Buchanan Tax Outline Spring 2013

7/21/2019 Buchanan Tax Outline Spring 2013

1/42

Tax Outline(Fall 2013 / Textbook: Bankman, Federal Income Taxation, 16thed 2012!

Introduction: Setting the Table

Tax "olic# $i%ili&ed 'ociet# la' )o%ernment('! taxe' (throu)h either )o%ernment '*endin) or tax

break'! +i&e and 'tructure o )o%ernment i' center o *olic# debate -ho )et' taxed (*eo*le, cor*oration'!

./ o tax re%enue come' rom indi%idual' 1/ o tax re%enue come' rom cor*oration'

o much e tax $on'ult table on * 3 to 'ee here ederal re%enue come' rom

Tax ba'e: thin) that i' taxed (income, *ro*ert#, 'ale', e'tate', con'um*tion, ealth! Tax Fraud

Tax )a* di4erence beteen the amount o taxe' e ould collect i *eo*le com*lied*erectl# ith tax la and the amount o tax re%enue )enerated in realit#

-ho i' cheatin) on their taxe'5 O%erall, + ha' hi)h le%el o tax com*liance 7%era)e *er'on doe'n8t cheat 9m*lo#er' ha%e an incenti%e to accuratel# re*ort ho

much mone# #ou are )ettin) *aid becau'e that8' a deductible ex*en'e to them Thatmean' there i' no much o**ortunit# or indi%idual to cheat

ou)hl# hal o the tax cheatin) come' rom 'mall bu'ine''e' and 'el;em*lo#ed *eo*le"articularl# amon) ca'h bu'ine''e' It8' a *roblem that ari'e' rom norm and o**ortunit#not com*lexit# o the tax code


2/42

Ceerence to the'e a' ell "ri%ate


3/42

Tax


4/42

Taxable income Ear)inal tax rate tax *ercenta)e *aid on the next/la't dollar o income

Aext/la't L not the 'ame thin), but oten turn' out to be the 'ame thin) Mero bracket (MB! amount o income on hich a tax*a#er *a#' no income tax

It i' *o''ible to ha%e a *o'iti%e income and #et *a# no income tax at the ederal le%el b/c othi' &ero bracket

"ro)re''i%e rate ate ri'e' a' income ri'e' Federaltax '#'tem i' de'i)ned to be *ro)re''i%e on it' mar)inal rate and a%era)e tax rate

e)re''i%e rate ate all' a' income ri'e'

"ro*ortional rate ate i' con'tant a' income ri'e' 9xam*le: 'ocial 'ecurit# tax i' *ro*ortional u* to a certain thre'hold

$ode N 1 contain' li't o tax im*o'ed de*endin) on income o to determine taxable income:

Taxable income )ro'' income L &ero bracket Mero bracket 'tandard deduction *er'onal exem*tion'

+tandard deduction amount e%er#one i' alloed to deduct (* 66 in textbook!

"er'onal exem*tion' P300 In a )raduated bracket '#'tem (*ro)re''i%e mar)inal rate'!, #ou )et an a%era)e rate that i'

ala#' loer than #our mar)inal rate (unle'' it8' &ero!

9xam*le o calculatin) income tax: Famil# o our P20k in income

Taxable income P20k ; P2.,100 P3@2,@00 Tax oed P10G,062 03G(P3@2,@00 L P3,3G0! P106,6GG0 7%era)e tax rate P106,6GG0 / P20,000 2GH Ear)inal tax rate 3GH


5/42

What is Income?

+ome $haracteri'tic' o Income Income i' a Qo %ariable

Flo %ariable L can onl# be de=ned relati%e to the *a''a)e o time (e) P/#ear! -ealth i' a 'tock %ariable

+tock %ariable L de=ned at a moment in time

ai);+imon' Ce=nition R m%$ SA- con'um*tion 'a%in)'

m%$ air market %alue o con'um*tion SA- chan)e in net orth chan)e in *er'on8' *ro*ert# ri)ht' Aote that 'a%in)' can be ne)ati%e

The $ode 'tart' ith the ai);+imon' de=nition o income, and then $on)re'' hittle' it don "roblem' ith a**l#in) ai);+imon' de=nition in real lie:

eali&ation %' accrual 7n a''et can )ro in %alue, hich increa'e' indi%idual8' net ealth, but #ou don8t

nece''aril# reali&e that )roth in %alue (b# turnin) it into ca'h!, 'o tax*a#er doe'n8tnece''aril# ha%e a )reater abilit# to *a# the tax

In the real orld, e u'e reali&ation '#'tem Tax*a#er onl# )et' taxed hen he turn' a''einto ca'h Tax*a#er can )ro reall# ealth# but not ha%e to *a# tax on an# o it (e) i hehold' 'tock' that )ro tremendou'l# in %alue!

Im*uted income Income throu)h non;market tran'action', e) eno#ment, )roin) #our on %e)etable',

cleanin) #our on home, 'tu4 #ou do b# #our'el or 'tu4 that ha' onl# a %alue to #ou 9xam*le: Rou on #our hou'e ee 'im*le -hen #ou don8t ha%e to rent, that mean' #ou

don8t ha%e to *a# rent mone# +o it8' rent;ree li%in) ai);+imon' ould 'a# air market%alue o con'um*tion L ho much ould it ha%e co't to rent #our hou'e in a air markettran'action5 +o the *ro*er de=nition o income ould include im*uted income romonin) a hou'e

Belo market 'ale' "eo*le don8t *a# air market %alue or e%er#thin) +o income ould be o%er'tated hen

takin) into con'ideration tho'e )ood'/'er%ice' or hich *eo*le *aid belo market *rice'(e) in;'tate tuition!

Taxin) lei'ure


6/42

Income tax paid by employer directly to the IRS constitutes employees taxable

income Fact': 9m*lo#er *aid the em*lo#ee8' income taxe' or the em*lo#ee I+ 'a#' that *a#in)

o the income tax i' it'el income eld: Thi' i' eDui%alent to the tax*a#er ha%in) recei%ed the mone# directl# rom the

em*lo#er and then u'in) that mone# to *a# the taxe' +im*l# becau'e it came in adi4erent orm doe'n8t chan)e the 'ub'tance

ro''in) u* 9m*lo#er can *a# em*lo#ee more to com*en'ate the em*lo#ee or the income taxe' that he

ill ultimatel# ha%e to *a# To determine ho much )ro'' income an em*lo#er ill ha%e to )i%e an em*lo#ee to make

'ure that em*lo#ee recei%e' the a)reed u*on amount, u'e the olloin) calculation: A/(1;t!

ro'' income income beore taxe'

A net *a# de'ired amount ne)otiated beteen em*lo#er/em*lo#ee

t tax rate 9xam*le

9m*lo#ee/em*lo#er a)ree that em*lo#ee 'hould ultimatel# )et P0k/#ear Tax rate i' 20Ho much 'hould em*lo#er *a# em*lo#ee5 A/(1;t! 0k/(1;02! 0k/0 P100k

ro''in) u* in the in'tance here )ro''in) u* ould *ut em*lo#ee in a ne tax bracket

9xam*le:


7/42

9%en i e do a**l# the con%enience o the em*lo#er te't, meal'/lod)in) here ernot *ro%ided or the con%enience o the em*lo#er Bena)lia didn8t li%e at all thehotel' he a' mana)in) and he took extended %acation' aa# rom the hotel'/)oclub

Kaluation under Bena)lia

I Bena)lia' had lo't and ere reDuired to re*ort the lod)in)/meal' a' income, ho'hould the# %alue the lod)in)/meal'5 It 'hould be the air market %alue o hat the# recei%ed (ould reDuire urther

actual =ndin)'! To calculate m%, #ou ould a'k: ho much ould a hori&ontall# eDui%alent *er'on

ha%e to *a# in the 'ame 'ituation5 The diJcult thin) i' that there mi)ht not be an'uch *eo*le

$ode N 11@ (* 11@! Eeal' and lod)in) can be excluded rom )ro'' income but onl# i

In the ca'e o meal', meal' are urni'hed on the bu'ine'' *remi'e'

In the ca'e o lod)in), the em*lo#ee i' reDuired to acce*t 'uch lod)in) a' a conditiono hi' em*lo#ment To determine i em*lo#ee a' reDuired to acce*t lod)in), court can look to

em*lo#ment contract but doe'n8t nece''aril# ha%e to belie%e hat it 'a#' 11@(b!(! non;di'crimination reDuirement

I #ou ha%e a )rou* o em*lo#ee', and the# )et ree meal' on the bu'ine'' *remi'e' othe em*lo#er, and #ou ha%e determined that hal o them or more are )ettin) them o

the con%enience o the em*lo#er, then the other' )et a ree ride 11@(d! exce*tion (meanin) %alue o the lod)in) CO9+ ha%e to be included a' income! or

tho'e ca'e' here lod)in) i' urni'hed b# an educational in'titution and the rent i'inadeDuate Aumerical exam*le

7**rai'ed %alue o lod)in) P300,000

ent *aid b# the em*lo#ee P2G0/month P3000/#ear

ent *aid b# non;em*lo#ee' P1000/month P12,000/#ear

+ection 11@(d!(2!: exclu'ion doe' not a**l# 11@(d!(2!(7!: to the le''er o

11@(d!(2!(7!(i!: 00G300000 P1G,000 11@(d!(2!(7!(ii!: P12,000

OK9 11@(d!(2!(B!: P3000

+o #ou do ha%e to include a' income P12,000 ; P3,000 P@,000 $ode N 132 ;; Frin)e bene=t' that 'hould not be included in )ro'' income (e%en thou)h the#

technicall# =t under the ai);+imon' income de=nition! ule' o )eneral a**licabilit# to rin)e bene=t':

