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OutlineMonda y, November 21, 20113:37 PM

I. Introductiona. Features of a tax system

i. Raising revenue1) Types

a) Ability to pay (fairness)i)

ii)

Horizontal equity--similar people in similar situations should be taxedsimilarlyVertical equity--the more you earn, the bigger the proportion of incomeshould be paid

b) Head tax2) Credit vs. deduction

a) Credit--dollar for dollar reductionb) Deduction--reduction by marginal tax rate

ii. Deductions, generally1) Adjusted gross income [62] ("AGI") is gross income ("GI") minus the

expenses associated with earning the income.a) You only get taxed on net profits a f t e r expenses

2) Above-the-line deductions make sure T gets deductions regardless of whether Titemizes

3) Schedulesa) Schedule A

i) Itemized deductionsb) Schedule C (business income)

i)

ii)

T can deduct expenses of earning income from GI to get to taxable income("TI")This includes 1/2 of self-employment taxes (if self-employed) to ensure Tis on equal standing with an employed employee

4) Personal and standard deductionsa) Single

i) ii) iii)

Standard deduction = $5,800Personal exemption = $3,700T gets $9,500 at 0%

5) Computation of taxa) Average rate of tax = Tax/TIb) Effective rate of tax = Tax/AGI

iii. Goals of the tax system1)2)3)

b. Tax law

Fairness Economic effects Administrative feasibility

i. How a bill becomes a law1) Executive proposed tax plan2) Begins in the Means and Ways Committee

a) Hearings, Committee Report (this is one of your sources)3) Goes to House for vote4) Senate Finance Committee

a) Senate Committee Report5) Goes to Senate6) Conference Committee makes compromises between both houses of Congress7) Congress votes again, and President signs

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ii. Tax law sources1) Tax Bluebook

a) Tax litigation is explained here. Some authority, not much,2) Treasury Regulations

a) Given great deference3) Revenue Rulings

a) IRS gets similar questions so issues a fact pattern and solution4) Notices5) Private letter ruling

iii.a)

Tax courtBinding on T and IRS, but no precedent

1) Fora a) Tax Court

i) ii) iii) iv)

19 expert judgesNo jury trialD o n o t need to pay tax to litigateAppeal goes to same appellate circuit

One. So you can have two TC decisions that end differentlyb) Federal D.Ct.

i) ii) iii)

Judge likely not an expertTax m us t b e p a i d to litigate (then T sues for refund) Appeal goes to same appellate circuit

c) U.S. Court of Federal Claims

II. Characteristics of income

i)ii)

No juryAppeal goes to D.C. Circuit

a. The concept of incomei. Concept of deferral

1) Accelerate deductions while deferring incomeb. Definitions of income

i. Haigs-Simons1) Income = consumption + changes in wealth

a) Problems with unrealized gains

ii.

i)ii)

Macomber case

T would be taxed on appreciation of homeWherewithal to pay problems

1) Value from labor and (…)a) Excludes windfalls

iii. Glenshaw Glass case1) Realized gain over items which T has dominion

iv. v.

Gain recognition occurs when there is gain realization, un l e s s a tax provision says otherwiseIncome considerations

1)2)3)

c. Section 61

Vertical/horizontal equity Administrative feasibility Economic effects

i. Income from all services, case, and property1) Turner v. Commissioner

i. T wins cruise tickets and exchanges them for other tickets. Point of case: it's difficult to estimate value of non-transferrable goods.

2) Revenue Ruling 79-24i. Services paid for in ways other money are included in GI at the FMV of

those services or their stipulated priceIII. Food and lodging; deductibility [119]

a. Benaglia v. Commissioneri. T had to live at resort for convenience of employer

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ii. N o t t a x a b l e because for employer's convenienceIV. Statutory Treatment of other fringe benefits [125, 129, 132]

a. Generallyi.

ii.

Non-cash benefits provided free or below-market price that relieve people of otherwise incurrable dedsFringe benefits never show up in GI.

b. Types of fringe benefitsi. Dependant Care Assistance Programs [129]

1) $5,000/year deductionii. Certain Fringe Benefits [132] (p. 124)

1) Seven types of excludable fringe benefitiii. Cafeteria Plans [125]

1) Non-cash benefits in lieu of salarya) Taking the cash is taxableb) Without [125], e v e n o ff e r i n g the option of cash would make the benefit taxable

(constructive receipt)2) Use-it-or-lose-it rule

iv. Employer provided health plans [106]1) Covers T, spouse, and dependants

V. Taxability of windfalls and gifts [102]a. Windfalls

i. Glenshaw Glass1)

2)b. Gifts [102]

Punitive damages are taxable because they are an undeniable accession to wealth, over which there has been realization and T have undeniable dominionT wanted a restrictive Macomber definition of income.

i.ii.

Gifts are excluded by the income tax, but T still has to think about gift and estate taxesCommissioner v. Duberstein, consolidated with Stanton

1) Dubersteina) Company gives T a car for sending customers their way

2) Stantona) T works for church, and church gives T a "gift" gratuity

3) Holdinga) Duberstein has to pay tax, Stanton didn't.

4) Congress' corrections to gift lawa) Congress limits business gifts to $25 under [274(b)]. Corporations cannot

deduct the expense so T isn't going to pay tax.b) Employers cannot give gifts to employees; employees cannot receive gifts from

employers [102(c)]i) Unless [132(e)] de minimis fringe benefit or [74(c)]

employee achievement awardsc. Gift versus Compensation

i.

ii.

If property is a gift, T takes donor's basis. If property is compensation, T's basis is what income is [1012]Page 114, good example

VI. Transfer of unrealized gain [102, 1012, 1014, 1015]a. 102(b) gift transfer

i. Taft v. Bowers [102] [1012]1) A buys 100 shares of stock for $1,000. A's basis is $1,000. A gives B the stock when

the stock is worth $2,000. B sells the stock for $5,000.2) $1,000 is B's [1012] basis.

a) T has $4,000 taxable income.3) Donee takes donors basis.

b. [1015] rules:i.

ii.Gifts of appreciated value = donor's basisGifts of depreciated value:

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1) Selling at further loss: use FMV2) Selling at gain above original basis: use donor's original basis3) Sale of depreciated asset at price between FMV at time of gift and donor's basis: -0-

c. [1014] death basis:i.

ii.Donee takes FMV of decedent's property at time of deathD o n o t d i e with depreciated assets

VII. Recovery of capital and annuities [72]a. Cost recovery methods

i. Basis last method1) Stocks2) T doesn't get ded for basis until sale3) Cost recovery occurs only upon sale of stock

ii. Initial cost recovery (basis first)1) Inaja Land (the sale of an easement)

a) T buys land and water rights, but city is polluting water and making it unusable.City pays T $50K to continue to pollute.

b) IRS says $49K in lost profits, T says $49 for easementc) Court says it is difficult to apportion the basis, especially because it was a

forced sale.i) T recognizes no gain, but must reduce his basis by $49K.

d) Where basis cannot be allocated by any means and T sells part of property,there is no gain until all basis is recovered.

2) With basis first cost recovery, income first offsets basis (by reducing it).a)b)

b. Annuities [72]

Rule works only to extent T has basis in property. Very difficult rule to take advantage of.

i.

ii.

Annuitant pays a lump sum in exchange for a stream of later payments. The payments made by the insurance company are part-premium, part-interest.[72(a)]--exclusionary rule:

1) [amount received * (investment in K/expected return in K)]c. Qualified pensions

i. Employer contributes to fund, not employee. Tax free until withdrawal, and fully taxable upon withdrawal

d. 401(k)i. Employer pays employee, T put money into tax -free trust, and T is taxed upon withdrawal

e. Gambling [165(d)]i.

ii.Gambling losses are deductible only to the extent of gambling winningsLosses cannot be netted against capital losses or ordinary income

VIII. Annual accounting cycle [1341(a), 111(a)]a. Claim of right and constructive receipt

i. ii.

Claim of right = T has money and is not restricted w.r.t. its dispositionConstructive receipt = T has not received money, but was eligible to receive it

b. North American Oil Consolidated v. Burnet (claim of right)i. Facts:

1) 1916 = disputed claim; 1917 = court rules in T's favor; 1922 = appeals concludeii. The taxable year is 1917. Even though there was still a dispute over the money, there

were no restrictions on that money for Tc. United States v. Lewis

i. ii. iii. iv.

T receives $22K bonus in 1944 and is forced to pay half of it back in 1946. T's tax rate in 1944 is higher than it was in 1946.T get deduct the $11K in 1946 at the 1946 tax rateT couldn't amend tax return because, at the time of filing, everything was correct. Amendments are allowed only for mistakes made at the time of filing.

d. Congress' correctioni. [1341(a)]

i. Everything takes place in year of correction. (In Lewis, 1946).

ii. T choose between: (1) taking the deduction in the year; or (2) getting to take a credit

1944 11,000 30% 3,300

1946 Repay 50% 5,500

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iii. iv.

of the tax paid in the prior year. T can choose the lesser tax. Amount of such a deduction must exceed $3,000 [1341(a)(3)] Example:

1)

2) Here, take the deduction election to get the 5,500.v.

vi.

It's like allowing an amended return for T, except there is no interest for overpayment.Embezzlers cannot take advantage of this section.

e. Tax benefit rule is the opposite of 1341. [111(a)]i.

ii.

Situation is where T takes a deduction in one year, and in another the deduction is recovered and the deduction was not justified.Alice Sullivan Corp. v. US

1) Gift of property to charity for use for church purposes with right of reversion.Company takes the deduction for the charity. The property is misused, and the company gets the property back.

2) Facts:a) 1939: FMV gift of property = 8,700

i) Tax benefit = 1,900b) 1957: Return of property where FMV = 12,000

3) IRS wants company to include 8,700 in income and since the tax rates went up, they would owe 4,500 in taxes.

a) Taxpayer wants to limit repayment to the tax benefit of 1,900.4) Court rules to use the rate of the year where the property is recovered.

iii. Case law gives the inclusionary rule. S e c [ 11 1 ] gives us the exclusionary rule1) T only has to repay to the extent there was benefit.2) Use rates in the year of recovery

IX. Recoveries and structured settlementsa. Compensation for injuries and sickness [104]

i. ii.

