Current through Register Vol. 43, No. 02, November 27, 2024
(1) For
the purposes of Chapter 6 of these regulations, the following definitions
apply:
(a) Unadjusted basis in property - The
original cost of the property if acquired after January 1, 1933. If the
property was acquired prior to January 1, 1933 the unadjusted basis is the fair
market value on January 1, 1933.
(b) Adjusted basis in property (for
transactions before January 1, 1985) - The unadjusted basis in the property,
plus the cost of improvements of a permanent character made to the property
that have been properly classified as a capital expenditure, minus prior return
of investment, depreciation, amortization, depletion, and other reductions in
the original cost.
(c) Fair market
value - The price at which property would change hands between a willing buyer
and a willing seller, neither being under any compulsion to buy or sell and
each having knowledge of all relevant facts.
1. The determination of the fair market value
of property is generally a question of fact and shall be established by
competent evidence. The general way of determining the fair market value of
stock, in the absence of knowledge of sales on any given date, is to value the
stock on the basis of the corporate assets underlying the stock as disclosed by
a balance sheet as of this date.
(2) The general rule is that the unadjusted
basis of property is its cost. The term "adjusted basis" means, in substance,
the original capital investment ("unadjusted basis") adjusted to the date the
taxpayer disposes of the property. "Basis" for determining gain or loss on sale
or other disposition is also the "basis" for computing depreciation, and in
some cases, depletion.
(a) The adjusted basis
for determining the gain or loss from the sale or other disposition of property
is the basis of the property defined in §
40-18-6(a),
Code of Ala. 1975, adjusted to the extent provided in
§
40-18-6(b)(1) as
in effect prior to January 1, 1985, or adjusted to the extent provided in
§
40-18-6(b) as in
effect after December 31, 1984; and interpreted below:
1. Expenditures made by the taxpayer after
acquisition of a property for improvements, additions or betterments of a
relatively permanent character, such as to prolong the life or increase the
utility of the property in substantial degree beyond the life or utility
reasonably to be expected from properties of like age and character, shall be
added to and increase the original basis of such property for the purpose of
determining gain or loss upon the disposition thereof. No adjustment shall be
made in respect of any item which, under any applicable provision of law or
regulation, is treated as an item not properly chargeable to a capital account
but is allowable as an expense deduction in computing net income for the
taxable year.
2. Adjustments to
basis may be made for carrying charges such as taxes and interest, with respect
to unimproved and unproductive real property, if the taxpayer elects to treat
these items as chargeable to asset accounts rather than as an allowable expense
deduction. The term "taxes" for this purpose includes duties and excise taxes
but does not include income taxes.
3. In any case in which a portion of the
taxpayer's cost or investment has been returned to him in any form or manner
since acquisition, or any losses have been incurred, or other items or events
have transpired, resulting in a return of capital, the amount thereof shall
apply against and reduce the original basis to the taxpayer. Thus, any receipts
or credits arising from or related to the ownership of an item of property,
which receipts or credits do not constitute income taxable under the law, are
to be treated as a refund of a portion of the original cost.
(3) If a casualty loss
has been sustained, the cost basis in the property must be reduced by the
amount of the casualty loss claimed as a deduction in the computation of net
income. If the loss is reimbursed, in part or total, by insurance proceeds; the
insurance proceeds must be used to repair the property to its original state.
For losses occurring in tax years ending before January 1, 1985, if the
insurance proceeds are not used to repair the property to its original state,
the casualty must be treated as an involuntary conversion and any gain
recognized and reported as income. See Reg.
810-3-8-.06 for involuntary
conversions. For losses in tax years beginning after December 31, 1984, see
Reg. 810-3-8-.06(2)
for determination of recognizable gain, (if any).
(a) EXAMPLE: A rental dwelling was partially
destroyed by fire. The fair market value of the property immediately before the
fire was $20,000.00 ($2,000.00 for the land and $18,000.00 for the dwelling).
The fair market value just after the fire was $12,000.00 ($2,000.00 for the
land and $10,000.00 for the dwelling). The insurance reimbursement was
$5,000.00. The entire amount of the insurance proceeds were used to repair the
property to its original state. Taxpayers adjusted cost basis in the property
before the casualty was $6,000.00 ($1,000.00 for the land and $5,000.00 for the
dwelling). The adjusted basis in the property following the casualty is as
follows:
Land Building
a.
Cost/basis $1,000 $5,000
b. Fair
market value before 2,000 18,000
c.
Fair market value after 2,000 10,000
d. Change in fair market value 0
8,000
e. Smaller of cost or change
in market value 0 5,000
f. Less
insurance proceeds 0 5,000
h. New
adjusted basis before repairs $1,000
(b) EXAMPLE: Same facts as in example (3)(a)
above, except the dwelling is a personal residence. The casualty loss and
adjusted basis would be computed as follows:
Homesite
b. Fair market value before
20,000
c. Fair market value after
12,000
d. Change in market value
8,000
e. Smaller of cost or change
in market value 6,000
f. Less
insurance proceeds 5,000
g.
Casualty loss (e - f) 1,000
h. New
adjusted basis before repairs 0
(4) The original basis must also be decreased
by the amount of maximum allowable deductions for exhaustion, wear and tear,
obsolescence (these three items hereinafter referred to as "depreciation"),
amortization, and depletion under the law applicable to the periods of time
prior to January 1, 1935 and subsequent to January 1, 1935. Deductions
allowable shall reduce the original basis of the property to the adjusted basis
for determining gain or loss. These deductions shall be the greater of the
following two amounts:
(a) the amount allowed
as deductions in computing taxable income to the extent resulting in a
taxpayer's income taxes, or
(b) the
amount allowable for the years involved.
(c) The general rule is "Always in the amount
allowed, but never less than the amount allowable."
(d) It is not necessary for this
depreciation, amortization, or depletion to have been claimed on tax returns or
entered in taxpayer's records. It shall be assumed that the taxpayer has
claimed maximum allowable deductions regardless of the expiration of the
statutory period for claiming deductions. A taxpayer is not permitted to take
advantage in a later year of his prior failure to take any such allowance or
his taking an allowance plainly inadequate under the known facts in prior
years. In the case of depreciation, if in prior years the taxpayer has
consistently taken proper deductions under one method, the amount allowable for
such prior years shall not be increased even though a greater amount would have
been allowable under another proper method.
(5) In the case of stock, the original basis
must be decreased by the amount of distributions previously made which at the
date of distribution were either tax free or applicable in the reduction of
basis. This does not apply to exempt dividends paid from income earned since
January 1, 1933, by the corporations paying the dividend.
(6) For transactions occurring in a tax year
beginning before January 1, 1985, whenever it appears that the basis of
property of the taxpayer is a substituted basis, then the adjustments provided
in §
40-18-6(b), and
this regulation shall be made after first making, in respect to such
substituted basis, proper adjustments of a similar nature in respect of the
period during which the property was held by the transferor, donor, or grantor,
or during which the other property was held by the person from whom the basis
is to be determined. A similar rule shall be applied in case of a series of
substituted bases.
Authors: Lloyd B. Byrd, Roy Wiggins, John H.
Burgess
Statutory Authority:
Code of Ala.
1975, §
40-18-6.
