Hellawell, E. Robert

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Elements of Capital Gain--General (cont\u27d) Meaning of Held More Than Six Months

Case Western Reserve University School of Law

Case Western Reserve Law ReviewVolume 12 | Issue 21961Elements of Capital Gain--General (cont'd)Meaning of Held More Than Six MonthsE. Robert HellawellFollow this and additional works at: https://scholarlycommons.law.case.edu/caselrevPart of the Law CommonsThis Symposium is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law ScholarlyCommons. It has been accepted for inclusion in Case Western Reserve Law Review by an authorized administrator of Case Western Reserve UniversitySchool of Law Scholarly Commons.Recommended CitationE. Robert Hellawell, Elements of Capital Gain--General (cont'd) Meaning of Held More Than Six Months, 12 W. Res. L. Rev. 267 (1961)Available at: https://scholarlycommons.law.case.edu/caselrev/vol12/iss2/19TAX CLINIC ON CAPITAL GAINSIVELEMENTS OF CAPITAL GAIN - GENERAL (cont'd)MEANING OF "HELD MORE THAN SIX MONTHS"E. Robert HellawellThe general rule is that an asset must be held not merely six monthsbut "more than six months" for its disposition to qualify for long termcapital gain treatment.' "More than 6 months" does not mean morethan half a year or more than 182 days. A holding period of 182 daysmay qualify and one of 184 days may fail to qualify.In these days of fluctuating prices and client pressure a lawyer mustcompute holding periods exactly, for a client may not wish to delay aday in realizing his long term capital gain and a sale that is a day toosoon will mean taxation at ordinary income rates.ORDINARY PURCHASE OR SALEPerhaps the first problem is a determination of when the holdingperiod commences and when it ends in the normal case of a purchase andsale.2 If a taxpayer buys an asset at noon on Tuesday and sells it at11:00 a. m. Thursday has he held it for two days? The answer, for-tunately, is yes. The computation is not concerned with the time of daythat an asset is bought or sold. That problem is eliminated by rough(and administratively feasible) justice: the day of purchase is excludedand the day of sale is included in the holding period.' Hence, taxpayerheld the asset for two days.The second problem is: how long is more than six months? The an-swer cannot be given simply but begins with the consideration thatthe holding period is concerned with months and fractions thereof rather1. See INT. REV. CODE OP 1954, § 1222(3). (Hereinafter cited as §). There are manyspecial provisions, having to do with specific types of property or transactions, where the gen-eral rules are varied. For example: long term gain treatment is provided for certain patentdispositions regardless of actual holding period. § 1235 (a); see Edward C. Myers, 6 T.C. 258(1946), acq., 1958-2 Ctmt BULL. 6 (normal rule on patents); § 1233 (short sales); § 735 (b)(holding period of property distributed by partnerships). Many such special provisions arediscussed in other articles in this series or noted at other points herein.2. On determining when a sale occurs for purposes of the holding period computation seediscussion pp. 293-99.3. But see I.T. 3985, 1949-2 CuM. BULL. 51, 52, which states that the rule "does not requireexclusion particularly of either the beginning date or the ending date of the period but merelyof one day . . . so as to eliminate duplication and avoid computations of fractions of days."Nevertheless, the rule is usually stated to require exclusion of the date of purchase. E.g., Fogelv. Commissioner, 203 F.2d 347 (5th Cir. 1953); I.T. 3287, 1939-1 CuM. BULL. 138; 3BMERTENS, LAw Op FEDERAL INcOME TAXATION § 22.104 at 440-41 (1958).1961]WESTERN RESERVE LAW REVIEWthan with days. A month means a calendar month regardless of whetherit has 28, 29, 30 or 31 days. And a calendar month means a periodending on the day of the succeeding month corresponding to the day ofthe beginning of the period (i.e., the day after purchase), less one.Thus, if an asset is purchased on March 15th and sold on April 15th ithas been held for exactly one month (from March 16th to April 15thinclusive). Where the succeeding month does not have a date correspond-ing to the date of the beginning of the holding period the "month" endswith the last day of the succeeding month. Thus an asset purchased onJanuary 30th and sold on February 28th has been held for one month(except in a leap year when it would have to be held until February29th).Putting these rules together, it can be seen that an asset purchasedon September 15th and sold on March 16th has been held for more thansix months, although the holding period comprises only 182 days; anasset purchased on May 1st and sold on November 1st has not been heldmore than six months although the holding period comprises 184 days.4The above rules explain computation of the holding period in thenormal situation. There can be complications, however.5 If an asset ispurchased on September 30th and sold on March 31st, has it been heldsix months or six months and a day? It seems that if the day of purchaseis excluded it would be considered to be held only six months (fromOctober 1st to March 31st). Whereas, if the date of sale is excludedit would be held longer than six months (from September 30th toMarch 30th). A private ruling issued in 1953 takes the position thatthe asset has been held more than six months, and also states that the dayof purchase is excluded.6 Despite this ruling and the policy statementmentioned previously' (that the rule does not require exclusion par-ticularly of either the beginning date or the ending date but only ofone day), caution dictates holding an extra day in this situation.SECURITIES EXCHANGE TRANSACTIONSPerhaps the area where exact computation of the holding period ismost often required is that of the purchase and sale of securities on thesecurities exchanges. Such transactions usually are not completed in oneday. The purchase or sale is executed on the floor of the exchange onone day and settlement is made by delivery of certificates and cash on a4. See E. T. Weir, 10 T.C. 996 (1948), a4f'd per curiam, 173 F.2d 222 (3d Cir. 1949).5. I.T. 3985, 1949-2 CUM. BULL. 51, sets out special rules for computing fractions of monthsin cases under the "wash sale" provisions where two separate periods must be added togetherto form one holding period.6. 