Rule of exclusion, not deferral. (Blackwater example, p. 44 Chirelstein)Generally excludable if p e r s o n a l (not business), ph y s i c a l (not emotional), and n o n - pu n i t i v e

1) Libel, discrimination, emotional distress2) Emotional distress is excludable from GI to the extent there was money actually

given to a doctor (not just for traumatic emotions)iii. Extends to lump-sum or structured settlements

1) Take the structured settlement to get the interest component tax -freeiv. Medical bills are excludable under [213], but [104(a)] is better because it is an

exclusion rather than a deductionX. Transactions Involving Loans & Income from Discharge of Indebtedness [61(a)(12)] [108]

a. Kirby Lumberi. Issued bonds and retired the bonds for less than what they were sold for because

interest rates went up.1) Ex: 1,000 bond issued @ 10%, but the interest rate goes down to 5%. The price of the

bond goes up.ii.

b. [108]i.

The difference between the par value and the buy-back price is a gain to the taxpayer

If you take the exemptions, you have to offset against your losses (carryforwards/carrybacks). If you don't have any other of these attributes you reduce basis in property.

c. [108(e)(5)]i. A sells land to B and A finances it. B wants to pay A less afterward. The effect of this is a

reduced sales price rather than COD income. No tax consequences. This is renegotiation of sale.

d. [108(a)(1)(E)]

i. Qualified principal residence indebtedness only refers to the acquisition or improvement of

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home. This d o e sn ' t apply to home equity loans. e. [108(h)]

i. ii.

This is a deferral, because it reduces the basis of the homeThere is an up to $2M exclusion of "qualified principal residence indebtedness" before you actually start getting COD income. W.r.t. your principle residence, you get a $2M exclusion of COD income.

f. Examples:i. You graduate from law school and your parents discharge your loans

i. This is a gift, no t a discharge of indebtednessii. You work for a law firm that has a cancellation of indebtedness program

i. This is regular income, no t a discharge of indebtedness. You'll also be subject to payroll taxes.

iii. You borrow from a bank and then your parents are going to pay off your bank loan.i. This is a gift. The bank received the money in full, it's not a discharge.

g. COD do e sn ' t a r i se if the borrower has no right against the lender.i. T borrows funds on a non-recourse basis and they give Blackacre as security. T borrows

$100K. T defaults on the loan and T transfers Blackacre to the lender in complete satisfaction of the debt.

1) This i s not cancellation or discharge. The outstanding amount of the debt is going tobe treated as T's amount realized. We treat the $100K as amount realized (relief of indebtedness). Let's say 60K basis in Blackacre. T will have a gain under [Sec. 1001] of40K.

XI. Transfer of property subject to debt [1001, 1012, 1016]a. Recourse versus non-recourse debt

i. Crane v. Commissionera. FMV 250K, with non-recourse debt equal to the FMV (250K). T claims depreciation

of about 30K using FMV (250K) as her basis. In exchange for the property, she receives$2,500 and the assumption of the non-recourse mortgage.

b. T wants to only pay tax on the $2,500 of equity. IRS doesn't like this because she tookdepreciation.

c. SCOTUS says she should be taxed on the $2,500 equity and on the $30,000 depreciation.

ii. Commissioner v. Tuftsa. What if the FMV is less than non-recourse mortgage?

i.ii.

See slidesYour [1012] basis in this example is amount borrowed plus amount invested. (1.850 + 0.040 = 1.890)

b. SCOTUS says IRS is right. [Mortgage amount - adjusted basis = gain]

b. How-to

i. ii.

iii.

iv.

v.

They apply the Crane rule, because of the need for tax symmetry.The only economic loss was their original investment of 40K. They gained 440Kin depreciation. The difference between 440 and 40 is 400 gain.The tax consequences must match the economic consequences. T must giveback that depreciation.Even though the FMV is only 1.4M, you still have to recapture the depreciatem i nu s a n y r e a l i nv e s t m e n t .Th e assu mp ti o n o f th e n on - re co u rs e d e b t is the amount realized

i. Where FMV = debta. Recourse and non-recourse

FMV (= amount of debt) 150K

i. Basis 100K

Gain 50K

i. Qualified principal residence indebtedness only refers to the acquisition or improvement of

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ii. Where FMV < debt (FMV = 110)

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a. Recoursei. Biforcate:

i)ii)

CoD (difference between FMV and debt) Partial sale at FMV

ii.

Amount of debt 150K

FMV 110K

CoD income 40K

FMV (= amount realized) 110K

Basis 100K

Gain (possibly capital or 1231) 10Kb. Non-recourse

Amount of debt (=amount realized) 150K

i. Basis 100K

Gain 50K

i) Tufts: regardless of FMV < debt, T treats assumption of debt as amount realized

XII. Sale of principal residence [121]a. 121 : Exclusion of gain from sale of principal residence (p. 111)

a. (a)--no gain if sale of T's p r i n c i p a l r e s i d e n c e for 2 of past 5 years b. (b)--$250K exclusion from GI, generally

i. (2)--for MfJ,1) (A)--it's a $500K exclusion, if,

a) (i)--e i t h e r spouse meets ownership requirements b) (ii)--b o th meet use requirements, ANDc) (iii)--n e i t h e r is ineligible under (3)

2) (B)--if not all 3 requirements are met, treat as though the spouses are separate, and see how much they are eligible for separately

ii.iii.

(3)--T can only use this section once every 2 years(4)--if T is a surviving spouse, and the (2)(A) requirements were met at time of decedent's death, AND if surviving spouse sells within 2 years, THEN $500K exclusion

c. (c)--exclusion for Ts who fail to meet certain requirementsi. (1)--general/"once-every-two-years" subsections won't apply, but exclusion will

equal the the shorter ratio of either:1) (B)(I)--aggregate periods during 5 year period used as principal residence to 2

years2) (B)(II)--period after which [121] was last used to 2 years

ii. (2)--t h i s subs e c t i o n a pp l i e s i f :1) (A)--if not for: failure to meet ownership and use requirements in [(a)], or

"once- every-two-years" limit [(b)(3)], AND2) (B)--sale is from unforeseen circumstances

a) Reg. 1.121-3(e)(2)(iii)(A) [p. 1083]

d. Special rules

i) Death, change in employment, change in employment in which Tcan no longer afford the housing costs, divorce, or multiple births

i. ii.

iii.

(1)--MfJ: (a) and (c) applies if ei t h e r spouse meets requirements(2)--property of deceased spouse includes period of time deceased spouse owner property(3)--property owned by spouse or former spouse

1) (A)--if transfer from spouse, time includes time owned by transferor2) (B)--spouse get principal residence designation if divorced spouse keeps the

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iv. v.

house for a specified period according to divorce decree(4)--section applies to co-ops(5)--involuntary conversions

1) (A)--involuntary conversion = sale2) (B)--for [1033], amount realized = amount - amount of gain not included in GI

from [121]3) (C)--later acquired property from involuntary conversion (LS)

vi. vii.

viii. ix. x.

xi.

(6)--T has to recognize depreciation adjustment(7)--exception for nursing homes (1 year in past 5 years) (8)--remainder interests (LS)(9)--special rules for armed forces, diplomatic community, and IC(10)--if property was acquired in a [1031] exchange, T can't use [121] for 5 years(11)--[121] applies to heirs of decedents who then take decedent's ownership and use in account

b. Regulationsa. [Reg. 1.121-1(b)(1)]--mobile homes and houseboats are included if they have a toilet and

a kitchenb. [Reg. 1.121-1(b)(2)]--factors for what is T's principal residencec. [Reg. 1.121-1(b)(3)]--sale of adjacent vacant land

XIII. Statutory Non-recognition Provisions [1031] [1033] [453]a. 3 categories of non-recognition

a. Continuity of investment--nonrecognition of gains and losses b. Hardship transactions--nonrecognition of gains

i. [1033] Involuntary Conversions1) Losses are recognized, gains are deferred2) Basis rules:

a) Direct conversion [1033(b)(1)]i) Basis shall be that of the property converted, decreased by

money received, increased by gainb) Conversion into money [1033(b)(2)]

i) Basis will be decreased by gain nc. Tax avoidance schemes--nonrecognition of losses

b. 103 1 li k e k i n d e x c h a n g e s a. Makes capital more mobile to prevent the lock-in effectb. T makes the case that the investment has not changed, and therefore a realization event

has not occurredc. Personal property cannot be swapped for real propertyd. Good examples: Reg. 1.1031(d)-2 (p. 1744)

c. Private Letter Ruling 200203033a. Like kind exchanges go to the nature of property (perpetual conservation easements),

not the quality of the property. The easement will be swapped for a fee that will later be burdened with an easement.

b. Refers to nature of property, not quality.1)2)3)

d. F o r m u l a e

You can swap improved real estate with unimproved real estate for exampleYou can swap a fee interest with a lease of 30 years or moreYou can swap easement and right of way

a. Gain realized = (Value of property received [FMV, not basis of building received] + cash received + mortgages given away) - (adjusted basis of property given + liabilities to which new property is subject + cash given away)

b. Recognize the lesser of (1) realized gain, or (2) boot, B U T no t l o ss related to boot!!!1) The difference between mortgages received and mortgages given (and whatever cash)

is considered r e c o g n i z a b l e g a i n as boot. (example in orange, p. 1745)1) "Consideration received by E in the form of transfer subject to a liability of

$150 is offset by consideration given in the form of a receipt of property subject to an$80 liability and by the $40 cash paid by E." (gain recognized of $30 [$150 - ($80

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+ $40)])c. Basis of new property = that of property exchanged + gain<loss> recognized + (liabilities

towhich new property is subject - liabilities being given away) + (cash given - cash

received)e. Golden rules

a. b. c. d.

f. Proof a.

If there is boot, you can still do a like -kind exchangeGain recognized is lesser of gain realized or boot receivedBoot always receives basis of FMVWhen you pay boot, you add to basis of the new property

Sell new property at FMV for confirmationXIV. Installment sales [453]

a. Inclusion ratio: (gross profit/ total K price) = amount i n c l ud e d in income b. Solves a liquidity problemc. A t le a s t o n e p a y m e n t i s to b e r e c ei v e d after the close of the taxable year d. Available for casual sales of personal property and real property

a. No dealer sales or stocks or bondse. [453] is a deferral provision, however, Congress is beginning to chip away at this:

a. [453(l)]: T must pay interest on deferred gains for timesharesb. [453A(b)(3)]: T must pay interest on deferred gains for non-farm property with sales

price over $150K and with obligations greater than $5Mf. Contingent sales [Reg. 15A.453-1(c), p. 1467]

a. There is a maximum amount to be paid under K1) "We will pay 10% of ore in mine, up to $xxx"2) When computing the inclusion ratio, use the maximum amount for both GP and K

price (?)b. There is a maximum period under K

1) "We will pay 'xxx' amount, but for no longer than 'zzz' years"2) Spread the basis over the maximum period.