N 132(h! L retired and di'abled em*lo#ee' and 'ur%i%in) '*ou'e o em*lo#ee ho diedhile em*lo#ed b# em*lo#er i' treated a' em*lo#ee

Aon;di'crimination rule (N 132(!! L $om*an# can *ro%ide non;taxable rin)e bene=t'but onl# 'o lon) a' it doe' 'o or *rett# much e%er# em*lo#ee in the com*an# anddoe'n8t u't aim it at hi)hl# com*en'ated executi%e'

(1! Ao additional co't 'er%ice

+ituation here the em*lo#er i' *ro%idin) a 'er%ice and *ro%idin) it to the em*lo#ee'

doe'n8t co't the em*lo#er an#thin)


8/42

9xam*le: em*lo#ee ork' or "roctor and amble I "? char)e' cu'tomer' PG/Duaror Tide, but make' a P1 on each 'ale, then em*lo#ee need' to onl# *a# P anddoe'n8t ha%e to include that extra P1 a' income oe%er, i "? onl# made 2G cent'or each PG Duart 'old, and 'old it to em*lo#ee or P, then em*lo#ee ould ha%e toinclude .G cent' a' taxable income

(3! -orkin) condition rin)e

7n#thin) the em*lo#er could deduct rom their taxe', the em*lo#ee could deduct al'ob# not *a#in) tax on that

9xam*le:

9m*lo#er bu#' book that i' rele%ant to the com*an#8' line o ork I em*lo#eebou)ht the book, that 'hould not be included a' income

9m*lo#er )i%e' em*lo#ee mone# to bu# 'omethin) that, i the em*lo#er hadbou)ht it him'el, ould ha%e been able to be deducted rom taxable income

(! Ce minimi' rin)e, N 132(e!

+omethin) reall# 'mall in %alue

Ao line o bu'ine'' reDuirement

9xam*le:

I em*lo#ee i' *ro%ided ith co4ee and donut' at a ork meetin), he need notcount it a' income

I em*lo#er *ut' out a bol o cand# or em*lo#ee' to 'hare, em*lo#ee need notcount a *iece o cand# a' income

AOT meal' *ro%ided to airline em*lo#ee' on Qi)ht' (thou)h tho'e Duali# under

con%enience o the em*lo#er exclu'ion! (G! Uuali=ed tran'*ortation rin)e, N 132(!

Tran'*ortation 'tu4

There i' a limit hoe%er to the amount o 'er%ice that can be excluded

9xam*le:

I+ $ommi''ioner )et' dri%en around in limou'ine Coe' he ha%e to include the%alue5 Re'


9/42

Turner % $ommi''ioner (T$E 1@G!

Fact': Turner' on on a radio 'ho to round tri* =r't cla'' crui'e ticket' beteen ARand Bueno' 7ire' The# *aid P12G0 and traded the ticket' in or our round tri* touri'cla'' crui'e ticket' to Bra&il Turner' re*orted PG20 on their tax return a' the %aluethe# )ot rom the ticket' I+ 'a#' the# 'hould ha%e re*orted P2,220 becau'e that8'the retail %alue o the ticket' to Bueno' 7ire'

eld: Turner' 'hould ha%e re*orted P100 $ourt *robabl# a%era)ed Turner'8e'timation and I+8 e'timation o the %alue Ticket' eren8t orth ull retail %aluebecau'e thi' i' not 'omethin) Turner' ould ha%e bou)ht in the =r't *lace and ticket'ere not 'alable

Ec$o# % $ommi''ioner (1@62! Fact': tax*a#er on a ne


10/42

nu'ual orm' o income Im*uted income L doin) thin)' or #our'el, thi' 'tu4 i' not taxed

"ro*ert# other than ca'h +er%ice' "'#chic income and lei'ure

Other unu'ual orm' o income here #ou )et 'omethin) rom 'omeone el'e L thi' i' taxed eali&ation rule don8t ha%e to orr# about bein) taxed on im*uted income until #ou 'ell it or

ca'h I #ou in *ri&e' or ha%e ound item', mu't *a# tax on them

9xam*le': "roe''or' )et ree book' nder ai) +imon', that ould be income But it8' not treated

a' income unle'' it8' 'old or ca'h Barr# Bond' hit career home run Eet' an catche' it 9nd' u* bein) orth lot' o mone#

e 'ell' it or hundred' o thou'and' Eu't *a# tax becau'e %alue a' reali&ed -hen O*rah )a%e her audience )ue't' a ne car, 'he )ro''ed u* +he )a%e audience

member' a car, ca'h to *a# taxe' on the car, and ca'h to *a# taxe' on the ca'h

e%enue ulin) .@;2: bartered 'er%ice' are taxable a' income -hat 'hould be counted a' incomei' m% o the 'er%ice +ituation 1: *ainter *aint' la#er8' hou'e in exchan)e or le)al 'er%ice' Both mu't include the

%alue o the 'er%ice recei%ed a' income +ituation 2: arti't *a#' rent in the orm o a *aintin) 7rti't mu't include %alue o rent in income

and landlord mu't include %alue o *aintin) "re'um*tion i' that 'er%ice' bein) exchan)ed are o eDual %alue

$ommi''ioner % len'ha la'' (+ 1@GG! Income = undeniable accessions to wealth andoer which the taxpayers hae complete dominion !must hae "ull right# Income becometaxable when the accession to wealth is $clearly reali%ed&' Fact':

len'ha la'' -hat i' the mone# at 'take in the len'ha la'' ca'e5 "uniti%e dama)e' or raud and

antitru't P32Gk or *uniti%e dama)e' and P.Gk a' com*en'ator# -hat doe' do on their taxe'5 The# re*orted the com*en'ator# but not the *uniti%e I+ 'a#' 'hould ha%e re*orted hole P00k

-illiam oldman

- )ot P12Gk in com*en'ator# dama)e' and P2G0k in *uniti%e dama)e' a' the re'ult oan antitru't 'uit

The# re*orted the com*en'ator# dama)e' but not the *uniti%e eld: "uniti%e dama)e' mu't be included a' income to aardee Ce=nition o income i' %er#

broad "uniti%e dama)e' are included in that broad de=nition

it' +ection 102(a!: )ro'' income doe' not include the %alue o *ro*ert# acDuired b# )it, beDue't,

de%i'e, or inheritance +o reci*ient doe'n8t ha%e to *a# tax on the )it, but )i%er can8t deduct rom income

+ection 102(b!: there are 'ome thin)' that mi)ht look like the# ould be excluded under 102(a!but the#8re not (1! Income rom an# *ro*ert# reerred to in 'ub'ection (a!


11/42

$ommi''ioner % Cuber'tein (+ 1@60! (or a trans"er to constitute a gi"t) it must proceed "rom a $detached and disinterested

generosity' and $out o" a*ection) respect) admiration) charity or like impulses'&It8' aobecti%e, totalit# o the circum'tance' te't

Thi' a' the onl# ca'e that8' e%er dealt ith the de=nition o a )it Fact':

$ommi''ioner % Cuber'tein

Fact': Cuber'tein i' *re'ident o Cuber'tein Iron ? Eetal $om*an# located in Ca#ton,Ohio The com*an# bu#' metal' and orm' them into *roduct' or 'ale Cuber'teindoe' bu'ine'' ith Eohak Berman i' *re'ident o Eohak, located in Ae Rork The

do re)ular bu'ine'' ith each other Cuber'tein reer' Berman to 'ome *eo*le homi)ht bu# hi' *roduct' Turn' out to be lucrati%e Berman )i%e' Cuber'tein a $adillacCuber'tein 'a#' it8' a )it

eld: $adillac a'n8t a )it> it a' com*en'ation or the reerral Berman deducted thecar a' a bu'ine'' ex*en'e and claim' it to be *a't con'ideration or the hel*Cuber'tein )a%e him

+tanton

Fact': +tanton a' $om*troller o Trinit# $hurch and a' *re'ident o their 'ub'idiar#cor*oration L a real e'tate cor*oration e orked at Trinit# or 10 #ear' but here'i)n' e re'i)n' becau'e the Board )ot rid o the Trea'urer and +tanton di'a)reedith that +o Board )a%e him P22,000 u*on the re'i)nation The# call it a )ratuit#but the# al'o call it or 'er%ice' rendered +o it8' kind o unclear hether it8' out o)ratitude or hether it8' dela#ed com*en'ation +tanton 'a#' it8' a )it

eld: remanded becau'e trial court didn8t 'uJcientl# ex*lain h# it reached theconclu'ion that the P22k a' a )it On remand, court conclude' a)ain it a' a )it

Xe# *oint' +$OT+ reect' *er 'e rule that no bu'ine'' related tran'er' could be a )it The# reect Frankurter8' rebuttable *re'um*tion that bu'ine'' related tran'er' are not

)it' The# reect common la de=nition o )it In'tead the# )i%e donor' intent dri%e' the re'ult te't

+tandard on re%ie o a**eal o determination o hether 'omethin) i' a )it oin) to be 'li)htl# di4erent de*endin) on hether it8' ur# trial or bench trial

Bench trial L clearl# erroneou'

Vur# trial L rea'onable men could not reach di4erin) conclu'ion' on the i''ue

$ourt i' ba'icall# makin) 'ure nothin) )et' to the a**ellate le%el "lu', intent i' reall# 'ubecti%e, it8' the t#*e o call that8' better or a trial court to make

nited +tate' % arri' (.th $ir 1@@1! Fact': $onle# and arri' are Xrit&ik8' com*anion' e )i%e' them each o%er hal a million dollar'

o%er the cour'e o 'e%eral #ear' The#8re both char)ed and con%icted o tax e%a'ion 9lement' o criminal tax e%a'ion: (1! the mone# a' income, (2! C kne 'he had the dut# to

