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US Internal Revenue Service: i1120ssd--2000

US Internal Revenue Service: i1120ssd--2000

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20
00
Department of the Treasury
Internal Revenue Service
Instructions for Schedule D(Form 1120S)
Capital Gains and Losses and Built-In Gains
Section references are to the Internal Revenue Code unless otherwise noted.
A Change To Note
Fiscal year S corporations may elect torecognize gain on certain assets held onJanuary 1, 2001. The election allows futuregain on the assets to be eligible for a lowercapital gain tax rate at the shareholder level.See
Election to recognize gain on assetsheld on January 1, 2001
, on page 3.
General Instructions
Purpose of Schedule
Schedule D is used by all S corporations toreport:
q
Sales or exchanges of capital assets.
q
Gains on distributions to shareholders ofappreciated capital assets (referred to here asdistributions).
q
Nonbusiness bad debts.If the corporation filed its election to be anS corporation before 1987 (or filed its electionduring 1987 or 1988 and qualifies for thetransitional relief from the built-in gains taxdescribed in Part IV on page 4), and had netcapital gain (line 17) of more than $25,000, itmay be liable for a capital gains tax on the gainin excess of $25,000. The tax is figured in PartIII of Schedule D.Generally, if the corporation filed an electionto be an S corporation after 1986, was a Ccorporation at the time it made the election,
and
has net recognized built-in gain as definedin section 1374(d)(2),
it is liable
for the built-ingains tax. The tax is figured in Part IV ofSchedule D.
Other Forms The CorporationMay Have To File
Use
Form 4797,
Sales of Business Property,to report:
q
Sales, exchanges, and distributions ofproperty used in a trade or business.
q
Sales, exchanges, and distributions ofdepreciable and amortizable property.
q
Sales or other dispositions of securities orcommodities held in connection with a tradingbusiness, if the corporation made amark-to-market election (see page 4 of theInstructions for Form 1120S).
q
Involuntary conversions (other than fromcasualties or thefts).
q
The disposition of noncapital assets (otherthan inventory or property held primarily forsale to customers in the ordinary course of atrade or business).Use
Form 4684,
Casualties and Thefts, toreport involuntary conversions of property dueto casualty or theft.Use
Form 6781,
Gains and Losses FromSection 1256 Contracts and Straddles, toreport gains and losses from section 1256contracts and straddles.Use
Form 8824,
Like-Kind Exchanges, if thecorporation made one or more like-kindexchange. A “like-kind exchange” occurs whenbusiness or investment property is exchangedfor property of a like kind. For exchanges ofcapital assets, enter the gain or loss from Form8824, if any, on line 3 or line 9 in column (f),and in column (g) if required.
Capital Asset
Each item of property the corporation held(whether or not connected with its trade orbusiness) is a capital asset
except:
q
Stock in trade or other property included ininventory or held mainly for sale to customers.
q
Accounts or notes receivable acquired in theordinary course of the trade or business forservices rendered or from the sale of stock intrade or other property held mainly for sale tocustomers.
q
Depreciable or real property used in the tradeor business, even if it is fully depreciated.
q
Certain copyrights; literary, musical, orartistic compositions; letters or memorandums;or similar property. See section 1221(a)(3).
q
U.S. Government publications, including theCongressional Record, that the corporationreceived from the Government, other than bypurchase at the normal sales price, or that thecorporation got from another taxpayer who hadreceived it in a similar way, if the corporation'sbasis is determined by reference to theprevious owner.
q
Certain commodities derivative financialinstruments held by a dealer. See section1221(a)(6).
q
Certain hedging transactions entered into inthe normal course of the trade or business. Seesection 1221(a)(7).
q
Supplies regularly used in the trade orbusiness.
Items for Special Treatment
Note:
For more information, see 
Pub. 544,
Sales and Other Dispositions of Assets.
Loss from a sale or exchange between thecorporation and a related person.
Except fordistributions in complete liquidation of acorporation, no loss is allowed from the saleor exchange of property between thecorporation and certain related persons. Seesection 267 for details.
Loss from a wash sale.
The corporationcannot deduct a loss from a wash sale of stockor securities (including contracts or options toacquire or sell stock or securities) unless thecorporation is a dealer in stock or securitiesand the loss was sustained in a transactionmade in the ordinary course of thecorporation's trade or business. A wash saleoccurs if the corporation acquires (by purchaseor exchange), or has a contract or option toacquire, substantially identical stock orsecurities within 30 days before or after thedate of the sale or exchange.See section1091 for more information.