1) Take (basis/maximum years) to compute gainc. There is neither a maximum amount nor a maximum length of years

1) Recover basis over a period of 15 yearsd. NOTE: it's difficult to just an open transaction (like Inaja Land, where gain is deferred

until all basis is recovered)1) To get an open transaction, elect out of the installment method [453(d)], and prove

the K has no ascertainable value (very difficult to do). This occurs with closely -held businesses sold on a contingent basis.

XV. Constructive receipt [Regs. 1.446-1(c) & 1.451-2, pgs. 1457 & 1463]a. Reg. 1.451-2 (p. 1463)

a. Income although not actually reduced to T's possession is constructively received by him in the taxable year during which it is:

1) Credited to his account2) Set apart for him3) Or otherwise made available so that he may draw upon it at any time4) Or so that he c o u l d h a v e drawn upon it during the taxable year if notice of intention

to withdraw had been givenb. Income is n o t constructively received if T's control of its receipt is subject to substantial

limitations or restrictionsb. Amend v. Commissioner

a. T sold wheat to buyer. K says that delivery occurs in December, but payment is due inJanuary.

b. Because legal duty to pay was in January (even though perhaps it could have been inDecember), there is no constructive receipt

c. Pulsifer v. Commissionera. T and his children enter sweepstakes and win. The kids' shares of the money is put into

trust until (1) the kids turn 21, or (2) the father petitions for the release of the money.b. Because father could have petitioned at any time to have the money released, there is

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constructive receipt due to the economic benefit doctrine. (Although, the constructive receipt doctrine would have worked as well.)

1) Economic benefit doctrine (cash equivalence doctrine)1) Secure, absolute right, designated with name upon it, non-forfeitable

a) All four factors must be present2) No requirement that T must have cash in his hands3) Creates wherewithal to pay problems

a) Hypo: "Kids don't get cash until 21."i)

ii) iii)

No constructive receipt (because kids can't get it yet) There is economic benefit, however.There is no claim of right problem (kids have right to money)

d. Mere promises to pay are neither c on s t r u c t i v e r e c e i p t NOR e c ono m i c b e n e fi t (whether oral or in written K) if factors are not met

a. Revenue Ruling 60-311) An employer's m e r e p r o m i s e to pay doesn't mean T have constructive receipt for

n o n - qu a li f i e d d e f e rr e d c o m p e ns a t i o n . CR only applies if amounts due are payable.1) However, corporations don't get current deductions for non-qualified plans. So

corporation wanting the deduction now might put Ts in a position of having to pay taxes on funded trusts in their name.

2) This doesn't apply to non-profits, but it does apply to universitiese. Minor v. United States

i.

ii.

iii.

T enters corporation and gets deferred benefit where corporation is the beneficiary of the deferred compensation trust. Amount is stipulated by K; however, it's not funded, secured, non-forfeitable, and is sub j e c t to g e n e ra l c r e d i t o r s T wins. There is neither constructive receipt (because T has no control of money and cannotdemand it) nor economic benefit (for failure to meet the four factors). Because T could lose his right to the money, neither doctrine applies.

f. Look at problems on p. 290 along with notes for more clarityi. Look at these problems when facing a constructive receipt/economic benefit problem!

XVI. Deferred Compensation and Qualified Employee Plansa. T gets the same benefits from a qualified plan (deferral) as a non-qualified plan, except there is

a present deductioni. Tax-free accrual of value, fully taxable at time of withdrawal

b. Two types of qualified plansi. Defined benefit

1) Employer bears investment risk and is under K2) Rare

ii. Defined contribution1) Employee bears risk and is subject to maximum contribution caps

c. A world without the qualified plani. Example:

1) T invests 6.5K after tax for 25 years @ 6.5% [after tax interest rate] = 328,7702) Before tax, 50,324. T has a basis of 328,770. T has to find the annuity proration.

1) 328,770/(50,324*15)=0.5072) So T is taxed on the $24,810.

a) T pays $8,6843)

d. 401(k) plansSo T gets $41,640 after taxes [50,324 - 8,684]

i. 401(k) plansa.

b. c.

e. IRAs [408]

Employer matches are often done so that lowly people will participate. 401(k) plans can't discriminate, and companies must abide by ERISA16K is the most you can defer.There are funding requirements

i. Roth IRA (tax now, no tax deduction now, but no tax later) [408A]1) Limitation of 5K a year

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2) If T is over 50, there are "catch-up contributions" (up to 6K, 8K if married)3) R o t h I R A s a r e a v a il a b l e t o t a x p a y e r s a t a h i g h e r A G I

ii. If no plan if offered at work1) Under [219], there is a $5K maximum, above the line deduction (that allows T to

get to AGI), and there is no limit on how much money T can make if single. If MFJ, T can make up to $169K before you get no deduction.

iii. Premature withdrawal of traditional IRA1) T is taxed on the amount, in addition, and has to pay a 10% penalty if made before

59.5 years old2) With a Roth IRA there is no penalty, but this is because there is no tax deduction and

the contributions are made with after-tax dollars. No penalty as long as T has left it 5 years, and funds are subject to the same restrictions of the traditional IRA

f. Who should use which IRA?i.

ii. iii.

If you are in a lower tax bracket now than you expect to be when you take out the money, take the Roth IRA.Look at the AGI factors, you may be eligible for the Roth but not the traditionalIf you are planning to use the IRA for college or the home, use the Roth IRA.

1) Traditional IRA would not have a penalty in this case, but you would have a taxiv. If the three factors above are not present: the value of traditional versus Roth is the same!

XVII. Marriage and Divorce [1041]a. US v. Davis

i. ii.

Transfer of 1000 shares to of appreciated stock to wife at divorce. Issue: is transfer incident to divorce a realization event?

1) [1014] says transfers between spouses (and former spouses incident to divorce) arenot recognition events.

2) Transferee takes spouse's adjusted basis and trumps [1015] basis (namely, the limitedloss provisions). The rule is just substituted basis.

b. Problems on spouse's basis in property after divorce (p. 316)i. The person who disposes of property outside of the marital unit owes the tax

XVIII. Alimony [62(a)(10)] [71] [215]a. Deductible in GI by payor [215] and includable in GI by payee [71]

i. Tax-friendly because spouse with lower income is paying the taxb. Child support is not deductible by payor, nor is it includable by payee

i. Provision for support until death of child is child support, not alimonyc. Requirements of alimony

i. ii.

iii. iv. v.

vi. vii.

Must be cashMust be a w r i tt e n agreement, not oralParties must agree it is alimonyParties must live apart (no "friendly" divorces) Payments must terminate upon death of either spouse It can't be child supportDoesn't apply to excess front-loading

d. Excess front-loading [71(f)]i.

ii.

If in substance "alimony" is really a cash settlement, payor must recapture income and payee gets a deduction. (Settlement becomes non-deductible and non-includable) Problems on p. 322

XIX. Marriage Penaltya. If you want a marriage bonus, marry someone who has no income.

i. A earns 200K, B earns 0. Tax = 51,143 (each T when single)1) MFJ 200K. Tax = 44,2642) They have a bonus of 6,879

ii. A earns 100K, B earns 100K. Tax = 43,440 (each T when single)1) MFJ 200K. Tax = 44,2642) They have a penalty of 824

XX. Current deduction versus Capitalization [161] [162] [263]a. Deductions for the costs of earning income

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i. Taxable income is net income, not gross income1) [162(a)] is a generous provision (deduction for necessary and ordinary

expenses incurred in trade/business)b. Capitalization

i. [263(a)] forbids immediate deduction of capital assets, even if they are ordinary1) Example:

1) In a limo business, the purchase of a vacant lot and a fleet of limos would be c a p i t a li z e d . The gas the limos use would be d e du c t e d .

ii. Assets whose useful life extends beyond the end of the taxable year are capitalized.1) Non-wasting assets (land): take the deduction at disposition2) Wasting assets (cars): take depreciation (or amortization, if intangible)

iii. Encyclopedia Brittanica v. Commissioner1) T pays third party to compile a manuscript. T wants to deduct expense, rather

than capitalize.2) More like purchasing an asset, rather than a service3) Unambiguous association with a single asset capable of valuation

iv. INDOPCO (p. 520)1) Costs incurred during a friendly takeover (legal, banking, and otherwise) meant for

the long-term benefit of the corporate structure of a company is a capital asset, and not deductible

2) Costs incurred to create an intangible asset are capitalized3) There is a de minimis rule for capitalization of $5K. (Cell phone example)

v. [263A]1) Includes indirect costs. Must allocate costs, including salaries, to certain projects

as capital expenditures for production of assets or inventory2) These costs are then capitalized into inventory

c. Repair and maintenance expensesi. Midland Empire

1) Factory basement is getting oil seepage from neighboring factory. Factory installs a cement floor, deducts it, and call it a repair. IRS says it's a capital asset.

2) It's a repair. There is no extension in life, and no improvement beyond remedial3) 1 . 263 ( a ) - 1 : (p. 1205)--capital assets (1) add to the value or substantially prolong

life, or (2) adapt property to a new use. Incidental repairs and maintenance is not a capital expenditure.

ii. Examples:1) Expenditure that is caused by an unexpected event: likely a repair2) Expenditure caused by old age: not allowed for deduction3) Small, periodic expenses (painting a building): deduction4) New doors and windows: likely not allowed

XXI. Overview of depreciation and expensing [167] [168] [179] [197] [1245]a. Depreciation (see worksheet)

i. Basics1) Reduces basis according to [1016]2) Property with a definite and finite life is depreciable3) Can only be taken for business property4) A valuable painting is likely not depreciable, but office artwork would be5) Land is not depreciable.6) Depreciation begins when p l a c e d i n t o s e r v i c e NOT when purchased

ii. ACRS [168]1) 3 year--special tools2) 5 year--computers, copiers, trucks3) 7 year--office furniture, fixtures, and equipment

iii. Straight-line depreciation1) Real property

1) Residential real property: 27.5 years2) Other real property: 39 years

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2) Separate cost of acquiring land and building from the actual land3) (cost - salvage value)/anticipated useful life

iv. Mid-year convention1) However, if more than 40% of property is p l a c e d i n s e r v i c e in the last quarter,

then mid-quarter convention appliesb. Limited expensing [179]

i.

ii.

Up to $500K spent on personal (non-real) property used in a trade or business that otherwise must be capitalized can be expensed immediately. Phase out begins once more than $2M has been placed into service that year.Cases

1) Simona) Expensive violin bow is depreciable for symphony player because it is a

wasting asset2) Newark Morning Ledger

a) Customer list is a depreciable intangible asset amortized straight-line over 15 years

c. Recapture of depreciation [1245]i. [1245] extends to recapture of all depreciation previously allowed on non-real,

depreciable property1) Example:

a) Farmer buys tractor for 10K [1012 basis]. Farmer depreciates 6K in 3 years [1016 adjustments to basis]. Adjusted basis equals 4K. Tractor is sold for 5K amount realized. Do not confuse with gain realized. There is 1K gain realized. T h i s i s t r e a t e d a s o r d i n ar y i n c o m e . [1245] overrides [1231] and says, to the extent you have gain to the extent there is depreciation, you treat it as ordinary income recapture because you over-depreciated.

i. What if we sell the tractor for 11K?

