Fed Tax Outline Final

8/2/2019 Fed Tax Outline Final

1/47

1

INTRODUCTION

A. Tax Formula- Gross Income ( 61 ) Exclusions ( 101-150 gifts/inheritance/annuities) Above the line

deductions ( 162 business deductions, 62 specified deductions) = AGIo AGI person exemptions, 151-152 minus

A) 63 standard deduction or B) itemized deduction ( 63, 2% floor imposed by 67 misc. itemized)

o Then personal/dependency exemptions ( 151, 152) = Taxable Income

Taxable income Tax Credits ( 25A) = Tax Liabilityo Tax liability x Applicable Tax Rate = Tax Due or Your Refund

B. Limitations to tax- Federal Tax must have uniformity across all 50 states, same tax is subject to everyone

o Uniformity: Whenever some mode of taxation is used somewhere in the US, the samemode of taxation must be used everywhere throughout the US

Ex: federal income tax- State income tax varies across each state- Direct tax: tax demanded from the very person who is intended to pay it (income tax, property

tax)o must have apportionment (Ar. 1 9): direct tax unavoidable, must be apportioned

among the states on the basis of population (head tax)- Indirect tax: tax paid primarily by a person who can shift the burden of the tax to someone else

or who at least is under no legal compulsion to pay the tax, it is avoidableo Ex: sales tax, buyer pays the sales tax but it is applied to the merchants

- Pollock : taxes on income from property is a direct tax. SC says tax on income is on property and

it is a direct tax on property, when theres direct tax there has to be apportionment;apportionment is usually based on income- 16 th amendment: can tax income from whatever source derived without apportionment, but

still must be uniformed

C. Courts- Tax Court:

o TP does not have to pay deficiency, a taxpayer can petition the Tax Court for aredetermination of the deficiency. Suits are between taxpayer and commissioner.

o Tried without a jury.o Ct based in DC but travels around the countryo If lose can appeal to Circuit Ct. of where TP resides

- District Court:o TP must pay all the deficiency and then if win case can get money backo There is a jury. If law is unfavorable to TP they can come here.o If lose can appeal to circuit courts, but can only appeal in circuit of where TP resides

- Court of Federal Claims:o Must pay deficiency. Then can get $ back if win.o No jury trialo If lose here, can go to US Court of Appeals Federal Circuit Ct.


2/47

2

- Court of Appeals for the Federal Circuit: decisions by district courts and of Tax Courts areappealable here.

o If lose here can go to SC- Supreme Court: appealable here by petition for cert.

D. Procedure of AuditTPs choices:

- Paying disputed items- Dispute it

o Auditor sends a 30-day letter (disagreeing) TP can pay or TP has 30 days to file written protest giving TPs reasons

If written protect is filed by TP within 30 days, case is sent to theappeals office of IRS if not settled or TP does nothing then

o TP receives a 90 day letter called Statutory notice of deficiency (6212-13) TP has 90 days from date of mailing to file petition w/ US Tax Ct or pay

No extension of 90 days If TP does nothing no recourse but to pay the deficiency If TP files petition within 90 days then IRS cant assess or collect deficiency

until case is settled or Tax Ct. decides case. (if TP wants to be heard in Ct.must file)

Petition must be postmarked on or before 90 days from the date on 90-dayletter, if not then TP is screwed and must pay

Interest: interest accrues on the amount during the pendency of any taxcase from the time the tax return was due to be filed and continued untiltax was paid

- Burden of Proof: burden initially on TP, can shift burden if TP has done certain things

- SOL: IRS has 3 yrs from day you filed (typically 4/15), unless filed early then it will beconsidered as filed on such last dayo 3 year period is extended to 6 years if TP omitted gross income in excess of 25% (

6501(e)(1)(A))o IRS must mail the 90 day letter certified mail and must be post marked before SOL

expiredExceptions to 3 yr SOL

No return filed by TP : No SOL, open indefinitely Fraud : requires specific and knowing intent, burden of proof on IRS to show

TP knew something was taxable and didnt include it Waiver/Agreement to Extend: IRS and TP can agree to extend. TP must

sign waiverPenalty

- Failure to file: if there is a deficiency 5% of the tax per month- Filed late: 1% per month until filed- Failure to pay the tax due on the return is one half of 1% of the tax per month


3/47

3

GROSS INCOME

61 Gross Income- (a) General Rule: GI is broadly defined and includes all income from whatever source derived.

Includes everything unless something is specifically excluded, intentionally set forth so Congressdoesnt have to keep amending it - Definition of Income:

o Accession to Wealth ando Realization event: there must be some sale or other disposition of an item of property

before the appreciation is realized and becomes gain included in GI o Receipt of economic benefit: when TP receives an economic benefit

- List is illustrative not inclusive- Cash flow is not income (ex. Loans)- Can reduce income w/ adjustments for AGI (Adjusted Gross Income) under 62

Gross income reduced by adjustments = AGI above the line and below the line deductions

above the line generate a bigger tax benefit- gets deductions andreduces gross income

can further reduce by personal and dependency exemptions each person gets a exemption for themselves unless they are claimed by

someone else (151) exemptions for all individuals that qualify as your dependent (152)

- 63 Taxable Income- reduce AGI with personal/dependency exemptions and deductionso can reduce AGI by greater of standard deductions or itemized deductions

standard deductions are automatic itemized deductions are a number of deductions Congress has set (ex. Buying a

home)o aged or blind gets additional standard deductions- From taxable income you compute your tax liability (1)o Filing status effects your tax rate schedule

- After computing tax liability then you may reduce w/ tax credito Tax credit decreases tax liability dollar for dollar while deductions only reduces by

marginal rate Non-refundable and Refundable- refundable can get a refund if tax liability is 0

(ex. HOPE, making work pay, Earned Income Tax Credit)- Current system of tax is progressive not flat rate

TR- 1.61-14(a): treasure trove includable in GI in the year which is reduced to undisputed

possessiono Jewelry: not taxed until possessor turns it into cash (no realization event)

- 1.61-8. If received cash for providing rent or rental space you will have income- TR. 1.61-14(a) makes punitive damages included in GI


4/47

4

Cesarini v. US- Discovered a treasure trove of old currency. 61 interpreted very broadly, gross income is

broadly defined and includes treasure trove. Treasure trove: when you discover something thatyou didnt own befo re and somehow affirm title to it, once gain title then includable in income

- Treasury regs under 61 : income in any form and does not have to be cash- Realization capturing the value; must be reported

Old Colony Trust v. Commissioner- The discharge by a third party of an obligation owed by the taxpayer is an economic benefit to

the TP, and is includable as gross income. Accession to wealth

Commissioner v. Glenshaw Glass- Awarding of punitive damages and treble damages are gross income. Gross income means all

income from whatever source derived. Gross income when you have undeniable accession towealth, clearly realized, and over which the taxpayer has complete dominion.

Charley v. Commissioner

- Travel credits converted into cash in a personal travel account established by an employerconstitute gross income to the employee. (air miles)

Helvering v Independent Life Ins. Co.- The rental value of the building used by the owner does not constitute income within the

meaning of the 16 th A

Revenue Ruling 79-24- The FMV of the services or property received as payment must be included as gross income

Dean v Commissioner- The fair rental value of the residence property is to be included in the taxpayers gross incomewhen the property was held in the name of the corporation and he lived there for free

EXCLUSIONS FROM GROSS INCOME

102 Gifts p. 96- (a) General Rule: GI does not include the value of property acquired by gift, bequest, devise, or

inheritance.- Under Duberstein a gift proceeds from a detached and disinterested generosity out of

affection, respect admiration, charity, or like impulses. Whether it is a gift is determined by thefacts and circumstances

o (b)(1) Exclusion does not include the income from the property received; oro (b)(2) Where gift, bequest, devise, or inheritance is of income from propertyo (c)(1) Exclusion does not apply for any amount transferred by or for an employer to or

for the benefit of an employee


5/47

5

Gifts from employer to an employee Gifts generally out of the business relationship are deemed

compensation To an employee during ongoing employment To employee upon or after retirement

To survivors upon death of an employee Excluded if employee can show that transfer was not made in recognition of the employees employment. Shall not apply to amounts transferred betweenrelated parties (father/son) if the purpose of the transfer can be shown transferwas for the familial relationship and not to the circumstances of employment.

Policy: IRS doesnt want gift to be disguised as compensation Look to the relationship, no quid pro quo

TR 1.102-1(f)o 102 does not apply to prizes and awards under 74 and de minimis fringe benefits

under 132Exceptions to TR

132(e) if traditional retirement gifts are treated as de minimis fringe benefitsthen excluded from GI

74(c) employee achievement awards are freed from taxGift from spouse:

o 1041(b): When property transferred to a spouse, there is no need to determinetransferors motive. Property is treated as received by the transferee as a gift andexcluded from GI.

