WFT Ch17 Solutions

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CHAPTER 17

PROPERTY TRANSACTIONS:SECTION 1231 AND RECAPTURE PROVISIONS

SOLUTIONS TO PROBLEM MATERIALS

Question/Problem Topic

Status:PresentEdition

Q/P inPriorEdition

1 § 1231 assets New2 § 1231 assets: application New3 § 1231 assets: losses New4 § 1231 assets: history New5 § 1231 assets: requirements to qualify New6 § 1231 assets: offsetting gains and losses New7 Section 1231 netting and casualty loss Unchanged 78 Section 1231: realized versus recognized Unchanged 89 Section 1231: business use property

condemnationUnchanged 9

10 Section 1231 netting: gains versus losses Unchanged 1011 Property gains and adjusted gross income Unchanged 1112 Section 1231 loss and § 1245 recapture Unchanged 1213 Section 1231 gain from disposition with

§ 1245 depreciation recaptureUnchanged 13

14 Section 1231 netting and depreciationrecapture

Unchanged 14

15 Section 1245 recapture and short-termholding period

Unchanged 15

16 Section 1231 and § 1245 property Unchanged 1617 Section 1245 recapture and single purpose

agricultural structureUnchanged 17

18 Residential real estate and § 1250 recapture Unchanged 1819 Unrecaptured § 1250 gain Unchanged 1920 Unrecaptured § 1250 gain Unchanged 2021 Unrecaptured § 1250 gain Unchanged 2122 Unrecaptured § 1250 gain Unchanged 2223 Unrecaptured § 1250 gain Unchanged 2324 Depreciation recapture and gifts Unchanged 2425 Depreciation recapture and death Unchanged 25

17-1


Question/Problem Topic

Status:PresentEdition

Q/P inPriorEdition

26 Depreciation recapture for corporation:property distributions

Unchanged 26

27 Related party transactions Unchanged 2728 Reporting procedure: § 1231 loss Unchanged 2829 Reporting procedure: business land and

§ 1231 gainUnchanged 29

30 Reporting procedure: § 1231 lookback Unchanged 30*31 Section 1231: timber Unchanged 31*32 Section 1231 computation and farm assets Unchanged 3233 Section 1231 nonpersonal use property

casualtyModified 33

*34 Section 1231 lookback Modified 3435 Section 1231 gain and loss planning Unchanged 35*36 Section 1245 recapture Unchanged 36*37 Section 1245 recapture Unchanged 37*38 Section 1245 recapture and § 1231 lookback Unchanged 38*39 Section 197 amortization and § 1245

recaptureUnchanged 39

*40 Section 1231 loss, § 1250 recapture, andunrecaptured § 1250 gain

Modified 40

*41 Section 1231 gain and § 1250 recapture Modified 41*42 Comprehensive §§ 1231, 1245, and 1250 Unchanged 4243 Section 1231 gain and unrecaptured § 1250

gainUnchanged 43

44 Recapture and gifts Unchanged 4445 Section 1245 and gifts New46 Section 1245 and inheritance New47 Section 1245 and charitable contributions Unchanged 4748 Section 1245 and like-kind exchanges Unchanged 4849 Section 1245 and property distributions Unchanged 4950 Reporting procedure New51 Reporting procedure New*52 Sections 1245 and 1231 gain and sales price

allocationUnchanged 52

*53 Cumulative Unchanged 54*54 Cumulative Modified 53

ResearchProblem

1 Section 1245 recapture Unchanged 12 Section 1250 recapture Unchanged 23 Alternative tax rates Unchanged 34 Section 1245 recapture and §197 intangibles New5 Internet activity Unchanged 56 Internet activity Modified 67 Internet activity Unchanged 7

*The solution to this problem is available on a transparency master.

17-2 2007 Individual Volume/Solutions Manual


CHECK FIGURES

31.a. 2004 $0 recognized; 2005 $10,000recognized gain; 2006 $32,000recognized loss.

31.b. 2005 § 1231; 2006 ordinary loss.31.c. 2005 $32,000 recognized ordinary

loss.31.d. 2004 $0 recognized; 2005 $52,000

recognized § 1231 loss, $1,000recognized ordinary gain; 2006 nogain or loss.

32. AGI $55,450.33. $13,000 net § 1231 gain.34. 2005 $30,000 ordinary gain; 2006

$9,000 ordinary gain, $30,000§ 1231 gain treated as a long-termcapital gain.

35. Sell the § 1231 gain asset this yearand the § 1231 loss asset nextyear.

36.a. Rack $35,000 ordinary gain; forklift$7,000 § 1231 loss; bin $7,000ordinary gain.

36.b. $0.37.a. Rack $60,000 ordinary gain,

$35,000 § 1231 gain; forklift$7,000 § 1231 loss; bin $7,000ordinary gain.

37.b. $23,000 capital gain and $5,000ordinary income.

38.a. Rack $5,000 ordinary gain; forklift$7,000 § 1231 loss; bin $3,000§ 1231 loss.

38.b. $0 capital gain.39. $4,500 ordinary gain; $29,500

§ 1231 gain.

40.a. $41,032 cost recovery; $358,968adjusted basis of building.

40.b. $73,968 § 1231 loss.41.a. $0 § 1250 ordinary gain and

$345,000 § 1231 gain.41.b. $400,000 § 1231 gain.42.b. AGI $461,108.43.a. $51,000 § 1231 gain.45.a. $3,000 adjusted basis at date of

sale.45.b. $33,000 recognized gain; $8,000

ordinary income and $25,000§ 1231 gain.

46.a. $17,000 adjusted basis at date ofsale.

46.b. $19,000 recognized gain; $5,500ordinary income and $13,500§ 1231 gain.

47. No recognized gain or loss;$34,000 charitable contribution.

48. The entire $45,000 gain is ordinaryincome due to § 1245 depreciationrecapture.

49. Brown has $4,500 § 1245 ordinaryincome; Emily has a $4,500qualifying dividend.

50. Section 1231 loss reported in PartI, line 2 of Form 4797.

51. Ordinary gain not carried toSchedule D.

53. AGI is $539,513; taxable income is$531,760; tax refund is $2,772.

54. AGI is $159,800; taxable income is$126,586; tax refund is $638.

Property Transactions: Section 1231 and Recapture Provisions 17-3


DISCUSSION QUESTIONS

1. Involuntary conversions of nonpersonal use assets qualify for § 1231 treatment. Theseconversions otherwise would not qualify for capital gain treatment because an involuntaryconversion is not a sale or exchange. pp. 17-3, 17-6, and 17-7

2. Section 1231 treatment does not apply to all business property. The property must be heldfor the long-term holding period and be either depreciable property or real estate used in atrade or business. p. 17-3

3. If the disposition of depreciable business property results in a net loss, § 1231 treats theloss as an ordinary loss rather than as a capital loss. p. 17-3

4. At the beginning of World War II, two developments in particular forced Congress toreexamine the situation regarding business assets. First, the sale of business assets at again was discouraged because the gain would be ordinary income. Gains were commonbecause the war effort had inflated prices. Second, taxpayers who did not want to sell theirassets often were required to do so because of government acquisitions throughcondemnation. p. 17-4

5. The taxpayer must address the following issues:

l Was the painting used in a trade or business?

l Was the painting depreciable (not held for sale in the ordinary course of the taxpayer’sbusiness and not held for investment)?

If the answer to both questions is ‘‘yes,’’ the property is a § 1231 asset because it has beenheld more than a year. p. 17-4

6. The vacant land would have to be a § 1231 asset for the gain on the land to offset the§ 1231 loss. Consequently, the land would have to have been used in a trade or businessand held more than 12 months rather than held for investment or personal use activity.pp. 17-3, 17-4, and 17-8

7. The tax issues that Sally must properly handle are:

l Should the two casualty items be netted against one another?

l If the items are netted, what type of gain or loss results from the netting?

l How are the results of the netting integrated with Sally’s other gains and losses (ifany)?

l Should Sally postpone the gain by reinvesting in similar property?

pp. 17-8, 17-9, and Chapter 15

8. Section 1231 has no effect on whether or not realized gain or loss is recognized. Instead,§ 1231 merely dictates how such recognized gain or loss is classified (ordinary, capital, or§ 1231) under certain conditions. p. 17-8

9. Since the property was used in a trade or business and held more than a year, it was a§ 1231 asset. Disposition by condemnation (unlike disposition by casualty or theft) is not



subject to any special netting rules. The loss is a § 1231 loss initially. Personal useproperty condemnation gains and losses are not subject to the § 1231 rules, but theproperty here was business use property. pp. 17-6 and 17-7

10. The factors that will influence whether any of the 2006 net § 1231 amount is treated aslong-term capital gain are:

l What is the amount of the 2003 net § 1231 loss?

l What is the amount of the 2004 net § 1231 gain, and after reducing the 2003 net § 1231loss by the 2004 net § 1231 gain, does any of the 2003 net § 1231 loss remain?

l If any of the 2003 net § 1231 loss remains, what is the amount of the 2005 net § 1231gain, andafter reducing the remaining2003net § 1231 lossby the2005net § 1231gain,doesanyof the 2003net § 1231 loss remain?

l If any of the 2003 net § 1231 loss remains, what is the amount of the 2006 net § 1231gain?

l After reducing the 2006 net § 1231 gain by the remaining 2003 net § 1231 loss, doesany of the 2006 net § 1231 gain remain?

pp. 17-8 and 17-9

11. In both Examples 4 and 6, the taxpayer’s adjusted gross income is $129,400 becausethere is no difference in the amount of gains and losses which are present. The $700 ofnonrecaptured § 1231 loss from 2005 is only used to recharacterize part of the 2006 net§ 1231 gain as ordinary gain. p. 17-8

12. If the taxpayer owns depreciable business equipment held for the long-term holding period,the equipment would have to be disposed of for less than its adjusted basis to generate a§ 1231 loss. Section 1245 depreciation recapture would not be applicable because therehas to be a gain for there to be depreciation recapture. p. 17-12

13. The machine would have to be sold for more than the amount that was paid for it. p. 17-12

14. To properly handle this transaction, Sylvia must determine the following:

l The tax status of the property (§ 1231 asset, capital asset, or ordinary asset).

l The applicability of § 1245 depreciation recapture.

l The outcome of the § 1231 netting process.

