§1245 — Gain from dispositions of certain depreciable property

The taxpayer subsequently reallocates $1.5 million ofits basis to section 1245 property and depreciates it as 5-year property under section 168(e). Example (9) concludes: Pursuant to paragraph (e)(2)(ii)(d)(2_)(i) ofthis section, * * * [the taxpayer's] change to this depreciation method, recovery period, and convention is a change in method ofaccounting. This method results in a section 481 adjustment. The useful life exception under Paragraph (e)(2)(ii)(d)(3)(i) ofthis section does not apply be

We disagree with Peco that Hosp.

3' - 22 - Respondent asserts.that pursuant to section 1245(a) (1), Mr.

Thus, a -51- partnership or S corporation could aggregate all of its leased section 1245 property, while other taxpayers treated each of their properties in that category as a separate activity. As amended by DEFRA, section 465(c)(2) generally requires, except as provided in section 465(c)(2)(B), that partnerships and S corporations separate equipment leasing activities (and the other activities listed in section 465(c)(1)) on a property-by-property basis, as do other taxpayers. If petitioners’

Under this exception, all activities of a partnership or S corporation with respect to section 1245 properties are considered to be a single activity to the extent that the “properties are leased or held for lease, and -48- * * * are placed in service in any taxable year of the partnership or S corporation”.

To decide whether petitioners utilized the proper recovery classes or periods in calculating their claimed depreciation deductions for those taxable years, we must decide (1) whether the tests developed under prior law for purposes of the investment tax credit are applicable, and, if so (2) whether the respective properties constitute section 1245 personal property or section 1250 real property pursuant to those tests.

To decide whether petitioners utilized the proper recovery classes or periods in calculating their claimed depreciation deductions for those taxable years, we must decide (1) whether the tests developed under prior law for purposes of the investment tax credit are applicable, and, if so (2) whether the respective properties constitute section 1245 personal property or section 1250 real property pursuant to those tests.

To decide whether petitioners utilized the proper recovery classes or periods in calculating their claimed depreciation deductions for those taxable years, we must decide (1) whether the tests developed under prior law for purposes of the investment tax credit are applicable, and, if so (2) whether the respective properties constitute section 1245 personal property or section 1250 real property pursuant to those tests.

The parties have resolved the issue of the amount of the Schedule F depreciation deduction that is allowable with respect to each of petitioners' 1991, 1992, and 1993 taxable years. - 3 - negligence or disregard of rules or regulations or for the substantial understatement of their 1991 income tax. We hold petitioners are liable for the

Tangible Asset Value - 23 - Respondent increased the corporation's taxable income by $15,643 for section 1245 depreciation-recapture income, resulting from the distribution of its tangible assets to the shareholders.8 Section 1245(a)(1) provides for the recapture of depreciation as ordinary income upon the disposition of section 1245 property.

Kluener sold the horses directly, a certain portion of any gain realized would have been taxed as ordinary income pursuant to section 1245, and the balance would have been taxed as capital gain.

tion 1231(a) property; and -- although culled cattle are section 1231(a) property, the gain on which may be long term capital gain (depending on the holding period), depreciation allowed must be recaptured as ordinary income under the provisions of section 1245. Principal payments equal to 10% of the face amount of the notes payable to Ranches will begin according to terms of the notes -- in the sixth year of the partnership * * * The agreement includes a provision listing "the total number of c

ee § 1245(a)(1) and (2) (providing that deductions allowable under section 179 are included in the recomputed basis of section 1245 property, which in turn generally increases the amount of ordinary income realized on the disposition of section 1245 property and recaptures the section 179 expense); see also § 179(d)(1)(B) (requiring section 179 property to be “section 1245 property (as defined in section 1245(a)(3))” unless it is qualified real property within the meaning of section 179(e)).

rdt, Docket No. 11146-20. Served 04/20/23 2 property should be deferred because the transaction qualified as a like-kind exchange under I.R.C. § 1031. R did not dispute that the transaction met the requirements of I.R.C. § 1031, but determined that I.R.C. § 1245 precluded deferral of the gain. J and S also sold certain property (MS) in 2017. They reported the net gain from the sale as ordinary income. R recomputed the amount of the gain and characterized it as long-term capital gain. For T and P

The controversy in this case, however, has a more conventional source: the Commissioner contends that Short Stop didn’t use the plow 16 Section 179 property is defined as tangible personal property which is section 1245 property and is “acquired by purchase for use in the active conduct of a trade or business.” § 179(d)(1).