Wolder v. Commissioner- Agreement between client and atty to continue to provide services if agreed to devise,

bequest, inherit- Court held that it is compensation. Cant just call something that is a devise, bequest,inheritance to turn the compensation for services as a devise, bequest, inheritance

- Test is whether in actuality the gift is a bonafide gift or simply a method for payingcompensation

o Must look to the intent of the parties, the reason for the transfer, and the partiesperformance in accordance with their intentions

- We look to substance of the transaction and not the form o Form here was devise, bequest, inheritance and substance was compensation for

services that were provided to his client

Lyeth v. Hoey- Received money from grandmas estate - Intent of statute 102 if truly an inheritance or bequest then can be excluded from gross

income, here it is truly inheritance but the state labeled it something else so to form it was notinheritance, but the Ct. looked at the substance and it is truly an inheritance

- Money received from the compromise of a will contest is received through inheritance and isexempt from income tax

- Damage received in settlement of a will contest are not taxed bc bequest are not taxed


6/47

6

132 Certain Fringe Benefits- Non-discrimination rule; must be provided on substantially equal terms to other employers- (a) Not included as gross income any fringe benefit which qualifies as a: 1. No-additional cost , 2.

Qualified employment , 3. Working condition fringe , 4. De minis fringe , 5. QualifiedTransportation , 6. Qualified moving expense, 7. Qualified retirement planning services

- Cannot give discount below cost o (b) no additional cost benefit means any service provided by an employer to an

employee for their use

(b)(1): such services is offered for sale to customers in the ordinary course of the line of business of the employer in which employee is performing services,and

(b)(2): employer incurs no substantial additional cost in providing service toemployee.

o (c) Qualified Employee Discount (1) Any employee discount with respect to qualified property or services to the

extent discount does not exceed:

(A) In the case of property discount, exclusion cant be greater thangross profit percentage (GPP)

(B) In the case of services, 20 % of the price offered to customers

(2) GPP = (aggregate sale price cost of goods)/aggregate sale price = % thatmay be excluded from GI

(4): Qualified property or services means any property or service (other thanpersonal or real property) which are offered for sale to customers in theordinary course of the line of business of the employer in which employee is

performing services.

o (d) Working Condition Fringe - this means any property or service provided to anemployee to the extent that if the employee paid for property or services such paymentis deductible under 162 (trade/business deductions) and 167 (depreciationdeduction)

Ex: use of company car, airplane, on job training, magazine subscription.

o (e) de minimis fringe (1) Means property or service the value of which is so small as to make

accounting for it unreasonable or administratively impractical.

Ex: photocopy, pens, coffee, eating facility (2): Any eating facility for employees is treated as a de minimis fringe if (A): facility is located on or near the business premises of the employer,

and (B): revenue derived from facility normally equals or exceeds the direct

operation costs of the facility


7/47

7

o TR 1.132-7(b)(1): operating costs include costs of food andbeverages and cost of cooks, servers and others employed atthe restuarant

Will apply to highly compensated employee only if access to the facilityis available on substantially the same terms to all other employees

o (f) Qualified transportation fringe (1) means the following provided by an employer to an employee:

(A) Transportation in a commuter hwy vehicle if transportation is inconnection with travel between employees residence and place of employment

o (f)(5)(B) Commuter vehicle means any highway vehicle whichsits 6 adults and at least 80% of the mileage used canreasonably be expected to be for purposes of transportingemployees between residence and place of employment, andtrips during which employees are transported is at least of theadult seating capacity (at least 3 people)

(B) Transit passo (f)(5)(A) Transit pass means any pass, token, farecard, voucher,

or similar item entitling a person to transportation if suchtransportation is

(f)(5)(A)(i) on mass transit (f)(5)(A)(ii) provided by any person in the business of

transporting persons for compensation (C) Qualified parking

o (f)(5)(C) means parking provided to an employee on or nearbusiness premises of the employer or on or near a location fromwhich employee commutes to work

(2) fringe benefits which are provided to employee which may be excluded fromGI shall not exceed

(A) $100 per month in the case of the aggregate of the benefits (B) $175 per month in the case of qualified parking

(3) Cash Reimbursements- fringe benefit includes a cash reimbursementprovided by employer. Apply to reimbursement for transit pass only if a voucheror similar item is not readily available for direct distribution by EP to EE

(f)(4) No constructive receipt- no amt. shall be included as GI of an employeeb/c EE may choose b/w any qualified transportation fringe and compensationwhich would otherwise be includible in GI of EE

o (g) qualified moving expense - means amount received directly or indirectly by anindividual from an employer as a payment for expenses which would be deductible asmoving expenses under 217. If not deductible than must be included in GI

o (h) Certain Individuals treated as EEs for purposes of no additional cost and qualifiedEE discount

(1) Retired and disabled EEs and surviving spouse of EE treate d as EE includes


8/47

8

(A) any individual formerly employed in the line of business by reason of retirement or disability

(B) any widow or widower of any individual who died while employed inthe line of business or w/in meaning of (A)

(2) Spouse and dependent children

Any spouse or dependent child of the EE treated as EE (3) Parent shall be treated as EE in cases of air transportationo (i) Reciprocal Agreements any service provided by an EP to EE of another EP shall be

treated as provided by the EP of EE if: (1) pursuant to written agreement (2) neither EP incurs additional cost

o (j) Only applies to highly compensated officers if not discriminatory

o (m) qualified retirement planning services - means any retirement planning advice orinfo provided to an employee and his spouse by employer

Does not include retirement planning that includes tax prep,accounting, legal or brokerage servic

119 Meals or lodging furnished for the convenience of the employer- (a) Gen Rule: Employee may exclude from GI the value of meals and lodging furnished to

employee, his spouse, and his dependents for the convenience of the employer only if:o (1): Meals are furnished on the business premises of the employer and if they are

furnished for the convenience of the employer or,o (2) In the case of lodging, the employee is required to accept such lodging on the

business premise of the employer as a condition of his employment.TR Elements

Lodging is furnished on business premises of the employer Furnished for convenience of employer and

Employee is required to accept lodging as condition of his employment- (b) Special Ruleso (1) In determining whether meals or lodging are furnished for the convenience of the

employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended ascompensation.

o (2) In determining whether meals are furnished for the convenience of the employer,the fact that a charge is made for such meals, and the fact that the employee mayaccept or decline such meals, shall not be taken into account.

o (3) If an employee is required to pay on a periodic basis a fixed charge for his meals, andsuch meals are furnished by the employer for the convenience of the employer, there

shall be excluded from the employee's gross income an amount equal to such fixedcharge.o (4) All meals furnished on the business premises of an employer to such employer's

employees shall be treated as furnished for the convenience of the employer if, withoutregard to this paragraph, more than half of the employees to whom such meals arefurnished on such premises are furnished such meals for the convenience of theemployer.


9/47

9

- (d)(1) Qualified campus lodging furnished by educational institutions to employees is excludedfrom GI (faculty housing, Professor getting free rent)

o (2)(A)Amount of exclusion is limited to either 5% of the appraised value of the qualifiedcampus lodging or average neighborhood rent. Excluded amount = the differencebetween how much TP pays and the lesser of the two (5% of appraised value or avg.neighborhood rent)

o (3)(A)qualified campus lodging means lodging located on or near proximity of campus (B)Has to be furnished and for TP, spouse, and dependent, no one other than TP

and must be used as a residenceo (4)(A)Employer must be academic college or academic health center

(B) Health center defined as providing of medical or hospital care, medicaleducation or research

TR 1.119-1- Meals furnished to EE by EP shall be excluded as GI if: 1. Meals furnished on business premises,

2. For the convenience of the EP- Meals furnished on nonworking days do not qualify for exclusion- If employer would have furnished meals to employee during work hours, but was furnished

immediately after work hours because so busy employee couldnt eat then it was furnished fornon compensatory business reason

- If furnishing lodging then must meet 3 requirements: 1. On business premises, 2. Convenienceof EP, 3. Condition of employment

Herbert G. Hatt v. CommissionerRule: The fact that a taxpayer is a shareholder in a closely held corporation does not alone disqualify himfrom excluding lodging benefits furnished for the convenience of the corporation

74 Prizes and Awards- (a)Gen Rule: GI includes amounts received as to the FMV of prizes and awards.- 3 exceptions where TP/client can exclude :

o (b): TP may exclude from GI amounts made primarily in recognition of religious,charitable, scientific, education, artistic, literary, or civic achievement, but only if: (mustsatisfy all 3)

(1) Recipient selected without any action on his part to enter contest orproceeding (passive recipient);

(2) Recipient is not required to render substantial future services as a conditionto receiving the price; and

Rev. Ruling 1.74-1

(b): Pulitzer Prize or Nobel prize is excluded from GIif donated to charitable org, even though the recipient is expected tomake a speech at the award ceremonies.

(3) The award/prize is transferred by the payor to a governmental unit ororganization described in paragraph (1) or (2) of 170 pursuant to a designationmade by the recipient (there was immediate transfer to charity w/o any use orenjoyment of it by the taxpayer).

o (c) Exceptions for certain employee achievement awards


10/47

10

(1): If cost to the employer of the award does not exceed the amount allowableas a deduction to the employer for the cost of the award than it is excludedfrom GI. (employee achievement awards are excluded only to the amount thatemployer can deduct)

The value of the award is its cost and not the FMV of the award that affects howmuch employer can deduct.

