Capital Assets — Related Issues, focuses its discussion on the following issues: (1) the “sale or exchange” requirement that is necessary in order for a capital asset to qualify for capital asset treatment under §1221; (2) the interpretation of the “property” requirement under §1221; (3) alternative characterizations of sales or exchanges of capital assets under other Code sections; (4) various judicial doctrines that may recharacterize gains or losses as arising or not arising, as applicable, from the sale or exchange of a capital asset; (5) specific issues involved in the sale of a business; (6) the computation and character of a capital gain or loss; and (7) issues related to the treatment of gain from the sale or exchange of qualified small business stock held by a noncorporate taxpayer for more than five years.

Tax Management Portfolio, Capital Assets — Related Issues, No. 562, serves as a companion Portfolio to Tax Management Portfolio, Capital Assets, No. 561-3rd.

This Portfolio may be cited as Rothman, Capps, Herzog, and Rigel, 562 T.M., Capital Assets — Related Issues.

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.

Portfolio 562-1st: Capital Assets — Related Issues

 Portfolio Description

 Authors

 Technical Advisors

 Description

 Detailed Analysis

 I. The Sale or Exchange Requirement

 A. General Overview

 1. Definition of “Sale or Exchange”

 a. Definition of a “Sale”

 b. Definition of an “Exchange”

 2. Background

 3. Statutory Sale or Exchange Treatment

 4. Dispositions that Are Not Sales or Exchanges

 5. Other Transactions

 B. Treatment of Specific Types of Transactions as Sales or Exchanges

 1. Dispositions of Debts: Retirement and Satisfaction of Bonds, Debts, and Other Obligations

 a. General

 b. Section 1271

 c. Case Law Not Involving § 1271 or Its Predecessors

 d. Property Transfers by Debtor to Satisfy or Retire Debt

 2. Cancellation, Lapse, Expiration or Other Termination of Rights or Obligations

 a. General

 b. Section 1241

 c. Section 1234A

 d. Case Law Not Involving § 1234A or § 1241

 (1) The Extinguishment Cases

 (a) Ordinary Income

 (b) Capital Gain or Loss

 (2) Substitute for Income — Comr. v. Pittston Co.

 (3) The Demise of the Extinguishment Cases

 (4) Extinguishment Redux

 (5) Post-Extinguishment Redux

 3. Involuntary Dispositions

 a. General

 b. Section 1231

 c. Foreclosures and Conveyances by Deeds in Lieu of Foreclosure

 (1) Outstanding Debt Exceeds Debtor's Basis in the Property

 (a) Debtor Is Solvent and Personally Liable on the Debt

 (b) Debtor Is Solvent and Not Personally Liable on the Debt

 (c) Debtor Is Insolvent and Personally Liable on the Debt

 (d) Debtor Is Insolvent and Not Personally Liable on the Debt

 (2) Debtor's Basis in the Property Exceeds Outstanding Debt

 (3) Timing of Gain or Loss Recognition in a Foreclosure

 4. Abandonment

 a. Abandonment of Property Where Taxpayer Is Personally Liable on the Debt

 b. Abandonment of Property Where Taxpayer Is Not Personally Liable on the Debt

 5. Worthlessness of Securities

 6. Payments by a Purchaser upon Default

 a. Options

 (1) Treatment of Grantor of Option

 (2) Treatment of Holder of Option

 b. Treatment of Down Payments or Deposits Before September 5, 1997

 (1) Treatment of Seller

 (2) Treatment of Purchaser

 c. Treatment of Down Payments or Deposits After September 5, 1997

 d. Default After Sale Completed

 7. Shareholder's Transfer of Stock to Employees

 8. Anticipatory Sales to Obtain Sale or Exchange Treatment

 9. Transfers of Property to Pension Plans

 10. Corporate Distributions

 11. Partition

 12. Transfer or Surrender of Life Insurance Policies

 a. General

 b. Surrender of a Life Insurance Contract

 c. Sale of a Life Insurance Contract

 d. Purchase of Life Insurance Contract by Third Party (“Life Settlements”)

 II. The “Property” Requirement

 A. General

 B. General Nonstatutory Exclusions to “Property” Definition

 1. Attributes of Property Approach

 a. General

 b. The Ferrer Case

 c. Rights to Acquire Interest in a Capital Asset

 d. Leasehold Interests

 e. Licenses

 2. The Substitution of Ordinary Income Approach

 a. General

 b. Right to Collect Previously Accrued Income

 c. Right to Collect Income

 (1) Substitute for Ordinary Income

 (2) Insurance Agency Management Contract

 d. Right to Earn Income

 (1) Personal Service Contracts

 (2) Rights to Purchase Materials or Products

 (3) Patent Rights

 (4) Contract Rights

 (5) Life Insurance Contracts

 e. Disguised Compensation

 C. Specific Examples of Certain Rights as Property

 1. Life Estates as Property

 a. General

 b. Disposition Aspects

 2. Securities Futures Contracts as Property

 3. Currency and Currency Contracts as Property

 a. Currency

 b. Currency Contracts

 4. Oil, Gas, and Other Mineral Interests as Property

 5. Interests in Privacy, Names, Trade Secrets, and Trade Names as Property

 a. Privacy

 b. Names

 c. Trade Secrets and Trade Names

 6. Memberships in Organizations as Property

 7. Miscellaneous Interests as Property

 a. Sham “Wine Contracts”

 b. “Whiskey Certificates”

