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2011 1040 Form

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2011 1040 Form

2011 1040 form 14. 2011 1040 form   Sale of Property Table of Contents Reminder Introduction Useful Items - You may want to see: Sales and TradesWhat Is a Sale or Trade? How To Figure Gain or Loss Nontaxable Trades Transfers Between Spouses Related Party Transactions Capital Gains and LossesCapital or Ordinary Gain or Loss Capital Assets and Noncapital Assets Holding Period Nonbusiness Bad Debts Wash Sales Rollover of Gain From Publicly Traded Securities Reminder Foreign income. 2011 1040 form  If you are a U. 2011 1040 form S. 2011 1040 form citizen who sells property located outside the United States, you must report all gains and losses from the sale of that property on your tax return unless it is exempt by U. 2011 1040 form S. 2011 1040 form law. 2011 1040 form This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the payer. 2011 1040 form Introduction This chapter discusses the tax consequences of selling or trading investment property. 2011 1040 form It explains the following. 2011 1040 form What a sale or trade is. 2011 1040 form Figuring gain or loss. 2011 1040 form Nontaxable trades. 2011 1040 form Related party transactions. 2011 1040 form Capital gains or losses. 2011 1040 form Capital assets and noncapital assets. 2011 1040 form Holding period. 2011 1040 form Rollover of gain from publicly traded securities. 2011 1040 form Other property transactions. 2011 1040 form   Certain transfers of property are not discussed here. 2011 1040 form They are discussed in other IRS publications. 2011 1040 form These include the following. 2011 1040 form Sales of a main home, covered in chapter 15. 2011 1040 form Installment sales, covered in Publication 537, Installment Sales. 2011 1040 form Transactions involving business property, covered in Publication 544, Sales and Other Dispositions of Assets. 2011 1040 form Dispositions of an interest in a passive activity, covered in Publication 925, Passive Activity and At-Risk Rules. 2011 1040 form    Publication 550, Investment Income and Expenses (Including Capital Gains and Losses), provides a more detailed discussion about sales and trades of investment property. 2011 1040 form Publication 550 includes information about the rules covering nonbusiness bad debts, straddles, section 1256 contracts, puts and calls, commodity futures, short sales, and wash sales. 2011 1040 form It also discusses investment-related expenses. 2011 1040 form Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 8949 Sales and Other Dispositions of Capital Assets 8824 Like-Kind Exchanges Sales and Trades If you sold property such as stocks, bonds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. 2011 1040 form Generally, you should receive the statement by February 15 of the next year. 2011 1040 form It will show the gross proceeds from the sale. 2011 1040 form If you sold a covered security in 2013, your 1099-B (or substitute statement) will show your basis. 2011 1040 form Generally, a covered security is a security you acquired after 2010, with certain exceptions. 2011 1040 form See the Instructions for Form 8949. 2011 1040 form The IRS will also get a copy of Form 1099-B from the broker. 2011 1040 form Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. 2011 1040 form What Is a Sale or Trade? This section explains what is a sale or trade. 2011 1040 form It also explains certain transactions and events that are treated as sales or trades. 2011 1040 form A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. 2011 1040 form A trade is a transfer of property for other property or services and may be taxed in the same way as a sale. 2011 1040 form Sale and purchase. 2011 1040 form   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. 2011 1040 form The sale and purchase are two separate transactions. 2011 1040 form But see Like-kind exchanges under Nontaxable Trades, later. 2011 1040 form Redemption of stock. 2011 1040 form   A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. 2011 1040 form Dividend versus sale or trade. 2011 1040 form   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. 2011 1040 form Both direct and indirect ownership of stock will be considered. 2011 1040 form The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend (see chapter 8), There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. 2011 1040 form Redemption or retirement of bonds. 2011 1040 form   A redemption or retirement of bonds or notes at their maturity is generally treated as a sale or trade. 2011 1040 form   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. 2011 1040 form For details, see Regulations section 1. 2011 1040 form 1001-3. 2011 1040 form Surrender of stock. 2011 1040 form   A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. 2011 1040 form The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. 2011 1040 form Worthless securities. 2011 1040 form    Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. 2011 1040 form This affects whether your capital loss is long term or short term. 2011 1040 form See Holding Period , later. 2011 1040 form   Worthless securities also include securities that you abandon after March 12, 2008. 2011 1040 form To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. 2011 1040 form All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. 2011 1040 form    If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. 2011 1040 form Do not deduct them in the year the stock became worthless. 2011 1040 form How to report loss. 2011 1040 form    Report worthless securities in Part I or Part II, whichever applies, of Form 8949. 2011 1040 form In column (a), enter “Worthless. 2011 1040 form ”    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. 2011 1040 form See Form 8949 and the Instructions for Form 8949. 2011 1040 form For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. 2011 1040 form See also Schedule D (Form 1040), Form 8949, and their separate instructions. 2011 1040 form Filing a claim for refund. 2011 1040 form   If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. 2011 1040 form You must use Form 1040X, Amended U. 2011 1040 form S. 2011 1040 form Individual Income Tax Return, to amend your return for the year the security became worthless. 2011 1040 form You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. 2011 1040 form For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. 2011 1040 form How To Figure Gain or Loss You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. 2011 1040 form Gain. 2011 1040 form   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. 2011 1040 form Loss. 2011 1040 form   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. 2011 1040 form Adjusted basis. 2011 1040 form   The adjusted basis of property is your original cost or other original basis properly adjusted (increased or decreased) for certain items. 2011 1040 form See chapter 13 for more information about determining the adjusted basis of property. 2011 1040 form Amount realized. 2011 1040 form   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). 2011 1040 form Amount realized includes the money you receive plus the fair market value of any property or services you receive. 2011 1040 form If you received a note or other debt instrument for the property, see How To Figure Gain or Loss in chapter 4 of Publication 550 to figure the amount realized. 2011 1040 form If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. 2011 1040 form For more information, see Publication 537. 2011 1040 form Fair market value. 2011 1040 form   Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. 2011 1040 form Example. 2011 1040 form You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. 2011 1040 form Your gain is $3,000 ($10,000 − $7,000). 2011 1040 form Debt paid off. 2011 1040 form    A debt against the property, or against you, that is paid off as a part of the transaction, or that is assumed by the buyer, must be included in the amount realized. 2011 1040 form This is true even if neither you nor the buyer is personally liable for the debt. 2011 1040 form For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property. 2011 1040 form Example. 2011 1040 form You sell stock that you had pledged as security for a bank loan of $8,000. 2011 1040 form Your basis in the stock is $6,000. 2011 1040 form The buyer pays off your bank loan and pays you $20,000 in cash. 2011 1040 form The amount realized is $28,000 ($20,000 + $8,000). 2011 1040 form Your gain is $22,000 ($28,000 − $6,000). 2011 1040 form Payment of cash. 2011 1040 form   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. 2011 1040 form Determine your gain or loss by subtracting the cash you pay plus the adjusted basis of the property you trade in from the amount you realize. 2011 1040 form If the result is a positive number, it is a gain. 2011 1040 form If the result is a negative number, it is a loss. 2011 1040 form No gain or loss. 2011 1040 form   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. 2011 1040 form In this case, you may have neither a gain nor a loss. 2011 1040 form See Basis Other Than Cost in chapter 13. 2011 1040 form Nontaxable Trades This section discusses trades that generally do not result in a taxable gain or deductible loss. 2011 1040 form For more information on nontaxable trades, see chapter 1 of Publication 544. 2011 1040 form Like-kind exchanges. 2011 1040 form   If you trade business or investment property for other business or investment property of a like kind, you do not pay tax on any gain or deduct any loss until you sell or dispose of the property you receive. 2011 1040 form To be nontaxable, a trade must meet all six of the following conditions. 2011 1040 form The property must be business or investment property. 2011 1040 form You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. 2011 1040 form Neither property may be property used for personal purposes, such as your home or family car. 2011 1040 form The property must not be held primarily for sale. 2011 1040 form The property you trade and the property you receive must not be property you sell to customers, such as merchandise. 2011 1040 form The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. 2011 1040 form However, see Special rules for mutual ditch, reservoir, or irrigation company stock, in chapter 4 of Publication 550 for an exception. 