11K Sale price

4K Adj, basis

7K Gain

1)

ii.

6K Ordinary income recapture

1K Capital gains

[This will absolutely be on exam. ]

[1250] applies to the excess of accelerated over straight-line depreciation on real property1) Special 25% capital gains rate for SL depreciation because depreciation plays a big

role with respect to tax sheltersXXII. Gains and losses from Capital Assets

a. Four types of capital gaini. Collectible gain [1(h)(4)]

1) Top rate of 28% (unproductive asset)ii. Unrecaptured 1250 gain [1(h)(6)]

1) Real property depreciation recapturea) [1245] handles non-real property depreciation recapture

2) To extent of depreciation recapture, it is subject to a 25% rateiii. [1202] gain

1) 28% rate on stock bought in IPO of a start-up and held for 5 yearsa) State-up < $10M

2) 100% exclusion of gain for TY 2010 and 2011iv. The default (everything else)

1) 15%/0% bucketb. What are capital gains?

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i. Property held by investor, w h e t h e r o r n o t held for trade/business, but does not include:1) Stock or inventory in T's business (?)

a) Van Suitendaali.

ii.

T is a daytrader and his portfolio doesn't do well. T wants a capital loss, but IRS wants it to be an ordinary loss and limited to $3K.Stocks are ordinary income here.

2) Birdenharn Realtya) B held a 973 acre plantation for farming. Instead of selling in bulk, they

could make more money selling in lots. He improved the lots.b) Issue: Does sale of lots of ordinary income or capital gain?

i) It depends on whether it is farm income, or being held for investmentc) SCOTUS found it to be o r d i n a r y

i) ii) iii)

Frequency of improvements Nature of improvements Amount spent on improvements

d) Found to be an ordinary assetii. Requirements:

1) Sale/exchangea) No statutory definition, but it's common sense

2) Capital asseta) Type of property held for investment (or for the production of income)b) N o t property for the sale to customers (buying land, subdividing, selling lots).

This would be ordinary income. c) Stock, land, buildings

3) Holding periodc. Capital asset netting

i. Capital investment losses are taken completely against capital gains, along with a $3K offset against ordinary income [1211(b)]. The remainder has an unlimited carryover [1212(b)(1)]. If it's a business loss, rather than a personal loss, the loss is fully deductible under [165(a)].

1) Congress treats losses poorly because:a) T is in control of timingb) This encourages cherry-picking c) This discourages false losses

ii. The netting process1) Net LT and net ST gains/losses

a) If both are losses, take $3K offset and carryforward2) If there is a gain, there is capital gain net income.

a) LT is preferred rate, ST is not.3) If one is gain and the other loss, then net them, and see if net LT or net ST.

iii. 1231 ("quasi-capital gains") assets get preferential gain treatment, but are treated as ordinary losses

d. The "Great Debate"i. Notes on 11/1, CB p. 702

XXIII. Personal deductionsa. 3 categories

i. ii. iii.

Feel-sorrySubsidy to encourage behaviorOther stuff

1) SALT deductionb. Implications

i. ii.

Upside-down subsidies (rich people benefit the most) Phase-outs

c. Personal casualty losses [165]i.

ii. iii.

10% floor of AGI, each casualty must exceed $100, special rules for disaster areasLesser of the drop in FMV or the amount of adjusted basis [Reg. 1.165-7(b)]1 . 165 ( a )( 3 ) : (allegedly)--exclude large, unexpected outlays that interfere with ability to pay

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iv.taxesSuddenness requirement

1) Ring into lake? Not deductible2) Ring in tissues gets flushed? Not deductible3) Ring in glass get dumped down disposal? Deductible

v. Cases:1) Dyer v. Commissioner

1) T wanted a casualty loss for vase broken by fitful cat2) Can't be claimed because event doesn't fit the definition (ejusdem generis)

2) Chamales1) OJ Simpson's neighbors house declines in value because of media attention2) 9th Circuit says there must be physical damage (Golson rule)3) No casualty

3) Blackmun1) T sets his house of fire while burning his wife's clothing2) Neither T nor his wife get a casualty loss3) T can be negligent, but not w illf u ll y negligent [Reg. 1.165-7(a)(3)]

i) In a car wreck, T may get a casualty loss, but not if T was drinking, except:1) Roars [sic]

First.

Second.4) § 1.165-7(a)(3)

T could claim casualty loss for damages to his car even though his BAC was slightly above 0.08 at the time.Court found he was negligent, but not willfully so

d. Medical expenses [213]i. 213(a)--unreimbursed medical care for spouse, dependent, etc., is deductible subject to a

7.5% AGI floor

ii.1)

Cases1)

213(d)(9)--cosmetic surgery is not deductible unless it fits certain exceptions

Taylor v. Commissioner1) T has allergy and doctor tells him to not mow lawn.2) T loses. Lawn care is not a medical expense.

2) Henderson v. Commissioner1) T has spina bifida. T wants to take expenses for v a n d e p r e c i a t i o n used

for medical expenses.2) IRS says depreciation isn't "an expense actually paid", so it can't be taken as a

medical expensei) The van might be for the mitigation of the disease, but it's unclear

what part of 213(a) this van falls under.3) Ochs v. Commissioner

1) T's wife suffered an illness and doctor said wife's recovery would be impaired if she had her kids around. She deducted boarding school costs.

2) Non-deductible personal expense3) D i ss e n t : the test should be whether the family would have spent that

money regardless4) Court is trying to look at direct versus indirect medical expenses, and increased

costs of livingi) However, the IRS shouldn't have to determine whether or not

people would have spent there money in a given manneriii. FSAs and HSAs (CB 369-372)

1) FSA--use it or lose it. If you don't use your full amount, it's gone!1) The amount you put into an FSA is not included in your W-9 however.

2) HSA--like an FSA except the leftovers roll over, and if you don't get sick, it becomes a retirement account!

iv. Policy (p. 379)1) Unintentional/undesired cost

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2) Gov't would bear the cost if the T doesn't3) Subsidize and encourage health insurance4) Prevents someone from working and creating cost-producing income

a) An exclusion here is the equivalent of an above-the-line deduction5) There is an upside-down subsidy, wealthy benefit more than poor because they

will spend more and receive a higher deduction1) This is why we have a 7.5% AGI floor!

e. Charitable contributions [170]i. Percentage limit ceiling for contributions [170(b)]

1) Public type charities (churches, education, medical, publically support universities) are limited to 50 % o f A G I .

2) Private foundations are limited to 30% o f A GI . [170(b)(1)(B)]3) If you are giving capital gains stuff to a "50%" organization, then you have a 30 % li m i t . 4) If you are giving capital gains stuff to a "30%" organization, then you have a 20 %

li m i t with a 5 y e a r c a rr y f o r w a r d . ii. Policy:

1) Policy:a) It's not consumption in the ordinary sense (wherewithal to pay)b) Gov't doesn't have to bear the costc) Efficient incentive to encourage such contributions d) People get no deduction for political contributions

2) Against policy:a) Tax dollars for activities that wouldn't be supported by Congress b) T gets to choosec) Church-state issuesd) IRS difficulties in determining if charities are doing their duties

3) Counterargument:a) Give power to the peopleb) If people have their own money at stake, the people will control oversight

iii. Valuation of charitable deductions1) Appraisals

a) Gift > $250 = written acknowledgement b) Gift > $500 = 170(f)(11)

i)ii)

You lose deduction without property descriptionIf > $5,000 = qualified appraisal

c) 170(f)(12)i) For cars, if you want to claim more than $500, you have to wait for

charity to sell it and tell you how much it's worthd) 170(f)(17)

i) w.r.t. religious donations, no deduction from putting cash in the collection plate unless there is recordkeeping!

2) Quid pro quo rulea) If you go to a charity event, and you get a benefit, you only get to deduct

the excess of the donation from the value.i) 61(15)--charity must provide donor with an estimate of what the value is

b) Rafflesi) No deduction for raffle tickets

c) No deduction for Girl Scout cookies! :-(3) Psychic returns

a) Having a law school named after you doesn't matter. It's a psychic benefit, but you get a full deduction

XXIV. Other deductions and creditsa. Interest

i. Business and investment interest is fully deductible1) Investment interest is limited to the extent of investment income (basketing).

The remainder is a carryforward, however.

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ii. No deduction for individuals for personal interest [163(h)]1) Exception: qualified home interest (CB 400)

a) Limitation of acquisition indebtedness = $1Mi) Acquiring, constructing, substantially improving home

b) Home equity = $100K

iii. Policy

i) Limited to lesser of $100K or FMV of qualified residence less acquisition indebtedness [163(h)(3)(c)]

1) Costs $85B + $14B in property taxes2) Biggest housing subsidy Ts get3) There is a reliance interest

iv. Tracing rules [Reg. 1.163-8T(c)]1) Loan proceeds must go to a business, investment, or qualified residence use2) Home equity loans cannot be used to purchase tax -exempt bonds [265(a)].

a) If T owns tax-exempt bonds, and uses loan to buy taxable bonds, calculate an exclusion ratio (tax exempt/total investment)

v. Points on the home are usually deductible over the life of the home, unless it's the principal

residence, in which case points are deductible when paid. [461(g)]b. Taxes [164]

i. Taxes connected to a trade/business [162] and investment are fully deductiblec. Personal and dependency exemption

i. ii. iii.

Each person gets a $3,700 zero-percent bracketAdjusted for inflationDefinition of dependent [152] (p. 145)

1) Qualifying childa) Relationship requirement b) Under 19, (24 if student) c) Over 50% supportd) Same abode as T

2) Qualifying relativea) Must have gross income of less than the exemption amount

3) Divorced parentsa) Default rule: whoever provides support gets exemptionb) Can be bargained away in divorce or given to non-custodial parent

i) King v. Commissioner1) W gives exemption right to H for daughter. W later gets a job and

wants the exemption. Not allowed because she bargained it away.

d. Earned Income Tax Credit [32]i.

ii. iii.