Gain on distribution of appreciatedproperty.
Generally, gain (but not loss) isrecognized on a nonliquidating distribution ofappreciated property to the extent that theproperty's fair market value exceeds itsadjusted basis.See section 311 for details.
Gain or loss on distribution of property incomplete liquidation.
Generally, gain or lossis recognized by a corporation upon theliquidating distribution of property as if it hadsold the property at its fair market value. Seesection 336 for details and exceptions.
Gain or loss on certain short-term Federal,state, and municipal obligations.
Suchobligations are treated as capital assets indetermining gain or loss. On any gain realized,a portion is treated as ordinary income and thebalance is considered as a short-term capitalgain. See section 1271.
Gain from installment sales.
If thecorporation sold property at a gain and it willreceive a payment in a tax year after the yearof sale, it generally must report the sale on theinstallment method unless it elects not to.However, the installment method may not beused to report sales of stock or securitiestraded on an established securities market. Inaddition, except for farm property, theinstallment method may not be used to reporta sale after December 16, 1999, if that salewould otherwise be reported under an accrualmethod of accounting.Use
Form 6252
, Installment Sale Income, toreport the sale on the installment method. Alsouse Form 6252 to report any payment receivedduring the tax year from a sale made in anearlier year that was reported on theinstallment method.To elect out of theinstallment method, report the full amount ofthe gain on Schedule D for the year of the saleon a return filed by the due date (includingextensions).If the original return was filed ontime, the corporation may make the election onan amended return filed no later than 6 monthsafter the original due date (excludingextensions).Write “Filed pursuant to section301.9100-2” at the top of the amended return.
Cat. No. 64419L
 
Gain or loss on an option to buy or sellproperty.
See sections 1032 and 1234 for therules that apply to a purchaser or grantor of anoption.
Gain or loss from a short sale of property.
Report the gain or loss to the extent that theproperty used to close the short sale isconsidered a capital asset in the hands of thetaxpayer.
Loss from securities that are capital assetsthat become worthless during the year.
Except for securities held by a bank, treat theloss as a capital loss as of the last day of thetax year. See section 582 for the rules on thetreatment of securities held by a bank.
Nonrecognition of gain on sale of stock toan employee stock ownership plan (ESOP)or an eligible cooperative.
See section 1042and Temporary Regulations section 1.1042-1Tfor rules under which a taxpayer may elect notto recognize gain from the sale of certain stockto an ESOP or an eligible cooperative.
Disposition of market discount bonds.
Seesection 1276 for rules on the disposition of anymarket discount bonds.
Capital gain distributions.
Report the
total
amount of capital gain distributions aslong-term capital gain on line 10, column (f),regardless of how long the corporation held theinvestment. Enter on line 10, column (g), the28% rate gain portion of your total capital gaindistributions.
Nonbusiness bad debts.
A nonbusiness baddebt must be treated as a short-term capitalloss and can be deducted only in the year thedebt becomes totally worthless. For each baddebt, enter the name of the debtor and“schedule attached” in column (a) of line 1 andthe amount of the bad debt as a loss in column(f). Also attach a statement of facts to supporteach bad debt deduction.
Real estate subdivided for sale.
Certain lotsor parcels that are part of a tract of real estatesubdivided for sale may be treated as capitalassets.See section 1237.
Sale of a partnership interest.
A sale orother disposition of an interest in a partnershipowning unrealized receivables or inventoryitems may result in ordinary gain or loss. See
Pub. 541,
Partnerships, for more details.
Special rules for traders in securities.Traders in securities
are engaged in the
business
of buying and selling securities fortheir own account. To be engaged in abusiness as a trader in securities thecorporation:
q
Must seek to
profit from daily marketmovements
in the prices of securities and notfrom dividends, interest, or capital appreciation.
q
Must be involved in a trading activity that is
substantial
.
q
Must carry on the activity with
continuity
and
regularity
.The following facts and circumstancesshould be considered in determining if acorporation's activity is a business:
q
Typical holding periods for securities boughtand sold.
q
The frequency and dollar amount of thecorporation's trades during the year.
q
The extent to which the activity is pursuedto produce income for a livelihood.