2011 1040 form Also, you can have a nontaxable trade of corporate stocks under a different rule, as discussed later. 2011 1040 form There must be a trade of like property. 2011 1040 form The trade of real estate for real estate, or personal property for similar personal property, is a trade of like property. 2011 1040 form The trade of an apartment house for a store building, or a panel truck for a pickup truck, is a trade of like property. 2011 1040 form The trade of a piece of machinery for a store building is not a trade of like property. 2011 1040 form Real property located in the United States and real property located outside the United States are not like property. 2011 1040 form Also, personal property used predominantly within the United States and personal property used predominantly outside the United States are not like property. 2011 1040 form The property to be received must be identified in writing within 45 days after the date you transfer the property given up in the trade. 2011 1040 form The property to be received must be received by the earlier of: The 180th day after the date on which you transfer the property given up in the trade, or The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs. 2011 1040 form    If you trade property with a related party in a like-kind exchange, a special rule may apply. 2011 1040 form See Related Party Transactions , later in this chapter. 2011 1040 form Also, see chapter 1 of Publication 544 for more information on exchanges of business property and special rules for exchanges using qualified intermediaries or involving multiple properties. 2011 1040 form Partly nontaxable exchange. 2011 1040 form   If you receive money or unlike property in addition to like property, and the above six conditions are met, you have a partly nontaxable trade. 2011 1040 form You are taxed on any gain you realize, but only up to the amount of the money and the fair market value of the unlike property you receive. 2011 1040 form You cannot deduct a loss. 2011 1040 form Like property and unlike property transferred. 2011 1040 form   If you give up unlike property in addition to the like property, you must recognize gain or loss on the unlike property you give up. 2011 1040 form The gain or loss is the difference between the adjusted basis of the unlike property and its fair market value. 2011 1040 form Like property and money transferred. 2011 1040 form   If all of the above conditions (1) – (6) are met, you have a nontaxable trade even if you pay money in addition to the like property. 2011 1040 form Basis of property received. 2011 1040 form   To figure the basis of the property received, see Nontaxable Exchanges in chapter 13. 2011 1040 form How to report. 2011 1040 form   You must report the trade of like property on Form 8824. 2011 1040 form If you figure a recognized gain or loss on Form 8824, report it on Schedule D (Form 1040), or on Form 4797, Sales of Business Property, whichever applies. 2011 1040 form See the instructions for Line 22 in the Instructions for Form 8824. 2011 1040 form   For information on using Form 4797, see chapter 4 of Publication 544. 2011 1040 form Corporate stocks. 2011 1040 form   The following trades of corporate stocks generally do not result in a taxable gain or a deductible loss. 2011 1040 form Corporate reorganizations. 2011 1040 form   In some instances, a company will give you common stock for preferred stock, preferred stock for common stock, or stock in one corporation for stock in another corporation. 2011 1040 form If this is a result of a merger, recapitalization, transfer to a controlled corporation, bankruptcy, corporate division, corporate acquisition, or other corporate reorganization, you do not recognize gain or loss. 2011 1040 form Stock for stock of the same corporation. 2011 1040 form   You can exchange common stock for common stock or preferred stock for preferred stock in the same corporation without having a recognized gain or loss. 2011 1040 form This is true for a trade between two stockholders as well as a trade between a stockholder and the corporation. 2011 1040 form Convertible stocks and bonds. 2011 1040 form   You generally will not have a recognized gain or loss if you convert bonds into stock or preferred stock into common stock of the same corporation according to a conversion privilege in the terms of the bond or the preferred stock certificate. 2011 1040 form Property for stock of a controlled corporation. 2011 1040 form   If you transfer property to a corporation solely in exchange for stock in that corporation, and immediately after the trade you are in control of the corporation, you ordinarily will not recognize a gain or loss. 2011 1040 form This rule applies both to individuals and to groups who transfer property to a corporation. 2011 1040 form It does not apply if the corporation is an investment company. 2011 1040 form   For this purpose, to be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock of the corporation. 2011 1040 form   If this provision applies to you, you may have to attach to your return a complete statement of all facts pertinent to the exchange. 2011 1040 form For details, see Regulations section 1. 2011 1040 form 351-3. 2011 1040 form Additional information. 2011 1040 form   For more information on trades of stock, see Nontaxable Trades in chapter 4 of Publication 550. 2011 1040 form Insurance policies and annuities. 2011 1040 form   You will not have a recognized gain or loss if the insured or annuitant is the same under both contracts and you trade: A life insurance contract for another life insurance contract or for an endowment or annuity contract or for a qualified long-term care insurance contract, An endowment contract for another endowment contract that provides for regular payments beginning at a date no later than the beginning date under the old contract or for an annuity contract or for a qualified long-term insurance contract, An annuity contract for annuity contract or for a qualified long-term care insurance contract, or A qualified long-term care insurance contract for a qualified long-term care insurance contract. 2011 1040 form   You also may not have to recognize gain or loss on an exchange of a portion of an annuity contract for another annuity contract. 2011 1040 form For transfers completed before October 24, 2011, see Revenue Ruling 2003-76 in Internal Revenue Bulletin 2003-33 and Revenue Procedure 2008-24 in Internal Revenue Bulletin 2008-13. 2011 1040 form Revenue Ruling 2003-76 is available at www. 2011 1040 form irs. 2011 1040 form gov/irb/2003-33_IRB/ar11. 2011 1040 form html. 2011 1040 form Revenue Procedure 2008-24 is available at www. 2011 1040 form irs. 2011 1040 form gov/irb/2008-13_IRB/ar13. 2011 1040 form html. 2011 1040 form For transfers completed on or after October 24, 2011, see Revenue Ruling 2003-76, above, and Revenue Procedure 2011-38, in Internal Revenue Bulletin 2011-30. 2011 1040 form Revenue Procedure 2011-38 is available at www. 2011 1040 form irs. 2011 1040 form gov/irb/2011-30_IRB/ar09. 2011 1040 form html. 2011 1040 form   For tax years beginning after December 31, 2010, amounts received as an annuity for a period of 10 years or more, or for the lives of one or more individuals, under any portion of an annuity, endowment, or life insurance contract, are treated as a separate contract and are considered partial annuities. 2011 1040 form A portion of an annuity, endowment, or life insurance contract may be annuitized, provided that the annuitization period is for 10 years or more or for the lives of one or more individuals. 2011 1040 form The investment in the contract is allocated between the part of the contract from which amounts are received as an annuity and the part of the contract from which amounts are not received as an annuity. 2011 1040 form   Exchanges of contracts not included in this list, such as an annuity contract for an endowment contract, or an annuity or endowment contract for a life insurance contract, are taxable. 2011 1040 form Demutualization of life insurance companies. 2011 1040 form   If you received stock in exchange for your equity interest as a policyholder or an annuitant, you generally will not have a recognized gain or loss. 2011 1040 form See Demutualization of Life Insurance Companies in Publication 550. 2011 1040 form U. 2011 1040 form S. 2011 1040 form Treasury notes or bonds. 2011 1040 form   You can trade certain issues of U. 2011 1040 form S. 2011 1040 form Treasury obligations for other issues designated by the Secretary of the Treasury, with no gain or loss recognized on the trade. 2011 1040 form See Savings bonds traded in chapter 1 of Publication 550 for more information. 2011 1040 form Transfers Between Spouses Generally, no gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or if incident to a divorce, a former spouse. 2011 1040 form This nonrecognition rule does not apply in the following situations. 2011 1040 form The recipient spouse or former spouse is a nonresident alien. 2011 1040 form Property is transferred in trust and liability exceeds basis. 2011 1040 form Gain must be recognized to the extent the amount of the liabilities assumed by the trust, plus any liabilities on the property, exceed the adjusted basis of the property. 2011 1040 form For other situations, see Transfers Between Spouses in chapter 4 of Publication 550. 2011 1040 form Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is treated by the recipient as a gift and is not considered a sale or exchange. 2011 1040 form The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. 2011 1040 form This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its fair market value at the time of transfer or any consideration paid by the recipient. 2011 1040 form This rule applies for purposes of determining loss as well as gain. 2011 1040 form Any gain recognized on a transfer in trust increases the basis. 2011 1040 form A transfer of property is incident to a divorce if the transfer occurs within 1 year after the date on which the marriage ends, or if the transfer is related to the ending of the marriage. 2011 1040 form Related Party Transactions Special rules apply to the sale or trade of property between related parties. 2011 1040 form Gain on sale or trade of depreciable property. 