US Income

Capital Assets (561 - 2nd)

 

Portfolio Description

Tax Management Portfolio, Capital Assets, No. 561-2nd, discusses in detail the provisions of §1221. It summarizes the historical development of §1221, analyzes the definition of the term ``property,' and describes certain traditional doctrines and other statutory provisions which affect the character of ``property' and the tax treatment of a disposition of the property.

For an item to be considered a capital asset under §1221, it must qualify as ``property' and must not be specifically excluded from capital asset treatment. There are eight classes of exclusions: (1) stock in trade (inventory); (2) depreciable or real property used in a trade or business; (3) a copyright, a literary, musical or artistic composition, a letter or memorandum or similar property; (4) accounts or notes receivable acquired in a trade or business; (5) certain federal publications received without consideration or at a discount; (6) certain commodities derivative financial instruments held by commodities dealers; (7) certain hedging transactions which are clearly defined as such before the close of the day on which the transaction was acquired, originated or entered into; and (8) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of the taxpayer's trade or business.

The maximum tax rate on long-term capital gains of an individual is 20% if the asset is held for more than 12 months, and any capital gain with respect to assets held that long by an individual which otherwise would be taxed at 15%, is taxed at 10%. It is not tied to the top marginal bracket. Also, for taxable years beginning after 2000, the maximum capital gains rates for assets which are held more than five years are 8% and 18%, depending on the income level of the individual.

Long-term capital gain rates will apply for assets held for more than 12 months. There is no tax benefit realized by a corporation that itself is subject to tax.

This Portfolio may be cited as Rothman, Brady, Capps and Herzog, 561-2nd T.M., Capital Assets.

Howard J. Rothman, B.A., City College of New York (1967); J.D., Brooklyn Law School (1971); LL.M. (Taxation) New York University School of Law (1972); Member, American Bar Association, Section of Taxation, Committee on Closely-Held Corporations, Subcommittee on Incorporations and Committee on Real Estate Tax Problems; New York State Bar Association Executive Committee and Committee on Partnerships; Member, New York Bar; Member, International Bar Association.

Mary Jo Brady, B.S., Fairfield University (1986); J.D., New York Law School (1995); Member, New York State Bar Association, Association of the Bar of the City of New York; Member, New York Bar.

Pamela M. Capps, B.S.B.A., Washington University in St. Louis (1987); J.D., Columbia University (1992); Member, New York State Bar Association, Association of the Bar of the City of New York; Member, New York Bar.

Barry Herzog, B.A., Yeshiva University (1987); J.D., Columbia University (1991); Member, New York State Bar Association, Committee on Corporations; Member, American Bar Association, Section of Taxation; Member, New York Bar.

The authors wish to acknowledge the invaluable assistance of Janie Kim and Kathryn Cardone in the preparation of this Portfolio.