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This year, Sigma Inc. generated $636,000 income from its routine business operations. In addition, the corporation...

This year, Sigma Inc. generated $636,000 income from its routine business operations. In addition, the corporation sold the following assets, all of which were held for more than 12 months: Initial Basis Acc. Depr.* Sale Price Marketable securities $ 157,600 $ 0 $ 74,000 Production equipment 115,600 92,480 36,000 Business realty: Land 235,500 0 241,750 Building 263,000 78,900 218,000 *Through date of sale.

Compute Sigma’s taxable income assuming that it used the straight-line method to calculate depreciation on the building and has no nonrecaptured Section 1231 losses.

*Answer for tax income is not 668,605

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Solution ;

Sigma's gain and losses from sales of business assets are computed and characterized as follows .

Amount realized Adjusted basis Realized gain(loss) Ordinary gain Section 1231 gain(loss)
Production equipment 36000 23120 12880 12880
Business land 241750 235500 6250 6250
Business building 218000 184100 33900 15780* 18120
28660 24370

*Building ordinary income is 20% recapture of the lesser of accumulated depreciation or

the realized gain .

Net income from operations 636,000
Ordinary income from sales of business assets 28660
Section 1231 gain (treated as capital gain) 24370
Sales of marketable securities:
Amount realized 74000
Basis (157600)
Realized loss (83600)
Deductiable loss limited to section 1231 gain (24370)
Taxable income 664660
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