 c. Rights Conditional upon Condemnation of Property

 d. Development Rights in Agricultural Lands

 e. Water Contracts

 f. Bank Deposits

 g. Human Body Parts

 h. “Scalper” Commodity Future Contracts

 i. Environmental Allowances and Credits

 j. Release of Restrictive Covenant

 III. Alternative Characterizations of Sales or Exchanges of Capital Assets

 A. Introduction

 B. Statutory Recharacterization

 1. Capital to Ordinary

 a. Section 130

 b. Section 163(d)(4)

 c. Section 80

 d. Section 165(g)(3)

 e. Section 165(l)

 f. Section 304

 g. Section 305(e)

 h. Section 306

 i. Section 367(d)

 j. Section 467(c)

 k. Section 475

 l. Section 582(b) and (c)

 m. Section 617

 n. Section 707(b)(2)

 o. Section 751(a)

 p. Section 817A

 q. Section 1236

 r. Section 1237(b)

 s. Section 1239

 t. Section 1242

 u. Section 1243

 v. Section 1244

 w. Section 1245

 x. Section 1248

 y. Section 1249

 z. Section 1250

 aa. Section 1252

 bb. Section 1254

 cc. Section 1255

 dd. Section 1257

 ee. Section 1258

 ff. Section 1260

 gg. Section 1271

 hh. Section 1276

 ii. Section 1287

 jj. Sections 1291–1298

 kk. Section 1385(c)

 2. Ordinary to Capital

 a. Section 1(h) — Qualified Dividend Income

 b. Section 303

 c. Section 631(a)

 d. Section 1231

 e. Section 1234A

 f. Section 1235

 3. Other Statutory Recharacterization Provisions

 a. Section 166(d)

 b. Section 301(c)(3)(A)

 c. Section 302

 d. Sections 331 and 332

 e. Sections 724 and 735

 f. Section 751(b)

 g. Section 1233(b)

 h. Section 1234

 i. Section 1234B

 j. Section 1241

 k. Section 1253

 l. Section 1256

 C. Judicial Recharacterization Doctrines

 1. Judicial Recharacterization Based on Prior Transactions — The Arrowsmith Doctrine

 a. General

 b. Arrowsmith and Payments Under the Securities Act

 c. Arrowsmith and Settlements and Other Payments

 d. Integrated Events

 2. The Open Transaction Doctrine

 3. “Sales” Used to Convert Ordinary Income into Capital Gains — The Sham Transaction Doctrine

 4. Corn Products and Its Progeny

 IV. Sale of a Business

 A. Introduction

 B. Section 1060: Allocation of Purchase Price in Applicable Asset Acquisitions

 1. Historical Overview

 2. Section 1060 ­ Generally

 3. Applicable Asset Acquisition

 a. Trade or Business

 (1) Section 355 Active Trade or Business

 (2) Circumstances Under Which Goodwill or Going Concern Value Could Attach

 (3) Transactions that May Fail the § 1060 Trade or Business Requirement

 (4) Multiple Trades or Businesses Transferred

 b. Cost Basis

 (1) In General

 (2) Section 1031 Exchanges

 4. Allocation of Consideration Among Assets

 a. Consideration

 (1) In General

 (2) Transaction Costs

 (3) Treatment of Covenants Not to Compete

 b. Fair Market Value

 (1) In General

 (2) IRS May Challenge; Taxpayers Bound

 (3) Treatment of Liabilities

 c. Asset Classes

 (1) Current Regulations — Seven Classes

 (2) Examples

 d. Post-Closing Adjustments to Consideration

 (1) Increases in Consideration

 (2) Decreases in Consideration

 (3) Contingent Income Assets

 5. Certain Partnership Transactions

 6. Information Reporting Requirements

 a. In General

 b. Certain Related-Party Transactions

 7. Section 6050J Foreclosures

 8. Comparison of § 1060 to § 338(h)(10)

 C. Methods Other than the Residual Method for Allocating Value to Intangibles

 1. Formula Method or Capitalization Method

 2. Second-Tier Allocation Method

 3. Bargain Method

 4. Allocations in Installment Sales

 V. Computation and Character of Capital Gain or Loss

 A. General

 B. Amount Realized

 C. Basis

 1. Property Acquired by Purchase

 2. Property Acquired by Gift

 3. Property Acquired by Inheritance

 D. Holding Period

 1. General

 2. Holding Period Computations

 3. Property Acquired from a Decedent

 4. Tacked Holding Periods

 5. Partnership Interests

 6. Sale of Option Distinguished from Sale of Property

 7. Sale of Entity

 E. Calculation of Tax on Capital Gains

 1. Rates of Tax

 2. 28% Gain

 a. Collectibles Gain and Loss

 b. Section 1202 Gain

 c. Net Short-Term Capital Losses and Long-Term Carryovers

 3. 25% Gain: Unrecaptured § 1250 Gain

 a. In General

 b. Look-Through Provisions

 4. 15% Gain

 VI. Qualified Small Business Stock

 A. General

 B. Small Business Stock Definition

 1. General

 2. The $50 Million Capitalization Test

 3. The Active Business Test

 C. Other Rules

 D. Rollover of Gain

 Working Papers

 Table of Worksheets

 Worksheet 1 Model Asset Purchase Agreement Language for Purchase Price Allocation

 Worksheet 2 Form 8594, Asset Acquisition Statement Under Section 1060

 Bibliography

 Treatises

 Periodicals

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