Section 179 property includes tangible property (to which section 168 applies) that is section 1245 property which is acquired by purchase for use in the active conduct of a trade or business.

Phoenix’s Section 179 Deduction Section 179 provides that a taxpayer may elect to treat the cost of any section 179 property as an expense which is not chargeable to a capital account.

Phoenix’s Section 179 Deduction Section 179 provides that a taxpayer may elect to treat the cost of any section 179 property as an expense which is not chargeable to a capital account.

Section 179 property includes section 1245 property which is acquired by purchase for use in the active conduct ofa trade or business that is either (1) tangible propertyto which section 168 applies or (2) computer software.

Thus, the partnership's outright contribution ofthe Aegir would have afforded it (or, more accurately, its partners) a zero charitable contribution deduction pursuant to section 170(e)(1)(A), which provides that a charitable contribution ofproperty must be reduced by the amount ofgain (in this case, section 1245 depreciation recapture) that would not be long-term capital gain on a fair-market-value sale of the property.

Qualified business property must be: (1) tangible property to which section 168 applies; (2) section 1245 property; and (3) property "acquired by purchase for use in the active con- - 21 - [*21] duct ofa trade or business." Sec.

epreciable property, the lesser ofthe allowed depreciation deductions or realized gain should be taxed as ordinary income. Section 1250(a) establishes depreciation recapture rules for depreciable real property otherwise excluded from the operation ofsection 1245. Sections 1245 and 1250, along with section 111, codify the tax benefit rule as applied in certain situations. See, e.g., Estate ofMunter v. Commissioner, 63 T.C. 663, 671 (1975) ("While the rule isjudicial in origin, it is applied to sp

Section 179 property includes section 1245 property which is acquired by purchase for use in the active conduct ofa trade or business that is either (1) tangible property to which section 168 applies or (2) computer software.

Section 179 property includes section 1245 property which is acquired by purchase for use in the active conduct ofa trade or business that is either (1) tangible property to which section 168 applies or (2) computer software.

Section 179 property is defined in pertinentpart as "tangible property", which is section 1245 property (as -16- definedin section 1245(a)(3)) and which is acquired by purchase for use in the active conduct ofa trade or business.

87-56 is filled with references to section 1245 property and section 1250 property.

Section 1250 property is any real property subject to the allowance for depreciation that is not section 1245 property.

For prope.rty, to qualify as section-179 property, it must be classified as section 1245 property.

Section 465 in Genera l Section 465(c)(1)(C) .provides that the section 465 at-risk rules .

The distinction,, turns on whether the property being .considered is "tangible personal property" (section 1245 property) or ".structural components of the buildings" (section 1250 property) .

Section 1250 applies to real property depreciable under section 167 (i.e., used in a trade or business) other than section 1245 property.

We are satisfied that the kennel petitioner had constructed in his backyard for his police dog was not a building as defined in section 1250 but rather was depreciable personal .

We are satisfied that the kennel petitioner had constructed in his backyard for his police dog was not a building as defined in section 1250 but rather was depreciable personal .

554 (2000) ; (6) la change in depreciation method resulting from a change from section 1250 property to section 1245 property, Standard Oil Co .~ ( Indiana) v.

Section 179 provides that a taxpayer may elect to treat the cost of any section 179 property as an expense which is not chargeable to a - 15 - capital account .

554 (2000); (6) a change in depreciation method resulting from a change from section 1250 property to section 1245 property, Standard Oil Co.

at 677, asset class 00.3, Land Improvements: Includes improvements directly to or added to land, whether such improvements are section 1245 property or section 1250 property, provided such improvements are depreciable.