Both assets are § 1231 assets. Section 1245 depreciation recapture causes the entire gainof $2,510 ($40,000 � $37,490) to be taxed as ordinary income since the selling price doesnot exceed the $100,000 original cost of the asset. Since the loss of $14,490 ($23,000 �$37,490) on the other asset is the only § 1231 gain or loss, there is a net loss of $14,490that is treated as an ordinary loss. Consequently, Sylvia is partially correct, the $2,510 gainfrom one of the items does offset the $14,490 loss from the other item. However, thesetransactions are reported separately from her 2006 business income. The $11,980 net lossis deductible for adjusted gross income on her 2006 tax return. pp. 17-3, 17-8, and 17-12

15. Section 1245 depreciation recapture generally applies to § 1231 assets; in this casedepreciable equipment held more than one year. This asset was held one year or less; so it



was an ordinary asset rather than a § 1231 asset. Since the asset is ordinary, the gain fromdisposition is also ordinary and § 1245 does not apply. pp. 17-3 and 17-12

16. The team should consider the following issues:

l The holding period of the contract.

l The amortization of the contract.

l The fact that the amortization is subject to § 1245 depreciation recapture.

l Whether the gain exceeds this § 1245 depreciation recapture.

l If the gain exceeds the § 1245 depreciation recapture, then the excess gain is § 1231 gain.

p. 17-13

17. The gain is all § 1245 depreciation recapture ordinary income because the gain is less thanor, in this case, equal to the depreciation taken ($40,000). p. 17-13

18. The real estate would have to have been acquired before 1987 (ACRS property) andaccelerated depreciation taken on it to be subject to the § 1250 depreciation recapturerules. However, for 2006, there would be no § 1250 depreciation recapture because theadjusted basis at the beginning of the tax year would be $0. p. 17-14

19. The maximum amount of unrecaptured § 1250 gain is equal to the depreciation taken onthe property. It will be less than this maximum amount if the § 1231 gain is less than thedepreciation taken. p. 17-17

20. Since the building was sold at a loss, there is no unrecaptured § 1250 gain. p. 17-17

21. None of the gain is taxed as unrecaptured § 1250 gain because there is a net § 1231 lossfor the year of $31,000 ($25,000� $56,000). p. 17-18

22. Abigail’s maximum unrecaptured § 1250 gain is the amount of the depreciation she took onthe real estate. If the $45,000 recognized gain is less than the depreciation taken, thatwould be the maximum. She would have no § 1250 depreciation recapture because sheacquired the real estate after 1986. Therefore, only straight-line depreciation was taken onthe property. pp. 17-16 to 17-19

23. The maximum amount of the unrecaptured § 1250 gain is the depreciation taken on realproperty sold at a recognized gain. When the depreciation taken on real estate is greaterthan the recognized gain, all of the gain is unrecaptured § 1250 gain. Since there was onlyone § 1231 transaction here, all of the net § 1231 gain treated as long-term capital gain isunrecaptured § 1250 gain. The short-term capital loss reduces the unrecaptured § 1250gain/long-term capital gain, but the net long-term capital gain is all subject to tax at thelower of the regular tax rate or 25%. p. 17-18

24. The § 1245 depreciation recapture potential carries over to the donee. p. 17-19

25. The § 1245 depreciation recapture potential does not carry over to the beneficiary. p. 17-19

26. The distribution of the truck is a taxable transaction for the corporation to the extent of theexcess of the fair market value of the truck over the adjusted basis. All of the gain is § 1245



gain because the truck is a § 1231 asset and the fair market value is less than the originalcost. pp. 17-13 and 17-21

27. The distribution of the truck is a taxable transaction for the corporation to the extent of theexcess of the fair market value of the truck over the adjusted basis. All of the gain isordinary gain due to § 1239 because the shareholder is a related taxpayer and will use thetruck in a business. Therefore, the truck is depreciable by the shareholder and § 1239makes all the gain of the transferor ordinary gain. p. 17-21

28. The § 1231 loss is entered in Part I, line 2. p. 17-26

29. The § 1231 gain from the sale of land goes in Part I, line 2. It does not go in Part III becausethere was no depreciation on the land. p. 17-26

30. The § 1231 lookback loss is entered in Part I, line 8. p. 17-26

PROBLEMS

31. Since Sue-Jen elected to treat the cutting as a sale, the recognized gain and loss arecalculated as follows:

a. and b. 2004: $0 recognized gain or loss.

2005: A § 1231 gain of $10,000 is recognized. The contract had been held forthe long-term holding period when the timber was cut in November2005.

FMV at January 1, 2005 $ 110,000Adjusted basis (100,000)

§ 1231 gain recognized $ 10,000

2006: A loss of $32,000 is recognized.FMV at January 30, 2006 $ 78,000FMV at January 1, 2005 (110,000)

Ordinary loss recognized ($ 32,000)

c. The $32,000 ordinary loss would be recognized in 2005 if the sale occurred in 2005.

d. 2004: $0 recognized gain or loss.

2005: A § 1231 loss of $52,000 and an ordinary gain of $1,000are recognized.

FMV at January 1, 2005 $ 48,000Adjusted basis (100,000)

§ 1231 loss recognized ($ 52,000)

FMV at sale in December 2005 $ 49,000FMV at January 1, 2005 (48,000)

Ordinary gain recognized $ 1,000

2006: No gain or loss realized or recognized.

pp. 17-3, 17-5, and Example 3



32. Cattle and horses must be held 24 months or more to qualify as § 1231 assets. Since thecow was held only 15 months, it is an ordinary asset and the $3,000 loss ($15,000 salesprice � $18,000 adjusted basis) is an ordinary loss. The workhorse was held 66 months,so it is a § 1231 asset. The $3,650 gain ($4,000 sales price � $350 adjusted basis) is a§ 1231 gain. Since there is only a § 1231 gain for the year, the net § 1231 gain is $3,650and that gain is treated as an ordinary gain because the $4,000 of prior nonrecapturedlosses causes application of the § 1231 lookback rule. None of the $3,650 net § 1231 gain istreated as a long-term capital gain; so the $200 long-term capital loss is deductible for AGI.

Section 1231 gain from sale of horse (treated as an ordinary gain) $ 3,650Long-term capital loss from corporate stock sale (200)Ordinary loss from sale of milk cow (3,000)Other adjusted gross income 55,000

Adjusted gross income $55,450

p. 17-6 and Concept Summary 17-1

33. Kwan has had two nonpersonal use property casualties. The $30,000 gain is nettedagainst the $17,000 loss and results in a $13,000 net gain. The $13,000 net gain is treatedas a § 1231 gain. Since there are no other property transaction gains or losses, andbecause Kwan has no lookback losses, he has a $13,000 net § 1231 gain for the year.That gain is treated as a long-term capital gain since both assets had been held more than12 months when the flood occurred. p. 17-6 and Concept Summary 17-1

Hoffman, Smith, andWillis, CPAs5191 Natorp Boulevard

Mason, OH 45040

November 23, 2006

Mr. Kwan Lee2367 Meridian RoadHannibal Point, MO 34901

Dear Mr. Lee:

Thank you for the opportunity to discuss the tax effect of the two casualties you sufferedthis year. Both the painting and the vase were assets you were holding for investment. Thepainting casualty resulted in a $30,000 gain because it was insured. The vase casualtyresulted in a $17,000 loss because it was not insured.

The $30,000 gain is netted against the $17,000 loss and results in a $13,000 net gain. The$13,000 net gain is treated as a ‘‘§ 1231 gain’’ � a special type of gain for tax purposes.Since there are no other property transaction gains or losses this year, and because youhad no § 1231 losses in prior years, the $13,000 net § 1231 gain for the year is treated as along-term capital gain. That gain is eligible for a tax rate of no more than 15%.

If you have any questions concerning these transactions or other tax matters, please feelfree to telephone me. Thank you.

Sincerely,

Sheila Dailey, CPAPartner

p. 17-6



34. Net § 1231 gains must jump a final hurdle before being netted with capital transactions.The net § 1231 gain must exceed the sum of nonrecaptured net § 1231 losses recognizedin the five most recent preceding years. The years 2001 through 2003 have a combinednonrecaptured net § 1231 loss of $81,000. The $81,000 nonrecaptured § 1231 loss ispartially absorbed by the 2004 $42,000 § 1231 gain and the 2005 $30,000 § 1231 gain.Thus, $9,000 of the nonrecaptured § 1231 loss remains for offset against the 2006$39,000 § 1231 gain.

Net Sec.1231 LossSubject toRecapture

Before Look-back: CurrentYear Net Sec.1231 Gain

OrdinaryIncome

Net Sec.1231 GainTreated asLong-TermCapital Gain

2001–2003 ($81,000)2004 42,000 $ 42,000 $42,000 $ –0–

Remaining potential recapture ($39,000)2005 30,000 30,000 30,000 –0–

Remaining potential recapture ($ 9,000)2006 9,000 39,000 9,000 30,000

Totals $ –0– $111,000 $81,000 $30,000

pp. 17-8 to 17-10

35. Yoshida should sell the § 1231 gain asset this year and the § 1231 loss asset next year.This year, Yoshida would have $40,000 net § 1231 gain; there would be no lookbacknonrecaptured § 1231 loss; the net § 1231 gain would be treated as a long-term capitalgain, and the $25,000 short-term capital loss carryover would be offset against this capitalgain. For this year, Yoshida would have a $15,000 net long-term capital gain which wouldbe taxed at a maximum rate of 15%. Next year, Yoshida could sell the § 1231 loss asset;the $30,000 loss would generate a net § 1231 loss, and that loss would be an ordinary lossdeductible for AGI. By selling the § 1231 gain asset the year before the § 1231 loss asset,Yoshida avoids having the § 1231 loss ‘‘taint’’ the § 1231 gain, converting that gain into ordi-nary gain. pp. 17-8, 17-9, and Example 25

36. a. Gray has $42,000 ($35,000 + $7,000) of ordinary income due to § 1245 recaptureand $7,000 of § 1231 loss.