5 CCH 1953 STAND. FED. TAX RPp. 5 6306.7. I.T. 3985, 1949-2 CUM. BULL. 51, note 3 supra.[MarchTAX CLINIC ON CAPITAL GAINSsubsequent day - usually four business days later. The Internal RevenueService has ruled that the holding period commences the day after thepurchase order is executed on the exchange - not on the later settle-ment date.' And the holding period terminates on the day the salesorder is executed.TACKING OF HOLDING PERIODSOrdinarily, the holding period on each individual piece of propertyowned by the taxpayer must be computed separately and with referenceonly to the period of time during which he held that property. Forexample, if the taxpayer first purchases an option on certain land andlater exercises his option, his holding period for the land does not includethe period he held the option.9 If he later constructs a building on theland, his holding period for the land is longer than that for the build-ing." And if the building is disposed of more than six months after itsconstruction was started, but less than six months after its completion, aportion of the gain on the building - but only a portion - will be con-sidered long term gain."Carryover of BasisIn certain circumstances specifically provided by statute, however, theholding period is not determined solely by the length of time the tax-payer held the particular property involved; an additional period isadded. Depending on the circumstances, the additional period may beeither the period during which the property was held by a former holderor the period of time the taxpayer held another item of property. Thefirst major area where this "tacking" of holding periods applies is in anexchange of property in which the taxpayer's basis for the property ex-changed becomes the basis for the property received.' This carryover ofbasis occurs in the type of exchange usually referred to as "tax-free";8. I.T. 3705, 1945 Cum. BUTLL 174 (the postponement of settlement date by interveningholidays does not alter the rule). As to "when issued" securities, see I.T. 3721, 1945 CUM.BuLL. 164, 173. As to identification of securities sold where some shares have been heldmore than six months and some have not, see Treas. Reg. §5 1.1223-1 (i), 1.1012-1 (c); Hel-vering v. Rankin, 295 U.S. 123 (1935); discussion pp. 300-02.9. E. T. Weir, 10 T.C. 996 (1948), af'd per curiam, 173 F.2d 222 (3d Cir. 1949); accord,Max H. Wyman, 33 T.C. No. 70 (1959); cf. § 1223(6) (stock acquired through exercise ofrights).10. Paul v. Commissioner, 206 F.2d 763 (3d Cir. 1953); Dunigan v. Burnet, 66 F.2d 201(D.C. Cir. 1933); W. H. Weaver, 32 T.C. 411 (1959); I.T. 2469, VIII-1 CUL BuLT. 158(1929).11. Paul v. Commissioner, 206 F.2d 763 (3d Cir. 1953); Fred Draper, 32 T.C. 545 (1959).12. See § 1223(1). To qualify, the property surrendered in the exchange must be a capitalasset or a § 1231 asset (real property or depreciable property used in a trade or business).Section 1223(1) expressly applies to two types of transactions which may not involve an ac-tual exchange: involuntary conversions under § 1033 and distributions to which § 353 applies.19611WESTERN RESERVE LAW REVIEWmany types of such exchanges are provided by various sections of theCode. When a taxpayer engages in one of these transactions, his holdingperiod for the property he receives will be extended by the length oftime he held the property which was surrendered in the exchange. Forexample, taxpayer purchases common stock in the A Company and atsome time thereafter A Company is merged into the B Company. Themerger qualifies as a reorganization under section 368 (a) (1) (A). Up-on merger, the taxpayer receives common stock of the B Company inexchange for his A Company stock. This constitutes a tax-free ex-change.'3 Taxpayer's basis for the A stock becomes his basis for the Bstock.Y Accordingly, in computing his holding period of B stock, thetaxpayer must add the period of time during which he held the A stockto the time he held B stock as such.The second major area where tacking is required is where the taxpayeracquires property from another person in a transaction such that the otherperson's basis for the property carries over and becomes taxpayer's basis. 5In this situation, the period during which the transferor held the propertyis added to taxpayer's holding period. A transfer by gift illustrates thisprovision. A owns property with a basis of $100 and a fair marketvalue of $200. A gives the property to B. Under these facts section1015 provides that A's basis will carry over to B. Thus B's basis willbe $100. Since B's basis is determined by A's basis he must add A'sholding period to his own. 6The gift situation should be contrasted with a transfer by inheritance.The basis of inherited property is determined not by decedent's basis butby the fair market value of the property at the date of death or at theoptional valuation date. Accordingly, the holding period of the decedentmay not be tacked to that of the recipient. The recipient's holding periodbegins at the date of death of the decedent. 713. § 354(a).14. § 358(a).15. See § 1223 (2). Other paragraphs of § 1223 set forth several other situations, of morelimited applicability, where tacking of holding periods is allowed, e.g., where gain on sale ofa residence is not recognized under § 1034.16. If the fair market value of the property is less than the donor's basis at the time of thegift, the donor's basis does not carry over for purposes of determining loss on a subsequentsale. Consequently, in such a case there will be no tacking of holding period. I.T. 3453,1941-1 CuM. BULL. 254.17. McFeely v. Commissioner, 296 U.S. 102 (1935).[Mardi

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Elements of Capital Gain--General (cont\u27d) Meaning of Held More Than Six Months

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