A1+Notes+Dump

Code Class - Case law Secondary toc

reg p 909

=I= Background Material p 1-44; 964-980; 981-994

=II Scope of Section 61= §§ 61, 74, 1001(b) Scope of Section 61 “Subtitle A Income Taxes” Gross Income Defined §61 (a)(12) Income from discharge of indebtedness - debtor owes $1,000 to credit card company; they make an agreement for him only to pay $600: this is $400 income...

Statute of Limitations is typically 3 years - IRS can only go back 3 years (Typically) Can go back 6 years for other things If fraudulent return – no limit (can go back to the day you were born).

Cesarini v. United States P 47 Purchase of a Piano for $15.00 1957 Found 4,467.00 in 1964

3 Points made by the taxpayers (and court's responses) 1) Not gross income because its an un-taxable gift (Broad Language of §61 encompasses the found money) 2) Never filed an income tax return in 1957 citing Dougherty - Statute of Limitations 3) Falls under Capital Gains Tax

Treasure Trove - is specifically treasure buried and unowned

Underlying point - Current Tax Code: 1986 Gross income (in subtitle A) means any source

Old Colony Trust Co. v. Commissioner P 53 - 1929 When someone else pays your bills its income - Grossing up = Xeno's paradox


 * Commissioner v. Glenshaw Glass Co. p 54**
 * "Undeniable accessions to wealth clearly realized which the taxpayer has complete dominion over."**
 * 1001(b) doesn't apply to Glenshaw**
 * Go to § 61 - Not taxable until realized**

clear instances of undeniable accessions to wealth, clearly realized and over which he has complete dominion


 * (Barry Bonds' Baseball)**


 * Clearly Realized - The problem**
 * Found Cash = Realized (Cesarini) if its cash its income**
 * - Anything less than cash = Grey area**
 * - Generally = Do you have the ability to pay the taxes**


 * buy a portrait for $50k - then discover that its very expensive worth 5 million**


 * Problems Pg 63**
 * 1: Whats the Result if the piano is worth 500k instead of finding 4,467**
 * § 1001(b) Determination of**

Winning the watch would be arguably income - Argue both Ways on the word "Realized"
 * 2: §74 doesn't apply - so must go to §61 and Glenshaw

Increase in Wealth Realized - hardest part can argue either way [whether its realized or not] Dominion and Control - Undisputed
 * 3 Tests for whether its income***

3) Section 61(a)(1) Compensation - Don't tax until sold - gift to spouse §102 Gifts and Inheritances - Kinda like Old Colony Trust Giving money to employee to buy the wife the car

Problem # 5 Page 63 Rent = 4,000 Charges = 1,000 Tenant makes 3,000 in improvements - Thus no difference between charging 4,000 and Charging 1,000 plus 3,000 in improvements

b) Counterfactual: - Owner must reimburse tenant for 500 in materials - 2500 plus the 1000 cash = increase in wealth

c) Tenant's net increase in wealth is 2500 - The living for free is compensation
 * Imputed Income**


 * Bartering is Taxable income to both parties.**


 * Problem**
 * Taxpayer buys sofa for $15**
 * - While cleaning sofa - finds 5,000**
 * - Must he include the 5,000 in income**
 * - Accession to wealth under §61, Glenshaw and Cesarini and Treasure Trove**
 * - 61 says: From whatever source derived - 5k in sofa is a source**
 * - It is income when its Undisputed Income; authority,**
 * 1) Reg 1.61-14**
 * 2) Report it in the year it is under undisputed possession per, Cesarini**


 * Treasure Trove**
 * Is income when realized**

"Can you afford it if someone does find out"**

Farmer purchased $3,000 / acre Greenacres - oil turns up - worth $10,000 / acre - Report the increase?

There is an accession in wealth once realized.

=III Property received by gift or bequest= Casebook 67-88. Code sections 102, 1014, 1015. Note sections 267 and 1022. Problems pp. 78, 80, 88.

Code 102 Gifts and Inheritances

- Gross income does not include the value of Gifts, Bequests, Devises, and Inheritance; however, income from any property received from these will be included in Gross Income; also, if a Gift, Bequest, Devise, or Inheritance is income from property, that amount is included in Gross Income.

Subchapter J refers to: Estates Trusts, Beneficiaries and Decedents: Section 641

Value of property via appraisal whatever - Some distinction between tangible and intangible

Gift is not gross income

Gift tax is paid by donor - He who gives gift must pay tax

Code 1014 Basis of Property acquired from decedent Details of when decedent died determine valuation

1015 Basis of Property acquired by gifts and transfers in trusts

Casebook p 67 1) Not a mere return of capital and 2) Not accompanied by a contemporaneously acknowledged obligation to repay, and 3) Not excluded by a specific statuary provision
 * Gross Income includes the receipt of any financial benefit which is:***

-1 -2 Taking out a loan is an increase in cash and an equal increase in liability, thus its not an accession to wealth. -3

Section 102(a) is codification of Irwin v. Gavit

Commissioner v. Duberstein p 69 Berman = President of Mohawk Corp Duberstein = President of Duberstein Iron and Metal

Berman gave a Cadillac to Duberstein as a gift - Duberstein didn't want the car - Berman/Mohawk deducted the car as a business expense on its corporate income tax - Duberstein did not include the value of the Cadillac in gross income for 1951

Gift / Not a Gift / Gift Trial Court / Appellate court / SCOTUS

A gift in the statutory sense proceeds from a "Detached and disinterested generosity" *** - Out of affection, respect, admiration, charity or like impulses - Person giving the gift is the standard

Duberstein was decided before 102(c) Reference: Stanton v. United States

Problems pp. 78, 80, 88.

78.1 Trial court as the finder of fact

appellate court can intercede only if the judge's finding is "Clearly erroneous"

78.2 The tip to the hostess and to the dealer is gross income for the recipient because there is no detached, disinterested generosity - even if its ephemeral it is not disinterested

80.1 Employer gives all employees 120 gift (wine) gives employee-son 700 gift (wine) - does the son have gross income?

Employee Gifts are to be included in Gross Income 102(c) 1.102-1(f)(2)

80.2 congregation gives 5,000 102(c) doesn't fit - Reverend isn't the employee of the congregation

80.3 Retiree receives $5,000 trip on his retirement - Employer contributed 2,000 and fellow employees contributed 3,000 The 3,000 from fellow employees is under 102(a)

§ 102 Gift - Duberstein - Disinterested, Detached Generosity Bequest - Devise - Inheritance -

§ 102 is an exception to the basic provision in § 61(a)

Compare Wolder (85) and Merriam (87)

88.1(a): 102 applies (b): 102 applies (c) (d): 102 applies - not really clear (e): 102 does not apply, 61 does - its definitely income (f): (g): 10,000 income (h): Compensation - NOT Merriam - taxable income (i): True Merriam case - not income 88.2 Taxable - income for past services 88.3 Wolder today?

=IV Fringe Benefits (Employee benefits) IRC 132= Casebook 89 - 104 Code 61(a)(1), 102(c) 119, 132; See Also §§ 105, 106. Reg 1.61-21; 1.62(a), (c), (d); 1.119-1; 1.132-1 to 1.132-8 Problems 98-99, 103-104 §132 discussion – Pay attention to the code language more than the casebook. Problem 102(a) Spouse gets the car

§§132 - 135

Qualified Employee Discounts formula – P 94 - Code 132(a)(2)

Problems 98.1(a) Non discriminatory plan No-Additional-Cost Service Whether Highly Compensated employee 414 q

If the hotel owner bumps someone else out of the room to allow an employee to stay - then it is taxable income IRC 132(j)1 IRC 132(j)6 IRC 414(q)

98.1(b) - Bounces paying guest then it is taxable income 98.1(c) 98.1(d) is excluded (h)(2) 98.1(e) is excluded a(i) 98.1(f) Highly Compensated 414(q) 1.132-8(a)(2) Consequences of discrimination * 98.1(g) Same Line of Business (SLOBS)? No, Hotel Room included in gross income 98.1(h) Assuming its non-discriminatory would not be included in gross income - 1.132-4(a)(1)(iv) 98.1(i) Excluded - Service visavis product 98.1(j) depends how much he does for the business - then he can exclude that % - Amount that is income is 1,000 but get to exclude 800 thus 200 is included in gross income

98.1(k) Working Condition Fringe - 1.132-5 Working Condition Fringes (a)(1) - 132(a)(3)

98.1(L) de minimis fringe

98.1(m) 132-6(e)(1)

Employee Parking only a(1) and a(2) cannot be discriminatory

98.1(p) on premises gym (there is a code for that)

103.1(a) Condition of Employment §119 103.1(b) If agreed to the condition Probably still taxable - probably a sham (Substance of the transaction over the form) 103.1(c) 6000 for groceries are NOT meals 103.1(d) the fee simple is not lodging

Go through the checklist Is it income? Is it a Gift?

119 apply on off premises working condition fringe under 132 --> deducible under 162

103.2 Limitation first? §132(f)(2) 102 problems: Disinterested? No, planner and employee are same person - Employee gifts

Definition of Employee? “Planner” is the owner and employee... - 132(f)(2)(E) Xref 401(c)(1)

Planner can in fact be a legitimate employee of the corporation

If the agreement said that the employer paid the meals and lodging for employee because employee is a shareholder - would it be excludable? - Would fail 119

Jack B. Lindeman p 102 60 T.C. 609 (1973)

What would it look like if she was a sole-proprietor? -119 would not apply at all (Necessary, Premises, Employee -= 3 elements?)

General rule under old colony trust = someone else pays your bills its income Exclusion vis a vis Deduction - Exclusion is excluded from Gross Income - Deduction: It is gross income and then you can deduct it from gross income

=V Income-producing entities (Not on exam)= Casebook 284-316. We will not spend as much class time on the specific cases and problems in this chapter as on the general question of how the various entities, and their owners and beneficiaries, are taxed on the income generated through the entity. You are responsible for understanding that a partnership, limited liability company, or sole proprietorship is not a corporation, and for being familiar with the basic concepts of how corporations, partnerships, estates and trusts are taxed.

3 Principle types of Income producing entities: 1. Partnerships a. Subchapter K §§ 701 – 777 b. §703 Computation of partnership’s income c. Super hard d. Flow-through entity 2. Corporations e. Subchapter C §§ 301 – 385 f. Section 11 g. Dividends? §61(a)(7), §301 h. C-Corp i. - Double Taxation (Of corp level and owner level) j. Subchapter "S" Taxed like a partnership 1300-1399 (boring 3. Trusts k. Subchapter J §§ 641 – 692 l. DNI distributable net income p 288 m. irrevocable

LLC is statutorily created by each state - Essentially a partnership with limited liability

(THERE IS NO 6)

=VII Adjusted basis, gain or loss realized, recognition= Casebook 115-22, 129-52. Code sections 1001, 1011(a), 1012, 1014, 1015, 1016(a)(1) & (2); note §§ 1022, 1032, 7701(g). Reg. §1.1001-2. Read “Introduction” to passive activity losses, pp. 528-31, and the first paragraph or two of the discussions under the italicized topic headings on pp, 531, 534, 535, and 537. Read §469(a), (b), (c)(1) and (d)(1). We will not attempt to master how §469 works, but I want you to have a general idea how it connects with cases like Crane and Tufts. Skim pp. 513-16, just to get a sense of where §469 fits in the larger scheme of things. Problems pp. 119-29, 128 (#1), 131, 151-52 (omit #3), 540 (#1(a-e)).