Asset Sold For Less Adjusted Basis Gain or Loss Character

Rack $75,000 $40,000 ($100,000�$60,000)

$35,000 All ordinary incomedue to § 1245recapture

Forklift $5,000 $12,000 ($35,000�$23,000)

($7,000) § 1231 loss

Bin $60,000 $53,000 ($87,000�$34,000)


b. Since Gray does not have a net § 1231 gain, none of the gains are treated as capitalgains.

pp. 17-2 to 17-14



37. a. Green has $67,000 ($60,000 + $7,000) of ordinary income due to § 1245 recap-ture and $28,000 ($35,000� $7,000) of net § 1231 gain.


Rack $135,000 $40,000 ($100,000�$60,000)

$95,000 $60,000 ordinaryincome due to§ 1245 recapture;$35,000§ 1231 gain

Forklift $5,000 $12,000 ($35,000�$23,000)

($7,000) § 1231 loss

Bin $60,000 $53,000 ($87,000�$34,000)


b. Green has a $28,000 net § 1231 gain, but only $23,000 is treated as capital gainbecause the $5,000 of nonrecaptured prior years § 1231 loss causes $5,000 of thecurrent year net § 1231 gain to be treated as ordinary income.

pp. 17-8 and 17-11 to 17-14

38. a. Magenta has $5,000 of ordinary income due to § 1245 recapture and $10,000 of§ 1231 loss.


Rack $55,000 $50,000 ($110,000�$60,000)


Forklift $15,000 $22,000 ($45,000�$23,000)

($7,000) § 1231 loss

Bin $60,000 $63,000 ($97,000�$34,000)

($3,000) § 1231 loss

b. Since Magenta has a $10,000 net § 1231 loss, there is no gain to be treated as cap-ital gain. The $5,000 § 1245 depreciation recapture gain is treated as ordinaryincome and the $10,000 net § 1231 loss is treated as an ordinary loss deduction forAGI.

pp. 17-11 to 17-14

39. The patent amortization is subject to § 1245 recapture as ordinary income. The balance ofthe gain is § 1231 gain. pp. 17-5 and 17-14

Selling price $ 70,000Cost $40,500Amortization (20 months� $225) (4,500)

Adjusted basis (36,000)

Recognized gain $ 34,000

§ 1245 ordinary gain $ 4,500

§ 1231 gain $ 29,500




Mason, OH 45040

November 23, 2006

Mr. Siddim Sadatha, ControllerGray Manufacturing Company6734 Grover StreetBack Bay Harbor, ME 23890

Dear Mr. Sadatha:

Thank you for the opportunity to respond to your question concerning the tax treatment ofthe gain from the disposition of the patent. As you know, amortization of $225 per monthhas been taken on this patent since it was acquired on December 1, 2004. That amortiza-tion totaled $4,500 when you disposed of the patent on July 30, 2006. The $4,500 is tax-able as ordinary income because it is ‘‘recaptured’’ by § 1245. The balance of the gain($29,500) is a ‘‘§ 1231 gain.’’ That gain will be taxed as long-term capital gain as no otherbusiness property dispositions have occurred this year.

If you have any questions concerning this transaction or other tax matters, please feel freeto telephone me. Thank you.

Sincerely,

Rose Goodwin, CPAPartner

p. 17-13

40. a. Store cost $400,0002002 cost recovery rate .013912003 cost recovery rate .025642004 cost recovery rate .025642005 cost recovery rate .025642006 cost recovery rate (.02564� 5.5/12) .01175

Total recovery rate � .10258

Total cost recovery $ 41,032

Adjusted basis ($400,000� $41,032) of building $358,968

b. Selling price $ 385,000Adjusted basis ($358,968+ $100,000) (458,968)

Recognized loss $ (73,968)

Since the store was real estate used in business, it is a § 1231 asset. None of theloss is § 1250 gain because only straight-line cost recovery was used and the prop-erty was sold for a loss. Therefore, all of the loss is § 1231 loss, and there is nounrecaptured § 1250 gain. pp. 17-15 to 17-18



41. a. The gain on the sale of the building is subject to § 1250 depreciation recapturebecause it is residential rental real estate acquired after 1975 and before January 1,1987, on which accelerated depreciation was taken. The gain from the sale is$345,000, $0 is ordinary income due to § 1250, and the $345,000 balance of the gainis § 1231 gain.

Selling price of building $345,000Cost of building $ 350,0001986–2005 depreciation (1.000� $350,000) (350,000)2006 depreciation (–0–)

Jan. 20, 2006 adjusted basis (–0–)

Gain on sale $345,0001986–2005 straight-line depreciation

($350,000� 1.0) $ 350,0002006 straight-line depreciation –0–Additional depreciation ($350,000� $350,000) =

§ 1250 ordinary income (–0–)

Balance of gain = § 1231 gain $345,000

b. The land is also a § 1231 asset because it was part of the residential rental realestate. However, there is no § 1250 recapture because it was not depreciated. The§ 1231 gain from the sale of the land is $400,000 ($500,000 selling price �$100,000 adjusted basis). pp. 17-16 to 17-18

42. a. Land:Condemnation proceeds $ 25,000Allocable basis (40,000)

Realized and recognized § 1231 loss ($ 15,000)

Truck:Depreciation taken: $3,491 ($6,000� $2,509).Adjusted basis: $2,509.Realized gain: $3,500� $2,509= $991.Recognized gain: $991 ordinary income under § 1245.

Rowing machine:Realized and recognized gain = Amount realized� Adjusted basis of machine

on date of sale = $3,900 � $0 = $3,900.Section 1245 recapture = Amount of depreciation claimed ($5,200) or gain rec-

ognized ($3,900), whichever is less= $3,900.

Apartment building:Realized gain = Amount realized � Adjusted basis = $200,000 � $124,783 =

$75,217.Section 1231 gain recognized = $75,217. No § 1250 recapture is recognized

because the taxpayer used the straight-line method of depreciation. Of the$75,217 § 1231 gain, $25,217 is unrecaptured § 1250 gain because thedepreciation taken of $25,217 ($150,000 cost � $124,783 basis) is less thanthe $75,217 recognized gain.

Yacht:Personal casualty loss (without regard to the 10% of AGI limitation) = Fair mar-

ket value at date of theft� Insurance proceeds� Floor= $20,000� $12,500�$100= $7,400.



Auto:Realized loss = Amount realized � Adjusted basis = $9,600 � $20,800 =$11,200. The loss relates to a personal use asset. Therefore, it is not recognized.

Trampoline:$6,000 business casualty loss is deductible for AGI. The casualty loss is meas-ured by the adjusted basis of the property at the time of the theft. There is no$100 or 10% of AGI floor for a business casualty.

b. ItemRecognizedGain/Loss

Section1245

RecaptureCasualty andTheft Loss

Section1231Gain

Land ($15,000) ($15,000)Truck 991 $ 991Rowing machine 3,900 3,900Building 75,217 75,217Yacht (7,400) ($ 7,400)Auto –0–Trampoline (6,000) (6,000)

$4,891 $60,217

Ordinaryincome

$6,000 Netbusiness lossfor AGI;No Netpersonal lossfrom AGI*

Gain:ReceivesLTCGtreatment**

Adjusted gross income computation:

Other sources $402,000Ordinary income from depreciation recapture, as above 4,891Long-term capital gain, as above 60,217Business casualty loss, as above (6,000)

Adjusted gross income $461,108

* None of the personal use activity property casualty loss is deductible from AGIbecause 10% of the $461,108 AGI is greater than the casualty loss of $7,400.

** Of the $60,217 § 1231 gain, $25,217 is unrecaptured § 1250 gain becauseaccording to the 2005 Form 1040, Schedule D instructions, if the net § 1231 gain isgreater than the potential unrecaptured § 1250 gain, all of the unrecaptured § 1250gain is in the § 1231 gain that is carried from Form 4797 to line 11 of the 2005Form 1040 Schedule D. Thus, the $60,217 § 1231 gain is comprised of $25,217 ofunrecaptured § 1250 gain and $35,000 of 5%/15% gain. References are to the2005 tax forms because the 2006 forms were not yet available.

pp. 17-6 to 17-9 and 17-11 to 17-18

43. a. If the property is residential real property, the gain is § 1231 gain.

Selling price $89,000Adjusted basis (38,000)

Recognized § 1231 gain $51,000



Of the $51,000 § 1231 gain, $12,000 is unrecaptured § 1250 gain because the$12,000 of depreciation taken is less than the $51,000 § 1231 gain.

b. Hoffman, Smith, andWillis, CPAs5191 Natorp Boulevard

Mason, OH 45040

March 17, 2006

Ms. Cora Hassant2345Westridge Street #23Homer, MT 67342

Dear Ms. Hassant:

The purpose of this letter is to answer the tax question which we discussed lastweek. Below you will find the specific question restated and the answer to it.

Question: What difference is there between the recapture rules for residential rentalreal estate acquired in 1986 as opposed to residential rental real estate acquired in1987 and thereafter?

Answer: Residential rental real estate acquired in 1986 was eligible for accelerateddepreciation. If accelerated depreciation was used, the gain upon disposition of theproperty may be partially taxable as ordinary income due to a special tax rule called‘‘§ 1250 recapture.’’ However, starting in 2006, there is no depreciation recapturesince the adjusted basis is $0. Residential rental real estate acquired in 1987 (andlater years) is not eligible for accelerated depreciation. Therefore, there is no depre-ciation recapture applicable to the gain from disposition of such property. All of thegain is potentially taxable as capital gain.

