Income Tax Fall 2014

CHANNEL 41
Syllabus
Basic Structure of the Income Tax
1. Tax Policy
a. Income is the sum of ones consumption plus ones increase in net worth
during a designated period
b. Consumption Tax does not tax savings, therefore it encourages taxpayers to
save
c. Fairness
i. Horizontal Equity- persons similarly situated should be taxed in a
similar fashion- make the same, pay the same
ii. Vertical Equity- persons whose situations are different should be taxed
differently, make more or less pay more or less
d. Efficiency- seeks a balance between maximizing tax revenues and minimizing
the social costs of taxation
e. Neutrality- tax system should avoid unnecessarily shaping behavior, income in
stocks, cash or trade is taxed as equal income- so the decision to accept
compensation is not influenced by having to pay taxes- it is tax neutral
i. Today there are numerous tax rules that DO drive economic decisions
f. All revenues bills must originate in the house of representatives
2. Marginal Rate of Tax is the tax rate at each bracket of taxable income
i. There are 7 rate brackets for individuals, the highest tax is 39.6%
ii. There are 4 rate brackets for Corporations, the highest rate is 35%
3. IRS Rulings and Procedures
a. Rulings are official announcement of the IRS position on the application of a
rule to a set of facts- limited in scope to those particular facts
i. Not as authoritative as regulations
ii. Published in the Cumulative Bulletin (C.B.)
b. Private Letters have no precedential value and can not be relied up on by
other taxpayers
4. Case Law
a. Three courts have jurisdiction
i. Refund Tribunals-a taxpayer must first pay the asserted tax deficiency
and then file an administrative claim for a refund, if the administrative
claim is denied the taxpayer can then file in the District or Claims
courts for refund
1. US District Court (only forum with a jury option) odds of success
higher here
2. US Claims Court
ii. US Tax Court- the only forum a taxpayer may litigate a disputed tax
claim without first having to pay the asserted tax deficiency
1. Regular Decisions (significant or novel issues, binding
precedent) are published in the United States Tax Court Reports
(T.C.)
2. Memorandum Opinions (apply established law to the facts of
the case) unofficially published by CCH and RIA
5. Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704, 178 L. Ed.
2d 588 (2011) Medical foundation operating graduate medical school and state
university brought action against the government for the refund of Federal Insurance
Contributions Act (FICA) taxes withheld and paid on medical residents' stipends.

a. Holding: full-time employee rule promulgated by the Treasury Department,

under which the services provided by one normally scheduled to work 40
hours or more for school, college, or university are not incident to and for
purpose of pursuing a course of study, as required for such services to
be exempt from taxation under the Federal Insurance Contributions Act (FICA),
was entitled to Chevron deference, and sought to distinguish between workers
who studied and students who worked, based upon number of hours that they
worked
Chapter 2
Gross Income
(Omit problems 1(h) & 2)
1. The Definitions of Gross income
a. 61 definition is all income from whatever source derived
b. SCOTUS definition of income is undeniable accessions to wealth, clearly
realized, and over which taxpayers have complete dominion.
c. Gross Income may be Realized in any Form (money, Property, or services)
d. Impact of Obligations to Repay- money loaned is not accession to wealth and
thus is not income within the meaning of 61
i. The most important factor to consider is whether the taxpayer enjoys
complete dominion over the funds
ii. Embezzlement is income, and repayment of embezzled funds is a
deductible loss
2. The Realization Requirement- determines the proper timing of taxation
a. Policy- gives certainty, consistency and objectivity
3. Statutory Exclusions from Gross Income- IRC 101-140
a. Gifts
b. Discharge of Indebtedness
c. Employee Benefits
4. Long-Standing Administrative Practices
a. General Welfare Exclusion- govt benefits and assistance paymentsIRC85
i. Must be made pursuant to a govt program
ii. Be for the promotion of the general welfare (based on need)
iii. Not represent compensation for services
b. Imputed Income-taxpayer does not have to pay tax on service that he
provides for himself (ie. Mowing his lawn, growing his own food)
c. Bargain Purchases- do not have to declare the difference between what was
paid and the actual value (Exception for bargains made in an employment
setting, 1.61-2(d)(2)(i))
d. Frequent Flyer Trips- govt will not tax promotional benefits unless converted to
cash
5. C.I.R. v. Glenshaw Glass Co., 348 U.S. 426, 75 S. Ct. 473, 99 L. Ed. 483 (1955)
Litigation settlements are included in taxable income because Congress applied no
limitations as to the source of taxable receipts, not restrictive labels as to their
nature.
i. Meets the requirements of
1. Accession to wealth
2. Clearly realized
3. Over which taxpayer has complete dominion
6. Cesarini v. United States, 296 F. Supp. 3 (N.D. Ohio 1969) aff'd, 428 F.2d 812 (6th Cir.
1970) taxpayers who purchased a piano in 1957, who subsequently discovered
$4,500 in old currency hidden in the piano in 1964, did not have the currency
reduced to undisputed possession for inclusion in gross income of treasure trove
until it was reduced to undisputed possession in 1964, and therefore the US was not