An award may qualify if it relates to length of service or to safety and must be inthe form of tangible personal property, be awarded as part of a meaningfulceremony, and not be mere disguised compensation

Limits under 274 Disallowance of Certain Entertainment Expenses- (j)(2): Deduction for the cost of an employee achievement award (not FMV) made by an

employer to an employee:o (A)Deduction cant be greater than $400, and o (B) is a qualified award when added to the cost to the employer for all other awards

made to employee shall not exceed $1600- (j)(3)(A)Employee achievement award is tangible property which

o (i) Must be related to length of stay or safetyo (ii) Needs to be awarded during a meaningful presentation, ando (iii) Cant be disguised as compensation

- (j)(4)(B): Length must be at least 5yrs or more and has not received a length of service award forthe current or any 4 yrs prior.

o (C): Safety achievement award qualifies if (i) employee achievement awards for safety achievement have not been

previously awarded by the employer to more than 10% of the employees of theemployer

(ii) award made to employee other than manager, administrator, clericalemployee or other profession employee

- Not indexed for inflation

Allen J. McDonell- Ct held that under the facts and circumstances, the expenses of the trip are not includable in the

gross income of petitioners. Petitioner had a duty to go and was a work obligation- Might also be able to exclude as fringe benefit under 132

117 Qualified Scholarship- (a) TP may exclude from GI money received from qualified scholarship who is a candidate for a

degree at a qualifying educational institution- (b)(1)Qualified scholarship means amount received by an individual as a scholarship or

fellowship grant so long used for qualified tuition and related expenseso (2)(A) Qualified tuition and related expenses means tuition and fees required for

enrollment or attendance of a student at an education organization, and (B) fees, books, supplies, and equipment required for course of instruction at

the educational organization


11/47

11

- (c) Limitations:o (c)(1) May not exclude any amount earned doing research, teaching, or other services by

the student required as a condition for receiving the scholarship Dont want this scholarship to be disguised as compensation) Any amount used for room and board and non-scholastic will be included in GI

o (2) May exclude amoun t received under Natl Health Service Corps or Armed forceshealth Profession Scholarship

- (d)(1) Qualified tuition reduction is excludedo (2) Qualified tuition reduction means amount of any reduction in tuition provided to an

employee of an educational organization described in 170(b)(1)(A)(ii) (an educationalorg that maintains a regular faculty and curriculum and regularly enrolled body of students in attendance) for the education

(A) of such employee (applies to only below grad level), or (B) Any person treated as an employee under 132(h) (broad definition)

o (3) Reduction must not discriminate in favor of highly compensated

TR 1.117-6 (d)(3): If TP gets scholarship and required to do some teaching or researching and facts showhow much other non-students get paid to do similar teaching or researching then TP can exclude fromGI amount of scholarship of how much he got more than what other non-students get paid for doingsimilar teaching.

127 Educational Assistance Programs- (a)(1) Gen Rule: Employees can exclude from GI amounts paid or expenses incurred by the

employer for educational assistance to the employeeo (2) Max exclusion up to $5,250

- (b) Educational Assistance Programo (1) Is a sep written plan of an employer for the exclusive benefit of his employees to

provide such employees with educational assistanceo (2) Must be available to broad class of employee and not discriminate in favor of highly

compensated employeeso (3) no more than 5% of amounts paid will benefit principal shareholders or ownerso (4) program cant provide choice of education assistance and other remunerationo (6) must have reasonable notification to employees that program exists

- (c)(1) Educational assistance means (A) The payment by an employer, of expenses incurred by employee for

education of the employee including but not limited to tuition, fees, and similarpayments, books supplies, and equipment relating to the education of theemployee

(B). Does not include meals, lodging or tools or supplies which may be retainedby employee after completion of a course. Does not include payment fortransportation, sports, games, or hobbies.


12/47

12

o (2) Employee includes individual who is an employee under 401(c)(1) (self employedindividual treated as employee)

Reg 1.127-2(c)(4 )- Education is instruction which improves or develops the capabilities of theemployee; it is not limited to job related courses and the employee is not required to be a candidate fora degree

If it exceeds limit of $5,250 or does not fulfill other requirements under 127 then:- Can still be excluded from employees GI if it constitutes a working condition fringe benefit

under 132(a)(3)

101 Life Insurance/Death Benefits- (a)(1)Gen. Rule: TP may exclude from GI amounts received under a life insurance contract if

such amounts are paid by reason of the death of the insured.o (2) If transfer for a valuable consideration by assignment or in other manner than

exclusion is only limited to principle amount of the policy. Must include amount if beneficiary receives more.

- (c) if any amount excluded from GI is held under an agreement to pay interest, the interestpayments are included.

- (d) When payment made at a date later than death : amounts held by insurer with respect to abeneficiary are prorated over period in which payments are to be made. Excluded from GI of such beneficiary in taxable years received any amount determined by proration. If beneficiary/TP does not elect to take lump sum when policy holder dies TP can receive money ininstallments and excluded amounts are prorated for each paid installment. Exclude capitalinvestment

- (g): Amounts paid to insurer who is (g)(1)(A) terminally or (g)(1)(B) chronically ill under lifeinsurance K is deemed to be paid by death of an insured and is excluded from GI . If borrowfrom own life insurance policy is not gross income because you dont have accession to wealth

since you have a debt. (g)(2)(B)(ii) Terminally ill defined as someone who is expected to die within 24

months after being certified by a physician as having an illness or physicalcondition which will lead to her death ( 101(g)(2)(B))

(g)(2)(B)(ii) Chronically ill defined as someone other than a terminally ill person,who has been certified by a licensed health care practitioner as being unable toperform without assistance certain activities of daily living, such as eating orbathing, or requiring supervision because of cognitive impairment (101(g)(4)(B)).

(g)(3) Payments made to chronically ill individuals are excludable only to extentthat the payments are for qualified long term care services of the insured or are

amts received on a per diem or other basis that do not exceed $175/day

72 Annuity- (a)Gen. Rule: Any amount received as annuity is included in GI (inclusionary provision)Exclusion Provision: When annuity is excluded from GI:- (b)(1) Exclusion ratio is the amount of TPs initial investment divided by their expected return.

Return of capital is excluded


13/47

13

o Exclusion Ratio = amount of TPs initial investment/expected returno If not above formula then expected return = life expectancy (years) of TP x $ payout per

year- (2): Exclusion from GI is limited to amount invested. Portion received that is under amount

invested is excluded from GIo Ex: When TP has recovered 150,000 then any payments received after that is all GI and

must be included.- (3)(A)(i) If after the annuity starting date, payments as an annuity under the contract cease

by reason of the death of an annuitant, and (ii) as of the date of cessation, there isunrecovered investment in the contract, the unrecovered amount shall be allowed as adeduction to the annuitant for his last taxable year. (will be itemized deduction and notmisc. itemized)o If TP doesnt have sufficient GI in her final year to absorb a deduction of whats left over

of the annuity that TP didnt receive (deduction greater than GI) then it will be a netoperating loss than it can be carried back to offset income in the TPs preceding years orcan be carried forward for 20 years to offset income in those years

108 Discharge of indebtedness 61 (a)(12) Discharge of indebtedness

- 61 (a)(12): General Rule: GI includes any increases of wealth due to discharge of indebtednesso US v. Kirby : if bond is sold at a price less than the issuing price or face value, the excess

of the price or face value over the purchase price is a gain and included in GI. If pricesold is less than issuing price it is included in GI.

Exception to 61(a)(12)- 108(a)(1): General Rule: can exclude from GI income from discharge of indebtedness if

discharge occurs:o (A) in a title 11 case. If bankrupt then debt relief is excluded from GI.o (B) when the taxpayer is insolvent (TP owes more than owns/liabilities more than

assets). (a)(3): insolvency exclusion shall not exceed the amount by which TP is insolvent

o (C) The indebtedness discharged is qualified farm indebtedness.o (D) Debt incurred when acquisition/improvement of real property used in TPs trade or

business is cancelled. Amount excluded is limited to extent that the outstanding

principal amount of such indebtedness exceeds the FMV of the real property. Anyamount so excluded results in a reduction of the basis of TP s depreciable real property.

Reduction of Tax attributes- (b)(1) If discharge of indebtedness is excluded from GI under (A) or (B) above then tax attributes

of TP must be reduced by that amount excluded. Takes away tax benefits to where you mightenjoy them later. Prevents double benefit.

- (b)(2) Reduction made in following order


14/47

14

o (A) Net operating losseso (B) General Business Credito (C) Min. Tax Credito (D) Capital loss carryoverso (E) Basis Reduction

If excluded from GI under (a) and (b)(2)(E) then such portion shall be applied inthe reduction of the basis of any property held under 1017.