Thank you for your inquiry. If we can be of any further service, please contact us.

Sincerely,

Walter Smith, CPATax Partner

pp. 17-15 and 17-16

44. Joanne has two alternatives for helping Susan:

(1) Joanne could sell the equipment, but probably not to Susan since she could not affordit. Joanne would have a taxable ordinary gain of $50,000 [$85,000 sale price �($135,000 cost � $100,000 depreciation)] due to depreciation recapture under§ 1245. After paying her tax of $17,500 ($50,000� 35%), Joanne would have $67,500($85,000 sale price � $17,500 tax) to give to Susan. That may not be enough cash forSusan to buy the equipment she needs. It would not be beneficial for Joanne to sellthe equipment on the installment basis because all the gain would be immediately rec-ognized since all the gain is recapture gain. p. 17-20

(2) Joanne could give the equipment to Susan. The $100,000 depreciation recapturepotential would carry over to Susan and Susan would take Joanne’s basis ($35,000)for the property. Any depreciation which Susan takes on the property would increasethe depreciation recapture potential. However, it appears that Susan may not sell theproperty for quite a while and is probably in a lower tax bracket than Joanne. p. 17-19



45. Depreciation recapture potential carries over to the recipient of a gift.

a. Caroline’s adjusted basis at the time of the sale is $3,000, the $5,000 basis at thedate of the gift (carryover basis from Paul) less the $2,000 depreciation she took.

b. Caroline’s recognized gain is $33,000 ($36,000 � $3,000) of which $8,000 (Paul’sdepreciation of $6,000 plus Caroline’s depreciation of $2,000) is ordinary incomedue to § 1245 depreciation recapture. The remaining $25,000 gain is § 1231 gain.

p. 17-20 and Example 17

46. Depreciation recapture potential does not carry over to the recipient of an inheritance.

a. Tonji’s adjusted basis at the time of the sale is $17,000, the $22,500 fair marketvalue at the date of Seko’s death less the $5,500 depreciation Tonji took.

b. Tonji’s recognized gain is $19,000 ($36,000 � $17,000) of which $5,500 (Tonji’sdepreciation) is ordinary income due to § 1245 depreciation recapture. The remain-ing $13,500 gain is § 1231 gain.

p. 17-20 and Example 18

47. The fair market value ($67,000) of the donated equipment is reduced by the potential$33,000 § 1245 depreciation recapture; so the charitable contribution is limited to $34,000($67,000� $33,000). p. 17-19

48. The § 1245 depreciation recapture potential carries over from property relinquished in alike-kind exchange to the replacement property. Consequently, the total § 1245depreciation recapture potential on the property sold was $60,000 ($27,000 + $33,000).Since that is more than the gain from the disposition of the replacement equipment, theentire $45,000 gain is ordinary income due to § 1245 depreciation recapture. p. 17-20

49. Brown has a taxable disposition of the machine. The gain equals the machine’s $4,500value because the machine had a zero tax basis. The entire gain is ordinary income due to§ 1245 depreciation recapture. Emily has a $4,500 qualifying dividend eligible for the 5%/15% alternative tax rate because the corporation had earnings and profits exceeding theamount of the dividend. p. 17-21 and Chapter 16

50. Since the property was depreciable equipment used in rental real estate and was heldmore than one year, it is a § 1231 asset. The loss is a § 1231 loss and is reported in Part I,line 2 of Form 4797. pp. 17-4 and 17-24

51. Gain reported on Form 4797, Part II, line 18(b) is ordinary gain. Therefore, it is not reportedon Schedule D because it is not a capital gain or a § 1231 gain treated as a capital gain.The gain is included in adjusted gross income. Example 4 and p. 17-26

52. The key to this problem is that all equipment depreciation taken is subject to recapture asordinary income due to § 1245. However, if the equipment is sold for more than was paidfor it, the excess of the selling price over the original cost is § 1231 gain. There appears tobe three ways to allocate the purchase price:

(1) Subtract the $100,000 total adjusted basis from the $300,000 selling price to yield a$200,000 gain. Since total depreciation on the three assets exceeds $200,000, all ofthe gain is § 1245 gain.



(2) Allocate the $300,000 selling price to each asset based on its relative original cost.For instance, the driller would be sold for $37,113 ($120,000/$970,000 � $300,000).The gains and losses using this approach are shown below.

Asset Alloc. S.P. Adj. Basis Gain

Skidder $ 71,134 $ 40,000 $ 31,134Driller 37,113 60,000 (22,887)Platform 191,753 –0– 191,753

Totals $300,000 $100,000 $200,000

The $31,134 gain would all be § 1245 gain because the skidder cost $230,000 andwas ‘‘sold’’ for $71,134. The $22,887 loss on the driller would be a § 1231 loss. The$191,753 gain on the platform would all be § 1245 gain because it cost $620,000 andwas ‘‘sold’’ for $191,753.

(3) Allocate the $300,000 selling price to each asset based on its relative adjusted basis.For instance, the driller would be sold for $180,000 ($60,000/$100,000 � $300,000).The gains using this approach are shown below.

Asset Alloc. S.P. Adj. Basis Gain

Skidder $120,000 $ 40,000 $ 80,000Driller 180,000 60,000 120,000Platform –0– –0– –0–

Totals $300,000 $100,000 $200,000

The $80,000 skidder gain would all be § 1245 gain because the skidder cost $230,000and was ‘‘sold’’ for $120,000. The $120,000 gain on the driller would be a $60,000§ 1245 gain (equals depreciation taken) and $60,000 § 1231 gain (equals excessof sale price over original cost of $120,000). The sale of the platform would generate nogain or loss because it was ‘‘sold’’ for nothing and the adjusted basis was $0. p. 17-13

CUMULATIVE PROBLEMS

53. Justin qualifies as a head of household. He has $539,513 of adjusted gross income,$531,760 of taxable income, $107,228 of Federal income tax on that taxable income, andwould have a net tax refund of $2,772. The computations appear below and are followed bythe completed 2005 Form 1040 and its Schedules A, B, D, and E, and Forms 4562 and 4797.

Wages $187,000Unemployment compensation (Note 1) 14,000Interest income—Blue 5,000Interest income—State Bank 3,000Rent income—Building (Note 2) 8,455Equipment sale ordinary income (Note 3) 14,000Net long-term capital gain (Notes 4 and 5) 308,058

Adjusted gross income $539,513Itemized deductions: State income taxes $ 4,300

Real estate taxes 5,600Homemortgage interest 8,900Charitable contributions 760Phaseout (11,807)

Total itemized deductions (Note 6) (7,753)



Taxable income before exemption deduction $531,760Personal and dependency exemptions (Note 7) (–0–)

Taxable income $531,760

Tax on taxable income (Note 8) $107,228Child tax credit (phased out) (–0–)

Net tax due after credits $107,228Federal income tax withholding $ 15,000Federal estimated tax payments 95,000

Total Federal income tax payments (110,000)

Net tax payable (or refund due) for 2005 ($ 2,772)

See the tax return solution beginning on page 17-20 of the Solutions Manual.

Note 1: Unemployment compensation is includible in gross income.

Note 2: Rent revenue—building $ 30,000Repairs ($ 4,568)Interest (12,000)Miscellaneous (1,000)Depreciation ($125,000� .03636� 10.5/12) (3,977)

Total expenses (21,545)

Net income $ 8,455

Note 3: $14,000 equipment sale price� $0 adjusted basis= $14,000 § 1245 ordi-nary gain because $25,000 of depreciation was taken on the property.

Note 4: $400,000 building sale price � ($125,000 cost � $27,081 pre-2005depreciation � $3,977 2005 depreciation) = $306,058 § 1231 gain.$31,058 of the gain is potential 25% gain (equals depreciation taken) andthe $275,000 balance of the gain is potential 5%/15% gain.

Note 5: $2,000 capital gain distribution + $306,058 § 1231 gain treated as along-term capital gain = $308,058 net long-term capital gain. $277,000is potential 5%/15% gain and $31,058 is potential 25% gain.

Note 6: The itemized deduction reduction applies since AGI exceeds $145,950.Itemized deductions total $19,560, but only $7,753 {$19,560 �[($539,513� $145,950)� .03]} is deductible.

Note 7: Since AGI exceeds $182,450, the personal and dependency exemptiondeduction is subject to a phaseout. The $6,400 (2 � $3,200) deduction isreduced to $0. $539,513 AGI � $182,450 head of household phaseoutthreshold = $357,063/$2,500 = 142.8252; rounded up to 143; 143 �2%= 286% phaseout.

Note 8: The alternative tax on taxable income yields a lower tax because of thenet long-term capital gains. The tax is $107,228. This is the sum of thetax on ordinary taxable income of $223,702 [($531,760 TI � $308,058net LTCG)] of $57,913; the tax on the 25% gain portion of the $308,058net LTCG [($31,058 � .25) = $7,765]; and the tax on the 15% gain por-tion of the net LTCG [($277,000� .15) = $41,550].

Note to Instructor: The alternative minimum tax is ignored in this solution.