Subchapter O §1001 Determining the amount of and recognition of gain or loss

§61(a)(3) Gains derived from dealings in property - is income - Leads into the meat and potatoes

115-122 Gain from dealings in property Definition of “basis” *
 * Basis, p 115: Return of Capital to taxpayer in question**


 * Basis, unadjusted, essentially answers the question: How much have I got in it? Thus if “T” buys property for $10,000, T has that amount in it, and T’s basis is $10,000.**


 * Basis differentiated from Value**
 * “B” buys securities that increase in value from purchase price of $10,000 to $15,000, then the basis is still $10,000 but the value is $15,000.**


 * Back to section 1001(a) – amount realized (if bought for $10,000 and sold for $15,000) is $5,000.**


 * Amount realized minus the adjusted basis**
 * Amount realized is 1001(b)**
 * Adjusted basis is 1011**


 * Amount realized is is the sum of any money received plus the fair market value of the property (other than the money) received.**

(i) Money (cash) (ii) FMV of property received other than money (iii) Reg §1.1001-2 (Discharge of Liability is like getting cash)
 * Elements of amount realized:

Hypo: Received $100 Cash and a house (FMV = 50,000) Amount realized is $50,100

Sold or other disposition triggers 1001 Other disposition: - Trade - Bartering - Gift

Gain or Loss is Amount Realized Minus Adjusted Basis

1001(c) Shall be recognized as income 61(a)(3) --> its part of gross income

1011 leads to 1012 and 1016 1012 is cost - (See Crane Case) plus debt 1014 basis of property --> Date of Death Value 1015 Gift 1016 is adjustments to basis - pretty self-explanatory - Putting new roof on house


 * House costs $500,000**
 * put 10% down**
 * $50,000 down**
 * - Gift for $50,000 from parents**
 * $450,000 Note + Mortgage**


 * Entered into a promise to pay back the 450,000**
 * What is the Cost? Amount paid plus repayment obligation (note, loan, etc).**
 * Adjusted Basis under 1012 = $500,000**


 * Sell for 525,000**
 * Gain of 25,000**
 * Pay off note for 500,000**


 * Counterfactual**
 * - Trade Painting (valued at 525,000) for the house - gain is 25,000 (base is 500,000)**


 * 1019**

(i) Money (cash) (ii) FMV of property received other than money (iii) Reg §1.1001-2 Discharge of Indebtedness is like getting cash.
 * Elements of amount realized:

Have loan for 500,000, house is worth 525,000 - someone else takes over the loan and gives 25,000 cash then under i it is 25,000 and ii is 500,000

Mortgage for 500,000 House increases to 675,000 New Mortgage for 175,000 Buy stock with the 175,000 - Basis is still 500,000

Mortgage for 500,000 House increases to 675,000 New Mortgage for 175,000 Repair/Improve the house with the 175,000 - Basis is still 500,000

Page 1510 Code: Example (6) is this analogous?

Exchange of something worth 60,000 for something worth 40,000 its part sale part gift for 20,000 --- however, it may be evidence of discharge of indebtedness or compensation income.

Part sale part gift 1.1001-1(e)

Date of Death: 1014: Date that Grandma died, the value of the stock at the date of her death is the basis - Start a new basis

Buy for 10,000, evaluates to 500,000; owner dies and leaves it to Son - son's Basis is 500,000 --> if he sells for 500,000 his gain is 0.

1015 Gift - received .1.1015-1


 * Crane case**
 * Liabilities whether recourse or not recourse - that are assumed, taken subject to or otherwise incurred in the acquisition of property are included in a taxpayers basis (1012 cost basis) even subject to liabilities. Lender will have to be notified.**
 * Liabilities whether recourse or not recourse - that are assumed, taken subject to or otherwise incurred in the acquisition of property are included in a taxpayers basis (1012 cost basis) even subject to liabilities. Lender will have to be notified.**


 * Other-thing learned - liabilities of a seller: whether recourse or non recourse - assumed or taken subject to by a purchaser are included in the seller's amount realized.**
 * A has property - B is going to take over - A has loan for 100,000 with 0 basis**
 * - B takes over property with loan on the land**
 * 100,000 gain**
 * 100,000 amount realized**
 * 100,000 is relief or discharge of indebtedness**


 * Part of amount realized - prong 3**
 * Elements of amount realized:**
 * (i) Money (cash)**
 * (ii) FMV of property received other than money**
 * (iii) Reg §1.1001-2 Discharge of Indebtedness is like getting cash.**
 * (iii) Reg §1.1001-2 Discharge of Indebtedness is like getting cash.**


 * Philadelphia Park Amusement Co. v. United States**
 * P 116**
 * Taxpayer deeded a bridge (it built) to the city in exchange for a 10 year extension of its franchise.**
 * Central Question: What is the basis of the 10-year extension of the franchise?**


 * 2 contexts:**
 * 1) Cost is the fair market value of the property given**
 * - Predicated on the theory that the cost to the taxpayer is the economic value relinquished**
 * 2) Cost is the fair market value of the property received.**
 * - Predicated on the theory that the term “Cost” is a tax concept and must be considered in the light of the prime role that the basis of property plays in determining tax liability.**


 * Court sides with the second context in this case.**
 * “The cost basis of the property received in a taxable exchange is the fair market value of the property received in the exchange. “**


 * When property is exchanged for property in a taxable exchange:**
 * Taxpayer is taxed on the difference between the adjusted bases of the 2 properties exchanged.**


 * To avoid double taxation: the basis of the property received is the adjusted basis of the property given plus any gain recognized or that should have been recognized, or minus any loss recognized or that should have been recognized.**


 * Therefore, the 10-year extension of the franchise was its fair market value at the date of exchange for the bridge; thus the bridge’s FMV is the cost of the 10-year extension.**


 * (Court does not make a final determination – remanded to the commissioner)**


 * Arms Length Transaction: each party is acting independently and (presumably) in his own interest.**


 * Crane Case P 135 CB - look to 1012 too**
 * Key Concepts: Depreciation qua Income Tax and Consequent Basis Adjustments.**
 * Core Question: How does a taxpayer compute her taxable gain when she sells a depreciable property subject to an unassumed mortgage.**


 * Tax shelter**


 * Summation of Section V**
 * Disposition of Property**
 * - The taxable income is a calculus of: amount realized (from the disposition) minus the basis (thus adjusted).**


 * 1011 Adjusted Basis for determining gain or loss**
 * 1012 Basis of Property – Cost (See Crane Case)**
 * 1014 Basis of Property from Dead Person --> Date of Death Value**
 * 1015 Gift and Transfers in Trust**
 * 1016 Adjustments to Basis - pretty self-explanatory**
 * - Putting new roof on house**


 * Crane Case P 135 CB**
 * Key Concept Depreciation qua Income Tax and Consequent Basis Adjustments.**
 * Started the tax shelters**


 * Problems**
 * 119.1(a) 6,000 gain**
 * 119.1(b) option – Is cost still 10,000 or is the option some modification? the option becomes part of the basis when the option is exercised**
 * 119.1(c) The basis of the option is 1,000 – the sale of the option is 1,500. The basis gain is 500 - option is a separate piece of property**
 * 119.1(d) mortgage - is the skin in the game - 10,000: 2,000 cash and 8,000 obligation to repay**


 * 6,000 gain**
 * Not in code - crane case sets up the shelter - depreciation**


 * Recourse v. Non-recourse debt**
 * Recourse - the bank can look beyond the property that the loan secures.**
 * Nonrecourse - the bank can only foreclose on the property**


 * 119.1(e) Improvements? 2,000 gets added to the basis under 1016. thus gain is 6,000**
 * 1016 for improvements and depreciations**


 * 119.1(f)**
 * 1019 - Rent from lessee does not affect basis**
 * - under 109, the 2,000 clearing does not include in income nor credit on basis**
 * - the owner gets tagged with the 2,000 improvements**
 * Gain is 8,000 because value is 18,000 at time of sale instead of 16,000.**


 * 119.1(g) 3,000 is a red haring -**
 * 10,000 is a bonus - employee compensation (not gift)**
 * - 10,000 is the basis**
 * no difference than if the employee got 10,000 cash and turned around and bought the land.**


 * 119.1(h) Basis is the cost - no authority answers this clearly**
 * - the central question is whether 132 is a real exclusion or a deferral**


 * 120.2(a)**
 * Sharp has**
 * Cost of 6,000**
 * Value of 9,000**


 * Exchanges for**


 * Stock = 8,000 basis and worth 10,000**


 * 6,000 basis traded for 10,000**
 * Property for Property**


 * Amount realized for sharp = 10,000 (property prong 2)**
 * Amount realized for Dull = 9,000 (property prong 2)**


 * Sharp's gain: 4,000**
 * Dull's gain: -1,000**


 * Sharps Cost basis: 10,000**
 * Dull's cost basis in the land: 9,000**


 * The arm's length transaction removes the 1,000 loss thus its not a gift**


 * 120.2(b) Philadelphia park case: if you don't know the value of one side's property in the exchange then you give them equal value - presume they are equal in value (in arms-length exchange) if not arm's length - presume there is a gift of some sort. 9,000 is the value of each, gain of 3,000. Basis in b is 9,000 each**


 * Recourse Liability?**
 * Nonrecourse Liability?**
 * 151.1(a) M purchases land from Seller for 100,000**
 * M's basis is 100,000**


 * Crane's 1012**


 * Non recourse mortgage - bank takes risk**


 * (b) M takes another non recourse mortgage of 100,000**
 * - the new mortgage does not increase the basis - because the facts don't say what it was used for**
 * - Buy stock?**


 * 80,000 Mortgage.1**
 * 100,000 Mortgage.2**


 * Land has a value of 300,000**
 * Net value of Land is 120,000**
 * Prong 1: 120,000**
 * Prong 2:**
 * Prong 3: 80,000 1.1001-2(a)(3)**
 * Prong 3: 100,000 under 1.1001-2(a)(4)(i)**
 * --> thus, amount realized is 300,000**
 * --> thus, amount realized is 300,000**


 * Adjusted Basis is 100,000**
 * Gain = 200,000**


 * 1(c) 100,000 is used to improve the land then M has a 200,000 basis under 1016(a)(1)**
 * 1(d) 100,000 basis for stocks and bonds 1012**


 * e) Purchaser's cost basis is 300,000**
 * f) Gift instead of Sale**
 * - then its a part gift part sale**
 * - value of the land over the mortgages is the gift part**


 * Gift = 120,000**
 * Amount realized is 180,000 (amount of debt that transferor is being absolved of)**
 * 80,000 gain to the mortgage or**


 * the Son's gain is the 120,000**


 * Son's basis is 180,000 (because of 1.1015-4(i))**


 * g) Spouse - Gain is still realized - 1.1015-4 still governs**
 * - but 1041 says, we don't tax spouse transfers**
 * - Non Recognition**
 * 80,000 realized, 0 gain recognized**


 * Basis is 100,000**


 * What happens when spouse pays off the 180,000? Non tax issue - basis is still 100,000**


 * (h) Deed in lieu of foreclosure - Parker v. Delaney 186 f.2d 455 (1st Cir. 1950)**
 * - Not tax depreciation**
 * FMV of land fluctuates down to 180,000 with outstanding mortgages of 180,000**
 * Adjusted basis is 100,000**
 * Amount realized is 180,000**
 * Gain = 80,000**


 * (i) Tufts Case said: Rule: for non recourse debt - regardless of the FMV the amount realized is the balance of the outstanding debt. Ignore FMV for NRDebt. Amount realized is the outstanding balance.**
 * FMV declines from 300,000 to 170,000 NRLoan is 180,000**


 * Answer for (i) is 80,000**


 * Counterfactual: Recourse Debt: FMV is 60,000 Loan is still 180,000 (recourse debt)**
 * When there is recourse debt - there are 2 things going on:**
 * 1) FMV that is over the Debt is 61 ordinary income (COD Income) 120,000 income.**
 * 2) up to the 60,000 is treated as a exchange 1001 ( amount realized is the 60,000 minus adjusted basis)**
 * - Going to have 117,000 of income (can write off 3,000)**


 * 1.1001-2**


 * 152: 2**
 * 300,000 per acre**
 * cost basis for each acre is 100,000**


 * Year 1: Gain of 40,000**
 * Year 2: Gain of 60,000**
 * 1.61-6** * Dealings in property gains and losses

=VIII Realization in intra-family transfers of property= Casebook 122-29, 209-18 Code section 1041 Reg. §§ 1.1001-1(e), 1.1015-4, 1.1041-1T. Problems pp.127 (#2), 129, 218 Note that payments of alimony are different from transfers of property to an ex-spouse. The treatment of alimony by both payor and payee is dealt with in §§ 71 and 215, and will be covered in assignment 20.