*a# taxe', and (3! 'he illull# ailed to =le eld: criminal con%iction' are re%er'ed o%ernment ailed to *ro%e men' rea element o the

crime Cicta about )it': it8' income onl# i each act o 'ex i' *aid or on an a la carte ba'i' I thi' had been a ci%il ca'e

7nd the )o%ernment had lo't, $onle# and arri' ouldn8t ha%e had to re*ort income but nodeduction or Xrit&ik becau'e no deduction or *er'onal 'er%ice'

7nd the )o%ernment had on, $onle# and arri' ould ha%e had to re*ort income ? Xrit&ikould ha%e )otten a deduction

I Xrit&ik a' a bu'ine'' 7nd the )o%ernment had lo't, $onle# and arri' ouldn8t ha%e had to *a# income tax and

Xrit&ik ould ha%e been able to deduct rom hi' income P2G but an# more than that ouldha%e been taxable a)ain't Xrit&ik

7nd the )o%ernment had on, $onle# and arri' ould ha%e had to re*ort *a#ment' a'taxable income but Xrit&ik could ha%e deducted the ull amount

11


12/42

Ti*' and nu'ual it' Ti*'

e) 161;2: Ti*' are income The *roblem i' enorcement It8' oten done in ca'h 9m*lo#er re*ort' )ro'' recei*t' to I+ Then in addition the# re*ort the ti*' that ere *aid o

ith credit card' 9m*lo#ee' are told to re*ort at lea't 12H o )ro'' recei*t' a' income nu'ual *a#ment'

United States v. McCormick: contribution' recei%ed b# a cit# clerk ater marria)e ceremonie'rom bride)room' ho ere earul o bein) accu'ed o 'tin)ine'' ere taxable

Olk v. United States: mone# )i%en to cra*' dealer out o 'u*er'tition in a ca'ino b# )ambler'

i' income "eo*le are bu#in) luck, not )i%in) )it -elare *a#ment' ulin) 'a#' it8' not income at all That8' not true, but it re'ol%e' the

Due'tion +ocial 'ecurit# L treatment o 'ocial 'ecurit# bene=t' de*end' on tax*a#er8' adu'ted )ro''

income 7' income ri'e', exclu'ion *ha'e' out 7limon# %' )it L 7limon# *a#ment' are deductible b# the *a#or and taxable to the reci*ient

$hild 'u**ort and *ro*ert# 'ettlement *a#ment' are not deductible b# the *a#or and are notincome to the *a#ee

Tat % Boer' (+ 1@2@! Recipient o" non+cash gi"t should be taxed on reali%ation o"increase in alue een though part o" that increase in alue accrued be"ore recipientreceied the gi"t Introduce' idea o ba'i' *rice it a' bou)ht at L onl# a**lie' to *ro*ert# o 'ome 'ort it not in the orm o ca'h Fact': T8' ather bou)ht 100 'hare' o 'tock or P1,000 in 1@16 In 1@23, he tran'er' the 'hare'

to Tat hen FEK i' P2,000


13/42

ain P1200 ;; P1000 P200 becau'e thi' number i' *o'iti%e, e mu't u'e ori)inal*urcha'e *rice

ain P1200 ; P1G00 ; P300 thi' i' not ri)ht either becau'e e end u* ith a lo'' +o in thi' 'cenario, tax*a#er declare' no )ain or lo'' Tax*a#er u't re*ort' P0

Tran'er' at Ceath +ection 101(a! L taxin) 'ale o *ro*ert# b# heir that a' *a''ed to him/her b# ill or inte'tac#

-hen *ro*ert# i' tran'erred at death, and then relati%e turn' around and 'ell' the *ro*ert#,the ba'i' i' the %alue o the *ro*ert# on the date o death

$reate' a lock in e4ect ;; The older #ou are, and the more the *ro*ert# ha' a**reciated, the

le'' likel# it i' that #ou ill ant to 'ell the *ro*ert# Rou ha%e a %er# )ood incenti%e to takead%anta)e o 101(a!(1! or #our heir'

-hat an old *er'on ould *reer to do in'tead i' to borro a)ain't the 'hare' loan' are nocountable a' income

9'tate tax Rou can )i%e a total o PG2Gm throu)hout lie and at death ithout )ettin) taxed Onl# hen the tran'er' amount to more than PG2Gm doe' the e'tate ha%e to *a# a tax

13


14/42


15/42

10(e!(G! "urcha'e;mone# debt treated a' *rice reduction Ce'cribe' 'ituation in hich a *er'on bu#' 'omethin) rom a com*an# and the com*an#

it'el loan' bu#er mone# to bu# the *iece o *ro*ert# I that com*an# later 'a#' #ou can 'to* *a#in) u' back no, or an# rea'on, then rathe

than treatin) that a' COI, e8ll treat that a' a *urcha'e *rice adu'tment Both *artie' cau't treat it a' i the *urcha'e *rice adu'tment a' the ori)inal *rice the 'eller 'old the)ood or

9xam*le: +eller 'ell' bu#er couch or P1000 and )i%e' bu#er loan to bu# the couch


16/42

I #ou ha%e lo'' on 'ale o home, #ou are not alloed to deduct that lo'' N 121 exclude' )ain on 'ale o home rom taxable income 7 'in)le tax*a#er )et' to exclude P2G0k or le'' 7 married cou*le )et' to exclude PG00k or le'' 7n# amount o )ain o%er and abo%e the exclu'ion limit i' taxed at a ca*ital )ain' rate

Uuali=cation' or 'in)le tax*a#er Uuali=cation' or married tax*a#e+in)le tax*a#er )et' P2G0k exclu'ion i, or at lea'tto out o the *a't =%e #ear', tax*a#er: Oned the home

'ed the home a' tax*a#er8' *rinci*al re'idence

Aot )otten the exclu'ion durin) the to #ear*eriod *rior to the 'ale o the home

Earried cou*le )et' PG00k exclu'ion i, or ato o *a't =%e #ear',: 9ither '*ou'e ha' oned the home or a

to o the *a't =%e #ear' Both '*ou'e' ha%e u'ed the home a' th

*rinci*al re'idence or to o the *a't =% Aeither '*ou'e mu't ha%e )otten the ex

ithin the *a't to #ear'

I a tax*a#er doe'n8t Duali# or the exclu'ion becau'e o the u'e, oner'hi*, or timin)reDuirement', the tax*a#er can 'till exclude 'ome o the )ain i the rea'on he or 'he i' 'ellin) thhou'e i' becau'e o: $han)e in *lace o em*lo#ment ealth nore'een circum'tance'

9xam*le': Blended amil# mo%e' to children8' 'chool di'trict

7dult child mo%e' in ith *arent'

Tax*a#er ado*ted kid' and ant' to )et bi))er hou'e

Ci'abled *arent mo%e' in ith tax*a#er and tax*a#er mu't bu# di4erent hou'e a' are'ult

7ircrat noi'e

$hild a''ault on 'chool bu', 'o amil# mo%e' to ne 'chool di'trict

C97 (narcotic'! a)ent threatened b# dru) lord and ha' to mo%e o much can tax*a#er exclude i he doe'n8t Duali# or the ull exclu'ion but all' into one o th

'*ecial cate)orie' (health, chan)e in *lace o em*lo#ment, unore'een circum'tance'!5 (no o month' 'ince T" u'ed exclu'ion/2 month'!(total amount o exclu'ion or hich T"

ould normall# be eli)ible! P amount

9xam*le:-ie li%ed in ou'e 7 rom 200@ to 2010 u'band li%ed in ou'e B rom 200@ to 2012 -ieli%ed in ou'e B rom 2010 to 2012 -ie 'ell' ou'e 7 on Vul# 1, 2011 or PG0k )ain andu'e' the exclu'ion to exclude P2G0k rom taxable income u'band )et' 'ick and u'bandand -ie 'ell ou'e B on Vanuar# 1, 2013 or PG00k )ain o much can the# exclude5

7n'er:u'band )et' P2G0k exclu'ion becau'e he ha' not u'ed the exclu'ion in the *a't to #ear',and he oned and li%ed in the home or the *a't three #ear'-ie u'ed the exclu'ion 1 month' a)o hen 'he 'old ou'e 7, 'o 'he )et' to exclude(2G0,000!(1/2! P1.,G00

To)ether the# can exclude P2G0,000 P1.,G00 P3.,G00 The remainder o the )ain(P62,G00! i' taxed at ca*ital )ain' rate

16


17/42

When Is Income Taxable?

Ce*reciation Tan)ible/real *ro*ert# a''et' bou)ht b# a bu'ine'' de*reciate o%er time and that de*reciation

can be deducted rom taxable income To a#' to calculate de*reciation:

+trai)ht;line method Couble declinin) balance method(Initial co't L 'al%a)e %alue! / u'eul lie annual deductionor co't reco%er#

7 lot o de*reciation in the be)innin) o the a''elie and then a 'itch to 'trai)ht;line method h

*oint i' reached here the 'trai)ht;line amount ethe declinin) balance amount

9xam*le: Ori)inal *urcha'e *rice a' P10,000 'eul lie i'10 #ear'

(10,000 L 0! / 10 P1000 Z e%er# #ear or 10 #ear' thebu'ine'' can reduce *ro=t' b# P1000

9xam*le: Ori)inal *urcha'e *rice a' P10,000 10 #ear' Ceclinin) balance actor i' 200H

Fir't #ear deduction P2000 ('trai)ht;line methdeduction x 2!That mean' a''et i' no %alued at P000

+econd #ear deduction P1600 (20H o P000!That mean' a''et i' not %alued at P600

Third #ear deduction P120 (20H o P600!That mean' a''et i' no %alued at PG120

Fourth #ear deduction P102 (20H o PG120!That mean' a''et i' no %alued at P0@6

Fith #ear deduction P1@20That mean' a''et i' not %alued at P32.60

9tc But re%ert to u'in) 'trai)htline method hen'trai)htline de*reciation amount exceed' decliniamount

+al%a)e %alue deault P0 'eul lie o an a''et L ound in $ode N 16(e!, * 1@3 o 'u**lement

Three #ear *ro*ert#

Fi%e #ear *ro*ert# +e%en #ear *ro*ert# Ten #ear *ro*ert# Fiteen #ear *ro*ert# Tent# #ear *ro*ert#

-hen #ou 'ell a *iece o *ro*ert# that #ou8%e been de*reciatin), count a' income the 'ale *rice de*reciated %alue (not the entire 'ale' *riceWW!

