2004 Instructions for Form 1040 (ALL) - Supreme Law Firm

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• The sale or exchange of S corporation securities for your own account. To be en- ing extensions) of the tax return for the year stock or an interest in a trust held for more gaged in business as a trader in securities: prior to the year for which the election bethan 1 year, which may result in col- • You must seek to profit from daily comes effective. To be effective for 2004, lectibles gain (28% rate gain). See page market movements in the prices of securi- the election must have been made by D-7. ties and not from dividends, interest, or April 15, 2004. • Gain or loss on the disposition of se- capital appreciation. Starting with the year the election becurities futures contracts. See Pub. 550. • Your activity must be substantial. comes effective, a trader reports all gains • Gain on the constructive sale of cer- • You must carry on the activity with and losses from securities held in connectain appreciated financial positions. See continuity and regularity. tion with the trading business, including se- Pub. 550. curities held at the end of the year, in Part II • Certain constructive ownership transshould be considered in determining if your election, see the Instructions for Form The following facts and circumstances of Form 4797. If you previously made the actions. Gain in excess of the gain you would have recognized if you had held a activity is a business. 4797. For details on making the financial asset directly during the term of a • Typical holding periods for securities mark-to-market election for 2005, see Pub. derivative contract must be treated as ordi- bought and sold. 550 or Rev. Proc. 99-17, 1999-1 C.B. 503. nary income. See section 1260. If any por- • The frequency and dollar amount of You can find Rev. Proc. 99-17 on page 52 tion of the constructive ownership your trades during the year. of Internal Revenue Bulletin 1999-7 at transaction was open in any prior year, you • The extent to which you pursue the www.irs.gov/pub/irs-irbs/irb99-07.pdf. may have to pay interest. See section activity to produce income for a livelihood. 1260(b) for details, including how to figure If you hold securities for investment, the interest. Include the interest as an addiactivity. ords on the day they are acquired (for ex- • The amount of time you devote to the they must be identified as such in your rectional tax on Form 1040, line 62. Write “Section 1260(b) interest” and the amount You are considered an investor, and not ample, by holding the securities in a of the interest to the left of line 62. This a trader, if your activity does not meet the separate brokerage account). Securities interest is not deductible. above definition of a business. It does not held for investment are not marked-to-mar- matter whether you call yourself a trader or ket. • The sale of publicly traded securities, if you elect to postpone gain by purchasing a “day trader.” Short Sales common stock or a partnership interest in a Like an investor, a trader must report specialized small business investment com- each sale of securities (taking into account A short sale is a contract to sell property pany during the 60-day period that began commissions and any other costs of acquirlater date, you either buy substantially you borrowed for delivery to a buyer. At a on the date of the sale. See Pub. 550. ing or disposing of the securities) on • The sale of qualified securities, held Schedule D or D-1 or on an attached statelender or deliver property that you held but identical property and deliver it to the for at least 3 years, to an employee stock ment containing all the same information ownership plan or eligible worker-owned for each sale in a similar format. However, did not want to transfer at the time of the cooperative, if you elect to postpone gain if a trader previously made the sale. Usually, your holding period is the by purchasing qualified replacement prop- mark-to-market election (see below), each amount of time you actually held the property. See Pub. 550. transaction is reported in Part II of Form erty eventually delivered to the lender to 4797 instead of Schedules D and D-1. Reclose the short sale. However, your gain • Gain or loss from the disposition of gardless of whether a trader reports his or when closing a short sale is short term if stock or other securities in an investment her gains and losses on Schedules D and you (a) held substantially identical property club. See Pub. 550. D-1 or Form 4797, the gain or loss from the for 1 year or less on the date of the short disposition of securities is not taken into sale or (b) acquired property substantially Wash Sales account when figuring net earnings from identical to the property sold short after the A wash sale occurs when you sell or otherself-employment on Schedule SE. See the short sale but on or before the date you wise dispose of stock or securities (includ- Instructions for Schedule SE for an exceping a contract or option to acquire or sell close the short sale. If you held substantion that applies to section 1256 contracts. tially identical property for more than 1 stock or securities) at a loss and, within 30 year on the date of a short sale, any loss days before or after the sale or disposition, The limitation on investment interest realized on the short sale is a long-term you directly or indirectly: expense that applies to investors does not capital loss, even if the property used to • Buy substantially identical stock or apply to interest paid or incurred in a trad- close the short sale was held 1 year or less. securities, ing business. A trader reports interest ex- • Acquire substantially identical stock pense and other expenses (excluding Gain or Loss From Options or securities in a fully taxable trade, or commissions and other costs of acquiring Report on Schedule D gain or loss from the or disposing of securities) from a trading • Enter into a contract or option to ac- closing or expiration of an option that is not business on Schedule C (instead of Scheda section 1256 contract but is a capital asset quire substantially identical stock or securi- ule A). ties. in