54. Federal income tax liability:

Wages: Glen’s wages $ 97,000Diane’s wages 68,000 $165,000

Qualified dividends 3,000Ordinary loss (Note 5) (13,200)Net long-term capital gain (Note 1) 5,000

Adjusted gross income $159,800Less: Itemized deductions (Note 2) (20,014)Less: Personal and dependency exemptions (Note 3) (13,200)

Taxable income $126,586

Federal income tax (Note 6) $ 23,962Less: Child care credit [$3,000 (maximum eligible expenses for one child)�

.20 (rate for Okumura’s AGI level)] (600)Child tax credit (2� $1,000) (Phased out) (–0–)Federal prepayments (Note 4) (24,000)

Net tax payable (or refund due) for 2006 ($ 638)

Notes

(1) Short-term capital loss ($2,000)Long-term capital gain 7,000

Net capital gain $5,000

(2) Medical expense $ 11,000Less: 7.5%� $159,800 (11,985)

Deductible medical expense $ –0–State income taxes 2,700Property taxes on realty 10,500Qualified residence interest 7,000Investment-related expenses $ 535Employee business expense 1,500

Total investment-related & employee expense $ 2,035Less: 2%� $159,800 (3,196)

Net deductible investment-related and employee expenses –0–

Itemized deductions before phaseout $20,200

Itemized deduction reduction [($159,800� $150,500)� .03� 2/3] (186)

Total itemized deductions $20,014

(3) Personal exemptions and dependency deductions (4� $3,300) $13,200

(4) Federal income tax withholding: Glen $13,000Federal income tax withholding: Diane 11,000

Total Federal income tax prepaid $24,000



(5) Sale of apartment building:

Sales price $ 199,980Cost $300,000Less: Cost recovery deducted (86,820)

Adjusted basis (213,180)

Total loss ($ 13,200)

Character of loss: § 1231 loss

(6) Federal income tax (alternative tax calculation):

Regular tax on ordinary taxable income of $118,586 ($126,586taxable income� $5,000 LTCG� $3,000 qualified dividend) $ 22,762

$8,000 net capital gain� 15% 1,200

Total alternative tax $ 23,962

The regular tax liability on $126,586 using the Tax Rate Schedule is $24,762. There-fore, the alternative tax saves $800 ($24,762� $23,962).


Mason, OH 45040

November 23, 2006

Glen and Diane Okumura39 Kaloa StreetHonolulu, HI 56790

Dear Glen and Diane:

Thank you for the opportunity to respond to your question concerning the tax treatment ofthe loss from disposition of the apartment building you owned. As you know, depreciationof $86,820 was taken on the apartment building while you owned it. That depreciationreduced your tax basis for the property to $213,180 ($300,000 � $86,820) at the time ofthe sale. Since the sales price was $199,980, you sustained a loss of $13,200 ($199,980�$213,180) on the sale of the building.

This loss is treated as a deductible ordinary loss in determining your 2006 adjusted grossincome. This result occurs because it was the only § 1231 gain or loss recognized duringthe year. Consequently, your adjusted gross income was substantially reduced.

If you have any questions concerning these transactions or other tax matters, please feelfree to telephone me. Thank you.

Sincerely,

William Henson, CPAPartner

The answers to the Research Problems are incorporated into the 2007 Individual Volume of theInstructor ’s Guide with Lecture Notes to Accompany WEST FEDERAL TAXATION: INDIVIDUALINCOME TAXES.



1 Single 4 Head of household (with qualifying person). (Seeinstructions.) If the qualifying person is a childbut not your dependent, enter this child’s

Filing Status2 Married filing jointly (even if only one had income)

3 Married filing separately. Enter spouse’s SSN above & full name hereCheck onlyone box. name here 5 Qualifying widow(er) with dependent child (see instructions)

6a Yourself. If someone can claim you as a dependent, do not check box 6aExemptionsb Spouse

c Dependents:(2) Dependent’ssocial security

number

(3) Dependent’srelationship

to you(1) First name Last name

(4) ifqualifying

child for childtax credit

(see instrs)

If more thanfour dependents,see instructions.

d Total number of exemptions claimed

7 Wages, salaries, tips, etc. Attach Form(s) W-2 7Income 8 a Taxable interest. Attach Schedule B if required 8 a

b Tax-exempt interest. Do not include on line 8a 8 b9 a Ordinary dividends. Attach Schedule B if required 9a

b Qualfd divs(see instrs) 9 b

10 Taxable refunds, credits, or offsets of state and local income taxes (see instructions) 1011 Alimony received 11

Attach Form(s)W-2 here. Alsoattach FormsW-2G and 1099-Rif tax was withheld.

12 Business income or (loss). Attach Schedule C or C-EZ 1213 Capital gain or (loss). Att Sch D if reqd. If not reqd, ck here 13

BAA For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see instructions. FDIA0112 11/07/05 Form 1040 (2005)

Boxes checkedon 6a and 6b

No. of childrenon 6c who:

• livedwith you

• did notlive with youdue to divorceor separation(see instrs)

Dependentson 6c notentered above

Add numberson linesabove

Department of the Treasury – Internal Revenue Service

Form 1040 U.S. Individual Income Tax Return 2005 (99) IRS Use Only – Do not write or staple in this space.

For the year Jan 1 - Dec 31, 2005, or other tax year beginning , 2005, ending , 20 OMB No. 1545-0074

Your first name MI Last name Your social security numberLabel(See instructions.)

If a joint return, spouse’s first name MI Last name Spouse’s social security number

Home address (number and street). If you have a P.O. box, see instructions. Apartment no.

Use theIRS label.Otherwise,please printor type.

City, town or post office. If you have a foreign address, see instructions. State ZIP code

You must enter yoursocial security

number(s) above.

Checking a box below will notchange your tax or refund.Presidential

ElectionCampaign

23 Educator expenses (see instructions) 2324 Certain business expenses of reservists, performing artists, and fee-basis

government officials. Attach Form 2106 or 2106-EZ 24AdjustedGrossIncome 25 Health savings account deduction. Attach Form 8889 25

26 Moving expenses. Attach Form 3903 2627 One-half of self-employment tax. Attach Schedule SE 27

28 Self-employed SEP, SIMPLE, and qualified plans 28

29 Self-employed health insurance deduction (see instructions) 2930 Penalty on early withdrawal of savings 3031a Alimony paid b Recipient’s SSN 31a32 IRA deduction (see instructions) 3233 Student loan interest deduction (see instructions) 3334 Tuition and fees deduction (see instructions) 3435 Domestic production activities deduction. Attach Form 8903 3536 Add lines 23 - 31a and 32 - 35 3637 Subtract line 36 from line 22. This is your adjusted gross income 37

If you did notget a W-2,see instructions. 14 Other gains or (losses). Attach Form 4797 14

15a IRA distributions 15a b Taxable amount (see instrs) 15b16a Pensions and annuities 16a b Taxable amount (see instrs) 16b17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 1718 Farm income or (loss). Attach Schedule F 1819 Unemployment compensation 1920a Social security benefits 20a b Taxable amount (see instrs) 20b

Enclose, but donot attach, anypayment. Also,please useForm 1040-V. 21 Other income 21

22 Add the amounts in the far right column for lines 7 through 21. This is your total income 22

Check here if you, or your spouse if filing jointly, want $3 to go to this fund? (see instructions) You Spouse

JUSTIN STONE 567-89-1234

112 GREEN ROAD

SANDUSKY ID 45623

X

X 1

1

2187,000.

8,000.

308,059.14,000.

8,455.

14,000.

539,514.

539,514.

FLINT STONE 098-77-6543 Son X

53.



Form 1040 (2005) Page 238 Amount from line 37 (adjusted gross income) 3839a You were born before January 2, 1941, Blind. Total boxes

Tax andCredits Check

if: Spouse was born before January 2, 1941, Blind. checked 39aStandardDeductionfor –• People whochecked any boxon line 39a or39b or who canbe claimed as adependent, seeinstructions.

• All others:

Single or Marriedfiling separately,$5,000

Married filingjointly orQualifyingwidow(er),$10,000

Head ofhousehold,$7,300

b If your spouse itemizes on a separate return, or you were a dual-statusalien, see instructions and check here 39b

40 Itemized deductions (from Schedule A) or your standard deduction (see left margin) 4041 Subtract line 40 from line 38 41

If line 38 is over $109,475, or you provided housing to a person displaced by Hurricane Katrina, see42instructions. Otherwise, multiply $3,200 by the total number of exemptions claimed on line 6d 42

43 Taxable income. Subtract line 42 from line 41.If line 42 is more than line 41, enter -0- 43

44 Tax (see instrs). Check if any tax is from: a Form(s) 8814 b Form 4972 44

45 Alternative minimum tax (see instructions). Attach Form 6251 45

46 Add lines 44 and 45 46

Payments 64 Federal income tax withheld from Forms W-2 and 1099 6465 2005 estimated tax payments and amount applied from 2004 return 6566a Earned income credit (EIC) 66a

b Nontaxable combat pay election 66b67 Excess social security and tier 1 RRTA tax withheld (see instructions) 6768 Additional child tax credit. Attach Form 8812 6869 Amount paid with request for extension to file (see instructions) 6970 Payments from: a Form 2439 b Form 4136 c Form 8885 7071 Add lines 64, 65, 66a, and 67 through 70.

These are your total payments 7172 If line 71 is more than line 63, subtract line 63 from line 71. This is the amount you overpaid 72Refund73a Amount of line 72 you want refunded to you 73a

b Routing number c Type: Checking Savingsd Account number

Direct deposit?See instructionsand fill in 73b,73c, and 73d.

74 Amount of line 72 you want applied to your 2006 estimated tax 74

75 Amount you owe. Subtract line 71 from line 63. For details on how to pay, see instructions 75AmountYou Owe 76 Estimated tax penalty (see instructions) 76

If you have aqualifyingchild, attachSchedule EIC.

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge andbelief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.Sign

Here Your signature Date Your occupation Daytime phone numberJoint return?See instructions.

Spouse’s signature. If a joint return, both must sign. Date Spouse’s occupationKeep a copyfor your records.

Preparer’ssignature

Date Preparer’s SSN or PTIN

Check if self-employedPaidPreparer’sUse Only EIN

Firm’s name(or yours ifself-employed),address, andZIP code Phone no.

Form 1040 (2005)

Do you want to allow another person to discuss this return with the IRS (see instructions)? Yes. Complete the following. NoThird PartyDesignee

Designee’sname

Phoneno.