q
The amount of time devoted to the activity.Like an investor, a trader must report eachsale of securities (taking into accountcommissions and any other costs of acquiringor disposing of the securities) on Schedule Dor on an attached statement containing all thesame information for each sale in a similarformat. However, if a trader made themark-to-market election (see page 4 of theInstructions for Form 1120S), each transactionis reported in Part II of Form 4797 instead ofSchedule D.The limitation on investment interestexpense that applies to investors does notapply to interest paid or incurred in a tradingbusiness. A trader reports interest expense andother expenses (excluding commissions andother costs of acquiring and disposing ofsecurities) from a trading business on page 1of Form 1120S.A trader also may hold securities forinvestment. The rules for investors generallywill apply to those securities.Allocate interestand other expenses between a tradingbusiness and investment securities. Investmentinterest expense is reported on line 11a ofSchedules K and K-1.
Certain constructive ownershiptransactions.
Gain in excess of the gain thecorporation would have recognized if it hadheld a financial asset directly during the termof a derivative contract must be treated asordinary income.See section 1260 for details.
Constructive sale treatment for certainappreciated positions.
Generally, thecorporation must recognize gain (but not loss)on the date it enters into a constructive sale ofany appreciated interest in stock, a partnershipinterest, or certain debt instruments as if theposition were disposed of at fair market valueon that date.The corporation is treated as making aconstructive sale of an appreciated position ifit (or a related person, in some cases) does
one
of the following:
q
Enters into a short sale of the same orsubstantially identical property (i.e., a “shortsale against the box”).
q
Enters into an offsetting notional principalcontract relating to the same or substantiallyidentical property.
q
Enters into a futures or forward contract todeliver the same or substantially identicalproperty.
q
Acquires the same or substantially identicalproperty (if the appreciated position is a shortsale, offsetting notional principal contract, or afutures or forward contract).
Exception.
Generally, constructive saletreatment
does not
apply if:
q
The transaction was closed before the endof the 30th day after the end of the year inwhich it was entered into,
q
The appreciated position to which thetransaction relates was held throughout the60-day period starting on the date thetransaction was closed,
and
q
At no time during that 60-day period was thecorporation's risk of loss reduced by holdingcertain other positions.For details and other exceptions to theserules, see
Pub. 550,
Investment Income andExpenses.
Rollover of gain from qualified stock.
If thecorporation sold qualified small business stock(defined on below) that it held for more than 6months, it may postpone gain if it purchasedother qualified small business stock during the60-day period that began on the date of thesale.The corporation must recognize gain tothe extent the sale proceeds exceed the costof the replacement stock. Reduce the basis ofthe replacement stock by any postponed gain.If the corporation chooses to postpone gain,report the entire gain realized on the sale online 1 or 7. Directly below the line on which thecorporation reported the gain, enter in column(a) “Section 1045 Rollover” and enter as a(loss) in column (f) the amount of thepostponed gain.
CAUTION
!
The corporation also must separately state the amount of the gain rolled over on qualified stock under section 1045 on Form 1120S, Schedule K, line 6, because each shareholder must determine if he or she qualifies for the rollover at the shareholder level. Also, the corporation must include on Schedule D, line 1 or 7 (and on Form 1120S,Schedule K, line 6), any gain that could qualify for the section 1045 rollover at the shareholder level instead of the corporate level (because a shareholder was entitled to purchase replacement stock). If the corporation had a gain on qualified stock that could qualify for the 50% exclusion under section 1202, report that gain on Schedule D, line 7 (and on Form 1120S, Schedule K, line 6).
To be
qualified small business stock
, thestock must meet
all
of the following tests:
q
It must be stock in a C corporation.
q
It must have been originally issued afterAugust 10, 1993.
q
As of the date the stock was issued, the Ccorporation was a qualified small business. Aqualified small business is a domestic Ccorporation with total gross assets of $50million or less
(a)
at all times after August 9,1993, and before the stock was issued, and
(b)
immediately after the stock was issued. Grossassets include those of any predecessor of thecorporation. All corporations that are membersof the same parent-subsidiary controlled groupare treated as one corporation.
q
The corporation must have acquired thestock at its original issue (either directly orthrough an underwriter), either in exchange formoney or other property or as pay for services(other than as an underwriter) to thecorporation. In certain cases, the corporationmay meet the test if it acquired the stock fromanother person who met this test (such as bygift or inheritance) or through a conversion orexchange of qualified small business stock heldby the corporation.
q
During substantially all the time thecorporation held the stock:
1.
