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The tax law default is no annual
income/accrual for market discount
Taxpapayer can affirmatively elect
(bond by bond) 13
General Strategy:
For taxable bonds, don’t elect annual income of
discount/interest.
For tax free bonds, it is ordinary income not tax
exempt interest income… 14
If no election, then recognize accrued market discount as
interest at maturity or on disposition.
15
If bond is sold prior to maturity, then accrued
market discount to date of sale is interest income
Ex: Sell 10 year bond after 5 years, if straight-line
accrual then 50% of market discount is interest.
16
Broker may include net interest in Form
1099 Int box 1 instead of showing
gross interest in box 1 and market
discount. 18
Cooper143 TC No. 10
Patent Holder's Control of Corporate Transferee Eliminates Long-Term
Capital Gain Treatment
6-4
23
T.D. 9659; Reg. § 1.83-3 (02/25/2014)
Final Regs Tighten Deferral Rules Involving Receipt of
Property with Substantial Risk of Forfeiture – See Examples
6-4
24
The only provision of the securities law that defers income under IRC sec. 83
is section 16(b) of theSecurities Exchange Act
25
• Section 16(b) causes disgorgement of insider profits on all purchases and sales within six months;
• With stock options, the six month clock begins on the date the option is granted.
26
Ex 6: A NQSO. “Pursuant to an underwriting agreement entered into in connection with the initial public offering, Q agrees not to sell, otherwise dispose of, or hedge any Y common stock from August 1 through February 1 of 2014 (“the lock-up period”).”
Not a Substantial Risk of Forfeiture
27
Ex 7: NQSO. “The exercise of the option occurs … and, on the date of exercise, Q is in possession of material nonpublic information concerning Y that would subject him to liability under Rule 10b–5 under the Securities Exchange Act of 1934 if Q sold the Y shares while in possession of such information.”
Not a Substantial Risk of Forfeiture28
Brinkley, TC Memo 2014-227
(Oct. 30, 2014) –
Tech Company Co-Founder Has Mostly Ordinary Income When
Company is Acquired by Google
6-7
29
• He said Google paid him entirely for his Zave stock.
• The Tax Court determined that he was paid for stock ($787,671) AND for services ($1,753,157)
• Tax Court sustained the 20% substantial understatement penalty. 30
Frederic Allen v. U.S., (DC CA 05/28/14)
California District Court Holds Land Sale Triggered
Ordinary Income, Not Capital Gain – Intent to
Develop Not Hold
6-8
32
Long v. Comm’r(CA 11 Nov. 20, 2014)
Developer Entitled to Long-Term Capital Gain
on Sale of Right to Purchase Real Estate
Supp
33
Patrick, 142 TC No. 5 (2/24/14)
$6,856,000 on Form 1099-MISC for
Whistleblower Award is Ordinary Income Not
Capital Gain
6-9
34
Cosentino, TC Memo 2014-186
(9/11/14) –
Damages For Lawsuit Against Accounting Firm Are Generally a Tax Free Return
of Capital SaysJudge Chiechi
6-10
35
Two Exceptions:(1)Compensation for
something previously deducted (Oregon state taxes)
(2)Compensation for a loss the taxpayer did not incur. (penalties alleged but not paid)
36
• In 2002, she separated from H, but H funded a partnership with community funds.
• In 2003, they remained married and filed MFS.
Holding: Whether or not Ann was considered a partner in 2003, she had income from the partnership in that year based on her community property interest in H’s partnership interest (IRC sec. 66).
• The Tax Court noted Ann's failure to argue for innocent-spouse relief in IRC sec. 66 on MFS returns.
• Innocent spouse relief in IRC sec. 66 is not available to California RDPs (unmarried) per IRS website Q&As.
1-23
What about employment tax on her half of the community income?
IRC sec. 1402(a)(5)(B) pushes 100% of community property income, for spouses, to the partner – H.If Ann is also a partner, then 50/50.
IRS Information Letter
2014-0018 (June 2014) -- Mortgage
Forgiveness in California; Boxer Letter Version 2.0
6-16
43
The Federal Exclusion for COD Income on a Principal
ResidenceExpires at the End
of 2014
California’s expired at the end of 2013
45
48
QPRI
FMV
BASIS
$500,000
$400,000$420,000
$20,000DDI
Exclude
Mortgage Foreclosure or Short Sale: QPRI Recourse Debt in 2014X
$100,000Loss
$400,000
48
49
QPRI
FMV
BASIS
$500,000
$400,000$420,000
$20,000COD
Income
Mortgage Foreclosure or Short Sale: QPRI Recourse Debt in 2015X
$100,000Loss
$400,000
49
7701(g), provides that “in determining the amount of gain or loss … the fair market value of such property shall be treated as being not less than the amount of any nonrecourse indebtedness to which such property is subject.”
Foreclosure or Short-Sale With Nonrecourse Debt
51
53
NRDEBT
FMV
BASIS
$500,000
$400,000$420,000
$80,000Loss
Foreclosure or Short Sale:Nonrecourse Debt (QRPI or Not)
Deemed
FMV
No COD
Income
53
FMV = Not Less Than DebtFMV minus A.B. = Gain or Loss
54
NRDEBT
FMV
BASIS
$300,000
$400,000$420,000
$120,000Gain
Foreclosure or Short Sale:Nonrecourse Debt (QRPI or Not)
Deemed
FMV
No COD
Income
54
FMV = Not Less Than DebtFMV minus A.B. = Gain or Loss
ExcludeGain Under
IRCSec.121
• CCP 580e debt is nonrecourse debt so a short-sale results in gain or loss not COD income.
• FTB quickly agreed.
Boxer Letter V1(9/19/13) 6-16
55
California CCP 580eFor short-sales after July 5, 2011, CCP §580e provides
that if the lender consents toa short sale the lender
cannot pursue the borrower for any excess debt over the
sales proceeds.
56
• The property needs to be a dwelling unit of 1 to 4 units (so no good for commercial property)
• Does not require owner occupancy, so it applies to a residential rental.
57
• Need not be purchase money debt so it applies to refinances and home equity debt.
• Not applicable to a corporation, LLC, or limited partnership.
58
CCP 580b(a)(3) purchase money debt on
an owner-occupied residence, NR debt from
the start, generates gain or loss but no COD
income.
What We Mean’t To Say
61
“Non-purchase-money loans subject to California’s anti-deficiency statutes generally appear to be recourse loans from their inception. We were overly broad in our prior response in extending our analysis of the
federal tax treatmentof obligations beyond those
described in section 580b(a)(3).” 62
Koriakos, TC Summary Opinion Not Acquisiton Debt means NOT Qualified
Principal Residence Debt(QPRI)
6-18
65
Couple used the debt to construct property
in Florida, but the debt was secured by
Arizona Property
66
• Debough sells his residence for $1,400,000 on the installment method.
• After sec. 121 exclusion, he recognizes $60,000
68
Repossess and gets:
• The House + $500,000 cash.
• Tax Court agrees he is taxed on $440,000 ($500,000 - $60,000 prior gain)
Did not resell within one year of repossession.
69
If he re-sold the house within one year of the repossession, he could have excluded the entire $440,000 gain under IRC sec. 121.
70
Notice 2014-68 (Oct. 24, 2014)
IRS Approves Leave-Sharing Programs to Help
West African Ebola Victims
6-24
75
CompareIRS Announcement 2002-18: IRS grants audit protection for “the receipt or personal
use of frequent flyer miles or other in-kind promotional
benefits attributable to the taxpayer’s business or
official travel….”77
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