IRC 1017- 1017(b)(2): (limitation in title 11 case or insolvency) TP required to reduce his basis only to the

extent of the excess of the total adjusted basis of TPs property immediately after the dischargeover the total liabilities immediately after the discharge. This does not apply if TP elects toreduce the basis of depreciable property and real property inventory in lieu of reducing netoperating losses and other tax attributes.

o (b)(2)(F) Passive activity loss and credit carryoversPurchase Price Adjustment

- (e)(5): If indebtedness arising out of the purchase of property is reduced or discharged by theseller of the property, the reduction is treated as a reduction in the purchase price of theproperty rather than as income from the discharge of indebtedness, so it is excluded from GI. If the purchase price of an item of property is reduced here, the cost basis of the property mustalso be reduced. Reduction must not occur in a title 11 case or when purchaser is insolvent

Zarin V. Commisioner

- The term indebtedness of the taxpayer, means any indebtedness a) for which the taxpayer isliable or b)subject to which the taxpayer holds property. in order to come under the scope of

discharge of indebtedness rules, the TP must satisfy one of the two prongs.- 1. Debt subject to which he held property and 2. legal obligation to repay debt.- Contested Liability- if a TP, in good faith, disputed the amt. of a debt, a subsequent settlement

of the dispute would be treated as the amt. of debt cognizable for tax purposes.- If a TP pays off a debt for less than the amt owed, the difference constitutes income to him, bc

he realizes an economic benefit by way of an increase in his net worth much as if he had soldproperty as a profit

Damages - Damages received to be made whole for injury are excludable; punitive damages generally have

to be included as gross income- Taxability of a recovery of damages can be determined by identifying the nature of the injury- Punitive or exemplary damages recovered arising in a business context are taxable, Glenshaw

Glass

Raytheon v. Commissioner- Recovery of damages of lost profit is gross income and taxable


15/47

15

- Court applies in-lieu-of test .o Must ask in lieu of what were the damages awarded?

If damages awarded in lieu of salary than it is included in GI. - Where the suit is no to recover lost profits but is for injury to good will, the recovery represents

a return of capital and with certain limitations is not taxable

- The determining factor is the nature of the basic claim from which the compromised amountwas realized

- Compensation for the loss of Raytheons good will in exc ess of its cost is gross income

104 Compensation for Injuries or Sickness- (a) General Rule: TP may exclude from GI (except amounts attributable to deduction allowed

under 213 made in a prior taxable year relating to the accident, then that amount deducted inthe prior year is included in GI)

o (1) amounts received under workmens comp. acts as compensation for personalinjuries or sickness; (so must occur while in course of employment)

o (2) amount of any damages (other than punitive damages) received (whether by suit oragreement and whether as lump sums or as periodic payments) on account of personalphysical injuries or physical sickness;

Emotional distress shall not be treated as physical injury or physical sickness. Emotional distress can be treated as physical injury to the extent amounts are

paid for under medical care in (A) (diagnosis, treat, cure, mitigate, treatment orprevention of disease) or (B) (transportation for care under (A))of 213(d)(1)attributable the emotional distress

Rev Rul 85-97: Lost wages can be excluded under (a)(2) if award is for damages on account for physicalinjury

(c)(1) Other than punitive damages shall not apply to punitive damagesawarded in a wrongful death action

Loss of consortium is a physical injury so can be excludedo (3) amounts received through accident or health insurance (or through arrangements

having effect of a health plan) for personal injuries or sickness (other than amountsreceived by an employee, to extent amounts (A) are attributable to contributions by theemployer which were not included in GI by the employee, or are (B) paid by employer)

105: Exclusion does not apply if the payments are made to an employeeeither:

(1) Under an accident or health plan to which employer made

contributions whi ch were excluded from employees GI under 106, or(2) paid by the employer.

If employer paid it and you didnt include it in GI that they paid it, then you cantnot use (3)

o (4) amounts received as a pension, annuity, or similar allowance for personal injuries orsickness resulting from active service in the armed forces of any country


16/47

16

o (5) amounts received by an individual as disability income attributable to injuries as adirect result of a terroristic or military action

TR. 1.61-14(a) makes punitive damages included in GI

106 Contributions by Employer to Accident and Health Plans- (a) General Rule: Employee may exclude from GI employer-provided coverage under an accidentor health plan. ( Employer paying into plan)

o Employees include dependents ( 152 ) and spouses ( 132(h)(2))- (c)(1) TP must include in GI employer provided coverage for qualified long-term care services to

the extent coverage is provided thru flexible spending or similar arrangemento (2) Flexible spending arrangement is a benefit program which provides EE with coverage

under which (A) specified incurred expenses may be reimbursed and (B) the maximum amt. of reimbursement which is reasonably available to a

participant is less than 500% of the value of such coverage- TP may exclude money employer is paying into a plan for the later benefit of employee. Tax

free fringe benefit. - Exclusion relates to amounts paid by employers for insurance premiums or into funded plans to

set up benefits for employees in case of future sickness or injury - Employer can deduct it; Excludes employer fringe benefits

105 Amounts Received under Accident and Health plans

(employer/employee relationship)- (a) Must include in GI amounts received by an employee through accident or health insurance

of personal injuries or sickness to the extent such amountso (1) from contributions by the employer which were not includible in GI of the employee

( 106), oro (2) paid by the employer

Can exclude when:- (b) (Except amounts attributable to 213 deduction from a prior taxable year) TP may exclude

from GI amounts received under accident and health plans if amounts are paid directly orindirectly, to the TP to reimburse the TP for expenses incurred by him for the medical care(defined under 213(d) as diagnosis, cure, mitigation, treatment, or prevention of disease, orfor the purpose of affecting any structure or function of the body) of TP, his spouse, and hisdependents ( 152)

- (c) May exclude from GI to the extent such amounts constitute payment for the permanent lossor loss of use of a member or function of the body, or permanent disfigurement, of TP, hisspouse, or a dependent and are computed with reference to the nature of the injury w/o regardto the period EE is absent from work.


17/47

17

- (g) Self employed not considered an employee- (h) Exclusion not available if payments are made under a plan which discriminates in favor of

highly compensated employees

911 Citizens or Resident of US Living Abroad- (a) Qualified individual may exclude from GI for any taxable year the foreign earned income andthe housing cost amount of TP

- (b)(1)(A): Foreign income means amount received from sources within a foreign country whichconstitute earned income attributable to services performed by TP

o (B): foreign income does not include pension or annuity paid by USo (b)(2)(D): Exclusion amount limited to $80,000 and indexed for inflation in 2006 (now at

91K)- (d)(1): Qualified individual means an person whose tax home is in a foreign country and a US

citizen that demonstrates he is bona fide resident of a foreign country for an uninterrupted

period which includes a taxable year, or who during any period of 12 consecutive months ispresent in a foreign country or countries at during at least 330 full days in such period (so mustbe there for 331 days to be a qualified individual)

- Provides an exclusion for amounts paid as reimbursement of foreign housing expenses inexcess of a statutorily provided base housing requirement, if the housing expenses are paid forby the TPs employ er

- Qualified TP s whose housing cost are not paid for by employers may elect to deduct a limitedamt. of housing costs in computing AGI

- Income and housing cost exclusions are elective and once made remain in effect in future yrsunless revoked

25A Hope and Lifetime Learning CreditsCredits come from taxable income. Not AGI. Dollar for dollar savings for TP. Greater benefit here. Giveadvice to TP to take one with greatest benefits.

- (a) Gen Rule: An individual is allowed a credit against the tax imposed.- (b) Hope Scholarship Credit (more narrow)

o (b)(1): This credit allows TP to elect a maximum per student credit of $2,500 of thequalified tuition and related expenses. 100% of qualified and related expenses notexceeding 2K and 25 % of such expenses exceed 2000 but not more than 2000.

Limitationso (b)(2)(A): Credit is only allowed for 4 taxable years.o (b)(2)(B): Credit only allowed only if individual is at least time student for portion of

yearo (b)(2)(C): Credit allowed only for first 2 years of post-secondary educationo (b)(2)(D): Credit is denied if Student is convicted of a felony drug offense

Eligible Student


18/47

18

o (b)(3)Means a student who is carrying at least the normal full-time work load for thecourse of study the student is pursuing

- (c) Lifetime Learning Credit (more broad)o (c)(1): Is the amount equal to 20% of the qualified tuition and related expenses paid by

the TP (for education furnished during any academic period beginning in such taxable

year) as does not exceed $10ko (c)(2)(B): Shall include qualified tuition and related expenses with respect to any course

of instruction at an educational institution to acquire or improve job skills of theindividual

- Limitations for BOTHo (f)(1)(A) Qualified tuition and related expenses means tuition and fees required for the

enrollment or attendance of the TP, TPs spouse, or any dependant of the TP whom theTP is allowed a deduction under 151, at an educational institution for courses of instruction at the institution.

o (f)(B): Qualified tuition and related expense does not include expenses for educationinvolving sports, games, or hobbies, unless course or other education is part of theindividuals degree program

o (f)(C): Qualified tuition and related expense does not include nonacademic fees likestudent activity fees, athletic fees, insurance expenses, or expenses unrelated toacademic course of instruction

o (d)(2)(A & B) Maximum credit for both is phased out for TPs with modified AGI between80K and 90K (160K and 180K for joint returns)

- (g) No double benefit with any other provisions in this chapter

221 Interest on Education Loans (Above the line deduction, 62 (a)(17)- (a) There shall be allowed as a deduction for the taxable year an amount equal to the interest

paid by TP during the taxable year on a qualified education loan- (b)(1) Max dollar amount is $2,500

o (2) limited based on AGI over 50 K (100K MFJ) bears over 15K (30K MFJ)- (c) Dependents not eligible for deduction- (d)(1) Qualified education means any indebtedness incurred by TP to pay qualified higher

education expenses (A) which are incurred on behalf of the TP, TPs spouse, or any dependent of TP

as of the time of indebtedness incurred, (B) which are paid or incurred within a reasonable period of time before or after

the indebtedness is incurred, and

(C) which are attributable to education furnished during a period during whichthe recipient was an eligible studento (2) The term "qualified higher education expenses" means the cost of attendance

- 221(e)(2) trap for people filing separately. If TP is married deduction shall be allowed only if TP and TPs spouse file a joint return. Can take $2500 total for those who marry. If single theneach can take $2500.