2011 1040 form   Your gain from the sale or trade of property to a related party may be ordinary income, rather than capital gain, if the property can be depreciated by the party receiving it. 2011 1040 form See chapter 3 of Publication 544 for more information. 2011 1040 form Like-kind exchanges. 2011 1040 form   Generally, if you trade business or investment property for other business or investment property of a like kind, no gain or loss is recognized. 2011 1040 form See Like-kind exchanges , earlier, under Nontaxable Trades. 2011 1040 form   This rule also applies to trades of property between related parties, defined next under Losses on sales or trades of property. 2011 1040 form However, if either you or the related party disposes of the like property within 2 years after the trade, you both must report any gain or loss not recognized on the original trade on your return filed for the year in which the later disposition occurs. 2011 1040 form See Related Party Transactions in chapter 4 of Publication 550 for exceptions. 2011 1040 form Losses on sales or trades of property. 2011 1040 form   You cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between you and the following related parties. 2011 1040 form Members of your family. 2011 1040 form This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc. 2011 1040 form ), and lineal descendants (children, grandchildren, etc. 2011 1040 form ). 2011 1040 form A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest. 2011 1040 form A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. 2011 1040 form (See Constructive ownership of stock , later. 2011 1040 form ) A tax-exempt charitable or educational organization directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. 2011 1040 form   In addition, a loss on the sale or trade of property is not deductible if the transaction is directly or indirectly between the following related parties. 2011 1040 form A grantor and fiduciary, or the fiduciary and beneficiary, of any trust. 2011 1040 form Fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. 2011 1040 form A trust fiduciary and a corporation of which more than 50% in value of the outstanding stock is directly or indirectly owned by or for the trust, or by or for the grantor of the trust. 2011 1040 form A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or the profits interest, in the partnership. 2011 1040 form Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. 2011 1040 form Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. 2011 1040 form An executor and a beneficiary of an estate (except in the case of a sale or trade to satisfy a pecuniary bequest). 2011 1040 form Two corporations that are members of the same controlled group. 2011 1040 form (Under certain conditions, however, these losses are not disallowed but must be deferred. 2011 1040 form ) Two partnerships if the same persons own, directly or indirectly, more than 50% of the capital interests or the profit interests in both partnerships. 2011 1040 form Multiple property sales or trades. 2011 1040 form   If you sell or trade to a related party a number of blocks of stock or pieces of property in a lump sum, you must figure the gain or loss separately for each block of stock or piece of property. 2011 1040 form The gain on each item may be taxable. 2011 1040 form However, you cannot deduct the loss on any item. 2011 1040 form Also, you cannot reduce gains from the sales of any of these items by losses on the sales of any of the other items. 2011 1040 form Indirect transactions. 2011 1040 form   You cannot deduct your loss on the sale of stock through your broker if, under a prearranged plan, a related party buys the same stock you had owned. 2011 1040 form This does not apply to a trade between related parties through an exchange that is purely coincidental and is not prearranged. 2011 1040 form Constructive ownership of stock. 2011 1040 form   In determining whether a person directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. 2011 1040 form Rule 1. 2011 1040 form   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. 2011 1040 form Rule 2. 2011 1040 form   An individual is considered to own the stock directly or indirectly owned by or for his or her family. 2011 1040 form Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. 2011 1040 form Rule 3. 2011 1040 form   An individual owning, other than by applying rule 2, any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. 2011 1040 form Rule 4. 2011 1040 form   When applying rule 1, 2, or 3, stock constructively owned by a person under rule 1 is treated as actually owned by that person. 2011 1040 form But stock constructively owned by an individual under rule 2 or rule 3 is not treated as owned by that individual for again applying either rule 2 or rule 3 to make another person the constructive owner of the stock. 2011 1040 form Property received from a related party. 2011 1040 form    If you sell or trade at a gain property you acquired from a related party, you recognize the gain only to the extent it is more than the loss previously disallowed to the related party. 2011 1040 form This rule applies only if you are the original transferee and you acquired the property by purchase or exchange. 2011 1040 form This rule does not apply if the related party's loss was disallowed because of the wash sale rules described in chapter 4 of Publication 550 under Wash Sales. 2011 1040 form   If you sell or trade at a loss property you acquired from a related party, you cannot recognize the loss that was not allowed to the related party. 2011 1040 form Example 1. 2011 1040 form Your brother sells you stock for $7,600. 2011 1040 form His cost basis is $10,000. 2011 1040 form Your brother cannot deduct the loss of $2,400. 2011 1040 form Later, you sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900. 2011 1040 form Your reportable gain is $500 (the $2,900 gain minus the $2,400 loss not allowed to your brother). 2011 1040 form Example 2. 2011 1040 form If, in Example 1, you sold the stock for $6,900 instead of $10,500, your recognized loss is only $700 (your $7,600 basis minus $6,900). 2011 1040 form You cannot deduct the loss that was not allowed to your brother. 2011 1040 form Capital Gains and Losses This section discusses the tax treatment of gains and losses from different types of investment transactions. 2011 1040 form Character of gain or loss. 2011 1040 form   You need to classify your gains and losses as either ordinary or capital gains or losses. 2011 1040 form You then need to classify your capital gains and losses as either short term or long term. 2011 1040 form If you have long-term gains and losses, you must identify your 28% rate gains and losses. 2011 1040 form If you have a net capital gain, you must also identify any unrecaptured section 1250 gain. 2011 1040 form   The correct classification and identification helps you figure the limit on capital losses and the correct tax on capital gains. 2011 1040 form Reporting capital gains and losses is explained in chapter 16. 2011 1040 form Capital or Ordinary Gain or Loss If you have a taxable gain or a deductible loss from a transaction, it may be either a capital gain or loss or an ordinary gain or loss, depending on the circumstances. 2011 1040 form Generally, a sale or trade of a capital asset (defined next) results in a capital gain or loss. 2011 1040 form A sale or trade of a noncapital asset generally results in ordinary gain or loss. 2011 1040 form Depending on the circumstances, a gain or loss on a sale or trade of property used in a trade or business may be treated as either capital or ordinary, as explained in Publication 544. 2011 1040 form In some situations, part of your gain or loss may be a capital gain or loss and part may be an ordinary gain or loss. 2011 1040 form Capital Assets and Noncapital Assets For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. 2011 1040 form Some examples are: Stocks or bonds held in your personal account, A house owned and used by you and your family, Household furnishings, A car used for pleasure or commuting, Coin or stamp collections, Gems and jewelry, and Gold, silver, or any other metal. 2011 1040 form Any property you own is a capital asset, except the following noncapital assets. 2011 1040 form Property held mainly for sale to customers or property that will physically become a part of the merchandise for sale to customers. 2011 1040 form For an exception, see Capital Asset Treatment for Self-Created Musical Works , later. 2011 1040 form Depreciable property used in your trade or business, even if fully depreciated. 2011 1040 form Real property used in your trade or business. 2011 1040 form A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property that is: Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Acquired under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. 2011 1040 form For an exception to this rule, see Capital Asset Treatment for Self-Created Musical Works , later. 2011 1040 form Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of property described in (1). 2011 1040 form U. 2011 1040 form S. 2011 1040 form Government publications that you received from the government free or for less than the normal sales price, or that you acquired under circumstances entitling you to the basis of someone who received the publications free or for less than the normal sales price. 2011 1040 form Certain commodities derivative financial instruments held by commodities derivatives dealers. 2011 1040 form Hedging transactions, but only if the transaction is clearly identified as a hedging transaction before the close of the day on which it was acquired, originated, or entered into. 2011 1040 form Supplies of a type you regularly use or consume in the ordinary course of your trade or business. 2011 1040 form Investment Property Investment property is a capital asset. 2011 1040 form Any gain or loss from its sale or trade is generally a capital gain or loss. 2011 1040 form Gold, silver, stamps, coins, gems, etc. 2011 1040 form   These are capital assets except when they are held for sale by a dealer. 2011 1040 form Any gain or loss you have from their sale or trade generally is a capital gain or loss. 2011 1040 form Stocks, stock rights, and bonds. 2011 1040 form   All of these (including stock received as a dividend) are capital assets except when held for sale by a securities dealer. 