Page 113 - Virtual Currencies

12:10 - 7-Feb-2023
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Fileid: … tions/p544/2022/a/xml/cycle03/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
(However, for a partnership interest Sale of a Business which the buyer's basis is determined only by
owned by or for a C corporation, this ap- the amount paid for the assets. This applies to
plies only to shareholders who directly or The sale of a business is usually not a sale of both direct and indirect transfers, such as the
indirectly own 5% or more in value of the one asset. Instead, all the assets of the busi- sale of a business or the sale of a partnership
stock of the corporation.) ness are sold. Generally, when this occurs, interest in which the basis of the buyer's share
2. An individual is considered as owning the each asset is treated as being sold separately of the partnership assets is adjusted for the
stock or partnership interest directly or in- for determining the treatment of gain or loss. amount paid under section 743(b) of the Inter-
nal Revenue Code. Section 743(b) applies if a
directly owned by or for his or her family.
Family includes only siblings, half siblings, A business usually has many assets. When partnership has an election in effect under sec-
tion 754 of the Internal Revenue Code.
spouse, ancestors, and lineal descend- sold, these assets must be classified as capital
A group of assets constitutes a trade or
ants. assets, depreciable property used in the busi- business if either of the following applies.
3. An individual owning (other than by apply- ness, real property used in the business, or • Goodwill or going concern value could, un-
property held for sale to customers, such as in-
ing (2)) any stock in a corporation is con- ventory or stock in trade. The gain or loss on der any circumstances, attach to them.
sidered to own the stock directly or indi- each asset is figured separately. The sale of • The use of the assets would constitute an
rectly owned by or for his or her partner. capital assets results in capital gain or loss. The active trade or business under section 355
4. For purposes of applying (1), (2), or (3), sale of real property or depreciable property of the Internal Revenue Code.
stock or a partnership interest construc- used in the business and held longer than 1 The residual method provides for the con-
tively owned by a person under (1) is trea- year results in gain or loss from a section 1231 sideration to be reduced first by the amount of
ted as actually owned by that person. But transaction (discussed in chapter 3). The sale Class I assets (defined below). The considera-
stock or a partnership interest construc- of inventory results in ordinary income or loss. tion remaining after this reduction must be allo-
tively owned by an individual under (2) or cated among the various business assets in a
(3) is not treated as owned by the individ- Partnership interests. An interest in a part- certain order. See Classes of assets next for
ual for reapplying either (2) or (3) to make nership or joint venture is treated as a capital the complete order.
another person the constructive owner of asset when sold. The part of any gain or loss
that stock or partnership interest. from unrealized receivables or inventory items Classes of assets. The following defini-
will be treated as ordinary gain or loss. For tions are the classifications for deemed or ac-
Indirect transactions. You cannot deduct more information, see Disposition of Partner's tual asset acquisitions. Allocate the considera-
your loss on the sale of stock through your Interest in Pub. 541. tion among the assets in the following order.
broker if under a prearranged plan a related The amount allocated to an asset, other than a
person or entity buys the same stock you had Corporation interests. Your interest in a cor- Class VII asset, cannot exceed its fair market
owned. This does not apply to a cross-trade be- poration is represented by stock certificates. value on the purchase date. The amount you
tween related parties through an exchange that When you sell these certificates, you usually re- can allocate to an asset is also subject to any
is purely coincidental and is not prearranged. alize capital gain or loss. For information on the applicable limits under the Internal Revenue
sale of stock, see chapter 4 in Pub. 550. Code or general principles of tax law.
Property received from a related person. If, • Class I assets are cash and general de-
in a purchase or exchange, you received prop- Corporate liquidations. Corporate liquida- posit accounts (including checking and
erty from a related person who had a loss that tions of property are generally treated as a sale savings accounts but excluding certificates
was not allowable and you later sell or ex- or exchange. Gain or loss is generally recog- of deposit).
change the property at a gain, you generally nized by the corporation on a liquidating sale of • Class II assets are certificates of deposit,
recognize the gain only to the extent it is more its assets. Gain or loss is also generally recog- U.S. Government securities, foreign cur-
than the loss previously disallowed to the rela- nized on a liquidating distribution of assets as if rency, and actively traded personal prop-
ted person. This rule applies only to the original the corporation sold the assets to the distribu- erty, including stock and securities.
transferee. This rule does not apply if the sale tee at fair market value. • Class III assets are accounts receivable,
or exchange is subject to the wash sale rules of In certain cases in which the distributee is a other debt instruments, and assets that
section 1091. In addition, this rule does not ap- corporation in control of the distributing corpo- you mark to market at least annually for
ply if the gain or loss with respect to the prop- ration, the distribution may not be taxable. For federal income tax purposes. However,
erty received from a related person is not sub- more information, see section 332 of the Inter- see Treasury Regulations section
ject to federal income tax in the hands of the nal Revenue Code and the related Treasury 1.338-6(b)(2)(iii) for exceptions that apply
transferor immediately before the transfer but is Regulations. to debt instruments issued by persons re-
subject to federal income tax in the hands of the lated to a target corporation, contingent
transferee immediately after the transfer. Allocation of consideration paid for a busi- debt instruments, and debt instruments
ness. The sale of a trade or business for a convertible into stock or other property.
Example 1. Your brother sold stock to you lump sum is considered a sale of each individ- • Class IV assets are property of a kind that
for $7,600. His cost basis was $10,000. His loss ual asset rather than of a single asset. Except would properly be included in inventory if
of $2,400 was not deductible. You later sell the for assets exchanged under any nontaxable ex- on hand at the end of the tax year, or prop-
same stock to an unrelated party for $10,500, change rules, both the buyer and seller of a erty held by the taxpayer primarily for sale
realizing a gain of $2,900 ($10,500 − $7,600). business must use the residual method (ex- to customers in the ordinary course of
Your recognized gain is only $500, the gain that plained later) to allocate the consideration to business.
is more than the $2,400 loss not allowed to your each business asset transferred. This method • Class V assets are all assets other than
brother. determines gain or loss from the transfer of Class I, II, III, IV, VI, and VII assets.
each asset and how much of the consideration Note. Furniture and fixtures, buildings,
Example 2. Assume the same facts as in is for goodwill and certain other intangible prop- land, vehicles, and equipment, which con-
Example 1, except that you sell the stock for erty. It also determines the buyer's basis in the stitute all or part of a trade or business are
$6,900 instead of $10,500. Your recognized business assets. generally Class V assets.
loss is only $700 ($7,600 − $6,900). You cannot • Class VI assets are section 197 intangibles
deduct the loss not allowed to your brother. Consideration. The buyer's consideration (other than goodwill and going concern
is the cost of the assets acquired. The seller's value).
consideration is the amount realized (money • Class VII assets are goodwill and going
Other Dispositions plus the fair market value of property received) concern value (whether the goodwill or go-
from the sale of assets.
ing concern value qualifies as a section
This section discusses rules for determining the Residual method. The residual method 197 intangible).
treatment of gain or loss from various must be used for any transfer of a group of as-
dispositions of property. sets that constitutes a trade or business and for
Page 22 Chapter 2 Ordinary or Capital Gain or Loss