+ummar# o 7nnual 7ccountin) I''ue' (material belo! Bi) *icture:

-e ha%e annual accountin) '#'tem Ao ne)ati%e tax reundabilit# Becau'e o the'e thin)', $on)re'' )oe' around tr#in) to =x ineDuitie' that re'ult

nder the claim o ri)ht doctrine (date rule!, e ha%e to *ron) te't: Rou *a# taxe' in the #ear in hich the 'econd o the to *ron)': (1! tax*a#er become'

entitled to the mone# and (2! tax*a#er actuall# recei%e' the mone# IneDuitie' that Qo rom the claim o ri)ht doctrine

Three *o''ible 'ituation':


18/42

+ection 111 (the tax bene=t rule!, hich i' limited to 'ituation here T" )ot literall# n

tax bene=t in the earlier #ear

1


19/42

A7O % Burnet (+ 1@32!3oney should be counted as income in the year in which the taxpayer has a 145I3 6(RI27T to the money&Taxpayer has claim o" right when !-# you hae legal entitlement to money and !8# youactually receie the money& 9oth prongs hae to be met&In this case) that was the year district court issued nal decree& I a tax*a#er recei%e' earnin)' under a claim o ri)ht and ithout re'triction a' to it'

di'*o'ition, he ha' recei%ed income hich he i' reDuired to return, e%en thou)h it ma# 'till beclaimed that he i' not entitled to retain the mone#, and e%en thou)h he ma# 'till be adud)edliable to re'tore it' eDui%alent

Back)round: 1@16 cor*orate income tax rate L 2H, 1@1. cor*orate income tax rate L 6H *lu' anexce'' *ro=t' tax rom 20 L 60H, 1@22 cor*orate income tax rate L 12GH

Fact': A7O lea'e' )o%ernment *ro*ert# o%ernment 'ue' or ou'ter -hile that ca'e i' bein)

'ettled, court 'et' u* recei%er to mana)e the *ro*ert# ecei%er )et' *aid P1.2k in 1@1. orthe ork done b# A7O in 1@16 In 1@22, ou'ter ca'e )et' di'mi''ed A7O ant' to countmone# a' income either in 1@16 or in 1@22 and I+ ant' to count the mone# a' income in1@1. becau'e that8' hen it a' *aid

eld: Eone# 'hould be counted a' 1@1. income That i' hen the di'trict court i''ued it' =naldecree

e*ercu''ion' rom annual accountin) '#'tem:


20/42

;; P0k P20k +o 2012 income can be reduced b

20


21/42

Income in 9arlier Rear,


22/42

deduction a' o**o'ed to the %a*ro*ert# in the #ear in hich it returned

9i'ner % Eacomber (+ 1@20! "or income to be taxable) the income must be $reali%ed'Stock diidends are not reali%ed gain to taxpayer& Buchanan 'a#' that the )o%ernment8' ar)ument' are ri)ht )i%en the la at the time The

+u*reme $ourt )et' it ron) here

Fact': Eacomber i' a 'tockholder +he on' 2200 'hare' o 'tock in +tandard Oil In 1@16,com*an# i''ue' 'tock di%idend' +o Eacomber recei%e' an additional 1100 'hare' +he no ha'a total o 3300 'hare' Becau'e *ar %alue o the 'tock i' P100/'hare, it look' like 'he ha' recei%eincome o P110,000, but the market %alue o the total number o 'tock' 'he on' ha' remainedthe 'ame I+ ar)ue' the 'tock di%idend a' income and the i''uance con'titute' a reali&atione%ent

eld: the i''uance o the 'tock di%idend a' not a reali&ation e%ent o%ernment8' ar)ument':

(1! 'tock di%idend i' income The la at the time ex*licitl# 'aid that a 'tock di%idend i'income $ourt 'a#' the 'tatute i' uncon'titutional and that a 'tock di%idend i' not income-hile it8' true that a 'tock di%idend i' not income, the a# the court )ot to that conclu'iomade a bi) me''

(2! i''uance o 'tock di%idend' i' a reali&ation e%ent Buchanan think' Brandei' di''ent

)ot it ri)ht: 'ub'tance dominate' orm i%in) Eacomber the 'tock di%idend ould be the'ame a' her 'ellin) her 'hare' back to +tandard Oil, the com*an# )i%in) her mone#, andthen 'he bu#' the 'hare' her'el In that 'cenario, the *urcha'e o the 'tock' ould becounted a' income, 'o the eDui%alent 'hould be counted a' income

(3! the time at hich the 'tock di%idend' are i''ued i' no or'e a time than an# othertime to tax the income Eacomber had been )ettin) a ree ride or #ear', 'o that 'houldcome to an end

7termath o Eacomber $on)re'' *ut reali&ation reDuirement into 'ection 1001 o the Tax $ode 9xactl# a' Eacomber i' 'a#in), hen #ou ha%e a di'*o'ition o *ro*ert#, an# exce'' that i'

reali&ed ill be counted a' reali&ed and an# lo'' that i' reali&ed ill be counted a' a lo''

Bruun % el%erin) (+ 1@0!Reali%ation eents are not limited to cash exchanges&2ain may occur as a result o" !-# exchange o" property) !8# payment o" the taxpayersindebtedness) !


23/42

+ection 101@ i/hen le''or 'ell' the im*ro%ed *ro*ert#, the ba'i' i' the %alue o the oldland/buildin), not the %alue o the land/buildin) ith im*ro%ement' The I+ ant' to tax e%er#dollar o )ain that the le''or )ot

-hether #ou a**l# Bruun rameork o 10@/101@ rameork, the ultimate amount 'ubect toincome tax i' the 'ame:

In 1@33, le''or )et' *ro*ert# back ith PG0k in im*ro%ement' e8' able to rent the *ro*ert# out atP.k *er #ear

Bruun 10@/101@

PG0k reali&ation e%ent in [email protected] income *er #ear or 10 #ear' but ithde*reciation deduction each #ear o PGk ('o P20k inincome o%er the cour'e o ten #ear'!

Ao reali&ation e%ent in [email protected] income *er #ear or 10 #ear' (P.0k totaincome!

Total income o P.0k Total income o P.0k

Aote 3, * 211 e) 161;(c! 'a#' that i buildin) i' ba'icall# a 'ub'titute or rent (determined b# the act' and

circum'tance'!, then the buildin) ill be counted a' income I I+ think' thi' i' ha**enin), then I+ ould determine hat the rental rate ould be or a

*ro*ert# like thi', and then char)e it a' income to the tax*a#er

-ood'am

There are some transactions that are not reali%ation eents& 1hange "rom recourse tononrecourse mortgage is one o" them&(or a sale or disposition o" property to count as a reali%ation eent) someone has to gieup ownership o" something> there must be a $relinuishment'The borrowings did not change the basis o" the property "or the computation o" gain orloss Fact':

In 1@22, Er' -ood bou)ht a *iece o *ro*ert# or P2@6,00 Er' -ood a' *er'onall# liable or the mort)a)e 'he oed on that *ro*ert# (recour'e

mort)a)e liabilit#! In 1@31, 'he re;mort)a)ed and con'olidated the mort)a)e' into a P00k nonrecour'e

mort)a)e L meanin) 'he a' not *er'onall# liable or the mort)a)e In 1@33, 'he deault' on the loan The mort)a)e lender take' *o''e''ion o the *ro*ert# and

cancel' the mort)a)e The mort)a)e balance b# that *oint a' P31,000 I+ ar)ue' that -ood 'hould ha%e to reco)ni&e COI income in the amount o the loan

cancelled -ood ar)ue' that 'he 'hould ha%e been taxed hen the loan a' con%erted rom a recour'e

to a nonrecour'e mort)a)e becau'e that a' tantamount to a di'*o'ition o the *ro*ert#'ince le)al entitlement to the *ro*ert# a' tran'erred to the bank 'hould 'he deault +o in1@31, 'he 'hould ha%e been taxed on more than P100k )ain, but +O< ha' run to tax thatincome Becau'e I+ didn8t tax at that *oint, ba'i' became P00k and her cor*oration'u4ered P1@,000 lo'' hen the *ro*ert# a' 'old or P31,000

eld: $han)e in the t#*e o loan L rom recour'e to nonrecour'e L i' not a reali&ation e%ent Thera' no relinDui'hment o the *ro*ert# ater the 1@31 re=nancin) e%ent

+a%in)' and


24/42

Aet orth a''et' L liabilitie'

In the [email protected]', there a' hu)e inQation> inQation a' hi)her than the amount an indi%idual could)et rom de*o'itin) mone# in an +?< e)ulator' did not allo the +?< com*anie' to rai'e the de*o'it intere't rate', 'o de*o'iter'

'tarted to take their de*o'it' out either b/c the# anted to '*end it beore inQation de%aluedtheir mone# e%en more or b/c the# anted to in%e't abroad and )ettin) hi)her intere't rate'

7nother e4ect o the inQation a' that the mort)a)e *ortolio' held b# the +?


