Proctor Inc. was incorporated in 2014 and adopted a calendar year. Here is a schedule of Proctor's net Section 1231 gains and (losses) reported on its tax returns through 2019. $\begin{array}{llcc}
2014&2015&2016&2017&2018&2019 \
\$-0-&\$(3,800)&\$9,040&\$(15,900)&\$-0-&\$-0-
\end{array}$
In 2020, Proctor recognized a $25,000 gain on the sale of business land. How is this gain characterized on Proctor's tax return?
A) $25,000 Section 1231 gain.
B) $19,700 ordinary gain and $5,300 Section 1231 gain.
C) $15,900 ordinary gain and $9,100 Section 1231 gain.
D) $25,000 ordinary gain.

Question

Proctor Inc. was incorporated in 2014 and adopted a calendar year. Here is a schedule of Proctor's net Section 1231 gains and (losses) reported on its tax returns through 2019. $\begin{array}{llcc}
2014&2015&2016&2017&2018&2019 \
\$-0-&\$(3,800)&\$9,040&\$(15,900)&\$-0-&\$-0-
\end{array}$
 In 2020, Proctor recognized a $25,000 gain on the sale of business land. How is this gain characterized on Proctor's tax return?
A) $25,000 Section 1231 gain.
B) $19,700 ordinary gain and $5,300 Section 1231 gain.
C) $15,900 ordinary gain and $9,100 Section 1231 gain.
D) $25,000 ordinary gain.

Quizplus · Accepted Answer

To determine how the gain on the sale of business land is characterized on Proctor's tax return, we need to first net all of Proctor's Section 1231 gains and losses from previous years. The net gain from the years 2014 through 2019 is $15,900.

Next, we need to consider the current year gain of $25,000. This gain is characterized as a Section 1231 gain since it comes from the sale of business land.

Lastly, we need to compare the current year Section 1231 gain of $25,000 to the net Section 1231 gain from previous years of $15,900. Since the current year gain is greater than the previous year's net gain, we must treat the entire $25,000 gain as ordinary income.

Therefore, the answer is C: $15,900 ordinary gain and $9,100 Section 1231 gain.