barred by the statute of limitations from collecting tax on such treasure trove for
1964, at ordinary income rates, and the treasure trove was not subject to capital
gains treatment.
7. Old Colony Trust Co v Commissioner (279 US 716 (1929)) It is immaterial if a sum is
paid directly to a third party the discharge by a third person of an obligation to him
is equivalent to receipt by the person taxed- as a taxable benefit
8. Related Matters- Gross income considerations- after determining if a particular
receipt is included in gross income and the proper amount that must be reported the
following questions must be addressed
a. Proper timing- when is it included in gross income? Get the proper taxable
year and whether the taxpayer is cash or accrual
b. Proper taxpayer- who must report the income?
c. Proper character of income- is it ordinary income or capital gain?
9. PROBLEMS:
a. 1. A- claim 75k for services rendered, $1000 claim the income 74, claim the
$1500 or use of cabin
i. Use fair market value to determine cash value of non-cash
compensation/income
b. 1. B- claim the 10k and the taxes paid as incomei. this was an accession to wealth clearly realized
c. 1. C- claim 5k for services rendered
i. not imputed income because there was an actual transfer of funds- he
did not utilize his own service or property- he actually bought the
property on his own behalf, not barter
d. 1. D- claim 15k- treasure trove 1.1-14, according to IRS treasure trove is
income when received whether it is cash or object, in the year it was found it
was realized, however the increase in value is not a realized benefit that
should be claimed as income until it is actually realized (in order to account
for fluctuations in the market) article 84 tax notes 1299
e. 1. E- claim $1800- excluding the personal consumption- imputed income
(benefiting from his own labor), has to report (61a2) the sale of blueberries
minus the basis, has to report the cottage swap as income as wellcompensation by a third party
f. 1. F- claim 100k when caught (you have complete dominion and this was a
realization event) and then 25k when sold
g. 1. G- claim the 250k and the tax compensation as income
i. (77a) or
ii. 280Ag- renting a home for less than 2 weeks a year
1. could have argued that this was a rental and this gain was
excludable as a renters improvements
10. Class Notes 8/27/14
a. Every tax involves the application of a rate to a base
i. Tax base x rate = tax
b. Taxes Designed to apply to every conceivable situation involving commerce
c. Tax Policy
i. Ability to Pay- everyone who gets taxed should have a means to pay
the tax
1. Fairnessa. horizontal equity- treat similar situated the same way
b. vertical equity- if people are differently situated they
should be treated differently
2. Efficiency- intelligent laziness