Personal identificationnumber (PIN)

FDIA0112 11/07/05

47 Foreign tax credit. Attach Form 1116 if required 47

48 Credit for child and dependent care expenses. Attach Form 2441 48

49 Credit for the elderly or the disabled. Attach Schedule R 49

50 Education credits. Attach Form 8863 50

51 Retirement savings contributions credit. Attach Form 8880 51

52 Child tax credit (see instructions). Attach Form 8901 if required 52

53 Adoption credit. Attach Form 8839 5354 Credits from: a Form 8396 b Form 8859 5455 Other credits. Check applicable box(es): a Form 3800

b Form8801

c Form 55

56 Add lines 47 through 55. These are your total credits 56

57 Subtract line 56 from line 46. If line 56 is more than line 46, enter -0- 5758 Self-employment tax. Attach Schedule SE 5859 Social security and Medicare tax on tip income not reported to employer. Attach Form 4137 59Other

Taxes 60 Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required 6061 Advance earned income credit payments from Form(s) W-2 6162 Household employment taxes. Attach Schedule H 6263 Add lines 57-62. This is your total tax 63

JUSTIN STONE 567-89-1234539,514.

7,753.531,761.

0.

531,761.107,228.

107,228.

107,228.

107,228.15,000.95,000.

110,000.2,772.2,772.

XXXXXXXXXXXXXXXXXXXXXXXXXX

X

EXECUTIVE

Self-Prepared

53. continued



10 Home mtg interest and points reported to you on Form 1098 10InterestYou Paid 11 Home mortgage interest not reported to you on Form 1098. If paid to the person

from whom you bought the home, see instructions and show that person’s name,identifying number, and address

(Seeinstructions.)

1112 Points not reported to you on Form 1098. See instrs for spcl rules 1213 Investment interest. Attach Form 4952 if required.

Note.Personalinterest isnotdeductible. (See instrs.) 13

14 Add lines 10 through 13 14

SCHEDULE A OMB No. 1545-0074

(Form 1040)Itemized Deductions

2005Department of the TreasuryInternal Revenue Service (99)

Attach to Form 1040.See Instructions for Schedule A (Form 1040). Attachment

Sequence No. 07Name(s) shown on Form 1040 Your social security number

Caution. Do not include expenses reimbursed or paid by others.1 Medical and dental expenses (see instructions) 12 Enter amount from Form 1040, line 38 2

MedicalandDentalExpenses

3 Multiply line 2 by 7.5% (.075) 34 Subtract line 3 from line 1. If line 3 is more than line 1, enter -0- 45 State and local (check only one box):

a Income taxes, or 5b General sales taxes (see instructions)Taxes You

Paid 6 Real estate taxes (see instructions) 67 Personal property taxes 7(See

instructions.) 8 Other taxes. List type and amount

89 Add lines 5 through 8 9

27 Other – from list in the instructions. List type and amount OtherMiscellaneousDeductions 27

28 Is Form 1040, line 38, over $145,950 (over $72,975 if MFS)?TotalItemizedDeductions

No. Your deduction is not limited. Add the amounts in the far right columnfor lines 4 through 27. Also, enter this amount on Form 1040, line 40. 28

Yes. Your deduction may be limited. See instructions for the amount to enter.

29 If you elect to itemize deductions even though they are less than your standard deduction, check here

Casualty andTheft Losses 19 Casualty or theft loss(es). Attach Form 4684. (See instructions.) 19

20 Unreimbursed employee expenses – job travel, union dues, job education, etc. Attach Form 2106 or 2106-EZ ifrequired. (See instructions.)

Job Expensesand CertainMiscellaneousDeductions

2021 Tax preparation fees 2122 Other expenses – investment, safe deposit box, etc. List (See

instructions.) type and amount

2223 Add lines 20 through 22 2324 Enter amount from Form 1040, line 38 2425 Multiply line 24 by 2% (.02) 2526 Subtract line 25 from line 23. If line 25 is more than line 23, enter -0- 26

BAA For Paperwork Reduction Act Notice, see Form 1040 instructions. FDIA0301 11/18/05 Schedule A (Form 1040) 2005

Total gifts by cash or check. If you made any gift of $250 orGifts toCharity

15amore, see instrs 15a

b Gifts by cash or check after August 27, 2005,that you elect to treat as qualifiedcontributions (see instructions) 15bOther than by cash or check. If any gift of $250 ormore, see instructions. You must attach Form 8283 if

16

over $500 16

If you madea gift andgot a benefitfor it, seeinstructions.

17 Carryover from prior year 1718 Add lines 15a, 16, & 17 18


X 4,300.

5,600.

9,900.8,900.

8,900.

760.

760.

7,753.X

Itemized Deductions Limited per IRC Sec. 68.

53. continued



Schedule B (Form 1040) 2005 OMB No. 1545-0074 Page 2Name(s) shown on Form 1040. Your social security number

Schedule B – Interest and Ordinary Dividends AttachmentSequence No. 08

Amount

Part IIIForeignAccountsandTrusts

You must complete this part if you (a) had over $1,500 of taxable interest or ordinary dividends; or (b) had aforeign account; or (c) received a distribution from, or were a grantor of, or a transferor to, a foreign trust. Yes No

7 a At any time during 2005, did you have an interest in or a signature or other authority over a financial accountin a foreign country, such as a bank account, securities account, or other financial account? See instructionsfor exceptions and filing requirements for Form TD F 90-22.1

b If ‘Yes,’ enter the name of the foreign country(Seeinstructions.)

8 During 2005, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust?If ‘Yes,’ you may have to file Form 3520. See instructions

BAA For Paperwork Reduction Act Notice, see Form 1040 instructions. FDIA0401 07/29/05 Schedule B (Form 1040) 2005

Part IInterest

1 List name of payer. If any interest is from a seller-financed mortgage and the buyer usedthe property as a personal residence, see the instructions and list this interest first. Also,show that buyer’s social security number and address

(See instructionsfor Form 1040,line 8a.)

1

Note. If youreceived a Form1099-INT, Form1099-OID, orsubstitute statementfrom a brokeragefirm, list the firm’sname as the payerand enter the totalinterest shown onthat form.

2 Add the amounts on line 1 2

3 Excludable interest on series EE and I U.S. savings bonds issued after 1989.Attach Form 8815 3

4 Subtract line 3 from line 2. Enter the result here and on Form 1040, line 8a 4

Note. If line 4 is over $1,500, you must complete Part III. Amount

5 List name of payer

Part IIOrdinaryDividends

(Seeinstructions forForm 1040,line 9a.)

5Note. If youreceived a Form1099-DIV orsubstitute statementfrom a brokeragefirm, list the firm’sname as the payerand enter theordinary dividendsshown on that form.

6 Add the amounts on line 5. Enter the total here and on Form 1040, line 9a 6

Note. If line 6 is over $1,500, you must complete Part III.


8,000.00

8,000.00

X

X

BLUE CORPORATIONSTATE BANK CD

5,000.003,000.00

53. continued



Name(s) shown on Form 1040 Your social security number

Part I Short-Term Capital Gains and Losses – Assets Held One Year or Less

(a) Description ofproperty (Example:

100 shares XYZ Co)

(b) Date acquired(Mo, day, yr)

(c) Date sold(Mo, day, yr)

(d) Sales price(see instructions)

(e) Cost or other basis(see instructions)

(f) Gain or (loss)Subtract (e) from (d)

1

2 Enter your short-term totals, if any, from Schedule D-1, line 2 2

3 Total short-term sales price amounts. Add lines 1 and 2 incolumn (d) 3

4 Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684, 6781, and 8824 4

5 Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 5

6 Short-term capital loss carryover. Enter the amount, if any, from line 8 of your Capital Loss CarryoverWorksheet in the instructions 6

7 Net short-term capital gain or (loss). Combine lines 1 through 6 in column (f) 7

Part II Long-Term Capital Gains and Losses – Assets Held More Than One Year

(a) Description ofproperty (Example:

100 shares XYZ Co)

(b) Date acquired(Mo, day, yr)

(c) Date sold(Mo, day, yr)

(d) Sales price(see instructions)

(e) Cost or other basis(see instructions)

(f) Gain or (loss)Subtract (e) from (d)

8

9 Enter your long-term totals, if any, from Schedule D-1, line 9 9

10 Total long-term sales price amounts. Add lines 8 and 9 incolumn (d) 10

11 Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or (loss) fromForms 4684, 6781, and 8824 11

12 Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 12

13 Capital gain distributions. See instrs 13

14 Long-term capital loss carryover. Enter the amount, if any, from line 13 of your Capital Loss CarryoverWorksheet in the instructions 14

15 Net long-term capital gain or (loss). Combine lines 8 through 14 in column (f). Then go to Part III onpage 2 15

BAA For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2005

FDIA0612 05/18/05

SCHEDULE D OMB No. 1545-0074

(Form 1040) Capital Gains and Losses Attach to Form 1040. See Instructions for Schedule D (Form 1040). 2005

Department of the TreasuryInternal Revenue Service (99) Use Schedule D-1 to list additional transactions for lines 1 and 8. Attachment

Sequence No. 12


306,059.

2,000.

308,059.

53. continued



Schedule D (Form 1040) 2005 Page 2

FDIA0612 05/18/05

Part III Summary

16 Combine lines 7 and 15 and enter the result. If line 16 is a loss, skip lines 17 through 20, and go to line 21.If a gain, enter the gain on Form 1040, line 13, and then go to line 17 below 16

17 Are lines 15 and 16 both gains?

Yes. Go to line 18.

No. Skip lines 18 through 21, and go to line 22.

18 Enter the amount, if any, from line 7 of the 28% Rate Gain Worksheet in the instructions 18

19 Enter the amount, if any, from line 18 of the Unrecaptured Section 1250 Gain Worksheet inthe instructions 19

20 Are lines 18 and 19 both zero or blank?

Yes. Complete Form 1040 through line 43, and then complete the Qualified Dividends and Capital GainTax Worksheet in the Instructions for Form 1040. Do not complete lines 21 and 22 below.

No. Complete Form 1040 through line 43, and then complete the Schedule D Tax Worksheet in theinstructions. Do not complete lines 21 and 22 below.