Code 1041 – Transfers of property between spouses or incident to divorce. §1041 deals with gain or loss realized by the transferor of property, and only incidentally with whether the receipt of the property is income to the transferee.

Basis is defined like a gift – Transferee has Transferor’s basis (1041(b))

(c) defines what is incident to a divorce

Reg 1.1001-1(e) Part sale part gift No loss if the amount realized is less than the adjusted basis.

1.1015-4 Part Sale Part Gift

Sum of 1 and 2 1) Basis is the greater of:

i) amount paid by transferee ii) transferor’s adjusted basis at the time of transfer

Loss: unadjusted basis of the property in the hands of the transferee will not be greater than the FMV of the property at the time of transfer.

Family members cannot traffic losses - if the amount realized is less than basis - then

Detached disinterested generosity then it is not income - daubernighter test

1.1041-1T Q and A regarding transfer of property in marriage and after.

Incident to divorce transfer done less than 1 year or related to the cessation of the marriage

Rebuttable presumption: cessation of the marriage: After 6 years the transfer is presumed to be not related to the cessation of the marriage. Q-7/A-7.

1015 - transferred basis
 * Not getting into gift tax on test *
 * 126.1a**
 * 1: 15,000 gain**
 * 2: 5,000 loss**
 * 3: 5,000 gain**


 * Code hates losses but loves income**


 * Special rule:**
 * FMV is below basis and there is a loss - then the gain = 0**


 * Don't want people to gift loss property**
 * b) At the time of the gift the FMV is less than the cost**
 * 1: 5,000 gain**
 * 2: loss is 5,000 not 15,000 loss because of the special rule**

3: 6,000 loss?? - When determining the loss use the FMV - no gain no loss recognized

Gifts Problems P 127 (#2) 127.2(a) - Transferred to his daughter - part gift part sale Amount realized is 100,000 with a gain of 0 for father Daughter's basis is 100,000

127.2(b) Basis is 50,000 Amount realized is 100,000 - Gain is 50,000

Still paid 100,000 for one half of the land - total basis = 150,000 --> 1012 basis for one half and a 1015 basis for the other

P 129.1 Bought land for 40,000 sold to his wife for 70,000 Gain Recognized is 0 Gain Realized: 30,000.

Steffi's basis is 40,000 Gain realized is 30,000 (1041 basis is 40,000) Gain recognized is 30,000 (1001)

Declined in Value to 30,000 Basis is 40,000 Sold to Spouse for 30,000

Andre's Amount realized 30,000 Loss Realized: 10,000 Loss recognized: 0 (1041)

Andre's Loss Realized: 10,000 Loss recognized: 0 (1041)

Steffi's basis is 40,000 She sells for 30,000 - Loss Realized 10,000 - Loss Recognized 10,000

(e) Part Sale Part Gift 1.1001-1(e) and 1.1015-1 Andre receives property from Stefi's Amount Realized 70,000 Minus Andre's basis of his previous property 40,000 Andre's gain realized 30,000 Andre's gain recognized: Andre's NEW Basis in the new property: 50,000

Steffi's amount realized: 70,000 Basis 50,000 Gain realized 20,000 Gain Recognized: 0 New Basis: 40,000

Exam Tip - Talk about all issues pertaining to one person then get into the other person. G P 131.1 G: owns 2 blocks of stock Date of Death Stepped up basis (P 129) - Must survive a year

218.1 1041 Divorce Basis 100,000

Incident to the divorce because its less than 1 year

Kevin's amount realized 500,000 - Because he is receiving some Property worth 500,000 Reg 1.61-6

Kevin's Amount recognized Amount Recognized 0

Brittany's amount realized 600,000 Basis 100,000 (1041 basis from former spouse) Amount Recognized 500,000 (Sold to a third party)

(b) Debt to satisfy - Basis 500,000 FMV of 400,000 Kevin uses property to pay off debt; value of debt = 400,000 Loss Recognized 0

Brittany's loss Realized 150,000 Loss Recognized 150,000

enter into a loan 5 years ago - pay off is the transfer of land

1.1041-1T Q-7/A-7 Presumption and rebuttable presumption when a transfer is not to be related to the cessation of the marriage.

Q&A 14 P 1543 Happens after the 6 year time period - each party wants to take the loss (for deduction purposes) one person wants 1041 to apply, the other does not.
 * Come to a conclusion *
 * Exam**

Exam possibility ***

Transition between former and next:

Non-Recognized Section 1041, 1031;

What Character is it? Ordinary Income, ordinary Loss Capital Gain or Capital Loss. -Long-Term or Short-Term? (Ordinary doesn't have long or short terms)

Capital Gain is better than Ordinary Gain (lower tax rates) Ordinary Loss is better than Capital Loss (better deductions)

Long-Term Capital Gain is lowest tax rate (typically 15%) - Plus 4% Michigan

=IX Introduction to capital gains and losses= Casebook 684-702, 718-25. Code sections 1(h), 61(a)(3), 1211, 1212, 1221, 1222, 1223 Problems pp. 696 (skip (c)), 701-2, 724-25 (See Rev. Rule 66-7). Like assignment 4 above, this one includes a heavy dose of spoon-feeding by the authors. You should do your best to disregard that until you have tried to do the problems using the statute.

CB 684-702, Looking at items both qualitatively as well as quantitatively is called “Characterization” of income and deduction items.

Whether a Gain or Loss is subject to special treatment as “Capital” as opposed to “ordinary” is dependent upon: 1) Whether it arises in a transaction involving a capital asset 2) Whether the capital asset has been the subject of a sale or exchange 3) How long the taxpayer has held the asset

There exist statutory provisions that artificially accord capital gain or loss treatment to some transactions which do not actually involve the sale or exchange of a capital asset.

CB 718-725

Code 1(h)

61(a)(3)

1211

1212

subtitle a income tax: 1221 Definition of Capital Asset Definition by exclusion: A Capital Asset is (Can be Tangible or intangible) (Whether in the trade of the taxpayer's business or not) - Not stock in trade of the taxpayer; not the inventory of his warehouse if on hand at the close of the year. - Not property used in his trade or business which is subject to §167 (depreciation?) - Not a copyright, literary, musical or artistic composition created by the taxpayer. - Not accounts or notes receivable acquired in the ordinary course of trade. - Not a publication of the US Gov’t. - Not a commodity derivative financial instrument held by a commodities derivative dealer UNLESS (1221(a)(6)(A) and (B).

Start from top of tree and go down: - Not a hedging transaction which is identified as such - Not a supply of a type regularly used or consumed by the taxpayer in his trade.

Used most often to least:

If you sell a capital asset

Inherited a car - stepped up basis under 1014 - its long term - if it was a capital asset it would be a long term capital asset (its typically not)

Must know the character of every gain or loss

1h has several percentages. 28% 25% 15%

(don't get involved with taxable income limits in 1h) we're not going into the limits. Net against each other.

LTCG

LTCL

STCG

STCL

696.1 (1) is a LTCG (unless you're a collector) (2) is a LTCG (Unless you're a stock trader) excess LTCG 35,000

No STCG or STCL therefore the Net Capital Gain is 35,000

(Like amounts is defined as the tax rate bracket [the 3 listed below] and then take the losses away from like gains and if there are no like amounts, subtract from the next higher bracket) Do like rates first, then jump to the highest (Not the next highest, the highest) Look in book 28% (Collectibles) 25% 15%

15,000 at 28% 20,000 15% 696.2 a) LTCG 10,000 LTCL (5,000)

take the loss and reduce the highest tax bracket first - then you get the lower bracket amount

Can only apply from top to bottom - Long Term is excess over Short Term - if there is no excess you cannot subtract.

Take like tax rate amounts first

b) 5,000 taxed at 28% If no like amounts, then go to next highest rate

(c) 5,000 at 15%

(d) 5,000 at 28% 5,000 at 25% 5,000 at 15%

and a 10,000 long term loss (From Stock) 15%

Net Capital Gain is 5,000 at 25%

696.2(b)


 * 1222**
 * Short-term capital gain/loss**
 * Long-term capital gain/loss**
 * Net short-term capital gain/loss**
 * Net long-term capital gain/loss**
 * Capital gain net income**
 * Net Capital Loss**
 * Net Capital Gain**

Net short-term capital gain (1222(5)) or Loss(6) equals Short-term capital gain (1222(1)) minus short-term capital loss (1222(2))

Net Long Term Capital Gain (1222(7)) and Loss (8) equals Long Term Capital Gain (1222(3)) minus Long Term Capital Loss (1222(4)).

When capital losses exceeds capital gains




 * 1223**


 * Problems**
 * 696 (Skip (c))**
 * 696.1(a) Determine Net Capital Gain:**
 * The excess of Net Long Term Capital Gain over the Net Short-Term Capital Loss**
 * NCG = 35,000**


 * 696.1(b) His tax Rate? 20%**


 * 696.2(a)**


 * 701-702,**
 * 1211(b)(1) or (2) deductions from Capital Loss?**


 * 701.1: Can you net a short term capital gain against a long term capital loss? No, what do you do?**
 * Losses can only be allowed to the extent of the gains plus the lower of 3,000 or the excess of such losses over such gains.**
 * --> 1211**


 * allowed to take 2400 against ordinary income**


 * 701.2**
 * LTCG 2,000**
 * LTCL (10,000) (8,000) NLTL**
 * STCG 2,000**
 * STCL (4,000) (2,000) NSTL**


 * to determine character of carry over - put in constructive short term capital gain of 3,000 and recalculate for the next year**


 * 3,000 subtracted from the short term loss - maintain the long term; that yields the next years net capital loss.**


 * year 3 - 7,000 long term capital loss; 17,000 short term capital loss; 12,000 long term capital gain; 5,000 short term capital gain.**


 * 5,000 long term capital gain**


 * - ends up being 4,000 carry over into the next year as STCL**


 * 1211(b) Can take the losses to the extent of the gains - no gains therefore the losses are (10,000); but you can only take 3,000 therefore 7,000 carry over**


 * Section 1212 fiction kicks in**
 * The 3,000 is a fictional Short Term Capital Gain**


 * the 7,000 Long Term Capital Loss Carried over to the next year.**
 * Then the next year you're able to take 3,000 again**


 * move on to 1212(b)**


 * New Scenario**
 * LTCG 4000**
 * LTCL (12,000)**
 * LTCL (12,000)**


 * LTCG 1,000**
 * LTCL (12,000)**


 * (1900) loss**
 * (16,000) Carry Over**


 * 8,000 LTCL**


 * 8,000 STCL**


 * start at 724**
 * Units 11 - 14 for Monday the 20th.**
 * Depreciation Chapter - the %s are in the back of the book. p 1890 Tables for Depreciation.**