Largest poverty program in the USR e f und a b l e Aimed at poor people and people with children

1) Three creditsa) No kids, one kid, more than one kid

2) Cannot take if T is someone else's dependentiv. T can take EITC and child tax credit

e. Child benefitsi. Child tax credit [24]

1) Allows $1K credit for each child under the age of 17 at the end of the tax year2) N o r m a ll y no n - r e f und a b l e unless 3+ kids and low income under certain circumstances

a) 15% * (earned income - $3K) = part of the credit that is refundable (subject to$1K per child, of course)

3) Meant to benefit low and middle class (phase out)a) [24(b)(2)]--$110K MfJ, $75K single with $50 reduction for every $1,000 excess

4) T can take EITC as wellf. Childcare expenses

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a. Smith v. Commissioner

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1) Woman becomes a working mother who claims she can't work unless there is someone there to care for the kids. She wants to deduct the cost of the child care because without it, she couldn't work.

2) Court won't allow it.a) Not ordinary expenses (not incurred by all people to work)b) "But for" analysis doesn't help here

i) It's like the Ochs arguments (but for woman's sickness, kids wouldn't have to go to boarding school)

b. Expenses for dependent care [21]1) N on - r e f und a b l e c r e d i t with phaseout

a) Appropriate expenses:a) 21(b)(2)(A)(i) & (ii)--expenses incurred to enable T to be

gainfully employed (but not sending kid to overnight camp-->Zoltan v. Commissioner).

i) This means nanny can cook, clean, laundry the kidb) Initially, you get a 35% credit, worst case scenario, you get a 20% credit

for amount spend on household servicesc) $3,000 limit for one child, $6,000 for two childrend) The child in question must be under the age of 13 [21(b)(1)(A)], or for a

physically or mentally incapacitated dependent [(B)], or physically or mentally incapacitated spouse [(C)].

2) Calculation of the credit:a) High income tax payer:

i) One child for whom $3,000 is spent. $3,000 * 20% = $600.00. You get a$600 credit here.

3) 21(d) limits the expenses to the lower earner. If you earn $1,000 but pay $3,000 in child care, then that $3K isn't for earning money with work.

a) If spouse A makes 50K and spouse B make 1K, you are limited to 1K, unlessspouse B is a full time student.

b) However, student exception [(d)(2)]:i) Students are "deemed" to earn $3K if one child, $6K if two children.

g. Dependent Case Assistance Programs [129]a. Employee can elect to exclude $5,000 for child care assistance programs

1) Employer doesn't have to provide the service on-premises2) Benefit is $5K * tax rate

h. W h o sh o u l d c l a i m S e c t i o n 2 1 o r 129 ? a. High income taxpayers should take 129, where as low income T should take 21

XXV. Mixed personal and business outlaya. W.r.t. personal, our overreaching section is [262] (no personal deduction unless otherwise stated)

a. This is in contrast with [162] fully authorized deduction for trade/business deduction b. This leaves [212] (deduction of expenses made for the production of income)

b. What do we do where elements of both?a. 2% floor on miscellaneous deductions [67]

1) Anything other than what is covered by 67(b)2) 162, 212 deductions are miscellaneous3) Employee business expense (like Kaye going to Europe) would be covered

a) Instead of this, if employer establishes a payment arrangement [62(a)(2)(A)]

XXVI. Education

i)ii)

iii)

These are above-the-line expensesThis is if there is a reimbursement plan. If the employer sets it up, there is another level of oversight.No floor

a. Carroll v. Commissionera. PO goes to school to improve his job prospects (he wants to be a lawyer) and b/c it

is suggested.b. Co u rt says not allowed b/c it's not required

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c. Test--(Reg. 1.162-5: Code 1109-1110)1) Look to effect of expenditure

a) Maintain or improve skills required for trade/businessb) Meet express requirements of employer to maintain established relationship

i) This is to k ee p job (CLEs)c) Doesn't qualify you for a new trade or business

2) Non-deductible for getting the minimum requirement for your joba) Law school not deductible b/c it's used to meet minimum requirements b) Applies to Barbri tooc) Denied MBA when undergrad or Army to MBA, but if you've been in

the workforce, you might get it if required by employerXXVII. Alternative Minimum Tax [55]

a. What it isa. An extra tax some Ts must pay in addition to "regular" tax b. Differences in AMT

1) Various benefits are reduced or eliminateda) Medical = 10% AGIb) SALT deduction not allowed

i) If T lives in a high income or high property tax area, T is more likely to pay

AMTc) No standard deductiond) Miscellaneous itemized deductions (?)

i) Prosman--unreimbursed employment expensesi) Need to get employer reimbursement because it is above the line

e) Various creditsi) American Opportunity Credit allowed against (?) AMT

f) No stock spread deductiong) No home equity interest deduction

2) Separate AMT exemption3) Calculated with two tax rates: 26% and 28%

c. Top 10 things that trigger AMT--[get Form 6251 on OnCourse]d. Presumed to be constitutional in tax law

1) No constitutional right to a child's exemption ( Klassen)2) No equity arguments

e. AMT planning1) May want to accelerate income and defer deductions to get 28% rate if you are

only going to pay one year of AMTf. Default exemption amounts: 55(d)(1)(A)g. Calculation

1) Start with taxable income, add deductions/credits, subtract exemption = AMTIXXVIII. Roles of the tax lawyers

a. There are legitimate tax reduction tools b. Tax shelter

a. An investment unrelated to T's business that is certain to create a tax loss, but no economic loss

1) Elements:a) Tax deferral b) Conversion

i) Conversion from ordinary to tax-favored incomec) Tax arbitrage

i)ii)

Tax favored spending to create tax-exempt income265--interest expenses not deductible if used to buy tax-exempt bonds

d) Overvaluationi) Motion picture industry

b. Even though real estate is likely 1231, and thus upon sale generates capital gain, it still is capital gain at 25% which is preferable

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c. Regulation of lawyers and CPAs (p. 604)a. Many shelters apply with the letter of the law, but do not comply with the spirit of the law

1) Judges use form-over-substance, economic substance doctrine, collapsed-step trx doctrine

b. 7701(o)--(p. 746)c. There is now a strict liability penalty to tax opinion abuse. In the past, getting a tax

opinion meant T could avoid negligence. Now tax opinions are worthless.d. There is now a 20% understatement penalty for not meeting economic substance. If T

doesn't disclose position on tax return, it increases to 40%. e. Page 28, footnote.

1)d. Disclosure

Anyone doing tax work must comply with Circular 230

a. Reportable transactions1) Offers under a confidentiality agreement2) Contingent fees3) Listed transactions4) Transaction of interest

b. No criminal actions just being aggressive with interpretation c. Penalty for failure to report

e. Types of tax sheltersa. Offshore

1) Amnesty program nowb. Return preparer fraud

1) Now preparers must have ID numbersc. Misuse of tax exempt organization

1) Lauderf. Whistleblowing

a. Rewards for thisg. $130B tax gaph. Get handout from Louise on policy considerations

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Stat AnnMonda y, November 21, 20113:40 PM

1 : Tax imposed (p. 1)(a)--married filing jointly and surviving spouses(b)--head of household(c)--single(d)--married filing separate(e)--estates and trusts(f)--phaseout of marriage penalty in 15% bracket

(1)--IRS must put out new tax tables each year(2)--changes must

(A)--adjust min/max brackets(B)--not changing rates; AND(C)--other adjustments

(3)--COLA calculationUses a 1992 base

(4)--CPI is calc'd on 8/31(5)--CPI definition(6)--Rounding

(A)--round to the next $50(B)--MfS replaces $50 with $25 w.r.t. MfJ rates

(7)--special rules for certain brackets(8)--elimination of marriage penalty in 15% bracket until 12/31/12

(g)--certain unearned income of children taxed as if parent's income (LS)(h)--maximum capital gains rate (LS)

(11)--dividends taxed as net capital gains(A)--dividends are not capital gains, nor can they be netted against capital losses.However, they are taxed at the preferential capital gains rates

55: Alternative Minimum Tax Imposed (p. 42)

(a)--tax due for AMT is excess of "tentative minimum tax" over the "regular tax"(b)--tentative minimum tax is:

(1)--the amount of:(A)--for non-corporate taxpayers

(i)--the sum of: (I) 26% of taxable excess not exceeding $175K; and (II) 28% oftaxable excess exceeding $175K, then reduced by the AMT foreign tax credit(ii)--taxable excess = (income -exemption)(iii)--there is a special adjustment for MfS (replace $175K with $87.5K)

(B)--for corporate taxpayers(i)--tentative tax = 20% of excess reduced by AMT foreign tax credit

(2)--AMTI = taxpayer's TI adjusted by sections [56] and [58], and increased by [57]preferences(3)--Maximum rate of tax on net capital gain of noncorporate taxpayers (LS)(4)--Maximum rate of tax on qualified timber gain of corporations (LS)

(c)--regular tax definition(d)--exemption amounts

(1)--for non-corporate taxpayers(A)--for MfJ or surviving spouse = $74,450 for TY2011(B)--for single = $48,450 for TY2011(C)--for MfS = 50% amount for MfJ(D)--for trusts and estates = $22,500

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(2)--for corporate taxpayers(A)--$40,000

(3)--phaseouts reduce exemption by 25% of excess of:(A)--for MfJ, surviving spouse, or corporations = $150,000(B)--for single = $112,500(C)--for MfS and trusts/estates = $75,000

MfS phaseout has additional phaseout rules contained in the flush language(e)--exemption for small corporations (LS)

61: Gross income defined (p. 58)(a)--all income from whatever source derived

62: Adjusted gross income defined (p.59)(a)--AGI = gross income mi nu s :

(1)--business deductions(2)--certain trade and business deductions of employees [161 & 162]

(A)--reimbursements(B)--certain performance expenses(C)--certain official expenses(D)--certain teaching expenses(E)--certain expenses for Armed Forces Reserves

(3)--loss from sale/exchange [161&s.](4)--deductions from rents/royalties [161&s., 212](5)--certain deductions of life tenants and beneficiaries (like depreciation) [611] (6)--pensions and other plans [401(c)(1)](7)--retirement savings [219](8)--[repealed](9)--penalties for early withdrawal [165](10)--alimony [215](11)--[nothing there](12)--certain req'd umemployment pymts(13)--jury pay remitted to employer(14)--[nothing](15)--moving expenses [217](16)--[nothing](17)--interest on student loans [221](18)--higher ed expenses [222](19)--HSAs [223](20)--discrimination suit costs

Defamation not covered(b)--qualified performing artist (LS)(c)--certain arrangements not treated as reimbursement arrangments (LS)(d)--eligible educators (LS)(e)--unlawful discrimination defined (LS)

63: Taxable income defined (p. 62) [(c)(2), (c)(5)(A), (f) inflation adj, p. xi](a)--TI = GI - deductions (other than std deductions)(b)--for people who don't itemize: TI = GI - std ded - personal exemption [151](c)--definition of std ded (LS) (d)--definition of itemized ded

