Income Tax Reading Notes

Income Tax Reading Notes
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Table of Contents
HISTORY, STRUCTURE, AND THE TAXING FORMULA ................................................................................................ 5 DEVELOPMENT OF THE INCOME TAX .................................................................................................................................................... 5 Alternatives to Income Tax ........................................................................................................................................................... 5 Constitutionality Of The Income Tax........................................................................................................................................ 5 STRUCTURE OF TAX LAW ......................................................................................................................................................................... 6 Metrics To Evaluate Tax Policy: (Goals of Equity and Efficiency) .............................................................................. 6 Progressive Rate Structure: .......................................................................................................................................................... 6 Policy: Macroeconomic Growth And Income Taxation (P. 17) .................................................................................... 6 ILLEGALITY AND ETHICAL CONSIDERATIONS: TAXING FORMULA ...................................................................................................................................................................................... 7 Gross Income = accessions to wealth on which an invididual is taxed ................................................................. 7 4 Classes of permissible deductions: ......................................................................................................................................... 7 WHAT IS GROSS INCOME? .................................................................................................................................................... 9 INTRODUCTION: 61(A): ALL INCOME FROM WHATEVER SOURCE DERIVED. ............................................................................. 9 FORMS OF GROSS INCOME (P.39) .......................................................................................................................................................... 9 Compensation for Services & Sale of Appreciated Property 61(a), 1001(ac) ................................................ 9 Income without Receipt of Cash [61, 83(a)(1)] .............................................................................................................. 9 Barter Transactions [61, 1001] .......................................................................................................................................... 10 Unanticipated Gains (Windfalls) [61(a); R: 1.61-14].................................................................................................. 10 Prizes and Awards [74] ............................................................................................................................................................. 10 ROLE OF DEBT IN GROSS INCOME ........................................................................................................................................................ 11 What is Debt? ................................................................................................................................................................................... 11 Receipts Subject To Claims ........................................................................................................................................................ 11 Discharge of Indebtedness [61(a)(12); R:1.61-12(a)] ................................................................................................ 12 LIMITATIONS ON GROSS INCOME .......................................................................................................................................................... 12 Recovery of Capital [1001, 1012] ....................................................................................................................................... 12 Realization [1001; R: 1.61-6(a); 1.1001-1(a)] ............................................................................................................... 13 Imputed Income, p.85 ................................................................................................................................................................... 13 Administrative Exceptions To Gross Income ..................................................................................................................... 14 DISPOSITION OF PROPERTY ................................................................................................................................................................... 14 Gains on the Disposition of Property, p.91 .......................................................................................................................... 14 Determining Adjusted Basis ...................................................................................................................................................... 14 Amount Realized from Debt Relief ......................................................................................................................................... 15 Discharge Of Indebtedness Redux........................................................................................................................................... 16 ITEMS EXCLUDED FROM GROSS INCOME (CH.3) .......................................................................................................19 GIFTS AND BEQUESTS (102, 1014(A), 1015(A); 1.102-1(F)(2)) ................................................................................... 19 Introduction ...................................................................................................................................................................................... 19 1015 Basis for Property Received as Gift ...................................................................................................................... 19 Part Sale/Part Gift Transactions ........................................................................................................................................... 20 1014 Basis of property acquired by Inheritance or Devise ................................................................................... 20 LIFE INSURANCE PROCEEDS 101 .................................................................................................................................................... 21 EMPLOYEE BENEFITS .............................................................................................................................................................................. 21 Meals and Lodging......................................................................................................................................................................... 21 Costs for Employee Life and Health Insurance ................................................................................................................. 22 Other Employee Fringe Benefits, p.152 ................................................................................................................................ 22 COMPENSATION FOR PERSONAL INJURIES AND SICKNESS ............................................................................................................... 24 DISCHARGE OF INDEBTEDNESS.............................................................................................................................................................. 24 Bankruptcy Tax Act of 1980 ...................................................................................................................................................... 24
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Rev. Rul. 92-53 ................................................................................................................................................................................. 24 OTHER MISCHELLANEOUS EXCLUSIONS .............................................................................................................................................. 24 Tax-Exempt Interest ..................................................................................................................................................................... 24 Social Security.................................................................................................................................................................................. 24 Sale of Principal Residence ........................................................................................................................................................ 24 CHOOSING THE PROPER TAXPAYER (CH4) .................................................................................................................25 ASSIGNMENT OF INCOMESERVICES [61, 73] ........................................................................................................................... 25 The Concept of Income Splitting ............................................................................................................................................. 25 Shifting Income within the Family by Gratuitous Transfer ........................................................................................ 25 Shifting Income within the Family by Compensatory Arrangement ...................................................................... 25 Shifting Income to a Related Corporation .......................................................................................................................... 25 ASSIGNMENT OF INCOMEPROPERTY 102, 1015(A) ................................................................................................................. 26 Appreciated Property Transferred by Gift .......................................................................................................................... 26 Transfers of Income from Property ....................................................................................................................................... 26 Property and Income Transfers Compared ........................................................................................................................ 26 Substance versus Form Analysis.............................................................................................................................................. 26 Dividends on Stock ......................................................................................................................................................................... 27 Assignments of Income for Consideration .......................................................................................................................... 27 Statutory Response: The Kiddie Tax 1(g) ..................................................................................................................... 28 DIVORCE AND ALIMONY.......................................................................................................................................................................... 28 Alimony versus Property Settlements ................................................................................................................................... 28 Statutory Requirements: 71(b) ............................................................................................................................................. 28 Property Transfers between Spouses 1041 .................................................................................................................. 29 TIMING OF GROSS INCOME (CH.5) ..................................................................................................................................31 GENERAL PRINICPALS ............................................................................................................................................................................. 31 Intro: when should an item be included in gross income? .......................................................................................... 31 Annual Accounting Period (Pillar #1) .................................................................................................................................. 31 Tax Accounting Method (Pillar #2) ....................................................................................................................................... 31 Relief Provisions .............................................................................................................................................................................. 31 CASH METHOD OF ACCOUNTING ........................................................................................................................................................... 31 Cash Equivalency [RE-READ].................................................................................................................................................... 31 Actual versus Constructive Receipt ........................................................................................................................................ 32 83 Property Received for Services Performed ............................................................................................................. 33 Employee Stock Options .............................................................................................................................................................. 34 ACCRUAL METHOD OF ACCOUNTING ................................................................................................................................................... 34 All Events Test .................................................................................................................................................................................. 34 Fixed Rights to Receipt ................................................................................................................................................................ 34 Timing of Inclusion of Various Forms of Income ............................................................................................................. 35 JUDICIAL EXCEPTIONS POSTPONING INCLUSION ................................................................................................................................ 35 Security Deposits ............................................................................................................................................................................ 35 Option to Purchase Real Property .......................................................................................................................................... 36 DEFERRED PAYMENT SALES OF PROPERTY ........................................................................................................................................ 36 Closed Transaction Reporting .................................................................................................................................................. 36 Open Transaction Reporting..................................................................................................................................................... 36 Installment Reporting .................................................................................................................................................................. 37 NONRECOGNITION OF GROSS INCOME.................................................................................................................................................. 38 1031Like-Kind Exchanges. ................................................................................................................................................. 38 Involuntary Conversions ............................................................................................................................................................. 39
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DEDUCTIONS FOR TRADE OR BUSINESS EXPENSES (CH.6) ...................................................................................41 DEDUCTIONSIN GENERAL .................................................................................................................................................................. 41 ADJUSTED GROSS INCOME - 62 ........................................................................................................................................................... 41 STATUTORY REQUIREMENTS FOR BUSINESS DEDUCTIONS [162(A); 262(A)] ......................................................................... 41 Ordinary and Necessary .......................................................................................................................................................... 41 Incurred in a Trade or Business ........................................................................................................................................... 42 Current Expense vs. Capital Expenditure ............................................................................................................................ 43 SPECIFIC CATEGORIES OF BUSINESS EXPENSES.................................................................................................................................. 44 Business-related Travel (p.381) .............................................................................................................................................. 44 Entertainment Expenses (3/21: p.404-413; 416-420).................................................................................................. 47 Business Meals ................................................................................................................................................................................. 49 DEPRECIATION AND COST RECOVERY (3/22: P.432-451) ............................................................................................................ 50 The Concept of Depreciation ..................................................................................................................................................... 50 The Accelerated Cost Recovery System ................................................................................................................................ 50 Mixed-Use Assets280F........................................................................................................................................................... 53 Amortization of Intangible Assets .......................................................................................................................................... 53 LIMITATIONS ON BUSINESS EXPENSES (4/2: P.451-58) ................................................................................................................ 54 Business Use of Personal ResidenceHome Offices....................................................................................................... 54 Illegality and Public Policy......................................................................................................................................................... 54
Introduction: History, Structure, and the Taxing Formula

I. Development Of The Income Tax A. Alternatives to Income Tax 1. Consumption Tax = rather than taxing income that is saved, defer taxation until such savings are consumed; arguments for: incentives people to save; tax laws should not unduly burden socially preferred behavior by influencing decision btwn consuming and saving 2. Value-Added Taxes (VAT) = tax on all the elements of gross national product (another form of consumption tax); Ex. Co pays a tax on value it added on to materials that passed through its hands (e.g., dif btwn value of peanuts bought and peanut butter sold) a. Cos that suffer a net loss over a tax period may still pay a tax 3. Transaction Taxes = Retail sales tax (like a consumption tax but at point of sale); Excise tax (tax on the privilege of the manufacture, sale or consuption of a good, e.g., alcohol and tabacco tax); Wealth transfer tax (e.g., gift and estate tax) 4. Wealth Tax = tax on the aggregate of an individuals wealth (e.g. property tax) B. Constitutionality Of The Income Tax 1. Congress shall have the power to lay and collect taxes (Art I, Sec.8) a. Limitation #1: Uniformity: taxes have to be uniform throughout the country (Art.I, 8) b. Limitation #2: Apportionment: direct taxes in proportion to the population (Art.I, 9) c. Pollock v. Farmers (1895): tax on rents from real estate was a direct tax on the real estate itself and thus unconstil violation of apportionment cl 2. Sixteenth Amendment (1913) = The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. a. Authorizes taxes on income without regard to apportionment b. Upheld in Brushaber v. Union Pacific Railroad, 240 U.S. 1 (1916) (p. 3) which said that income tax does not violate due process clause 3. Challenges to constitionality of taxes usually fail (p.4) a. Taft v. Bowers, (U.S. 1929): Ct rejected the taxpayers arg that Congress could not tax the gain that accrued on a piece of property before it was given as a gift. In effect, the Ct deferred to Congress as to the meaning of income for the purposes of the 16th, as long as Congress did not act unreasonably or arbitrarily. b. Autenrieth v. Cullen, (9th Cir. 1969): Ps said that they were entitled to a refund of their income taxes because they did not support the Vietnam War. Their arguments were based on equal protection and freedom of religion. The Ct held that nothing in the Constitution prohibits the Congress from levying a tax upon all persons for the support of the general govt and that the Code was religion-neutral. Ct also expressed concern about the Govts ability to function if the taxpayers position was permitted. c. Hellerman v. Commissioner, 77 T.C. 1361 (1981): court held that gain solely due to inflation income IS within meaning of the 16th Am for two reasons: (1) Congress has the power to establish the dollar as a unit of legal value with respect to the determination of taxable income independent of its actual worth. [Legal Tender Cases]; (2) the meaning of income is to be gathered from the implicit assumptions of its use in common speech, i.e., as a layperson would interpret it and not as an economist would. Thus, given that the taxpayer had more dollars now, that could be treated as gain. d. Perry v. Commissioner, (p.6): Taxpayers contended that Congress was taxing income that did not exist b/c Congress limited the deductions due to losses to $3K. Ct found that the taxpayers did have income and that net income (gains losses) is not the same thing as taxable income because deductions are a matter of legislative grace. e. Most courts consider tax laws to be an issue of property rights rather than one of fundamental personal rights or liberties
Introduction II. STRUCTURE OF TAX LAW
A. Metrics To Evaluate Tax Policy: (Goals of Equity and Efficiency) 1. Equity: Basic idea is that tax allowances will not change taxpayer behavior, and if they do, it will not change pre-tax income significantly. a. Horizontal: Does the Code treat taxpayers with the equally income similarly? b. Vertical: Does the Code treat taxpayers with the different income differently? 2. Efficiency: Do tax allowances allocate resources efficiently? Tax-favored behavior will increase with a corresponding decrease in tax-unfavored behaviors. 3. Simplicity: How costly is it for taxpayers to determine their liability and file their taxes? 4. Administration: How easy is it for govt to induce compliance; how costly is it to enforce? a. Administrative costs: direct costs incurred by govt to administer tax system ($10B) b. Compliance costs: taxpayers cost to interact w/ income tax syst ($100B to $200B) c. Efficiency costs: (TP may make inefficient choices to take advantage of tax-favored behaviors): Economic theory suggests if you 2x tax rate, you 4x the excess burden. B. Progressive Rate Structure: 1. Premises of progressivity: 1) Ability to pay, 2) Marginal utility 2. Definitions: a. Progressive: Rate increases as the value of the tax base increases. b. Proportional: Tax rate is constant for all values of the tax base. c. Regressive: Tax rate decreases as the value of the tax base increases. 3. Rates: a. Marginal: Rate for the next range of income (i.e., marginal income) b. Effective: Tax liability/income 4. Utility a. Marginal: The more money you have, the less valuable it is b. Linear: All money is equally valuable 5. Good statistics to potentially use on the final (p. 14) C. Policy: Macroeconomic Growth And Income Taxation (P. 17) 1. High marginal rates may discourage additional work and savings while encourage tax avoidance schemes that tie up capital in unproductive uses. 2. Tax cuts could help in the modernization of plant and equipments in heavy industry. 3. Tax incentives could help for research and development. 4. Tax cuts could boost savings. D. Procedure: Primary Sources of Fed Tax Law 1. Statute. a. U.S. Constitution: Art I, 9, cl. 4; 16th Amendment (permitting taxation of income). b. Internal Revenue Code. c. Legislative history. d. Joint committee on taxation. 2. Treasurys statutory interpretation: a. Regulations. b. IRS rulings. c. Public (revenue) rulings. Offer general guidance and are precedential. d. Revenue procedures. IRS explaining required steps to practitioners. 3. Case authority (tax court and other courts). 4. Tax treaties (international). III. ILLEGALITY AND ETHICAL CONSIDERATIONS: U.S. v. Greenberg, 735 F.2d 29 (2d Cir. 1984) (p. 19): Taxpayer filed jointly with his wife and reported his income as split between the two of them, so his wife could obtain credit. The difference in taxes between the correct and false returns was only $48. He was convicted of filing materially false returns and failure to file a return. The court held that the issue is not the effect of a false statement, but rather does the false statement have an obstructive or inhibitive effect.
Introduction
Comparison of Trial Forums for Tax Disputes
Question Pay tax first? Jury Trial? U.S. Tax Court No No Yes Available U.S. District Court
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U.S. Court of Federal Claims Yes No
IV. TAXING FORMULA

Gross income - 62 deductions Adjusted gross income (AGI) - Standard deduction or itemized deductions - Personal exemptions Taxable income * Tax rate Tax liability (TI) - Credits + Additional taxes Final liability
A. Gross Income = accessions to wealth on which an indiv is taxed; 4 Classes of permissible deductions: 1) Those associated with the conduct of the taxpayers business/trade, 2) Associated w/ an activity gearted to the production of income (but not business/trade-related), 3) Congressionally specifically authorized deductions, [not in (1) or (2)] 4) Artificial deductions: allowed on policy grounds, but no funds expended, e.g., personal exemption
What Is Gross Income? (ch.2)

