For taxable years beginning after December 31, 1954, and before January 1, 1958, the partial tax under subdivision (i) of this subparagraph shall also be computed at the rates provided in section 802(a). For taxable years beginning before January 1, 1963, the reference in such subdivision to section 821 (a) or (c) is to be read as a reference to section 821 (a) or (b).
Example: During 1964, A, B, and C formed a closely held corporation, and A was appointed as president of the organization. On July 1, 1964, A received for consideration 100 shares of common stock in the corporation subject to the agreement that, if A should retire from the management of the corporation or die, A or his estate would first offer his shares of stock to the corporation for purchase and that, if the corporation did not buy the stock within 60 days, the stock could be sold to any party other than the corporation. On September 1, 1970, A retired from the management of the corporation and offered his shares to the corporation for purchase. Pursuant to the agreement, the corporation purchased A's stock on September 30, 1970. A's sale of such stock was pursuant to a binding contract entered into on or before October 9, 1969.
Tax Under Section 1 | ||
Taxable income exclusive of capital gains and losses | $99,400 | |
Net long-term capital gain (100 percent of $50,000) | $50,000 | |
Net short-term capital loss (100 percent of $20,000) | 20,000 | |
Excess of net long-term capital gain over the net short-term capital loss | 30,000 | |
129,400 | ||
Deduction of 50 percent of excess of net long-term capital gain over the net short-term capital loss (section 1202) | 15,000 | |
Taxable income | 114,400 | |
Tax under section 1 | 80,136 | |
Alternative Tax Under Section 1201(b) | ||
Taxable income | $114,400 | |
Less 50 percent of excess of net long-term capital gain over net short-term capital loss (section 1201(b)(1)) | 15,000 | |
Taxable income exclusive of capital gains and losses | 99,400 | |
Partial tax (tax on $99,400) | 66,798 | |
Plus 25 percent of $30,000 | 7,500 | |
Alternative tax under section 1201(b) | 74,298 |
Tax Under Section 1 | ||
Taxable income exclusive of capital gains and losses | $100,000 | |
Net section 1201 gain (net capital gain for taxable years beginning after December 31, 1976) (excess of net long-term capital gain over the net short-term capital loss) | 200,000 | |
Total | 300,000 | |
Deduction of 50 percent of net section 1201 (net capital gain for taxable years beginning after December 31, 1976) gain (section 1202) | 100,000 | |
Taxable income | 200,000 | |
Tax under section 1 | 110,980 | |
Alternative Tax Under Section 1201(b) | ||
(1) Net section 1201 gain (net capital gain for taxable years beginning after December 31, 1976) | $200,000 | |
(2) Subsection (d) gain: | ||
Section 1201(d)(1) | 100,000 | |
Section 1201(d)(2) | 50,000 | |
Total subsection (d) gain | 150,000 | |
(3) Net section 1201 (net capital gain for taxable years beginning after December 31, 1976) gain in excess of subsection (d) gain ($200,000 less $150,000) | 50,000 | |
(4) Tax under section 1201(b)(1): | ||
(i) Taxable income | $200,000 | |
(ii) Less: 50% of item (1) | 100,000 | |
(iii) Amount subject to tax under section 1201(b)(1) | 100,000 | |
Partial tax (computed under section 1) | 45,180 | |
(5) Tax under section 1201(b)(2): (25% of item (1) or of item (2), whichever is lesser [25% of $150,000]) | 37,500 | |
(6) Tax under section 1201(b)(3) on item (3): | ||
Tax under section 1 on taxable income ($200,000) | $110,980 | |
Less: Tax under section 1 on sum of item (4)(iii)(c) ($100,000) plus 50% of item (2) ($75,000) (Total $175,000) | 93,780 | |