25/42

I+8 te't or material di4erence: look to the attitude' o the *artie', ho the market treatthe *ro*ert#, the %ie' o the rele%ant re)ulator# a)enc# $ourt think' thi' te't i' too'ubecti%e and un;orkable Buchanan think' the te't i' orkable in the'e circum't'ance

$ourt8' te't i' hether the re'*ecti%e *o''e''or' eno# le)al entitlement' that aredi4erent in kind or extent b# %irtue o the exchan)e

$ourt 'a#' that i #ou ado*ted I+ *o'ition L that there can onl# be a meanin)uldi4erence i the#8re di4erent in a a# that an in%e'tor ould care about L then that ouldrender the like;kind doctrine unnece''ar#

o Buchanan8' to re'*on'e': That8' ron) I #ou think about hat


26/42

ain or lo'' 'hould not be reco)ni&ed i the nature o the tax*a#er8' in%e'tment doe' not'i)ni=cantl# chan)e (a' lon) a' T" i' doin) the 'ame t#*e o bu'ine'' a' he a' beore theexchan)e, )ain or lo'' 'houldn8t be reco)ni&ed!

ain 'hould not be reco)ni&ed in order to a%oid di'coura)in) mobilit# o ca*ital exce*tin) out *ro*ert# that8' not real *ro*ert#!: 9xchan)e o:

+tock in trade or other *ro*ert# held *rimaril# or 'ale (in%entor#!

+tock', bond', or note'

Other 'ecuritie' or e%idence' o indebtedne'' or intere't

Intere't' in a *artner'hi* 9xam*le' L are the'e exchan)e' taxable5 "a)e 22@

+tock or 'tock all' ithin exce*tion, 'o exchan)e i' taxable Farm held or in%e'tment or another arm not taxable, 'o lon) a' the 'econd arm a'

al'o held or *roducti%e u'e or or in%e'tment

T" 'ell' arm, )et' ca'h, u'e' ca'h to bu# another arm taxable, thi' i' a normal*urcha'e not a like kind exchan)e

Farm or Qeet o tractor' taxable, not a like;kind exchan)e

Ce=nin) like;kind exchan)e' -hat make' 'omethin) like kind i' the nature or character o the *ro*ert# and not it8' )rade or

Dualit# e) 11031(a!;1(b! 9xam*le': 'u*er hi)h;end ool i' the 'ame a' lo;end ool to be u'ed a' *illo =ller


27/42

Boot Boot ca'h and non;like;kind *ro*ert#

eco)ni&in) )ain/lo'' in the #ear o the tran'action AO BOOT

Rou don8t ha%e to reco)ni&e a )ain or lo'' in the #ear o the tran'action, exce*t under certaincircum'tance': +tock in trade or other *ro*ert# held *rimaril# or 'ale (in%entor#! +tock', bond', or note' Other 'ecuritie' or e%idence' o indebtedne'' or intere't

Intere't' in a *artner'hi* T99 I+ BOOT

T" )ain' rom the exchan)e (m% o hat T" )ot Y ba'i' in *ro*ert# T" )a%e aa#!, then theamount o )ain T" mu't reco)ni&e i' le''er o the amount o )ain reali&ed or the amount othe boot 1031(b!

T" lo'e' rom the exchan)e (m% o hat T" )ot \ ba'i' in *ro*ert# T" )a%e aa#!, then T"re*ort' P0 +ince mo't o the time #ou ant to reco)ni&e lo''e', #ou8d be better o4 'ellin) the

*ro*ert# or a lo'' than exchan)in) the *ro*ert# or a lo'' 9xam*le 1 9xam*le o 1031(b! here )ain Y boot

T" )i%e' u* *ro*ert# ith ba'i' o P10k In exchan)e, 'he )et' *ro*ert# ith m% o P100k,ca'h o P1Gk, and tractor orth Pk

Boot P1Gk Pk P23k "roceed' rom 'ale are P123k er )ain i' P123k ; P10k P113k

+he onl# ha' to reco)ni&e the le''er o the amount o the )ain (P113k! or the amount o theboot (P23k! +o her reco)ni&ed )ain i' )oin) to be P23k

9xam*le 2 9xam*le o 1031(b! here )ain \ boot T" )i%e' u* *ro*ert# ith ba'i' o P110k In exchan)e, 'he )et' *ro*ert# ith m% o P100k,

ca'h o P1Gk, and tractor orth Pk Boot P23k "roceed' rom 'ale P123k ain P123k ; P110k P13k

+he ha' to reco)ni&e )ain o P13k 9xam*le 3 9xam*le o 1031(c!

T" )i%e' u* *ro*ert# ith ba'i' o P130k In exchan)e, 'he )et' *ro*ert# ith m% o P100k,ca'h o P1Gk, and tractor orth Pk Boot P23k "roceed' rom 'ale 100k 1Gk k P123k


28/42

Ba'i' +o hen #ou ultimatel# )o to 'ell the *ro*ert# #ou u't )ot in the exchan)e L hat 'hould #ou u'

a' #our ba'i'5 -hen there8' no boot at all the ba'i' or the *ro*ert# recei%ed ill be the 'ame a' the ba'i' o

the *ro*ert# relinDui'hed -hen there i' boot

(7 B! L C 9 'ub'tituted ba'i' o the like;kind *ro*ert# recei%ed 7 ori)inal ba'i' o the *ro*ert# #ou u't traded aa# B amount o )ain reco)ni&ed tax con'eDuence toda#

ain reali&ed *roceed' L ba'i' in *ro*ert# traded aa#

I *o'iti%e u'e that number or )ain reco)ni&ed

I ne)ati%e u'e 0 or )ain reco)ni&ed C air market %alue o the boot (thi' i' *o'iti%e i #ou )ot boot or ne)ati%e i #ou )a%e it

aa#!

9xam*le 1 ()ain to T" rom tran'action!:

T; has basis in "arm C o" D-0)000& She trades "or "arm E) which has "m o" D-00k) and boD-/k& 6riginal owner o" E "arm has basis o" D/0k&So that means "arm C must hae "m o" D--/k&

How much should TP getting farm Y recognie in gain

in the year of the transaction!

How much should TP getting farm " recogn

in the year of the transaction!

ain reco)ni&ed i' the le''er o the amount o )ainreali&ed or the amount o the boot #ou )ot 1031(b!

7mount reali&ed *roceed' L ba'i' (P100k P1Gk! ;; P10k P10Gk )ain7mount o boot P1Gk

+o T" mu't reco)ni&e a )ain o P1Gk in the #ear othe tran'action

P0 See1031(a! (or the *a#or o the boot recei%e' no boot, it i' a *ure like kind excha

#asis for reci$ient of the %oot #asis for giver of the %oot

(7 B! L C 9(P10k P1Gk! ;; P1Gk P10k

+o i T" later 'ell' arm R or P100k, her )ain reali&edand reco)ni&ed *roceed' L ba'i' P100k ;; P10k P@0k

(7B! L C 9(G0k 0! L (;1Gk! G0k 1Gk P6Gk

+o i T" later 'ell' arm, hi' ba'i' ill be P6G

9xam*le 2 (lo'' to T" rom tran'action!:

T" )i%e' u* *ro*ert# ith ba'i' o P130k In exchan)e, 'he )et' *ro*ert# ith m% o P100k, ca'h oP1Gk, and tractor orth Pk

-hat i' T"8' immediate tax con'eDuence5

ain *roceed' L ba'i' 123k L 130k ; P.kImmediate tax con'eDuenceT" reco)ni&e' )ain/lo'' o P0

-hat i' T"8' ba'i' or the uture5(7 B! L C 9(130k 0! L 23k P10.k

+o i T" 'ell' the *ro*ert# or P100k, hat i' the tax con'eDuence5ain/lo'' *roceed' L ba'i' P100k ;; P10.k ;P.k

2


29/42

+o T" )et' to reco)ni&e P.k lo''

2@


30/42

Tran'er' Incident to Earria)e and Ci%orce

nited +tate' % Ca%i'Fxchange o" property as part o" diorce settlement is not a gi"t> its a bargained+"orexchange& 7usband has reali%ation eent when he turns oer stock) and wi"e will use "mat time o" trans"er as her basis&

Fact': In di%orce 'ettlement, Er Ca%i' a)reed to *a# Er' Ca%i' 1000 'hare' o 'tock inexchan)e or her inchoate marital ri)ht' (her doer and inte'tac# ri)ht'! The title to the*ro*ert# i' in hi' name becau'e thi' i' a 'e*arate *ro*ert# 'tate

eld: Thi' a' a bar)ained;or exchan)e That mean' Er Ca%i' ha' a reali&ation e%ent in the

#ear o the exchan)e and ha' to *a# tax on the di4erence o the m% o the 'tock and hi'ba'i' in the 'tock Er' Ca%i' ado*t' the m% o the 'tock at the time o tran'er a' her ba'i'or the uture

$on)re'' didn8t like thi' outcome, seeN 101 (tran'er' o *ro*ert# b/ '*ou'e' or incident todi%orce! Tran'eror doe'n8t ha%e to reco)ni&e income *ur'uant to a di%orce 'ettlement here he turn'

o%er *ro*ert# Tran'eree ill )et tran'eror8' ba'i' Tran'erred ba'i' (like a )it!

