Internal Revenue Code:Sec. 1231. Property used in the trade or business and involuntary conversions

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Contents


Location in Internal Revenue Code


     TITLE 26 - INTERNAL REVENUE CODE
      Subtitle A - Income Taxes
       CHAPTER 1 - NORMAL TAXES AND SURTAXES
        Subchapter P - Capital Gains and Losses
         PART IV - SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
       

Statute

    Sec. 1231. Property used in the trade or business and involuntary
        conversions
 
    (a) General rule
      (1) Gains exceed losses
        If -
          (A) the section 1231 gains for any taxable year, exceed
          (B) the section 1231 losses for such taxable year,
      such gains and losses shall be treated as long-term capital gains
      or long-term capital losses, as the case may be.
      (2) Gains do not exceed losses
        If -
          (A) the section 1231 gains for any taxable year, do not
        exceed
          (B) the section 1231 losses for such taxable year,
      such gains and losses shall not be treated as gains and losses
      from sales or exchanges of capital assets.
      (3) Section 1231 gains and losses
        For purposes of this subsection -
        (A) Section 1231 gain
          The term ''section 1231 gain'' means -
            (i) any recognized gain on the sale or exchange of property
          used in the trade or business, and
            (ii) any recognized gain from the compulsory or involuntary
          conversion (as a result of destruction in whole or in part,
          theft or seizure, or an exercise of the power of requisition
          or condemnation or the threat or imminence thereof) into
          other property or money of -
              (I) property used in the trade or business, or
              (II) any capital asset which is held for more than 1 year
            and is held in connection with a trade or business or a
            transaction entered into for profit.
        (B) Section 1231 loss
          The term ''section 1231 loss'' means any recognized loss from
        a sale or exchange or conversion described in subparagraph (A).
      (4) Special rules
        For purposes of this subsection -
          (A) In determining under this subsection whether gains exceed
        losses -
            (i) the section 1231 gains shall be included only if and to
          the extent taken into account in computing gross income, and
            (ii) the section 1231 losses shall be included only if and
          to the extent taken into account in computing taxable income,
          except that section 1211 shall not apply.
          (B) Losses (including losses not compensated for by insurance
        or otherwise) on the destruction, in whole or in part, theft or
        seizure, or requisition or condemnation of -
            (i) property used in the trade or business, or
            (ii) capital assets which are held for more than 1 year and
          are held in connection with a trade or business or a
          transaction entered into for profit,
        shall be treated as losses from a compulsory or involuntary
        conversion.
          (C) In the case of any involuntary conversion (subject to the
        provisions of this subsection but for this sentence) arising
        from fire, storm, shipwreck, or other casualty, or from theft,
        of any -
            (i) property used in the trade or business, or
            (ii) any capital asset which is held for more than 1 year
          and is held in connection with a trade or business or a
          transaction entered into for profit,
        this subsection shall not apply to such conversion (whether
        resulting in gain or loss) if during the taxable year the
        recognized losses from such conversions exceed the recognized
        gains from such conversions.
    (b) Definition of property used in the trade or business
      For purposes of this section -
      (1) General rule
        The term ''property used in the trade or business'' means
      property used in the trade or business, of a character which is
      subject to the allowance for depreciation provided in section
      167, held for more than 1 year, and real property used in the
      trade or business, held for more than 1 year, which is not -
          (A) property of a kind which would properly be includible in
        the inventory of the taxpayer if on hand at the close of the
        taxable year,
          (B) property held by the taxpayer primarily for sale to
        customers in the ordinary course of his trade or business,
          (C) a copyright, a literary, musical, or artistic
        composition, a letter or memorandum, or similar property, held
        by a taxpayer described in paragraph (3) of section 1221(a), or
          (D) a publication of the United States Government (including
        the Congressional Record) which is received from the United
        States Government, or any agency thereof, other than by
        purchase at the price at which it is offered for sale to the
        public, and which is held by a taxpayer described in paragraph
        (5) of section 1221(a).
      (2) Timber, coal, or domestic iron ore
        Such term includes timber, coal, and iron ore with respect to
      which section 631 applies.
      (3) Livestock
        Such term includes -
          (A) cattle and horses, regardless of age, held by the
        taxpayer for draft, breeding, dairy, or sporting purposes, and
        held by him for 24 months or more from the date of acquisition,
        and
          (B) other livestock, regardless of age, held by the taxpayer
        for draft, breeding, dairy, or sporting purposes, and held by
        him for 12 months or more from the date of acquisition.
      Such term does not include poultry.
      (4) Unharvested crop
        In the case of an unharvested crop on land used in the trade or
      business and held for more than 1 year, if the crop and the land
      are sold or exchanged (or compulsorily or involuntarily
      converted) at the same time and to the same person, the crop
      shall be considered as ''property used in the trade or
      business.''
    (c) Recapture of net ordinary losses
      (1) In general
        The net section 1231 gain for any taxable year shall be treated
      as ordinary income to the extent such gain does not exceed the
      non-recaptured net section 1231 losses.
      (2) Non-recaptured net section 1231 losses
        For purposes of this subsection, the term ''non-recaptured net
      section 1231 losses'' means the excess of -
          (A) the aggregate amount of the net section 1231 losses for
        the 5 most recent preceding taxable years beginning after
        December 31, 1981, over
          (B) the portion of such losses taken into account under
        paragraph (1) for such preceding taxable years.
      (3) Net section 1231 gain
        For purposes of this subsection, the term ''net section 1231
      gain'' means the excess of -
          (A) the section 1231 gains, over
          (B) the section 1231 losses.
      (4) Net section 1231 loss
        For purposes of this subsection, the term ''net section 1231
      loss'' means the excess of -
          (A) the section 1231 losses, over
          (B) the section 1231 gains.
      (5) Special rules
        For purposes of determining the amount of the net section 1231
      gain or loss for any taxable year, the rules of paragraph (4) of
      subsection (a) shall apply.
 