I. INTRODUCTION: All encompassing definition of gross income has proved to be elusive A. 61(a): All income from whatever source derived. (up to the limits of the 16th amend.) 1. Eisner v. Macomber, (1920) [Labor-Capital Formula]: narrowly defined income as the gain derived from labor, from capital, or from both combined. Def incomplete & inadequate b/c excluded: Prizes, awards, punitive damage awards, and discovered wealth. 2. Commissioner v. Glenshaw Glass, (1955) (p.37): Taxpayers argued punitive damages were not income. The Court disagreed and stated that income includes [1] undeniable accessions to wealth, [2] clearly realized, and [3] over which the taxpayers have complete dominion. B. Haig-Simons (economists) [BROAD]: Personal income may be defined as the algebraic sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights between the beginning and the end of the period. In other words, how much could have been spent on consumption during the year without a change in net wealth 1. INCOME = consumption + change in net worth (over tax yr) 2. Would include increases in value of an individuals store or property rights (ex. if house increases in value during a yr., owners net worth increases practical problems).
C. Accountants approach [NARROW]: Income encompasses only realized amounts that is, assets that have been converted into money or other property by economic transactionsneed an economic benefit: 1. Mere increase in value of a house Income unless appreciation in value has been realized D. Tax law [btwn economists and accountants]: Goes beyond accountants def to incorporate policy considerations in determining whether to tax an accession to wealth apportionment
II. Critical questions: A. What items are included in gross income?: 1. focus on taxpayer receiving stuff of value= incl Cash, Property, Services, Discharge of debt 2. What is NOT income: a. Loan proceeds (b/c of offsetting obligation to repay) b. Capital recovery c. Imputed Income (use of TPs own property or value of TPs own services), B. What is the amount of such inclusions? C. To whom are these accessions gross income? (Who is the TP?) D. When must an accession to wealth be included in gross income?(Note if combines a nontaxable receipt and a later development that may change the result, e.g., discharge of debt) III. FORMS OF GROSS INCOME (p.39) A. Compensation for Services & Sale of Appreciated Property [61(a), 1001(ac)] 1. 61(a)(1): Gross income includes compensation for services, including fees, commissions, fringe benefits, similar items. Arise from a compensatory relationship and are attributable to the rendition of labor (Thus, IRS will closely scrutinize a transaction between employer and employee to ensure that a transaction is not really disguised compensation.) 2. 61(a)(3): Gross income incl gains derived from dealings in property (gains receipts); 3. 1001(a): Gain from a Property Transaction = Amount realized Adjusted basis a. Adjusted Basis: Cost to acquire the property. b. 1001(b): Amount Realized: Total economic benefit received in exchange for the property; Amt Realized = Money received + FMV of any property/other economic benefit received in transaction. B. Income Without Receipt of Cash [61, 83(a)(1)] 1. 2-Step Analysis: (1) Is It Gross INCOME?; (2) How Should It Be VALUED? 2. 61 explicitly includes noncash benefits in gross income. Reg 1.61-1(a): gross income includes income realized in any form, whether in money, propery, or services; (receiving land as compensation for services = cash payment) a. Important questions to consider when determining which in-kind receipts are included in gross income: (1) type of relationship between the parties (familialless likely
What is Gross Income (ch2)
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receipt is compensatory in nature)?; and (2) What effect does inclusion of noncash receipts have on ability to pay the resulting tax liablity? 3. Valuation: Tax law generally adopts the purely objective standard of fair market value, (price that would be reached btwn a willing buyer seller); Reg 1.61-2(d)(1): If services are paid for in property, the FMV of property must be included in income as compensation 4. Rooney v. Commissioner, (1987) (p. 41): TP agreed to accept goods and services as payment for previously rendered services. Valuation amt = Retail price; but Ct suggested that if it was a forced purchase, a subjective valuation may be appropriate 5. McCann v. United States, (Fed. Cir. 1983) (p. 41): Court held that (1) it IS income when an employer pays an employees expenses on a trip that is a reward for services rendered by the employee, the value of the reward = income. (2) When services paid for in a form other than money, it is necessary to determine the FMV of the thing received. FMV=Cost of trip to ER. 6. United States v. Gotcher, 401 F.2d 118 (5th Cir. 1968) (p. 43): Taxpayers all-expenses-paid trip to Germany to tour a VW factory is NOT income because the trip was predominant business related and the taxpayer did not personally benefit from it. Here, trip was predominantly business-related, no personal benefit; When this indirect economic gain is subordinate to an overall business purpose, recipient not taxed a. Rule: 2 Prerequisites for gross income: (1) there must be an economic gain and (2) this gain must primarily benefit the taxpayer personally. b. Key differences from McCann: 1) Trip was for personal benefit of McCanns v. benefit of VW, 2) McCann was an employee while Gotcher was not a VW employee, 3) McCanns were not required to go to seminars while Gotcher had no choice but to go to Germany, 4) McCanns schedule had plenty of time for personal diversions while Gotchers schedule did not and had been planned by VW. C. Barter Transactions [61, 1001] 1. Reg. 1.61-1(a): Income may be realized in the form of services, meals, accommodations, stock, or other property, as well as in cash. 2. Rev. Rul. 79-24 (1979-1) (p. 45): 1.61-2(d)(1) of the regs provide that if taxpayers exchange services, each has income equal to the FMV of the services received; If the services were rendered at a stipulated price, such price will be presumed to be the FMV of the compensation received in the absence of evidence to the contrary. D. Unanticipated Gains (Windfalls) [61(a); R: 1.61-14] 1. Under the Glenshaw Glass definition, income includes receipts without a compensatory nexus; in other words, it is irrelevant if taxpayer earned the income, instead what matters is if receipt of the item increased the taxpayers wealth 2. Cesarini v. United States, 428 F.2d 812 (6th Cir. 1970) (p. 47): Taxpayers found $5,000 cash inside an old piano they had purchased. Held: cash was income in year in which they found it; Citing Reg 1.61-14 which states value of treasure trove is included in income in the year it which it is discovered and reduced to undisputed possession. (note: not the same as when a TP discovers that something he had bought was worth more than he originally paid for it; income would be when item sold, i.e. when gain was realized) 3. Problem 2-8: Lucinda finds brooch in backyard. Appraised at $16K, but sold for $14K a. She has gross income of $14K as soon as it is reduced to her possession 4. Problem 2-9(a): H bought rare book for $850, was appraised at $2k, but sold for $1800. a. a) Gross income of $950 ($1800 - $850) b. d) If had found book in trash, treasure trove and gross income would be FMV E. Prizes and Awards [74] 1. 74(a): Prizes and awards are generally included in gross income; 2. Reg 1.74-1(a): Prizes and awards includes (but not limited to) amts received in contests, door prizes, radio and TV promotions and games and employee prizes. 3. Limited Exceptions: In 1986, Congress expanded the scope of 74 and revoked the previous good works exception (where Pultzier prize excluded from gross income); Now, 74(b) says prizes and awards transferred to charities may be excluded IF: a. Recipient was chosen without action on his part to enter contest,
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b. Recipient not required to render substantial future services as a condition of receipt, c. and must immediately transfer the prize to charity. 4. Turner v. Commissioner, T.C. Memo 1954-38 (p. 51): Taxpayers received 2 round-trip first class cruise tickets which they exchanged for 4 coach class tickets. They reported $520 on their return while the IRS stipulated that it should have been $2200, the retail price of the tickets. a. Holding: Value to the taxpayers was not equal to their retail cost because it 1) Was a luxury that they could not afford and 2) Probably would not have been resold for $2200. The court, based on meager evidence, assigned a value of $1400.
IV. ROLE OF DEBT IN GROSS INCOME A. What is Debt? 1. Interest: commonly defined as compensation for the use or forbearance of money ( DuPont); From a legal perspective, interest is stated as a single rate on the principal amount of the loan. 2. Interest consists of 3 components: 1) Inflation, 2) Time-value of money, 3) Credit risk. 3. Interest Calcualted by 2 methods (1) simple; (2) compound
B. Receipts Subject To Claims 1. LOAN: United States v Rochelle, (1967) (p. 54): Not income because the economic benefit is temporary and there is an obligation to repay: whatever temporary economic benefit he derives from the use of the funds is offset by the corresponding obligation to pay 2. CLAIM OF RIGHT: North American Oil Consolidated v. Burnet, 286 U.S. 417 (1932) (p. 54): When a creditor takes payment from a debtor regarding a disputed debt, which may need to be refunded if the dispute is settled in favor of the debtor it IS income; If the funds are returned, taxpayer is entitled to a deduction the year the funds were returned. a. Claim of Right Doctrine: when a taxpayer received funds with (1) a contingent obligation to repay, because the sum is either disputed or mistakenly paid, and (2) no limitation on the use of the funds exists, those funds are included in the taxpayers income in the year they were received. 3. Summary: Borrowed funds are not included in income, but funds subject to a claim of right are. (No income if a binding obligation to repay, but if might need to repay, may have income.) Difficulty occurs if borrower does not acknowledge an obligation to repay. 4. Erickson Post Acquisition v. Commissioner, T.C. Memo 2003-218 (p. 55): Background: Amoco provided Erickson with certain equipment and a $175,000 loan. Erickson had to repay 10% per year (6% interest), but if supply agreement was full force, then no need to repay for that year. During the 5-year term, Erickson did not make any payments. a. RULE: (definition of a loan): For a payment to constitute a loan, at the time the payment is received, (1) the recipient must intend to repay the amount and (2) the transferor must intend to enforce repayment. (3) Further, the obligation to repay must be unconditional and not contingent on a future event. b. Holding: $175K was a loan b/c (1) There was a promissory note, (2) Amoco took steps to collect the outstanding balance of the loan, (3) Debt was secured by a mortgage on Ericksons property and (4) There was an unconditional obligation to repay. c. Factors: court could use to determine if there was a loan, p.57: i. Is there a note or other evidence of indebtedness?; Written loan agreement? ii. Interest charged?; A fixed maturity date or schedule for repayments? iii. Security or collateral requested?; iv. Has demand for repayment been made? Have any repayments been made? v. Do parties records reflect transaction as a loan? vi. Was borrower solvent at time of the loan? 5. Kriemer v. Commissioner T.C. 1983-672 (p. 58): Kriemer et al. borrowed money, but concealed their true identities as borrowers. The court held that the money was a loan, and therefore not income, because there was an actual intent to repay. RULE: gains from fraudulent or illegal activities are income even though there is no rightful claim to that gain and/or that money may need to be repaid. However, fraudulent intent does not in itself establish a lack of intent to repay
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a. TEST: Loans are only loans if there is a mutual recognition of the obligation to repay. Both parties must have actual intent to repay the loan. b. Held: In this case, although Kriemer concealed their identities, they treated the obligation as a bona fide debt. They had sufficient net worth and cash flow to repay the debt, witnesses established that they always intended to repay the debt, and they did repay the debt. (factors for actual intent to repay listed on p.62) C. Discharge of Indebtedness [61(a)(12); R:1.61-12(a)] 1. 61(a)(12): Removal of a liability is as much income as the receipt of cash because the taxpayer has more cash or assets over which to exercise dominion and control; gross income includes discharge of indebtedeness, (in particular the payment or purchase of taxpayers obligation at < face amount) 2. US v. Kirby Lumber Co, (1931) (p. 64): TPs are required to include as income the difference between the face amount of the debt and what was actually repaid. (in yr cancellation occurs) 3. Zarin v. Commissioner (3rd 1990), p.64: [contested liability]: if a TP, in good faith, disputed the amt of the debt, a subsequent settlement of the dispute is treated as the amount of the debt, (No assets are freed, and so, no income b/c the amount of assets that were offset by the debt is not clear.); Here, b/c the debt was unenforceable, the amount of the debt, was in dispute. a. Facts: Zarin ran up $3.4M in gambling debt to a casino. When casino sued, Z claimed debt was unenforceable because Casino had illegally increased his credit limit. They settled and Z paid $500k. b. Holding: The $500 settlement fixed the amount of debt. In other words, the parties agreed that based on the circumstances the chips he acquired might not have been worth $3.4M, but were worth something. Such a debt cannot be called liquidated, since its exact amount was not fixed until settlement. 4. Rood v. Commissioner, T.C. Memo 1996-248, p.67: A settlement alone is not sufficient to establish the disputed nature of a debt; Debtor may actually owe the debt but Creditor may be willing to settle to save the time and expense of litigation or other policy reasons. (eg if problems of proof or collectibility) a. Facts: : Lawyer ran up a Casino debt of $355K that he couldnt pay. To induce him to make a payment, Casino agreed to write of $225K, if he paid $100K. b. Holding: cancellation of debt was income because the circumstances of the settlement were not conclusive of whether the debt was disputed in good faith 5. Indicia used to determine if debt is real: 1) Legally enforceable K, 2) Reasonable intent to pay? 6. Problem 2-15: Bank offers a 10% discount to each borrower who prepays the balance on their mortgage note. J paid the financial institution $180k cash in full payment of his $200k note. a. a) Have gross income of $20K. (debt forgiven) b. b) Have gross income of $10K ($10K debt still outstanding) c. c) Yes, $10K relief of debt (61(a)(12)), $15K of ordinary compensation income d. d) Has gross income of $17K ($10K debt forgiven + $7K gain).
V. LIMITATIONS ON GROSS INCOME A. Recovery of Capital [1001, 1012] 1. Recovery of original capital investment is NOT an accession to wealth; a. Stanton v. Baltic Mining (1916): SCt implies by legislated perogative, not constl right b. Thus, receipt of a loan payment is recovery of ones original capital investment and a rebate is a reduction in purchase price (return of capital) c. Reason why compensatory damages are excluded from gross income while damages representing lost profit are included in income (see ch.3) 2. Rev. Rul. 81-277 (1981-1), p.71: Payment by a contractor in exchange for a release of the buyers claims against contractor for failure to fulfill a contract is a return of capital. The buyer did not receive any economic gain b/c the payment was only to make the buyer whole. a. If payment for damages of lost profit, IS taxed as ordinary income

3. 4.
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5.
6.
b. If payment made to restore TP to position he was in before loss incurred (i.e., to make whole as if the contract had been fulfilled), a return of capital and NOT taxed Cts have avoided issue where paymt for body products (blood, breast milk) are taxable. Problem 2-16: Jane pays $100K for her house and discovered that the roof was defective . She sued the builder and recovered $20K. a) No gross income (return of capital); Basis of house is $80k b) No gross income; basis of house $95k Problem 2-18: T purchased a car for $8k with a $1,000 cash rebate to follow from the factory. a) No gross income (return of capital) b) $7K Problem 2-19: K flies on Uniteds frequent flyer program for personal trips during a 2 -yr period. amasses enough mileage to earn RT ticket to Australia that is normally sold for $1700. a) Does not have gross income because of return of capital doctrine states that each time she bought tickets over the years she purchased a little more of the Australia ticket. The ticket can also be characterized as a rebate. b) Would have $1100 in gross income c) Tickets are valued objectively, so he may have $600 of gross income d) $400 of gross income e) Announcement 2002-18
B. Realization [1001; R: 1.61-6(a); 1.1001-1(a)] 1. Realization is a fundament concept that generally ensures that gains/losses are not taxed until they are severed from the capital that created it. (Severance = sale, exchange, etc.) a. Policy of administrative convenience: Glenshaw Glass characterized realization as an administrative rule rather than a constl requirement as held in Eisner v. Macomber 2. Realization Event: a transaction in which the taxpayer receives something materially different from that which he had before the exchange; TEST: to be materially different, property received must confer different legal interests or entitlements on the taxpayer (Cottage Savings) 3. Cottage Savings v. Commissioner, 499 US 554 (1991), p.76: (Dif Legal Entitlements Test): holding: [1] A realization event under 1001(a) occurs only if the properties exchanged are materially different. [2] A property is materially different if the legal entitlements associated with the property are different in kind or extent (test from case law). Here, the swap of mortgage loans that were made to different obligors and secured by different homes resulted in a realization event because there were legally distinct entitlements. (TP had different legal interests than it had before the exchange, thus the loss that was realized.) a. Comparison (stock): Separate groups of stock are NOT different if they confer the same proportional interest of the same character in the same corporation; while it would be different if issued by different corporations or confer different rights and powers (Phellis and Marr: stock in company that reincorporated in different state WAS different because different rights; but Weiss: company that reincorporated in same state, was not really different) b. Dicta: Material difference Economic substitute (IRSs arg): 1) Case law does not support this approach, 2) Overly complex, 3) Incompatible with the structure of the Code (gain/loss realized under 1001(a) shall be recognized unless a nonrecognition provision applies; one such provision withholds recognition for the exchange of properties that are economic substitutes.) c. Reg. 1.1001-3(e) (in response to Cottage Savings): Modifications to debt instruments must be significant for there to be a realization event. i. If debt instrmt is not within one of the specific bright line tests, then under the general signif rule, modifications to propertys legal rights and obligations must be economically significant under all the facts and circumstnaces C. Imputed Income, p.85 1. Generated in 2 situations: When taxpayer derives an economic benefit from (1) ownership/use of their own property (e.g., renting out house), and (2) performing services for themselves.
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2. Policy: Not included in income tax base b/c of valuation difficulties, potential burden on the poor/industrious/creative, and early misgivings if taxing imputed income was constitutional. 3. A barter transaction does NOT generate imputed income; drawing line btwn imputed income & bartering is difficult, eg catching ball result of my skill 4. Commissioner v. Daehler, 281 F.2d 823 (5th Cir. 1960) (p. 87): Taxpayer (who was a real estate broker) bought property and received 70% of the brokerage fee from that sale from his employer (a broker); the Tax Court held that the fee was a reduction in the purchase price (because the taxpayer had been acting as his own broker) and not income. The Court held that the taxpayer acted as an employee and that the fee he received was compensation for services. 5. Problem 2-21: Phillip Granville, a lawyer, normally charges $1400 for drafting a will. a. a) $1400 is not counted gross income because net there is no gross income because it cost him $1400 to do the service b. b) Yes, have gross income, because barter D. Administrative Exceptions To Gross Income 1. Policy: Transaction costs would exceed costs of collection. 2. Examples: Frequent flier miles, relocation payment made by a local jurisdiction to a taxpayer to move from his flood-damaged to another residence, ball from a home run (assuming that the taxpayer does not sell it). [Announcement 2002-18] 3. Problem 2-19: [see above]
VI. DISPOSITION OF PROPERTY (ch 2E) (1001(a)-(c), 1012, 1016(a)(1)-(2); 1.1001-2(a)(1)-(2), (b), (c) Example 1 and 2; 1016-2(a)-(b))
A. Gains on the Disposition of Property, p.91 1. Gains from property (net gains realized on the sale or exchange) are gross income 61(a)(3) a. Gain is not gross income until the gain has been realized; b. A gain is realized if the amount realized > adjusted basis c. Gain from property does NOT include amounts received as a return of the initial capital investment in the property 2. Gain = Amount Realized Adjusted Basis a. Amt realized: total economic benefit received in exchange for the property transferred. i. 1001(b): Amount realized = Sum of $ received (includes debt forgiveness) + FMV of property/services given in return. b. Adjusted basis: i. Only relevant to computing net gain from property (irrelevant for services) ii. 1012: Basis equals cost to acquire property 1. includes certain acquisition expenses, e.g., brokers and attorneys fees 2. If acquire 2 or more properties in single transaction, total cost basis allocated among individual properties. If not arms length, use FMV. iii. Basis determined depending on how property was acquired (purchase, gift, inheritance, or exchange) and adjusted thereafter as required by 1016 (e.g., depreciation, or capital improvements) B. Determining Adjusted Basis 1. Taxable Exchanges Of Property a. Basis (of received property) = FMV of property received i. Philadelphia Park (maj view): cost basis of the property received is the FMV of the property received; Based on theory that the term cost is a tax concept and is related to other areas of the tax code 1. But where the value of property received cannot be ascertained, the FMV of property transferred is used. Based on reasoning that FMV of exchanged properties should be equal ii. Minority View: basis is the FMV of property given; FMV of the property transferred in the exchange (prop A) was the amount paid and thus was the cost basis of the property received (Budd International, 1944)
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1. Based on theory that the cost to the taxpayer is the economic value of prop relinquished, but when properties exchanged are of unequal value, resulted in taxpayer realizing an incorrect amt of gain or loss on a subsequent disposition of the acquired property b. Problem 2-24: On 1/1, S got 100 stock at $60/share. On 12/1, market value of stock appreciated to $100, S exchanged for a parcel of undeveloped land appraised at $10k. i. a) Gain = $4000 ii. b) Basis on land = $10K c. Problem 2-25: W exchanged stock with adjusted basis of $10K and FMV of $15K in return for Js GM stock, having an adjusted basis of $20K and a FMV of $16K. There is a realization event because change of legal entitlement to each specific stock. i. a) Wyatt: Amount realized = $16K, adjusted basis = $10K, gain = $6K; Jones: Amount realized = $15K, adjusted basis = $20K, loss = $5K ii. b)Wyatt: $16K; Jones: $15K 2. Debt Incurred in the Acquisition of Property a. Loan and debt basics: i. Higher credit = lower interest rate ii. Secured loan = A loan that has collateral; iii. Unsecured loan = A loan that does not have specific property as collateral iv. Recourse Debt = Borrower is personally liable for full amount of debt. If borrower doesnt repay, his other assets are at risk. v. Nonrecourse Debt = Lenders only recourse is against the property. Thus, if value of the property is insufficient to repay debt in ful, lender cannot proceed against debtors other assets for repayment (the lender bears the risk the property will decline in value) b. Basis (of property acquired by purchase) = Purchase price (cash + liabilities incurred in acquiring the property) (Crane) c. Crane v. Commissioner, 331 U.S. 1 (1947) (p.96): Entire amount of any debt incurred in the acquisition of property is included in the purchasers cost basis at the time the property is acquired (not at a later date when the debt is paid). Example: $100K purchase price: $20K cash, $80K note Basis = $100K (not $20K). i. Originally limited to cases where debt < value of property ii. If didnt include debt, depreciation deductions could produce negative basis iii. Including debt allows basis to be fixed at the time of purchase (else basis would change with principal payments) d. Problem 2-26: a-e) $100K 3. Debt Incurred After Property Acquisition (p.100) a. Woodsam Assoc v. Commissioner (2nd Cir. 1952): When property is mortgaged as security for a loan for a purpose other than the propertys acquisition, there are no tax consequences because there has not been a realization event b. Same result if a nonrecourse debt in excess of the basis of the encumbered property, but also debt does not represent the cost of the property, so not included in basis C. Amount Realized from Debt Relief 1. Nonrecourse Indebtedness a. Reg. 1.1001-2 provides the general rule that the amount realized on the disposition of encumbered property includes the full amount of any debt relief. b. Double deduction theory: (Millar v. Commissioner, 577 F.2d 212 (3d Cir. 1978) (p. 104): Taxpayer should include the full amount of a nonrecourse loan in the amount realized because to exclude the amount of liability from the amount realized would be tantamount to giving the taxpayer a double deduction (Once for depreciation deductions against that basis and for debt forgiveness).
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c. Commissioner v. Tufts, 461 U.S. 300 (1983) (p. 104): When the nonrecourse obligation exceeds the FMV of property sold, amount realized includes the outstanding amount of the obligation. FMV is irrelevant. i. Example: $100K purchase price for a $100K note. Basis = $100K. Take depreciation deduction of $20K (for a basis of $80K) but dont pay principal. FMV drops to $50K. Gain/loss = $100K - $80K = $20K. 2. Recourse Indebtedness a. Rev. Rul. 90-16 (1990-1) (p. 111): X defaulted on recourse debt. FMV = $10K, basis $8K, debt = $12K. Recourse debt of $12K > FMV of $10K. Regular gain = $10K $8K. Discharge of indebtedness gain = $12K - $10K. b. Problem 2-29: On 1/1, Year 1, Rose purchased a parcel of undeveloped land from Morgan in exchange for $100,000 cash and Roses $900,000 promissory note. Rose was unconditionally liable for repayment of the note, which was secured by the land. On 1/15, Year 3, Rose made a total of $25,000 payments on the note and informed Morgan that because the FMV of the property had declined to $850,000, Rose would not make additional payments on the note. What result to Rose if: i. a) 1001(a): $850 (90025 payments25 deficiency jdmt) $1M = -$150 loss ii. b) 1001(a): $850 (amt realized from discharge of debt) - $1M = -$150 loss iii. c) 1001(a): $850K (amount realized from the discharge of indebtedness) $1M = -$150K +$25K discharge of indebtedness = -$125K loss. D. Discharge Of Indebtedness Redux 1. Preslar v. Commissioner, 167 F.3d 1323 (10th Cir. 1999) (p. 115): Preslars paid down $1000K recourse debt to $799K. Preslars settled with the FDIC for $350K after bank went under. Contested liability doctrine does not apply because the original amount of the debt must be liquidated (not subject to debate if it is, settlement determines original debt amount (See Zarin)). Therefore, extinguished debt obligation is gross income. 2. Problem 2-27: [not doing in class anymore] a. a) A/B $30K (10K cash + 20K note), Amt Real. = $42K (22K cash + 20K obligation) b. b) Basis still $30, A/R = $42 (Cancellation of $22 obligation + discharge of $20 debt) c. c) Basis is still $30K, Amt realized = $42K (Get $22K truck + discharge of $20K debt) 3. Summary a. Example #1: Adjusted basis: $1,000K real debt, FMV = $800K i. Non-Recourse: If Gain = 0 (walk away), Tufts tells us amount realized = $1,000K, even if FMV is lower ii. Recourse: -$200K = $800K - $1M. 1. Why the difference? They can come after you for the remaining $200K. 2. What if the bank just says dont worry about the remaining $200K? 3. $200K capital loss AND 4. $200K of cancellation of indebtedness (i.e., $200K income) b. Example #2
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Debt example Cuban borrows $100M from bank to buy TX capital building; owes $100M plus interest to bank Under first part of Crane, Cuban owns capital with $100M adjusted basis, regardless if recourse or nonrecourse, even though none of the money came from his pocket If repays, adjusted basis does not change. Basis can change under 1016, but not for debt reasons. Property appreciates to $200M, so Cuban borrows an additional $50M from the bank (post acquisition loan) o $50M is still not income because there is an offsetting obligation o Basis remains $100M (does not change to $150M) o Using property as collateral is not a realization event. If you give up control, etc., that would be realization event. Property drops to $80M (Adjusted basis $100M, $100M of debt). Perot gets building and assumes debt obligation. Cuban is out the property, but no debt. Perot doesnt pay anything. o This is the issue in the second part of Crane and for Tufts. o Crane: FMV > AB. taxpayer got something valuable, relief from debt. Amount realized = debt. o Tufts: FMV < AB, Cubans amount realized = $100M (amount of non-recourse debt), $0 gain o Perots basis: $100M. If walks away, amount realized is $100M. Foreclosure o $100M obligation, $100M AB, $80M FMV o Changes Cubans legal rights Realization event o Amount realized = $100M
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Items Excluded from Gross Income (Ch.3)