"o't;&avis*roblem' 7'k: hat i' *er'on in dollar amount'5 -hat i' the *er'on )i%in) u* (e) le)al ri)ht in

*ro*ert#!5 -hat i' the ba'i' that i' )oin) to a**l# to thi' ne *ro*ert#5 In other ord', ho doe' ba'i' com*are to amount o %alue tran'erred5

I the *er'on that i' recei%in) the *ro*ert# had a ba'i' in the *ro*ert# (PG0k in exam*le! thati' di4erent than u't the ca'h %alue o it at the time o tran'er (P200k in exam*le! there i')oin) to be 'ome tax that the reci*ient oe'

I the *er'on that i' recei%in) the *ro*ert# had a ba'i' in the *ro*ert# that i' the 'ame a' theca'h %alue o it at the time o tran'er, then there ill be no )ain or reci*ient or recei%erunder 101 and Ca%i'

and - are li%in) in a hou'e here the# ha%e ba'i' o P100k The hou'e ha' m% o P00k The#di%orce - mo%e' out and bu#' her hal o the hou'e +o he )i%e' her a *romi''or# note o P200kor her hal o the hou'e

Result under -0- Result under ,aisWhat amount o" gain does Wrecogni%e?

eali&ed )ain *roceed' L ba'i'eali&ed )ain P200k ;; PG0k P1G0k

But under 101(a!(2!, 'he ha' noreco)ni&ed )ain

-8' reali&ed )ain P200 P1G0ker reco)ni&ed )ain i' al'

What is Ws basis in the note? P200k The rea'on it i' P200k i'becau'e e are treatin) it likeca'h


31/42

What is 7s basis in the house? i' ba'i' i' no P100k 101(b!(2! P2G0k

Result "or 7? not a gi"t&

Fact': Xre')e and Eercer 'i)n a *re;nu* e )i%e' her P00k orth o 'tock and in return 'he*romi'e' to marr# him and not claim her inchoate marital ri)ht' Xre')e and Eercer marr#and di%orce +he ultimatel# 'ell' the 'tock' I+ 'a#' 'he 'hould ha%e to *a# tax u'in)Xre')e8' ba'i' a' her ba'i' +he 'aid it a' a bar)ained;or exchan)e, and that her ba'i' i'the m% at time o tran'er

eld: Thi' a' a contractual a)reement Xre')e had a reali&ation e%ent hen 'tock' ere

tran'erred Eercer8' ba'i' i' the m% o the 'tock at the time o tran'er

Ear%in % Ear%in;ayment "or personal serices is not deductible but is income to the recipient&

$ommon la marria)e in a 'tate that didn8t reco)ni&e common la marria)e' +he cook',clean', etc or him and he take' care o her =nanciall# *on the di''olution o their not le)amarria)e, doe' Eichelle Ear%in )et an# raction o hi' le)all# oned *ro*ert# a' i 'he ere aie5

$ourt 'a#' " 'tated a cau'e o action -hat8' the tax treatment o hate%er " ultimatel# recei%e'5

Income to her Ao deduction' or him (*er'onal 'er%ice' are not deductible!

101 i' irrele%ant becau'e the#8re not actuall# married

Ba'i' in Ca%i' and Eercer Buchanan: 7' ron) a' it 'eem', treatin) the tran'action' a' )it' i' better tax doctrine than

treatin) them the a# the court' in Ca%i' and Eercer treated them In Ca%i' and Eercer, there are reali&ation e%ent' ith re'*ect to the hu'band/=anc] 'ellin)

'tock' to ie/=anc]e -ie/=anc]e i' )i%in) u* her marital ri)ht' Thi' 'hould be a reali&atioe%ent to the ie/=anc]e, but the court' are u't i)norin) that

$ourt di'*o'e' o the *roblem brieQ# L *a)e 2@, ootnote 20 L the relea'e o marital ri)ht'in exchan)e or *ro*ert# or other con'ideration i' not con'idered a taxable e%ent a' to theie

31


32/42

Aote: 101 a**lie' onl# to cou*le' that are married a' reco)ni&ed b# ederal la ('o 'ame;'excou*le' don8t )et 101 treatment!

7limon# 7limon#

7limon# count' a' income to the reci*ient N .1 "a#or )et' deduction or the amount o the alimon# *a#ment N 21G

To be *ro*erl# con'idered alimon#, the *a#ment' mu't meet certain condition': (1! "a#ment mu't be in ca'h N .1(b!(1!

(2! "a#ment mu't be recei%ed under an in'trument o di%orce or 'e*arate maintenanceOral a)reement' ill not do

(3! The *a#ment' ha%e to be taxable to the *a#ee and deductible to the *a#or "artie' can o*t out $an elect not to include in income and not to deduct

(! The *artie' mu't not be member' o the 'ame hou'ehold (G! The *a#ment' cannot continue ater the death o the *a#ee '*ou'e

I *a#ment made i' le'' than the ull alimon# child 'u**ort *a#ment the *a#or a' 'u**o'ed tmake, then the *a#ment 'hould be treated a' child 'u**ort =r't and then the balance i' to betreated a' alimon# N .1(c!(3! 9xam*le: "a#ment i' 'u**o'ed to be P2000 That8' P1200 in child 'u**ort and P00 in

alimon# "a#or onl# *a#' P1G00 +o P1200 i' treated a' child 'u**ort and P300 i' treated a'alimon#

$hild +u**ort $hild 'u**ort doe' not count a' income to the reci*ient $hild 'u**ort *a#ment' are not deductible to the *a#or '*ou'e It8' u't a *er'onal ex*en'e,

hich i' not deductible N 262

9xce'' Front;


33/42

.1(!(!(B! P0 P1Gk P1Gko (i! P0o (ii! P1Gk

.1(!(!(7! P0

9xce'' *a#ment' or =r't *o't;'e*aration #ear

.1(!(3! P3Gk

.1(!(3!(B! P0 P1Gk P1Gko .1(!(3!(B!(i! 0

o .1(!(3!(B!(ii! P1Gk .1(!(3!(7! PG0k

9xce'' alimon# *a#ment'

.1(!(2! P3Gk

.1(!(2!(7! P3Gk

.1(!(2!(7! P0

33


34/42

Cie&;7r)uelle' % $ommi''ioner (Tax $ourt 1@! Wi"e cannot deduct non+paid childsupport payments& 4ack o" child support payments does not "all under section -..& Inorder to write o* the money that you are owed) you hae to hae some kind o" basisGcosthat you paid to get that in the rst place !example = you incur costs in producingi;hone& 1ustomer neer pays& Eou can deduct that as nonbusiness bad debt Fact': Ceadbeat dad Xe%in doe'n8t *a# child 'u**ort $hri'tina trie' to deduct hat 'he 'hould

ha%e )otten a' a nonbu'ine'' bad debt under 'ection 166 I+ di'allo' thi' eld: $hri'tina can8t deduct hat 'he didn8t )et a' a nonbu'ine'' bad debt Buchanan think' Tax

$ourt )ot it ron) (1! $ourt look' to 'ection' 166(a! L (b! to reDuire that $hri'tina ha%e 'ome ba'i' in the debt

or the debt to Duali# or deduction a' a nonbu'ine'' debt $hri'tina i' rel#in) on *ro%i'ion 166(d!, hich '*eci=call# 'a#' that 166(a! doe' not a**l#

Thereore the reDuirement under 166(b! o ba'i' doe' not a**l# either (2! $ourt relie' on 'ong v. Commissionerto ar)ue that $hri'tina ha' no ba'i' in the debt

becau'e 'he i' not out o *ocket an#thin) a' a re'ult o Xe%in8' ailure to *a# $hri'tina doe' ha%e a ba'i' in the debt The amount 'he *aid or her children are her out

o *ocket ex*en'e' and thu' her ba'i' o 'hould a uture $hri'tina a%oid the 'ame re'ult in the uture5

(1! e;ar)ue in the Tax $ourt or ne la "oint out that *a#ment' to 'u**ort children,mentioned in ' .1(c!, are not 'u**o'ed to ha%e tax con'eDuence' and hat8' ha**enin)i' that 'he i' makin) *a#ment' out o *ocket that 'omeone el'e a' 'u**o'ed to *a#

o 7 )ood aith ar)ument that the la i' ron) i' not a ri%olou' ar)ument +o don8tear indi%idual 'anction

(2! o orum 'ho**in) Thi' i' in Tax $ourt Rou can 'till )o to $OF$ or di'trict court

(3! 7**eal to 'cholarl# commentar# $ommentar# on )ood a#' to de%elo* the la

"err# % $ommi''ioner (note ca'e! Fact': +ame 'cenario a' Cie&;7r)uelle' ca'e Tax $ourt didn8t bud)e and )ot na't# about it $ourt8' *oint': (1! $ourt' don8t le)i'late T" can )o to $on)re'' i the# ant a chan)e (2!

Becau'e T" doe'n8t )et max bene=t ('he i'n8t in hi)he't tax bracket!, 'he 'houldn8t )et an#bene=t

Ec$lendon % $ommi''ioner


35/42

;ersonal ,eductions) Fxemptions) and 1redits

ro'' income (N 61!

Minus

7bo%e the


36/42

Ce*reciation on *ro*ert# doe' not count

Ta#lor % $ommi''ioner (1@.! ;aying someone to mow your lawn bGc you hae allergies isnot a medical expense& Fact': T" ha' 'e%ere aller)ie' 'o doctor recommend' he a%oid moin) the lan T" *a#'

'omeone el'e to do it or P1. and then trie' to deduct the mone# a' medical ex*en'e eld: the mone# a' not '*ent a' a medical ex*en'e

(1! T" ha' burden o *roo T" didn8t cite an# le)al authorit# that thi' i' medical ex*en'e (2! 7ltman ca'e ol ex*en'e' are not medical ex*en'e', e%en i )ol hel*' T"8' em*h#'ema

+o i miti)ation o em*h#'ema i'n8t )oin) to )et a deduction, miti)ation o aller)ie' i' not

)oin) to )et a deduction

Och' % $ommi''ioner 9oarding school expenses not deductible& Fact': T"8' ie )et' cancer Coctor recommend' that ie a%oid an#thin) that could irritate her

or create ner%ou'ne'' T" 'end' to children ( and 6! to boardin) 'chool or to #ear' until theare certain ie i' cured Then the# brin) the kid' home and 'end them to *ublic 'chool T" antto deduct boardin) 'chool ex*en'e' a' medical ex*en'e'

eld: boardin) 'chool ex*en'e' not deductible The *er'onal ex*en'e' bene=ted the hole amil#, not u't the 'ick *er'on Thi' i' more like a *er'onal ex*en'e b/c it8' the eDui%alent o hirin) a nann#, hich ouldn8t

ha%e been deductible Ci''ent: Buchanan 'ide' ith the di''ent Ci''ent8' rule i' the one that ha' become realit#

I mother had been 'ent to 'anitarium, that ould ha%e been deductible ex*en'e -e 'houldtreat it the 'ame

The doctor didn8t *re'cribe le'' hou'eork, he '*eci=call# *re'cribed *eace and Duiet,and motherin) i' incom*atible ith *eace and Duiet

Thi' i'n8t )oin) to o*en the Qood)ate' ere are 'ome actor' to con'ider: -ould the T", con'iderin) hi' income and li%in) 'tandard, normall# '*end mone# in thi'

a# re)ardle'' o illne''5 (no deductible! a' he eno#ed 'uch luxurie' or 'er%ice' in the *a't5 (no deductible! Cid a com*etent *h#'ician *re'cribe thi' '*eci=c ex*en'e a' an indi'*en'able *art o the

treatment5 (#e'deductible! a' the T" olloed the *h#'ician8' ad%ice in the mo't economical a# *o''ible5 (#e'

deductible! 7re the 'o;called medical ex*en'e' o%er and abo%e hat the *atient ould ha%e to *a#

an#a# or hi' li%in) ex*en'e', that i', room, board, etc5 (#e' deductible! I' the treatment clo'el# )eared to a *articular condition and not u't to the *atient8'

)eneral )ood health or ell bein)5 (#e' deductible!

