Gain or loss on property used in a trade or business, including rental real estate, is not "capital gain or loss"--it is referred to as "IRC Section 1231 gain or loss
." (9) If all of the taxpayer's IRC Section 1231 gains in a year exceed his IRC Section 1231 losses, the net gain is treated as long-term capital gain; however, such net gain must be treated as ordinary income to the extent of net IRC Section 1231 losses of the taxpayer in the five most recent prior years beginning after 1981 (which have not been thus previously offset by net gains of a later year).
Thus, for example, an amortizable section 197 intangible is not a capital asset for purposes of section 1221." All hope for capital gains treatment is not lost, however, because Treasury Regulations section 1.197-2(g)(8) goes on to state that if the intangible is "used in a trade or business and held for more than one year, gain or loss on its disposition generally qualifies as section 1231 gain or loss
Consider further the situation where the manufacturer sustains a section 1231 gain or loss
on the sale of equipment used in fulfilling the contract, and the cost-plus contract provides that such gain or loss is to be taken into account in determining the net amount due.