2011 1040 form However, if you own small business stock, see Losses on Section 1244 (Small Business) Stock , later, and Losses on Small Business Investment Company Stock, in chapter 4 of Publication 550. 2011 1040 form Personal Use Property Property held for personal use only, rather than for investment, is a capital asset, and you must report a gain from its sale as a capital gain. 2011 1040 form However, you cannot deduct a loss from selling personal use property. 2011 1040 form Capital Asset Treatment for Self-Created Musical Works You can elect to treat musical compositions and copyrights in musical works as capital assets when you sell or exchange them if: Your personal efforts created the property, or You acquired the property under circumstances (for example, by gift) entitling you to the basis of the person who created the property or for whom it was prepared or produced. 2011 1040 form You must make a separate election for each musical composition (or copyright in a musical work) sold or exchanged during the tax year. 2011 1040 form You must make the election on or before the due date (including extensions) of the income tax return for the tax year of the sale or exchange. 2011 1040 form You must make the election on Form 8949 by treating the sale or exchange as the sale or exchange of a capital asset, according to Form 8949, Schedule D (Form 1040), and their separate instructions. 2011 1040 form For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. 2011 1040 form See also Schedule D (Form 1040), Form 8949, and their separate instructions. 2011 1040 form You can revoke the election if you have IRS approval. 2011 1040 form To get IRS approval, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. 2011 1040 form See, for example, Rev. 2011 1040 form Proc. 2011 1040 form 2013-1, corrected by Announcement 2013–9, and amplified and modified by Rev. 2011 1040 form Proc. 2011 1040 form 2013–32, available at www. 2011 1040 form irs. 2011 1040 form gov/irb/2013-01_IRB/ar06. 2011 1040 form html. 2011 1040 form Alternatively, you are granted an automatic 6-month extension from the due date of your income tax return (excluding extensions) to revoke the election, provided you timely file your income tax return, and within this 6-month extension period, you file Form 1040X that treats the sale or exchange as the sale or exchange of property that is not a capital asset. 2011 1040 form Discounted Debt Instruments Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions. 2011 1040 form Short-term government obligations. 2011 1040 form   Treat gains on short-term federal, state, or local government obligations (other than tax-exempt obligations) as ordinary income up to your ratable share of the acquisition discount. 2011 1040 form This treatment applies to obligations with a fixed maturity date not more than 1 year from the date of issue. 2011 1040 form Acquisition discount is the stated redemption price at maturity minus your basis in the obligation. 2011 1040 form   However, do not treat these gains as income to the extent you previously included the discount in income. 2011 1040 form See Discount on Short-Term Obligations in chapter 1 of Publication 550. 2011 1040 form Short-term nongovernment obligations. 2011 1040 form   Treat gains on short-term nongovernment obligations as ordinary income up to your ratable share of original issue discount (OID). 2011 1040 form This treatment applies to obligations with a fixed maturity date of not more than 1 year from the date of issue. 2011 1040 form   However, to the extent you previously included the discount in income, you do not have to include it in income again. 2011 1040 form See Discount on Short-Term Obligations in chapter 1 of Publication 550. 2011 1040 form Tax-exempt state and local government bonds. 2011 1040 form   If these bonds were originally issued at a discount before September 4, 1982, or you acquired them before March 2, 1984, treat your part of OID as tax-exempt interest. 2011 1040 form To figure your gain or loss on the sale or trade of these bonds, reduce the amount realized by your part of OID. 2011 1040 form   If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of OID to figure gain or loss. 2011 1040 form For more information on the basis of these bonds, see Discounted Debt Instruments in chapter 4 of Publication 550. 2011 1040 form   Any gain from market discount is usually taxable on disposition or redemption of tax-exempt bonds. 2011 1040 form If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. 2011 1040 form If you bought the bonds after April 30, 1993, the gain is ordinary income. 2011 1040 form   You figure the market discount by subtracting the price you paid for the bond from the sum of the original issue price of the bond and the amount of accumulated OID from the date of issue that represented interest to any earlier holders. 2011 1040 form For more information, see Market Discount Bonds in chapter 1 of Publication 550. 2011 1040 form    A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss. 2011 1040 form Redeemed before maturity. 2011 1040 form   If a state or local bond issued before June 9, 1980, is redeemed before it matures, the OID is not taxable to you. 2011 1040 form   If a state or local bond issued after June 8, 1980, is redeemed before it matures, the part of OID earned while you hold the bond is not taxable to you. 2011 1040 form However, you must report the unearned part of OID as a capital gain. 2011 1040 form Example. 2011 1040 form On July 2, 2002, the date of issue, you bought a 20-year, 6% municipal bond for $800. 2011 1040 form The face amount of the bond was $1,000. 2011 1040 form The $200 discount was OID. 2011 1040 form At the time the bond was issued, the issuer had no intention of redeeming it before it matured. 2011 1040 form The bond was callable at its face amount beginning 10 years after the issue date. 2011 1040 form The issuer redeemed the bond at the end of 11 years (July 2, 2013) for its face amount of $1,000 plus accrued annual interest of $60. 2011 1040 form The OID earned during the time you held the bond, $73, is not taxable. 2011 1040 form The $60 accrued annual interest also is not taxable. 2011 1040 form However, you must report the unearned part of OID ($127) as a capital gain. 2011 1040 form Long-term debt instruments issued after 1954 and before May 28, 1969 (or before July 2, 1982, if a government instrument). 2011 1040 form   If you sell, trade, or redeem for a gain one of these debt instruments, the part of your gain that is not more than your ratable share of the OID at the time of the sale or redemption is ordinary income. 2011 1040 form The rest of the gain is capital gain. 2011 1040 form If, however, there was an intention to call the debt instrument before maturity, all of your gain that is not more than the entire OID is treated as ordinary income at the time of the sale. 2011 1040 form This treatment of taxable gain also applies to corporate instruments issued after May 27, 1969, under a written commitment that was binding on May 27, 1969, and at all times thereafter. 2011 1040 form Long-term debt instruments issued after May 27, 1969 (or after July 1, 1982, if a government instrument). 2011 1040 form   If you hold one of these debt instruments, you must include a part of OID in your gross income each year you own the instrument. 2011 1040 form Your basis in that debt instrument is increased by the amount of OID that you have included in your gross income. 2011 1040 form See Original Issue Discount (OID) in chapter 7 for information about OID that you must report on your tax return. 2011 1040 form   If you sell or trade the debt instrument before maturity, your gain is a capital gain. 2011 1040 form However, if at the time the instrument was originally issued there was an intention to call it before its maturity, your gain generally is ordinary income to the extent of the entire OID reduced by any amounts of OID previously includible in your income. 2011 1040 form In this case, the rest of the gain is capital gain. 2011 1040 form Market discount bonds. 2011 1040 form   If the debt instrument has market discount and you chose to include the discount in income as it accrued, increase your basis in the debt instrument by the accrued discount to figure capital gain or loss on its disposition. 2011 1040 form If you did not choose to include the discount in income as it accrued, you must report gain as ordinary interest income up to the instrument's accrued market discount. 2011 1040 form The rest of the gain is capital gain. 2011 1040 form See Market Discount Bonds in chapter 1 of Publication 550. 2011 1040 form   A different rule applies to market discount bonds issued before July 19, 1984, and purchased by you before May 1, 1993. 2011 1040 form See Market discount bonds under Discounted Debt Instruments in chapter 4 of Publication 550. 2011 1040 form Retirement of debt instrument. 2011 1040 form   Any amount you receive on the retirement of a debt instrument is treated in the same way as if you had sold or traded that instrument. 2011 1040 form Notes of individuals. 2011 1040 form   If you hold an obligation of an individual issued with OID after March 1, 1984, you generally must include the OID in your income currently, and your gain or loss on its sale or retirement is generally capital gain or loss. 2011 1040 form An exception to this treatment applies if the obligation is a loan between individuals and all the following requirements are met. 2011 1040 form The lender is not in the business of lending money. 2011 1040 form The amount of the loan, plus the amount of any outstanding prior loans, is $10,000 or less. 2011 1040 form Avoiding federal tax is not one of the principal purposes of the loan. 2011 1040 form   If the exception applies, or the obligation was issued before March 2, 1984, you do not include the OID in your income currently. 2011 1040 form When you sell or redeem the obligation, the part of your gain that is not more than your accrued share of OID at that time is ordinary income. 2011 1040 form The rest of the gain, if any, is capital gain. 2011 1040 form Any loss on the sale or redemption is capital loss. 2011 1040 form Deposit in Insolvent or Bankrupt Financial Institution If you lose money you have on deposit in a bank, credit union, or other financial institution that becomes insolvent or bankrupt, you may be able to deduct your loss in one of three ways. 2011 1040 form Ordinary loss. 2011 1040 form Casualty loss. 2011 1040 form Nonbusiness bad debt (short-term capital loss). 