Tax under section 1201(c)(1) | 17,200 | |
Limitation under section | ||
1201(c)(2)(A) (291/2% of item (3)) | 14,750 | 14,750 |
(7) Alternative tax under section 1201(b) | 97,430 |
Tax Under Section 1 | ||
Taxable income exclusive of capital gains and losses | $80,000 | |
Net long-term capital gains (100% of $90,000) | $90,000 | |
Net short-term capital loss (100% of $10,000) | 10,000 | |
Net section 1201 gain (net capital gain for taxable years beginning after December 31, 1976) | 80,000 | |
Total | 160,000 | |
Deduction of 50% of net section 1201 gain (net capital gain for taxable years beginning after December 31, 1976) (section 1202) | 40,000 | |
Taxable income | 120,000 | |
Tax under section 1 | 57,580 | |
Alternative Tax Under Section 1201(b) | ||
(1) Net section 1201 gain (net capital gain for taxable years beginning after December 31, 1976) | $80,000 | |
(2) Subsection (d) gain: | ||
Section 1201(d)(1) | 30,000 | |
Section 1201(d)(2) | ||
Section 1201(d)(3) ($50,000 less $30,000) | 20,000 | |
Total subsection (d) gain | 50,000 | |
(3) Net section 1201 (net capital gain for taxable years beginning after December 31, 1976) gain in excess of subsection (d) gain ($80,000 less $50,000) | 30,000 | |
(4) Tax under section 1201(b)(1): | ||
(i) Taxable income | $120,000 | |
(ii) Less: 50% of item (1) | 40,000 | |
(iii) Amount subject to tax under section 1201(b)(1) | 80,000 | |
Partial tax (computed under section 1) | 33,340 | |
(5) Tax under section 1201(b)(2): (25% of item (1) or of item (2), whichever is lesser [25% of $50,000]) | 12,500 | |
(6) Tax under section 1201 (b)(3) on item (3): | ||
Tax under section 1 on taxable income ($120,000) | $57,580 | |
Less: Tax under sec. 1 on sum of item (4) (iii) ($80,000) plus 50% of item (2) ($25,000) (Total $105,000) | $48,280 | |
Tax under section 1201(c)(1) | 9,300 | |
Limitation under section 1201(c) (2)(B) (321/2% of item (3)) | 9,750 | $9,300 |
(7) Alternative tax under section 1201(b) | 55,140 |
Tax Under Section 1 | ||
Taxable income exclusive of capital gains and losses | $250,000 | |
Net long-term capital gains (100% of $140,000) | $140,000 | |
Net short-term capital loss (100% of $50,000) | 50,000 | |
Net section 1201 gain (net capital gain for taxable years beginning after December 31, 1976) | 90,000 | |
Total | 340,000 | |
Deduction of 50% of net section 1201 gain (net capital gain for taxable years beginning after December 31, 1976) (section 1202) | 45,000 | |
Taxable income | 295,000 | |
Tax under section 1 | 177,480 | |
Alternative Tax Under Section 1201(b) | ||
(1) Net section 1201 gain (net capital gain for taxable years beginning after December 31, 1976) | $90,000 | |
(2) Subsection (d) gain: | ||
Section 1201(d)(1) | ||
Section 1201(d)(2) | ||
Section 1201(d)(3) | 50,000 | |
Total subsection (d) gain | 50,000 | |
(3) Net section 1201 gain (net capital gain for taxable years beginning after December 31, 1976) in excess of subsection (d) gain ($90,000 less $50,000) | 40,000 | |
(4) Tax under section 1201(b)(1): | ||
(i) Taxable income | $295,000 | |
(ii) Less: 50% of item (1) | 45,000 | |
(iii) Amount subject to tax under section 1201(b)(1) | 250,000 | |
Partial tax (computed under section 1) | 145,980 | |
(5) Tax under section 1201(b)(2): (25% of item (1) or of item (2), whichever is lesser [25% of $50,000]) | $12,500 | |
(6) Tax under section 1201(b)(3) on item (3): | ||
Tax under section 1 on taxable income ($295,000) | $177,480 | |
Less: Tax under section 1 on sum of item (4) (iii) ($250,000) plus 50% of item (2) ($25,000) (Total $275,000) | 163,480 | 14,000 |
(7) Alternative tax under section 1201(b) | 172,480 |
26 C.F.R. §1.1201-1