Capital gain from sale of business asset business income?

[equinecpa]

I had a NOL carryback for a client. The IRS increased it by $1500 because they reclassified a capital gain resulting from a sale of a business asset (from K-1 1120S) from business income to non-business income.

My software treated the $1500 as business income, and I thought it was too...is the IRS correct this is non-business income?

[Burke]

A sale of a business asset would have capital gains treatment if held more than one year. How did the IRS know this? Where was it originally reported as "business income?" On 4797? Flow thru to Line 9 of the K-1 as 1231 gain? What was the item sold?

[equinecpa]

A sale of a business asset would have capital gains treatment if held more than one year. How did the IRS know this? Where was it originally reported as "business income?" On 4797? Flow thru to Line 9 of the K-1 as 1231 gain? What was the item sold?

The item sold was a horse that was being depreciated on an S-corp 4562. Figures flowed from K-1 to 4797 to Schedule D. I don't argue that it is a capital gain, I just thought it was included in the calculation of business income, is it not?

[JG EA]

The item sold was a horse that was being depreciated on an S-corp 4562. Figures flowed from K-1 to 4797 to Schedule D. I don't argue that it is a capital gain, I just thought it was included in the calculation of business income, is it not?

TTB 8-16

Capital gains and losses. Most capital gains and losses are
nonbusiness. An example of a business capital gain would be
the Section 1231 gain in excess of depreciation recapture on the
sale of property used in a trade or business.

The " pattern" based on 3 notices I have received lately is to latch onto the first thing that catches their eye. Like Big Bird asking directions. You know - Go one block, turn right, go 3 blocks..... And Big Bird goes one block and needs to ask for more directions.

[equinecpa]

Ok so I'm not losing my mind (at least not totally). This is to my client's benefit so I might just let the IRS have their way this time LOL.

[erchess]

mmmmm

I agree that it's tempting in this case to agree with an IRS mistake. The problem as I see it is that IF they ever realize they made a mistake they may come back on the client and also on you, even saying the F word (fraud). Am I incorrect?

[TaxmannEA]

Quick question. The horse had been held for 2 years, right?

[equinecpa]

Quick question. The horse had been held for 2 years, right?

Yes

I agree that it's tempting in this case to agree with an IRS mistake. The problem as I see it is that IF they ever realize they made a mistake they may come back on the client and also on you, even saying the F word (fraud). Am I incorrect?

I think they'd have a hard time arguing that since I filed it correctly, and they "corrected the error" -it's their action not mine that has cause the error.

[Bees Knees]

I think they'd have a hard time arguing that since I filed it correctly, and they "corrected the error" -it's their action not mine that has cause the error.

You still have an ethical responsibility to correct a mistake, even when it is an IRS error.

My client received a larger refund than I had calculated. IRS said I made an error on the making work pay credit. I told the client to hold on to the extra money. We sent IRS an explanation as to why they were wrong. IRS then agreed with me that I did it right the first time. Then they sent my client a bill for the extra refund they had paid him, plus interest.

My client was OK with following the rules, and I can sleep nights knowing I'm not breaking any ethical rules.