19/47

19

222 Qualified Tuition and Related Expenses ABOVE THE LINE ( 62(a)(18))- (a) Shall be allowed as a deduction an amount equal to the qualified tuition and related

expenses paid by TP during taxable year- (b) TP subject to dollar limitations

o (b)(1) Amount allowed as a deduction can not exceed applicable dollar limit

(b)(2)(B) After 2003: Applicable dollar limit: (i) for TP whose AGI is not over $65,000 ($130,000 joint return) is $4000 (ii) if TP not under (i) whose AGI is not over $80,000 ($160,000 joint

return) is $2000

135 Income from US savings bonds used to pay higher education tuition andfees

- (a) Gen. Rule- no redemption of any qualified US savings bonds will be included as gross incomeif the taxpayer uses it to pay for qualified higher education expenses during the taxable year

- (b) Limitations- not included as gross income is redemption amount of US savings bonds thatexceed qualified higher education cost

Not available to a parent if the bonds purchased by the parent but put in the name of a child or arepurchased by a childPhased out if TPs gross income exceeds 40K (60K joint return) - Fully phased out at 55K (90K) adjustedfor inflation starting in 1990

529 Qualified tuition programs- (a) A qualified tuition program shall be exempt from taxation- (b) qualified tuition means a program established and maintained by a State or agency or

instrumentality or by 1 or more eligible educational institutionsExcess distribution of funds not used for higher education purposes are taxable using 72 principlesThere is a tax penalty for distribution that is taxed of 10%Taxation of distribution may be avoided by a rollover within 60 days to other plans or other familymembersNo phase out

530 Coverdell Educational Savings Accounts- (a) Gen Rule- A Coverdell education savings account is exempt from taxation

- (b) Coverdell means a trust created or organized in the US exclusively for the purpose of payingthe qualified educational cost of an individual who is the beneficiary of the trust

o (b)A- contributions must be in cash and individual contributions cannot be more than2K, before beneficiary turns 18, or maybe made by rollover contributions, if suchcontributions result in aggregate contributions for the taxable year exceeding 2K

2K per yr contribution ceiling is phased out for higher income families w modified AGI between 95 K and110K (190K and 220K joint)


20/47

20

Distribution that is exceeds education costs are taxable like in 529- Rollover must be to someone under 30 as additional requirement

103 Interest on state and local bonds- (a) gross income does not include interest on any State or local bond- (b) exceptions:

(1) private activity bond which is not a qualified bond (2) arbitrage bond (3) bond not in registered form

115 Income of states and municipalities- Federal govt cannot tax state govt

Gain from dealings in propertyPhiladelphia Park v. US

- Basis = FMV (fair market value) of property received on day of transaction --- arms length deal- Once property is received property should not have any built in gain or loss- If basis = FMV and sell it immediately then wont have any gain or loss - All gain realized on bridge must be recognized under 1001(c), so paying for 10 yr extension on

the franchise- Basis of property received must be equal to FMV or property received or FMV of property given

up

1001 Amount and Recognition of Gain or Loss- (a) Gain derived from sa le of property is the excess of the AR over the propertys AB

o Gain or Loss from sale of property determined by AR AB = GR/LR (positive number = Gain, negative number = Loss).

o Must compute gain and loss on any transaction, if you have a realization event thentrigger to compute gain or loss under (a).

- (b) Amount realized includes the sum of any money plus the FMV of any property (other thanmoney) received in the transaction, and debt relief. Everything received in exchange for theproperty and is not limited to cash.

- (c) the entire amt. of gain or loss on the sale or exchange of property shall be recognized unlessspecifically excluded

1011 Adjusted Basis for Determining Gain or loss,- (a) shall be the basis of the property and as adjusted under 1016


21/47

21

1012 Basis of Property Cost,- Basis of property is the cost of the property. What TP paid for.

o TR 1.263(a)-2(e): brokerage fee offsets the sell price so if sold stock for $70 it is really

$65o If settling a claim and receive stock your cost basis would be the value of the stock

1016 Adjustments to Basis,- (a): is the basis plus or minus certain adjustments in respect to the property,

o (a)(1): Basis of property is increased by the amount of capital expenditures, such as costof capital improvements made to property

o (a)(2): Amount of reduction in basis on account of deductions for depreciation,amortization or depletion

- Under 1001(c), TP must recognize every gain/loss realized, unless a nonrecognitionprovision applies.

o Included in GI under 61(a)(3)

Amount realized- Recourse debt: lender has recourse on you and whatever you have, if debt is taken over by the

buyer you will have relieve of debt equal to face value amount of that debt- Nonrecourse debt: loan where borrower is not personally liable

1014 Basis of Property Acquired from a Decedent,- (a) General Rule: Basis of property acquired from a decedent is the FMV of the property at the

date of decedents death. - (b) Property acquired from decedent include

o (1) Property by bequest, devise, or inheritance, or by the decedents estate from thedecedent

o (2) Property transferred by decedent during the lifetime in trust to pay the income forlife to or on the order or direction of the decedent with the right reserved to thedecedent at all times before his death

o (6) In a community property state, surviving spouses one -half share and gets a step upin basis to the FMV when spouse dies.

- (e) Appreciated property will not receive a stepped-up basis if it is acquired by gift by a decedentwithin one year of his death and if it passes back to the initial donor or the donors spouse. Theproperty will take a transferred basis, equal to the donors original basis in the property prior tothe gift to the decedent. (prevent fraud)

- Built in gain or loss disappears


22/47

22

1015 Basis of Property Acquired by Gifts and Transfers in Trust,- (a) Property acquired by gift after 1920, the basis shall be the same as it would be in the hands

of the donor. Step into the shoes of the donor. (inter vivos gift)

o Exception. (a) does not apply if basis is greater than the FMV of the property at the time

of the gift; and donee sells the property in a transaction that would result in a loss.

If basis unknown then basis would be FMV at time gift was acquired by donor.

- (d)(1)(A) If donor paid gift tax, donees basis goes up by that amount, but not above the FMV of the property at time of gift.

Taft v Bowers- Rule: Constitution does not prevent congress from treating as taxable income to the recipient of

a gift the increase in the value of the gift while it is owned by the donor.- LR: 1015 provides that if property was acquired by gift,the basis shall be the same as it

would be in the hands of the donor or the last preceding owner by whom it was not acquired bygift. 16 th amend gives congress to tax all gains derived even from a gift.

- to the extent that property has a built in loss and sold, the done cannot take the tax benefitfrom the built in loss exception to the general rule

1041 Transfers of Property Between Spouses or Incident to Divorce- (a) Nonrecognition provision. No gain or loss shall be recognized on a transfer of property from

an individual too (a)(1) a spouse, oro (a)(2) a former spouse, but only if the transfer is incident to the divorce. (c) Transfer of property is incident to divorce if such transfer

(c)(1) occurs within 1 year after the date on which the marriage ceases,or

(c)(2) is related to the cessation of the marriage- (b) Transfer of property between spouses then

o (b)(1) the property shall be treated as acquired by the transferee by gift, ando (b)(2) the basis of the transferee in the property shall be the adjusted basis of the

transferor- Trumps 1015 Basis Acquired by Gift

Intl Freighting Corp. v. Commissioner - Rule: When TP disposes of property in exchange for services, there is an amount realized equal

to the fair market value of the services.- When P gave stock with a fair market value greater than its basis to its employees, P realized a

gain in the amount of the difference between the basis of the stock and its fair market value


23/47

23

when transferred. Delivery of shares was not a gift and constituted a disposition of property fora valid consideration.

Crane v. Commissioner:- Amount of a nonrecourse liability incurred on the acquisition of property is included in the

basis. So, if one takes property that is subject to a nonrecourse mortgage either by sale,devise or gfit, that person has a basis in the property equal to the balance on the mortgageplus any other money or property that he gave in order to obtain the property.