The issuer was a C corporation,
2.
At least 80% of the value of the issuer'sassets were used in the active conduct of oneor more qualified businesses (defined below),and
3.
The issuing corporation
was not
aforeign corporation, DISC, former DISC,corporation that has made (or that has asubsidiary that has made) a section 936election, regulated investment company, realestate investment trust, REMIC, FASIT, orcooperative.
Note:
A specialized small business investment company (SSBIC) is treated as having met test 
above.
A
qualified business
is any business
otherthan
the following:
q
One involving services performed in thefields of health, law, engineering, architecture,accounting, actuarial science, performing arts,consulting, athletics, financial services, orbrokerage services.
Page2
Instructions for Schedule D (Form 1120S)
 
q
One whose principal asset is the reputationor skill of one or more employees.
q
Any banking, insurance, financing, leasing,investing, or similar business.
q
Any farming business (including the raisingor harvesting of trees).
q
Any business involving the production ofproducts for which percentage depletion canbe claimed.
q
Any business of operating a hotel, motel,restaurant, or similar business.
Election to recognize gain on assets heldon January 1, 2001.
S corporations may electto treat certain assets held on January 1, 2001,as having been sold and then reacquired onthe same date. The purpose of the election isto make future gain on the asset eligible for an18% (instead of 20%) capital gain tax rate atthe shareholder level. The 18% rate isapplicable to the extent the gain wouldotherwise be taxed to the shareholder at 20%if the holding period of the asset begins afterDecember 31, 2000, and the asset is held formore than five years. The holding period of anyasset for which this election is made begins onthe date of the deemed sale and reacquisition.Any readily tradable stock (that is a capitalasset) not sold before January 2, 2001, forwhich the election is made is deemed to havebeen sold on January 2, 2001, at its closingmarket price on that date and reacquired onthat date for the same amount. For thispurpose, readily tradable stock includes sharesissued by an open-end mutual fund. Any othercapital asset held on January 1, 2001, forwhich the election is made is deemed to havebeen sold and reacquired on January 1, 2001,for its fair market value on that date. Any gainon a deemed sale must be recognized. A lossfrom a deemed sale is
not
allowed in any taxyear, but the asset will be eligible for the 18%rate on future gain. The basis in the reacquiredasset is its closing market price or fair marketvalue, whichever applies, on the date of thedeemed sale, whether the deemed sale resultsin a gain or unallowed loss.If the S corporation makes the election withrespect to an interest in another pass-throughentity and that pass-through entity makes theelection with respect to assets it holds, thatpass-through entity's election will beconsidered to immediately precede the Scorporation's election for deemed sales thatoccur on the same day. For purposes of thiselection, pass-through entities include mutualfunds (or other regulated investmentcompanies), real estate investment trusts,partnerships, estates, trusts, and common trustfunds.To make the election, report the deemedsale(s) on Schedule D for the tax year thatincludes the date of the deemed sale (calendaryear S corporations make the election on their2001 tax returns). If the deemed sale results ina loss, enter zero instead of the amount of theloss. Make the election on a share-by-share orasset-by-asset basis.Attach a statement to thereturn stating that the S corporation is makingan election under section 311 of the TaxpayerRelief Act of 1997 and specifying the assets forwhich the election is being made. File Form1120S no later than its due date (includingextensions). However, if the return was filedwithout making the election for any asset, theelection can still be made by filing an amendedreturn within 6 months of the original due date(excluding extensions).Write “Election UnderSection 311 of the Taxpayer Relief Act of1997” at the top of the amended return and fileit where the original return was filed. Oncemade, an election for any asset is irrevocable.
Specific Instructions
Parts I and II
Generally, report sales or exchanges (includinglike-kind exchanges) even if there is no gainor loss. In Part I, report the sale, exchange, ordistribution of capital assets held 1 year or less.In Part II, report the sale, exchange, ordistribution of capital assets held more than 1year.Use the trade dates for the dates ofacquisition and sale of stocks and bonds tradedon an exchange or over-the-counter market.
Column (e)—Cost or other basis.