Section 1250 property is any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been subject to the depreciation allowance under section 167.

at 677, asset class 00.3, Land, Improvements: Includes improvements directly to or added to land, whether such improvements are section 1245 property or section 1250 property, provided such improvements are depreciable.

ection 1231(a) property; and " although culled cattle are section 1231(a) property, the gain on which may be long term capital gain (depending on the holding period), depreciation allowed must be recaptured as ordinary income under the provisions of section 1245. * * * * * * * • For all years after 1980, Management Company is comprised of Mr. Hoyt, who is entitled to 15% of the profits; and the 24 investor partnerships in existence at December 31, 1981. " The investor partnerships are each entit

section 1231(a) property; and although culled cattle are section 1231(a) property, the gain on which may be long term capital gain (depending on the holding period), depreciation allowed must be recaptured as ordinary income under the provisions of section 1245. (cid:16)042 For all years after 1980, Management Company is comprised of Mr. Hoyt, who is entitled to 15% of the profits; and the 24 investor partnerships in existence at December 31, 1981. o The investor partnerships are each entitled

In its petitions, petitioner alleged that respondent: erroneously disallowed [the] depreciation deductions * * * by erroneously classifying [the tanks] as “land improvements” designated as asset class 57.1 * * * rather than as “section 1245 assets used in marketing petroleum and petroleum products” designated as asset class 57.0 * * * OPINION Section 167(a)(1) permits a depreciation deduction for the exhaustion and wear and tear of property used in a trade or business.

Pursuant to section 1250(c), section 1250 property is any real property subject to the allowance for depreciation that is not section 1245 property.

Section 179 property is tangible property to which section 168 applies and which is section 1245 property.7 Sec.

Section 1245 relates to gains from disposition of certain properties and provides for a depreciation adjustment. Respondent in the notice of deficiency determined that petitioners had a capital gain of $103,970 resulting in an adjustment of $105,427 ($103,970 + $1,457 reported loss) from the sale of an asset “as shown in the accompanying computatio

None of the parties or their experts addressed this point. However, Mr. Frazier used a 34-percent rate for both ordinary income and capital gains, which appears to be the correct result under secs. 11 and 1201. Thus, for our purposes it is irrelevant whether the proceeds resulted in ordinary or capital gain. 10 Respondent also challenges

ital gain and ordinary gain: - 9 - Gross sale price $158,890 Less: Cost or other basis plus expense of sale $33,245 Less depreciation 13,760 Adjusted basis 19,485 Total gain from sale of property 139,405 Less: Ordinary gain (depreciation claimed on section 1245 property) 13,760 Capital gain 125,645 Form 8594, Asset Acquisition Statement, filed with the 1992 return showed the allocation of the total $158,890 sale price as follows: Aggregate fair Allocation of Assets market value sale price Class

As pertinent here, section 179 property is any tangible property that is section 1245 property as defined in section 1245(a)(3).

On its Federal income tax return for the year ending August 31, 1984, petitioner reported a gain of $16,221,675 from the sale of the Lamont gas plant. This gain comprised the following components: Amount realized in excess of cost basis $12,852,544 Sec. 1245 recapture 3,287,803 Straight-line depreciation on sec. 1250 property 81,328 Total reported gain 16,221,675 - 60 - Petitioner reported the entire gain from the sale of the Lamont gas plant as ordinary patronage income. In the subject notice

heir original income tax return. 15Petitioners do not argue, nor do they provide sufficient facts to establish, that the gain on the sale of the newsstand qualifies for capital gain treatment, or that the gain would not be subject to recapture under sec. 1245 or 1250. - 14 - Accuracy-Related Penalty The final issue is whether petitioners are liable for the accuracy-related penalty under section 6662(a) for 1994. Section 6662(a) imposes a penalty in an amount equal to 20 percent of the portion of

Includes section 1245 assets used in marketing petroleum and petroleum products * * * - 80 - Rev.

did not make a reasonable attempt to comply with the provisions of the internal revenue laws, and that she did not act with reasonable cause and good faith. Petitioner 16 The entire $2,350 of recognized gain is subject to the recapture provision of sec. 1245 and is therefore treated as ordinary income. - 25 - failed to report a substantial amount of her income on her 1993 return, including income from her trucking business and income from the sale of her truck. Petitioner overstated her Schedul

Includes section 1245 assets used in marketing petroleum and petroleum products * * * Rev.