your hands. If an option you purchased A trader also may hold securities for in- expired, enter the expiration date in column You cannot deduct losses from wash vestment. The rules for investors generally (c) and enter “EXPIRED” in column (d). If sales unless the loss was incurred in the oran option that was granted (written) exwill apply to those securities. Allocate indinary course of your business as a dealer terest and other expenses between your pired, enter the expiration date in column in stock or securities. The basis of the subtrading business and your investment sestantially identical property (or contract or (b) and enter “EXPIRED” in column (e). curities. Fill in the other columns as appropriate. option to acquire such property) is its cost See Pub. 550 for details. increased by the disallowed loss. For more Mark-To-Market Election for details on wash sales, see Pub. 550. Traders Undistributed Capital Gains Report a wash sale transaction on line 1 A trader may make an election under sec- Include on line 11 the amount from box 1a or 8. Enter the full amount of the (loss) in tion 475(f) to report all gains and losses of Form 2439. This represents your share of column (f). Directly below the line on from securities held in connection with a the undistributed long-term capital gains of which you reported the loss, enter “Wash trading business as ordinary income (or the regulated investment company (includ- Sale” in column (a), and enter as a positive loss), including securities held at the end of ing a mutual fund) or real estate investment amount in column (f) the amount of the loss the year. Securities held at the end of the not allowed. trust. year are “marked to market” by treating them as if they were sold (and reacquired) If there is an amount in box 1b, include Traders in Securities for fair market value on the last business that amount on line 11 of the Unrecaptured You are a trader in securities if you are en- day of the year. Generally, the election Section 1250 Gain Worksheet on page D-8 gaged in the business of buying and selling must be made by the due date (not includ- if you complete line 19 of Schedule D. D-3
If there is an amount in box 1c, see Ex- the stock received. If you held the equity • A business whose principal asset is clusion of Gain on Qualified Small Busi- interest for more than 1 year, report the the reputation or skill of one or more emness (QSB) Stock on this page. gain as a long-term capital gain on line 8. If ployees. If there is an amount in box 1d, include you held the equity interest for 1 year or • A banking, insurance, financing, leasthat amount on line 4 of the 28% Rate Gain less, report the gain as a short-term capital ing, investing, or similar business. Worksheet on page D-7 if you complete gain on line 1. Your holding period for the new stock begins on the day after you reline 18 of Schedule D. • A farming business (including the ceived the stock. raising or harvesting of trees). Enter on Form 1040, line 69, the tax • A business involving the production paid as shown in box 2 of Form 2439. Also Exclusion of Gain on of products for which percentage depletion on line 69, check the box for Form 2439. Qualified Small Business can be claimed. Add to the basis of your stock the excess of • A business of operating a hotel, motel, the amount included in income over the (QSB) Stock restaurant, or similar business. amount of the credit for the tax paid. See Section 1202 allows for an exclusion of up Pub. 550 for details. For more details about limits and addito 50% of the eligible gain on the sale or tional requirements that may apply, see exchange of QSB stock. The section 1202 Installment Sales section 1202. exclusion applies only to QSB stock held If you sold property (other than publicly for more than 5 years. Pass-Through Entities traded stocks or securities) at a gain and To be QSB stock, the stock must meet If you held an interest in a pass-through enyou will receive a payment in a tax year all of the following tests. tity (a partnership, S corporation, or mutual after the year of sale, you generally must fund or other regulated investment comreport the sale on the installment method 1. It must be stock in a C corporation pany) that sold QSB stock, to qualify for unless you elect not to. Use Form 6252 to (that is, not S corporation stock). the exclusion you must have held the interreport the sale on the installment method. 2. It must have been originally issued est on the date the pass-through entity ac- Also use Form 6252 to report any payment after August 10, 1993. quired the QSB stock and at all times received in 2004 from a sale made in an 3. As of the date the stock was issued, thereafter until the stock was sold. earlier year that you reported on the installthe corporation was a domestic C corpora- How To Report ment method. tion with total gross assets of $50 million or To elect out of the installment method, less (a) at all times after August 9, 1993, Report on line 8 the entire gain realized on report the full amount of the gain on Sched- and before the stock was issued and (b) imumns as indicated. Directly below the line the sale of QSB stock. Complete all col- ule D on a timely filed return (including ex- mediately after the stock was issued. Gross tensions) for the year of the sale. If your assets include those of any predecessor of on which you reported the gain, enter in original return was filed on time, you may the corporation. All corporations that are column (a) “Section 1202 exclusion” and make the election on an amended return members of the same parent-subsidiary enter as a loss in column (f) the amount of filed no later than 6 months after the due controlled group are treated as one corporapleting line 18 of Schedule D, enter as a the allowable exclusion. If you are com- date of your return (excluding extensions). tion. Write “Filed pursuant to section positive number the amount of your allow- 4. You must have acquired the stock at 301.9100-2” at the top of the amended reits original issue (either directly or through able exclusion on line 2 of the 28% Rate turn. Gain Worksheet on page D-7. an underwriter), either in exchange for Demutualization of Life money