a. Cost of collection and compliance

b. Minimize the dragon the economy
3. Neutrality- tax in a way that causes all economically equivalent
transactions to pay the same amount of tax
d. Structure of Income Tax see chart on page 6 of text
i. Pre-exclusions gross income
ii. X tax rates
iii. Net tax liability or refund
e. Marginal Rate- highest rate of tax one pays- the more income you have the
higher tax rate you pay
f. Effective Rate- take all of income and find out what percentage of your
income you paid tax on
g. POLICY: Progressive tax structure built on premise that there is a Declining
marginal utility of money
h. Who Pays taxes- slides on Twen or BB
i. Individuals
1. Income
2. Payroll (SSC & Medicare)
ii. Corporations
1. Income
2. Payroll
i. Tax Expenditures- Congress creates a tax deduction that reduces overall tax
revenues- 1.2 trillion in estimated tax expenditures
i. Tax system primary mechanism for both spending and collecting
money
ii. We spend as much or more money through the tax system with outlays
through a tax deduction that reduces overall tax revenues
iii. Every time you shrink the tax base the money needs to be made up
elsewhere
11.KEY POINTS
a. The tax system is a mechanism for spending money as well as collecting it
b. Facially neutral rules often favor one group over another
12. CLASS NOTES 8/27/14
a. Take Legal Accounting if have no experience with money
b. Fundamental equation:
i. Assets= Liabilities + Equity
ii. Equity= Assets Liabilities
c. Gross Income 61- see slides
i. Economic
1. net increase in wealth plus personal consumption
ii. Tax
1. Accessions to wealth clearly realized. Glenshaw Glass (punitive
damages are income)
iii. NOTES:
1. Even illegal income is income for tax purposes
a. Like money laundering when the goal is to legitimize the
cash
2. Like the conviction of Al Capone
iv. Code rulings 71 on define
1. Treasure trove is gross income once it has been realized
v. Excluded from income 101, 102, 121, 75-271
vi. When debt if forgiven it is income, but borrowing is not income

vii. A gift is an accession to wealth- but there is an exclusion for it 102

1. The gift must arise from detached and disinterested generosity
2. Employers can only give income- not gifts
viii. Any accession to wealth is presumed to be income- to overcome the
presumption must find an exclusion
ix. Should Treasure troves be argued to be income when found or
realized?
Chapter 3 Gains from Dealings in Property
A. Renter reimbursed taxes do not count as income? 1001(b)(1)
B. What is the tax difference in the basis of the income earned on a dividend
reinvestment plan treated as an open-end fund and transferring so the account basis
is determined at the time of transfer? 1012(d)(1+2)
C. Gains and Losses from Dealing in Property
a. Gain form the sale or other disposition of property is the excess of amount
realized over adjusted basis
b. Sale or other disposition includes most transactions producing a quid pro
quo
i. Selling for money or other property is a realization event
ii. Compensation by insurance is a realization event P35
iii. A gratuitous transfer of property is not a realization event
iv. Transfer of property for the satisfaction of a debt is a realization event
c. Computation of Gain or Loss Realized
i. Gain realized= amount realized adjusted basis
ii. Loss realized= adjusted basis- amount realized
iii. Cost basis 1012= amount invested
1. Taxpayer can recover his investment (adjusted basis) to avoid
double taxation
iv. Tax Cost Basis- is the fair market value at acquisition that was
accounted for on tax return for gross income
v. Gift tax basis and stepped up basis- 1014 and 1015
1. Giftees basis is same as giftors basis at time of gift
vi. Adjustments to basis- 1016 initial basis+improvements or
downward with basis-cost recovery deductions
d. Recognition of realized gain or loss
i. Unless there is an exception (nonrecognition provision) the entire gain
or loss realized is recognized for tax purposes
1. 1031 land exchange with higher value
2. 351a or 721a exchanging land for company ownership with a
higher FMV
3. 165 allows losses for business or investment property, not
personal unless it is a casualty loss
e. Impact of Liabilities in Property Transactions
i. General Framework
1. Basis is in total loan amount (not interest)
a. Recourse loan- the borrower agrees tobe personally
liable for the debt
b. Non-Recourse loan- the lenders recourse for default is
limited to the asset securing the debt
ii. Philadelphia Park Amusement Co v US 126 F Supp 184; Suit by
corporate taxpayer to recover alleged overpayment of income taxes
for years 1944 and 1945. The Court of Claims, Laramore, J., held that

iii.

f.