Deductions allowed under title that are not ded allowable in arrive at AGI and personalexemption [151]

(e)--election to itemize(a)--no itemized ded unless elected(b)--election made on return(c)--change of election may be made, but if MfS, not allowed un l e s s :

(A)--spouse changes return to be consistent w/ changing spouse, AND

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(B)--T consents to deficiencies that may occur(f)--aged or blind add'l amounts (LS)(g)--marital status is determined under 7703

71: Alimony and separate maintenance payments (p. 67)(a)--GI includes alimony or separate maintenance(b)--definitions

(1)--"alimony" is any payment i n cas h(A)--received by divorce/separation decree(B)--parties agree it's alimony(C)--not members of the same household, AND(D)--there is no post-death liability

(2)--definition of divorce (LS)(c)--payments to support children

(1)--child support is not included in GI(2)--reduction in child support is still child support(3)--failure to pay full child support amount is still child support

(d)--"spouse" = spouse or former spouse(e)--section [and 215] doesn't apply if MfJ(f)--recomputation where excess front-loading of alimony payments

(3)--first year payments cannot exceed the average of second and third years, plus $15K(4)--second year payments cannot exceed third year payments, plus $15K(5)--exceptions, including for death or remarriage, or out-of-T's-control flux payments

72: Annuities (p. 69)(a)--GI includes annuities (LS)(b)--exclusion ratio

(1)--[amount received * (investment in K/expected return from K)](2)--once T has recovered basis, T includes the rest in income(3)--deduction on final return if T dies prematurely

102: Gifts and inheritances (different from gift and estate tax) (p. 91)(a)--generally, gifts are excluded(b)--where gift produces income, that income is taxable(c)--gifts from employer to employee are taxable (non-excludable from GI)

104: Compensation for injuries or sickness (p. 92)(a)--GI does not include (except [213] deductions) [rule of exclusion, not deferral (Blackacre ex.)]

(1)--worker's comp for personal (not business) "injuries or sickness"(2)--non-punitive damages for ph y s i cal injury, whether lump-sum or periodic

Emotional distress is n o t a physical sickness or injury (doesn't apply where damagesare not in excess of the amount paid for medical care [where T actually pays apsychiatrist to deal with emotional problems])

(3)--insurance proceeds that are not premium recovery(4)--personal injury/sickness pension from certain gov't places(5)--disability from military action or terrorism

Lost wages are not excluded by this rule.106: Contributions by employer to accident and health plans (p. 95)

(a)--employer-provided health plan not included in GI(d)--HSA contributions excluded from GI subject to [223(b)] (p. 247) limits(f)--reimbursements for medicine are excludable from GI if prescription or insulin

108: Income from Discharge of Indebtedness (p. 96) (LS)(a)--exclusion from gross income [for (A) -(C) see, 108(b); for (E) see, 108(h)]

(1)--Generally,(A)--Title 11 bankruptcy discharge(B)--discharge occurs while T is insolvent(C)--indebtedness is qualified farm indebtedness(D)--qualified real property business indebtedness (if not a C-corp)

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(E)--qualified p r i n c i p a l r e s i d e n c e indebtedness discharged before 1/1/13

Only applies to acquisition or improvement of p ri n ci p al re s id en ce. Does notapply to home equity loans

(2)--Coordination of exclusions (LS)(b)--reduction of tax attributes

(1)--generally, if CoD income falls under (A)-(C) and is excludable from GI, then T has tooffset the CoD income with his tax attributes (in the order given). If T has no tax attributes,then he must reduce basis in his property.

(e)--general rules for discharge of indebtedness(5)--adjustment of purchase money debt (seller financed agreement) in which reduction ofdebt incurred to purchase property and owed to seller is treated as a reduction in salesprice, rather than income to debtor. No tax consequence. This is a renegotiation of

sale. (f)--student loans(2)--cancellation or repayment of loan is excluded from GI provided the cancellation iscontingent upon work for a charitable or educational institution

(h)--special rules relating to qualified p ri n ci p al re s i d en ce indebtedness(1)--the amount excluded from GI under [108(a)(1)(E)] shall reduce the basis in property(2)--$2M exclusion of CoD income before it might be taxed

111: Recovery of tax benefit items (p. 106)(a)--GI includes recoveries of tax benefit items to extent they reduced past taxes

119: Meals or lodging furnished for the convenience of the employer (p. 109)(a)--food and housing for convenience of employer not in GI (compensatory intent irrelevant) o n l yi f :

(1)--meals are furnished on business premises, OR(2)--employee must accept lodging as a condition of employment

(b)--special rules for (a):(1)--provisions of employment K or state statute are n o t determinative of whether benefitsare compensation(2)--where meals are for a charge or whether they are optional don't come into accountwhen determining convenience(3)--certain fixed charges for meals

(A)--If:(i)--employee must pay a fixed charge periodically, AND(ii)--meals are furnished for convenience, charge is excluded from 61

(B)--(A) applies:(i)--whether employee pays the fixed charge out of compensation or his ownfunds; AND(ii)--only if employee is re qu ire d to make pymt whether he accepts or declinesthe meals

(4)--Meals are excludable even if not all employees get benefit if half of employees get it forconvenience or employer

121: Exclusion of gain from sale of principal residence (p. 111)

(a)--no gain if sale of T's p ri n ci p al re s i d e n ce for 2 of past 5 years(b)--$250K exclusion from GI, generally

(2)--for MfJ,(A)--it's a $500K exclusion, if,

(i)--e ithe r spouse meets ownership requirements(ii)--bo th meet use requirements, AND(iii)--n eith er is ineligible under (3)

(B)--if not all 3 requirements are met, treat as though the spouses are separate, andsee how much they are eligible for separately

(3)--T can only use this section once every 2 years

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(4)--if T is a surviving spouse, and the (2)(A) requirements were met at time of decedent'sdeath, AND if surviving spouse sells within 2 years, THEN $500K exclusion

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(c)--exclusion for Ts who fail to meet certain requirements

(1)--general/"once-every-two-years" subsections won't apply, but exclusion will equal thethe shorter ratio of either:

(B)(I)--aggregate periods during 5 year period used as principal residence to 2 years(B)(II)--period after which [121] was last used to 2 years

(2)--th i s subs ecti o n app li es i f :(A)--if not for: failure to meet ownership and use requirements in [(a)], or "once -every-two-years" limit [(b)(3)], AND(B)--sale is from unforeseen circumstances

Reg. 1.121-3(e)(2)(iii)(A) [p. 1083]Death, change in employment, change in employment in which T can no

longer afford the housing costs, divorce, or multiple births

Special rules(1)--MfJ: (a) and (c) applies if e i th e r spouse meets requirements(2)--property of deceased spouse includes period of time deceased spouse owner property(3)--property owned by spouse or former spouse

(A)--if transfer from spouse, time includes time owned by transferor(B)--spouse get principal residence designation if divorced spouse keeps the house fora specified period according to divorce decree

(4)--section applies to co-ops(5)--involuntary conversions

(A)--involuntary conversion = sale(B)--for [1033], amount realized = amount - amount of gain not included in GI from[121](C)--later acquired property from involuntary conversion (LS)

(6)--T has to recognize depreciation adjustment(7)--exception for nursing homes (1 year in past 5 years)(8)--remainder interests (LS)(9)--special rules for armed forces, diplomatic community, and IC(10)--if property was acquired in a [1031] exchange, T can't use [121] for 5 years(11)--[121] applies to heirs of decedents who then take decedent's ownership and use inaccount

Regulations:[Reg. 1.121-1(b)(1)]--mobile homes and houseboats are included if they have atoilet and a kitchen[Reg. 1.121-1(b)(2)]--factors for what is T's principal residence[Reg. 1.121-1(b)(3)]--sale of adjacent vacant land

125: Cafeteria plans (p. 115)(a)--even though employee can choose the plan or cash, there is no taxable event for choosing theplan. Constructive receipt override.(d)--"cafeteria plan" is a written plan under which:

(1)--generally:(A)--all participants are employees, AND(B)--participants can choose between two or more benefits consisting of cash andqualified benefits

(2)--"cafeteria plan" generally doesn't include any plan providing for deferred compensation

Except for HSAs(f)--definition of "qualified benefit" is a benefit excluded from GI by express provision and groupterm life insurance. Definition d o e s n o t cover long-term care insurance

132: Certain fringe benefits (p. 124)(a)--exclusion from GI:

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**N o te: (a)(1) & (2) have special employee def [132(h)] and highly-paid non-discriminationrules [132(j)]. (a)(1) also has a special reciprocal agreement rule [132(i)]. (1)--no add'l cost service [b]

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(2)--qualified employee discount [c] (3)--working condition fringe [d](4)--de minimis fringe [e](5)--qualified transportation fringe [f](6)--qualified moving expense reimbursement [g](7)--qualified retirement planning services [h]

(b)--no add'l cost service(1)--service normally sold to customers, AND(2)--employer incurs no substantial add'l cost (incl. forgone revenue)

(c)--qualified employee discount [1.132-3, p. 1091](1)--QED means any employee discount w.r.t. services/property to the extent discount d o e sn o t exceed:

(A)--for property, the gross profit percentage at which property is offered tocustomers [employers can sell to employees at cost](B)--for services, 20% of price at which services are offered to customers

(2)--gross profit percentage [1.132-3(e), p. 1094](A)--excess of sale price to customers d i v i d ed b y aggregate sales price(B)--percentage is found based on all property offered to customers AND theemployer's experience during a representative period

(3)--employee discount = (customer price - employee price)/(customer price)(4)--qualified property or services = items in the ordinary course of business

(d)--working condition fringe: items which would be deductible under [162] or [167] if theemployee had to pay(e)--de minimis fringe [1.132-6, p. 1097]

(1)--in general, it's so small, it's unreasonable to account for(2)--employer-run eating facility is de minimis if:

(A)--facility is on/near premises, AND(B)--revenue derived >= operating costs

Preceding sentence applies to highly compensated employees o n l y i f substantially similaraccess is also given to regular employees

(f)--qualified transportation fringe(1)--definition includes (A)-(D): commuter highway vehicle, transit pass, qualified parking,and qualified bike(2)--limits

(A)--for commuter highway vehicle and transit pass, $100/month. (However, itappears that it's actual inflation-adjusted to $230/month according to p. xi and following flush language)(B)--for qualified parking, $230/month.(C)--for qualified bikes, the applicable annual limitation ($20/month)

(3)--cash reimbursements for vouchers/passes/etc. are allowed(4)--employee can choose between qualified transport fringe and taxable compensationwithout penalty (no constructive receipt)(5)--Definitions (LS)