or other property or as pay for serv- Gain from Form 1099-DIV. If you re- ices (other than as an underwriter) to the ceived a Form 1099-DIV with a gain in box Insurance Companies corporation. In certain cases, you may meet 2c, part or all of that gain (which is also Demutualization of a life insurance comsection 1202 exclusion. In column (a) of the test if you acquired the stock from an- included in box 2a) may be eligible for the pany occurs when a mutual life insurance other person who met the test (such as by company changes to a stock company. If gift or inheritance) or through a conversion line 8, enter the name of the corporation you were a policyholder or annuitant of the or exchange of QSB stock you held. whose stock was sold. In column (f), enter mutual company, you may have received 5. During substantially all the time you the amount of your allowable exclusion as either stock in the stock company or cash in held the stock: a loss. If you are completing line 18 of exchange for your equity interest in the mua. The corporation was a C corporation, amount of your allowable exclusion on line Schedule D, enter as a positive number the tual company. The basis of your equity interest in the mutual company is considered b. At least 80% of the value of the 2 of the 28% Rate Gain Worksheet on page to be zero. corporation’s assets were used in the active D-7. If the demutualization transaction qualinesses (defined below), and Form 2439 with a gain in box 1c, part or all conduct of one or more qualified busi- Gain from Form 2439. If you received a fies as a tax-free reorganization, no gain is recognized on the exchange of your equity c. The corporation was not a foreign of that gain (which is also included in box interest in the mutual company for stock. corporation, DISC, former DISC, regulated 1a) may be eligible for the section 1202 ex- The company can advise you if the transacment trust, REMIC, FASIT, cooperative, or name of the corporation whose stock was investment company, real estate invest- clusion. In column (a) of line 8, enter the tion is a tax-free reorganization. Because the basis of your equity interest in the musubsidiary that has made) a section 936 your allowable exclusion as a loss. If you a corporation that has made (or that has a sold. In column (f), enter the amount of tual company is considered to be zero, your basis in the stock received is zero. Your election. are completing line 18 of Schedule D, enter holding period for the new stock includes as a positive number the amount of your the period you held an equity interest in the SSBIC. A specialized small allowable exclusion on line 2 of the 28% mutual company. If you received cash in TIP business investment company Rate Gain Worksheet on page D-7. exchange for your equity interest, you must (SSBIC) is treated as having Gain from an installment sale of QSB recognize a capital gain in an amount equal met test 5b above. stock. If all payments are not received in to the cash received. If you held the equity Qualified Business the year of sale, a sale of QSB stock that is interest for more than 1 year, report the not traded on an established securities margain as a long-term capital gain on line 8. If A qualified business is any business that is ket generally is treated as an installment you held the equity interest for 1 year or not one of the following. sale and is reported on Form 6252. Figure less, report the gain as a short-term capital • A business involving services per- the allowable section 1202 exclusion for gain on line 1. formed in the fields of health, law, engi- the year by multiplying the total amount of If the demutualization transaction does neering, architecture, accounting, actuarial the exclusion by a fraction, the numerator not qualify as a tax-free reorganization, you science, performing arts, consulting, athlet- of which is the amount of eligible gain to be must recognize a capital gain in an amount ics, financial services, or brokerage serv- recognized for the tax year and the denomiequal to the cash and fair market value of ices. nator of which is the total amount of eligi- D-4
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Note. This booklet does not contain
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What is IRS e-file? It’s the fast
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Tax Return Page Reference Questions
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Quick and Easy Access to Tax Help a
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Topic TeleTax Topics No. Subject No
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Before You Fill In Form 1040 See Ho
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Chart B—For Children and Other De
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Form Item and Box in Which it Shoul
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Line 2 December 31, 2004, you were
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Form 1040—Lines 7 and 8a less tha
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gross income was over $139,500 ($69
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Form 1040—Lines 16a and 16b Age (
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Form 1040—Lines 20a and 20b Socia
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Form 1040—Line 25 IRA Deduction W
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Form 1040—Lines 27 Through 29 for
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Line 35 Include in the total on lin
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Form 1040—Lines 41 and 43 Tax Tab
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Line 44 • Tax-exempt interest fro
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Line 51—Child Tax Credit What Is
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ured the credit. Check box c and en
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Lines 65a and 65b— Earned Income
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Form 1040—Lines 65a and 65b Conti
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2004 Instructions for Form 1040 (ALL) - Supreme Law Firm

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