I. GIFTS AND BEQUESTS (102, 1014(a), 1015(a); 1.102-1(f)(2)) A. Introduction 1. 102(a) excludes gifts, bequests, devises, and inheritances (assume latter 3 are the same thing because someone has to die) from gross income a. But subsequent income earned from gifts is gross income - 102(b) b. Policy: administrative burden to track gifts (whereas treasure trove is relatively rare) 2. Definition: A gift is a payment or transfer (Duberstein v. Commissioner, (1960),p. 122): a. made out of a detached and disinterested generosity; b. made out of affection, respect, admiration, charity, or like impulses; c. not made primarily from the constraining force of any moral or legal duty; d. not made from the incentive of anticipated benefit of an economic nature; and e. not made in return for services rendered. 3. Whether a payment/transfer is a gift depends on the donors intent or motive 4. Olk v. U.S., 536 F.2d 876 (9th Cir. 1976) (p. 124): Even though players motive for giving Tokes (tips) was impulsive generosity or superstition: are not acts of detached generosity, but are gross income because: 1) Regularity of flow, 2) Equal division between dealers, 3) Daily amt received indicate that the person would come to see them as a form of compensation. 5. Note on Gift versus Compensation a. Altman v. Commissioner, (2d Cir. 1973): Mothers checks for $122k to son were not a gift, but was gross income because they were given in response to the sons threats (i.e., not detached generosity). b. Wolder v. Commissioner, (2d Cir. 1974): Bequest of cash/stock to lawyer for lifetime services was compensation for tax services. c. Greisen v. U.S., (9th Cir. 1987): Oil royalty payments given to Alaska residents were not a gift because they were given out by the State due to a legal (or moral) obligation 6. Problem 3-2: Js employer had 2 bikes delivered to her, with a note: To J, with many thanks. a. 102(c); Would need to rebut presumption that the gift is includable by virtue of the employer-employee relationship by applying the Duberstein factors to the employers subjective intent. This statement modifies 102(a), so if 102(a) does not apply, then 102(c) does not apply. But, need to analyze type of relationship in 102(a) first. 7. Problem 3-4: T approaches his two sons, R and D, and offered to pay $500 to the one who earned the highest GPA by the end of the academic year. As a result of the offer, both spent extra time and effort studying; however, D finished the year with a 3.75GPA while R could only muster a 3.6 GPA. What result to Donald on the receipt of the $500? a. Why gift: Familial relationship is hard presumption to overcome b. Why not gift: Quid pro quo. No legal obligation
B. 1015 Basis for Property Received as Gift 1015(a), (d)(1), (2), (4), (6); R: 1.1015-1(a),(c),(d) 1. 1012: Basis of property = cost $0 basis for gifts, but under 1015 gift recipient acquires a transferred or carryover basis; that is, the donees basis is the donors basis at time of transfer 2. 1015: Calculating donees basis: a. If property has appreciated (FMV is donors adjusted basis) Carryover Basis i. Donees basis = Donors adjusted basis + gift tax paid b. If property has depreciated (FMV < donors adjusted basis), donee has two bases i. Gain basis = Donors adjusted basis (same as above) ii. Loss basis = FMV of the property at time of the gift c. Using gain/loss bases: i. If (donees amount realized > gain basis) then // Donee has gain 1. Realized gain = Donees amount realized gain basis ii. Else if (donees amount realized < loss basis) then // Donee has loss 1. Realized loss = Donees amount realized loss basis iii. // else No gain or loss (thus, if sold a depreciated property at FMV, donee would realize neither gan nor loss)
Items Excluded from Gross Income
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d. Gift Tax: increase basis (but not above propertys FMV) for gift tax paid, which is attributable to the net appreciation in the property (pro-rated) - 1015(d) i. Ex. AB: (As adjusted basis = $30k) (FMV = $40k) (total gift tax = $1K) 1. $1k x $10k (net appreciation) $40k (total amount of the gift) = $250 (the gift tax attributable to the net apreciation) 3. Gifts of appreciated property to children (low tax bracket) can result in significant tax savings, but Code does not allow using gift to transfer tax losses to another person. 4. Problem 3-6 (Assume no gift tax): W purchased the following in Year 1: Property A, $10k and Property B, $14k. In Year 5, the properties were valued at $15,000 and $9,000, respectively. a. a) [Gives A to M, who sells in Yr 6 for $17,000] Amount realized = $17K (1001(b)) i. FMV in year 5 > donors basis ($15K > $10K) donees basis = $10K ii. Gain = $17K - $10K = $7K b. b) [Gives B to Pearl, who sells 1 month later for $8K] Amount realized = $8K i. FMV in year 5 < donors basis ($9K < $14K) 1. Gain basis = $14K; Loss basis = $9K ii. Donees amount realized < loss basis: Realized loss = $8K - $9K = $1K c. c) [Pearl sells B for $12K] Amount realized = $12K i. FMV in year 5 < donors basis ($9K < $14K) 1. Gain basis = $14K; Loss basis = $9K ii. Gain basis > amount realized > loss basis No gain or loss d. c.2) [Sold B at $17K] Amount realized = $17K i. FMV in year 5 , donors basis ($9K < $14K) 1. Gain basis = $14K; Loss basis = $9K ii. Donees amount realized > gain basis: Realized gain = $17K - $14K = $3K C. Part Sale/Part Gift Transactions - 1015(a); 1011(b); R: 1.1015-4; 1.1001(e); 1.1001-2(a)(1), 4(iii) 1. when property is transferred in return for consideration totaling less than propertys FMV 2. Reg 1.1015-4: basis is a hybrid of cost basis and gift basis rules a. Basis: transferees basis= greater of (1) amount paid OR (2) transferors adjusted basis i. No loss deduction permitted to the transferor on part sale/part gift. 1.001-1(e) b. Determining a Realized loss: i. Loss basis: lesser of (1) transferees basis (greater of: amt paid or transferors adjusted basis) OR (2) the FMV of the property at the time of the transfer 3. Diedrich v. Commissioner, 475 U.S. 191 (1982), p.133: 4. Problem 3-7: S transferred prop with A/B of $30K and FMV of $90k to son M for $60K; M sold property for $100k a. A) Gain of $40K = amt realized $100k Ms basis: $60k b. B) if sold for $25K? Loss of $35K (basis of $60k amt realized $25k) c. C) Gain of $40k = amt realized $100k basis of $60k d. D) Loss of $35k = basis of $60k amt realized $25k e. E) Gain of $10k = amt realized $100k 90k basis f. F) Loss of $35k = basis of 60k amt realized of $25k D. Basis of property acquired by Inheritance or Devise - 1014(a) 1. 1014(a): basis is the FMV of the property on date of death a. If (FMV > decedents basis) then i. Donees basis = FMV // FMV - decedents basis escapes income tax b. else // FMV < decedents basis i. Donees basis = FMV // Decedent and donee cannot realize the inherent loss ii. Rule of thumb: Hold your winners ; harvest your losers c. If get by inheritance, basis stepped-up to FMV. Donee must pay for gain btwn amt realized & FMV@time of inheritance. BASIS AT DEATH ALWAYS FMV. i. Reasons to step-up basis: 1) Donor is dead (cant ask) 2) Spotty record keeping 2. Consequences: a. Devise property that has appreciated To get the stepped-up basis b. Sell property that has depreciated just before death To be able to get the loss
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3. CLASS NOTE: look at categories under 1014(b)!! 4. Exception: 1014(e): Stepped-up basis rules in 1014 do not apply w.r.t. appreciated property acquired by the decedent through gift within 1 year of death where such property passes from the decedent to the original donor(basically, the heir cant transfer appreciated property immediately before grandmas death in hopes of receiving it back at stepped up basis) 5. Problem 3-8: A) no income on $40k sale;
II. LIFE INSURANCE PROCEEDS 101(a),(c),(d); Reg: 1.101-1(a)(1), (b)(1-2); 1.101-3; 1.101-4(a) A. 101(a) excludes from gross income life insurance proceeds, payable by reason of death 1. If however the policyholder lives to see the endowment policy mature, or if he cashes in a whole life policy, may be governed by 72 (designed to exclude policies that function primarily as investments rather than insurance) 2. 3 Types of Insurance Policies: a. Term policies: only provide insurance coverage for state period; insured acquires no cash value while policy in force b. Endowment policies: provide two types of coverage: 1) if insured lives for a specified number of years, he will receive a predetermined sum at end of the period, 2) but if insured dies before, a beneficiary will receive a predetermined death benefit c. Whole Life policies: like endowments, acquire a cash value; but more of the premium goes toward purchasing a death benefit 3. Special Rules and exceptions: Accelerated death benefits-101(g): under certain contracts, a terminally ill or chronically ill individual may exclude proceeds of a life insurance contract, even though they are not paid by reason of death as required by 101 4. Problem 3-9: Rs uncle died and R got $20k from a whole life insurance policy III. EMPLOYEE BENEFITS A. Introduction: List of employee fringe benefits can be found in 132 B. Meals and Lodging (119(a)(b)(d), 107; Reg: 1.119-1(a)-(c),(f)) 1. 119. Requirements: can exclude the value of ER provided meals and lodging IF provided for: a. (1) Convenience of the employer: there must be a substantial noncompensatory business reason of the employer for supplying the meals/lodging (ex. on call meals); satisfied when there is a direct nexus between housing furnished and business interests of the employer served thereby (The McDonald Rule) b. (2) on Business premises: generally where the employee performs his duties; but is a functional definition not a physical one (Adams v. U.S.) c. (3) LodgingCondition of employment: TP required to accept lodging in order to enable him properly to perform the duties of his employment (Reg 1.119-1(b)) 2. Policy: meals and lodging, when provided for the convenience of the ER rather than the benefit of the EE are not compensation and thus not gross income 3. 107 (For clergy only): Excludes value of cash housing allowances as well as the rental value of housing furnished in-kind 4. employer-provided groceries (circuit split): in Tougher, (9th Cir.) Groceries are not excluded, but in Jacob, (3d Cir.): Groceries cooked and eaten on premises are excluded 5. Commissioner v. Kowalski, 434 U.S. 77 (1977), p.142: Meal allowances for state troopers who patrolled highways and ate at restraurants are NOT excluded form gross income under 119. Here, meal allowances were not necessary for employee to properly perform his duties. a. RULE: cash for meals allowances is not the same as meals. Cannot infer the noncompensatory character of a benefit merely from employers characterization, need evidence that benefit was granted because the employers business could not function properly unless an employee was furnished that benefit on the employers permises. b. Reasoning: no limitations on how they spent meal allowances (not required to spend on mid-shift meals, nor required to account for how money was speant) and could eat in anywhere within patrol area (including home) .
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6. Adams v. United States, 585 F.2d 1060 (Ct. Cl. 1978) (p. 145): Japanese residence provided by Exxon Mobil for the president of their Tokyo subsidiary is not gross income. a. 1) Convenience of ER requirement: His living at residence was in business best interests because they built and owned it, it had been the home of the subsidiarys president for about 20 years, and it needed to be (and was) sufficiently lavish. Also, due to Tokyo real estate prices, needed subsidy to attract a qualified candidate. b. 2) Premises requirement: Employers premises is a functional definition, not a physical one. Thus, its not limited to business compound or HQ, but rather anywhere where an employees duties are performed. Here, it directly served a business function and influenced his effectiveness in business computinty c. 3) Condition of Employment requirement: Living at residence was condition of employment because his home needed to be sufficiently dignified to him to be effective in the Tokyo business community and he needed to have meetings, entertain clients, conference calls, etc. 7. Problem 3-10: EE, a law firm associate, was required to attend luncheons of her ER every Mon and Thur. The ER wanted to encourage social interaction among the firm employees and arranged for lunch to take place at a restaurant across the street. Lunches were $20/plate. a. Need to be for 1) Convenience of the employer and 2) Business premises b. Hard to say that meals are for convenience of the employer c. Business premises is property where business is conducted. In this case, no specific work being done, so hard to say that employer is renting space. Most likely gross income because hard to meet convenience of the employer test. 8. Problem 3-11: R is a waiter and is on duty from 10a-6p every day. His employment K states that he is to eat lunch at 2p and dinner at 7p and may select any item from menu at no charge. a. Need to be for 1) Convenience of the employer and 2) Business premises b. Definitely on business premises for both lunch and dinner c. 2pm lunch is for convenience of employer because need him on-site, may want him on-call, want him to try food, be competitive with other restaurants, etc. d. Dinner is harder to say because regulations say it needs to be immediately before/after. 7pm may not be immediate. C. Costs for Employee Life and Health Insurance (79, 106) 1. 79(a): Excludes up to $50K of group term life insurance (cost for coverage above $50K are gross income). Premiums for endowment/ whole-life polices not excluded (are gross income). a. 79(d): Life insurance plans must be nondiscriminatory (if provide more substantial benefits for key employees, cost of coverage included in key employees gross income) 2. 106: Employer contributions to health/accident insurance plans are generally excludable. Not subject to nondiscriminatory policy. D. Other Employee Fringe Benefits, p.152 1. General Rule: Gross income does not include any fringe benefit that qualifies as an employe benefit at no additional cost to the employer, an employee discount, a working condition fringe, a de minimis fringe, a transportation fringe, or a moving expense reimbursement 2. Policy Reasons: Employers have valid business reasons, other than simply providing compensation, for offering employee discounts on items they sell. (ex.store EEs wearing clothes they sell); and want to Set clear boundaries for what counts as a tax-free benefits 3. 132(a) Statutory Criteria for Excludable Fringe Benefits: if a fringe benefit does not fall under one of the following categories, it must be included in gross income: (1) No-additional-cost service: i. any service provided for EEs use, at no additional cost to the ER (including forgone revenue); (includes benefits provided directly at no charge, at a reduced price, or through a cash rebate) ii. Requirements: 1. Nondiscrimination requirement: service must be available to all employees, else favored employees will be taxed
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2. Line of business limitation: Service must be the same type of service sold to the public in the ordinary course of the employers line of business, in which the employee works. (If employee works in one of the X lines the company has, employee can only get discounts in the line he works in.) a. If an EE provides services that directly benefit more than one line of business (e.g. payroll), then the employee is treated as performing services for all of the employers lines of business b. Reciprocal arrangements provided by an unrelated ER okay if: 1) Both Ers in same line of business, 2) Written reciprocity agreement, 3) No substantial additional cost for either (2) Qualified Employee Discounts: iii. EE discounts are excludable only if it is with respect to a qualified property or service and falls within a specified percentage requirement; (also subject to the nondiscriminatory requirement and the line of business limitiation) 1. Limitations: 1) Not available on highly liquid property; 2) Discount for services cannot exceed 20%; 3) Discount on goods cannot exceed ERs profit % (retailcost); (EEs excess discount is gross income) (3) Working Condition Fringe Benefits: iv. Property or services provided by the employers that, had the EE purchased it directly, the EE would be allowed to deduct it under 162 or 167 (at least hypothetically deductible) (At times, an exclusion can be much more valuable than a deduction) v. Examples: law firm pays Bar dues, Company car (But must be used for business purposes) (4) De minimis Fringe Benefits: vi. Any property/service value is so small its unreasonable/impractical to track 1. Some may be offered discriminatorily (but not eating facility benefit) 2. Benefit is NOT de minimis if granted to a particular EE so regularly that in effect it serves as a means of disguised compensation 3. No statutory/regulatory limit on how much benefit a particular EE can receive as long as overall fringe benefit program is de minimis to ER vii. Ex: Below-cost meals in EE cafeteria, typing of personal letters by secretary, occasional personal use of copier, monthly transit passes < $21/mo., etc. (5) Qualified Transportation fringe: includes ER-provided commuter transportation, transit pass, or qualified parking (Ceilings are imposed, but are inflation-adjusted) (6) Qualified Moving Expense reimbursement: Includes moving expenses and lodging paid by employer (direct or reimbursed) as long as costs are reasonable. Does not include meals while traveling. (7) Qualified retirement planning services: Includes any retirement planning advice provided to employee or spouse by an employer who has a qualified plan, contract, pension, etc. Must be non-discriminatory b. On-premises athletic facilities: Includes FMV of on-premises facilities if most of the use of the facility is by employees, spouses, and children. Facility needs to be owned and operated by employer. Nondiscrimination requirement does NOT apply. c. Family members: Most benefits are explicitly for the employee only, but 132(h)(2) enjoyment of a no-additional-cost or employee discount fringe benefit by spouses and dependent children as if had been enjoyed by the EE. 4. Problem 3-17: E is an attorney working full-time in the legal department at United. During the current year, she received and used the following benefits at no charge pursuant to her negotiated employment agreement w/ United. What tax consequences attend the following? a. (a): [Round trip, first-class standby ticket for United flight between NY and Paris for her and spouse] No gross income under 132(a)(1) because there is no additional cost
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(132(b)(2): Minimal w.r.t. employers fixed costs), meets nondiscrimination, and meets line of business requirement. Spouses ticket not GI either due to 132(h)(2)(A). b. (b): [Reserved ticket] Gross income because reserved ticket means forgone revenue, which is an additional cost. c. (c): [if on Air France]: not gross income as long as there is a written reciprocity agrmt d. (d): [Daughter and brother used tickets instead] Daughter qualifies under 132(h)(2) if a dependent. Brother does not qualify. e. (e): [30% discount on in-flight sales brochure]: income because discriminatory f. (f): 5% discount above profit would be taxed g. (h): [50% discount for 10 nights lodging at Inter-Continental Hotel which is owned/operated by United] Almost certainly no. No similar concept of standby rooms, line of business limitation, questions about whether hotel room is a service or a good. Even if excluded, discount limited to 20%. h. (m):[Making 1000 personal copies per year] Does not qualify under no-additional-cost service because of line-of-work. May be de minimis. 5. Problem 3-18: J worked for M and purchased a new car. The typical price for the car was $30k but J only paid $24k b/c of the customary 20% EE discount. Dealer profit ratio is 30%. a. Excludable under 132(c) b/c (1) Car offered for sale to customers in normal course of business; (2) profit percentage of 30% > 20% discount; (3) discount is on something that is not highly liquid and generally held for investment; (4) nondiscriminatory.
IV. COMPENSATION FOR PERSONAL INJURIES AND SICKNESS - 104(a)(1)-(3); 105(a)-(b), (e), (h)(1-2), (7); 106(a) A. 104: Generally excludes amount received due to personal injury or illness (regardless if received through workers comp, accident or health insurance, or civil suit). 1. Exclusion does NOT apply if taxpayer has taken itemized deduction for corresponding expenses. (Along with 105(a), gross income if employer pays.) 2. Includes compensation for tortious conduct (include personal, but not nonphysical injuries, e.g., gender discrimination B. 104(a)(2): 1. Punitive damages are includable, unless state law mandates that only punitive damages can be awarded for wrongful death and injuries were account of a personal injury/sickness. a. Rationale: Compensatory damages could be considered to be a return of capital. 2. Exclusion only applies to physical injuries/sickness, includes non-physical injuries/sickness that has a physical origin, e.g., emotional distress, loss of consortium 3. Doesnt matter if paid in lump sum or in periodic payments (even if end up getting more that way) because of time value of money V. DISCHARGE OF INDEBTEDNESS: 108(a), (b)(1)-(2), (d)(1)-(3), (e)(5); 1017(a) A. Bankruptcy Tax Act of 1980 1. lkj B. Rev. Rul. 92-53 1. lkj VI. OTHER MISCHELLANEOUS EXCLUSIONS A. Tax-Exempt Interest 1. lkjl B. Social Security 1. Goldin v. Baker, p.178 C. Sale of Principal Residence 1. Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 1997
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Choosing the Proper Taxpayer (Ch4)