CLASS
i.

ii.
iii.

iv.
v.
vi.
vii.

where taxpayer which had franchise from city to operate passenger

railway in public park exchanged a bridge for extension of its franchise,
the exchange was a taxable one and taxpayer was entitled to use, as
basis of extension of franchise, which taxpayer later abandoned, the
fair market value of extension of franchise on date of exchange, for
purposes of determining depreciation and loss due to abandonment of
franchise, but since case was not argued on such theory and no
evidence as to cost basis had been presented, judgment would be
suspended and question of value of extended franchise remanded to
court commissioner.
Crane v Commissioner 331 US 1 (1947); how a taxpayer who acquires
depreciable property subject to an assumed mortgage, holds it for a
period and finally sells it still encumbered, must compute her taxable
gain.
NOTES 8/29/14
An arms length transaction1. Between unrelated, non-conspiring parties
a. Each party is looking out for their own interest
b. Ie- not a family or employer
Fair market value- the price that would be paid by a willing buyer to a
willing seller both with reasonable knowledge and neither acting with
compulsion 20.2021-1b
Recourse v non-recourse debt
1. Normally a person borrows on a recourse basis- personally liable
2. Non-recourse borrowing is rarely employed
a. Only the property secures the debt
Quiz question- A cash prize under 74a is income (rarely is the prize
exclusion qualifying)
Quiz question- General welfare exclusion
Quiz question- treasure trove
Gains and Losses from Dealings in Property
1. 1001a- computation of gain or loss
a. Amount realized over adjusted basis= gain realized
2. 1001b- Amount realized- what you received- money and
property
a. this includes debt relief
3. FMV- what a winning buyer would pay a winning seller with
knowledge and no compulsion
4. Adjusted basis 1012- your cost
a. Cost= the FMV of the property you received, not the FMV
of the property you gave is the default position
b. Cost/basis adjusts under 1016a- ie. improvements on a
building
c. Cost/basis also goes down as you take depreciation
adjustments
5. Basis is used to get us to ground zero after the first transaction,
the next transaction (like a sale) determines if we gained or lost
money
6. When we know the value of one side of a taxable exchange the
second side is presumed to equal the first
7. Amount realized 1001b-adjusted basis 1012= realized gain
1001a

8. The gain recognizes post tax dollars

9. How do we calculate loss
a. Adjusted basis - amount realized= loss realized
b. 1001c consequences
i. a realized gain or loss must be recognized unless
there is a provision requiring non-recognition
ii. recognized gains and losses must be on your tax
return
g. CLASS NOTES:
i. Recap 9/3/14
a. Amount realized (1001b)- adjusted basis (1012)=
realized gain (1001a)
b. Amount realized is anything we get- including debt relief
c. FMV- willing buyer pays will seller both with knowledge
and without compulsion
d. Adjusted basis
i. Cost 1012
1. What we put out
2. The FMV of what we received
3. The value of what we received in a taxable
exchange
4. When one value in a taxable exchange is
known and the other is not we can
presume the properties are equal
a. Cash sale of real estate
b. Publicly traded securities for a
patent
ii. Adjusted Under 1016(a)
e. To get a zero starting place- take the basis of what we
received minus the value of what we gave upexchanges are not always equal
2. Why isnt the entire amount received in a sale gain?
a. Because return of basis merely places you back where
you began, there has been no increase in wealth
3. Understanding basis crucial for this course- measuring post tax
dollars so we avoid double taxation
4. Calculation of a loss- take the same formula and flip it: adjusted
basis- amount realized=loss realized (whatever number is
bigger goes on top)
5. What does 1001c tell us are the tax consequences of a realized
gain or loss?
a. We must recognize it unless there s a provision which
requires non-recognition (eg 121, 165)
6. Conflicting motivations between business and IRS
a. How to generate profits without getting taxed- figure out
a way to profit while generating losses
7. What does it mean to recognize a gain or loss? Record it on your
tax return- income paid upon it or a deduction taken
8. 3 steps to analyzing
a. gain or loss realized
b. gain or loss recognized
c. if recognized, character of recognized gains or losses