(A)--transit pass(B)--commuter highway vehicle(C)--qualified parking(D)--transportation provided by employer(E)--employee (doesn't include 401(c)(1) definition)(F)--bike commuting reimbursement

(ii)--applicable annual limitation = $20/month

(6)--inflation adjustment(g)--qualified moving expense reimbursement

Amount that would have been deductable under [217] anyway(h) --special definition of employee for (a)(1) & (2) [no add'l cost service and qualified employee

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discount](1)--retired, disabled, and surviving spouse of employee = employee(2)--spouse, child of employee = employee(3)--in case of air transportation, parents = employee

(i)--reciprocal agreement of no add'l cost service is excludable if: (1) there is a written agreementbetween employers, and (2) if neither employer incurs substantial add'l costs(j)--special rules

(1)--sections (a)(1) & (2) [no add'l cost service and qualified employee discounts] only applyto highly compensated employees if there is no discrimination(4)--on - p remis es gym and other athletic facilities

(A)--generally excludable from GI(B)--def of facility: on premises, operated by employer, and substantially all use offacility is for employer, spouse, and kids

(6)--def of highly compensated employee(7)--def of air cargo(8)--employer provided education is excluded, if and only if, amounts are working conditionfringe and are not excludable under [127]

161: Allowance of deductions (p. 149)(a)--certain deductions are allowed from GI

162: Trade or business expenses (p. 149)(a)--deduction allowed for necessary and ordinary expenses in trade/business, including:

(1)--reasonable salary/compensation(2)--reasonable traveling expenses, AND(3)--rentals/payments for property in which T will gain no equity

(b)--no deduction for charitable contributions and gifts not allowed by other sections(c)--illegal bribes, kickbacks, etc. are not deductible(d)--(***)(e)--no deduction for political expenses and lobbying (LS)(f)--no deductions for penalties or fines(g)-(p)--(LS)

163: Interest (LS) (p. 155)(a)--generally, deductions for indebtedness interest are allowed(d)--deductions cannot exceed net investment income(h)--disallowance of deduction for personal interest

(1)--Not allowed(2)--Except:

(A)--indebtedness interest allocable to trade or business(B)--investment interest(D)--qualified residence interest(F)--student loan interest

(3)--for qualified residence interest:(B)--interest on the first $1M of acquisition indebtedness for acquiring, constructing,or substantially improving the qualified residence (which is secured by residence)(C)--interest on the first $100K of home equity interest to the extent the home equityindebtedness does not exceed (FMV of residence - amount of acquisitionindebtedness on the residence)Home equity loans cannot be used to buy tax-exempt stock

(4)--"qualified residence" = principal residence + one other residence (so long as it has atoilet and kitchen)

164: Taxes (LS) (p. 165)(a)--state, local, and foreign real and personal property taxes are generally deductible(b)--definitions and special rules

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(5)--T can elect to deduct sales taxes rather than income taxes(H)--to make this determination, T can use special tax tables

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(f)--one-half of self-employment taxes are deductible165: Losses (p. 168)

(a)--generally, any loss not compensated for is deductible(b)--use 1011 basis to determine the amount of loss(c)--losses for i ndi vi dual s are limited to:

(1)--those incurred in a trade or business,(2)--losses incurred in transactions entered into for profit(3)--except for (h) [casualty losses], arising from fire, storm, shipwreck, other casualty ortheft

(d)--gambling losses are allowed to the extent of gambling winnings(e)--losses from theft are taken in the year of discovery(f)--losses from sal e /e x change of capi tal ass e ts is allowed to the extent of [1211 & 1212] (limitson capital losses & capital loss carryback/forward(g)--if a security is a capital asset and found to be worthless, the loss = loss from sale or exchangeon the last day of that taxable year(h)--treatment of casualty gains/losses

(1)--$100 limitation per casualty(2)--loss allowed only to the extent casualty exceeds 10% of AGI

Where loss > gain, losses limited to extent of amount of gains p l u s the excess of 10%of AGIWhere gain > loss, treat gain like the sale of a capital asset, and treat loss like loss ofsale of a capital assetSpecial rules for federally declared disaster areas (LS)

Lesser of the drop in FMV or amount of adjusted basis(i)--disaster losses (LS)

(1)--T can elect to take disaster losses in the tax year before the disaster167: Depreciation (p. 171)

(a)--deduction for depreciation allowed for exhaustion, wear and tear, and obsolescence of:(1)--business/trade property(2)--property held for the production of incomeN OTE: only business property. Land cannot be depreciated.

(b)--cross-references (LS)(c)--adjust basis for depreciation taken(d)--for trusts/estates, a life tenant is treated as the "absolute owner"(e)--certain term interests are not depreciable (LS)(f)--treatment of certain property excluded from [197] (LS)

(1)--computer software is depreciated straight-line for a life of 36 monthsNOTE: Intangible assets produce d by T are amortized using straight-line method over asset'suseful life. Whereas, intangible assets purchase d by T are amortized using straight-line over 15years. [197].

168: Accelerated Cost Recovery System (LS) (p. 173)

(a)--use the appropriate depreciation method, recovery period, and convention(b)--applicable depreciation method

(1)--use the double-declining balance method until straight-line yields a larger allowance(2)--use 150% method in certain circumstances (LS)(3)--use straight-line method for certain things (including, but not limited to, residential andnon-residential re n tal property) (LS)(4)--salvage value equals zero

(c)--applicable recovery period[Residential re n tal = 27.5 years, non-residential re al = 39 years](d)--applicable convention

(1)--use the half year convention un l es s stated otherwise(2)--real property uses the mid-month convention

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(3)--where more than 40% of property covered by this section are placed into service in the

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last 3 months of year, use m i d - qu a r t e r convention(e)--classifications of property (LS)(f)-(k)--(LS)

170: Charitable, etc., contributions and gifts

(a)--generally, charitable deductions are allowed(b)--follow the following rules: (LS)

Contributions to "public" charities (churches, education, medical, universities) are limited to50% o f A GIPrivate foundations are limited to 30% o f A GIIf giving capital assets to a "50%" organization, then T has a 30% li mi tIf giving capital assets to a "30%" organization, then T has a 20% li mi t with a 5 yearcarryforwardIf giving a contribution of appreciated value, the full FMV amount is deductible

(c)--definition of charitable contribution (LS)(d)--carryover of excess contributions

(1)--For individuals:(A)--generally, there is a 5 year carryforward

(e)--certain contributions of ordinary income and capital gain property (LS)(f)--disallowance of deduction in certain cases and special rules (LS)

(8)--substantiation requirement for certain contributions(A)--generally, contributions over $250 must be substantiated by writtenacknowledgement

(11)--qualified appraisal and other documentation for certain contributions(B)--$500+ then property description(C)--$5,000+ then appraisal

(12)--cars, planes, and boats must be sold by the organization and have the sales price in awritten acknowledgement(16)--generally, clothes and other household items must be in good condition, but items ofminimal value get no deduction

(g)-(k)--(LS)(l)--if T donates to a university and in exchange for the donation receives the right to buy (but hasnot actually bought) preferred athletic tickets, then T gets an 80% of the amount given

179: Election to expense certain depreciable business assets (p. 215)Generally, up to $500K spent on personal (non-real) property used in a trade or business thatotherwise must be capitalized can be expensed immediately. Phase out begins once more than$2M has been placed into service that year."Placed in service" timeframe

197: Amortization of goodwill and certain other intangibles (p. 222)(a)--Intangible assets purchase d by T are amortized using straight-line over 15 years. Intangibleassets produce d by T are amortized using straight-line method over asset's useful life. [167].

213: Medical, dental, etc., expenses (p. 231)(a)--unreimbursed medical expenses > 7.5% AGI are deductible(b)--drugs limited to prescription drugs and insulin(c)--medical bills of estate, paid within one year of death, is treated as incurred by T(d)--definitions

(1)--"medical care" =(A)--diagnosis, cure, mitigation, treatment, or prevention of disease

(2)--reasonable lodging for medical care, not to exceed $50/person/night(7)--insurance payments are deductible(9)--cosmetic surgery usually n o t all o w ed unless necessary to ameliorate a deformity arisingfrom abnormality, trauma/accident, or disease

215: Alimony, Etc., Payments (p. 234)

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(a)--payor gets deduction for alimony(b)--definition of alimony

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(c)--requirement of taxpayer identification number(1)--payee must furnish his TIN to T(2)--T must put payee's TIN on T's tax return

(d)--if payee doesn't include alimony in income, then payor doesn't get deduction263: Capital expenditures (p. 258)

(a)--no deduction for new buildings or permanent improvements made to increase the value ofthe property, except (1)(A)-(L)(b)--no deduction for making good the exhaustion of property for which an allowance was made

408: Individual Retirements Accounts (p. 362) (LS)Generally, if employer doesn't provide a plan, T has other options

453: Installment method (p. 389)(a)--income from an installment sale uses the installment method(b)--definition of installment method d o e s n o t i n cl u de dealer dispositions. No stocks or bonds.

**At least one payment is to be received after the close of the taxable year(c)--installment method = (gross profit/ total K price) (d)--there is an opt-out provision (LS)(e)--second dispositions by related persons (LS)

(1)--in general,(A)--if related party disposes of property to a related person, and,(B)--before the first person receives all of the installment payments from the secondpersonTHEN, first person realizes the gain made from the second disposition

(2)-(8)-- (LS)(f)--definitions (LS)(g)--sale of depreciable property to controlled entity (LS)(h)--use of installment method by shareholders in certain liquidations (LS)(i)--recognition of recapture income in year of disposition

(1)--generally,(A)--recapture income is recognized in year of disposition(B)--excess gain will use installment method

(j)--where gross profit or total contract price is not readily ascertainable, use ratable basis(k)--revolving credit plans (LS)(l)--dealer dispositions

(2)--exceptions(B)--do not include timeshares. Timeshares must pay interest on deferred gains.(C)--payments apply first to interest and charges

453A: Special rules for non-dealers (p. 395)(a)--interest is paid on the deferred tax liability for the following:(b)--non-farm property where the sales price is over $150K and the face amount of all obligationsexceeds $5M(c)--interest computation (LS)

1001: Determination of amount of and recognition of gain or loss (p. 526)(a)--gain = amount realized minus adjusted basis ([1011])

Property does not necessarily mean equity(b)--amount realized = sum of any money received plus FMV of the property (other than money)received

(1)--doesn't include property taxes imposed on T(2)--includes taxes imposed by T

(c)--all amount of gain/loss is recognized(d)--nothing prevents taxation of gain/loss from installment(e)--certain term interests

(1)--gain or loss is determined with adjusted basis

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(2)--definition of "interest"1012: Basis of property--cost (p. 536)