I. ASSIGNMENT OF INCOMESERVICES [61, 73] A. The Concept of Income Splitting 1. Motivation for income splitting is to avoid high marginal tax rates by assigning income to another taxpayer with lower taxable income while still effectively controlling the use and enjoyment of the income 2. Lucas v. Earl, 281 U.S. 111 (1930) (p.198): Income is taxed to the one who earns itK between husband and wife gave half of husbands income to wife so they each had half his total income. Using the tree and fruit analogy, Court held: cannot escape income tax by anticipatory arrangements and Ks however skillfully devisedby which the fruits are attributed to a different tree from that on which they grew 3. Vnuk v. Commissioner, 621 F.2d 1318 (8th Cir 1980) (p.199): whoever controls the income, rather than who receives it, is the one who should be taxed. (TP transferred all their property to an inter vivos trust and claimed that as a leased employee of the trust, it is the trust that pays tax on income from the services; Ct rejected because trust had no right to supervise TPs employment and the TP had no legal duty to earn money for the Trust) a. Ultimate direction and control: Who has authority to dictate 1) Nature and extent of the individuals services, and 2) to Whom those services should be rendered. B. Shifting Income within the Family by Gratuitous Transfer 1. Teschner v. Commissioner, 38 T.C. 1003 (1962) (p. 200): where an individual neither receives nor has the right to receive income, he is not the taxable individual. (Parents won essay contest for which the prize was an annuity for a person <17 yrs. Ct said no gross income for parents bc they never received anything and were never entitled to receive anything) a. Ct narrowly defines earn: to acquire by labor, service, or performance; to deserve and receive compensation b. Holding: (1) The power to appoint/designate recipient of income is NOT sufficient to justify taxing possessor of such a power; (2) Power to dispose of income = ownership; but where there is neither possession nor right to possess, there can be no disposition; C. Shifting Income within the Family by Compensatory Arrangement 1. Fritschle v. Commissioner, 79 T.C. 152 (1982) (p. 205): Test for true earner = who controls the earnings of the income? (Mother had contract with company to assemble ribbons; used her kids to do 70% of the work and was paid for their work. Court said that mother had all gross income because it was she who controlled the capacity to earn the income, and it was she who in fact received it: contract was with her, checks were payable to her, and she exercised total control over the entire operation.) a. Holding: It does not necessarily follow that income is taxable to the one whose personal efforts producted it. Thus, despite fact that a portion of amounts received can be traced to work actually performed by the children, mother is treated as true earner. b. 73 operates to tax a minor child on income he is deemed, in the tax sense, to have earned, regardless of the fact that under State law, the parent may be entitled to those amounts. Still need to find that the child is the true earner D. Shifting Income to a Related Corporation 1. Control Test: two necessary elements must be satisfied before the corporation, rather than its service-performer employee, may be considered the controller of the income: a. 1) Employee: Service-performer employee must be an employee of the corporation whom corp has the right to direct or control in some meaningful way b. 2) Contract: A contract must exists between the corporation and person using the services that recognizes the coproprations controlling position. 2. Johnson v. Commissioner, 734 F.2d 20 (9th Cir. 1984) (p.207): failed on step 2: Basketball player, rather than the corporation, contracted directly with sports team and then tried to assign that K to the corp, but like Earl, he was the only party to the contracts by which the salary was earned. Thus, he actually controlled the earnings and amounts paid by the warriors with respect to his services. Cf. Fox v. Commissioner (1983), and Laughton v. Commissioner (1939)
Choosing the Proper Taxpayer (ch.4)
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E. Rule: Each individual is a separate taxpayer and who has the power (Factors: Arms length contract, employment contract, etc.) to generate it is a significant factor in whos income it is. However, it is not the only or dominant factor. No bright line. F. Problem 4-1: Gordon entered into an employment contract with Greensleeves that required him to work 40 hours/week for $1000/week. 1. a) [G and GS agree to give $800 to him and $200 to 15-yr old son J] All $1000 to G (Lucas) 2. b) [Same as a), but there is a K btwn G and J] All $1000 to Gordon. Joseph has legal right, but Gordon has the power to generate. Contract is not dispositive as was the case for wife in Lucas. 3. c) [Same as b), but K is a GS requirement] Same result even though G could not get $1000 because employer paid $1000 for $1000 of services. But there is an arg that Teschner applies. 4. d) [Joseph does some work in exchange for $100 of Gordons $1000] Joseph provided services for his $100, so the answer is different. Gordon gets $900, Joseph gets $100. 73. 5. e) [Same as d), but Joseph signs employment contract] Result would not change. Contract only lets him be legally entitled, but doesnt change who generated the income. G. Problem 4-2: 8-year old Tracey wins a free trip to Disneyland for her and 4 other kids. 1. a) Tracey has gross income. 2. b) [goes alone and does not designate any other kids] Ability to control is important, but so is accession to wealth. 3. c) [Tracey designates a kid in return for $250] Tracey has gross income.
II. ASSIGNMENT OF INCOMEPROPERTY [102, 1015(a); Reg: 1.102-1, 1.61-9(c)] A. Appreciated Property Transferred by Gift 1. Gifts 102 and 1015: combination of these statutory rules allows a donor to transfer to the donee the unrealized appreciation in property, if the gift is of the full property 2. Key Q: Has there been an assignment of income from the property or a transfer of property? a. Assignment of income from the property: Gross income to donor b. Assignment of property:No gross income to donor, donee gets stepped up basis (FMV) B. Transfers of Income from Property 1. Generally income from property is taxable to the owner of the property. In these situations, an owner of income-producing property (eg, stocks, bonds, realestate) gifts income or property. 2. Rule: Attempts to transfer income of property independently of property itself are allowed only if the income interest is transferred for its entire duration. Otherwise, donor will be taxed on the income, and will be deemed to have made a (nontaxable) gift to donee 3. Blair v. Commissioner: If property is assigned to a person, income from the property is taxed to the assignee (assigned life estate to children). 4. Helvering v. Horst, 311 U.S. 112 (1940) (p. 212): Income that a taxpayer realizes is taxable to him even if he never directly receives it. The Dads gift of the coupons constituted enjoyment of the income, and hence the realization, thus income should be taxed to the person who obtains enjoyment of it. (Taxpayer transferred interest coupons on bond as a gift. Donor had income even before maturity date bc no doubt interest would be paid to owner of bond.) C. Property and Income Transfers Compared 1. Moore v. Commissioner, T.C. Memo 1968-110 (p 215): Assigning a mere right to receive future royalties (future income) of book falls under assignment of income. (Moore did not transfer property to his children because he had previously granted all property rights in the manuscript to to publisher by K) 2. Heim v. Fitzpatrick, 262 F.2d 887 (2d Cir. 1959) (p. 216): Coupling a right to income with additional significant rights elevates a mere bare right to future income to the statuts of income-producing property. (Along with a right to future royalties in patent, P also assigned a bargaining power over certain rights and royalties). See Rev. Rul. 71-33 (1971-1). D. Substance versus Form Analysis 1. Rule: The substance of a transaction, and not its form, determines taxable consequences, and familial transfers are subject to special scrutiny.Analysis: Is transfer of property in substance as well as form? Consider the reality of transferees control over the property and other indicia that ownership of property has in fact been transferred.
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2. Salvatore v. Commissioner, T.C. Memo 1970-30 (p. 216): After contracting to sell property and receiving down payment, but before sale completed, mother gifted half to children. Court held this was an anticipatory assignment of future income; children treated as mere conduits for the income. Result may have been different if transfer occurred before contracted to sell. 3. Ferguson v. Commissioner, 174 F.3d 997 (9th Cir. 1999) (p. 217): During an ongoing tender offer and pending merger agreement of taxpayers business, TP gave some shares of old stock to charity. Because it was practically certain the merger would be completed (i.e., old stock would be converted into cash), the stock had ripened (right to receive income had occurred) even though no income had yet been received. Thus, taxpayers had gross income on the cashequivalent of stock BEFORE stock had been gifted and charity received that cash equivalent. a. Rule: under the anticipatory assignment of income doctrine, once a right to receive income has ripened for tax purposes, the taxpayer who earned or otherwise created that right will be taxed on any gain realized from it, notwithstanding the fact that the TP has transferred the right before actually receivin gthe income b. Test: To determine whether a right has ripened for tax purposes, a court must consider the realities and substance of events to determine whether the receipt of income was practically certain to occur; Not based on mere formalities and remote hypothetical possibilities 4. Rauenhorst v. Commissioner, 119 T.C. 157 (2002): If right to payment has not ripened prior to gift of stock, evidence of mere intent to sell (e.g., tender offer or nonbinding agreement) before the gift of stock, will not necessarily cause assignment of income doctrine to apply. E. Dividends on Stock 1. Issue of who is taxed on dividend income received after transfer of stock is a matter of timing 2. Key dates in Reg 1.61-9(c): a. Declaration of the dividend date: i. Transferred before this date, then dividend is transferees gross income b. Record date (date that determines which shareholders are eligible to receive the dividend): Right to dividend ripens on this date. Reg. 1.61-9. i. Transferred before this date, then dividend is transferees gross income ii. Transferred after this date, the dividend income has matured (ripened) prior to transfer and is transferors gross income (regardless of who receives it) 1. Day after the record date, stock price goes down because buyers do not get the dividend. c. Transfer of stock date: Dividend is paid out on this date F. Assignments of Income for Consideration 1. Est. of Stranahan v. Commissioner, 472 F2d 867 (6th Cir 1973) (p.222): The presence of tax avoidance motives will not nullify an otherwise bona fied transaction. Taxpayer-father was entitled to a large interest deduction but didn't have enough income in that year to use it. So he agreed to transfer to his son his right to dividends on certain stock owned by him, in exchange for a payment equal to the present value of the future divident income. Essentially, the son paid consideration (the present value) to receive future income. a. PH: Tax court found transaction lacked a business motive and was essentially a loan, rather than a sale, so TP did not realize income. (reversed) b. Holding: The taxpayer realized income on the sale. Even though the tax benefit was the sole motive for the transaction, it was a bona fide sale with all of a sales attendant risk and reward. The valuable consideration and nongratuitous nature of the transaction distinguishes it from Helvering v. Horst. i. Cf. to cases where there was no consideration at the time of the assignment: Fred W. Warner (1926) (mere grautitous assignment of income since only consideration was $10 dollars) and Alred LeBlanc (TP assigned dividends to son as long as son remained with fathers corp was actually just post -dating assignment to dates when father was to receive dividends) c. 451(a): a cash basis tp ordinarily realizes income in the year of receipt rather htan the year when earned
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G. Statutory Response: The Kiddie Tax 1(g): The kiddie tax applies only to the net unearned income of a child (generally types of passive income such as interest, dividends, rents, etc.) above a statutory threshold amount. Other income of the child (e.g. income from part-time job) is unaffected. 1. Tax rate: treats such income as childs income but applies a tax rate equal to the greater of the childs marginal tax rate or the parents marginal rate. 2. Generally applies to children under the age of 18 and have at least one living parent. Expanded to apply to children between 18 and 24, in certain circumstances. 3. relevant to as more children work and save during HS or college to pay for their school. H. Problem 3-5 (p.128): Father made a deal with his two sons that whichever one got the higher GPA, got an interest-bearing bond worth $500. Donald received the higher GPA. 1. $500: Not gross income to Donald because its a gift. 102(a). 2. Interest: Need to determine when interest had ripened. If while Father owned, his income. If not, then its Ds even though bond itself was not gross income. 102(b). 3. Problem with 102(a) and 102(b): Hard to tell when something is property v. income from property when property does not have present value. I. Problem 4-4 (a)-(e), (g) (p.226): L owns 100 shares of stock, worth $100/share. L purchased it 3 yrs ago for $20/share. On 11/1, IBM declared a $5/share dividend payable on 12/20 to s/h of record on Nov 15. Key dates: - Declaration of dividend date: November 1 - Record date: November 15 - Transfer of stock date: December 1 1. a1) [Lake keeps stock, but transfers right to receive current years dividend to daughter Karla on 10/1] Dividend is gross income to Lake because he owned the property that produced the income, so he is only assigning away future income. see Helving v. Horst a2) [Lake transfers right to receive all future dividends] Same result as a.1 2. [Ks tax consequences when receives $500 dividend on 12/1] treat it as if $500 went to L (def. income), then $500 went to K (may/ not be gift). If given out of detached generosity, then gift. 3. [L gives all 100 shares and rights to all future dividends to K on 10/1] Shares are gift (no gross income), but dividends are her gross income because before record date. 4. [Karlas tax consequences when receives $500 dividend on 12/1] Same result as c. 5. [Transfer takes place on 11/20] Stock is a gift to her, but dividend is gross income for Lake because he owned it on the record date. 6. g) [L gives stock on 10/1, but has reversionary interest after 5 yrs] Same as giving away dividend for 5 yrs, so dividends are Ls income (law doesnt allow artful devices like this).
III. DIVORCE AND ALIMONY [71, 215, 1041(a)-(c); Reg: 1.71-1T, 1.1041-1T] A. Alimony vs Property Settlements: if transfer involves property other than cash, it cannot be alimony (cash payments to third parties on behalf of spouse can be included in alimony, see Reg 1.71-1T(b) A-6) 1. The Statutes: a. Property Transfers - 1041 b. Alimony - 61, 71, and 215: c. Child Support - 71 2. Tax implications: 71: Permits alimony to be included in payees gross income; 215: Permits a corresponding deduction by the payor a. Bottom line: Congressionally mandated income splitting (in contrast to Lucas v. Earl) B. Statutory Requirements: 71(b) 1. To qualify as an alimony or separate maintenance payment, the payment must be: a. (1) In cash - 71(b)(1) i. Can be paid directly to creditors ii. Can be paid by trustee or insurance company b. (2) Pursuant to a written divorce or separation instrument - 71(b)(1)(A) i. 71(b)(B) allows parties to disavow paymts as alimony, i.e., a lower payment c. (3) btwn spouses who are not in same household when payment is made -(b)(1)(C) i. If no final decree of divorce or separate maintenance has been entered and the payments are being made under a written separation agreement, the payments may be alimony even though the parties are part of the same household.
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d. (4) Subject to discontinuance on the death of payee, and - 71(b)(1)(D) i. If not discont, looks more like agrmt to pay fixed sum, than alimony (support) ii. If payor is required to make payments after the death of payee, NONE of the payments made before or after payees death will be considered alimony. iii. Must be explicitly stated 2. 71(f): Alimony can not be front-loaded. If it is, then recomputed as follows: a. Recapture calculation is only made in the 3rd post-separation year b. Payments made in the 2nd post-separation year will be recaptured if they exceed the payments made in the 3rd post-separation year by > $15,000. c. Payments made in the 1st post-separation year will be recaptured if they exceed the average of the payments made in the 2nd post-separation year and the 3rd postseparation year by > $15,000 d. Example: $50K, $20K, and $0K payments in year 1, 2, and 3, respectively i. Yr 2 recapture: $20K - $0K = $20K > $15K. $5K is recovered ($20K - $15K). ii. Yr1 recapture: Average of payments in Yrs 2 and 3 not recovered = Avg($15K, $0K)= $7.5K. 50K - 7.5K = 42.5K > 15K. 42.5K - 15K = 27.5K 3. 71(c): Child support: is not alimony; Not deductible for payor and not income for payee a. Reason: purpose of alimony payments is split income (should be taxed) b. Disguised Alimony?: A reduction in payments tied to an event in the childs life is sufficient specificity to have that monthly amount characterized as child support (and not alimony, so not deductible) i. Reg. 1.71-1T(c): A-18: regs tie contingency event with age (18, 21, etc.) C. Property Transfers between Spouses 1041 1. 1041: Divorce-related transfers are non-taxable events (reverses S.Ct case U.S. v. Davis) a. 1041 applies broadly to transfers of many types of property b. Uniformity: intended to eliminate differential tax treatment of property transfers in divorces regarding community property states versus non-community property states. c. Policy: allow splitting of assets in divorce without as little tax intrusion as possible 2. Gen Rule: For 1041 to apply, a taxpayer must transfer property to a spouse, or a former spouse in a transfer that is incident to a divorce. 1041(a); (note: also applies to transfers between spouses in non-divorce situtations). a. Nonrecognition: transferor recognizes no gain or loss. - 1041(a). b. Basis: Transferees basis = the transferors adjusted basis. - 1041(b) c. Gift: receipient of property treated as if acquired by gift, and so the transferee does not need to include the value of the property in gross income 1041(b)(1) i. But note: 1041 has its own basis rules, the basis rules for a gift are not used 3. Rev. Rul. 2002-22 (2002-1) (p. 245): Assignment of Income doctrine does not apply: taxing the transferor spouse when the transferee spouse ultimately receives income from the property transferred in the divorce would frustrate the purpose of 1041 a. If A transfers interest in nonstatutory stock options to spouse (B) incident to divorce: i. The Transferor (A) is NOT required to include an amount in gross income; ii. The Transferee (B) IS required to include an amount in gross income when former spouse exercises the stock options. 4. Problem 4-9: Harold and Maude receive their final divorce decree. a. a) [H to pay M $9k /yr for 5 yrs] Not alimony b/c payments do not terminate on death b. b) [Same as a, but payments terminate at the time of her death if she dies within 5 years] Alimony because all requirements are satisfied. 71(1)(A-D). c. j) [Harold is to sell car to Maude for $5K. FMV is $10K, with adjusted basis of $3K] Because pre-divorce, transfers between spouses is not a realization event. No gain or loss for Harold 1041(a); no gross income for Maude and gets $3K in basis. 1041(b) d. k) [same as j, but M assumes a $2k bank loan on car]: no change; $3k basis (see regs) e. l) [M lives rent free in Hs home for 7yrs or until her death]: Reg: A-6 f. m) [in l, but H req to spend $300/ month for the house]:
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Timing of Gross Income (Ch.5)

I. GENERAL PRINICPALS when should an item be included in gross income? A. Why determining which year is important? a particular items tax liability may change if incl in a given yr depending on: 1) statutory increase/decrease in overall tax rates; 2) Fluctuations in TPs other income; 3) Changes in TPs filing status, or 4) Substantive changes in the tax law B. Annual Accounting Period: Each year is separate taxable period in which income and deductions from transactions of previous and subsequent years do not affect the current taxable year ; may be on a calendar or fiscal year. 12 month timeframe balances admin costs v. fairness. 441(a) 1. TP mistakenly includes income in one year, but needs to repay it. Under claim-of-right doctrine, cannot undo previous mistake, but can take a deduction in the year of repayment. 2. Problem 5-2: What is taxable period for a calendar-year taxpayer who dies on Oct 1?: 6013(a)(3); point: all in the calendar year unless you die (called a stub return) C. Tax Accounting Method: TP can compute taxable income by method of accounting they use to keep their books; Method must clearly reflect income; Commissioner has authority to impose any method of accounting on taxpayers to most clearly reflect income - 446 1. Cash method: Items are included in income when they are actually or constructviely received a. Actual receipt: physical acquisition and unrestricted use of the item b. Constructive receipt: occurs in year in which an item is credited, set apart, or otherwise made available to the TP; cant turn back on income earned and available to them in an attempt to defer taxation until its actually received; c. Cash equivalency doctrine: if promissory notes, etc. have readily ascertainable FMV, then included in income at its FMV, in yr of receipt. ($ may actually be received later.) 2. Accrual method report in the yr in which 1) all events have occurred that fix the right to receive the income and 2) the amt can be determined with reasonable accuracy D. Relief Provisions: For reasons such as graduated tax rates, fluctuating income, and bunching, there are exceptions to the general rules of accounting 1. Exception #1: Installment Reporting -453: most imp and widely used; used to deferred payment sales of property in lieu of cash or accrual method. This method permits TP to defer income by prorating payments as they are received in order to recover a portion as basis and to report the remainder as income. (i.e., pro rata recovery of basis as payments are received) 2. Exception #2: Open Transaction Reporting: Judicially created open transaction reporting method applies only in rare cases when consideration has no readily ascertainable FMV. (ex. contract to receive indefinite amts of income, such as a % of future earnings). Transaction is held open until taxpayer recovers basis and then reports any income on top of that II. CASH METHOD OF ACCOUNTINGincluded when they are actually or constructviely received A. Cash Equivalency - 446(c), 451(a) [RE-READ] 1. Default RULE: the actual receipt of cash or its equivalent must be included in income if the item can be valued in terms of money. See Reg 1.446-1(a)(3) a. Tangible property: As good as cash, include FMV of prop b. Intangible property: represents the right to receive something in the future (e.g., K rights or evidence of indebtedness); i. Valuation problems and issues of characterizing as a mere promise to pay in the future or current payments that are the same as cash 2. Payments for Services a. Kahler v. Commissioner, 18 T.C. 31 (1952) (p. 253): TP who received a paycheck on Dec 31 after banking hours still had gross income for that taxable year because he realized income in that year. All items of gross income shall be included in the taxable year in which received by the taxpayer, and that where services are paid for other than by money, amount to be included as income is the FMV of the thing taken in payment. 3. Promise to Pay Future Income a. Cowden v. Commissioner, 289 F.2d 20 (5th Cir. 1961) (p. 255): Taxpayers had a mining lease which had a bonus and advance royalty payments with a firm and absolute obligation that the payments would be made no matter what. A promise to pay
Timing of Gross Income (ch5)
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income in future is just as good as cash if: 1) Solvent debtor, 2) Assignable, 3) Only discount is a time-value discount, 4) FMV, 5) Unconditional b. Problem 5-3: P owned a beauty salon and uses cash method. Linda (big-wig executive) paid Patricia $1,000 cash plus a $4,000 promissory note due on 2/14 of the following year with 10% interest. i. a) [Note is assignable, but unsecured, and had a FMV of $3.6K] $4.6K ii. b) [Note is unassignable and FMV of $1.2K] $1K B. Actual versus Constructive Receipt - 446, 451(a) 1. Constructive receipt doctrine was created to prevent the taxpayer from choosing the year to get the income (similar to income shifting, but here same tp tryign to shift to dif year) 2. Definition: Constructive receipt occurs when income is credited without restriction, set apart, or otherwise made available to the taxpayer - Reg. 1.451-2(a) a. Rule: Under the constructive receipt doctrine, an item must be included in income, if: i. (1) TP has sufficient control over it to compel payment even though they may not have actually recevied payment, and ii. (2) Only if there are no substantial limitations or conditions on the TPs right to bring funds within his control b. Requirements: For constructive receipt doctrine to apply: (1) Taxpayer must turn his/her back on the payment, and (2) Taxpayers right to receive the payment must be i. A) without condition, ii. B) fully earned, and iii. C) the obligor must be ready, willing, and able to pay 3. Miele v. Commissioner, 72 T.C. 284 (1979) (p. 259): Law firm utilized cash method and only included in its gross income the portion of client advances held in a special bank account that were transferred to a general partnership account when the case closed. Court held that income is not constructively received if the taxpayers control of its receipt is subject to substantial limitations or restrictions. 4. Problem 5-4 (p.270): On December 31 AM, employer has a check for employees December salary delivered to the employees office mailbox. a. [picks up at 10AM, but too busy to deposit it that day] Have not received cash, but l, assignable, solvent debtor, ascertainable FMV, and only discount is time value). b. [picks up at 6:35PM, after all banks have closed] Cash equivalency. (Same result if employee picked up check at 11pm Bright-line rule.) c. [intentionally refrains from picking it up] No actual receipt. Has not received anything, so no cash equivalency. But Check written and made available to him const receipt. d. [Check does not have funds until 1/3] No actual receipt. Insolvent debtor, so no cash equivalency. Obligor not able to pay, so no constructive receipt. Taxpayer is not receiving economic benefit. No gross income. e. [EE is sick, so did not pick up check that day] No actual receipt. Has not received anything, so no cash equivalency. Check written and made available to him (could have arranged to have it picked-up, ER was not stopping him) Constructive receipt. f. [What if 12/31 were a Sunday and banks were closed] Have not received cash, but received something like cash cash equivalency. g. [Check mailed and received on 1/2] No actual receipt. Has not received anything, so no cash equivalency. Taxpayer did not turn his back on the payment, so no constructive receipt. Taxpayer is not receiving economic benefit. No gross income. h. [What if check mailed only because of EEs request] Has not received anything, so no cash equivalency. TP turned his back on the payment and right to receive was without condition, fully earned, and obligor ready/willing/able to pay, so constructive receipt. i. x) [Employee picks up, but check bounces] No actual receipt. Insolvent debtor, so no cash equivalency (Check was not honors in due course, so it was not cash equivalent when he picked it up). Obligor not able to pay, so no constructive receipt. Taxpayer is not receiving economic benefit. No gross income
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C. 83 Property Received for Services Performed (278-284) 1. Generally, when a purchaser is permitted to acquire goods at a price below market as compensation for services, he has income in amt of the discount (FMVprice paid) a. However, where there is a substantial risk of forfeiture at the time of transfer AND if the property is non-transferable, then it is treated as still owned by the transferor and no income is realized by the transferee 83(a) b. When the forfeiture risk is removed OR the property becomes transferable, then the property becomes income (when it is substantially vested - s.1.83-3(b)) and is taxable 2. 83(a): General Rule - A taxpayer who receives property in connection with the performance of services must include an amount in gross income in the first year in which he may transfer the property or the rights are not subject to a substantial risk of forfeiture. a. Amount included is calculated as FMV at the time of vesting minus purchase price. b. Substantial risk of forfeiture: if full enjoyment of the property is conditioned upon future performance of substantial services by any individual - 83(c)(1). c. Example: if a corp permits an employee to purchase stock valued at $3,000 for $1,000 conditioned on the employee remaining with the company for another 5 years. If the employee leaves before then, he must resell the stock to corp for $1,000. The restriction is stamped on the shares making them non-transferable. At the end of 5 years the stock is worth $7,000. Employee has $6,000 in income when ownership vests (at end of 5 yrs), but he has no income before that time. 3. 83(b) Election - a TP receiving restricted property may elect to include the value of the property in gross income at the time received, rather than waiting for the restricitons to laspse. Election must be made within 30 days of the date of transfer a. The taxpayer has no further income when the property vests, and is not taxed on any additional gain until the property is sold. b. In the above example, Employee would have $2,000 of income when he bought the stock, but no income when ownership vests at the end of 5 yrs. The $4,000 gain would not be taxed until the stock is sold. c. You are permitted to make an 83(b) election even if zero excess- Regs s.1.83-2 d. Drawbacks to 83(b) Election - If you forfeit property, then you do not have a deductible loss. E.g., Employee paid tax on the $2,000 and in year 3 forfeits the shares by leaving the company. He may not deduct the $1,000 loss, even though he previously reported $2,000 in income 4. The effect of 83(a) is to defer gain recognition, where an 83(b) election enables the taxpayer to defer income realization. When TP sells the property, the total income realized will be the same, 83 only affects the timing of the realization. a. Thus, 83(b) election should be done if the increase in value of the property is expected to outweigh the value of deferring payment of tax (e.g., interest you would get by deferring payment) 5. Alves v. Commissioner, 734 F.2d 478 (9th Cir. 1984), p.280: 3 requirements: 83 applies when property is: (1) transferred in connection with the performance of services; (2) subject to a substantial risk of forfeiture; and (3) not disposed of in an arms length transaction before the property becomes transferable or the risk of forfeiture is removed. a. Issue: whether 83 applies to an employees purchase of restricted stock when the amount paid for the stock equaled its full FMV, without regard to any restrictions. i. TPs arg: In connection with means employee is receiving compensation. Because he paid full FMV for the shares, no compensation. Shares were issued as an investment, rather than in connection with the performance of services. b. Holding: Yes. The phrase in connection with does not require the property to be compensation for services. 83 applies to all restricted stock that is transferred in connection with the performance of services, regardless of the amount paid for it. Congress made 83(a) applicable to all restricted property, not just stock; to property transferred to any person, not just to employees; and to property transferred in connection with services not just compensation for employment. 6. Problem 5-7:
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D. Employee Stock Options 421, 422, Reg 1.83-7 1. A stock option is a right for a holder to purchase a certain amount of stock within a specified future time period at a predetermined price, the "strike price." The strike price is fixed at the time the option is granted and usually is based on the stock's then-current market price; 2. Two kinds of employee stock options: a. (1) Statutory: also known as incentive stock options (ISOs): The tax consequences of ISOs are governed by 421. These rules are favorable to employees, deferring recognition of income until sale, and taxing gain on sale as capital gain. b. (2) Nonstatutory (Nonqualified) Stock Options (NSO): A nonqualified stock option is any option that does not meet the requirements of 422. The tax consequences are governed by the rules applicable to restricted stock (83) 3. Incentive Stock Options (ISOs) - 422 requirements for an ISO: a. The employee must hold the stock for at least two years from the date of the granting of the option, and for one year after exercise of the option (422(a)(1)); b. The person holding the option must have been employed by the company granting the option (or an affiliate) for the entire period beginning on the date of the grant of the option, and until 3 months before exercise ( 422(a)(2)); c. The company granting the option must have adopted a plan that sets forth the aggregate number of shares that can be granted under the plan (422(b)(1)); d. The option is granted within 10 years of adoption of the plan (422(b)(2)); e. Option price is not < FMV of the stock at the time the option is granted (422(b)(4)); f. The option is transferable only in limited circumstances (422(b)(5)); and g. The grantee does not own >10% of the stock of Co. granting the option. (422(b)(6). 4. Tax Consequences to the Employee:
Tax consequence to employee At grant of option At vesting of Option At Exercise of Option At Sale of Stock Incentive Stock Option 422, 421
No income to employee No income to employee No income, except for AMT purposes spread between exercise and strike price is income for AMT purposes Capital gain
Nonqualified Stock Option