Och' i' 'till the la, but I+ ha' loo'ened u* o%er time and alloed more medical ex*en'ededuction' Tax*a#er' can deduct the exce'' co't o Braille book' or blind child o%er the co't o re)ular

edition' Tax*a#er' can deduct co't o hirin) a *er'on to accom*an# T"8' blind child or the *ur*o'e o

)uidin) the child in alkin)

$haritable $ontribution' $a'h Conation'

94ect on Conor Tax*a#er can deduct donation' he )i%e' to charit# N 1.0 7nti;abu'e mechani'm':

The max deduction #ou can take i' G0H o #our 7I N 1.0(b! 9xam*le: i #ou ha%eP100k in 7I and donate P100k, #ou can onl# deduct PG0k But, =%e #ear carr#o%er alloed

Conatin) u'ed motor %ehicle', boat', air*lane'

$haritie' t#*icall# 'ell the'e thin)' or ca'h, 'o T" can deduct hat the charit# i' ableto 'ell the car orN 1.0(!(12!

36


37/42

94ect on eci*ient $haritie' don8t ha%e to *a# income tax N G01 For our *ur*o'e', charitie' under N G01 are the 'ame a' charitie' under N 1.0

"ro*ert# Conation' "ro*ert# held b# donor or 'hort;term (one #ear or le''!

Conor can onl# deduct the ba'i' "ro*ert# held b# donor or lon);term

Conor can deduct FEK Conor doe' not ha%e to *a# tax on )ain

-hat8' a charit#5 N 1.0(c!, N G01(c!(3! o%ernment, but onl# i contribution i' made or exclu'i%el# *ublic *ur*o'e' Or)ani&ation o*erated or reli)iou', charitable, 'cienti=c, literar#, or education *ur*o'e', or t

o'ter national or international amateur '*ort' com*etition, or or the *re%ention o cruelt# tochildren or animal'

Fraternit# o 'ome 'ort Or)ani&ation or ar %eteran' The earnin)' o the cor*oration can8t inure to the bene=t o an# *ri%ate indi%idual or

'hareholder-hen "ri%ate Bu'ine''/"er'on Bene=t' in 9xchan)e or $haritable $ontribution'

For bu'ine''e':$OF$/Federal $ircuit Tax $ourt

ule I donor 9$9IK9+ or 9^"9$T+ TO9$9IK9 'ub'tantial bene=t (bene=tthat doe'n8t inure to the *ublic atlar)e!, then donor )et' no deduction

I *rimar# or dominant Ithe donor i' to )et a *erbene=t rom the donationo deduction

$a'e Ottaa +ilicaFact': Ottaa +ilica i' in%ol%ed inminin) o*eration in 'outhern$aliornia Conate' .0 acre' to 'chooldi'trict ith knoled)e that count#ill ha%e to build acce'' road' toacce'' the donated *ro*ert# $laim' adeduction or m% o *ro*ert# 7cce''

road' ill im*ro%e acce'' to Ottaa+ilica8' minin) o*eration' andincrea'e the %alue o the land orhen O+ 'ell' the *ro*ert# orre'idential de%elo*menteld: Becau'e O+ recei%ed a'ub'tantial *ri%ate bene=t (did notinure to the )eneral *ublic!, it can8tclaim a charitable deduction

CuKal % $ommi''ionerFact': Ce%elo*er contriba' 'ite or a librar# Ce%needed re&onin) or a **ro*ert# he intended toeld: CuKal can claim acharitable deduction Cuanted to )i%e 'ometh

to the communit#

For indi%idual': 7mount o deduction i' limited to the exce'' o the *a#ment to the charit# o%er the %alue o an#

bene=t recei%ed b# the donor Kalue o bene=t m% o hate%er i' recei%ed b# the donor

9xam*le: Rou bid P2000 or dinner ith Buchanan at 9VF auction Aormall# the dinner ould co't #ou

P200 +o #ou )et a charitable deduction o P2000 ; P200 P100

Bob Vone' ni%er'it#

To get /0-!c#!


38/42

Fact': Bob Vone' ni%er'it# i' $hri'tian 'chool that orbid' interracial relation'hi*' In [email protected], I+denied it tax exem*t 'tatu' on the ba'i' that it i' raciall# di'criminator# and thereore notcon'i'tent ith *ublic *olic# Bob Vone' ni%er'it# 'ued becau'e it ant' to retain tax exem*t'tatu'

eld: Tax exem*t 'tatu' denied Eaorit#:

"ublic *olic# reDuirement 'tem' rom common la and *olic# (i e%er#one ha' to *a# mortax to make u* or the tax exem*tion, the reci*ient o the tax exem*tion 'hould be'omethin) hel*in) e%er#one!

$on)re'' ha' acDuie'ced in the I+ rulin)' b/c it ha'n8t done an#thin) to di'allo them

e%en thou)h the# are more than a decade old Indeed, $on)re'' ha' enacted G01(i! den#in) tax exem*tion or or)ani&ation' ith ritte

*olic# o di'crimination on the ba'i' o race, color, or reli)ion Ao Fir't 7mendment %iolation becau'e combatin) raci'm i' more im*ortant

"oell concurrence: -ant' to limit the holdin) o the maorit# Rou 'hould lo'e G01(c!(3! 'tatu' i #ou are an o*enl# raci't or)ani&ation

Tax $redit' 9arned Income Tax $redit, N 32

+e%eral eature': 7mount o credit de*end' on number o children

It8' a reundable credit L meanin) it doe'n8t o4'et tax liabilit# but rather re'ult' in*a#ment rom the )o%ernment $redit ri'e' a' earned income ri'e' and then at a certain *oint the credit decrea'e' Earria)e *enalt# L hen to a)e earner' )et married, their combined 9IT$ i' loer than

the 'um o their 9IT$' had the# 'ta#ed 'in)le "ha'e in ? *ha'e out )ra*h, * 3G 7nti;abu'e mechani'm ;; N 32(k!

(1! i #ou raudulentl# claim a deduction, #ou can8t )et a 9IT$ credit or the next ten #ear' (2! i #ou im*ro*erl# claimed a credit due to reckle''ne'' or intentional di're)ard o rule'

and re)ulation' (but not due to raud!, #ou can8t )et 9IT$ credit or the next to #ear' "er'onal exem*tion' %' 'tandard deduction'

"er'onal exem*tion' L count' one *er *er'on on tax orm +tandard deduction L one *er tax orm

Eixed Bu'ine'' Ceduction' Eixed bu'ine''/*er'onal con'um*tion deduction

+cenario: o*erate bu'ine'' out o their home, o*erate a bu'ine'' on the 'ide, bu#in)*en'/*a*er or #our ob

+tatutor# 'cheme N 162(a! allo' a deduction or ordinary and necessaryex*en'e' *aid or incurred in

carr#in) on an# trade or bu'ine'' The amount that #ou are tr#in) to deduct ha' to be )reater than 2H o 7I

9xam*le: #ou make PG0k 9x*en'e' ould ha%e to be at lea't P1000 beore #ou )etdeduction

N 13 L bu'ine'' deduction i' not alloed i acti%it# i' not en)a)ed in or *ro=t N 13(d! *re'um*tion L i T" made *ro=t on the acti%it# in 3 o *a't G #ear', there8' a

*re'um*tion that the acti%it# i' en)a)ed in or *ro=t N 212 co%er' ex*en'e o )eneratin) income rom 'ource' other than a trade or bu'ine''

7 *er'on ith in%e'tment' in 'tock' and bond' ould claim deduction' or ee' *aid toin%e'tment ad%i'or', 'ub'cri*tion to -+V, and ex*en'e' incurred in attendin) in%e'tment'eminar'

N 262 L no deduction 'hall be alloed or *er'onal, li%in), or amil# ex*en'e' Aicker'on % $ommi''ioner

Fxpenses "or hobbies are non+deductible& I" you are intending to make a prot "rom

your actiity) then you get the deduction&

3


39/42

-hether or not acti%it# i' en)a)ed in or *ro=t i' a act' and circum'tance' te't Factor' tocon'ider: Eanner in hich T" carrie' on acti%it# (i' it bu'ine''like ith accurate recordkee*in)5! The ex*erti'e o the T" or hi' ad%i'or' The time and e4ort ex*ended b# the T" in carr#in) on the acti%it# 9x*ectation that a''et' u'ed in acti%it# ma# a**reciate in %alue The 'ucce'' o the T" in carr#in) on other 'imilar or di''imilar acti%itie' The T"8' hi'tor# o income or lo''e' ith re'*ect to the acti%it# The amount o occa'ional *ro=t', i an#, hich are earned The =nancial 'tatu' o the T" 9lement' o *er'onal *lea'ure or recreation