- Establishes the proposition that nonrecourse mortgages should be treated as true loans for taxpurposes.

- Under 1012 , when you buy property with nonrecourse debt you get the nonrecourse debt asyour basis .

- So when you buy property with nonrecourse debt it becomes part of your basis and when yousell property you can offset AR as well as depreciate it if you dont sell it and instead hold on toit. Thus, court concluded that amount realized should nonrecourse debt

Commissioner v. Tufts- Rule: When a party transfers property encumbered by a nonrecourse mortgage with an unpaid

balance that exceeds the fair market value of the property, the transferor has realized anamount equal to the unpaid mortgage balance.

- Issue: if the value of the house is below amount of debt and it is nonrecourse debt should wehave to include in the amount realized the entire debt or just the FMV of the property?

- Answer: if you include it in basis and depreciate it and off set it then Court argues we shouldinclude the full face amount of the debt in the amount realized.

After Crane/Tufts- amount realized includes all of the nonrecourse debt thats been discharged even if FMV is

well below that debt

CAPITAL GAINS AND LOSSES

1221 Capital Asset Defined,- (a) capital asset means property held by a TP, but does not include:

o (1) Stock in trade of the TP or other property of a kind which would be included ininventory (things you would sell) of the TP if on hand at the close of tax year, orproperty held by the TP primarily for sale to customers in the ordinary course of TPstrade or business;

o (2) Property not sold, but property used in trade or business (ex: tables chairs, utensils,real property)


24/47

24

o (3) TPs self produced or prepared items such as copyright, literary, musical, or artisticcomposition. If sold will give rise to ordinary income or loss

o (4) Accounts or notes receivable acquired in the ordinary course of trade or business forservices rendered or from the sale of property

o (5) A publication of the US gov. which is received from the US gov. or any other agency,other than by purchase at the price at which it is offered for sale to the public and isheld by TP who received the publication, or TP (a)(5)(B)

o (8) Supplies of a type regularly used or consumed by TP in the ordinary course of a tradeor business of TP. If sold while using in course of ordinary business then gain is ordinaryincome

1222 Terms Relating to Capital Gains and Losses ,- (1) STCG: gain from sale or x/c of an asset held less than a year, extent such gain is taken into

account in computing GI

- (2) STCL: loss from sale or x/c of an asset held less than a year, extent such loss is taken intoaccount in computing GI

- (3) LTCG: gain held more than a year, extent such gain is taken into account in computing GI- (4) LTCL: loss held more than a year, extent such loss is taken into account in computing GI- (5) NSTCG: Excess of STCG for the taxable year over the STCL for such year (STCG STCL)- (6) NSTCL: Excess of STCL for the taxable year over the STCG for such year (STCL STCG)- (7) NLTCG: Excess of LTCG over the LTCL (LTCG LTCL)- (8) NLTCL: Excess of LTCL over the LTCG (LTCL LTCG)- (9) Capital gain net income: Excess of the gains from sales or x/cs of capital assets over the

losses from such sales or exchanges (G L)

- (10) Net Capital loss: excess of the losses from sale or x/c of capital assets over the sum allowedunder 1211.

- (11) Net Capital gain: excess of TPs NLTCG over the NSTCL (NLTCG NSTCL)

- Rev. Rul. 66-7 : for property, the date on which it is acquired is excluded and the date on which itis sold is included. Property goes long term on the date 1 year and 1 day after it is acquired . If capital asset is acquired on the last day of a calendar month, it must not be sold or exchangeduntil on or after the first day of the thirteenth succeeding calendar month in order to hold it formore than a year.

- Rev. Rul. 66-97: Trade date is the date securities are considered acquired and sold. Thus,holding period for securities is determined by excluding the trade date on which they wereacquired and by including the trade date on which they were sold . Settlement date (whensecurity is delivered and payment tender) does not affect holding period of the security

o If received as gift: count date you receive it, holding period would be donor ortransferor.

o If you inherit property holding period will ALWAYS be long term regardless of transferors holding period.


25/47

25

o When TP buys stock at different times go to TR1223-1, first shares in is first shares outwhen TP sells stock (FIFO)

1223 Holding Period of Property

(1) TP is holding the property during period property is held and has the same basis in whole or in part- (9) If acquired property by 1041 (through spouse) and basis in property is based under 1041

and property is sold within 1 year after decedents death then pro perty is considered to haveheld property for more than 1 year.

- Must hold property for more than 1 year to get preferential tax treatment. If held for less than1 year than would be subject to tax at ordinary tax rate.

If it is a Net Capital Gain then:o For TPs who are in the 25 % or higher bracket (rich ppl) and it is NCG (not short term

capital gain) than under 1(h)(1)(C) max rate is 15%, unless it is a collectible then under

1(h)(5)(A) it will be 28%o For TPs who are the 25% or below bracket (poor ppl) and it is NCG under 1(h)(1)(B)

max rate is 5% and in 2008 it is 0%, unless it is a collectible then it will be 28% under 1(h)(5)(A)

If it is a short term capital gaino Then taxed at regular rate of 35%

If it Net Capital Loss:o 1211 for limitations on loss.

TP can deduct the amount of loss of either the lesser of $3000 or excess of losses over gains

o 1212 for carryover TP has lifetime carryforward to offset ordinary income. Can carry a min. of

$3000 each year under 1211(b)(1) or excess of losses over gains under 1211(b)(2)

If not Net Capital Losso 62(a)(3) can use capital loss deduction to offset GI.

The loss allowable is to extent of the capital loss plus the excess of the capitallosses over gains.

1. 1001 (a) determines if there is gain or loss (AR AB) = Gain or loss realized and must berecognized unless other provision states you dont have to pursuant to 1001(c)

a. if gain or loss is part of a capital asset as defined as 1221 we then have to go to 1222(defines STCG, STCL, LTCG, LTCL)

2. Net [STCG and STCL] and [LTCG and LTCL]a. And you will end up with Net short term capital gain (net is positive number) or a net

short term capital loss (net is a negative number, losses exceed gain, you lose money),net them by subtracting (p. 680 STCG STCL = NSTCG/NSTCL)


26/47

26

b. You can end up with a net long term capital gain or net long term capital loss. Net themby subtracting them from each other (p. 680 LTCG LTCL = NLTCG/NLTCL)

c. Once we net each individual Short or Long and then we add them together.i. Can have NSTCG (taxed as ordinary income) and NLTCG ( 1(h) tax rate of 15%

on collectible). And offset each value

ii. Can have NSTCG or NLTCL. NSTCG it will be taxed as ordinary income. If youend up with NLTCL then it is subject to limits 1211(b) limit to $3000. Under 1212(b) excess of $3000 can carry it forward indefinitely

iii. Can have Net Capital Gain under 1222 so you have NLTCG and taxed at 28%iv. Can end up with a NSTCL and a NLTCL. Use NSTCL first to carryover under

1212(b), when carry forward it retains character. (25% rate in book do not needto know, just know 15% and 28% on collectible)

Mauldin v. Commissioner- important how P advertised land and in originally what you are in as a business- if buy house with intention to doing this on a routine basis then it can be inventory- when you buy land and hold it as an investment then the asset in your hands is a capital asset,

just like stock

1(h) Maximum Capital Gains Rate- (1) If TP has net capital gain TP gets preferential tax treatment. Can have capital asset hold more

than a year and sell it at a gain and get max tax rate of 15% unless it is a collectible, for thosewho are above 25% tax bracket

- (B) Pay only 5% rate if you have adjusted net capital gain, and 0% rate for taxable years after2007. Applies only for TP who are below 25% bracket and applies only to net capital gains.Does not apply to net short term capital gain

- can liquidate your gains and then have a 0% tax rate- (h)(5)(A) Collectibles : capital gain or loss means gain or loss of a collectible held for more than 1

year. Has max tax rate of 28%, no preferential rate, just get regular rateo 408(m) Defines collectibles as (A) work of art, (B) rug or antique, (C) metal or gem, (D)

any stamp or coin, (E) alcohol beverage, (F) or any tangible personal property specifiedby the Secretary.

If you sell collectibles and incur a gain or loss will be subject to 28% rate. TP willnever pay higher rate then your ordinary rate, ex: so if you pay 15% rate youdont pay 28% collectible rate since youre ordinary rate is 15%.