83 determines 83 determines Spread between exercise price and strike prices is ordinary income. Capital gain (short or long term, depending on holding period)
III. ACCRUAL METHOD OF ACCOUNTING [ 446(c)(2), 451(a)]; (3/5: pp. 284-289.) A. Under the accural method, it is the right to receive and not the acual receipt that determines the inclusion of the amount in gross income. When the right to receive an amount becomes fixed, the right accures. B. All Events Test 1. Reg. 1.451-1(a): Have gross income when all events have occurred which 1) fix the right to receive such income and 2) the amount thereof can be determine with reasonable accuracy; 2. Rev. Rul. 79-292 (p. 284): All events have occurred when 1) The required performance occurs, 2) Payment thereof is due, or 3) Payment therefore is made, whichever occurs first. C. Fixed Rights to Receipt 1. Flamingo Resort v. U.S., 664 F.2d 1387 (9th Cir. 1982), (p.285): Issue: whether gamblingdebt markers represent a right to income that has been fixed" for accural purposes. TPCasinos arg: b/c the persons who gave the markers had no legal obligation to repay the casino, the liability markers represent was not fixed, rather it was contingent on customers volition. a. Holding: When the right to receive income becomes fixed depends not so much upon the legal right to enforce collection as upon the existing probability of its being received. Here, despite the legal unenforceability of gambling debt, casinos estimated collectibility was 96%. Thus, the debts which the markers represent are fixed, because there is a reasonable expectancy of collection b. Reasoning: ct avoided a rigid def of fixed in order to be responsive to unique facts and practical circumstances; Course of dealing w/ debtor is a determinative factor.
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D. Timing of Inclusion of Various Forms of Income 1. Interest Income a. Generally, taxable as its is earned over the life of the interest-bearing obligation, b. IRS: under claim-of-right doctrine, interest collected in advance of date on which it is actually earned, is income in year of receipt even if accural method. Rev Rul. 58-225 c. Tax Court: because purchaser may have right to refund, the event fixing right to interest did not occur until interest became due. i. Gunderson Bros: T.C. held that finance charges that are part of an installment sale should be included in income over the life of the K, if a portion of the finance charges is abated in event that purchaser prepays any of the prinicipal d. Where interest cannot be collected, neither the judiciary nor IRS requires accrual i. In that case, amounts that accrued up to the date of default are gross income while amounts accruing after the date of default are not included 2. Dividend Income a. Both accrual and cash method taxpayers report dividend income in the taxable year in which the dividend checks are received - Reg. 1.301-1(b) 3. Sales in the Course of a Trade or Business a. All events test is satisfied when the goods are either shipped, delivered, or accepted, or when title passes, provided that it is consistent from yr. to yr Reg. 1.446-1(c)(1)(ii) b. Accrual TPs report all accounts receivable in gross income (Sale made via cash or on credit is the same buyers ability to pay doesnt matter) (Spring City Foundry Co.) c. Remedy for an uncollectible account is to claim a tax deduction in the year in which the unrecoverable amount is ascertained. d. Consignment Exception: income not reported until actual sale of the goods R. 1.471-1 4. Prepayment for Services a. 446(b): Taxpayers method of accounting must clearly reflect income. b. Auto Club of Mich (U.S. 1957): prepaid service income is taxable in the year of receipt
IV. JUDICIAL EXCEPTIONS POSTPONING INCLUSION (304-313. Problems 5-14 (a), (b)) A. Security Depositsnot included in the lessors income in year of receipt; Reason: at the time of receipt, unknown if TP will be able to keep the money (thus, gross income) or return it (thus, a nontaxable loan) 1. But if lease agreement provides that deposit is primarily held for payment of rent, then it could be prepaid rent, which is gross income in the year it was received; Courts look to substance of transaction to determine primary purpose a. Clinton Hotel Realty v. Commissioner, (5th Cir 1942): even though deposit could be credited toward last rental payment, ct held character of deposit was as security rather than prepayment of rent, likening the transaction to borrowing by the lessor. (Lessor required to pay interest and obligated to return deposit if premises were destroyed) b. Gilken Corp v. Commissioner, (T.C. 1948): primary purpose of the deposit was prepayment of rent and it lacked the characteristics of a loan, thus was taxable income in year of receipt, even though deposit secures performance of the lease agreement. 2. Nature of the protected interest: a security deposit protects TPs interest in the property; prepaid rent protects TPs income from the property. 3. Commissioner v. Indianapolis Power, 483 U.S. 203 (1990) (p.305): Utility required certain deposits to ensure payment of future bills, which was refunded if customer made timely payments. IPLs ability to retain the deposit is contingent upon 2 events outside its control: the customers choice to purchase electricity and to ultimately apply the deposit against final bill. a. Holding: were deposits and thus excluded from income. Whether something is prepayment or a deposit depends on the parties rights and obligations at the time of payment. Here, the consumer has sole control over whether deposit is paid back Thus, the utility does not have unfettered dominion over the money at the time of receipt. b. Test: The key to determining whether a TP enjoys complete dominion is whether the TP has some guarantee that he will be allowed to keep the money. i. Individual who makes an advance payment retains no right to insist upon return of the funds; so long as recipient fulfills terms, money is theirs to keep
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ii. However, in a deposit, customer retains right to insist upon repayment in cash; he may choose to apply money to purchase of good or service but he assumes no obligation to do so 4. Problem 5-14 (p.309): J leased property to Vickie for 1 year. Both are cash method taxpayers. Lease required Vickie to pay a $2,000 security deposit to secure her performance under the agreement. The deposit could be applied to the last 2 months rent or refunded at the end of the lease, provided that Vickie fulfilled all covenants. If Vickie failed to adhere to covenants, Joseph was to retain the $2,000 as liquidated damages. Joseph was required to hold the funds in an account that prohibited his use unless Vickie breached a material term of the lease a. Not income in year 1 because a deposit: obligated to return principal, Js dominion over amt depends on Vickies choice to apply it to last months rent or her breach. b. If V breaches, include in income the amt applied to rent less amts used to pay damages B. Option to Purchase Real Property, p.310 General rule is that neither grantor nor option holder realize tax consequences at time option is purchased; Grantor defers income until either the option holder exercises the option or allows it to lapse, whichever comes first 1. Straight Options: the purchase of a right to buy property at a future time for a fixed price; 2. Virginia Iron Coal v. Commissioner, (4th Cir. 1938): RULE: option payments are taxable in the year the optionee surrenders (or exercises) all rights under the option contract and not in the year the option payment is actually received. The option holder similarily delays realizing tax consequences until the option is execised, lapses, or is resold. 3. Kitchin v. Commissioner, 353 F.2d 13 (4th Cir 1965): held that rental payments received under a lease option must be treated as income in the year received. Distinguished a lease coupled with an option-to-purchase from a straight option.
V. DEFERRED PAYMENT SALES OF PROPERTY, pp. 313-325. Omit 453 regs A. Deferred payment sales arise whenever property is sold and part/all of the proceeds are received in the future; three ways to report: B. Closed Transaction Reporting 1. All gain realized in a deferred payment sale is recognized in the year of sale; the tax consequences are established at the time of the sale (gain = amt realized adjusted basis) 2. Valuation Treatment depends on accounting method: a. Cash method: Include when cash or its equivalent is actually or constructively received i. If promissory note is considered property received, FMV of promissory note is included in Amt Realized (1001(b)) ii. In yr of sale, may have tax liability > liquid cash b/c cash not yet received b. Accrual method: Generally include the face amount of note as amount realized at the time of sale because the obligation to pay that amount is fixed i. problematic because not all promises to pay are equal (Warren Jones Co, how to place a value on a promise to pay in the future) 3. Reg. 1001-1(g): Amount realized in a sale of property for a debt instrument is the issue price of the debt instrument determined for OID purposes; Issue Price (IP) of debt depends on if prop./debt instrument is publicly traded: a. If publicly traded, IP = FMV b. If not, IP = Present Value of all future paymts discounted at the AFR 4. However, amt realized is NOT discounted for the risk that future pymts may not be made 5. NOTE: most of this is obsolete because of installment method C. Open Transaction Reporting 1. In rare and extraordinary circumstances, a purchasers obligation may not have a specific face amount AND may be incapable of valuation Use open transaction (limited situtations where its virtually impossible to determine amt realized) a. Seller holds the transaction open, treating payments received as a tax-free recovery of basis to the extent of the basis of the property sold and thereafter treating any payments received in excess as taxable gain in the year received b. Can totally defer gain until basis has been completely recovered
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2. Burnet v. Logan, 283 U.S. 404 (1931) (p. 316): Taxpayer sold iron mine. Received cash upfront and royalty payment based on their share in following years. Promise to pay, conditioned upon future amount of extracted ore. Court held that because the promise was contingent upon circumstances impossible to foresee with reasonable certainity, promise was not equivalent to cash and had no ascertainable FMV. Tax law is concerned only with realized losses and gains. So a promise to pay indeterminate sums of money is not necessarily taxable income. Court said to treat it as if you paid off basis first. Therefore, no taxable gain until basis paid off. D. Installment Reporting 1. Hybrid reporting method where a portion of each payment is treated as a return of basis and a portion is treated as income. After the total sales proceeds have been collected, the entire gain will be taxed. 2. Opt-out: 453 installment reporting automatically applies unless TP elects out. If a taxpayer elects out of, we revert to the open versus closed transaction analysis. Default is opt-in. 3. Installment Calculation: income received = payment x [gross profit / contract price] a. Gain ea yr. = Payment x Gross Profit Percentage b. Gross profit percentage = Gross profit / Total contract price c. Gross Profit = Total Contract price Adjusted Basis in property 4. Example: Taxpayer sells property with a FMV of $100K and $30K basis. Buyer will pay $10K in year 1 and $30K (plus interest) in the next 3 years. Gain is taxed @ 20%.
Closed transaction If the entire gain is taxed in the year of the sale, the taxpayer will owe $14K in taxes 20% * ($100K $30K), but only have $10K in cash to pay the taxes. Open transaction Year 1 Year 2 Year 3 $30K $0K $0K $30K $20K $0K $10K $30K $30K $20K $0K $0K $0K $10K $30K $0K $2K $6K $10K $28K $24K Year 4 $0K $0K $30K $0K $30K $6K $24K Total $30K $0K $100K $0K $70K $14K $86K
Total basis Unrecovered basis Payment received Remaining basis Gain recognized Tax due Surplus cash
Installment transaction Year 1 Year 2 Year 3 $10K $30K $30K Payment received 70% Gross profit percentage $7K $21K $21K Gain recognized $3K $9K $9K Return of basis $1.4K $4.2K $4.2K Tax due $8.6K $25.8K $25.8K Surplus cash
Year 4 $30K $21K $9K $4.2K $25.8K
Total $100K $70K $30K $14K $86K
5. 453 assumes that a taxpayer will get paid everything, so 453 is only a timing provision; total amount realized remains unchanged 6. Estate of Silverman v. Commissioner, 98 T.C. 54 (1992) (p. 321): Taxpayers accepted a takeover agreement and received 1 withdrawable and 1 non-withdrawable savings account, which were not readily tradable. Taxpayers could use the 453 installment method because they had not achieved complete dominion over the money, nor assign/withdraw it. a. If entitled to use 453 installment reporting, there has been a realization event, which makes further consideration of the cash equivalency doctrine redundant. b. 453 is almost always more favorable to taxpayers than the closed transaction doctrine 7. Problem 5-17 (p.325): Year 1: Erica purchases Blackacre for $20,000 in cash. Year 3: Justin approaches Erica and offers to purchase Blackacre for $20K cash plus a note with a face amount of $80K, bearing adequate stated interest and $20,000/year for each of Years 4-7. Note FMV = $70,000. Erica accepts the offer and at the end of Year 3, Justin pays her the $20,000 cash and the $80,000 note.

a. Amount realized = $20K + $80K = $100K; adjusted basis = $20K; Gain = $80K b. If closed transaction; $80K gain in year 3, but only $20K cash c. a) [Erica is a cash method taxpayer]
Payment received Gross profit percentage Gain recognized Return of basis Year 3 $20K $16K $4K Year 4 $20K $16K $4K Year 5 Year 6 $20K $20K 80% $16K $16K $4K $4K Year 7 $20K $16K $4K Total $100K $80K $20K
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d. b) [Erica is a accrual method taxpayer] Same result. Installment method does NOT depend on which method of accounting (cash, accrual) is used. e. c) [Erica elects out] First, determine if open or closed close because ascertainable value. Recognize $80K in Year 3
VI. NONRECOGNITION OF GROSS INCOME (March 8. Text pp. 334-347. Problem 5-24.) A. 1001(c) provides the general rule that realized gains and losses are recognized unless otherwise provided in the Code. 10311045 provide various nonrecognition rules that apply in certain property transactions to defer taxation of such realized gain. 1. Nonrecognition does not exclude the gain realized from taxation; it merely defers timing of inclusion by adjusting the basis of the property received such that if the property received were sold immediately after the exchange, the taxpayer would realize gain in an amount equal to the amt of gain realized in in the exchange that went unrecognized. 2. Two policies: (1) the transfer has not changed the economic substance of ownership, even if investment has changed in form; (2) TP has not cashed in his investment, thus it is equitable to defer recognition until there is taxable disposition on new prop B. 1031Like-Kind Exchanges: 1. provides for nonrecognition of realized gain or loss on the exchange of trade or business or investment property for like-kind property that will also be used in the taxpayers trade or business or held for investment. 2. 3 RequirementsNonelective: if requirements met, nonrecognition applies. (cant waive): a. [1] Both the property given and property received must be held for productive use in trade or business or for investment; (so not personal car) b. [2] Must qualify as an exchange (i.e., property transferred in return for other property), as distinguished from a sale and purchase; c. [3] Properties must be of like kind, which refers to the nature or character of property and not to its grade or quality. Reg 1.1031(a)-1(b) i. So cant exchange personal property for real property because not same nature and character not of like kind; but All real property, developed or undeveloped and commercial or residential, are treated as like-kind [Reg. 1.1031(a)-1(b)] ii. If personal property, see R. 1.1031(a)-2(b) for like-kind rules for depreciable tangible property (basically, have to stay in same asset class) d. Dont need to apply to all parties in transaction: 1 may qualify even if other does not e. Nonsimultaneous Exchanges qualfiy (Rev Rul. 61-119): even though the sale of old equipment and the purchase of new equip were done in two separate contracts, the 2 steps were in fact reciprocal and mutually dependent. So, the steps in these two transactions were collapsed into one 1031 exchange. 3. Moore v. Commissioner, T.C. Memo 2007-134, (P.336): exchange of lake front properties did not qualify as a property held for investment because the primary purpose for acquiring and holding properties was to enjoy them as vacation residences. a. Rule: Whether it is held for investment, depends on TPs intent or primary purpose in holding and aquiring the properties, determined as of the time of exchange. b. Holding: The mere hope or expectation that property may be sold at a gain cannot establish an investment intent if the taxpayer uses the property as a residence; Moreover, TP cannot escape residential status of property merely by moving out. Here, lack of upkeep was inconsistent with an intent to protect investment, rather they only
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continued upkeep and maintenance of the property in connection with regular personal use as a vaction home. i. Factors: 1) were properties held for the production of income?; 2) made available for rent; or 3) held primarily for sale at a profit. (consider reasons why decided to sell or acquire new property, here new property bought because easier to get to) 4. Basis1031(d): basis in property received = basis in property given up in the exchange a. No gain is recognized on exchanges of permitted like-kind proeprty b. But if also receives boot (other property or money), the gain, if any, is recognized up to the value of boot received in the exchange. - 1031(b) i. gain recognized= lesser of: (i) gain realized OR (ii) FMV of boot received ii. But if realizes a loss, loss is not recognized, even if boot received. 1031(c) c. If gain is recognized basis of prop received = [basis of prop given up] [FMV of boot or cash received] + [gain recognized in exchange]. i. The taxpayers Basis in noncash boot received is FMV. 1031(d) d. The party paying boot adds the boot to the basis of the like-kind property given up in the exchange, for purposes of computing (i) the gain realized, and (ii) the basis of likekind property received 5. Deferred Multiparty Exchanges - 1031(a)(3) a. 1031(a)(3) permits multiparty exchanges as long as i. (1) X locates and identifies the replacement prop w/in 45 days of the exchange; ii. (2) and Y purchases and transferrs the identified property to X before the earlier of (i) 180 days from the transfer, or (ii) the due date of Xs tax return for the year in which the original transfer to Y occurs. b. Rev. Rul. 90-34: Issue: If X transfers property to Y in exchange for property of a like kind, may the exchange as to X qualify for nonrecognition of gain or loss under 1031 even though Y never held legal title to the property recevied by X? i. Holding: Yes. 1031(a) does not require that Y hold legal title to property received by X, but merely that X receive solely property of a like kind to the property transferred. [So can deed title Z X directly and skip Y] 6. Rev. Rul. 79-44 (p.344): the transfer of interests in real property held by tenants in common that results in the conversion of two jointly owned parcels into two indvidually owned parcels qualifies as a like-kind exchange for 1031. a. Facts: One had a $1000 mortgage that A and B were each liable. A received the parcel subject to the mortgage + plus a promissory note from B for $500 to compensate for his half of the mortgage. B received the parcel free of debt. b. Holding: Consideration received by A in the form of money or other property is NOT offset by consideration given in the form of an assumption of liabilities. [thus, A will recognize the gain realized form the exchange, but not in excess of the FMV of the note received ($500). B will not recognize any of the gain realized.] 7. Problem 5-24: C. Involuntary Conversions1033 (p.350) 1. 1033(a) allows taxpayer to elect to not recognize gain realized on the involuntary conversion of property into cash due to destruction (e.g., fire), theft, seizure, or condemnation, provided that the TP reinvests the cash in qualified replacement property within statutory time period. a. If cost of replacement property < amt realized from conversion must recognize gain to the extent of the excess b. In a direct conversion into other property, nonrecognition of gain is mandatory; c. In an indirect conversion (cash reinvested into qualfied property), its elective i. If indirect, must be by purchase. It will be considered a purchase if, but for 1033(b), the unadjusted basis of property = cost. 1033(a)(2)(A)(ii) ii. thus, acquisition of replacement property by gift does not qualify (because basis would be the givers basis, not cost) d. Timing replacement property be purchased withinsee 1033(a)(2)(B)
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2. Basis of new property= cost of acquiring new property less any gain realized on converted property that was not recognized. 1033(b)(2) a. *Cost = purchase price = [basis of lost property + any additional cash or debt invested] b. so, Basis = [basis of lost property + additional cash/debt invested] + [gain recognized proceeds not reinvested in similar property] 3. Qualified Replacement Property= similar or related in service or use to converted property a. 1033(g) (liberal replacement rule): for condemned property only (so not fire), if business or investment property is involuntarily converted, into property of a like-kind also held for business/investment, it satisfies the similar or related req 4. Liant Record v. Commissioner, 303 F.2d 326 (2nd Cir 1962), p.352: if an owner-lessor, is an investor rather than an end user, it is not the lessees actual physical use but the nature of the lessors relation to the land which must be examined. a. A Single Test: the relevant analysis is a comparison of the services or uses to the taxpayer-owner, not the actual physical end use of the property. Thus, when owner is a lessor, the nature of the owners services or use of the property may remains similar even though that of the end user changes. b. Factors when applying test to lessor: extent and type of the lessors management activity; the amount and kinds of services rendered by him to the tentans, and the nature of his business risks connected with the properties 5. Rev. Rul. 76-319: if an owner-user, property is not considered similar or related in service or use to the converted property unless the physical characteristics and end uses of the properties are closely similar. (Rev. Rul. 64-237) a. Issue of whether a billard center (replacement property) is similar or related in service or use to the bowling center (property destroyed by fire) within 1033(a)? b. Holding: No. The physical characteristics of the replacement property are not closely similar to those of the converted property since bowling alleys and equipment are not closely similar to billiard tables and equipment. Thus, billard center does not qualify as replacement property. 6. Problem 5-27
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Deductions For Trade or Business Expenses (ch.6)

