill is involved. The purchase price is assigned to the assets, excluding goodwill, to the extent of their total fair market value. This assigned amount is allocated among the assets on the basis of the fair market value of the individual assets acquired. Goodwill is then assigned the residual amount of the purchase price. d. Some of the assets may be capital or § 1231 assets that receive special tax treatment upon subsequent sale or other disposition.
2. Allocation for Stock Rights and Stock Dividends . Allocation may be necessary on the receipt of nontaxable stock dividends and stock rights under §§ 305(a) and 307(a). a. Nontaxable stock dividends . The allocation depends on whether the dividend is a common stock dividend on common stock or a preferred stock dividend on common stock. The holding period for a nontaxable stock dividend , whether received in the form of common stock or preferred stock, includes the holding period of the original shares. (1) Common stock dividend on common stock . In this case, the cost of the original common shares is allocated to the total shares owned after the dividend. (2) Preferred stock dividend on common stock . In this case, the cost of the original common shares is allocated between the common and preferred shares on the basis of their relative fair market values on the date of distribution. b. Nontaxable stock rights . Whether part of the basis of the stock is allocated to the stock rights depends on the relative values of the stock and the rights or on whether the taxpayer elects to allocate. The holding period of nontaxable stock rights includes the holding period of the stock on which the rights were distributed. However, if the rights are exercised, the holding period of the newly acquired stock begins with the date the rights are exercised.
3. Fair market value of the stock rights is at least 15% of the fair market of the stock. Allocation is mandatory in this case. (2) Fair market value of the stock rights is less than 15% of the fair market value of the stock. Allocation is not required in this case. However, the taxpayer can elect to allocate .
4. GIFT BASIS 18. Reason for Carryover Basis . A taxpayer who receives property as a gift has no donee cost or consideration associated with the property. a. Under § 102, gifts are not treated as income to the donee. b. Therefore, a carryover basis must be assigned to the property. Otherwise, the amount of the gift would be taxed as a gain on the subsequent disposition of the property since the basis would be zero. (2) In addition, there would be no basis for depreciation (cost recovery) if the gift property is depreciable.
5. Calculation of Basis . Basis of gift property depends on whether the donee recognizes a gain or a loss on the subsequent disposition of the property. a. Gain basis : If the subsequent disposition results in a gain, the basis of the gift property is the same as the donor’s adjusted basis on the date of the gift if no gift tax is paid. If gift tax is paid, the basis calculation formula is dependent on whether the gift was made prior to 1977 or after 1976. (1) Gifts made prior to 1977 : The calculation formula is as follows: Donor’s basis + gift tax paid* * Gift tax paid is permitted to be added only to the extent the summation of the donor’s basis and gift tax paid does not exceed the fair market value of the property at the date of the gift. (2) Gifts made after 1976 : The calculation formula is as follows: Donor’s basis +  Unrealized appreciation  X Gift tax paid  Taxable gift*  * The taxable gift is the fair market value of the gift less the per donee annual exclusion of $12,000.
6. b. Loss basis : If the subsequent disposition results in a loss, the basis of the gift property is the lower of the donor’s adjusted basis or fair market value on the date of the gift. (1) Loss basis rule will produce a basis different from the gain basis rule only if the property has declined in value while the donor held it. (2) Reason for the loss basis rule is that the law views the decline in value as the donor’s loss, which should not be deductible by the donee.
7. No Gain or Loss on Subsequent Disposition . The donee will recognize neither gain nor loss on the sale or other disposition of the gift property if the amount realized is not greater than the basis for gain or less than the basis for loss.
8. Special Limitation on “Death-Bed” Gifts . Section 1014 contains a provision intended to eliminate a tax avoidance scheme associated with “death-bed” gifts. a. If (1) the decedent received appreciated property as a gift during the one-year period ending on the date of the decedent’s death, and (2) the property is acquired from the decedent by the donor of the property (or the donor’s spouse), the property will have a carryover basis rather than a stepped-up basis. b. Example : Doris, who was terminally ill received a gift of land from her son, Steve, on September 1, 2007, when the fair market value of the land was $10,000. Steve had purchased the land in 1991 for $6,000. Thus, Doris’s basis for the land is equal to Steve’s basis, or $6,000. Doris died on December 15, 2007, and bequeathed the land which was then worth $11,000 to Steve. Under the general rule for inherited property, Steve would receive a stepped-up basis of $11,000. However, because the one-year exception applies, his basis is $6,000 (i.e., the same as the decedent’s basis). If Doris had made a capital improvement to the property of $2,000 after its receipt by gift and prior to her death, Steve’s basis would be $8,000 ($6,000 + $2,000).
9. Wash Sales . Section 1091 provides for loss disallowance associated with a “wash sale.” a. A wash sale occurs if a taxpayer sells or exchanges stocks or securities at a realized loss and, within thirty days before or after the date of such sale or exchange, acquires “substantially identical” stocks or securities. b. The basis of the replacement stocks or securities is the cost of such replacement stocks or securities increased by the amount of the disallowed loss . The holding period of the replacement securities begins on the date of acquisition of the old securities. c. A taxpayer may acquire fewer shares than the number sold in a wash sale. The loss from the sale is prorated between recognized and unrecognized loss on the basis of the ratio of the number of shares acquired to the number of shares sold.