 * 1212(b) Capital Loss Carryover?**


 * 724-725**
 * (Revised Rule 66-67)**


 * 724.1(a) long term of 1,000 at 15%**
 * 724.1(b) ordinary income rate but it is a short term capital gain which are taxed at the ordinary rate for the tax payer**


 * Start at March 1 of year 1 and end at the end of february of year 2.**


 * (c)**
 * Feb 10 100 @ 50 = 5,000**
 * March 10 100 @ 50 = 5,000**


 * Sold 50 Year 2 Feb 15 year 2 at 60 per share**


 * First batch sold - at 15% - long term**
 * Second Batch sold -**


 * don't know which of the 100 he sold or sold some of both**
 * - Regs in the prob: Issue is: Which layer, rule is: the earliest first or "First in first out"**
 * - That is only when you cannot identify which shares were sold**


 * (d) Trade dates are exactly 1 year - broker actually sold on december 30 - exclude date acquired and include date sold (dec 30) Trade date is 30. Exactly 1 year thus not long term.**


 * (e) short term capital loss of $500 - "Lesser of 3,000 or the loss (500)" at the bracket of the taxpayer**


 * (f) Glenshaw test first - wealth went up**
 * Detached Disinterested Generosity - Duberstein**
 * t's basis is 30$**
 * 3,000 gain**


 * Tack on holding period 1223(2)**


 * (g) wealth went up but not taxable §102**
 * Automatically long term holding period when capital asset is received from decedent**
 * - Stepped up basis to fair market value at date of death.**
 * 15%**


 * (h) 10,000 long term capital gain**
 * - Once dead - estate gets stepped up basis and long term holding period**
 * - taxed at 15%**


 * 2) option**


 * owner**
 * tacker**
 * purchaser**


 * a) Tacker exercises the option to purchase the lease**


 * Cost basis for tacker when she exercises the option = 250,000**
 * pays 225,000 then the cost of the option gets put into the cost of the property thus 250,000**


 * Tacker sells for 300,000**


 * Gain 50,000 Tacker owned for less than 1 year**
 * - short term holding period**
 * - Short Term Capital Gain**


 * tacker could have assigned to someone else for 75,000 the basis is 25,000**
 * Selling the option for 75,000 is a long term capital gain**
 * 1234 - look through the option to the property**
 * - 1234(b)**


 * 3) unimproved land**
 * building vacation home**
 * Land sold for 250,000 basis is 200,000**
 * 50,000 gain from sale is long term capital gain**


 * another way to determine long term v. short term**
 * - 25,000 is LTCG**
 * - 25,000 is STCG**


 * Difference between land and building - land is not depreciable; building is a depreciable asset**


 * Long Term Capital Gain is 15% max**


 * P 693 Capital Gains:**
 * If a taxpayer has inadequate ordinary income (including net short term capital gain) to fill up the amount of taxable income taxed below a 25% rate, then, under §1(a)-1(e), use the Net Capital Gains above 15% to fill in this gap and tax such gains at 15%.**


 * P 697Mechanics of Capital Losses**
 * The following are only deductible losses and only for noncorporate taxpayers.**


 * Whether a loss is deductible (§165(c))**


 * Capital Losses in excess of Capital Gains can be deducted from ordinary income to a limited extent (CODE SECTION).**


 * Any additional capital loss is carried forward retaining its original character**


 * 1211(b)**
 * 1212(b)**
 * 1222(10)**


 * 3 Possible Net Loss Situations:**
 * 1) Net SHort Term Loss that reduces or eliminates the amount of Net Long-Term Gain.**
 * 2) There may be a Net Long-Term Loss which reduces or eliminates any Net Short-Term Gain.**
 * 3) Net Losses in both Short Term and Long Term Categories.**


 * 1211(b) Limitation: Capital Losses are deductible only to the extent of capital gains plus, if such losses exceed such gains, an amount of ordinary income not to exceed the lower of:**
 * 1) 3,000 (1,500 in the case of married individual filing a separate return) or the excess of such losses over such gains.**
 * 2) or the excess losses (if it is less than 3,000)**


 * 1212(b)**
 * When there is a capital loss over 3,000; then 1212(b) is invoked and there is a carryover.**
 * Thus, 3,000 Short Term Capital Gain is Constructively Created and is applied against the total capital loss; this 3,000 is applied to ordinary income as a deduction, and the excess is applied to the excess is carried over to the next year.**


 * Must make the 1212(b)(2) Computation first, then the 1212(b)(1) computation.**


 * The excess capital loss that is carried over retains its character (as Long Term or Short Term capital loss).**


 * 1212(b) carryover losses die with the taxpayer (p 700)**
 * §642(h) Unused Loss and Death**


 * 1222(10)**


 * Salary**
 * LTCG**
 * LTCL**
 * NLTCG**
 * STCG**
 * STCL**
 * NSTCL**
 * NCG**
 * Gross Income:**
 * (After Capital Loss)**

Definition: Adjusted Net Capital Gain:

start at 724 Units 11 - 14 for Monday the 20th. Depreciation Chapter - the %s are in the back of the book. p 1890 Tables for Depreciation.

=X Definition of capital gain. (2 hours) for Monday the 1Casebook 702-18, 725-46.= We will give some attention to §1221 if, as seems likely, we have not found time for it before this class. We will spend relatively little class time on the cases in this assignment, but you should be somewhat familiar with the concepts raised by them: the Corn Products doctrine (which, after being shrunken by the Arkansas Best case, has now largely disappeared into §1221(a)(7); the sale or exchange requirement; the Arrowsmith doctrine, as well as some of the judicial twists on the definition of a capital asset.

Casebook 702-718 Cases: Mauldin v. Commissioner Point: Profits received form ordinary course of one's trade or business should be treated as ordinary income and not entitled to capital gains treatment.

the question of whether property is held primarily for sale is not answerable by a "Fixed Formula" - rather there are several factors that aid the analysis.

Reminder: Court of Appeals looking back over the Tax Court decision must determine that the Tax Court's judgment is "Clearly Erroneous"

Mauldin factors: P 704

Malat v. Riddell Capital Gains treatment may not be given to profits received from the sale of property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.

Note page 707: Supreme Court defined "Primarily" as used in 1221(a)(1) as "Of first importance, or principally"

Corn Products Refining Co. v. Commissioner Sale of corn futures is not a capital asset as it is a normal and integral course of dealings for corn farmers.

Arkansas Best Corp. v. Commissioner The Company's sale of stock held for business purposes was the sale of a capital asset

725-746

§1221

§1221(a)(7) Hedging transaction any transaction in the normal course of the taxpayer's trade or business primarily to manage risk of price changes; or of interest rate or price changes or currency fluctuations; to manage other risks in the regulations.

codified Corn v. Commissioner

Sale or Exchange Requirement

Arrowsmith Doctrine? P 737

Each Taxable year is a separate unit for tax accounting purposes.

--

What is a Capital Asset? Stocks, Bonds, and Real Estate? (any asset that is used to make money – in contrast to an asset used for personal enjoyment or consumption). Stock

Bonds Debt Security – Authorized issuer owes the holder a debt and pays interest (the coupon) to use or to repay the holder at a later date (at the maturity of the bond).

Real Estate (Dirt)

=XI Deductions for Losses (2 hours)Casebook 403-06, 817-27= Code sections 63(a),(b),(d), 165, 262. Look briefly at §§ 172 and 183, and take another look at §469. Think about this question: do §§ 172, 183 and 469 use the term “loss” in the same sense as §165? Reg. §§ 1.165-1, 1.165-7, 8, 9. Problems pp. 405-6, 823, 827.

§165 - the central switchboard for all losses (a) makes all losses for corporate taxpayers deductible (in general with other vacillations...)

(c) more important: Individual Taxpayer can only deduct what is in (c). Only realized losses are taken into account.

deductible business losses: Buying a delivery truck for use in business and sells a year later for less than the adjusted basis.

Buyer pays 1,000 for an option to buy a factory and does not exercise the option - the 1,000 is a business loss.

Measurement of the loss (For deduction purposes) depends on the taxpayer's adjusted basis in the property.

Example of business loss calculus: Uninsured boat that is used for business purposes • Taxpayer has a 6,000 adjusted basis in his boat • Boat had a 10,000 value before the storm • Boat has a 7,000 value after the storm (uninsured boat) • Taxpayer has a 3,000 loss - If the boat was completely destroyed, he would have a 6,000 loss

Scenario 2: • Insured boat • 6,000 adjusted basis • 10,000 value before storm • completely destroyed • Insurance pays 4,000 • Taxpayer has a 2,000 loss

• Fully insured boat • Taxpayer receives full 10,000 from insurance - then taxpayer would realize 4,000 casualty gain.

Problems pp. 405-6, 405.1 Depreciation (167) of a car - Purchase Price of 40,000; depreciation deduction to an adjusted basis of 22,000 - FMV of car was 30,000 and then totally destroyed [0] Taxpayer received 15,000 of insurance proceeds.

Depreciation deduction is not depreciated in value - for depreciation that you're allowed under the tax code to measure wear and tear -

P 407 Calculation of deduction

Lesser of Difference between FMV before and after [OR] the loss less insurance reimbursement.

405.a: Deductible Loss is 7,000 if 405.b: - Reg 1.165-7(b)(1) Car not destroyed, FMV reduced from 30,000 to 10,000 because of the accident. Loss deductible [Because 20,000 is less than 22,000] Loss deductible is 5,000.

405.c: Adjusted Basis in (b) if the taxpayer incurs 17,000 repairing the car. 15,000 from insurance 2,000 out of pocket previous basis is 22,000 1.1011-1

Loss Deductible is 5,000 plus 22,000 adjusted basis, take out the insurance add back the repairs subtract the loss deductible. 1016(a)(1) and (a)(2) New Basis is 19000 27,000 minus 15,000 =

1.165-7 leads to 1.1011-1 which leads to 1012, 1016, 1017, 1018 OR OTHERWISE

Nature of Losses allowed - Cross reference 165 with 1231 - Where is Casualty Defined?

Buist Rosenberg Shopmaker Rogers Fay Dodge p 818 Casebook

Pulvers v. Commissioner - Fear of mudslide damage caused a lowering of the property value - does that constitute a loss? Court: No. Why?  - Taxpayer uses the "Other Casualty Losses" clause of sec 165(c)(3)

--- Casualty loss definition Suddenness of the loss - unaware - Mold is probably not a casualty loss because its not sudden -

Mary Frances Allen v. Commissioner Taxpayer has burden of proof to demonstrate stolen casualty loss.

Equipoise

823, 823.1 Elements of Casualty 1) Casualty has to be identifiable 2) Must damage the property 3) Sudden, unexpected, and unusual in nature.

Prone hypothetical; p 823; diamond lost - fails the sudden element

Emanuel: 94, 111-113, 102, 114 827. 827.1(a) Car Casualty Loss: Basis: 10,000 FMV: 8,000 After Accident Value: 1,000

Vase Basis: 10,000 Insurance money realized: 20,000 FMV of Vase 20,000 After accident its 0

1.165-7

(a) Loss 5,900 (lesser of the FMV before/after OR the basis - Code reduces by 100 - Insurance pays 1,000 (b) Personal Casualty Gain on Vase: 10,000 (c) Character is Capital Asset (165(h)(2)(b)) - if vase is collectable - 10,000 LTCG with (5900) is 4100 LTCG at 28% rate (no like with like, then you deduct from the highest rate first then step down to the 25% then step down to 15% if left)

(d) Adjusted Gross Income = 30,000 if over 10% then all is deductible?