Fact': T" Aicker'on bu#' a arm in -i'con'in e ant' to tran'ition out o ad%erti'in) careere )oe' there e%er# eekend durin) )roin) 'ea'on and tice *er month durin) non;)roin'ea'on e mo'tl# ork' on the home hile he8' there Aicker'on ha' ex*erienced lo''e' onthe arm and ant' to deduct them under N 162

eld: Thi' i' an acti%it# en)a)ed in or *ro=t, 'o T" can )et the deduction' 7**ellate court i' 'u**o'ed to a**l# clearl# erroneou' 'tandard 7**ellate court actuall#

a**lie' de no%o $ourt 'a#' *eo*le don8t do hard labor unle'' it8' or *ro=t -hat about Iron Ean

com*etition'55 Buchanan think' the arm i' u't a man ca%e 'o that T" can take a break rom amil#/cit#

lie

Bu'ine'' u'e o a home, N 207 enerall#, bu'ine'' u'e o a home i' not deductible 9xce*tion': -hen *ortion o the home i' exclu'i%el# u'ed on a re)ular ba'i' L

7' the *rinci*al *lace o bu'ine'' or an# trade or bu'ine'' o the tax*a#er, Solimonmaorit#: hat i' the *rinci*al *lace o bu'ine''5 $on'ider:

elati%e im*ortance o the acti%itie' *erormed at each bu'ine'' location

The time '*ent at each *lace Solimonconcurrence (Thoma' and +calia!:

To be a ""B, there ha' to be income earned in that location

-e 'hould rule out an# *lace here there8' no mone# earned at all

I there i', then #ou ould mo%e onto maorit# te't 7' a *lace o bu'ine'' hich i' u'ed b# *atient', client', or cu'tomer' in meetin) or dealin)

ith the tax*a#er, or In the ca'e o a 'e*arate 'tructure hich i' not attached to the dellin) unit, in connection

ith the tax*a#er8' trade or bu'ine'' "o*o% % $ommi''ioner

3usician may deduct expenses "rom the portion o" their home used exclusiely "or

musical practice& Fact': "o*o% i' a *roe''ional %iolini't +he *ractice' ;G hour' at home *er da# in her li%in)

room er em*lo#er' do not *ro%ide her *ractice '*ace eld: +he can deduct 0H o her rent and 20H o her electricit# bill b/c her home i' her

*rinci*al *lace o bu'ine'' er li%in) room '*ace a' u'ed exclu'i%el# or her bu'ine'' -hile the *lace o deli%er# i' im*ortant, the our to =%e hour' o dail# *ractice 'he did at

home la# at the %er# heart o her career a' a *roe''ional %iolini't

+he '*ent a lot o time in her *ractice '*ace a' com*ared to *lace o deli%er#

ender'on % $ommi''ioner Fact': ender'on bu#' *lant and *rint or her oJce and trie' to deduct a' a bu'ine'' ex*en'e eld: Ao deduction alloed

For N 162, there ha' to be 'uJcient nexu' b/ the ex*en'e and the carr#in) on o thebu'ine'' I the ex*en'e i' in e''ence *er'onal, then no deduction i' *ermitted

The'e ex*en'e' eren8t nece''ar# or her to *erorm her ob N 262 trum*' N 162 $+udge(alloin) deduction or *ediatrician8' ex*en'e' '*ent on *icture' '*eci=call#

a**ealin) to children and di'*la#ed in *atient room'!

3@


40/42

Tra%el ? 9ntertainment 9x*en'e' udol*h % nited +tate'

T@F expense o" traeling to BE1 as reward "or meeting sales goal is income and

not deductible as a business expense under H-.8 Fact': T" and ie ent to AR$ e )ot to )o on the tri* becau'e he met certain in'urance

'ale' )oal eld: Thi' a' income Ao deduction alloed

"ron) one: a' thi' income5 Re' It a' or *lea'ure

Te't dominant moti%e and *ur*o'e "ron) to: i' thi' *er'onal ex*en'e or deductible bu'ine'' ex*en'e5

Te't hether it8' related *rimaril# to bu'ine'' or i' *rimaril# *er'onal Fact '*eci=cinDuir#

Thi' i' *er'onal e a'n8t orced to )o Ci''ent:

"ron) one: thi' i'n8t income

Ao e%idence thi' a' a 'ham But that8' not the le)al te't

Thi' i'n8t com*en'ation Ao connection beteen the tri* and 'er%ice' renderedThat8exactl# hat thi' i'W 7 reard or 'ellin) in'uranceW

9x*en'e a' to ie i' a bu'ine'' deduction

-i%e' contribute to *roducti%it# o the hu'band' +ection 2.

9x*en'e' o '*ou'e', N 2.(m!(3! -hen T" i' on le)it bu'ine'' tri*, no deduction alloed or '*ou'e ho come' alon)

unle'': +*ou'e i' em*lo#ee o T",

+*ou'e had bona =de bu'ine'' *ur*o'e or )oin) on the tri*, and

7dditional ex*en'e' ould otheri'e be deductible e) 1162;2: tra%elin) ex*en'e'

I tri* i' *rimaril# related to T"8' bu'ine'', tra%elin) ex*en'e' to and romde'tination are deductible

I tri* i' *rimaril# *er'onal, tra%elin) ex*en'e' to and rom de'tination are notdeductible e%en thou)h the T" en)a)e' in bu'ine'' acti%itie' hile at thede'tination

9x*en'e' at the de'tination that are related to bu'ine'' are deductible

$lothin) a' a Bu'ine'' 9x*en'e' The co't o clothin) i' deductible a' a bu'ine'' ex*en'e onl# i:

The clothin) i' o a t#*e '*eci=call# reDuired a' a condition o em*lo#ment It i' not ada*table to )eneral u'a)e a' ordinar# clothin) (obecti%e te't!

eneral ada*tabilit# can8t ha%e national meanin) See ,elson v. Commissioner(alloin) bu'ine'' deduction or clothin) ex*en'e' here clothin) a' hea%# co'tume' orn on th'et o a TK 'ho =lmed in 'outhern $aliornia!

It i' not 'o orn "e%'ner

Fact': T" i' mana)er at R+< boutiDue +he ha' to ear R+< clothe' at ork and at orke%ent' +he doe' not ear them hen 'he8' o4 dut# becau'e 'he lead' 'im*l# lie +he

ant' to deduct the ex*en'e o the clothe' rom income eld: +he can8t deduct The clothin) i' ada*table to )eneral u'a)e a' ordinar# clothin)

T#*e' o clothin) that ould Duali#:a'tronaut 'uit, dee* 'ea di%er8' 'uit, 'omethin) that ouldlook eird in *ublic

9ducational 9x*en'e', e) 1162;G(b! 9x*enditure' made b# an indi%idual or education are deductible a' bu'ine'' ex*en'e' i the

education: Eaintain' or im*ro%e' 'kill' reDuired b# the indi%idual in hi' em*lo#ment or other trade or

bu'ine''

"rimar# *de*end'act' ?circum'tin each cbut amoutime '*e*er'onalacti%itie'im*ortan

0


41/42

Eeet' the ex*re'' reDuirement' o indi%idual8' em*lo#er or reDuirement' o re)ulation' (e)$


42/42

Alternative Minimum Tax

I #ou are in a certain income ran)e, #ou ha%e to calculate #our tax liabilit# u'in) both the 100method and 7ET method

-hiche%er one i' bi))er i' the one that #ou *a# 7ET (taxable income di'alloed itemi&ed deduction' L alternati%e minimum 'tandard

deduction! tax Ci'alloed itemi&ed deduction':

+tandard deduction

Ceduction' or *er'onal exem*tion' Ceduction or 'tate and local taxe' Ceduction or intere't on home eDuit# loan' $ertain ob;related outla#' Ceduction or medical ex*en'e' i' limited to exce'' o%er 10H o 7I (a' o**o'ed to .GH or

the normal tax! 7lternati%e minimum 'tandard deduction

PG0,600 or 'in)le' P.,.G0 or married cou*le =lin) ointl#

Tax 26H tax rate or =r't P1.Gk 2H o 'o much o the taxable exce'' a' exceed' P1.Gk

Xlaa''en % $ommi''ioner

Fact': Xlaa''en' had ten kid' and ant TET to a**l# to them rather than 7ET 7I P3,0G6

Tentati%e Einimum Tax 7lternati%e Einimum Tax7I L itemi&ed deduction' L *er'onal exem*tion' taxable income P3,0@2

Itemi&ed deduction' P,.6. or medicalex*en'e', P3,26 or 'tate and local taxe',P11,G33 or charitable donation'!12 *er'onal exem*tion' P2@,00

P30@2 326 2@00 20.6 P6,32

P6,32 L 'tandard deduction at the time (hicha' G000! P23,32

Tax taxable income TET PG,111 02623,32 P6,1@6

eld: the# ha%e to *a# 7ET $oncurrence (Xell#!:

Xell# i' %er# '#m*athetic Rou can look at con)re''ional intent e doe'n8t ant maorit#to 'a# that con)re''ional intent doe'n8t matter

+u))e'ted alternati%e':

(1! 9liminatin) itemi&ed deduction' and *er'onal exem*tion' a' adu'tment to re)ulataxable income in arri%in) at 7ET income

(2! 9xem*tin) lo and moderate income tax*a#er' rom the 7ET

(3! ai'e and index the 7ET exem*tion amount (thi' one ha' actuall# come to be!

(! +ome other mea'ure

Documents

Buchanan Tax Outline Spring 2013