- (11) Dividends taxed as net capital gain. Qualified dividends included as net capital gain, andsubject to tax rate of max tax rate of 15%

o To get dividends you must be a corporate shareholder, earnings are paid out throughdividends. Publicly traded companys pay dividends out quarterly. Dividends tax favoredsource of income. If you hold stock for more than 1 year and sell it as a gain, it will beLTCG. Dividends and Interest income is different. Interest income paid for the use of


27/47

27

your money. Interest income is not subject to tax preferred rates as dividends are.Added to salary on rest of income and subject to tax at ordinary rates

1202 50% Exclusion for Gain from Small Business Stock

- (a)(1) allows noncorporate TP an exclusion of 50% of the gain on qualified small business stockheld for more than 5 yrs

1211 Limitation on Capital Losses- (b) for regular TP, losses from sales or exchanges of capital assets shall be deductible to extent

losses exceed gains from such sales or exchanges, plus up to the smallest of o (b)(1) $3,000 ($1500 for married individual filing sep. return), oro (b)(2) the excess of such capital losses over such capital gains

Which ever value is chosen then that value is constructive STCG and added to

the given STCG and that deduction must be deducted from NSTCL then NLTCLfor 1212 carryforward

1212 Capital Loss Carryforward- (b) If noncorporate TP has net capital loss ( 1222 (10))

o (1)(A) the excess of the net short term capital loss over the net long term capital gain forsuch year shall be a short term capital loss in the succeeding taxable year and

o (2)(B) the excess of the net long term capital loss over the net short term capital gain forsuch year shall be carried over as a long-term capital loss in the succeeding year

Provides that the carryforward of losses retain their character as short-term orlong-term to the next tax year

- (b)(2): For determining the excess referred to under (b)(1)(A) and (B) there shall be treated as ashort term capital gain an amount equal to the lesser of

o (i) the amount allowed under (1) ($3,000) or (2) (excess of such losses over such gains)of 1211(b) (must add one of these values to STCG before determining carry forwardamount)

o Forces TP to use their short-term capital losses before any long-term capital losses foroffset allowed against ordinary income

Mauldin v. CommissionerRule: Property held by TP for sale to customers in the ordinary course of a trade or business is not acapital asset entitled to capital gain or loss treatment, regardless of TPs stated purpose.

Malat v. Riddell


28/47

28

Rule: When determining whether property is held primarily for sale to customers in the course of atrade or business, and thus exempt from capital gain or loss treatment, primarily means of firstimportance or principally

Kenan v. Commissioner

Rule: Using stock to satisfy a specific monetary gift to a beneficiary results in a capital gain to the estateequal to the amount the stock had appreciated from the time of the decedents death to the time of transfer.

Hudson v. CommissionerRule: Collecting money to settle a judgment even if the judgment was purchased from the originalcreditor, is not a sale or exchange.

Assignment of IncomeASSIGNMENT OF INCOME

- Idea is to shift income to lower tax brackets to get lower tax rateso State general rule of assignment:

Income is taxed to TP who earns it or owns property that produces theincome. Person who is earning income will be subject to tax on that income. TPmust include compensation in GI, and TP cant generally shift earnings toanother person.

Under Lucas v. Early TP cant separate income stream from person who is

earning it, cant cut out earnings and shift it to someone else. Cant takesomething earned from sweat and labor and give it to somebody for taxpurposes

TPs would like to shift income to another person because of the progressive taxrates. TPs want to try to escape and avoid taxation thats why hard to servicescrutinizes assignment of income.

o Then look to facts and see where income is coming from: If coming from personal earnings or services: income in form of compensation is

generally included in person of who performed the services ( Lucas v. Earl ) Sub issues: Giananini : when qualified TP early on disclaims salary before

it ripens and never earned any $$ and refuses to receive anycompensation and tells his employer where to donate it without havingany control of where it will go then TP does not have to include in GI,since it is forgone compensation. This is an exception to the rule inLucas. If TP retains interest in where compensation will go then it is stillconsidered to belong to TP . If giving away dominion or control of money then not included in GI. (fruit and tree analogy)


29/47

29

If income coming from property (rental, lease, stocks/dividends) then propertyowner may not avoid income merely by directing income to another person(Helvering v. Horst ). Income derived is normally included in owners GI

If TP wants to not include in GI then must transfer not only the $ butalso the property (fruit and tree analogy)

Improper assignment when a conveyance is unsupported byconsideration. Children were merely a conduit through which to passtitle form was proper, but substance was an anticipatory assignment(Susie Salvatore )

One who receives income as the owner of the beneficial trust pays thetax. (Blair)

It is proper assignment of property when Under Estate of Stranahan, transaction showed substance and form and

was an assignment of future income for valid consideration. Justbecause it was a transfer within family does not make it invalid. Herefather was not trying to avoid or escape recognition of income, butwanted to take advantage of reduced taxation. The assignment was anassignment of the asset and not just redirecting a stream of income.

- Stocks: if you want to shift dividend income to someone else, you have to shift the entire stock.(the tree) Cant just tell company to write dividend check to son. Not good enough because youwill get taxed.

- Rental income: can forward check to child but you as the landlord will be taxed because you arethe property owner. Put child on title (give tree), cant just divert income stream. No substancefor tax purposes.

Rev. Ruling 66-167- Husband disclaimed fees never took possession, similar to Giannini. Substance of transaction

showed that husband did not take a fee and worked based on a gratuitous basis.Rev. Ruling 74-581

- in substance the school was getting the money, so school must include it in GI- TP received check, but gave check to school


30/47

30

DEDUCTIONS for Individuals

- Deductions are used to offset GI and prevent that amount of GI from being taxed.

62 AGIAbove the line deductions are generally more advantageous for a taxpayer than below the linedeductions. Above the line deductions are not subject to income-sensitive phaseouts or limitations.Certain below the line deductions, by contrast, are phased out for wealthy taxpayers. Additionally,certain below the line deductions may be taken only if they exceed a certain percentage of adjustedgross income.

Policy why above the line deductions are better: Adjustments for AGI (above the line deductions)reduces gross income and more powerful deductions because it generates tax benefit higher thanmarginal tax rate.

- (a) Gen Rule: AGI = GI Above the line deductions- All are above the line deductions

o (1) Trade and business deductions where TP is not an employeeo (2) Trade and business deductions for employees

(A): Reimbursed expenses of employees (allowed under 161 and following).Expenses paid or incurred by TP in connection with the performance by TP of services as an employee under a reimbursement or expense allowancearrangement with TPs employer

(B) Expenses for Performing artists (allowed under 162). Expenses paid orincurred by a qualified performing artist in connection with the performances byhim of services in the performing arts as an employee.

(C) Expenses of officials (allowed under 162). Consist of expenses paid orincurred with respect to services performed as an official as an employee of aState or a political subdivision

(D) Expenses of elementary and secondary teachers (allowed under 162). Notin excess of $250, paid or incurred by an eligible educator in connection withbooks, supplies (other than nonathletic supplies for health or physicaleducation, CPU equipment (including related software and services) and otherequipment, and supplementary materials used by the educator in class.

(d)(1)(A) Eligible educator means an individual who is a K-12 teacher,instructor, counselor, principal, or aide in a school for at least 900hoursduring a school year.

(d)(1)(B) School means any school that has grades K-12o (3) Losses from sale or exchange of property (should think about 165)o (4) Deductions attributable to rents and royalties (allowed by 161 and following,

212(relating to expenses for production of income), and 611 (relating to depletion)which are attributable to property held for the production of rents or royalties.

o (5) Certain deductions of life tenants and income beneficiaries of property. (allowed by 167 and 611)

o (6) Pension, profit-sharing, and annuity plans of self-employed individuals. If TP who isan employee within the meaning 401 (c)(1), the deduction is allowed by 404.

o (7) Retirement savings. (allowed by 219)


31/47

31

o (10) Alimony. (allowed by 215)o (15) Moving Expenses (allowed by 217)o (17) Interest on education loans ( 221)o (18) Higher education expenses ( 222)o (19) Health savings accounts ( 223)o (20) Costs involving discrimination suit

63 Taxable Income- (a) Gen Rule: TI = GI Deductions allowed by this chapter (other than standard deduction)

o If they dont fall under 62 fall here, and all are itemized deductions Standard Deductiono (b) If TP doesnt choose itemized then TI = AGI standard deduction and deduction for

personal exemptions under 151 o (c)(1) Standard deduction means sum of basic standard deduction and the additional

standard deduction (c)(2) (A)Basic standard deduction is 200% of the dollar amount of $3000 for the

taxable year in the case of: ($11,400) (i) Joint return, or (ii) A surviving spouse (defined by 2(a))

(c)(2)(B) $8,100 in the case of a head of household (under 2(b)), or (c)(2)(C) $5,700 in any other case (c)(3) Additional standard deduction is sum of aged and blind amounts

(f)(1)(A) TP shall take an additional $600 if he has attained age of 65before the close of his taxable year, and

(f)(1)(B) for the spouse if spouse has attained 65 before close of tax yearand additional exemption is allowed to TP for the spouse under 151(b)

(f)(2)(A) TP shall take additional $600 if himself is blind at close of

taxable year, and (f)(2)(B) for the spouse of TP if spouse is blind at close of tax year and

additional exemption is allowed to TP for such spouse under 151(b). If spouse dies during tax year than whether she is blind is determined attime of death

(f)(3) if not married TP can take $750 instead of $600 (f)(4) Blindness is does not exceed 20/200 in the better eye with

correcting lenses, or if his visual acuity is greater than 20/200 but haslimitation in field of vision where widest diameter of visual fieldsubtends an angle no greater than 20 degrees

