Internal Revenue Service
Revenue Ruling
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smRev. Rul. 79-22
1979-1 C.B. 275
Section 453
Section 1202
IRS Headnote
Capital gains; 60 percent capital gain deduction. Examples illustrate application of the increased capital gain deduction provided by section 1202 of the Code, as amended by the Revenue Act of 1978, to installment sale payments received after October 31, 1978, and to a cash basis taxpayer's gain on an October 31, 1978 sale of stock from which the proceeds are received after that date.
Full Text
Rev. Rul. 79-22
ISSUE
Situation 1.
Does the increase in the capital gain deduction from 50 percent to 60 percent of the net capital gain, as provided by section 1202 of the Internal Revenue Code of 1954 as amended by section 402 of the Revenue Act of 1978, 92 Stat. 2763, apply to installment sale payments received after October 31, 1978?
Situation 2.
Does the increase in the capital gain deduction from 50 to 60 percent of net gain, as provided by section 1202 of the Code, as amended, apply to gain from the sale of stock by cash basis taxpayer on October 31, 1978, if the sale proceeds were not received until November 7, 1978?
FACTS
Situation 1.
In 1977, an individual taxpayer sold real property held for more than one year and received less than 30 percent of the selling price. The taxpayer realized gain from the sale and elected to report such gain on the installment method under section 453(b) of the Code. The taxpayer properly determined that 80 percent of each installment to be received would be long-term capital gain. Installment payments of 150x dollars and 100x dollars were received by the taxpayer on June 1 and December 1, 1978, respectively. The taxpayer is not a dealer in real estate and realized no other capital gains during 1978.
Situation 2.
An individual taxpayer reports income on the cash receipts and disbursements method of accounting on a calendar year basis. On October 31, 1978, the taxpayer sold stock at a gain through a stock exchange. The stock had been held by the taxpayer for more than one year. The stock was delivered and the sales price received by the taxpayer on November 7, 1978. The taxpayer is not a dealer in securities and did not have other gains or losses from the sale or exchange of capital assets during 1978.
LAW
Prior to the Revenue Act of 1978, section 1202 of the Code provided that 50 percent of the amount of an individual taxpayer's net gain shall be a deduction from gross income.
Section 402 of the Revenue Act of 1978 amended section 1202 of the Code to provide that 60 percent of the amount of an individual taxpayer's net capital gain shall be a deduction from gross income. H.R. Rep. No. 95-1800, 95th Cong., 2d Sess. (1978), indicates, at page 257, that the provisions of section 402 are effective for taxable transactions occurring and installment payments received, after October 31, 1978. The legislative intent is that the 60 percent capital gain deduction is to apply to gains from sales or exchanges of capital assets recognized after October 31, 1978, by the "person" engaging in the transaction.
HOLDING
Situation 1.
The increase in the amount of the capital gain deduction from 50 percent to 60 percent of net capital gains applies to the gain from the installment payment received by the taxpayer on December 1, 1978, because the payment was received after October 31, 1978. The amount of the taxpayer's 1978 net capital gain is computed as follows:
Portion of installment
payment received June 1,
1978, includible in gross
income (80 percent of
150x dollars) ____________ 120x dollars
Portion of installment
payment received Decem-
ber 1, 1978, includible in
gross income (80 percent
of 100x dollars) _________ 80x dollars
___________
Net capital gain
for 1978 _________________ 200x dollars
The capital gain deduction is computed as follows:
1. 60 percent of the lesser
of the net capital gain
for 1978 (200x dollars)
or the net capital gain
received after October
31, 1978 (60 percent
of 80x dollars), plus _ 48x dollars
2. 50 percent of the excess
of the net capital gain
for 1978 over the
amount of net capital
gain taken into account
above (50 percent of
120x dollars (200x
dollars minus 80x
dollars)) _____________ 60x dollars
___________
The 1978 capital gain
deduction from gross
income ___________________ 108x dollars
Situation 2.
The increase in the amount of the capital gain deduction from 50 to 60 percent of net capital gain also applies to the gain recognized by the taxpayer from the sale proceeds received November 7, 1978.