I. DEDUCTIONSIN GENERAL: Deductions are expenditures that may be subtracted from gross income in arriving at taxable income; Courts view them as a matter of legislative grace A. 162: Business expenses are deductible B. 262: Personal expenses are not deductible 1. Contrast: Deductions are narrowly construed while gross income is broadly construed 2. Above the line deductions: a. No caps, no floors, no phaseb. Unlimited because these are things that tend to generate income 3. Below the line deductions: a. Health and medical, charitable, unreimbursed employee expenses, etc. b. Permitting only those TPs burdened with abnormally large expesses to deduct c. Significant limitations on ability to claim, even if entitled to II. ADJUSTED GROSS INCOME - 62(a)(1)-(3) A. AGI = Gross Income 62 deductions Disposable income to pay for food, living expenses, etc 1. Purpose of AGI: 1) arrive at disposable income; 2) equalize the tax treatment of self-employed taxpayers and employee taxpayers 2. Employees vs. Non-employees in 62(a) a. non-employees may deduct all business exp other than those under 211 through 219 b. employees restricted to business deductions that have been reimbursed by their ER 3. 62 DOES NOT GRANT DEDUCTIONS. It only tells us which deductions are above the line and which are below a. 162 grants deductions 4. AGI deductions are primarily, but not exclusively, business-related or profit-related deductions III. STATUTORY REQUIREMENTS FOR BUSINESS DEDUCTIONS [162(a); 262(a)] A. 162 authorizes deduction of all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. 1. Broad language, general purpose is to distinguish between deductible business expenses vs. nondeductible personal or cost of living expenses 2. Congress has generally allowed deductions dictated by reasonable business practice 3. 3 Req for business expense: item must be [1] ordinary and necessary, [2] incurred in a trade or business, and [3] an expense rather than a capital expenditure B. Ordinary and Necessary 1. Ordinary= means normal, usual, or customary. An expense may be ordinary even if it only happens once in TPs lifetime as long as the transaction is of common or frequent occurrence in the type of business involved. (Deputy v. Du Pont) a. Cts usually focus on ordinary half of test to outline parameters of allowable deductions 2. Necessary= means appropriate and helpful in taxpayers business. Function is to ensure a connection between the expense and furtherance of the business. (Heininger) a. Dependent on subjective factors; fact specific inquiry b. Cts generally hesitant to question if expense is sufficiently related to the business because requires judges to substitute their business judgment 3. Bribes/fines not deductible, its not ordinary or necessary to violate the law (162(c),(f)) 4. Trebilcock v. Commissioner, (6th Cir 1977) (p.361): Trebilock, a brokerage of wood products, paid minister to conduct prayer meetings, counseled people regarding business/personal issues, etc. Advice regarding business was not based on business expertise/knowledge. Considering the method used, court held those amounts were not ordinary and necessary because prayerbased advice is not common or frequent in that type of industry. Look to objective factors other companies have similar expenses, training/background of person being hired, etc a. Fred Amend, (7th Cir 1971): consultation of spiritual advisor not deductible because did not sharpen business skills, rather gave him heightened spiritual awareness. All benefits derived from such services are inherently personal in nature.
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5. 6.
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b. Problem with frequent standard is that it may stifle business innovation: innovators may not get a deduction, but those who later adopt their copycat competitors may c. Personal services could be deductible provided there is a direct link to the generation of profits or directly impacts income (see Hymel v. Commissioner) 274(a)(3): Cannot get a deduction for membership dues paid to clubs organized for business, pleasure, recreation, or other social purpose even if those dues are ordinary and necessary. Problem 6-1: Doctor to administer monthly physical examinations directed specifically toward the detection of job-related complaints. Deductible under 162? a. Ordinary/necessary? Depends on what other businesses are doing, probably deductible; directly related if detection lowers sick days and makes EE more productive, but Dr are also personal benefit to health; however primary purpose is job related ailments Problem 6-2: Psychiatrist to meet with employees once a month to help them cope with jobrelated stress. Employees are also free to consult the psychiatrist for any health complaint. a. O & N? probably yes assuming lower stress leads to higher profits (e.g., cops on job) Problem 6-3: Analyst to meet w/ employees, employees required to attend the sessions. Hired analyst in an attempt to help EEs and organization to be more in touch with themselves. a. O & N? probably not b/c link is less direct, benefits are personal in nature Problem 6-4: author found guilty of plagarism and paid $40k in damages a. Not deductible because illegal conduct not necessary and ordinary
C. Incurred in a Trade or Business (p.364) 1. Two issues: (1) activities must constitute a trade/business, not merely investment activity; and (2) expense must be incurred pursuant to that business and not to some personal activity a. J. Frankfurters Gloss: carrying on any trade or business involves holding ones self out to others as engaged in the selling of goods or services. (DuPont, concurrence) b. Business vs. Investor: Higgins v. Commissioner, (US 1940): issue involved investors activities in managing their own securities; held managing ones stock investments was not carrying on of a trade or business, regardless of frequency or size of the transaction i. 212: passed a yr after Higgins, allows deduction of expenses arising from the production or collection of income; Thus, nonbusiness investment activities are now deductible, but below the line c. Hirsch v. Commissioner, (9th 1963): interpreted phrase as an activity entered into, in good faith, with the dominant hope and intent of realizing a profit 2. Commissioner v. Groetzinger, 480 US 23 (1987), p.365: full-time gambler, who made wagers for his own account, was engaged in a trade or business. This is decided on a fact specific caseby-base basis. Defer to common-sense concept of what is a trade or business. Rule: to be engaged in a trade/business, TP must be involved in the activity with continuity and regularity and his primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify. a. Holding: This was not a hobby or passing bet for amusement. Here, there was constant and large-scale effort, skill was required and applied. Did what he did for a livelihood; Factors: (1) devotes his full-time activity to it; (2) it is his intended livelihood source; (3) basic concepts of fairness demand his activity be regarded as a trade or business just as readily as any other b. Test: Ones gambling activity is a trade or business, if it is [1] pursued full time, [2] in good faith, and [3] with regularity, [4] to the production of income for a livelihood, and [5] is not a mere hobby, 3. Expenses for job seekers: Critical factor is if job seeker has an existing trade or business a. Can deduct employment agency fees if in the same trade or business. But, cannot deduct if seeking initial employment or in a new field. Rev. Rul. 75-120 So, Students cannot deduct because not in the trade or business (yet) b. Air Force vet who did public relations in the military could not deduct for new job that would utilize the skills he acquired because he could not show that new employment would not be substantially different than old. Evans v. Commissioner, (1981) (p. 371).
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4. Problem 6-5 (p.372): Julian is a 3L interviewing with law forms for a permanent position. In preparation for the interviews, Julian spent $500 for a new suit, $200 for resume printing, $1800 travel. One interviewer gave Julian a $150 reimbursement. a. a) Not entitled to 162 deductions because he is not in that trade or business already. b. b) Do not need to include reimbursements in gross income. c. c) Deductible because already in the trade or business. d. d) Not deductible because not in that trade or business. e. x1) [J summered, got full-time offer, but looked for another job] Maybe. Look at facts. f. x2) [Got a job, but not pass bar] Probably can get deduction if working as legal clerk. g. x3) [Got a job and admitted to the bar] Probably can get deduction. D. Current Expense vs. Capital Expenditure (3/15: p.372-381) 1. Capital expenditures are not immediately deductible a. 162 authorizes deductions for ordinary and necessary business expenses b. But 263 and 263A prohibit a deduction for capital expenditures even if ordinary and necessary. Rather the cost of a business asset with a useful life that extends beyond taxable year, must be capitalized. c. Capital expenditures: i. Reg. 1.263(a)-2(a): amounts paid out to acquire, produce, or improve, buildings, machinery, equipment, furniture, fixtures, and similar property having a useful life beyond the taxable year ii. 263A: include costs of real and tangible property produced by TP iii. Depreciation deduction for the purchase price over the useful life of the asset 2. Policy: purpose of capitalization requirement is to accurately reflect the taxpayers true income for each year by matching an expense with the income to which it relates; Depreciation reflects the cost of an existing capital asset, not the cost of a potential replacement a. Depreciation is an accounting device which recognizes that the physical consumption of a capital asset is a true costs, since the asset is depleted; the purpose is to allocate the expense of using an asset to the various periods which are benefited by that asset. 3. Issues: a. Taxpayer already owns the capital asset i. Reg. 1.162-4: allows a current dediction for the cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition provided basis of property is not increased by amt of such expense. ii. Ex: If a new roof is required to keep the property operating and does not increase basis, then current expense. But it is a capital expenditure if it either (i) materially adds to the value of the warehouse or (ii) substantially prolongs the useful life of the building. iii. General plan test: Any expenditure that is part of a general plan of improvement must be capitalized, even if standing alone it would have been characterized as a repair expense. Factors: to determine if a plan exists and if a particular item is a part of it: Look to purpose, nature, extent, and value of work done (U.S. v. Wehrli, (10th Cir. 1968) (p. 373)). b. Costs of acquisition: Problems do not arise over nature of property acquired (e.g., pencils with short life v. word processor), but rather what constitutes a cost of acquisition. Generally interpreted broadly; include the costs of fees paid to attorneys for litigation, consultants, appraisers, etc. (cost added to basis of acquired asset) i. Woodward v. Commissioner, (U.S. 1970): held appraisal and litigation costs incurred in fixing price for stock to be acquired were capital expenditures. where property is acquired by purchase, nothing is more clearly part of the process of acquisition than the establishment of a purchase price. 4. Commissioner v. Idaho Power, 418 US 1 (1974) p.374: Costs incurred in construction of a capital asset, such as tools, materials, and wages paid construction workers, are treated as part of the cost of acquisition, even if they would otherwise be deductible business expenses. Issue:
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Whether construction-related depreciation is to be deducted over the shorter life of the equipment or, instead, is deducted over longer life of capital facility constructed. a. Holding: power company had to capitalize expenses for wages and depreciation on trucks used to construct a capital facility with a 30-yr. useful life. The effect was that TP required to recover the cost of the trucks over the 30 year life of the facility, not the shorter useful life of the trucks. i. Significant fact is that the exhaustion of construction equipment does not represent the final disposition in the equipment; rather, the investment in the equipment is assimilated into the cost of the capital asset constructed. (Here, it was important that the TPs own accounting procedure reflected this) ii. Policy: Cts primary concern was to treat construction related depreciation consistently with accounting and taxation realities. Requiring capitalization of construction-related depreciation by TP who does his own construction work also maintains equal treatment with TP who hires an independent contractor, and is required to capitalize entire cost of facility including depreciation charged to it by the contractor. 5. Indopco v. Commissioner, (U.S. 1992): capitalization also applies to expenses that produce significant future benefits, even if it does not create a separate and distinct asset. (legal and professional fees incurred in connection with a friendly takeover required capitalization) a. Rev. Rul. 92-80 (p.379): Indopco decision does not affect the treatment of advertising costs as business expenses which are generaly deductible under 162 even though advertising may have some future effect on business activities. (Only in the unusual circumstance where advertising is directed towards obtaining future benefits significantly beyond those traditonally associated with ordinary product ads, must the cost of that advertising be capitalized) 6. Capitalization of Inventory a. 263A: All direct and indirect costs attributable to the acquisition or production of inventory items, including general and administrative and overhead costs, must be capitalized into the basis of the inventory b. Thus, for retailers and wholesalers, basis of inventory includes the cost of purchasing AND costs incident to purchasing it (e.g. salaries of employees purchasing inventory). c. Interest on debt must be capitalized IF the debt is incurred to finance inventory with a production period of more than 2 years, e.g. wine. 7. Problem 6-6 (p.380): Tom spent $8,000 for a new roof on his house. Harry spent $15,000 on a new roof for his warehouse and owns a lumber yard. a. a) Toms expense is not deductible because its a personal expense. (but may realize benefit on sale or exchange, adjusted basis) b. b) Harrys roof is a capital expenditure because it has a useful life beyond the taxable year and is likely incurred in a trade or business. The cost of the roof is added to the cost of the warehouse; thus $500k (cost of warehouse) + $15k = $515k is the new basis
IV. SPECIFIC CATEGORIES OF BUSINESS EXPENSES A. Business-related Travel (p.381) 1. 162(a)(2) allows a deduction for travel expenses if the following 3 req are met: [1] for travel or be travel-related (including meals and lodging), [2] incurred while away from home and [3] motivated by exigencies of TPs business, not personal choice a. Business necessity has to be the primary purpose for the travel b. 262 specifically disallows a deduction for personal travel 2. Commuting expensestravel home to work are NOT deductible no matter how long the trip a. Test for deductibility: expense must be: 1) ordinary and necessary, 2) Incurred while away from home; and 3) incurred in pursuit of business. (must be a direct connection) b. Commissioner v. Flowers, 326 US 465 (1946), p.382: Flowers got a job in another city, but conditioned his acceptance on continuing to reside where he was. Ct held no deduction for expenses to commute from residence to work in another city. Part 3 requires a direct connection between the expense and the carrying on of the TPs trade
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or business. The expense must also be necessary and appropriate to the development and pursuit of that business. Here, this was a personal expense that was a result of his personal choice to live in another city. Thus, commuting expense did not have a sufficiently direct connection to business. (failed prong 3) i. White v. Commissioner, T.C.M. (1972) and Coombs v. Commissioner, (9th Cir. 1979): Taxpayer could not deduct commuting expenses even in cases where there was no habitable housing within 45 or 65 miles of the job site, and thus, commute was not based on TPs personal choice ii. Buccino v. U.S., (Ct. Cl. 1983): even though Drs expenses between residence, hospital, and clinic were ordinary and necessary business expenses, they were so inherently personal, that denied deduction for travel from home to hospital. c. Exceptions: i. Tool Rule: Can deduct extra commuting expenses to transport job-required tools to/from work if ordinary and necessary business expenses. Applied very narrow! Separate nondeductible commuting expenses from deductible expenses incurred in transporting incidentals of TPs occupation. Fausner v. Commissioner, (U.S. 1973); Rev. Rul. 75-380. ii. Multiple Business Sites: Can deduct commuting expenses incurred in traveling between two or more places of employment in same day. Even though travel expense not incurred in discharging duties of either job, both positions are part of the taxpayers combined trade or business and the expenses were ordinary and necessary. Rev. Rul. 55-109 (1955-1) (p. 383) d. Problem 6-8: Margaret is a civilian scientist for Defense Department at a nuclear testing facility. The laboratory is off-limits to all people except authorized employees during working hours. Margaret purchased the nearest house she could find to her job but must drive 30 miles to and from work. i. She made personal choice to live where and take the job that she did, so no deduction. See White and Coombs e. Problem 6-9: Each day DS drives one mile to her office and then in afternoon drives 30 miles to second job back to office home. i. Can deduct the cost of traveling from between jobs (see Rev Rul 55-109, but probably not from office to home (see Buccino). f. Problem 6-10: A carpenter initially took public transit at $2/day. When it became necessary to cary tools to and from work she drove. Cost $3/day to drive car and $5/day to rent trailer. i. Separate $8 for transporting tools b/c necessary and ordinary for contractors from $2 nondeductible commuting expenses. So may deduct $6. 3. Travel Away from Home (p.384) a. home= TPs principal place of employment; not where personal residence is located. b. U.S. v. Correll, 389 U.S 299 (1967), p.384: (sleep or rest rule) traveling salesman drove around a lot and ate breakfast/lunch on the road, but always returned home in time for dinner. He was not entitled to a deduction because he was not away from home Rule: Away from home = excludes all trips that do NOT require sleep or rest regardless of how far he traveled and/or if had higher expenses. c. Bissonnette v. Commissioner, 127 T.C. 124 (2006) (p. 387): By virtue of his duties, a ferryboat captain was away from home on turnaround voyages completed within 24 hours. Worked 15 to 17 hours per day and would sleep on ship during 6 hour layovers. Holding: Because of job was very demanding, required his full attention at all times and he was responsible for safety of passengers, Court found it reasonable for captain to obtain sleep or rest in order to meet the exignecies and business demands of his job. Further, released time of 6 hr was sufficient in duration that it would normally be related to an increase in expenses. So, was away from home. i. Sleep Rest Rule: May deduct traveling expenses, If nature of employment was such that it was reasonable for him to need and to obtain sleep or rest in order
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to meet the exigencies or business demands of his employment. Rest Period: involves a rest of sufficient duration that it would ordinarily cause a significant increase in expenses ii. Factors to determine if he required sleep or rest: [1] Age, [2] physical condition, [3] length of workday, and [4] importance of being alert to safely carry out job responsibilities. 4. Summary: a. Commuting from home to work and vice-versa is not deductible b. Commuting between worksites is c. Traveling away from home (whatever that is) is deductible d. Traveling away from home requires sleep or rest and is subjective to the person. 5. Business/Pleasure Travel (p.390) a. Rule: Transportation costs are deductible only if primary purpose of trip is business. Decide if primary purpose based on all facts/circumstances. Rev. Rul. 1.162-2(b)(2). i. Transportation is fully deductible (only if primary purpose is business) ii. Lodging is deductible on the days devoted to business iii. Even on days devoted to business, only get a 50% deduction on food 274(n) iv. The amt of time spent on business vs. pleasure is an important factor in determining primary purpose but is not dispositive b. Foreign travel i. 274(c): Deduction for transportation costs are pro-rated based the number of days devoted to business. A day is devoted to business if principal activity during working hours is business. 1. must first meet 162 req, i.e. primary purpose must be business ii. Travel days are business days if purpose of trip was business iii. Two Exceptions: 274(c) applies only if 1) trip exceeds one week (dont cound first day of travel); and 2) if 25% or more of time spent on nonbusiness c. Spousal travel on business trips i. Reg. 1.162-2(c): For a spouses travel costs to be deductible, taxpayer must show that spouses presence on the trip served a bona fide purpose. Incidental services are insufficient ii. U.S. v. Disney, (9th Cir 1969): Test: the dominant purpose of the trip was to serve her husbands business purpose and she actually spent a substantial amount of her time in assisting her husband in fulfilling that purpose ( wifes presence at social events w/ husband did serve a bona fide purpose because it conformed with company policy to promote companys image) iii. 274(m)(3): 3-part Test: No deduction is allowed for travel expenses of a spouse or other individual accompaning a TP unless 1) companion is an employee of the taxpayer, 2) travel must be for a bona fide purpose, and 3) expenses must be otherwise deductible 1. If spouses expenses do not meet 3-pt test, cannot deduct additional expenses due to spouse (e.g., double-occupancy for lodging) d. Problem 6-11 (p.392): Arthur is president of Silk, Inc., a CA corporation. Arthur frequently travels for business: he flew from CA to Phoenix at 8am and returned home the same day at 9pm. $500 spent for airfare, $10 for lunch and $30 for dinner. i. a) Airfare may be deductible if 1) for travel (Yes), 2) incurred in pursuit of TPs trade or business (Business was probably the primary reason), and 3) incurred while away from home (Yes). But did not require sleep or rest, so meals are not deductible. ii. b1) Full Airfare deductible if primary purpose was business; Lodging and 50% of meals deductible only 6 days in business meetings, but not 2 days sight seeing are personal expenses
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6. The Tax Home Doctrine a. Generally, Tax Court has held that the taxpayers tax home is the taxpayers principal place of business. No tax home (i.e., no deductions) for a traveling salesperson without a permanent abode. b. Temporary or Indefinite Rule: Travel-expense deduction necessarly assumes that the taxpayer is away from home for only a short or temporary period of time; When the taxpayer has moved away for an indefinite period of time, traveling expenses become nondeductible personal expenses, because it becomes rasonable for TP to move home to new place of employment. i. Key question: Is it reasonable for the taxpayer to keep two places or move and just have one (Depends on the length of the stay)?; in other words, is it reasonable to duplicate business expenses ii. Temporary means sort of employment which termination within a short period could be foreseen iii. 162(a): If employment away from home lasts more than a year, it will be treated as indefinite, regardless of any other factors, thus making travel expenses nondeductible. c. Problem 6-13 (p.403): (a)-(c): Sue and Stanley live in Houston. Stanley drives a cab on weekends to supplement Sues salary. Stanley accepted a summer job with a petroleum company in Dallas. Sue remained in Houston and Stanley commuted on the weekends, renting an apartment in Dallas for the summer. i. a) His primary employment is as a ChemE, so his primary place of business is in Dallas. So tax home is in Dallas. So Dallas lodging not deductible. Houston home is not deductible because that is a personal expense (assume cabbie job not substantial enough for tax home, treat as if he quit job and moved to dallas ii. b) [Drives cab each wknd in Houston] Full time students arent in a trade of business, but cab driver is; trying to keep primary job in houston, makes dallas job look more like a temporary job, but Dallas prob still tax home (5 days vs. 2 days); what about flipped: dallas home and traveling to houston for one shift, issue of commuting vs. traveling away from home iii. c) [Co has offices in both places, hired to work in D b/c no openings in H], tax home is in Dallas, where taxpayers primary place of business occurs. B. Entertainment Expenses (274(a), (d), (l), (n)) (3/21: p.404-413; 416-420) 1. 274(a): Gen Requirements: To be deductible, entertainment expenses must be either directly related to or associated with the active conduct of the TPs business; (Must also be ordinary and necessary under 162, and be adequately substantiated) a. Directly-Related Test: [Reg 1.274-2(c)(3)]: i. Must have a reasonable expectation of deriving income or some other specific business benefit, other than goodwill (need more than a general expectation, but dont need to show intended benefit actually resulted). ii. Must actively engage in a business discussion or some other bona fide business transaction during the entertainment. iii. Business meeting or transaction must be the principal reason for the entertainment (doesnt require more time spent on business than enterainmt.) 1. Presumption against: if hunting or fishing trip or meeting on a yacht, it is presumed that business is NOT the principal reason for trip. 2. Business setting: expense not directly related to active conduct of business if occurred in surroundings where little or no possibility of engaging in business discussions (eg. TP not present). R. 1.274-2(c)(7) a. Substantial distractions presumed: if meeting takes place at night clubs, theaters, or sporting events or cockail parties. 3. If deduction allowed, only deduct amts allocable to TP (and those closely connected to him) and those with whom conducted business.
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b. Associated with Test: Deductible if entertainment immediately preceeds or follows a substantial, bona fide business discussion. [Reg. 1.274-2(d)] i. substantial discussion requirement satisfied if business was principal aspect of the combined activity (but does not require more time spent on business); ii. Purpose must be a specific business benefit but can be for the purpose of maintaining customer goodwill. iii. Entertainment occuring on same day as business meeting generally sufficient, if not look to the facts and circumstnaces. Relevant factors include: place, date, duartion of business discussion, whether they are from out of town, and reasons that meeting and fun did not occur on same day. Reg 1.274-2(d)(3)(ii) c. Walliser v. Commissioner, 72 TC 433 (1979), (p.405): Under directly related test, no deduction for activity that merely promotes goodwill in a social setting, even if otherwise deductiable under 162 as an ordinary and necessary expense. (TP traveled abroad on sighting tour with a groups of industry contacts) i. Objective test used to determine if an activity is of a type generally considered to constiute entertainment, and thus must meet addtl 274 tests. 1. If could be either entertainment or travel, will be treated as entertainment. Here, activities were same as any other tourist; Its irrelevant that TPs didn't regard trip as a vacation or find it relaxing. ii. Holding: No deduction. had general business discussions about the services he could provide but did NOT conduct any business meetings or negotiations on the tour. (1) Thus, could not directly connect particular business transactions with specific discusions which occurred during the trip; (2) not assoc w/ a substantial and bona fide business disucssion: general discussions of a business nature intended to promote good will are not sufficient. d. 274(e)(2)(B): corporation may deduct only an amount equal to the amount the officer or director includes in his gross income. i. Overrules Sutherland v. Commissioner, (8th 2001), ct allowed the corporation to deduct the full cost of owning and operating the jet ($15k), even though the director only included FMV of flight on private jet ($5k) in income) 2. Entertainment Facilities: any item of personal or real property owned, rented, or used by a TP for, or in connection w/, an activity normally considered to be of an entertainment nature; a. Ex. yachts, hunting lodges, fishing camps, homes in vacation resorts. R. 1.274-2(e)(2) b. 274(a)(3): No deduction for exp relating to most ent. facilities. In addition, dues/fees to social, athletic, or sporting clubs or organiz are not deductible. 3. Substantiation & 50% Ceiling: if TP does not adequately substantiate travel, entertainment, and business gift expenses, the entire claimed deduction will be disallowed 274(d); a. Substantiation Requirements (Reg. 1.274-5T): Must produce adequate records or sufficient corrobative evidence showing: i. (1) the amount of the expense; ii. (2) the time and place of the event; iii. (3) the business purpose of the expense; and iv. (4) the business relationship btwn TP and person benefited by the expense. b. Records: maintaining an account book, diary, statement of expense, or similar record and documentary evidence (receipts), which together are sufficient to establish the amount, time and place, business purpose and relationship. Reg. 1.274-5T(c)(2) i. Mann v. Commissioner: credit card statements were not sufficient for substantiation, because were not specific concerning the business purpose or the business relationship with the guest. Disallowed deduction. c. 274(n): 50% ceiling on otherwise allowable entertainment and meal deductions 4. Problem 6-15 (p.412): Which of the follow may Joe, a personal injury lawyer, deduct: a. [$500 on cocktails for patrons in local taverns]: NO, a general hope is not sufficient for either test, need a specific business purpose; under the associated with test, which allows for goodwill to get new business, they still need to be closely associated with
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taxpayer. 1.274-2(d)(2); also talking about what you do is prob not a substantial and bona fide business discussion (see Walliser) b. [$1k spent on dinners with clients during which discucssed cases]: direct test: YES, has specific purpose of disucssing cases, occurred during the dinner, and probably principal reason; no presumption against surroundings; capped at 50% discount c. [[$700 on dinner with clients after lengty meetings]: associated with test: YES it, it took place after a substantial bona fide business meeting (same day, lengthy); business principal aspect of combined activity? d. [$200 for waitress who sustained a neck injury in a car accident]: YES under both test, seeing neck brace is a more specific business purpose than general patrons at a bar, business occurred during dinner, and principal aspect is business since he described how he would handle and began immediately after he saw here with neck brace. C. Business Meals (p.413); [162(a), Reg. 1.162-17(a)] 1. DO NOT CONFUSE WITH 119. 119: Income side v. 162: Deduction side. 2. Two categories: Incurred while 1) Traveling away from home, 2) Not away from home (Criticized for deducting 3-martini lunches) 3. Sutter v. Commissioner, 21 T.C. 170 (1953): Meals need to be different from or in excess of the taxpayers personal expenses.: a. If qualify, can fully deduct the cost of the meal, not just the excess b. Subjective test: Taxpayers who normally brownbag will almost always get a deduction while taxpayers who normally eat expensive meals will not 4. Moss v. Commissioner, 758 F.2d 211 (7th Cir. 1985) (p. 417): Lawyers from a firm met every day during the lunch hour to discuss their cases and get necessary approvals. Expenses from these business-related lunches were NOT deductible because it was not different from or in excess of what TP would have spent for his personal purposes. Iow, if there had been no lunch meetings, lunch expense would have been the same. a. Holding: Although it saved time to combine lunch with work, the expense of the lunch was not a necessary business expense. The meal itself was not an organic part of the meeting, cf to examples of lunch with clients, where the business objective, to be fully achieved, required sharing a meal. b. Rule: Must show that the meal is a real business necessity. Lunches with coworkers are different than lunch with clients; Co-workers already know each other well and dont require the social lubrication provided by a meal i. Factors: It's a Matter of degree and circumstance and of frequency (daily for a full year too often even if with clients) ii. Test: if got less value from the meal than the cash equivalent, e.g., if restaurant was too expensive for their personal tastes, thus, would not have bought meal if it werent for the business benefit 5. Summary: a. 62(a): Grants deductions for both meals while traveling and at home b. 274(a): But need to justify that the deduction is warranted c. 274(d): Need to keep records of expenses d. 274(k): Expenses cannot be lavish e. 274(n): Deductions for meals are limited to 50% of expense 6. Problem 6-17 (p.420): K is requested but not required to eat lunch w/ her coworkers every Fri a. a) [She generally does not eat lunch] i. 162: Ordinary, but maybe not necessary (try to make arg not really optional) ii. 274(a): May not be directly related to because they may not talk business and just getting to know coworkers may not be sufficiently associated with iii. 274(k): Meals cant be lavish or extravagant b. b) [She generally does eat lunch] Same analysis as a), but her meal needs to be different or in excess of what she normally spends, but not lavish or extravagant c. c) [Required to each lunch w/ coworkers] Now its necessary and part of business. But, it still needs to be dif from or in excess of what she normally spends to be deductible.
Deductions For Trade or Business Expenses (ch.6) V. DEPRECIATION AND COST RECOVERY [167, 168] 3/22: p.432-451)
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A. The cost of a buisness asset with a useful life greater than one year cannot be immediately deducted, but must be capitalized. If an asset is of the type that is used up over time, may deduct depreciation to offset income it generates. To be eligible for depreciaiton must (1) have wear and tear; and (2) used in trade or business or (3) held for the production of income 1. 167(a) what can you deduct?: allows as a depreciation deduction, "a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) "of assets used in a trade or business or held for the production of income. 2. 168 - sets forth the mandatory schedule of depreciation a. Use calculation tables on p. 1888 B. Policy for depreciation: stimulate economic growth, encourage investment in technological innovations, permit a recoupment of business- or profit-oriented expenditures C. The Concept of Depreciation: 1. If the useful life of the asset is finite or ascertainable (so not land which has an infinite useful life) can recover the cost of the asset (less the salvage value when it can no longer be used in business) by taking deductions in the years in which the asset is expected to be used in business 2. 167 is like 162 in that it tries to make taxable income reflect the cost of doing business, (but independent of 162.) Matching the pace of depreciation deductions to period of time the asset would produce income in TPs business. 3. Depreciation accounts for the fact that a capital asset is being used up. Thus, it is a process designed to allocate the cost of an asset, not to reflect its decline in value. (cf. accountants) a. so, the aggregate of depreciation amts + salvage value equal the original cost) b. May be possible to recoup the total cost of the asset in depreciation deduction, thereby leaving asset with a 0 basis even though the FMV > 0 D. The Accelerated Cost Recovery System (ACRS)168: Amt of Depreciation deduciton determined based on: (1) depreciation method, (2) recovery period, and (3) convention. 1. Policy: achieve economic goals by artificially accelerating deduction at a faster rate than pre1981 laws. 3 ways: (i) recovery periods shorter than actual useful life, (ii) accelerated depreciation methods, (iii) salvage value is zero, thus can deduct of entire cost of the property. a. 168 eliminated factual disputes by replacing actual useful life determinations with statutorily defined class lives and an assumption that salvage value is zero 2. Calculating: (TABLES on p.1888) a. First, Determine Depreciable Base: Annual depreciation allowance is applied to depreciable base - usually the basis: cost (s.1011) + any capital expenditures added to basis under s.1016, MINUS any deductions under 179. - Reg. 1.167(g)-1 b. Second, Determining Recovery Period depreciable assets are assigned to statutory recovery classes - there are eight classes with class lives from 3 to 39 yrs (recovery period often shorter than the class life). 168(c) and (e) i. 3 methods are used for different classes: 1. Property in a 3, 5, 7, or 10 year class - 200% declining balance, then switch to straight line in the year that straight line produces a larger deduction than the declining balance would - s.168(b)(1) 2. Property in the 15 or 20 yr class - 150% declining balance, with a switch to straight line under same circumstances - s.168(b)(2) 3. Real Estate (nonresidential RP, Residential rental prop, RR grading and tunnel bore) - must use straight line depreciation - s.168(b)(3) 4. may elect (irrevocably) to use straight line (will apply to all property in such class placed in service that year) - 168(b)(5) ii. Look to 168(e)(3) for classifications of specific property. iii. Look to 168(c) to determine applicable recovery period. iv. if not real property under (e)(2) and not listed under (e)(3), convert class life under 168(e)(1) (class life of the asset as determined by Sec. of Treasury.) v. 7-yr property= catch-all classification, includes all property without a class life
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c. Third, Convention - Applicable Deduction in year put in service or disposed of the date deductions begin. The applicable convention determines the date on which the property is deemed to have been placed into service (not date TP aquired the property). convention applies when purchased any time during year, even Jan 1. 168(d) i. For Personal Property (equipment): half-year convention (July 1st). So, allowed a deduction in both the yr of acquisition and disposition, regardless of how long it was held during that year. 168(d)(1). Hence, there is an incentive to buy late in the year and sell early 1. But if a disproportionate amount (40%+) of depreciable property is placed into service in the last 3 months of the year, a mid-quarter convention applies. 168(d)(3). ii. For Real Property: a mid-month convention applies, so take in month of acquisition and disposition. E.g., if RP was bought on Oct. 20th you would 2.5 months of depreciation - 168(d)(2) d. Fourth, Methods of Depreciation. 168(b) i. Straight Line Method: allocates the total cost of an asset ratably to each year of the useful life of the asset. Depreciation rate is simply reciprocal of life (e.g., 10 yrs rate = 1/10 or 10%); 1. Recompute EVERY year until time you switch, 2. SL deduction in a given year is based on (i) the adjusted basis of the property in that year and (ii) the remaining useful life of the property; a. SL ea yr. = [remaining adj. basis] / [remaining useful life] 3. Once you switch to straight line the amount of deduction stays the same you do not recompute 4. Switch over to SL in first year in which the SL deduction is greater than or EQUAL TO the declining balance deduction ii. Declining Balance Methods: uses a constant % to accelerate depreciation and create larger deductions earlier on; calculate the straight-method-% and multiply it by the specified percentage, 150% or 200%. The amount of depreciation is then subtracted from the basis. 3. Ex: Purchase a light truck (5 yr class time) in Yr 1 for $5000. Subject to half-year convention
i. Straight-line Method (deduct 20% of her initial investment each year)
Year 1 2 3 4 5 6 Start of year adjusted basis $5000 $4000 $2400 $1440 $864 $288 Start of year adjusted basis $5.000 $4,500 $3,500 $2,500 $1,500 $500 Depreciation deduction $500 $1,000 $1,000 $1,000 $1,000 $500 End of year adjusted basis $4,500 $3,500 $2,500 $1,500 $500 $0 Depreciation Deduction claimed $1000 $1600 $960 $576 $576 $288 End of year adjusted basis $4000 $2400 $1440 $864 $288 $0
ii. Double Declining Balance Method