(e) SKIP FOR NOW (f) - 5900 loss from car and 2,000 from the vase (overall) thus its a 3900 loss See a loss

165(h)(2)(A) yields: 2900

(g) No difference, tax still treats it as if you filed the insurance claim irrespective of whether you filed or not.

Personal Casualty 165(h)(4)

(h)(1) Must rise above 100, and the amount above 100 is deductible (1,000 casualty means 900 is deductible)

165(h)(2)(b) if personal casualty gains exceed personal casualty losses.

Not getting jammed up on depreciation

=XII Recovery of basis through depreciation and amortization= Casebook 406-46, Appendix pages 1872-73. Code sections 167(a), 168, 179, 197, 274(d)(4). Note §§ 280F, 464. Problems pp. 431, 441(#1), 445(#1(a),(b)). In the last problem, add this to the facts: the property was purchased February 8, 2010. This is a lot of reading for relatively little class time, but more than half of it is detailed explanation by the authors of material that you should have little difficulty figuring out by doing the problems. I am not as interested as I once was in having you learn to compute depreciation, but I do think you should do enough to have some sense of where the numbers come from. Go straight to the problems and do the depreciation for the first couple of years, referring to the text only as you need it.

Depreciation is treated as an annual operating expense; thus allowed as a deduction each year for the total deprecation. – it is a cost spreading device over a period.

Prerequisite for deduction: §167(a) and §168(a) restrict the depreciation deduction to either: 1) Property used in a trade or business or 2) property held for the production of income.

Useful Life: only a piece of property that has an identifiable useful life to the taxpayer can qualify for the deduction.

Goodwill has a useful life of 15 years - §197

1.1: For an item with a useful life of 8 years, initial cost of 8,000 and after 8 years has a salvage value of 2,000 – the annual depreciation deductions allowed each year for 8 years is 750. [8,000 minus 2,000 = 6,000; 6,000 * .125 = 750.00]

Different Methods [P410 CB] : Straight Line method (described in 1.1) Accelerated Method: Must be expressly authorized. Declining Balance Method

Basis Adjustments §1016(a)(2) May only draw deductions down to the basis; the basis for depreciable property is a limited supply of deductions from which the taxpayer may draw in accordance with one of the various methods until the supply is used up.

Depletion – the oil drillers equivalent to the cobbler’s deprecation.

Sharp v. United States

Essential to all questions of deprecation

1) Applicable Depreciation Method 2) Applicable Recovery Period 3) Applicable Convention

441.1 1) 200% Method 168(b)(1)(A) 2) Recovery Period: 168(c) - 6 Year Class Life (What does class life mean?) - 168(e) Class Life 9 year class life is 5-year property 168(e) then to 168(c)

Class-Life is 15 years, then it is 7 year property; its recovery period (168(c)) is 7 years.

3) Convention: Half-Year Convention 168(d)(1) - Regardless of when you bought it, you treat it as if you bought it in the middle of the year - thats the year of purchase (or putting in service). - Property disposition is still treated as half year. Sold in april - treated as if it was sold July 1

> thus (according to p 1890)

Bought property for 300,000 Salvage value 30,000 (Salvage value is 0 168(b)) Depreciation for first year is 60,000 (Allowed to deduct 60,000 from taxes)

§1012 Cost Basis is 300,000 After year 1, the adjusted basis is 240,000

Year 1: 60,000 Year 2: 96,000 year 3: 57,600 year 4: 34,560 Year 5: 34,560 Year 6: 17,280

year Full Year Adjusted Basis On Half-Year convention (Amount Deductible) 1 60,000 240,000 2 96,000 144,110 3 57,600 86,400 4 34,560 5 34,560 34,560 6 17,280

Counterfactual: Selling something in year 5:

Adjusted basis in year 5 is 51,840 (After 4 years of depreciation at the time of sale) Sell for 60,540 Amount Realized is 60,540 Gain Recognized: 26,000

If sold to spouse - gain recognized: 0 Spouses basis: 34,560

Not a capital asset as it is a 1231(a)(2) used in trade and subject to depreciation 179 election Dollar Limit 179(b)(1) Tangible personal property

179 election Counterfactual 250,000 is allowed thus 50,000 is what we are allowed to deduct from Expense deduction

250,000 is the 179 deduction - reduce the basis of the 300,000 down to 50,000 Basis is 50,000 the depreciable basis is

- 50,000 - 40,000 - 24,000 -

1245 Property: tangible personal property

Definition of 179 Property: 179(d)

Problems pp. 431, 441(#1), 445(#1(a),(b)

431

441.1 (only)

445.1(a)

445.1(b)

445.1 Depreciate land? No Depreciate building? Yes Residential? Yes - renting to

Depreciator

1) Applicable Depreciation Method 2) Applicable Recovery Period 3) Applicable Convention

1) Method Straight Line Method 168(b)(3)(B) 2) Recovery Period 168(c) 27.5 year 20-year class life 3) Mid-Month Convention 168(d) Flush Language

Table in page 1891 for buying

to sell (Disposition) its reverse

to Buy: Jan is Month 1 To Sell: Jan is Month 12

Figure out mid month - use

When selling, you use year 1. - to calculate adjusted basis - you subtract the depreciation deduction from x years for adjusted basis

Gain or loss on depreciable assets

=XIII Gains and losses on dispositions of depreciable property= Casebook 746-63, 770-79; re-read the discussion of the character of personal casualty losses, pp. 826-7. Code sections 61(a)(3), 64, 65, 1001, 1011, 1016(a)(2), 1231, 1245, 1250, 1(h)(1)(C), (D), (E). Note §1239. Problems pp. 762-63 (Probs. 1(a)-(f), 3), 770, 776, 779. There may be an additional handout problem relating to §197 intangibles.

Depreciations are expenses that reduces your tax bill of ordinary income - non cash deduction

Gain on a depreciable asset - tax the depreciable deduction as ordinary income -

762 problems

1231 gains are greater than losses: then always Long Term 1231 Flush Language 1231 Losses are treated as Ordinary Gain or Loss

If its a capital asset - go to 1221 - if its not a capital asset, go to 1231; if its not a 1231 (defined in 1231(b)) then (go up the christmas tree)

1231(b) definition Property Used in trade or business Subject to depreciation (167) held for more than 1 year (and real property used in trade or business held for more than 1 year which is not: (A)/b/c/d

Its not a capital asset, its a 1231 asset

762.1(a) Land used in business for 4 years Sold for 20,000 Cost Basis 10,000 Received 16,000 (for other land purchased for 18000) -> 1231 gain from the real property

1231(a)(3)(A)(i) and (ii) Main Pot Gain / Loss

(i) Gain of 10,000 (ii) Loss of 2,000

Pia: "Do not Net and then move on" - show all work Long Term Capital Gain of 10,000 Long Term Capital Loss of 2,000

8,000 Taxed at 15% LTCG

762.1(b) Inheritance Date of Death Value = basis 16,000 Land 1 Sold for 20,000: 4,000 gain 18,000 Value at Death 16,000: 2,000 loss

Both were not held for more than a year - 1231? Tack the holding period from the uncle under 1223(9)

4,000 gain and 2,000 loss

762.1(c) Depreciated Building Straight Line Method Sells for 15,000 Basis = 5,000

Main pot gain of 10,000

1) Applicable Depreciation Method 2) Applicable Recovery Period 3) Applicable Convention

Car destroyed Car used in business received 4,000 insurance - 1.165-7

Little Pot: (C) Involuntary Conversions Little Pot first, then put it into the Main Pot - Reads like 165 (Casualty Loss) plus trade or business (Non-Personal Use)

FMV Before/After: 8,000 / 0 Adjusted Basis/ Insurance or Salvage: 6,000 / 4,000 (From Insurance)

Lesser of the two: thus 2,000 loss (In the sub pot - it fails the sub pot thus it does not go into the big pot)

Main pot gain: 10,000 LTCG

LTCG: 10,000 LTCL:

STCG: STCL:

Ordinary Loss: 2,000

(d) Painting - bought for 4,000 / destroyed / received 8,000 FMV Decreased by 8,000 Received 4,000 gain (which is less than 8,000)

SubPot has 2,000 loss and 4,000 gain thus it passes (C) and goes into main pot:

LTCG: 10,000 at 15% and 4,000 at 28% LTCL: 2,000 (Car) 15%

STCG: STCL:

Compare like with like Put the 2,000 against the 10,000 gain and you have 8,000 @15% with 4,000 @28%

762.1(e) Same as above and: Sells land used in business for 30,000 Basis in land: 50,000

1231 Losses exceeds the 1231 gains thus its treated as all ordinary: Total Ordinary Loss: 8,000 Adjusted Basis Fair Market Value Gain Character Inventory 8,000 16,000 8,000 Not 1231 Asset Not Capital Goodwill 0 20,000 20,000 Not 1231 Is Capital Asset Land (used in business) 30,000 20,000 (10,000) (loss) 1231 Building (used in bus) 35,000 50,000 15,000 1231 Machinery & Equip 12,000 14,000 2,000 1231

Total: 85,000 120,000

(f)

(g) Skip

(h) Skip

(i) Skip

3) really good

additional 20,000 noncompete - Wage not to work - ordinary income - §61 inventory gain: 8,000 Ordinary Income Goodwill LTCG 15%: All Main Pot because there is no casualty

27,000 LTCG at 15%

If someone buys something over FMV - at arm's reach - that is good will (Good will is a capital asset)

1239 Sell depreciable property to related party

1239 Family Defined: go to 267

Family Digested: Taxpayer's Family - T's Parents and up - T's Children and Grand Children etc. - Brothers and Sisters (Half or Whole blood)

Under 1239 - if T gains from selling Depreciable property to family member, then any gain is ordinary property.

770.1(a) 60,000 gain 1239 --> problem? Depreciator only owns 40% (actual and constructive ownership) - Not violating 1239 so do it all in 1231

770.1(b) Depreciator owns (Constructively and actually) owns more than 50% thus its ordinary income.

(c) 267(c)(4) and (c)(5)

Midterm Number or final number 770.1(d) Sale to Controlled Entity

What would 1239 apply to? Only to the building - not to the land (§167)

1231 main pot gain --> land

So, the building sale is ordinary income; the land is 1239 (skip e)

(f) Look to transferee and how he is going to use it to determine if it is business

pg 776 To determine the basis of depreciable property: 1) Applicable Depreciation Method 2) Applicable Recovery Period 3) Applicable Convention

If 1245 doesn't exist it'd be a 1231 1245 makes it taxed against ordinary income

Define "Recomputed basis"

Adjusted basis: Cost Basis minus Depreciation Recomputed: Adjusted Basis plus the depreciation

Take the lower of the Recomputed Basis and the Gain - Tax that at ordinary income (Thus 30,000 at ordinary income)

1245 gain (ordinary income) 30,000

776.1(b) SKip C Elect to use 179? No difference

(d) Sell to Spouse 1245(b)(1) talks about gift - 1041 is about spouses (act like gift) When spouse receives the property - spouse will take a carryover basis of 0 and it will maintain the 1245 taint (Will have to take depreciation and recapture into account) - Carry's the 1245 taint

General rule for 1245: Recaptures as ordinary income any gain otherwise required to be recognized to the extent of any depreciation taken on the property. (So if you have gain and depreciation - to the extent that your gain fills up the deprecation bucket first, thats ordinary income - if you have gain left over it can go into the 1241 bucket)

(e) 100,000 = Deductible under 1245 1231: 10,000 is LTCG (if only gain for the year)

=XIV Nonrecognition= Casebook 889-92, 902-22. Code §§ 1031, 1033. All Regs under §§ 1031, 1033. Problems, pp. 909-11 (omit #1), 920-22. Chief Counsel Advice 200836024 (forward, reverse exchanges using qualified intermediaries. For your own use, read material on sale of personal residence 218-23.