Includes section 1245 assets used in marketing petroleum and petroleum products * * * Rev.

locate cost to the franchise rights and goodwill which are not amortizable. Conversely, sellers would be motivated to allocate little of the purchase price to player contracts because gain recognized on the sale of player contracts may be subject to sec. 1245 depreciation recapture and treated as ordinary income. Sellers would also be motivated to allocate a larger portion of the purchase price to unamortizable assets, such as franchise rights, any gains on which may be taxable at capital gain r

The classes at issue are as follows: Asset Class 00.3--Land Improvements: Includes improvements directly to or added to land, whether such improvements are section 1245 property or section 1250 property, provided such improvements are depreciable.

(2) Classes of recovery property.--Each item of recovery property shall be assigned to one of the following classes of property: * * * * * * * (B) 5-year property.--The term “5-year property” means recovery property which is section 1245 class property and which is not 3- year property, 10-year property, or 15-year public utility property.

The classes at issue are as follows: Asset class 00.3 — Land Improvements: Includes improvements directly to or added to land, whether such improvements are section 1245 property or section 1250 property, provided such improvements are depreciable.

Section 751 would prevent the selling partner from converting section 1245 depreciation recapture income from the player contracts into capital gain.

— The term “5-year property” means recovery property which is section 1245 class property and which is not 3-year property, 10-year property, or 15-year public utility property.

Under section 263A(d)(3), a farmer may elect out of the UCR, and, instead, deduct his expenses in accordance with the provisions of section 162, with the requirement that the property produced is then treated as section 1245 property, and any gain resulting from the disposition thereof is recaptured to the extent of the deductions which, but for the election under section 263A(d)(3), would have been capitalized.

tion 1231(a) property; and -- although culled cattle are section 1231(a) property, the gain on which may be long term capital gain (depending on the holding period), depreciation allowed must be recaptured as ordinary income under the provisions of section 1245. Principal payments equal to 10% of the face amount of the notes payable to Ranches will begin according to terms of the notes -- in the sixth year of the partnership * * * The agreement includes a provision listing "the total number of c

ction 1231(a) property; and -- although culled cattle are section 1231(a) property, the gain on which may be long term capital gain (depending on the holding period), depreciation allowed must be recaptured as ordinary income under the provisions of section 1245. Principal payments equal to 10% of the face amount of the notes payable to Ranches will begin according to terms of the notes -- in the sixth year of the partnership * * * The agreement includes a provision listing "the total number of

Includes section 1245 assets used in marketing petroleum and petroleum products.

tion 1231(a) property; and -- although culled cattle are section 1231(a) property, the gain on which may be long term capital gain (depending on the holding period), depreciation allowed must be recaptured as ordinary income under the provisions of section 1245. Principal payments equal to 10% of the face amount of the notes payable to Ranches will begin according to terms of the notes -- in the sixth year of the partnership * * * The agreement includes a provision listing "the total number of c

ction 1231(a) property; and -- although culled cattle are section 1231(a) property, the gain on which may be long term capital gain (depending on the holding period), depreciation allowed must be recaptured as ordinary income under the provisions of section 1245. Principal payments equal to 10% of the face amount of the notes payable to Ranches will begin according to terms of the notes -- in the sixth year of the partnership * * * The agreement includes a provision listing "the total number of

subject to the allowance for depreciation under section 167; (4) at the time of the distribution the fair market value of the property was $2,000 and its basis to the distributing corporation was $1,000; (5) there was no recapture income to X under section 1245 or section 1250 on the distribution of the property; and (6) prior to the distribution the property was used by X in a trade or business acquired within 5 years of the distribution in a taxable transaction.

Based on this survey and prior to the issuance of the notice of deficiency, the parties reached an agreement that 5 percent of the leasehold improvements to petitioner’s drugstores and 10 percent of the leasehold improvements to the restaurants coxlsisted of personal property (section 1245 property) that was properly depreciated by petitioner.