i. capital, or
ii. ordinary

ii. Borrowing1. Basis is the FMV or property acquired even if we use somebody
elses money to get the property
a. Borrowing does not reduce our basis
2. Basis represents post tax dollars- any recovery of basis is not
income, when coupled with the concept of depreciation Crane
created a tax hole
a. Depreciation is the decline in property value due to wear
and tear and obsolences- creates a tax deduction
i. The operating presumption is the property is
useless at the end of the depreciation term- say
ten years
b. So if you can buy a building for a 1m, and you can
borrow 900k to buy it with your 100k out of pocket, and
you can rent the building for 100k a year, take a
depreciation deduction for 100k each year, at the end of
year one you got the 100k you put up and you owe no
taxes since your deductions are equal to your revenue,
same in year two- and now you have 100k that you did
not have when you startedc. when you get down to zero with your basis, if you then
turn around a sold the building anything you get will be
income- so if the building is still worth 1m- you have to
pay taxes on 1m- but you still come out way ahead
d. tricksi. divorce- non-recognition event- nobody
recognizes any gain or loss so person receiving
gets the tax problem and whatever mortgage was
not paid off
3. Crane- use somebody elses money still get a full basis
a. Corrolary principle- if you transfer the property later any
debt relief will be part of your debt realized
b. But what about non-recourse borrowing, should it always
go into basis (along with any cash paid)?
i. Almost always- authority is split on when it does
not
ii. If the non-recourse borrowing is less than the FMV
you can include the amount in the basis
c. Conflicting decisions:
i. Pleasant Summit: it goes into basis to the extent
that it does not exceed FMV, but no further (so
you get the cash and the nonrecourse mortgage
up to the FMV- add the two together even if it
more than the property is worth)
ii. Estate of Franklin: if it exceeds FMV is does not
go into basis at all
1. Ie. Mortgage is 900 and building is worth
500k, if that debt was recourse it all goes
into the basis- and out buyers basis; but if
it is non-recourse

iii. Summary on borrowing

1. Recourse borrowing goes into basis
2. Nonrecourse borrowing
a. If the borrowing is less than FMV it goes into basis
b. If the borrowing is greater than the FMV then you get
into the split between Franklin and Pleasant Summit
h. Basis comes due each time there is a step up- so if angie Jolie buys a dress for
4k, then exchanges it for a 10k dress, she realizes the 6k at that time and her
basis is at 10k moving forward
i. Whenever property exchanges hands it is an event for tax purposes- gain or
loss realized, or gain or loss not-recognized- pay attention to how you
structure exchanges
i. When you form an entity when you put property inside a new entity
you are exchanging that property for an interest in that corporation
1. There are rules that allow you to avoid recognizing gain on that
transactions
ii. When you give your ownership interest in your corporation for an
interest in a new corporation (a merger) you are exchanging property
iii. Liquidation of an LLC is a sale or exchange of property
j. Pg 33 problems
i. 1.
1. A. No realization event
2. B. Amount realized- is 95k, basis was 50k, gain realized is 45k
3. C. Amount realized is 95k, basis is 125k, loss realized is 30k
4. D. Amount realized 0, basis is 50k that passes to son
5. E. Amount realized is 100k, basis is 50k, gain realized is 50k
6. F. Amount realized is FMV, basis of 50k passes to ex-husband
7. G. Amount realized is 100k, basis of 50k, if 1031a applies no
gain or loss realized
8. H. amount realized is 100k, basis is 50k, gain realized is 50k
9. I. Amount realized is 100k, basis of 50k, if 351a applies no gain
or loss realized
ii. 2.
1. Amount realized is 80k, basis is 50k, gain realized is 30k
2. Amount realized is 80k, basis is 70k, gain realized is 10k;
1016a1
3. Amount realized is 80k, tax cost basis in real estate is 50k (had
to report the income to get the real estate- this is for her time
only, any out of cost expenses would be tax deductible), gain
realized is 30k
4. Amount realized is 80k, basis is 50k (gave up property worth
50k so we assume she got property worth 50k- cash or asset
acquisition is a taxable exchange), gain realized is 30k
iii. 3.
1. Jacks Amount realized is 3m, adjusted basis is 2m, gain realized
1m (taxable income due to the depreciation)
a. Jill assumed a debt of 3m, however must do the Pleasant
Summit Franklin analysis
i. 2.2m basis under Pleasant Summit
ii. zero basis under Franklin
b. NOTE: Debt relief is treated as the equivalent of a cash
payment