Sources

    (Aug. 16, 1954, ch. 736, 68A Stat. 325; Pub. L. 85-866, title I,
    Sec. 49(a), Sept. 2, 1958, 72 Stat. 1642; Pub. L. 88-272, title II,
    Sec. 227(a)(2), Feb. 26, 1964, 78 Stat. 97; Pub. L. 91-172, title
    II, Sec. 212(b)(1), title V, Sec. 514(b)(2), 516(b), Dec. 30, 1969,
    83 Stat. 571, 643, 646; Pub. L. 94-455, title XIV, Sec.
    1402(b)(1)(R), (2), Oct. 4, 1976, 90 Stat. 1732; Pub. L. 95-600,
    title VII, Sec. 701(ee)(1), Nov. 6, 1978, 92 Stat. 2924; Pub. L.
    97-34, title V, Sec. 505(c)(1), Aug. 13, 1981, 95 Stat. 332; Pub.
    L. 98-369, div.  A, title I, Sec. 176(a), title VII, Sec.
    711(c)(2)(A)(iii), title X, Sec. 1001(b)(15), (e), July 18, 1984,
    98 Stat. 709, 944, 1012; Pub. L. 106-170, title V, Sec.
    532(c)(1)(G), Dec. 17, 1999, 113 Stat. 1930.)
 