What is amount realized (not even to section 61 yet) What is the amount recognized
 * The Path for each question**
 * The Path for each question**

P 909.2 Amount Realized - T Got: BLDG $70,000 (Like Kind With THe Property Exchanged) - T Got: 4,000 Cash (NonLike Kind) - T Got: Stock worth 26,000 (Not Like Kind) - Amount Realized = 100,000

Actual Basis: 10,000 Gain Realized 90,000

90,000 Gain Realized 30,000 Gain Recognized - main pot - considered LTCG taxed at 15% T's basis for the stock is 26,000 - 1031(d) Basis

1031(d) Basis + (Positive Adjusted Basis of Property Given) + (Positive Cash) Cash Given + (Positive Boot given other than cash) (Plus Gain Recognized) (Plus Liability Assumed by Transferor) (minus Cash Received) (Minus Boot Received other than cash) (Minus Loss Recognized) (Minus Liability Assumed By Transferee)

Should equal adjusted basis of property received

1031 only defers the gain - deferral of gain.

Adjusted Basis of Property Given = 10,000 Gain Recognized = 30,000 No Liabilities 4,000 Cash Received Boot Received other than cash = 26,000 Basis in Apartment Building = 10,000

Basis of the stock was its fair market value

Sells APT Building = 60,000 Gain Realized [This was the gain differed earlier]

1231 Gain -> Gains exceed the losses - therefore its LTCG

In Kind Property - Deals with real property, don't really care if it is improved - Real estate is real estate -

Non like kind means "boot"

1031 exchanges - No gain or loss shall be recognized - Solely for like kind

b) Gain Not solely in kind c) Loss not solely in kind

Figure out when to and not to use 1031

909.2(b) B's realized gain Received Unimproved farmland worth 100,000 because thats what he received for it - He Gave 70,000 APT Building, 4,000 Cash, and 26,000 Stock

The land for land is like kind - the other two are not like kind

Realized 70,000 4,000 26,000 Basis 30,000 4,000 40,000 §1031(a) §1031(c) Gain 40,000 0 (14,000) Recognized? 0 0 (14,000)

Boot received by B? --> No (He gave boot that is, the stock)

B can recognize the loss because 1031(c) does not apply

Stock Loss is a long term capital loss 14,000 loss Take 3,000 against ordinary income 11,000 carryover Take 3,000 as STCG and recompute --> Next Year

B's Adjusted Basis of property given is 70,000 (Land Plus Stock) Cash is 4,000 (14,000) in Loss for Stock

Look in the reg for the deferred gain

910.3 T Purchased land at a cost of 500,000 300,000 building; 200,000 Land Held as investment 300,000 Depreciation (Can take depreciation deductions? Yes)

1031 does apply

Basis of the building is 0 when transferred Gain = 400,000 Recognized? = 0

Land: Basis = 200,000 Gain 200,000 Recognized 0

Basis in the land received = 200,000 (Do the long calculus above)

Going forward, the land has a basis of 100,000 building has basis of 100,000

911.5 property is actually "worth" 400,000

A transfers his property to B in exchange for B's investment real estate worth 400,000

A's amount realized 500,000 Property: 400,000 plus (Assumption of mortgage) Debt Taken Over; 100,000 (Taken like cash)

A's adjusted basis= 200,000 Gain recognized = 100,000 (Take over of mortgage - because its like cash boot)

A's basis in B's property that A receives = 200,000

Holding period that A gets is - Tacked holding period 1223(1) - 1221 (capital asset, so it is a capital gain) - LTCG = 100,000

1231(d) xref with 1223(1)

B's amount realized is actually 400,000 FMV = 500,000 Mortgage incurred = 100,000

B's Gain Realized = 300,000 Gain Recognized = 0

B's Basis in A's Property = adjusted basis of 100,000

100,000 plus liabilities = 100,000 = 200,000 basis in property received Tacked holding period

--> Net the two mortgages B is taking on 30,000 of A's mortgage
 * a* Treatment of assumption of Liabilities: 1.1031(d)-2

A's amount realized: 470,000 Plus the 30,000 of the Liabilities that B is taking on A's adjusted basis is 200,000 A's gain recognized: 30,000

Assumption of Liability of 30,000 - Character: the underlying asset 1221 asset - Long Term Capital Gain 15% of 30,000

A's Basis [not complete] 200,000 property given Liability assumed by Transferor: 70,000 Minus Liability Assumed by Transferee: 100,000 [not complete]

1031(d) Basis + (Positive Adjusted Basis of Property Given) + (Positive Cash) Cash Given + (Positive Boot given other than cash) + (Plus Gain Recognized) + (Plus Liability Assumed by Transferor)

(minus Cash Received) (Minus Boot Received other than cash) (Minus Loss Recognized) (Minus Liability Assumed By Transferee)

B's Basis under 1031(d) +100,000 +100,000 (Liability Assumed by transferor) - Liability assumed by Transferee = 70,000 1031(d) Basis 130,000 B's amount realized: 470,000 Recognized --> 0

911.5(c) Net the cash against the assumption of Liability

When the dust settles - A is only getting 450,000 A's Basis is 200,000 Gain Realized 250,000 Gain Recognized: 50,000 (boot) Character: Long Term Capital Gain Adjusted Basis of property A Receives

200,000 Adjusted Basis of Property Given up plus cash 50,000 Plus Gain Recognized: 50,000 Liability assumed by Transferee = 100,000

Adjusted basis = 200,000 (Tacked Holding Period 1223(1))

Define Assumption of Liability Define Discharge of Liability

B's amount realized: B's adjusted basis

A's property is worth 450,000 Still Subject to 100,000 Plus 50,000

B Amount Realized: 350,000 Plus Cash Amount Realized: 400,000 B's Adjusted Basis in HIS property: 100,000 300,000 Amount Realized Gain Recognized 50,000

B's 1031(d) Basis: Plus 100,000 Basis in property given Plus 50,000 gain recognized Plus 100,000 Liability Assumed by Xferor Minus 50,000 Cash Received

$200,000 1031(d) Basis

1031(d) Basis + (Positive Adjusted Basis of Property Given) + (Positive Cash) Cash Given + (Positive Boot given other than cash) + (Plus Gain Recognized) + (Plus Liability Assumed by Transferor)

(Minus Cash Received) (Minus Boot Received other than cash) (Minus Loss Recognized) (Minus Liability Assumed By Transferee)

=XV Installment sales= Casebook 830-48. Code sections and Regs cited at casebook 830, 832, 835, 837 (omit §453A but do read the casebook material relating to it). Problem #1 pp. 846-47.

453 says, "Whether your cash or accrual" it doesn't matter - if one payment comes after December 31 of (this year) then you're in 453.



If you decide to elect out, then Cash or Accrual Method matters - Cash  - Accrual

Installment Sales CB P 830 § 453(b)(1) Definition: Sale or disposition of property wherein at least 1 payment is to be received after the close of the taxable year in which the disposition occurs.

(c) Installment Method Defined Ratio of payments received in that year to the total contract price.

(d) Taxpayer may elect not to have 453(a) apply to him.

(f)(3) “Payment” does not include a note of indebtedness

CB P 832 453(j)(2) Selling price not readily ascertainable

CB P 835 – When 453 is inapplicable 453(b)(2) When “Installment Sale” is not applicable: - Dealer Dispositions - Inventories of Personal Property

(f)(6) Like-Kind Exchanges – if described in 1031, then total contract price is reduced to A) B) Gross Profit will be reduced to take into account any amount not recognized because of 1031(b) AND C) Payment means (except in (b)(1)) does not include property permitted to be received without recognition of gain. - Also applies to exchange described in §356(a)

(f)(7) Depreciable, look to §167

(g) Sale of Depreciable property to related persons Subsection (a) will not apply:

(i) Recognition of recapture

(k)

CB P 837

Example of Installment Sale and the effects thereof. Buyer wants to buy a property worth 400,000 - Will pay Seller the 400,000 over 4 years. -

Characterization and 453 The character of the gain over the various years retains the same character as if the sale had been completed all at once.

453(d) election:

846.1 Seller owns Long Term Capital Asset – Investment Land Seller’s Cost basis in the Land 2,000 Buyer agrees to pay 2,000 Cash up front plus 4 Notes each with 2,000 Face Amount [1,750 FMV]

Accounting Methods §1.446-1(a) Cash Method Taxpayer includes income when it is received and claims deductions when expenses are paid. - Constructive Receipt 1.451-2 - Cash Equivalence

Accrual Basis Taxpayer includes items when they are earned and claim deductions when expenses are incurred.

(a) Seller is a Cash Method Taxpayer 453(f)(4) The notes are considered as receipt of payment as he is a cash method taxpayer.

2,000 LTCG cash is in current year 7,000 LTCG in current year as the cash method taxpayer is considered to have constructively received payment as he could sell them for market value as they are Readily Tradable.

(b)

Loss from an installment method happens in the year the sale happens.

Installment Sales CB P 830 § 453(b)(1) Definition: Sale or disposition of property wherein at least 1 payment is to be received after the close of the taxable year in which the disposition occurs.

(c) Installment Method Defined Ratio of payments received in that year to the total contract price.

(d) Taxpayer may elect not to have 453(a) apply to him.

(f)(3) “Payment” does not include a note of indebtedness

CB P 832 453(j)(2) Selling price not readily ascertainable

CB P 835 – When 453 is inapplicable 453(b)(2) When “Installment Sale” is not applicable: - Dealer Dispositions - Inventories of Personal Property

(f)(6) Like-Kind Exchanges – if described in 1031, then total contract price is reduced to A) B) Gross Profit will be reduced to take into account any amount not recognized because of 1031(b) AND C) Payment means (except in (b)(1)) does not include property permitted to be received without recognition of gain. - Also applies to exchange described in §356(a)

(f)(7) Depreciable, look to §167

(g) Sale of Depreciable property to related persons Subsection (a) will not apply:

(i) Recognition of recapture

(k)

CB P 837

Example of Installment Sale and the effects thereof. Buyer wants to buy a property worth 400,000 - Will pay Seller the 400,000 over 4 years. -

Characterization and 453 The character of the gain over the various years retains the same character as if the sale had been completed all at once.

453(d) election:

846.1 Seller owns Long Term Capital Asset – Investment Land Seller’s Cost basis in the Land 2,000 Buyer agrees to pay 2,000 Cash up front plus 4 Notes each with 2,000 Face Amount [1,750 FMV]

Amount Realized 10,000 Total Contract Price: 10,000 Gross Profit: 8,000 - Gross Profit %: 80%

Seller received in year of disposition 2,000 which is 1600 income 2,000 y1: 1600 15% 2,000 y2: 1600 15% 2,000 y3: 1600 15% 2,000 y4: 1600 15% 2,000 y5: 1600 15%

400 each year is ROB (Return of Basis)

Character 1221 (Investment land)

Accounting Methods §1.446-1(a) - IGNORE ACCOUNTING METHODS Cash Method Taxpayer includes income when it is received and claims deductions when expenses are paid. - Constructive Receipt 1.451-2 - Cash Equivalence

Accrual method Basis Taxpayer includes items when they are earned and claim deductions when expenses are incurred.