2. Jacks Amount realized is 3m, adjusted basis of 2m, still has

gain of 1m as a non-recourse debt
a. Surrendering the property is not a way out, except
i. Bankruptcy
ii. Death
iii. Divorce- transfer property to departing spouse in
divorce it is a non-realization event for the
transferor
b. Had it been a recourse debt there would have been
different considerations
c. Quit claim is a unilateral act
k. Bitcoin
i. A form of virtual currency
1. Does not have a tangible form of existence
ii. Bitcoins are property for tax purposes- if you buy a bitcoin
1. If you buy $100 of bitcoin, and then buy something worth $150
you had a realization event that netted $50 in income
Chapter 4 Gifts and Inheritances (Omit Problem 1(c))
a) Gift: the voluntary transfer of property to another without compensation; made in
detached and disinterested generosity
b) Theory: is giving a straight transfer of wealth or consumption?
i) Net zero- a gift means an increase to the recipients wealth and a decrease of the
donors wealth
(1) Can result in different tax collections due to individual tax brackets of donor
and done
ii) Consumption- the act of giving is a consumption of ones wealth (giving instead of
taking a vacation or buying something)
(1) More favorable to tax collection
c) General Exclusionary Rule for Gifts and Inheritances 102(a)
i) Exclusion for inter vivos gift
ii) Commissioner v Duberstein, 363 US 278 (1960), Taxpayer Duberstein received a
Cadillac from a long-time business acquaintance. At issue was whether the
Cadillac was truly a gift or a payment in exchange for business information
(1) Duberstein Test for an excludable transfer from gross income
(a) the critical consideration is the transferor's intention. This is a question of
fact that must be determined on a "case-by-case basis".
(b) an objective inquiry that looks to "the mainsprings of human conduct to
the totality of the fact of each case." On review, the trier of fact must
consider all of the evidence in front of it and determine whether the
transferor's intention was either disinterested or involved:
(i) Gifts result from "detached and disinterested generosity" and are often
given out of "affection, respect, admiration, charity or like impulses".
(ii) Contrast payments given as an "involved and intensely interested" act.
(c)
Does not apply to:
(i) spouses who are considered one taxable unit so when they transfer
property it is not an accession of wealth
(ii) prizes, awards, or scholarships
(iii)
income from property received by gift
(iv)
gifts transferred by or for an employer, to or for the benefit of
an employee
(v)
d) Basis of Property Received by Gift, Bequest, Devise, or Inheritance

i)

The donees basis is generally the same as the donors basis- transferred basis
(1) The donee also assumes the donors gains on the property
(2) The donors basis is not used for a loss, where the lower FMV is used (donees
loss is limited to the loss while in donees hands)
e) Heirs take stepped up basis in the property equal to its FMV at the date of
decedents death 1014
i) POLICY: equalize tax burden for non-community property states to match the
advantages of community property states
ii) Exception- 1014(e) triggered only if the decedent dies within a year of the
original transfer
f) Tax Planningi) Give away properties with higher bases (that transfer) and holding on to
properties with lower bases that will get the step up upon death when they
transfer
g) Part sale part gift is a realization event for donor (the consideration recvd- full basis in
the property)
i) Exception for part gift to charitable organization 1011(b)
ii) No loss is ever allowed in a part sale part gift situation
2) Wolder v Commissioner, 493 F.2d 608 (2d Cir. 1974)
a) FACTS: Pursuant to a written agreement, appellant taxpayer, an attorney, provided
legal services to her at no charge to his client who bequeathed her stock to appellant
upon her death. Appellant received the stock and cash one year after the client's
death, when its value had considerably increased.
b) tax court: held that the stock and cash were taxable income, under I.R.C. 61, and
were not exempt as a bequest, under I.R.C. 102, and that appellant constructively
received the stock and cash in the year of the client's death rather than the year in
which he actually received it. Appellant and appellee Commissioner of Internal
Revenue (United States) sought review.
c) The court affirmed the judgment in part, holding that the gift was not excludable,
under 102, as the contract was, in effect, one for the postponed payment of legal
services rather than for a gift. The court reversed the judgment in part, holding that
the date of the transfer of the stock was the date of appellant's actual
receipt rather than the date of the client's death, as the income was not
unqualifiedly subject to the demand of appellant because it was open to the
residuary legatees.
3) Problems pg 49
a) 2. A- amount realized of 90k, transfer basis is 40k, 50k is the realized gain
b) 2b- amount realized 90k, adjusted basis 30k, loss realized is 10k is taxable (even
though the 10k loss at time of gift just evaporates)- second scenario- 1.1015-1a2,
neither a gain or a loss if sold at 35k, daughter can recognize moms gain but cannot
recognize moms loss
i) using lessor of FMV on date of gift or the transfer of the adjusted basis
ii) the family may have been better off selling the property instead of gifting it so
that the 10k that was lost from the adjusted basis by having to take the FMV in
the gift is not lost
c) 2ci) Catherine- part sale part gift 1.1001-1e transferor has a gain when the amount
realized exceeds the adjusted basis- so she has a gain of 20k, because the
adjusted basis stayed at 40k
ii) Elisabeth- 1.1015-4 during her sale she can use the basis of her amount paid or
the transferors basis whichever is greater- so she can