Miscellaneous

                                 AMENDMENTS
      1999 - Subsec. (b)(1)(C), (D). Pub. L. 106-170 substituted
    ''section 1221(a)'' for ''section 1221''.
      1984 - Subsec. (a). Pub. L. 98-369, Sec. 1001(b)(15), (e),
    substituted ''6 months'' for ''1 year'' wherever appearing,
    applicable to property acquired after June 22, 1984, and before
    Jan. 1, 1988. See Effective Date of 1984 Amendment note below.
      Pub. L. 98-369, Sec. 711(c)(2)(A)(iii), amended subsec. (a)
    generally, substituting pars. (1) to (4), for ''If, during the
    taxable year, the recognized gains on sales or exchanges of
    property used in the trade or business, plus the recognized gains
    from the compulsory or involuntary conversion (as a result of
    destruction in whole or in part, theft or seizure, or an exercise
    of the power of requisition or condemnation or the threat or
    imminence thereof) of property used in the trade or business and
    capital assets held for more than 1 year into other property or
    money, exceed the recognized losses from such sales, exchanges, and
    conversions, such gains and losses shall be considered as gains and
    losses from sales or exchanges of capital assets held for more than
    1 year.  If such gains do not exceed such losses, such gains and
    losses shall not be considered as gains and losses from sales or
    exchanges of capital assets.  For purposes of this subsection -
        ''(1) in determining under this subsection whether gains exceed
      losses, the gains described therein shall be included only if and
      to the extent taken into account in computing gross income and
      the losses described therein shall be included only if and to the
      extent taken into account in computing taxable income, except
      that section 1211 shall not apply; and
        ''(2) losses (including losses not compensated for by insurance
      or otherwise) upon the destruction, in whole or in part, theft or
      seizure, or requisition or condemnation of (A) property used in
      the trade or business or (B) capital assets held for more than 1
      year shall be considered losses from a compulsory or involuntary
      conversion.
    In the case of any involuntary conversion (subject to the
    provisions of this subsection but for this sentence) arising from
    fire, storm, shipwreck, or other casualty, or from theft, of any
    property used in the trade or business or of any capital asset held
    for more than 1 year, this subsection shall not apply to such
    conversion (whether resulting in gain or loss) if during the
    taxable year the recognized losses from such conversions exceed the
    recognized gains from such conversions.''
      Subsec. (b)(1), (4). Pub. L. 98-369, Sec. 1001(b)(15), (e),
    substituted ''6 months'' for ''1 year'', applicable to property
    acquired after June 22, 1984, and before Jan. 1, 1988. See
    Effective Date of 1984 Amendment note below.
      Subsec. (c). Pub. L. 98-369, Sec. 176(a), added subsec. (c).
      1981 - Subsec. (b)(1)(D). Pub. L. 97-34 substituted ''paragraph
    (5)'' for ''paragraph (6)''.
      1978 - Subsec. (b)(1)(D). Pub. L. 95-600 added subpar. (D).
      1976 - Subsecs. (a), (b)(1), (4). Pub. L. 94-455, Sec.
    1402(b)(2), provided that ''9 months'' would be changed to ''1
    year'' wherever appearing.
      Pub. L. 94-455, Sec. 1402(b)(1)(R), provided that in subsecs.
    (a), first and last sentences, (a)(2), and (b)(1), (4), ''6
    months'' would be changed to ''9 months'' for taxable years
    beginning in 1977.
      1969 - Subsec. (a). Pub. L. 91-172, Sec. 516(b), provided that
    casualty (or theft) losses with respect to depreciable property and
    real estate used in trade or business and capital assets held for
    the production of income as well as personal assets are to be
    consolidated with casualty (or theft) gains with respect to this
    type of property and if the casualty losses exceed the casualty
    gains, the net loss is treated as an ordinary loss without regard
    to whether there may be noncasualty gains under this section, but,
    if the casualty gains exceed the casualty losses, the net gain is
    treated as a gain under this section and must be consolidated with