2011 1040 form  For more information, see Deposit in Insolvent or Bankrupt Financial Institution, in chapter 4 of Publication 550. 2011 1040 form Sale of Annuity The part of any gain on the sale of an annuity contract before its maturity date that is based on interest accumulated on the contract is ordinary income. 2011 1040 form Losses on Section 1244 (Small Business) Stock You can deduct as an ordinary loss, rather than as a capital loss, your loss on the sale, trade, or worthlessness of section 1244 stock. 2011 1040 form Report the loss on Form 4797, line 10. 2011 1040 form Any gain on section 1244 stock is a capital gain if the stock is a capital asset in your hands. 2011 1040 form Report the gain on Form 8949. 2011 1040 form See Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. 2011 1040 form For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. 2011 1040 form See also Schedule D (Form 1040), Form 8949, and their separate instructions. 2011 1040 form Holding Period If you sold or traded investment property, you must determine your holding period for the property. 2011 1040 form Your holding period determines whether any capital gain or loss was a short-term or long-term capital gain or loss. 2011 1040 form Long-term or short-term. 2011 1040 form   If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. 2011 1040 form If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. 2011 1040 form   To determine how long you held the investment property, begin counting on the date after the day you acquired the property. 2011 1040 form The day you disposed of the property is part of your holding period. 2011 1040 form Example. 2011 1040 form If you bought investment property on February 6, 2012, and sold it on February 6, 2013, your holding period is not more than 1 year and you have a short-term capital gain or loss. 2011 1040 form If you sold it on February 7, 2013, your holding period is more than 1 year and you will have a long-term capital gain or loss. 2011 1040 form Securities traded on established market. 2011 1040 form   For securities traded on an established securities market, your holding period begins the day after the trade date you bought the securities, and ends on the trade date you sold them. 2011 1040 form    Do not confuse the trade date with the settlement date, which is the date by which the stock must be delivered and payment must be made. 2011 1040 form Example. 2011 1040 form You are a cash method, calendar year taxpayer. 2011 1040 form You sold stock at a gain on December 30, 2013. 2011 1040 form According to the rules of the stock exchange, the sale was closed by delivery of the stock 4 trading days after the sale, on January 6, 2014. 2011 1040 form You received payment of the sales price on that same day. 2011 1040 form Report your gain on your 2013 return, even though you received the payment in 2014. 2011 1040 form The gain is long term or short term depending on whether you held the stock more than 1 year. 2011 1040 form Your holding period ended on December 30. 2011 1040 form If you had sold the stock at a loss, you would also report it on your 2013 return. 2011 1040 form U. 2011 1040 form S. 2011 1040 form Treasury notes and bonds. 2011 1040 form   The holding period of U. 2011 1040 form S. 2011 1040 form Treasury notes and bonds sold at auction on the basis of yield starts the day after the Secretary of the Treasury, through news releases, gives notification of acceptance to successful bidders. 2011 1040 form The holding period of U. 2011 1040 form S. 2011 1040 form Treasury notes and bonds sold through an offering on a subscription basis at a specified yield starts the day after the subscription is submitted. 2011 1040 form Automatic investment service. 2011 1040 form   In determining your holding period for shares bought by the bank or other agent, full shares are considered bought first and any fractional shares are considered bought last. 2011 1040 form Your holding period starts on the day after the bank's purchase date. 2011 1040 form If a share was bought over more than one purchase date, your holding period for that share is a split holding period. 2011 1040 form A part of the share is considered to have been bought on each date that stock was bought by the bank with the proceeds of available funds. 2011 1040 form Nontaxable trades. 2011 1040 form   If you acquire investment property in a trade for other investment property and your basis for the new property is determined, in whole or in part, by your basis in the old property, your holding period for the new property begins on the day following the date you acquired the old property. 2011 1040 form Property received as a gift. 2011 1040 form   If you receive a gift of property and your basis is determined by the donor's adjusted basis, your holding period is considered to have started on the same day the donor's holding period started. 2011 1040 form   If your basis is determined by the fair market value of the property, your holding period starts on the day after the date of the gift. 2011 1040 form Inherited property. 2011 1040 form   Generally, if you inherited investment property, your capital gain or loss on any later disposition of that property is long-term capital gain or loss. 2011 1040 form This is true regardless of how long you actually held the property. 2011 1040 form However, if you inherited property from someone who died in 2010, see the information below. 2011 1040 form Inherited property from someone who died in 2010. 2011 1040 form   If you inherit investment property from a decedent who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your holding period. 2011 1040 form Real property bought. 2011 1040 form   To figure how long you have held real property bought under an unconditional contract, begin counting on the day after you received title to it or on the day after you took possession of it and assumed the burdens and privileges of ownership, whichever happened first. 2011 1040 form However, taking delivery or possession of real property under an option agreement is not enough to start the holding period. 2011 1040 form The holding period cannot start until there is an actual contract of sale. 2011 1040 form The holding period of the seller cannot end before that time. 2011 1040 form Real property repossessed. 2011 1040 form   If you sell real property but keep a security interest in it, and then later repossess the property under the terms of the sales contract, your holding period for a later sale includes the period you held the property before the original sale and the period after the repossession. 2011 1040 form Your holding period does not include the time between the original sale and the repossession. 2011 1040 form That is, it does not include the period during which the first buyer held the property. 2011 1040 form Stock dividends. 2011 1040 form   The holding period for stock you received as a taxable stock dividend begins on the date of distribution. 2011 1040 form   The holding period for new stock you received as a nontaxable stock dividend begins on the same day as the holding period of the old stock. 2011 1040 form This rule also applies to stock acquired in a “spin-off,” which is a distribution of stock or securities in a controlled corporation. 2011 1040 form Nontaxable stock rights. 2011 1040 form   Your holding period for nontaxable stock rights begins on the same day as the holding period of the underlying stock. 2011 1040 form The holding period for stock acquired through the exercise of stock rights begins on the date the right was exercised. 2011 1040 form Nonbusiness Bad Debts If someone owes you money that you cannot collect, you have a bad debt. 2011 1040 form You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless. 2011 1040 form Generally, nonbusiness bad debts are bad debts that did not come from operating your trade or business, and are deductible as short-term capital losses. 2011 1040 form To be deductible, nonbusiness bad debts must be totally worthless. 2011 1040 form You cannot deduct a partly worthless nonbusiness debt. 2011 1040 form Genuine debt required. 2011 1040 form   A debt must be genuine for you to deduct a loss. 2011 1040 form A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. 2011 1040 form Basis in bad debt required. 2011 1040 form    To deduct a bad debt, you must have a basis in it—that is, you must have already included the amount in your income or loaned out your cash. 2011 1040 form For example, you cannot claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. 2011 1040 form If you are a cash method taxpayer (as most individuals are), you generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items. 2011 1040 form When deductible. 2011 1040 form   You can take a bad debt deduction only in the year the debt becomes worthless. 2011 1040 form You do not have to wait until a debt is due to determine whether it is worthless. 2011 1040 form A debt becomes worthless when there is no longer any chance that the amount owed will be paid. 2011 1040 form   It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. 2011 1040 form You must only show that you have taken reasonable steps to collect the debt. 2011 1040 form Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. 2011 1040 form How to report bad debts. 2011 1040 form    Deduct nonbusiness bad debts as short-term capital losses on Form 8949. 2011 1040 form    Make sure you report your bad debt(s) (and any other short-term transactions for which you did not receive a Form 1099-B) on Form 8949, Part I, with box C checked. 2011 1040 form    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in chapter 16. 2011 1040 form See also Schedule D (Form 1040), Form 8949, and their separate instructions. 2011 1040 form   For each bad debt, attach a statement to your return that contains: A description of the debt, including the amount, and the date it became due, The name of the debtor, and any business or family relationship between you and the debtor, The efforts you made to collect the debt, and Why you decided the debt was worthless. 2011 1040 form For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt. 2011 1040 form Filing a claim for refund. 2011 1040 form    If you do not deduct a bad debt on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the bad debt. 2011 1040 form To do this, use Form 1040X to amend your return for the year the debt became worthless. 