Total Contract Price - 10,000

(a) Seller is a Cash Method Taxpayer 453(f)(4) The notes are considered as receipt of payment as he is a cash method taxpayer.

2,000 LTCG cash is in current year 7,000 LTCG in current year as the cash method taxpayer is considered to have constructively received payment as he could sell them for market value as they are Readily Tradable.

(b) 2,000 LTCG Cash in Current Year 1750 or 2,000 is amount realized in each year for the next 4 years.

Total contract price is 10,000

2,000/10,000

1/5 of each amount realized is the amount recognized in year realized.

(c) 453(i)(1)(A) recapture income is recognized in year of disposition. 453(i)(1)(B) Gain in excess of recapture income is taken as installment method.

Accrual Method Taxpayer would recognize the 3,000 recapture in the current year and 7,000 over the next 4 years. - What is effect to total contract price? - is it 1,000 amount realized (with 1/5 recognized?) for year 2 and 2,000 for year 3, 4, 5?

You add the 3,000 recapture to the adjusted basis - thus you have 5,000 adjusted basis

Gross Profit % is 50% Y1: 2,000 received the 1245 3,000 is taxed as ordinary income 1,000 is 1231 (Sticks as 1231 gain) Y1: 4,000 Taxable Income Y2: 2,000; 1,000 1231 @15% (as long as its the only thing in the pot) Y3: 1,000 etc..

(d) 453(g) Then Subsection (a) does not apply (1239 applies) To Controlled Entity: All Payments to be received (as modified by (ii)) are treated as received in the year of disposition. (ii) contingent then basis is recovered ratably.

2 ---> if tax avoidance is not the primary purpose... then (1) doesn't apply.

8,000 gain ordinary income in year of disposition

(e) 1.453-12(a) and (d) - unrecaptured 1250 gain? Maybe otherwise 1250 is not in play 1245: No 1239: No 1231: Yes

1231 MP Gain Maintains the LTCG

5,000 Depreciation - Fill the 5,000 bucket at 25% first y1: 1,600 @25% y2: 1,600 @25% y3: 1,600 @25% y4: 200 @25% and 1400 at 15% y5: 1600 @ 15%

(f) Subject to 2,000 mortgage - and buyer Assumes the Liability Total Contract Price: 8000 - The mortgage assumed up to the basis Gross Profit is 10,000 minus 2,000: 8,000 each payment is all taxable at 15% (All the character of LTCG)

1.453-4(c)

(g) 3,000 mortgage eats up the 2,000 basis and is considered 1,000 payment.

Y1: 10,000 reduced by 2,000 (because of Mortgage) Gross Profit: 8,000 100%

2,000 cash payment 1,000 constructive payment at 15% (LTCG) [1.453-4(c)] ->

Y2: 2,000 100% at 15% Y3: 2,000 100% at 15% Y4: 1,000 100% at 15%

(h) Basis of these notes is the face value (8,000) minus the income 1600 income in each note: 4@400 --> return of basis = 400

each note has 400 basis in it. 5*400 = 2,000

Character maintains 453B Must pick up gain

- The Buyer: 1012 Cost Basis of 7,000 - note matures and he receives 8,000 (Just income)

(i) Must still recognize the gain - Dad still recognizes (Other Disposition) - The carry over basis is 7,000 (for Daughter) Test Q? - Don't recognize gain if transfer between spouses -

1031 exchange - does not apply - Can exchange note for note and 1031 does not apply -

846.2 Rental Building 1231 Adjusted Basis of 200,000 Value 500,000

buyer purchases building with 5 100,000 interest bearing notes one to be paid per year.

Client borrowed 200,000 pledging the 5 notes; securitizing the 5 notes. 453(i) test q?

453A(d) Pledges - Securitized the notes for 200,000 Y1- Thus *60 120,000 of income 1231 gain main pot Y2- Y3- Y4- 100,000; 60,000 gain 1231 gain main pot that year

847.3:

=XVI Election out of §453, contingent sales under §453= Casebook 832-35, 848-56. Code section 453(d), (j)(2). Reg. §§ 15a.453-1(c),(d), 1.1001-1(g)

Problem 3, p. 847, and problem pp. 854. Make the following modification to the facts of both problems: Taxpayer receives in years 1-5 respectively $1,000, $5,000, $7,000, $12,000 and $15,000. In years 6-10 she receives $15,000 each year. There are no payments after year 10 because new technology has made the machines obsolete. If Mrs. Logan sold her stock in 2004 and received the same payments as in Burnet v. Logan, what would she report if she did not elect out of §453? If she did elect out? Assume for this purpose that her basis was $200,000. Problem, p. 856.

Still a 25 year deal

100,000 cost basis thus 4,000

Stated Maximum or Fixed Period? 15a. 453-1(c) - P 1231 of the code Return of basis over 25 years Allowed to take 4,000 every year for 25 years.

Can only take as much basis as you have payment

Y1 1,000 payment (1,000 LTCL Into Brackets) Y2 5,000 payment ( [7,000 allowed to recover total]) Y3 7,000 Payment ( - Thus 1,000 is gain attributable to sale (LTCG) Y4 12,000 Payment 8,000 attributable to sale (8,000 LTCG) Y5 15,000 payment 11,000 attributable to sale

At the end of year 10, write off remaining 60,000 as LTCL

---

Stated Maximum Selling Price 300,000 200,000 Gross Profit 300,000 contract price

2/3 * each payment = the gain for each year 

2/3 * 15,000 = 10,000 LTCG

P 854.1 Electing out of installment sale 100,000 cost basis 50,000 cash and 2% of earnings over life of firm.

received 2,000 every year

Must be able to show too contingent to give value, no FMV, purely speculative to give value. --> for election out of 453 (that is, to exercise 453(d) )

The 50,000 cash is return of basis the first 25 2,000 payments is excluded the 26th 2,000 payment is LTCG.

-- If you do not elect 453(d) then Reg: 15a. 453-1(c)(4) applies (page 1234 code)

Payment Basis Recovery Gain 1,000 1,000 0 (2,000 carryover) 5,000

=XVII Annuities and life insurance= Casebook 153-62. Code sections 72(a)-(d), 79(a), 101. Reg. §§ 1.72-5(a), 1.72-9 (Table I), 1.101-1. Problems pp. 156-7, 161-2.

101(a)(1) starts out to exclude proceeds from insurance policies from gross income from recipients.

Face Amount of policy is the amount a fixed sum is to be paid upon the death of the insured.

Terminally ill vs chronically ill IRC 101(g)(3)(D); (g)(4)(B)

IRC 101(c) and (d) are typically mutually exclusive. Typically when a recurring payment substantially eats into the principle amount of the insurance (d) applies.

3 Hats of Insurance 1) Owner of Policy 2) Insured 3) Beneficiary

Problems 156.1(a) 100,000 gain; 100,000 excluded from Gross Income 156.1(b) 6,000 interest Interest is to be considered as part of Gross Income for current year. 101(c)

156.1(c) Daughter is to receive 12,000 per year. 25 year Life Expectancy. 102(b)(1) Apply? (If it applies, then such amount is not excluded from Gross Income.

The first 100,000 is excluded 25 year life expectancy = 4,000 excluded per year 12,000 per year for 25 years is 300,000 - 8,000 income each year.

Living beyond the life expectancy 1.101-4(c) --> 8,000 is still income each year (4,000 is still excluded every year) 156.2(a) 79 does not apply (GLI is when employer buys for wife being beneficiary) 100% excludable

156.2(b) 101(a)(2) cover transfers for the 20,000 consideration. The exclusion will not exceed the 20,000.

If he dies, and the proceeds are paid to the employer, the employer will incur: 980,000 in gross income (taxable).

156.2(c) (c) Shareholder modification? How does being a shareholder affect life insurance? 101(a)(2)(B) – it means that 101(a)(2) does not apply to the company, meaning the company can exclude all 2 mil from gross income.

156.3(a) 100,000 Premium Face Value 40,000 Cost

20,000 gain to insured (sale of Capital Asset)

Sells to Child for 60,000 FMV - Insured dies and child collects 100,000.

Child can exclude 60,000 of the 100,000



Part Sale Part Gift 

(b) 1041 apply? No Gain Recognized Reg 1.101-1(b)(2) Gratuitous transfer? (no transfer for value) If yes, then deductible amount is i) amount which would have been excludable by transferor AND ii) any premiums the Transferee paid.

Thus, 100,000 excludable? 40,000 plus 60,000?

(c) Terminally Ill 101(g)(3)

Sell for 80,000 FMV to Viatical Settlement - VSP collects 100,000

Insured bought for 40,000 --> sells for 80,000 - Sale to Viatical is treated as if it was payout of the policy 

Beneficiary is changed to the Viatical - The Viatical company is taxed on the 20,000 gain when the insured dies. - Ordinary Income (Not a sale or exchange)

Define Viatical 101(g)(B) - Person who is certified (or in the business of) taking assignments of life insurance contracts on the insured’s life.

Annuity - an arrangement under which one buys a right to the future money payments. 3 Basic Classes of Annuities: 1) Single Life Annuity Fixed money payments to the annuitant for her life after which all rights cease. 2) “Self and Survivor Annuity” Fixed payments are made to an annuitant during her life and are then continued to another after the annuitant’s death. 3) Joint and Survivor type. pays amounts jointly to two annuitants while both are living. Then payments are continued to the survivor.

Section 72 governs annuities; 72(a), (b), (c).

161.1 Single Life annuity with no refund feature for 48,000 72,000 is expected return (a) what portion of 3,000 is taxable 24 Years * 3,000

Investment in contract: 48,000 tax free 48,000 / 72,000 is tax free 2/3 is tax free each year 1/3 is included as ordinary income each year

Only pay tax on the amounts over and above basis.

72(b)(2) Different than Life Insurance Pay Out - if you outlive the annuity - then you're taxed on 100%

3,000 x 9,000 x 2/3 = 18,000

48,000 -18,000 =30,000 --> Deduction - Net Operating Loss (ordinary loss)

34 years life expectancy Joint and Survivor 76,500 investment 102,000 total return

3/4 excluded each year 

2250 excluded 750 included in income

=XVIII discharges of Indebtedness= Casebook 163-82. Code and Reg provisions cited at head of chapter, p.163. Reg. §1.1001-2 Problems pp. 180-82. Seto Article, “Inside Zarin,” 59 SMU L. Rev. 1761. This is optional, but I think you’ll find it interesting, at least if you find the Zarin case interesting.

§108 exclusions

180.1(a) Settle a 10,000 debt Settle it for 7,000 cash

3,000 income in taxable year (§61 income)

Bad Debt (non business debt) Short Term Capital Loss (fiction) 166

1(b) Give a painting with basis and FMV of 8000 - Income of 2000 - Painting

1(c) 5,000 basis 8,000 FMV 2,000 discharge 3,000 for painting total of 5,000

the 3,000 for painting should be at 28% LTCG and the 2,000 is ordinary income 

1(d) Remodeling Poor has 10,000 services income 

1(e) 8,000 Services Income and 2,000 Cancellation of Debt income 1(f) Old Colony Trust: 7,000 Ordinary Income plus 3,000 debt discharge 102(c) Can't be Gift 180.2 Mortgagor purchases parcel of land Recourse Mortgage (can get assets other than the property that has been mortgaged)

Purchase land for 100,000 20,000 Cash 80,000 Loan (mortgage) Land is security for the note

Land increased in value to 300,000

1.100-2(a)(1)

Debt over FMV

Recourse Debt FMV of underlying property matters - how much realized

Recourse Debt - Check: 1) FMV of property (even other than the secured property) 2)

181.2: 1) Recourse: FMV Matters 70,000 LTCG at 15% + 10,000 §61 CoD 2) NonRecourse: FMV doesn't matter 80,000 Gain

Over the FMV is Cancellation of Debt (Cancellation of Indebtedness) income

180,000 mortgages 170,000 amount realized Basis = 100,000 70,000 gain realized 70,000 recognized 1221 held for investment 

last 10,000 is Cancellation of Debt Ordinary Income §61 Income - Recourse Debt - the FMV Matters

--

If it was Nonrecourse, include all debt in amount realized 180,000 no cancellation of indebtedness if it is nonrecourse  80,000 gain

-- When the bank take over the deed in lieu of foreclosure - redemption period - Owner can come back and get - Transaction doesn't close until redemption period ends. Can waive right of redemption

--

§108 - saving Grace Can exclude discharge of indebtedness under - Bankruptcy - insolvency FMV of assets = 100,000 Liabilities = 350,000 Can discharge up to 250,000 in debt without having to pay as ordinary income - 982 - must file form 982. Uncle Sugar - Must let him know in a timely tax return.