Year 1 2 3 4 5 6 Double declining balance deduction $1000 (1/2 of 40% * $5000K) $1600 (40% * $4000) $960 (40% * $2400) $576 (40% * $1440) $345.60 (40% * $864) $115.20 (40% * $288) Straight-line basis deduction $500 (1/2 of $5000K / 5.0) $888.89 ($4000 / 4.5) $685.71 ($2400 / 3.5) $576 ($1440 / 2.5) $576 (Straight-line from prev yr) $288 (half of $576)

E. CALCULATION TABLES (p.1888): Table 1: Applicable Depreciation Method: 200 or 150% (Declining balance Switching to Straight Line) Applicable Recover Convention: Half-Year
If the Recovery Year is: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 and the Recovery Period is: 7-year 10-year the Depreciation Rate is: 33.33 44.45 14.81 7.41 20.00 14.29 10.00 5.00
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3-year
5-year
15-year
20-year 3.750

nd
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F. Antiques = what constitutes depreciable property?: Simon v. Commissioner, 68 F.3d 41 (2 Cir 1995) (p.440): IRS says that not depreciable because no ascertainable useful life based on physical condition. But Simon, tax court permitted professional musicians to deduct cost of antique violin bows bec. evidence offered that they could suffer wear and tear and become unplayable with use in business. 1. useful life is measured by use in a taxpayers business, not by the full abstract economic life of the asset in any business. Thus, may still be eligible for depreciaiton even though item retains value after use in a business a. It is important to remember that depreciation reflects diminution in value apart from market conditions - so an antique bow may appreciate in market value from purchase price, but taxpayer will still have depreciations because of wear and tear. 2. Depreciability depends on how item is used, ie, if the use subjects it to wear/tear: if Simon's bows had been on display in a museum, they would not be subject to wear and tear and thus not depreciable. Similarly, a painting hanging on a wall in a law firm is not subject to wear and tear (though it is being used in a trade or business) G. Luxury Cars & Mixed-Use Assets280F: Generally applies to cars and other means of transportation (planes), computers, property used used for entertainment, as well as other property listed in Regs 1. To be get accelerated depreciation, must be predominately used in a qualified business (>50%). If business use in first year is not more than 50%, use straight-line method; if ever falls below 50%, will take back any earlier year depreciation that would be over straight method. 2. Bryant v. Commissioner, T.C. Memo 1993-597 (p.447): under 280F(d), employee may not claim a depreciation deduciton for listed property unless the employees use of the listed property is 1) for the convenience of the employer and 2) required as a condition of employment. Focus is on the convenience of the employer and not the convenience of the employee. (Teachers use of a mac was not a necessary condition for employment because she could have used schools computers to do grades.) H. Amortization of Intangible Assets197: most intangibles, including goodwill, are amortized on a straight line basis over 15 years. Begin claiming deductions in month intangible was acquired 1. Other intangible assets: include workforce in place, going concern, information base, customer lists, know-how, government licenses, covenants not to compete, franchises and trademarks. 2. Only applies if intangible was created in connection with trade or business 3. You cannot amortize self-created intangibles, but can amortize acquired intangible. E.g., if you open a restaurant and throw a party, that's self-created goodwill - but if you by a business with a customer list, then it is amortizable. 197(c)(2) 4. Even intangibles with a more limited useful life get amortized over the statutory 15 yr. period; e.g., a 5 year covenant not to compete; (Frontier Chevrolet: non-compete covenant entered into in connection with the indirect acquisition of a trade or business, i.e. regaining possession of 75% of its stock, was a s.197 intangible and bust be amortized over 15 yrs.) I. Immediate Deductions for Small Business179 Property: may elect (irrevocably) to expense (i.e., deduct immediately) the purchase price of qualifing property placed into service in current year. This permits many small businesses to avoid having to capitalize these expenses. 1. Dollar Limit: the amount of deduction is capped 179(b)(1) and this maximum amount is reduced if the TPs annual investment in qualified property exceeds the statutes set threshold amt. 179(b)(2). ($125k excess over $500k = max amt of deduction) a. Amounts adjusted for inflation. Any additional amount must be capitalized and is subject to usual depreciation rules. Congress often adjusts for economic incentives:
Year 2011 2012 2013 179(b)(1) cap amount $500,000 $125,000 $25,000 179(b)(2) threshold amount $2,000,000 $500,000 $200,000
2. Limited to income from trade or business: The amt of the deduction cannot exceed TPs AGI from conduct of trade or business. 179(b)(3)(A). (any amt limited in this way is carried over) 3. Qualifying 179 Property: any depreciable tangible personal property that is acquired by purchase for use in the a trade or business. 179(d)(1), 1245. (Includes computer software.)