2011 1040 form You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. 2011 1040 form For more information about filing a claim, see Amended Returns and Claims for Refund in chapter 1. 2011 1040 form Additional information. 2011 1040 form   For more information, see Nonbusiness Bad Debts in Publication 550. 2011 1040 form For information on business bad debts, see chapter 10 of Publication 535, Business Expenses. 2011 1040 form Wash Sales You cannot deduct losses from sales or trades of stock or securities in a wash sale. 2011 1040 form A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: Buy substantially identical stock or securities, Acquire substantially identical stock or securities in a fully taxable trade, Acquire a contract or option to buy substantially identical stock or securities, or Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. 2011 1040 form If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). 2011 1040 form The result is your basis in the new stock or securities. 2011 1040 form This adjustment postpones the loss deduction until the disposition of the new stock or securities. 2011 1040 form Your holding period for the new stock or securities includes the holding period of the stock or securities sold. 2011 1040 form For more information, see Wash Sales, in chapter 4 of Publication 550. 2011 1040 form Rollover of Gain From Publicly Traded Securities You may qualify for a tax-free rollover of certain gains from the sale of publicly traded securities. 2011 1040 form This means that if you buy certain replacement property and make the choice described in this section, you postpone part or all of your gain. 2011 1040 form You postpone the gain by adjusting the basis of the replacement property as described in Basis of replacement property , later. 2011 1040 form This postpones your gain until the year you dispose of the replacement property. 2011 1040 form You qualify to make this choice if you meet all the following tests. 2011 1040 form You sell publicly traded securities at a gain. 2011 1040 form Publicly traded securities are securities traded on an established securities market. 2011 1040 form Your gain from the sale is a capital gain. 2011 1040 form During the 60-day period beginning on the date of the sale, you buy replacement property. 2011 1040 form This replacement property must be either common stock of, or a partnership interest in a specialized small business investment company (SSBIC). 2011 1040 form This is any partnership or corporation licensed by the Small Business Administration under section 301(d) of the Small Business Investment Act of 1958, as in effect on May 13, 1993. 2011 1040 form Amount of gain recognized. 2011 1040 form   If you make the choice described in this section, you must recognize gain only up to the following amount. 2011 1040 form The amount realized on the sale, minus The cost of any common stock or partnership interest in an SSBIC that you bought during the 60-day period beginning on the date of sale (and did not previously take into account on an earlier sale of publicly traded securities). 2011 1040 form  If this amount is less than the amount of your gain, you can postpone the rest of your gain, subject to the limit described next. 2011 1040 form If this amount is equal to or more than the amount of your gain, you must recognize the full amount of your gain. 2011 1040 form Limit on gain postponed. 2011 1040 form   The amount of gain you can postpone each year is limited to the smaller of: $50,000 ($25,000 if you are married and file a separate return), or $500,000 ($250,000 if you are married and file a separate return), minus the amount of gain you postponed for all earlier years. 2011 1040 form Basis of replacement property. 2011 1040 form   You must subtract the amount of postponed gain from the basis of your replacement property. 2011 1040 form How to report and postpone gain. 2011 1040 form    See How to report and postpone gain under Rollover of Gain From Publicly Traded Securities in chapter 4 of Publication 550 for details. 2011 1040 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The 2011 1040 Form

2011 1040 form 2. 2011 1040 form   Tax Shelters and Other Reportable Transactions Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Abusive Tax SheltersRules To Curb Abusive Tax Shelters Investor Reporting Penalties Whether To Invest Introduction Investments that yield tax benefits are sometimes called “tax shelters. 2011 1040 form ” In some cases, Congress has concluded that the loss of revenue is an acceptable side effect of special tax provisions designed to encourage taxpayers to make certain types of investments. 2011 1040 form In many cases, however, losses from tax shelters produce little or no benefit to society, or the tax benefits are exaggerated beyond those intended. 2011 1040 form Those cases are called “abusive tax shelters. 2011 1040 form ” An investment that is considered a tax shelter is subject to restrictions, including the requirement that it be disclosed, as discussed later. 2011 1040 form Topics - This chapter discusses: Abusive Tax Shelters , Rules To Curb Abusive Tax Shelters , Investor Reporting , Penalties , and Whether To Invest . 2011 1040 form Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 556 Examination of Returns, Appeal Rights, and Claims for Refund 561 Determining the Value of Donated Property 925 Passive Activity and At-Risk Rules Form (and Instructions) 8275 Disclosure Statement 8275-R Regulation Disclosure Statement 8283 Noncash Charitable Contributions 8886 Reportable Transaction Disclosure Statement See chapter 5, How To Get Tax Help , for information about getting these publications and forms. 2011 1040 form Abusive Tax Shelters Abusive tax shelters are marketing schemes involving artificial transactions with little or no economic reality. 2011 1040 form They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or mischaracterization of the substance of the transaction. 2011 1040 form Despite appearances to the contrary, the taxpayer generally risks little. 2011 1040 form Abusive tax shelters commonly involve package deals designed from the start to generate losses, deductions, or credits that will be far more than present or future investment. 2011 1040 form Or, they may promise investors from the start that future inflated appraisals will enable them, for example, to reap charitable contribution deductions based on those appraisals. 2011 1040 form (But see the appraisal requirements discussed under Rules To Curb Abusive Tax Shelters , later. 2011 1040 form ) They are commonly marketed in terms of the ratio of tax deductions allegedly available to each dollar invested. 2011 1040 form This ratio (or “write-off”) is frequently said to be several times greater than one-to-one. 2011 1040 form Because there are many abusive tax shelters, it is not possible to list all the factors you should consider in determining whether an offering is an abusive tax shelter. 2011 1040 form However, you should ask the following questions, which might provide a clue to the abusive nature of the plan. 2011 1040 form Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States source income through foreign corporations incorporated in a tax haven and owned by United States shareholders? Rules To Curb Abusive Tax Shelters Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters. 2011 1040 form These provisions include the following. 2011 1040 form Disclosure of reportable transactions. 2011 1040 form   You must disclose information for each reportable transaction in which you participate. 2011 1040 form See Reportable Transaction Disclosure Statement , later. 2011 1040 form   Material advisors with respect to any reportable transaction must disclose information about the transaction on Form 8918, Material Advisor Disclosure Statement. 2011 1040 form To determine whether you are a material advisor to a transaction, see the Instructions for Form 8918. 2011 1040 form   Material advisors will receive a reportable transaction number for the disclosed reportable transaction. 2011 1040 form They must provide this number to all persons to whom they acted as a material advisor. 2011 1040 form They must provide the number at the time the transaction is entered into. 2011 1040 form If they do not have the number at that time, they must provide it within 60 days from the date the number is mailed to them. 2011 1040 form For information on penalties for failure to disclose and failure to maintain lists, see Internal Revenue Code sections 6707, 6707A, and 6708. 2011 1040 form Requirement to maintain list. 2011 1040 form   Material advisors must maintain a list of persons to whom they provide material aid, assistance, or advice on any reportable transaction. 2011 1040 form The list must be available for inspection by the IRS, and the information required to be included on the list generally must be kept for 7 years. 2011 1040 form See Regulations section 301. 2011 1040 form 6112-1 for more information (including what information is required to be included on the list). 2011 1040 form Confidentiality privilege. 2011 1040 form   The confidentiality privilege between you and a federally authorized tax practitioner does not apply to written communications made after October 21, 2004, regarding the promotion of your direct or indirect participation in any tax shelter. 2011 1040 form Appraisal requirement for donated property. 2011 1040 form   If you claim a deduction of more than $5,000 for an item or group of similar items of donated property, you generally must get a qualified appraisal from a qualified appraiser and complete and attach section B of Form 8283 to your return. 2011 1040 form If you claim a deduction of more than $500,000 for the donated property, you generally must attach the qualified appraisal to your return. 2011 1040 form If you file electronically, see Form 8453, U. 2011 1040 form S. 2011 1040 form Individual Income Tax Transmittal for an IRS e-file Return, and its instructions. 2011 1040 form For more information about appraisals, including exceptions, see Publication 561. 2011 1040 form Passive activity loss and credit limits. 2011 1040 form   The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities and limit the amount that can offset nonpassive income, such as certain portfolio income from investments. 