Final answer:
The statement is false; capital additions increase the basis of a property, while recoveries of capital decrease it. The adjusted basis reflects these changes, representing the asset's current value. Savings in an economy is crucial for capital formation as it provides the funds required for investments that lead to economic growth.
Step-by-step explanation:
The statement that capital additions decrease and recoveries of capital increase the original basis so that on the date of disposition, the adjusted basis reflects the unrecovered cost or other basis of the property is false. In reality, capital additions, which refer to expenses for improvements and betterments that increase the value of a property or adapt it to a new use, actually increase the basis of the property. On the other hand, recoveries of capital, such as depreciation deductions or insurance reimbursements for property damage, decrease the basis. The adjusted basis is calculated to reflect these changes over time, which represents the current value of the asset after adjustments for various tax-related items.
Capital formation in an economy is directly related to the amount of savings. Savings provide the funds necessary for investment, which is used to purchase capital goods like machinery and equipment, leading to production expansion. Increased production facilitates economic growth and additional savings, creating a cycle that further fuels capital formation.