(c)(5) If individual to whom a deduction under 151 is allowable to another TP

for a taxable year, the basic standard deduction applicable to such individualshall not exceed greater of (c)(5)(A) $500 ,or (c)(5)(B) the sum of $250 and such individuals earned income

(c)(6): Not eligible for standard deduction if: (A) married individual filing sep. return where either spouse itemizes

deductions; (B) a nonresident alien individual


32/47

32

(D) an estate or trust, common trust fund, or partnership

o Itemized Deductions o (d) Itemized deductions means deductions allowable under this chapter other than

deductions allowable under 62 and the deduction for personal exceptions under 151 itemized are usually personal deductions TI = GI AGI Itemized personal/dependency exemptions

67 Misc. Itemized deductions,- For individuals the misc. itemized deduction allowed only to extent that the aggregate of such

deductions exceed 2% of AGI o (b) Misc. Itemized deductions are NOT listed below

(1) 163 deductions Interest (2) 164 deductions Taxes (3) 165 deductions Losses (4) 170 deductions Charitable Contributions (5) 213 deductions Medical Expenses (6) Deductions allowable for impairment related work (7) 691 deductions (8) Deductions allowable in connection with personal property used in a short

sale (9) 1341 deduction (10) 74(b)(3) deduction Prizes and Awards (11) 171 (12) 216

- Policy: misc. itemized not that powerful since most people take the standard deduction overitemized

151 Deductions for Personal Exemptions (deduction taken after taking62/63 deductions)

- (a) All individuals allowed exemption deduction in computing taxable income- (b) TP allowed exemption and additional exemption allowed for spouse of TP if joint return is

not made by TP and spouse, has no GI, and is not dependent of another TP- (c) TP allowed exemption for each dependant (defined under 152).

o (d)(1): Exemption amount is $3,650o (d)(2): TP may not claim a personal exemption for himself, if he is able to be claimed as a

dependent by another TP (such as a parent).- (d)(3) phase out TPs whose AGI exceeds the threshold then the exemption amt is reduced

by the applicable percentages in (d)(B)& (C).

152 Dependent Defined- TP may take an additional deduction for the exemption amount for each of TPs dependents - (a) Gen Rule: Dependent means a qualifying child or a qualifying relativeExceptions- (b)(1): If individual is dependent of a TP that individual will be treated as having no dependents


33/47

33

- (b)(2): Individual not treated as a dependent of a TP if individual has made a joint return withspouse

- (b)(3)(A): Dependent does not include individual who is not a citizen of US unless is resident of US or a country contiguous with US

- (b)(3)(B): Child shall be excluded under (A) as a dependent if child has same principal place of abode as TP and is a member of TPs household and the TP is a citizen or national of US

Qualifying child means:- (c)(1)(A): an individual who bears a relationship to the TP,

o (c)(1)(B) who has same principal place of abode as TP for more than one half of taxableyear,

o (c)(1)(C) who is under the age of 19 or a student under the age of 24, and (f)(2): Student defined as a full time student at an educational organization

described under 170(b)(1)(A)(ii) (an educational org that maintains a regfaculty and curriculum and regularly enrolled body of students in attendance) orpursuing a fulltime course of institutional on-farm training under supervision of an accredited agent of an educational organization under 170(b)(1)(A)(ii)

o (c)(1)(D) who has not provided over one- half of such individuals own support for thetaxable year.

- (c)(2) Individual is related to TP if person is a child of the TP or a descendant of such a child, abrother, sister, stepbrother, or stepsister of the TP or a descendant of any such relative (c)(2),

o (f)(1): Definition of a child includes stepchildren, eligible foster children, and adoptedchildren

- (c)(3)(B): Person who is permanently disabled at any time during calendar year the agerequirement is met.

- (c)(4)(A): If qualifying child is claimed by 2 or more TP as a dependent then individual treated asqualifying child of TP who is a parent of the individual or if not a parent then TP with highest AGI

- (c)(4)(B): if parents claiming any qualifying child do not file a joint return, the child shall betreated qualifying child of the parent with whom child has resided for the longest period of time,

or if the child resides with both parents for the same amount of time during taxable year, thenthe parent with the highest AGIQualifying Relative means:- (d)(1)

o (d)(1)(A) One who bears a relationship to TP,o (d)(1)(B) whose GI for calendar year is less than exemption amount ($3,650, defined

under 151(d)),o (d)(1)(C) for whom the TP provides over one- half of the individuals support for the

calendar year, ando (d)(1)(D) who is not a qualifying child of such TP or any other TP for any taxable year

- (d)(2) Relationship to TP meanso (A) a child or a descendent of a childo (B) a brother, sister, stepbrother, or stepsister,o (C) the father or mother, or an ancestor of eithero (D) a stepfather or stepmothero (E) a son or daughter of a brother or sister of the TPo (F) a brother or a sister of the father or mother of the TPo (G) a son in law, daughter in law, father in law, mother in law, brother in law, sister in

law


34/47

34

o (H) an individual other than the spouse, who for the taxable year of TP has the sameprincipal place of abode as the TP and is member of TPs household

- (d)(3): If individual satisfies requirements of qualifying relative of a TP, but TP does not provideover one- half of individuals support, TP may still claim individual as a dependent if T P satisfiesmultiple support agreement. To qualify, no one person may contribute over one-half of theindividuals support, but over one -half of the support must be provided by qualified relatives.TP must contribute over 10% of the individuals support, and each person related to theindividual who furnished over 10% of the dependents support must file a written declarationthat they will not claim an exemption for that individual for the taxable year.

Children of Divorced Parents- (e)(1) Child who received more than one-half of his support from his parents, but whose parents

are divorced, sep, or living apart during the last 6 months of a calendar year, and who is incustody of one or both parents for more than one-half of the year is treated as being thequalifying child or qualifying relative of the custodial parent.

- (e)(2) If custodial parent signs written declaration stating that he will not claim the child aseither a qualifying child or relative and the non custodial parent attaches that declaration to herreturn then the non custodial parent may claim the child as a dependent

- (e)(3) Rule does not apply if TP is treated as providing more than one- half of a childs supportbecause of multiple support agreement.

213 Medical, Dental Expenses (not listed in 62(a) so Itemized Deduction, 67(b)(5)), not misc.

- (a) TP may deduct expenses paid which are not compensated for by insurance for medical careof the TP, his spouse, or dependent (under 152 ) to the extent that such expenses exceed7.5% percent of AGI.

- (d)(1) Medical care meanso (d)(1)(A) amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of

disease, or for the purpose of affecting any structure or function of the body,o (d)(1)(B) the transportation primarily for and essential to medical care,o (d)(1)(C) for qualified long term services, oro (d)(1)(D) for insurance covering medical care referred in (A) or (B)

- (d)(2) Expenses for lodging (not lavish or extravagant) while away from home primarily formedical care shall be treated as amounts paid for medical care if:

o (d)(2)(A) the medical care referred to in (d)(1)(A) is provided by a physician in a licensedhospital or in a medical facility related to or an equivalent to a licensed hospital

o (d)(2)(B) and there is not element of personal pleasure or vacation in the travel awayfrom home.

- (d)(5): Any child to whom 152(e) (child of divorced parents applies shall be treated adependent of both parents for purposes of this section

- (d)(9) Medical care does not include cosmetic surgery unless the surgery or procedure isnecessary to ameliorate a deformity arising from or directly related to a congenial abnormality,a personal injury resulting from an accident or trauma or disfiguring disease.

TR- 1.213-1(e)(1)(iii): eye glasses and contacts are deductible- Rev. Rul. 79- 151: weight loss program to promote general health and not to cure a specific

ailment or disease is not deductible.


35/47

35

- Rev. Rul. 55-261: medical care includes the cost of special food is (1) the food alleviates or treatsan illness, (2) it is not part of the normal nutritional needs of the TP, (3) the need for the food issubstantiated by a physician

- Rev. Rul. 2002-19: uncompensated amts. paid by individual for participation in a weight-lossprogram as treatment for a specific disease or diseases (including obesity) diagnosed by aphysician are expenses for medical care that are deductible under 213.

Gerard v. Commissioner (air conditioner was built for daughters health and it raised value of house. TPwas allowed to deduct 500 as medical expenses). Where the TP is able to show that the expenditurewas more than the increase in value the difference is allowed as a medical deduction. ($1300 for AC,raised value of house by $800= 500 deduction for medical)

- If you see this cite TR 1.213(1)(e)(1). It says portions of capital improvements made primarily formedical care are deductible under 213 (ex: air conditioning, wheel chair ramp)

- If installed something in house like railings to assist handicap person then have to argue it is or isnot a capital expenditure under 263. Maybe able to exclude cite Ferris v. Commissioner where they excluded a pool for health reasons and that was a capital expenditures

- lodging and 50% of meals en route to place of care are included ( Montgomery v Commissioner ) - 213 (d)(2) deduction is limited to $50 per night for each eligible person.

215 Alimony (above the line deduction 62(a)(10))- (a) Gen Rule: In the case of an individual, there shall be allowed as a deduction an amount equal

to the alimony or separate maintenance payments p

Documents

Fed Tax Outline Final