2011 1040 form For more detailed information about determining and reporting income, losses, and credits from passive activities, see Publication 925. 2011 1040 form Interest on penalties. 2011 1040 form   If you are assessed an accuracy-related or civil fraud penalty (as discussed under Penalties , later), interest will be imposed on the amount of the penalty from the due date of the return (including any extensions) to the date you pay the penalty. 2011 1040 form Accounting method restriction. 2011 1040 form   Tax shelters generally cannot use the cash method of accounting. 2011 1040 form Uniform capitalization rules. 2011 1040 form   The uniform capitalization rules generally apply to producing property or acquiring it for resale. 2011 1040 form Under those rules, the direct cost and part of the indirect cost of the property must be capitalized or included in inventory. 2011 1040 form For more information, see Publication 538. 2011 1040 form Denial of deduction for interest on an underpayment due to a reportable transaction. 2011 1040 form   You cannot deduct any interest you paid or accrued on any part of an underpayment of tax due to an understatement arising from a reportable transaction (discussed later) if the relevant facts affecting the tax treatment of the item are not adequately disclosed. 2011 1040 form This rule applies to reportable transactions entered into in tax years beginning after October 22, 2004. 2011 1040 form Authority for Disallowance of Tax Benefits The IRS has published guidance concluding that the claimed tax benefits of various abusive tax shelters should be disallowed. 2011 1040 form The guidance is the conclusion of the IRS on how the law is applied to a particular set of facts. 2011 1040 form Guidance is published in the Internal Revenue Bulletin for taxpayers' information and also for use by IRS officials. 2011 1040 form So, if your return is examined and an abusive tax shelter is identified and challenged, published guidance dealing with that type of shelter, which disallows certain claimed tax shelter benefits, could serve as the basis for the examining official's challenge of the tax benefits you claimed. 2011 1040 form In such a case, the examiner will not compromise even if you or your representative believes you have authority for the positions taken on your tax return. 2011 1040 form The courts have generally been unsympathetic to taxpayers involved in abusive tax shelter schemes and have ruled in favor of the IRS in the majority of the cases in which these shelters have been challenged. 2011 1040 form Investor Reporting You may be required to file a reportable transaction disclosure statement. 2011 1040 form Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction (discussed later) in which you participated. 2011 1040 form Generally, you must attach Form 8886 to your return for each tax year in which you participated in the transaction. 2011 1040 form Under certain circumstances, a transaction must be disclosed within 90 days of the transaction being identified as a listed transaction or a transaction of interest (discussed later). 2011 1040 form In addition, for the first year Form 8886 is attached to your return, you must send a copy of the form to: Internal Revenue Service OTSA Mail Stop 4915 1973 North Rulon White Blvd. 2011 1040 form  Ogden, UT 84404 If you file your return electronically, the copy sent to OTSA must show exactly the same information, word for word, provided with the electronically filed return and it must be provided on the official IRS Form 8886 or an exact copy of the form. 2011 1040 form If you use a computer-generated or substitute Form 8886, it must be an exact copy of the official IRS form. 2011 1040 form If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. 2011 1040 form See Penalty for failure to disclose a reportable transaction , later under Penalties. 2011 1040 form The following discussion briefly describes reportable transactions. 2011 1040 form For more details, see the Instructions for Form 8886. 2011 1040 form Reportable transaction. 2011 1040 form   A reportable transaction is any of the following. 2011 1040 form A listed transaction. 2011 1040 form A confidential transaction. 2011 1040 form A transaction with contractual protection. 2011 1040 form A loss transaction. 2011 1040 form A transaction of interest entered into after November 1, 2006. 2011 1040 form Note. 2011 1040 form Transactions with a brief asset holding period were removed from the definition of reportable transaction for transactions entered into after August 2, 2007. 2011 1040 form Listed transaction. 2011 1040 form   A listed transaction is the same as, or substantially similar to, one of the types of transactions the IRS has determined to be a tax-avoidance transaction. 2011 1040 form These transactions have been identified in notices, regulations, and other published guidance issued by the IRS. 2011 1040 form For a list of existing guidance, see Notice 2009-59 in Internal Revenue Bulletin 2009-31, available at www. 2011 1040 form irs. 2011 1040 form gov/irb/2009-31_IRB/ar07. 2011 1040 form html. 2011 1040 form Confidential transaction. 2011 1040 form   A confidential transaction is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. 2011 1040 form A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on your disclosure of the tax treatment or tax structure of the transaction and the limit protects the confidentiality of the advisor's tax strategies. 2011 1040 form The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. 2011 1040 form Transaction with contractual protection. 2011 1040 form   Generally, a transaction with contractual protection is one in which you or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained, or a transaction for which the fees are contingent on your realizing the tax benefits from the transaction. 2011 1040 form For information on exceptions, see Revenue Procedure 2007-20 in Internal Revenue Bulletin 2007-7, available at www. 2011 1040 form irs. 2011 1040 form gov/irb/2007-07_IRB/ar15. 2011 1040 form html. 2011 1040 form Loss transaction. 2011 1040 form   For individuals, a loss transaction is one that results in a deductible loss if the gross amount of the loss is at least $2 million in a single tax year or $4 million in any combination of tax years. 2011 1040 form A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership. 2011 1040 form   Certain losses (such as losses from casualties, thefts, and condemnations) are excepted from this category and do not have to be reported on Form 8886. 2011 1040 form For information on other exceptions, see Revenue Procedure 2004-66 in Internal Revenue Bulletin 2004-50, as modified and superseded by Revenue Procedure 2013-11, (or future published guidance) available at www. 2011 1040 form irs. 2011 1040 form gov/irb/2004-50_IRB/ar11. 2011 1040 form html. 2011 1040 form Transaction of interest. 2011 1040 form   A transaction of interest is a transaction entered into after November 1, 2006, that is the same as, or substantially similar to, one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest. 2011 1040 form The IRS has identified the following transactions of interest. 2011 1040 form “Toggling” grantor trusts as described in Notice 2007-73, 2007-36 I. 2011 1040 form R. 2011 1040 form B. 2011 1040 form 545, available at www. 2011 1040 form irs. 2011 1040 form gov/irb/2007-36_IRB/ar20. 2011 1040 form html. 2011 1040 form Certain transactions involving contributions of a successor member interest in a limited liability company as described in Notice 2007-72, 2007-36 I. 2011 1040 form R. 2011 1040 form B. 2011 1040 form 544, available at www. 2011 1040 form irs. 2011 1040 form gov/irb/2007-36_IRB/ar19. 2011 1040 form html. 2011 1040 form Certain transactions involving the sale or other disposition of all interests in a charitable remainder trust and claiming little or no taxable gain as described in Notice 2008-99, 2008-47 I. 2011 1040 form R. 2011 1040 form B. 2011 1040 form 1194, available at www. 2011 1040 form irs. 2011 1040 form gov/irb/2008-47_IRB/ar11. 2011 1040 form html. 2011 1040 form Certain transactions involving a U. 2011 1040 form S. 2011 1040 form taxpayer owning controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership to avoid reporting income as described in Notice 2009-7, 2009-3 I. 2011 1040 form R. 2011 1040 form B. 2011 1040 form 312, available at www. 2011 1040 form irs. 2011 1040 form gov/irb/2009-03_IRB/ar10. 2011 1040 form html. 2011 1040 form   For updates to this list, go to www. 2011 1040 form irs. 2011 1040 form gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions. 2011 1040 form Penalties Investing in an abusive tax shelter may lead to substantial expenses. 2011 1040 form First, the promoter generally charges a substantial fee. 2011 1040 form If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20%, 30%, or even 40% accuracy-related penalty, or a 75% civil fraud penalty. 2011 1040 form You may also be subject to the penalty for failure to pay tax. 2011 1040 form These penalties are explained in the following paragraphs. 2011 1040 form Accuracy-related penalties. 2011 1040 form   An accuracy-related penalty of 20% can be imposed for underpayments of tax due to: Negligence or disregard of rules or regulations, Substantial understatement of tax, Substantial valuation misstatement (increased to 40% for gross valuation misstatement), Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or Undisclosed foreign financial asset understatement (40% in all cases). 2011 1040 form Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. 2011 1040 form Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith. 2011 1040 form   If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty. 2011 1040 form   The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty (discussed later). 2011 1040 form Negligence or disregard of rules or regulations. 2011 1040 form   The penalty for negligence or disregard of rules or regulations is imposed only on the part of the underpayment due to negligence or disregard of rules or regulations. 2011 1040 form The penalty will not be charged if you can show you had reasonable cause for understating your tax and that you acted in good faith. 2011 1040 form    Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. 2011 1040 form It also includes any failure to keep adequate books and records. 