Indetermining gain or loss, the basis of propertyis generally its cost (see section 1012 andrelated regulations). Special rules fordetermining basis are provided in sections insubchapters C, K, O, and P of the Code. Theserules may apply to the corporation on thereceipt of certain distributions with respect tostock (section 301), liquidation of anothercorporation (334), transfer to anothercorporation (358), transfer from a shareholderor reorganization (362), bequest (1014),contribution or gift (1015), tax-free exchange(1031), involuntary conversion (1033), certainasset acquisitions (1060), or wash sale of stock(1091). Attach an explanation if you use a basisother than actual cash cost of the property.If the corporation is allowed a charitablecontribution deduction because it sold propertyto a charitable organization, figure the adjustedbasis for determining gain from the sale bydividing the amount realized by the fair marketvalue and multiplying that result by the adjustedbasis.See section 852(f) for the treatment ofcertain load charges incurred in acquiring stockin a mutual fund with a reinvestment right.Before making an entry in column (e),increase the cost or other basis by anyexpense of sale, such as broker's fees,commissions, option premiums, and state andlocal transfer taxes, unless the net sales pricewas reported in column (d).
Column (f)—Gain or (loss).
Make a separateentry in this column for each transactionreported on lines 1 and 7 and any other line(s)that apply to the corporation. For lines 1 and7, subtract the amount in column (e) from theamount in column (d). Enter negative amountsin parentheses.
Column (g)—28% rate gain or (loss).
Enterthe amount, if any, from Part II, column (f), thatis from collectibles gains and losses. A
collectibles gain or loss
is any long-term gainor deductible long-term loss from the sale orexchange of a collectible that is a capital asset.
Collectibles
include works of art, rugs,antiques, metals (such as gold, silver, andplatinum bullion), gems, stamps, coins,alcoholic beverages, and certain other tangibleproperty.Also include gain (but not loss) from the saleor exchange of an interest in a partnership ortrust held more than 1 year and attributable tounrealized appreciation of collectibles.Fordetails, see Regulations section 1.1(h)-1. Also,attach the statement required underRegulations section 1.1(h)-1(e).
Part III—Capital Gains Tax
If the net long-term capital gain is more thanthe net short-term capital loss, there is a netcapital gain. If this gain exceeds $25,000,
and
the corporation elected to be an S corporationbefore 1987 (or filed its election during 1987or 1988 and qualifies for the transitional relieffrom the built-in gains tax described in Part IVon page 4), the corporation may be liable forincome tax on the gain.Determine if the corporation is liable for thetax by answering questions A, B, and C below.If all the answers are “Yes,” the tax applies andPart III of Schedule D must be completed.Otherwise, the corporation is not liable for thetax.If net capital gain is more than $25,000, andthe corporation is not liable for the tax, attachthe Part III instructions to Schedule D withquestions A, B, and C answered to show whythe tax does not apply.
A.
Is net capital gain (line 17,Schedule D) more than$25,000, and more than 50%of taxable income (see theinstructions for line 21,Schedule D)?No
B.
Is taxable income (see theinstructions for line 21,Schedule D) more than$25,000?
C.
Does any long-term capitalgain (line 16, Schedule D)represent gain fromsubstituted basis property(defined below)?YesNoYesNoYes
For purposes of the capital gains tax,
substituted basis property
is property that:
q
Was acquired by the S corporation during theperiod that began 36 months before the firstday of the tax year and ended on the last dayof the tax year, and
q
Has a basis determined by reference to thebasis of any property in the hands of anothercorporation, if the other corporation was
not
an S corporation throughout the period that,
began
the later of:
1.
36 months before the first day of the taxyear, or
2.
The time the other corporation came intoexistence,
Line 17.
If the corporation is liable for the taxon excess net passive income (line 22a, page1, Form 1120S) or the built-in gains tax (seePart IV on page 4), and capital gain or loss wasincluded in the computation of either tax, figurethe amount to enter on line 17 as follows:
Step 1.
Refigure lines 1 through 3, 7through 9 in column (f), and 15 of Schedule Dby:
q
Excluding the portion of any recognizedbuilt-in capital gain or loss that does not qualifyfor transitional relief, and
q
Reducing any capital gain taken into accountin determining passive investment income (line2 of the worksheet for line 22a, page 1 of Form1120S) by the portion of excess net passiveincome attributable to such gain. Theattributable portion is figured by multiplyingexcess net passive income by a fraction, the
and
ended
on the date the othercorporation transferred the property usedto determine the basis of the propertyacquired by the S corporation.
Instructions for Schedule D (Form 1120S)
Page3

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