21 If line 16 is a loss, enter here and on Form 1040, line 13, the smaller of:

• The loss on line 16 or 21

• ($3,000), or if married filing separately, ($1,500)

Note. When figuring which amount is smaller, treat both amounts as positive numbers.

22 Do you have qualified dividends on Form 1040, line 9b?

Yes. Complete Form 1040 through line 43, and then complete the Qualified Dividends and Capital GainTax Worksheet in the Instructions for Form 1040.

No. Complete the rest of Form 1040.

Schedule D (Form 1040) 2005


308,059.

X

31,059.

X

53. continued



Income:Properties Totals

A B C (Add columns A, B, and C.)3 Rents received 3 34 Royalties received 4 4

Expenses:5 Advertising 56 Auto and travel (see instructions) 67 Cleaning and maintenance 78 Commissions 89 Insurance 9

10 Legal and other professional fees 1011 Management fees 11

Mortgage interest paid to banks, etc12(see instructions) 12 12

13 Other interest 1314 Repairs 1415 Supplies 1516 Taxes 1617 Utilities 1718 Other (list)

20 Depreciation expense or depletion(see instructions) 20 20

21 Total expenses. Add lines 19 and 20 21

22 Income or (loss) from rental real estate orroyalty properties. Subtract line 21 from line 3(rents) or line 4 (royalties). If the result is a(loss), see instructions to find out if you mustfile Form 6198 22

23 Deductible rental real estate loss.Caution. Your rental real estate loss on line 22may be limited. See instructions to find out if youmust file Form 8582. Real estate professionalsmust complete line 43 on page 2 23

24 Income. Add positive amounts shown on line 22. Do not include any losses 2425 Losses. Add royalty losses from line 22 and rental real estate losses from line 23. Enter total losses here 2526 Total rental real estate and royalty income or (loss). Combine lines 24 and 25. Enter the

result here. If Parts II, III, IV, and line 40 on page 2 do not apply to you, also enter this amounton Form 1040, line 17. Otherwise, include this amount in the total on line 41 on page 2 26

BAA For Paperwork Reduction Act Notice, see instructions. Schedule E (Form 1040) 2005FDIZ2301 11/14/05

SCHEDULE E Supplemental Income and Loss OMB No. 1545-0074

(Form 1040) (From rental real estate, royalties, partnerships,S corporations, estates, trusts, REMICs, etc) 2005

Department of the TreasuryInternal Revenue Service (99)

Attach to Form 1040 or Form 1041. See Instructions for Schedule E (Form 1040). Attachment

Sequence No. 13Name(s) shown on return Your social security number

Part I Income or Loss From Rental Real Estate and Royalties Note. If you are in the business of renting personalproperty, use Schedule C or C-EZ (see instructions). Report farm rental income or loss from Form 4835 on page 2, line 40.

1 List the type and location of each rental real estate property: 2 Yes NoA

AB

For each rental real estateproperty listed on line 1, did youor your family use it during thetax year for personal purposesfor more than the greater of:• B

C•

14 days, or10% of the total daysrented at fair rental value?

(See instructions.) C

18

19 Add lines 5 through 18 19 19


30,000.

12,000.

17,568.

3,977.

8,455.

8,455.

RENTAL BUILDINGSANDUSKY, ID X

12,000.

4,568.

17,568.

21,545.

8,455.

30,000.

3,977.

Miscellaneous exp. 1,000.

53. continued



OMB No. 1545-0172Depreciation and Amortization4562Form(Including Information on Listed Property)

Department of the TreasuryInternal Revenue Service

AttachmentSequence No. 67See separate instructions.

Identifying numberName(s) shown on return Business or activity to which this form relates

Election To Expense Certain Property Under Section 179Note: If you have any listed property, complete Part V before you complete Part I.

$105,000.1Maximum amount. See the instructions for a higher limit for certain businesses12Total cost of section 179 property placed in service (see instructions)2

$420,000.

3,977.

3,977.

3Threshold cost of section 179 property before reduction in limitation34Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter -0-4

Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If married filingseparately, see instructions

55

(a) Description of property (b) Cost (business use only) (c) Elected cost

6

7Listed property. Enter the amount from line 29788 Total elected cost of section 179 property. Add amounts in column (c), lines 6 and 79Tentative deduction. Enter the smaller of line 5 or line 89

10Carryover of disallowed deduction from line 13 of your 2004 Form 45621011Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions)1112Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line 1112

13 Carryover of disallowed deduction to 2006. Add lines 9 and 10, less line 12 13Note: Do not use Part II or Part III below for listed property. Instead, use Part V.

MACRS Depreciation (Do not include listed property.) (See instructions.)

(b) Month andyear placed in

service

(c) Basis for depreciation(business/investment use

only—see instructions)

(d) Recoveryperiod(a) (e) Convention (f) Method (g) Depreciation deduction

Section B—Assets Placed in Service During 2005 Tax Year Using the General Depreciation System

3-year property19a5-year propertyb7-year propertyc

10-year propertyd15-year propertye20-year propertyf

S/LMM27.5 yrs.Residential rentalproperty

hS/LMM27.5 yrs.S/LMMNonresidential real

propertyi

S/LMMSection C—Assets Placed in Service During 2005 Tax Year Using the Alternative Depreciation System

S/L20a Class life12 yrs. S/L

S/Lb 12-year

40 yrs. MMc 40-year

Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.)

MACRS deductions for assets placed in service in tax years beginning before 200517 17

15Property subject to section 168(f)(1) election15Other depreciation (including ACRS)16 16

Summary (see instructions)2121 Listed property. Enter amount from line 28

Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21.Enter here and on the appropriate lines of your return. Partnerships and S corporations—see instr.

2222

23 For assets shown above and placed in service during the current year,enter the portion of the basis attributable to section 263A costs 23

Form 4562 (2005) (Rev. 1-2006)For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 12906N

Part IV

Part I

Part II

Part III

Attach to your tax return.

39 yrs.

Section A

18 If you are electing to group any assets placed in service during the tax year into one or moregeneral asset accounts, check here

Classification of property

25-year propertyg 25 yrs.

Special allowance for certain aircraft, certain property with a long production period, and qualified NYLor GO Zone property (other than listed property) placed in service during the tax year (see instructions)

1414

(Rev. January 2006) 2005

S/L

JUSTIN STONE Sch E RENTAL BUILDING 567-89-1234

53. continued



2(a) Description

of property(b) Date acquired(month, day, year)

(c) Date sold(month, day, year)

(d) Grosssales price

(e) Depreciationallowed or

allowable sinceacquisition

(f) Cost or otherbasis, plus

improvements andexpense of sale

(g) Gain or (loss)Subtract (f) from thesum of (d) and (e)

3 Gain, if any, from Form 4684, line 42 3

4 Section 1231 gain from installment sales from Form 6252, line 26 or 37 4

5 Section 1231 gain or (loss) from like-kind exchanges from Form 8824 5

6 Gain, if any, from line 32, from other than casualty or theft 6

7 Combine lines 2 through 6. Enter the gain or (loss) here and on the appropriate line as follows 7Partnerships (except electing large partnerships) and S corporations. Report the gain or (loss) following theinstructions for Form 1065, Schedule K, line 10, or Form 1120S, Schedule K, line 9. Skip lines 8, 9, 11, and12 below.

Individuals, partners, S corporation shareholders, and all others. If line 7 is zero or a loss, enter the amount fromline 7 on line 11 below and skip lines 8 and 9. If line 7 is a gain and you did not have any prior year section 1231losses, or they were recaptured in an earlier year, enter the gain from line 7 as a long-term capital gain on theSchedule D filed with your return and skip lines 8, 9, 11, and 12 below.

8 Nonrecaptured net section 1231 losses from prior years (see instructions) 8

9 Subtract line 8 from line 7. If zero or less, enter -0-. If line 9 is zero, enter the gain from line 7 on line 12 below. Ifline 9 is more than zero, enter the amount from line 8 on line 12 below and enter the gain from line 9 as along-term capital gain on the Schedule D filed with your return (see instructions) 9

Part II Ordinary Gains and Losses (see instructions)10 Ordinary gains and losses not included on lines 11 through 16 (include property held 1 year or less):

11 Loss, if any, from line 7 11

12 Gain, if any, from line 7 or amount from line 8, if applicable 12

13 Gain, if any, from line 31 13

14 Net gain or (loss) from Form 4684, lines 34 and 41a 14

15 Ordinary gain from installment sales from Form 6252, line 25 or 36 15

16 Ordinary gain or (loss) from like-kind exchanges from Form 8824 16

17 Combine lines 10 through 16 17

18 For all except individual returns, enter the amount from line 17 on the appropriate line of your return and skip linesa and b below. For individual returns, complete lines a and b below:

a If the loss on line 11 includes a loss from Form 4684, line 38, column (b)(ii), enter that part of the loss here. Enterthe part of the loss from income-producing property on Schedule A (Form 1040), line 27, and the part of the lossfrom property used as an employee on Schedule A (Form 1040), line 22. Identify as from ‘Form 4797, line 18a.’See instructions 18a

b Redetermine the gain or (loss) on line 17 excluding the loss, if any, on line 18a. Enter here and on Form 1040,line 14 18b

BAA For Paperwork Reduction Act Notice, see separate instructions. Form 4797 (2005)

OMB No. 1545-0184Form 4797 Sales of Business Property

(Also Involuntary Conversions and Recapture AmountsUnder Sections 179 and 280F(b)(2)) 2005

Department of the TreasuryInternal Revenue Service (99) Attach to your tax return. See separate instructions. Attachment

Sequence No. 27Name(s) shown on return Identifying number

1 Enter the gross proceeds from sales or exchanges reported to you for 2005 on Form(s) 1099-B or 1099-S(or substitute statement) that you are including on line 2, 10, or 20 (see instructions) 1

Part I Sales or Exchanges of Property Used in a Trade or Business and Involuntary Conversions From OtherThan Casualty or Theft – Most Property Held More Than 1 Year (see instructions)

FDIZ1001 10/17/05


306,059.306,059.