2011 1040 form A return position that has a reasonable basis is not negligence. 2011 1040 form   Disregard includes any careless, reckless, or intentional disregard of rules or regulations. 2011 1040 form   The penalty for disregard of rules and regulations can be avoided if all the following are true. 2011 1040 form You keep adequate books and records. 2011 1040 form You have a reasonable basis for your position on the tax issue. 2011 1040 form You make an adequate disclosure of your position. 2011 1040 form Use Form 8275 to make your disclosure and attach it to your return. 2011 1040 form To disclose a position contrary to a regulation, use Form 8275-R. 2011 1040 form Use Form 8886 to disclose a reportable transaction (discussed earlier). 2011 1040 form Substantial understatement of tax. 2011 1040 form   An understatement is considered to be substantial if it is more than the greater of: 10% of the tax required to be shown on the return, or $5,000. 2011 1040 form An “understatement” is the amount of tax required to be shown on your return for a tax year minus the amount of tax shown on the return, reduced by any rebates. 2011 1040 form The term “rebate” generally means a decrease in the tax shown on your original return as the result of your filing an amended return or claim for refund. 2011 1040 form   For items other than tax shelters, you can file Form 8275 or Form 8275-R to disclose items that could cause a substantial understatement of income tax. 2011 1040 form In that way, you can avoid the substantial understatement penalty if you have a reasonable basis for your position on the tax issue. 2011 1040 form Disclosure of the tax shelter item on a tax return does not reduce the amount of the understatement. 2011 1040 form   Also, the understatement penalty will not be imposed if you can show there was reasonable cause for the underpayment caused by the understatement and that you acted in good faith. 2011 1040 form An important factor in establishing reasonable cause and good faith will be the extent of your effort to determine your proper tax liability under the law. 2011 1040 form Substantial valuation misstatement. 2011 1040 form   In general, you are liable for a 20% penalty for a substantial valuation misstatement if all the following are true. 2011 1040 form The value or adjusted basis of any property claimed on the return is 150% or more of the correct amount. 2011 1040 form You underpaid your tax by more than $5,000 because of the misstatement. 2011 1040 form You cannot establish that you had reasonable cause for the underpayment and that you acted in good faith. 2011 1040 form   You may be assessed a penalty of 40% for a gross valuation misstatement. 2011 1040 form If you misstate the value or the adjusted basis of property by 200% or more of the amount determined to be correct, you will be assessed a penalty of 40%, instead of 20%, of the amount you underpaid because of the gross valuation misstatement. 2011 1040 form The penalty rate is also 40% if the property's correct value or adjusted basis is zero. 2011 1040 form Transaction lacking economic substance. 2011 1040 form   The economic substance doctrine only applies to an individual that entered into a transaction in connection with a trade or business or an activity engaged in for the production of income. 2011 1040 form For transactions entered into after March 30, 2010, a transaction has economic substance for you as an individual taxpayer only if: The transaction changes your economic position in a meaningful way (apart from federal income tax effects), or You have a substantial purpose (apart from federal income tax effects) for entering into the transaction. 2011 1040 form   For purposes of determining whether economic substance exists, a transaction's profit potential will only be taken into account if the present value of the reasonably expected pre-tax profit from the transaction is substantial compared to the present value of the expected net tax benefits that would be allowed if the transaction were respected. 2011 1040 form   If any part of your underpayment is due to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, that part of your underpayment will be subject to the 20% accuracy-related penalty even if you had a reasonable cause and acted in good faith concerning that part. 2011 1040 form   Additionally, the penalty increases to 40% if you do not adequately disclose on your return or in a statement attached to your return the relevant facts affecting the tax treatment of a transaction that lacks economic substance. 2011 1040 form Relevant facts include any facts affecting the tax treatment of the transaction. 2011 1040 form    Any excessive amount of an erroneous claim for an income tax refund or credit (other than a refund or credit related to the earned income credit) that results from a transaction found to be lacking economic substance will not be treated as having a reasonable basis and could be subject to a 20% penalty. 2011 1040 form Undisclosed foreign financial asset understatement. 2011 1040 form   For tax years beginning after March 18, 2010, you may be liable for a 40% penalty for an understatement of your tax liability due to an undisclosed foreign financial asset. 2011 1040 form An undisclosed foreign financial asset is any asset for which an information return, required to be provided under Internal Revenue Code section 6038, 6038B, 6038D, 6046A, or 6048 for any taxable year, is not provided. 2011 1040 form The penalty applies to any part of an underpayment related to the following undisclosed foreign financial assets. 2011 1040 form Any foreign business you control, reportable on Form 5471, Information Return of U. 2011 1040 form S. 2011 1040 form Persons With Respect To Certain Foreign Corporations, or Form 8865, Return of U. 2011 1040 form S. 2011 1040 form Persons With Respect to Certain Foreign Partnerships. 2011 1040 form Certain transfers of property to a foreign corporation or partnership, reportable on Form 926, Return by a U. 2011 1040 form S. 2011 1040 form Transferor of Property to a Foreign Corporation, or certain distributions to a foreign person, reportable on Form 8865. 2011 1040 form Your ownership interest in certain foreign financial assets, temporarily reportable on Form 8275 or 8275-R. 2011 1040 form    Instead of, or in addition to, Form 8275 or 8275-R, you may have to file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return. 2011 1040 form See the Instructions for Form 8938 for details. 2011 1040 form    Your acquisition, disposition, or substantial change in ownership interest in a foreign partnership, reportable on Form 8865. 2011 1040 form Creation or transfer of money or property to certain foreign trusts, reportable on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. 2011 1040 form Penalty for incorrect appraisals. 2011 1040 form   The person who prepares an appraisal of the value of property may have to pay a penalty if: He or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund; and The claimed value of the property on a return or claim for refund based on that appraisal results in a substantial valuation misstatement or a gross valuation misstatement as discussed earlier. 2011 1040 form For details on the penalty amount and exceptions, see Publication 561. 2011 1040 form Penalty for failure to disclose a reportable transaction. 2011 1040 form   If you fail to include any required information regarding a reportable transaction (discussed earlier) on a return or statement, you may have to pay a penalty of 75% of the decrease in tax shown on your return as a result of such transaction (or that would have resulted if the transaction were respected for federal tax purposes). 2011 1040 form For an individual, the minimum penalty is $5,000 and the maximum is $10,000 (or $100,000 for a listed transaction). 2011 1040 form This penalty is in addition to any other penalty that may be imposed. 2011 1040 form   The IRS may rescind or abate the penalty for failing to disclose a reportable transaction under certain limited circumstances but cannot rescind the penalty for failing to disclose a listed transaction. 2011 1040 form For information on rescission, see Revenue Procedure 2007-21 in Internal Revenue Bulletin 2007-9 available at www. 2011 1040 form irs. 2011 1040 form gov/irb/2007-09_IRB/ar12. 2011 1040 form html. 2011 1040 form Accuracy-related penalty for a reportable transaction understatement. 2011 1040 form   If you have a reportable transaction understatement, you may have to pay a penalty equal to 20% of the amount of that understatement. 2011 1040 form This applies to any item due to a listed transaction or other reportable transaction with a significant purpose of avoiding or evading federal income tax. 2011 1040 form The penalty is 30% rather than 20% for the part of any reportable transaction understatement if the transaction was not properly disclosed. 2011 1040 form You may not have to pay the 20% penalty if you meet the strengthened reasonable cause and good faith exception. 2011 1040 form The reasonable cause and good faith exception does not apply to any part of a reportable transaction understatement attributable to one or more transactions that lack economic substance. 2011 1040 form   This penalty does not apply to the part of an understatement on which the fraud penalty, gross valuation misstatement penalty, or penalty for nondisclosure of noneconomic substance transactions is imposed. 2011 1040 form Civil fraud penalty. 2011 1040 form   If any underpayment of tax on your return is due to fraud, a penalty of 75% of the underpayment will be added to your tax. 2011 1040 form Joint return. 2011 1040 form   The fraud penalty on a joint return applies to a spouse only if some part of the underpayment is due to the fraud of that spouse. 2011 1040 form Failure to pay tax. 2011 1040 form   If a deficiency is assessed and is not paid within 10 days of the demand for payment, an investor can be penalized with up to a 25% addition to tax if the failure to pay continues. 2011 1040 form Whether To Invest In light of the adverse tax consequences and the substantial amount of penalties and interest that will result if the claimed tax benefits are disallowed, you should consider tax shelter investments carefully and seek competent legal and financial advice. 2011 1040 form Prev  Up  Next   Home   More Online Publications