    other gains and losses under this section.
      Subsec. (b)(1)(C). Pub. L. 91-172, Sec. 514(b)(2), inserted
    reference to a letter or memorandum.
      Subsec. (b)(3). Pub. L. 91-172, Sec. 212(b)(1), redesignated
    existing provisions as subpar. (B) and added subpar. (A).
      1964 - Subsec. (b)(2). Pub. L. 88-272 inserted reference to iron
    ore in text, and to domestic iron ore in heading.
      1958 - Subsec. (a). Pub. L. 85-866 inserted provision respecting
    casualty losses sustained upon certain uninsured property.
                      EFFECTIVE DATE OF 1999 AMENDMENT
      Amendment by Pub. L. 106-170 applicable to any instrument held,
    acquired, or entered into, any transaction entered into, and
    supplies held or acquired on or after Dec. 17, 1999, see section
    532(d) of Pub. L. 106-170, set out as a note under section 170 of
    this title.
                      EFFECTIVE DATE OF 1984 AMENDMENT
      Section 176(b) of Pub. L. 98-369 provided that: ''The amendment
    made by subsection (a) (amending this section) shall apply to net
    section 1231 gains for taxable years beginning after December 31,
    1984.''
      Amendment by section 711(c)(2)(A)(iii) of Pub. L. 98-369
    applicable to taxable years beginning after Dec. 31, 1983, see
    section 711(c)(2)(A)(v) of Pub. L. 98-369, set out as a note under
    section 165 of this title.
      Amendment by section 1001(b)(15) of Pub. L. 98-369 applicable to
    property acquired after June 22, 1984, and before Jan. 1, 1988, see
    section 1001(e) of Pub. L. 98-369, set out as a note under section
    166 of this title.
                      EFFECTIVE DATE OF 1981 AMENDMENT
      Amendment by Pub. L. 97-34 applicable to property acquired and
    positions established by the taxpayer after June 23, 1981, in
    taxable years ending after such date, and applicable when so
    elected with respect to property held on June 23, 1981, see section
    508 of Pub. L. 97-34, set out as an Effective Date note under
    section 1092 of this title.
                      EFFECTIVE DATE OF 1978 AMENDMENT
      Section 701(ee)(2) of Pub. L. 95-600 provided that: ''The
    amendment made by paragraph (1) (amending this section) shall apply
    with respect to sales, exchanges, and contributions made after
    October 4, 1976.''
                      EFFECTIVE DATE OF 1976 AMENDMENT
      Section 1402(b)(1) of Pub. L. 94-455 provided that the amendment
    made by that section is effective with respect to taxable years
    beginning in 1977.
      Section 1402(b)(2) of Pub. L. 94-455 provided that the amendment
    made by that section is effective with respect to taxable years
    beginning after Dec. 31, 1977.
                      EFFECTIVE DATE OF 1969 AMENDMENT
      Section 212(b)(2) of Pub. L. 91-172 provided that: ''The
    amendments made by paragraph (1) (amending this section) shall
    apply to livestock acquired after December 31, 1969.''
      Amendment by section 514(b)(2) of Pub. L. 91-172 applicable to
    sales and other dispositions occurring after July 25, 1969, see
    section 514(c) of Pub. L. 91-172, set out as a note under section
    1221 of this title.
      Amendment by section 516(b) of Pub. L. 91-172 applicable to
    taxable years beginning after Dec. 31, 1969, see section 516(d)(2)
    of Pub. L. 91-172, set out as a note under section 1001 of this
    title.
                      EFFECTIVE DATE OF 1964 AMENDMENT
      Amendment by Pub. L. 88-272 applicable with respect to amounts
    received or accrued in taxable years beginning after Dec. 31, 1963,
    attributable to iron ore mined in such years, see section 227(c) of
    Pub. L. 88-272, set out as a note under section 272 of this title.
                      EFFECTIVE DATE OF 1958 AMENDMENT
      Section 49(b) of Pub. L. 85-866 provided that: ''The amendment
    made by subsection (a) (amending this section) shall apply to
    taxable years beginning after December 31, 1957.''
 

References

                   SECTION REFERRED TO IN OTHER SECTIONS
      This section is referred to in sections 1, 64, 118, 170, 268,
    272, 341, 451, 543, 702, 724, 735, 751, 755, 818, 904, 1223, 1400B,
    1400F, 1503, 7704 of this title.
 

Personal tools