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(a)--in general, basis = cost, except where otherwise provided(b)--cost of real property does not include property taxes imposed upon T(c)--determinations by account

(2)(A)--in general, unless average basis method applies, each stock account has its basisdetermined on an account-by-account basis

(d)--average basis for stock acquired pursuant to a dividend reinvestment plan(1)--basis of stock in dividend reinvestment plan is determined using one of the methodsused for an open-end fund(2)--basis after transfer is the basis before transfer(3)--separate accounts; election for treatment as single account(4)--dividend reinvestment plan def

1014: Death basis (p. 538)(a)--Donee who takes property from decedent takes a basis of FMV at time of death

1015: Gift and Transfer Basis (p. 539)(a)--

Gifts of appreciated value = donor's basisGifts of depreciated value:

Selling at further loss: use FMVSelling at gain above original basis: use donor's original basisSale of depreciated asset at price between FMV at time of gift and donor's basis: -0-

1016: Adjustments to basis (p. 541)(a)--adjust basis for:

(1)--expenditure, receipts, losses, or other items, properly chargeable to the capital account;but DO NOT adjust for:

(A)--taxes or carrying charges in [266]; or(B)--[173] expenditures

(2)--adjust for depreciation allowable as deductions resulting in a reduction in taxesStraight line depreciation is the default(***)(14)--adjust for R&D that result in less taxes

(b)--when basis looks like the basis in the hand of the T is a substituted basis, make substitutedbasis adjustments first

1031: Exchange of Property Held for Productive Use or Investment (p. 549)

(a)--nonrecognition of gain or loss from exchanges solely in kind(1)--no gain/loss for exchange of property held for productive use in a trade/business orinvestment is exchange is s o l e l y for like-kind property for productive use in trade/business or investment(2)--lists of exchanges not covered by this section (LS)(3)--requirement that property by identified within 180 days (LS)

(b)--there is gain recognition for p arts o f th e e x ch an ge th at are n o t li k e - k i n d (sum of money orFMV of other property)

(Value of property rec'd [FMV, not basis of building rec'd] + cash received + mortgagesgiven away) - (adjusted basis of property given + liabilities to which new property is subject + cash given away) = gain realizedRecognize the lesser of (1) realized gain, or (2) boot

The difference between mortgages received and mortgages given (and whatevercash) is considered re cogni z abl e gai n as boot.

(c)--no loss recognition from exchanges not solely in kind(d)--basis of new property = that of property exchanged + gain<loss> recognized + (liabilities towhich new property is subject - liabilities being given away) + (cash given - cash received)(e)--male livestock is not like -kind to female livestock(f)--special rules for exchanges between related persons

(1)--if transaction with related person and that person disposes of property within 2 years of

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the exchange, then no non-recognition

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(2)--certain exceptions to the related party rule:(A)--disposition after the earlier of the death of T or the death of related person(B)--compulsory/involuntary conversion, OR(C)--exchange and disposition not avoidance of federal income

tax(3)--definition of related person(4)--if T doesn't want this statute to apply, it won't

1033: Involuntary Conversions (p. 551)(a)--these are realization events, but are non-taxable

(1)--if property is converted into similar property, there is no gain recognition(2)--if property is converted into money, a similar investment in property will preventrecognition so long as purchase occurs within 2 years of the end of the tax year

(b)--basis of converted property is the property's old basis decreased by amount of cash notexpended, but increased by gain (or loss) recognized

1041: Transfers of Property Between Spouses or Incident to Divorce (p. 557)(a)--no gain/loss recognition for transfers to spouse or to former spouse (incident to divorce) (b)--transferee gets gift basis(c)--"incident to divorce" means:

(1)--occurring within one year of divorce, OR(2)--relating to the cessation of marriage

(d)--rule doesn't apply if spouse is non-resident alien(e)--transfers in trust where liability exceeds basis (LS)

1221: Capital Asset Defined (p. 575)(a)--capital asset = property help by T ( w h e th e r o r n o t co nn e cte d with his trade or business)

(1) doesn't include inventory, [167] depreciable property, copyrightsNOTE: involuntary conversions and depreciable property covered by [1231] (real property orproperty subject to depreciation)

1222: Other Terms Relating to Capital Gains (p. 577)(1)--"Short term" = less than or equal to one year(3)--"Long term" = longer than one year(9)--"Capital gain net income" = capital gains - capital losses

1223: Holding period of property (p. 578)(2)--If a gif t, T gets transferor's holding period (and his basis)(9)--If acquiring property from de ce dent, IF (1) the basis of the property is determined under[1014], AND (2) property is sold by heir within one year of decedent's death, THEN heir isconsidered to have held property for more than one year

1231: Property Used in the Trade or Business and Involuntary Conversions (p. 579)(a)--"quasi-capital gains"

(1)--gains treated at cap i tal gai n s rate s(2)--losses treated as o rd i n ary i n co me(3)--definition of capital gains and losses

(A)--"gain" =(i)--recognized gain from trade/business(ii)-involuntary conversion of trade/business OR capital asset held for more thanone year

(B)--"loss" definition(b)--definition of property used in the trade or business

(1)--"property used in the trade or business" = property with [167] depreciation, held formore than one year, and real property used for trade or business, but not:

(A)-(C)--inventory, property sold in ordinary course, or copyrights(2)--timber (LS)(3)--section includes cattle/horse held for 24 months and other livestock for over 12months. The section doesn't include poultry.

1245: Gain from Dispositions of Certain Depreciable Property (p. 588)(a)--generally,

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(1)--the excess over adjusted basis (that was taken as depreciation in prior years) is taxed as ordinary income(2)--recomputed basis (LS)(3)--applies to property subject to depreciation that is:

(A)-(F)--(LS)1250: Gain from Disposition of Certain Depreciable Realty (p. 590)

General recapture of the excess of accelerated over straight-line depreciation on real property1341: Computation of tax where T restores substantial amount held under claim of right (p. 631)

(a)--If:(1)--in a prior taxable year, T appeared to have an unrestricted right to income,(2)--a deduction is allowed in this TY because T found he did not have an unrestricted right,AND(3)--this deduction exceeds $3,000, THEN(4)--the tax is the lesser of either, the tax for the taxable year with such a deduction, OR(5)--the amount = tax without deduction mi nu s decrease in tax from sole exclusion of itemfrom GIIn othe r words: T chooses between: (1) taking the deduction in the year; or (2) getting totake a credit of the tax paid in the prior year. T can choose the lesser tax.

T r e a s u r y R e g s:

1 . 61 - 1 ( a ) : (p.1024)--income can be from money, property, or services1. 61- 2( d )( 1) : (p.1025)--compensation paid in property or services shall be valued at FMV of thatproperty or service. If services are rendered at a stipulated price, such price will be presumed to be theFMV of the compensation received in the absence of evidence to the contrary1. 121- 1( b )( 1) : (p. 1078)--mobile homes and houseboats are included if they have a toilet and a kitchen1. 121- 1( b )( 2) : (p. 1078)--factors for what is T's principal residence1. 121- 1( b )( 3) : (p. 1078)--sale of adjacent vacant land1. 121- 3( e )( 2)( ii i) (A ): (p. 1083)--death, change in employment, change in employment in which T can nolonger afford the housing costs, divorce, or multiple births1. 132- 3( e ) : (p. 1094)--excess discounts are included in income1. 132- 6( d ) : (p. 1098)--special rules for de minimis meal money: it must be (1) on occasional basis, (2)overtime and, (3) meal money (?)1. 162- 5: (p. 1109)--test for educational expenses1. 163- 8T( c) : (p. 1124)--tracing rules of interest1. 165- 7( a)( 3) : (p. 1138)--for an auto casualty, T cannot be willfully negligent1. 165- 7( b ) : (p. 1138)--for casualty losses, take the lesser of the drop in FMV or the adjusted basis1. 165( a)( 3) : (allegedly)--exclude large, unexpected outlays that interfere with ability to pay taxes1. 263( a)- 1: (p. 1205)--capital assets (1) add to the value or substantially prolong life, or (2) adaptproperty to a new use. Incidental repairs and maintenance is not a capital expenditure.1. 446- 1( c) : (p. 1457)-- allowable methods of accounting1. 451- 2: (p. 1463)--constructive receipt of income15A . 453- 1( c) : (p. 1467)--contingent sales on the installment method1. 1031( d )- 3: (p. 1744)--great examples on like-kind exchange

C a s e s: 21: Smith61: Benaglia v. Commissioner; Turner v. Commissioner; Revenue Ruling 79-24102: Duberstein; Stanton; Taft v. Bowers111: Alice Sullivan Corp

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119: Benaglia v. Commissioner162: INDOPCO

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165: Dyer; Chamales; Blackmun; Roars [sic]167: Simon; Newark Morning Ledger213: Taylor; Henderson; Ochs263: Encyclopedia Brittanica v. Commissioner; Midland Empire1001: Inaja Land1012: Taft v. Bowers1016: Crane v. Commissioner; Commissioner v. Tufts1031: Private Letter Ruling 2002030331221: Van Suitendaal1341: North American Oil; LewisReg. 1.451-2: Amend v. Commissioner; Pulsifer v. Commissioner; Revenue Ruling 60-31

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Table of ContentsTues da y, December 06, 201111:23 AM

I. II.

III. IV. V.

VI. VII.

VIII. IX. X.

XI. XII.

XIII. XIV. XV.

XVI.XVII.

XVIII. XIX. XX.

XXI. XXII.

XXIII. XXIV. XXV.

XXVI. XXVII.

XXVIII.

IntroductionCharacteristics of incomeFood and lodging; deductibility [119]Statutory Treatment of other fringe benefits [125, 129, 132]Taxability of windfalls and gifts [102]Transfer of unrealized gain [102, 1012, 1014, 1015] Recovery of capital and annuities [72]Annual accounting cycle [1341(a), 111(a)]Recoveries and structured settlementsTransactions Involving Loans & Income from Discharge of Indebtedness [61(a)(12)] [108] Transfer of property subject to debt [1001, 1012, 1016]Sale of principal residence [121]Statutory Non-recognition Provisions [1031] [1033] [453] Installment sales [453]Constructive receipt [Regs. 1.446-1(c) & 1.451-2, pgs. 1457 & 1463]Deferred Compensation and Qualified Employee PlansMarriage and Divorce [1041] Alimony [62(a)(10)] [71] [215] Marriage PenaltyCurrent deduction versus Capitalization [161] [162] [263]Overview of depreciation and expensing [167] [168] [179] [197] [1245]Gains and losses from Capital AssetsPersonal deductionsOther deductions and creditsMixed personal and business outlayEducationAlternative Minimum Tax [55] Roles of the tax lawyers