J. Problem 6-27 (p.451): On 1/1, Ken paid $12,500 for an asset to be use in his trade or business (4 year class life, salvage value of $2500). Assume 3-year property
a) Accelerated cost recovery 168:
Yr 1 2 3 4 A/B $12,500 $8,331 $2,774 $924 Double declining balance deduction $4,169 (($12,500 * 66.7%)2) $5,557 ($8,331 * 66.7%) $1,850 ($2,774 * 66.7%) $617 ($924 * 66.7%) SL deduction $2,083 (($12,500 / 3)2) $3,332 ($8,331/ 2.5) $1,850 ($2,774/ 1.5) $924 (.5 of straightline) Deduction claimed $4,169 $5,557 $1,850 $924 Accum Deduction $4,169 $9,726 $11,576 $12,500
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b) elect 3-yr. SL 168(b)(3)(D): deduct 33% of initial invest ea yr

Yr 1 2 3 4 A/B $12,500 $10,417 $6,250 $2,083 Deduction claimed $2,083 $4,167 $4,167 $2,083 Accum deduction $2,083 $6,250 $10,417 $12,500
VI. LIMITATIONS ON BUSINESS EXPENSES (4/2: p.451-58) A. Business Use of Personal ResidenceHome Offices 280A 1. 280A generally disallows deductions by individuals for business use of personal residence, subject to four exceptions: (1) home offices, (2) inventory storage, (3) rental, and (4) day care. 2. Requirements: 280A(c)(1): to qualify for a home office deduction must satisfy two tests: a. (1) must use the home office exclusively for business purposes on a regular basis, b. (2) must be either the principal place of the business or where TP meets patients, clients, or customers in the normal course of business. i. If not attached to house, use more relaxed in connection w/ TPs bus. test. ii. If an employee additional requirement that home office is for convenience of employer (i.e., employer doesnt provide an office) 3. Principal Place of Buisness: if (1) the office is used by the TP to conduct administrative or management activities of a trade or business and (2) there is no other fixed location of the business where the TP conducts substantial administrative activites. flush lang in 280A(c)(1). a. Passed in response to unfairly decided: Commissioner v. Soliman, (1993): even though Dr. exclusively used home office for administrative activites, the S.Ct denied denied a deduction because the TPs principal place of business was not home office because he performed the essence of the personal service at the hospital.
B. Illegality and Public Policy 1. 162(c): no deduction for illegal payments, such as bribes or kickbacks 2. 162(f): no deduction for any fine or penalty paid to govt 3. 280E: no deduction for expenditures in connection with illegal sale of drugs (med weed?) 4. Policy: would be an endorsement of illegal activity and tax savings would lessen sting of fine 5. Rev. Rul. 82-149: illegal payments must be subtracted from gross sales in determining gross income (cf. deduction taken from gross income to determine taxable income (??) a. Pittsburgh Milk and Max Sobel: 162(c) disallows only deductions from gross income, can not be used to prevent adjustments in the computation of gross income itself. b. Tellier (1966): Constl: fed tax is on net income, not a sanction against wrongdoing 6. Tucker v. Commissioner, 69 TC 675 (1978) (p.456): teacher fined for going on strike, the amount of the fine was gross income even though it was deducted directly from her pay check (discharge of indebtedness) and payment of the fine was nondeductible under 162(f). 7. Problem 6-32 (p.458): Bill was hired by JM to drive JMs van, which contained stolen guns, from a warehouse to JMs office. Drunk driver hit van and entire load of guns was destroyed. a. [cost of guns or Bs salary]: yes, not specifically disallowed by 162, so can deduct as an ordinary and necessary business expense incurred in business under 162 b. [fine for possession of stolen goods]: no, cant deduct cost of fine under 162(f) c. [bribe to friend at police dpt]: bribes specifically not deductible under 162(c) d. [tried on criminal charges]: Business-related costs of defending oneself against criminal charges are deductible (but maybe not ordinary/necessary??)
Capital Gains and Losses (ch.7)
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Capital Gains and Loses (Ch.7)

I. INTRO: BACKGROUND (4/4: p.461-69) A. Capital gains are treated more favorably than ordinary gains, while capital losses are treated less favorably than ordinary losses Taxpayer wants gains to be capital and losses to be ordinary B. Policy Rationale: 1. Policy reasons for favorable capital gain treatment: a. Avoid bunching: Gain accurred over several years but taxed in a single year, thus may push taxpayer in higher tax bracket and more burden than if gain taxed as it accurred b. Avoid lock-in: because taxed only if and when realization event occurs, people may not sell their capital assets to avoid a big tax bill (where not taxed for merely holding asset), which discourages free flow of capital c. Incentives for equity investment and risk-taking (encourage buying corp stock and VC) d. Improve international Competitiveness of U.S. w.r.t. other countries e. Compensate for Inflation 2. Policy reasons against favorable capital gain treatment: a. Measurement of income: Time-value of money for gains, already get benefit from deferrel of tax on accrued appreciation until asset is sold b. Neutrality: Eliminate tipping investors towards investments that offer a return in form of appreciation rather than current income (such as interest or dividends) c. Reduction of conversion opportunities: Encourages people to engage in activities that convert ordinary income into capital income, (e.g. debt financing: TP has a net aftertax positive cash flow even though on a pre-tax basis transaction was not profitable) d. Simplification and consistent treatment of taxpayers C. Overview Of Capital Gain And Loss Analysis: (3-Step Process) 1. Characterization Phase - (1) Definition of a capital asset, (2) Sale or exchange requirement, (3) TPs holding period in the capital asset (to determine if long-term or short-term) 2. Recharacterization Phase - Consider several specific statutory exceptions that serve to prevent unduly favorable tax treatment from gen rules 3. Netting Phase - 1222 requires the netting of capital gains and losses, which may lead to the unfavorable limitation rules reserved for capital losses (s.1211) 4. Note: The role of 1211 capital loss limitation is to allow or disallow deductions from gross income. Capital losses are above the line deductions under 62(a)(3) II. MECHANICS OF CAPITAL GAIN AND LOSS
A. Statutory Overview 1. lj B. Definitions and Netting Rules 1222 1. Long term vs. short term capital gain (or loss) is long-term if the taxpayer held the capital asset for more than one year. 1222(1)-(4). a. Short term: Asset is held for < 1 year b. Long term: Asset is held for > 1 year 2. 1222(5)-(11): Netting Rules a. aggregate amounts derived from comparing gains and losses from all transactions in one particular holding period. C. Capital Loss Deduction 1211(b) 1. 1211(b): Rules for determining maximum capital loss deduction permitted in a particular taxable year (two parts) a. If losses < gains: All capital losses can be deducted to the extent of all capital gains (regardless of short/long term composition of the gains/losses) b. If losses > gains: All capital losses can be deducted to extent of all capital gains, and the remaining excess of losses are subject to the limitations rules of 1211(b)(1) or (2): i. Limitation (amt deductible) is smaller of (1) $3,000 or (2) excess losses
Capital Gains and Losses (ch.7)
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D. Carryover of Capital Losses 1. 1212(b) permits excess capital losses to be carried forward to subsequent tax years a. Losses carried forward retain their long/short term status, and treated as if sustained in year to which they are carried b. Long-term carryover losses first reduce long-term capital gain and then short-term; remaining unused portion reducing ordinary income to the $3,000 limitation c. Short-term carryover losses continue to be applied against the $3000 ordinary income limit first (before long-term). If total short-term losses < $3000, then long-term losses are applied against that limit. 2. Example: ($60,000 taxable income) a. $1K net STCL, $6K net LTCL: i. Use $1K net STCL against ordinary income, ii. $2K of LTCL against (up to the $3k limit), iii. Remaining $4K LTCL is carried forward b. $1K net STCG, $100 net LTCG, $5.1K carryover STCL: i. Offset $1K of the STCL carryover with $1K STCG, ii. Offset $100 of the STCL carryover with $100 LTCG, iii. Use $3K STCL carryover against ordinary income, iv. Carryover $1K of STCL carryover. E. Capital Gain Exclusion 1. Exclusion of 50% of the gain permitted from disposition of certain small business stock 2. Requirements: a. Qualified small business stock (C corporation engaged in certain specified trades or business and having < $50M market cap) b. Stock acquired from the issuer c. Held for 5 years 3. Policy: to encourage investment in small businesses 4. Excluded portion not taken into effect for 1211, 1212 F. Problem 7-1: John has $10K LTCG, $15K LTCG, $5K STLG, $7 STCL, $1K LTCL, $2K LTCL. 1. a) (STCG: $5K) + (STCL: -$7K) = -$2K 2. b) (LTCG: $10K + $15K) + (LTCL: -$1K $2K) = $22K 3. c) (Net LTCG: $22K) + (Net STCL: -$2K) = $20K 4. d) *** include $30,000 of capital gain in gross income (d)(a)(3) ---you get losses only as legislature permits 5. e) how much capital losses can we deduct under 165(f) and 1211(b)? $10,000 6. f) adjusted gross income?: 30,000 10,000 = 20,000 AGI; authority for deducting 10,000 above the line 62(a)(3). 7. *g) no short-term capital loss, but all other facts same. Whats the net capital gain? $22,000 G. Problem 7-2: (p.469) Betty has $5K LTCG, $15K LTCG, $3K LTCL, $25K LTCL, $12K STCG, $2K STCL, $14K STCL. Tax income outside of capital gains is $40K. 1. a) 1222(6): NSTG/L: $12K - $2K - $14K = -$4K 2. b) 1222(8): NLTG/L: $5K + $15K - $3K - $25K = -$8K 3. c) 1211: 1) Offset capital gains of $32K; 2) Offset minimum($3K, excess losses above $32K) of ordinary income; 3) Carryover (losses - minimum($3K, excess losses above $32K)) a. L/STL: -44K offset 32K in L/STCG, 3K in ordinary income, carryover -9K in losses b. Short/long term nature of losses/gains do no matter 4. f) Gross income = $40K + $5K + $15K + $12K = $72K; Above the line deductions = $35K ($32K losses that offset gains + minimum($3K, excess losses above $32K)); AGI = $37K a. Be careful do not net capital gains and losses together to get the deduction (e.g., $12K) and subtract from gross income ($40K). 165(f) and 1211 take away $9K of losses (i.e., minimum($3K, excess losses)) 5.
Capital Gains and Losses (ch.7) III. DEFINITION OF A CAPITAL ASSET (4/5: 470-473; 486-494; 495-505. Problem 7-8)
a. d
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B. Statutory Analysis (1221(a)(1) to (4), (7); 1235(a), (b)) 1. 1221(a) defines capital asset as property that does NOT fall within any of the following eight ordinary asset categories: a. 1) inventory or property held for sale to customers in the ordinary course of business b. 2) depreciable or real property used in the taxpayers trade or business c. 3) certain copyrights or literary musical or artistic properties d. 4) accounts receivable or notes receivable acquired in the ordinary course of a trade or business e. 5) certain United States government publications f. 6) certain commodities derivative financial instruments held by commodities drivative dealer g. 7) hedging transactions which are identified as such in advance h. 8) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of business C. Property Held Primarily for Sale 1. K D. Nonstatutory Analysis (p.486) 1. Corn Products Refining Co. v. Commissioner, 350 U.S. 46 (1955) (p. 487): Corn Products said that hedging against inventory cost fluctuations are included in 1221 as capital assets. Court said that literal wording of 1221 makes that interpretation correct, but dont want to interpret things so literally to defeat Congressional intent. a. Exam Tip: Dont want to defeat purpose of statute, no matter what technical answer is 2. Arkansas Best Corp. v. Commissioner, 486 U.S. 212 (1988) (p. 489): Bought competitor to prop them up, sold them later; said there cannot be anything more business-y than holding stock. Court says if something is property, it is a capital asset unless it meets one of the exceptions (Adopted by Congress). Now, taxpayer has to identify property up-front when they buy it. Cant just see how things turn out and then try to fit it into the lower tax category (i.e. whipsaw). a. Tip for exam: Gross income list is to be interpreted as illustrations, deductions are to be interpreted as a literal list 3. Post-Corn Products and Arkansas Best, very little, if anything, remains of the nonstatutory exception to capital gain status IV. SALE OR EXCHANGE REQUIREMENT (p.495) 1. K 2. Middleton v. Commissioner V. HOLDING PERIOD (p.500) 1. l B. Computing the Holding Period 1. l C. Tacked and Split Holding Periods 1. Citizens National Bank of Waco v. U.S. 2. Problem 7-8 (p.505):
VI. 1231PROPERTY USED IN A TRADE OR BUSINESS 1. l

B. Definitions and mechancis (4/9: 506-516; 521-526. Problems 7-14, 7-16 (a), (b), 7-18 (a)-(e)) 1. International Shoe Machine Corp v. U.S. 2. Problem 7-14 (p.512): 3. Problem 7-16:
Capital Gains and Losses (ch.7) VII. ASSIGNMENT OF INCOME

1. Kj
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VIII. RECAPTURE OF DEPRECIATION (p.521) 1. l

B. General Principles 1. Legislative History of 1245 C. Installment Sales 1. Problem 7-18 (p.525): (a)-(e)
IX. TIMING OF DEDUCTIONS AND TAX SHELTERS (Ch.9: p.654-659; 695-705)

A. 1341Repayments of Items Previously Included in Income 1. Claim of Right Doctrine a. U.S. v. Lewis 2. Application of 1341 3. The Arrosmith Doctrine a. K B. Other Statutory Anti-Abuse Provisions 1. Sales or Exchanges between Related Parties a. McWilliams v. Commissioner 2. Wash Sales of Stock [1091(a), (d); 1223(4)] a. Estate of Estroff v. Commissioner, T.C. Memo 1983-666 (p.701): b. Problem 9-16 c. D
Investment and Personal Deductions (ch.8)
59

I. INTRODUCTION (#11&12: p.545-564) 1. Kj II. INVESTMENT ACTIVITY 1. k
B. Produciton of Income Expenses [212] 1. Kj C. Personal versus Investment Expense 1. L D. Capital Expenditure Limitation 1. K 2. Problem 8-1 (p.555) 3. Problem 8-2 (p.556)
III. HOBBY LOSSES [183] 1. l

B. Mechanics 1. L C. Profit Motive Defined 1. K
IV. INVESTMENT AND PERSONAL DEDUCTIONS (#13: p.575-581; 585-588)

A. Bad Debts [165(g)(1), (2); 166] 1. 166(a)(1) permits a bad debt deduction for any debt which becomes worthless within the taxable year. Must satisfy 2 requirements: (1) bona fide debt, and (2) debt must be worthless. a. Bona Fide Debt: arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum. Reg 1.166-1(c); i. gifts and contributions to capital dont count ii. Two situations where bona fide debt issues arise: 1. Trans between Corporation and Shareholder: did taxpayer make a loan to corporation or purchase equity? 2. Intra-family loans: bona fide debt or a gift?; presumption against debtor-creditor relationship among family members; so to prevail, TP needs to establish an intent, at time of transaction and at time of claimed deduction, to enforce collection of debt b. Worthless debt: also need to establish date on which debt was rendered worthless, get deduction in that year; depends on facts and circumstances of each case; Gratuitous forgiveness of a loan does not produce a bad debt deduction; merely creates a gift i. Reg 1.166-2(a): an identifiable event indicating an inability to pay helps establish worthlessness (bankruptcy, continued refusal to pay on demand, etc.) c. Business versus nonbusiness bad debts: i. Business bad debt losses create ordinary deductions; can deduct even if only partially worhtless (166(a)(2)) ii. Nonbusiness bad debts create short-term capital losses; cant deduct if only partially worthless; and cant be carried back to earlier years as a net operating loss (172(d)(4)) iii. Nonbusiness Debt: any debt other than (A) a debt created or acquiredin connection with a trade or business of the taxpayer; or (B) a debt the loss from the worthlessness of which is incurred in TPs trade or business. 166(d)(2) 1. Classification depends on if loan is proximately related to TPs trade or business: if tp makes loan to corp to protect his employment,
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loan may be classified as one arising from his trade or business as an employee (Trent) 2. U.S. v. Genres, 405 US 93 (1972), p.577: 3. Problem 8-10: B. Interest Expense [163(a), (h)(1) to (3)(C); 221(a) to (d); 265(a)(2)] 1. Problem 8-12(p.587):
V. PERSONAL DEDUCTIONS (#14: p.591-601) 1. k

B. Casualty Losses [165(c)(3), (h)] 1. Problem 8-16 2. Problem 8-17: C. Charitable Contributions [170] (#15: pp. 601-605; 609-612; 618-623) 1. Code: 170(a)(1), (c)(1) and (2), (e)(1) and (2) 2. Regs: 1.170A-1(a) to (c); 1.170A-4(b)(1), (2) 3. 170 Req: 1) Must go to a charitable organization and 2) no tangible quid pro quo a. No realization event (i.e., no gain) when you give appreciated property to charity. More tax favorable than selling and giving cash (minus taxes) to charity. b. Limitations: i. The amount of the contribution is reduced by the short-term capital gain or ordinary income that would have been realized upon its sale (i.e., Contribution is limited to basis of the property) ii. Long-term capital gain in property reduces the contribution amount only if the property is tangible property used by the donee in a use unrelated to the donees charitable purpose, or if the property is donated to a private foundation c. What constitutes a contribution depends on if there are intervening interests (e.g., remainder interest). Burden on TP to establish that there were no intervening interests. d. Can deduct excess amount above quid pro quo 4. 170(c): Types of organizations that qualify: 1) State or other political subdivision, 2) Corporation, trust, or community trust fund, 3) Post or organization of war vets, 4) Religious, charitable, scientific, literary, or educational organization, 5) Cemetery. 5. IRS has conceded that specific naming rights are not quid pro quo thus, deductible 6. Policy: More cost effective for the government to give out deduction for charitable contributions than directly pay for the charitable work and avoids partisan politics over which charity gets the money. 7. Hernandez v. Commissioner, 490 U.S. 680 (1989) (p. 602): Taxpayer attempted to deduct expenses for auditing and training sessions at Church of Scientology. The Court disallowed the deductions because those payments were quid pro quo. 8. Rev. Rul. 81-163 (1981-1) (p. 610): BARGAIN SALE: Taxpayer gave real property (FMV of $25x, adjusted basis of $15x, mortgage of $10x) to a charity. a. Adjusted basis for determining gain = Adjusted basis entire property * amount realized / FMV of property = $15x * $10x / $25x = $6x i. (Relief of indebtedness is treated as amount realized for these purposes) b. Long-term capital gain=Indebtedness Adjusted basis for determining gain= $10x $6x= $4x 9. Problem 8-21: Partner contributes $50K to his alma mater, hoping to ensure that his daughter will be admitted as an undergrad and eventually in their law school. Is the contribution deductible? a. Depends on if there is quid pro quo. Probably, but need to look into factors Can only look at objective factors at the time the gift was made (not subjective or future factors). 10. Problem 8-22: Walter contributes $5M to a law school in return for naming rights. a. The only thing you can get for a deductible contribution is naming rights, so $5M is deductible.

D. Clothing Expenses (p.618-623) 1. Code: 162(a); 212; 262(a) 2. Regs: 1.262-1(b)(8) 3.
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Capital Gains and Losses (plus some special mistake correction and anti-abuse rules) 7. April 4. Text pp. 461-469. Problems 7-1, 7-2. 8. April 5. Text pp. 470-473; 486-494; 495-505. Problem 7-8. 9. April 9. Text pp. 506-516; 521-526. Problems 7-14, 7-16 (a), (b), 7-18 (a)-(e). 10. April 11. Text pp. 654-659; 695-705. Problems 9-9(a)-(c), 9-15, 9-16 (a), (b). Investment and Personal Deductions 11. April 12. Text pp. 545-555. Problems 8-1, 8-2. 12. April 16. Text pp. 556-563. Problems 8-3,. (Omit p. 564-575, and prob 8-5) 13. April 18. Text pp. 575-581 (omit Uslu and Pau); 585-588. Problems 8-10, 8-12(a)-(e). 14. April 19. Text pp. 591-601. Problems 8-16, 8-17. 15. April 23. Text pp. 601-605; 609-612; 618-623. Problems 8-20, 8-21, 8-22, 8-24(a), 8-26, 8-27, 8-28.

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Introduction: History, Structure, and the Taxing Formula

Introduction II. STRUCTURE OF TAX LAW

IV. TAXING FORMULA

What Is Gross Income? (ch.2)

What is Gross Income (ch2)

What is Gross Income (ch2)

What is Gross Income (ch2)

What is Gross Income (ch2)

What is Gross Income (ch2)

What is Gross Income (ch2)

What is Gross Income (ch2)

What is Gross Income (ch2)

Items Excluded from Gross Income (Ch.3)

Items Excluded from Gross Income

Items Excluded from Gross Income

Items Excluded from Gross Income

Items Excluded from Gross Income

Items Excluded from Gross Income

Choosing the Proper Taxpayer (Ch4)

Choosing the Proper Taxpayer (ch.4)

Choosing the Proper Taxpayer (ch.4)

Choosing the Proper Taxpayer (ch.4)

Choosing the Proper Taxpayer (ch.4)

Timing of Gross Income (Ch.5)

Timing of Gross Income (ch5)

Timing of Gross Income (ch5)

Timing of Gross Income (ch5)

Nonqualified Stock Option

Timing of Gross Income (ch5)

Timing of Gross Income (ch5)

Timing of Gross Income (ch5)

Year 4 $30K $21K $9K $4.2K $25.8K

Total $100K $70K $30K $14K $86K

Timing of Gross Income (ch5)

Timing of Gross Income (ch5)

Timing of Gross Income (ch5)

Deductions For Trade or Business Expenses (ch.6)

Deductions For Trade or Business Expenses (ch.6)

Deductions For Trade or Business Expenses (ch.6)

Deductions For Trade or Business Expenses (ch.6)

Deductions For Trade or Business Expenses (ch.6)

Deductions For Trade or Business Expenses (ch.6)

Deductions For Trade or Business Expenses (ch.6)

Deductions For Trade or Business Expenses (ch.6)

Deductions For Trade or Business Expenses (ch.6)

Deductions For Trade or Business Expenses (ch.6)

ii. Double Declining Balance Method

Deductions For Trade or Business Expenses (ch.6)

Deductions For Trade or Business Expenses (ch.6)

Deductions For Trade or Business Expenses (ch.6)

b) elect 3-yr. SL 168(b)(3)(D): deduct 33% of initial invest ea yr

Capital Gains and Losses (ch.7)

Capital Gains and Loses (Ch.7)

Capital Gains and Losses (ch.7)

VI. 1231PROPERTY USED IN A TRADE OR BUSINESS 1. l

Capital Gains and Losses (ch.7) VII. ASSIGNMENT OF INCOME

VIII. RECAPTURE OF DEPRECIATION (p.521) 1. l

IX. TIMING OF DEDUCTIONS AND TAX SHELTERS (Ch.9: p.654-659; 695-705)

Investment and Personal Deductions (ch.8)

Investment and Personal Deductions (ch.8)

III. HOBBY LOSSES [183] 1. l