14,000.

14,000.

14,000.

53. continued



Form 4797 (2005) Page 2

27 If section 1252 property: Skip this section if youdid not dispose of farmland or if this form isbeing completed for a partnership (other thanan electing large partnership).

a Soil, water, and land clearing expenses 27a

b Line 27a multiplied by applicablepercentage (see instructions) 27b

c Enter the smaller of line 24 or 27b 27c

28 If section 1254 property:

a Intangible drilling and development costs,expenditures for development of mines and othernatural deposits, and mining exploration costs(see instructions) 28a

b Enter the smaller of line 24 or 28a 28b

29 If section 1255 property:

a Applicable percentage of paymentsexcluded from income undersection 126 (see instructions) 29a

b Enter the smaller of line 24 or 29a (see instrs) 29b

Summary of Part III Gains. Complete property columns A through D through line 29b before going to line 30.

30 Total gains for all properties. Add property columns A through D, line 24 30

31 Add property columns A through D, lines 25b, 26g, 27c, 28b, and 29b. Enter here and on line 13 31

32 Subtract line 31 from line 30. Enter the portion from casualty or theft on Form 4684, line 36. Enter theportion from other than casualty or theft on Form 4797, line 6 32

Part IV Recapture Amounts Under Sections 179 and 280F(b)(2) When Business Use Drops to 50% or Less(see instructions)

(a) Section 179 (b) Section280F(b)(2)

33 Section 179 expense deduction or depreciation allowable in prior years 33

34 Recomputed depreciation. (see instructions) 34

35 Recapture amount. Subtract line 34 from line 33. See the instructions for where to report 35

BAA FDIZ1002 10/17/05 Form 4797 (2005)

These columns relate to the properties on lines19A through 19D Property A Property B Property C Property D20 Gross sales price (Note: See line 1

before completing.) 2021 Cost or other basis plus expense of sale 2122 Depreciation (or depletion) allowed or allowable 2223 Adjusted basis. Subtract line 22 from line 21 2324 Total gain. Subtract line 23 from line 20 2425

aIf section 1245 property:Depreciation allowed or allowable from line 22 25a

b Enter the smaller of line 24 or 25a 25b

26 If section 1250 property: If straightline depreciation was used, enter -0-on line 26g, except for a corporationsubject to section 291.

a Additional depreciation after 1975 (see instrs) 26ab Applicable percentage multiplied by the smaller

of line 24 or line 26a (see instructions) 26b

c Subtract line 26a from line 24. If residential rentalproperty or line 24 is not more than line 26a, skiplines 26d and 26e 26c

d Additional depreciation after 1969 & before 1976 26d

e Enter the smaller of line 26c or 26d 26e

f Section 291 amount (corporations only) 26 f

g Add lines 26b, 26e, and 26f 26g

Part III Gain From Disposition of Property Under Sections 1245, 1250, 1252, 1254, and 1255(see instructions)

19 (a) Description of section 1245, 1250, 1252, 1254, or 1255 property: (b) Date acquired(mo, day, yr)

(c) Date sold(mo, day, yr)

A

B

C

D


320,059.14,000.

306,059.

RENTAL BUILDINGEQUIPMENT

01/02/199907/10/1998

11/22/200511/22/2005

400,000. 14,000.125,000. 25,000.31,059. 25,000.93,941. 0.

306,059. 14,000.

25,000.14,000.

0.

306,059.

0.

53. continued



Schedule D Unrecaptured Section 1250 Gain 2005Line 19 Worksheet - Line 19

G Keep for your records

Name(s) Shown on Return Social Security Number

If you are not reporting a gain on Form 4797, line 7, skip lines 1 through 9 and go to line 10.

1 If you have a section 1250 property in Part III of Form 4797 for which you made an entry in Part I of Form 4797 (but not on Form 6252), enter the smaller of line 22 or line 24 of Form 4797 for that property. If you did not haveany such property, go to line 4. If you had more than one property, see instrs. 1

2 Enter the amount from Form 4797, line 26g, for the property for which you made an entry on line 1 2

3 Subtract line 2 from line 1 34 Enter the total unrecaptured section 1250 gain included on lines 26 or 37 of

Form(s) 6252 from installment sales of trade or business property held morethan 1 year (see instructions) 4

5 Enter the total of any amounts reported on a Schedule K-1 from a partnershipor an S corporation as "unrecaptured section 1250 gain". 5

6 Add lines 3 through 5 67 Enter the smaller of line 6 or the gain from Form

4797, line 7 78 Enter the amount, if any, from Form 4797, ln 8 89 Subtract line 8 from line 7. If zero or less, enter -0- 9

10 Enter the amount of any gain from sale or exchange of an interest in apartnership attributable to unrecaptured section 1250 gain (see instructions) 10


31,059.

0.31,059.

31,059.

31,059.

31,059.

11 Enter the total of any amounts reported on a Schedule K-1, Form 1099-DIV, orForm 2439 as "unrecaptured section 1250 gain" from an estate, trust, real est-ate investment trust, or mutual fund (or other regulated investment company.) 11

12 Enter the total of any unrecaptured section 1250 gain from sales (including installment sales) or other dispositions of section 1250 property held more than1 year for which you did not make an entry in Part I of Form 4797 for the yearof sale (see instructions) 12

13 Add lines 9 through 12 1314 If you had any section 1202 gain or collectibles gain

or (loss), enter the total of lines 1 through 4 of the28% Rate Gain Worksheet. Otherwise, enter -0- 14

15 Enter the (loss), if any, from Schedule D, line 7. If Schedule D, line 7, is zero or a gain, enter -0- 15

16 Enter your long-term capital loss carryovers from Sch.D, line 14, and Schedule K-1 (Form 1041), line 11c 16

17 Combine lines 14 through 16. If the result is a (loss), enter it as a positive amount. If the result is zero or a gain, enter -0-. 17

18 Unrecaptured section 1250 gain. Subtract line 17 from line 13. If zero or less,enter -0-. If more than zero, enter the result here and on Schedule D, line 19 18

31,059.

0.

0.

0.

31,059.

53. continued



Schedule D Tax Worksheet 2005 Keep for your records

Name(s) Shown on Return Social Security Number

Complete this worksheet only if line 18 or line 19 of Schedule D is more than zero. Otherwise, complete theQualified Dividends and Capital Gain Tax Worksheet to figure your tax.Exception: Do not use the Qualified Dividends and Capital Gain Tax Worksheet or this worksheet to figureyour tax if:

• Line 15 or line 16 of Schedule D is zero or less and you have no qualified dividends on Form 1040,line 9b, or

• Form 1040, line 43, is zero or less.

1 Enter your taxable income from Form 1040, line 43 12 Enter your qualified dividends from Form 1040, line 9b 23 Enter the amount from Form 4952, line 4g 34 Enter the amount from Form 4952, line 4e* 45 Subtract line 4 from line 3. If zero or less, enter -0- 56 Subtract line 5 from line 2. If zero or less, enter -0- 67 Enter the smaller of line 15 or line 16 of Schedule D 78 Enter the smaller of line 3 or line 4 89 Subtract line 8 from line 7. If zero or less, enter -0- 9

10 Add lines 6 and 9 1011 Add lines 18 and 19 of Schedule D 1112 Enter the smaller of line 9 or line 11 1213 Subtract line 12 from line 10 1314 Subtract line 13 from line 1. If zero or less, enter -0- 1415 Enter the smaller of line 1 or:

• $29,700 if single or married filing separately; or• $59,400 if married filing jointly or qualifying widow(er); 15• $39,800 if head of household.

16 Enter the smaller of line 14 or line 15 1617 Subtract line 10 from line 1. If zero or less, enter -0- 1718 Enter the larger of line 16 or line 17 18

If lines 15 and 16 are the same, skip lines 19 and 20 and go to line 21.Otherwise, go to line 19.

19 Subtract line 16 from line 15 1920 Multiply line 19 by 5% (.05) 20

If lines 1 and 15 are the same, skip lines 21 through 33 and go to line 34. Otherwise, go to line 21.

21 Enter the smaller of line 1 or line 13 2122 Enter the amount from line 19 (if line 19 is blank, enter -0-) 2223 Subtract line 22 from line 21. If zero or less, enter -0- 2324 Multiply line 23 by 15% (.15) 24

If Schedule D, line 19, is zero or blank, skip lines 25 through 30 and go to line 31. Otherwise, go to line 25.

25 Enter the smaller of line 9 above or Schedule D, line 19 2526 Add lines 10 and 18 2627 Enter the amount from line 1 above 2728 Subtract line 27 from line 26. If zero or less, enter -0- 2829 Subtract line 28 from line 25. If zero or less, enter -0- 2930 Multiply line 29 by 25% (.25) 30

If Schedule D, line 18, is zero or blank, skip lines 31 through 33 and go to line 34. Otherwise, go to line 31.

31 Add lines 18, 19, 23, and 29 3132 Subtract line 31 from line 1 3233 Multiply line 32 by 28% (.28) 3334 Figure the tax on the amount on line 18. Use the Tax Table or Tax

Computation Worksheet, whichever applies 3435 Add lines 20, 24, 30, 33, 34 3536 Figure the tax on the amount on line 1. Use the Tax Table or Tax

Computation Worksheet, whichever applies 3637 Tax on all taxable income (including capital gains and qualified dividends).

Enter the smaller of line 35 or line 36. Also enter this amount on Form 1040, 44 37

* If applicable, enter instead the smaller amount you entered on the dotted line next to line 4e of Form 4952.


531,761.

0.0.

308,059.

308,059.308,059.31,059.31,059.

277,000.254,761.

39,800.

39,800.223,702.223,702.

277,000.0.

277,000.41,550.

31,059.531,761.531,761.

0.31,059.7,765.

57,913.107,228.

163,678.

107,228.

53. continued



NOTES


Documents

WFT Ch17 Solutions