180.2 Mortgage is 180,000

180.3(a) B Borrows 100,000 from C B Purchases Depreciable property at a cost of 100,000

Adjusted Basis and Value are still 100,000 Debtor accepts 60,000 to discharge - 40,000 §61 income - No Exclusion (Solvent and not bankruptcy)

b) §1017 matter? 108 Insolvency or Bankruptcy is limited by 1017(b)(2) (c) Creditor is also the Dealer Purchase Price Adjustment

FMV is 100,000 Debt is 100,000 (Guy is still solvent) Reduction of 40,000 Basis after Depreciation is 35,000 Lender is Dealer 108(e)(5) Purchase Price Adjustment up to the 35,000 so 35,000 is excluded - Last 5,000 is Income (COD) (c) Insolvent Taxpayer FMV 100,000

Insolvent - then 108 says exclude discharge of indebtedness

Liabilities 225,000 125,000 insolvent (Debt is higher than Assets by 125,000)

Good News: 40,000 is Income, but it is excluded. Bad News: Reduction (Take away) of the basis 1017(b)(2) ??? (Maybe not)

225,000 reduced by 40,000 = 185,000

 --> 1017(b)(2) Cost basis of Ambulances = 100,000 --> Don't have to reduce basis yet, because it didn't exceed the limit under 1017(b)(2)

1017(b)(2) Limit = The Excess of The excess of Basis immediately after discharge OVER The liabilities immediately after discharge

FMV of Property = 100,000 Liabilities of 225,000 Insolvent by 125,000 150,000 is being discharged (75,000 remaining) <Equity> 25,000 (of discharge) is taxable 125,000 is excluded [The amount of insolvency is excluded] 108(a)(3)

Cut down the basis of the ambulances from 100,000 down by 25,000

Basis In Property after Discharge is 75,000 Liabilities after Discharge is 75,000

If Cost is greater than the amount Discharged, then ??? If Cost is Less than amount Discharged, then ???

(d) 30,000 net operating loss

FMV is 100,000 Basis is 100,000 225,000 Liabilities

Bank agrees to reduce debt by 40,000

NOL: Net Operating Loss is Good General Business Credit is written off Minimum Tax Credit (Written Off) Capital Loss Carryovers (Written Off) --> then get to basis reduction

Reduce Basis? No, because when you'd o 1017 (b) you don't have to write the basis down yet because "This Number" is negative. [100,000 (185,000) = (85,000)

Wipe off the 30,000 NOL first <Cant use against other income> 225,000 minus 40,000 is 185,000 <Same Result as Before>

(e) Liabilities exceed his assets by 25,000 125,000 Liabilities

15,000 Income 25,000 Excluded <Insolvency Exception>

100,000 85,000 Positive 15,000

New Basis (after discharge) is 85,000

1017(b)(2) Limit = The Excess of The excess of Basis immediately after discharge OVER The liabilities immediately after discharge

Decedent owned friend 5,000 Nephew owned Decedent 10,000 <Solvent Estate> Balance Sheet>

4(a) Decedent's Estate has taxable income for the discharge of indebtedness

4(b) Dauberstein test? (Case with intent of giving a gift disinterested generosity)

4(c) Will states do not collect on debt: Looks like inheritance

-- When Insolvent: If Amount Discharged is Greater than Liabilities - All of AD is Income that is Excluded If Amount Discharged is Less than Liabilities - AD is Income that is not Excluded

Formally define Insolvency - 108(a)(1)(B) - Debts larger than FMV of Assets - Must also take into account stocks and bonds (etc) to define as insolvent -

Recourse vis a vis Non-Recourse

Recourse:

=XIX Damages, etc.= Casebook 183-95 Code section 104(a)(2), (3), 105, 106. Reg. § 1.104-1(c), (d). Problems pp. 186-7. 194-5.

186.1(a) 8000 excluded from gross income 500 included in gross income as interest income

1(b) Land Worth 8,500 Basis 2,000 Debtor has 6500 income recognized probably 1221 Capital Asset 15%

(c) Business Contract Breach 8000 lost profits 16000 punitive

24,000 income, ordinary income - Glenshaw Glass *


 * Business punitive damages are taxable**


 * (d) (1)**
 * 4,000 basis in the Good Will**
 * Worth 10,000 at time of breach**


 * Good WIll totally destroyed**
 * 1.104(1)(c) Damages Received**
 * 6,000 not taxable**


 * (2) P Recovers 4,000 Goodwill was only partially destroyed**
 * - Only recovery of capital 4,000 excluded**
 * - Recovery of Basis**


 * (3) Recovers 3,000 because Good WIll was worth 7,000 after breach**
 * 3,000 is tax free with 1,000 left over (in basis)**
 * - Basis after suit is 1,000**


 * 194.1**
 * 104(a)(2) Damages received by suit or agreement on account of**


 * 1.a) Excluded**
 * 1.b) 50,000 of the recovery is allocated as compensation for scheduled performances (Compensation for employment)**


 * 50,000 is (Excluded 104(a)(2) )**
 * 50,000 is excluded**


 * 1.c) 100,000 damages; 200,000 punitive damages are <TAXABLE> [not excludable]**


 * 1.d) Excludable [On Account of]**


 * Scar Tissue Test then you're under 104**
 * - Cut off a limb you're fine.**


 * 1e) Not a personal physical**


 * 1f) non-physical so its taxable**


 * 1g) Wrongful Death 104(c) (1)**
 * - Exclude from Tax**


 * Skip 2**


 * 195.3(a)**
 * 20-year life expectancy**
 * 1 Million is deposited in a money market account paying 5%**
 * ---> Not a Structured Settlement<--**


 * (b) Structured Settlement**
 * 1 million invested**
 * 2 million expected**


 * Annuity Review:**
 * 100,000 payments per year for 20 years**
 * 50,000 excluded each year**
 * 50,000 included**


 * Life Insurance Annuity is**
 * Different than**
 * Annuity**


 * Outlive an annuity --> then the exclusion ends**
 * Outlive a insurance annuity --> the exclusion continues at the same rate**


 * [Net Operating Loss when you die before the annuity ends]**

If there are losses, then how were those losses funded? If there are gains, who is getting the cash?

(c) All Excluded 104(a)(2) Periodic

=XX Marriage, divorce and separation= Casebook 928-41, 196-209, 218-26. Reread the first two paragraphs of the section on “Property Settlements,” pp. 209-10. Code sections 71, 215 Problems pp. 940 (#1(a-b)), 204-06, 219-20.

Problems on 204 Skip 2

1041 IS ONLY TRANSFERS OF PROPERTY 71 is money

204.1: 71 Money Heather gains income, but it is not recognized under Alimony: Person that pays it, it is a deduction Person that receives it, its income

71(b)(2)

204.1(b) Can he use an IOU? No, is not an alimony payment.

204.1(c) Art Work transferred in satisfaction of the 10,000 Incident to the divorce or cessation of marriage 1041

204.1(d) non alimony

204.1(e) non alimony . 204.1(f) not alimony; more like an annuity or property settlement

204.1(g) qualify it as alimony 71(b)(1)(D) 204.1(h) 10,000 qualifies as alimony and 5 does not qualify as alimony. 15,000 is not deducted nor included

204.1(i) not alimony - cant live in same house 71(b)(1)(C)

204.1(j) Alimony just cant file joint return

PG 208

208.1(a) Cash Payments to Q&A 6 Reg Alimony payments to the landlord

208.1(b) Mortgage Payments per month - Q&A6 is Alimony

208.1(c) Mortgage Payments [Is NOT Alimony - owned by Tom] Real estate Taxes [Not Alimony - its owned by Tom] AND Upkeep Expenses [Not Alimony - its own by Tom she is living there]

Upkeep expenses cannot be deducted - Not Alimony [Payments to maintain property are not payments to spouse]

208.2(a) Life Insurance Policy he is Owner He is Insured She is Beneficiary

Brad Transfers ownership to Jen 101 - Transfer for Value -Value is the decrease in the alimony REVIEW 208.2

208.2(b) It is alimony

(c) 5,000 purchase is alimony the rest of the 5,000 payments are not alimony

d) Like paying the Landlord Q&A6 Is Alimony - On Behalf of the Spouse (e) Q&A 6 - She would get alimony if you made her the owner and beneficiary - So if he retains ownership its not alimony - incidence of ownership -

=XXI= “Ethics Across the Curriculum.” (1 hour) Note: it is possible that this assignment will be replaced by one involving representation of multiple clients. If so, we will probably cover that assignment after #22.

=XXII Assignments of income; the "kiddie tax"= Casebook 250-83. Code section 1(g) Problems pp. 262-3, 282-3, 941 (#3) Note discussion of Poe v. Seaborn, Casebook pp. 929-30.

=XXIII Introduction to deductions for business expenses= Casebook 318-63. Code sections 161, 162(a),(l),(m), 195, 211, 212, 262, 263 Reg. §§ 1.161-1, 1.162-1, 1.162-4, 1.162-6, 1.162-7, 1.212-1, 1.262-1 Reg. §1.263-4: read subsections (a) and (b), and skim the rest. Reg. §1.263-5: read subsections (a) and (b), and skim the rest. In connection with §195, see PLR 200749013.

=XXIV Business travel & entertainment, education.= Casebook 363-82, 387-403. Code sections 162(a)(2), 274(a), (d), (e), (k), (l),(n). Reg. §§ 1.162-2, 1.162-5, 1.262-1(b)(5). Problems pp. 380-82, 395, 402-3.

=XXIV Section 212 “nonbusiness” expenses= Casebook 447-77. Code section 212. Reg. § 1.212-1. Problems pp. 467, 477.

=XXV Miscellaneous limitations on deductions= (probably no class time) Read pp. 515-28. Review materials on passive activity loss from Assignment 7 above.

=XXVI Some problems in taxing “net” income= Casebook 577-84,. Code section 67. Note §62(a)(20), 62 (e). Optional Reading: Cohen, “Misassigning Income: The Supreme Court and Attorney Fees,” 110 Tax Notes 355 (2005).

=XXVII Interest income and deduction= Casebook 481-508. Code sections 163 (a), (d), (h), 221, 7872. Problems pp. 506-08; omit 3(f), 4(d). Add this fact to those given for problem 1: the borrower’s net investment income for the year in question is $350.

=XXVIII Charitable contributions= Casebook 794-817. Code section 170(a)(1), (b)(1), (c), (d)(1), (e)(1), 501(c) Problems pp. 815-17.

=XXIX Alternative Minimum Tax= Casebook 949-61. Code sections listed p. 949.