4)

5)
6)
7)

(1) Daughter got it with 40k in adjusted basis-so we bump the daughters basis
from 40-60 so that the dollars are only taxed once
(2) We increased the mothers adjusted basis to 60k
(3) Basis is always adjusted to preserve what had not been recognized
d) 2d. donors relief of liability is treated as the amount realized- Catherines gain is still
at 20k, daughters basis is 60k (same as 2c scenario)
e) 2e- amount realized 90k, adjusted basis (is 1014a- stepped up) 80k, amount of gain
realized is 10k
f) 3a. community property 1014b6- she gets the stepped up basis in both halfs- 500k
FMV step up to her adjusted basis
i) 1014b6- she gets a basis step up from her own half (regardless if she inherits the
other half)
(1)
ii) 1014b1 governs the other half- the half that passes from him to her
g) 3b. joint tenancy in a common law state- wife gets the basis step up in the one half
that came form her husband, but would keep her basis from before his death in her
half- so the adjusted basis is now 300k (this scenario means she owes taxes on 200k
of gain that she did not have in the community property state)
i) in joint tenancy analysis go to 1014b9- we are going to act as if she received half
the property from her deceased spouse
h) 3c
Questions 1015a- always donor basis for gain purposes, only use date of gift
FMV for loss purposes when less than date of gift FMV is greater than donors
basis then we always use donors basis
a) RULE: what basis does the surviving spouse take in her half of the joint
tenancy property- answer: she keeps her old basis in her half
b) RULE: what basis does the recipient of a bequest take? Answer: Date of
death FMV
c) RULE: Dad gives kid property worth 50k with basis of 40k what is kids basis
for gain and loss purposes? Answer 40k
d) RULE: dad gives kid property worth 50k with basis of 40k, subject to
mortgage of 20k what is kids basis for gain and loss purposes? Answer 40k
e) RULE: dad gives kid property worth 50k with a basis of
i) Since donors basis less than FMV we use the donors basis for both gain and loss
purposes
f) RULE: dad gives kid property worth 50k with basis of 40k subject to mort of
45k what is kids basis for gain and loss purposes. Answer 45k
g) RULE- what do you do when donors basis is more than the FMV? 1015a
i) Gain? Use donors basis
ii) Loss? Use FMV for soling for a loss
when dealing with debt situations- equivalent to giving mother 60k cash and mother
paying off the debt or daughter borrowing 60k form mother to pay for propertya) step up works for stocks too!
Look at 1014a for bequesting property
CLASS NOTES 9/8/14
a) What is a gift for income tax purposes?
i) A transfer of property out of detached and disinterested generosity
Duberstein
(1) Motive of donor examined
ii) Does the recipient of a gift or bequest of property have income?
(1) No. 102a- not income to recipients
(2) Facially neutral, but who really benefits?

(a) This is not capped at any specific amount

(b) This helps wealthier people more than other people, in particular people
with lots of disposable wealth who can afford to make huge gifts
(i) The gift tax has been revised so that you can give anybody up to 5.5m
to anyone without gift tax (so a couple can give 11m)
(ii) In addition- any year you can give 14k to anyone and it does not count
against your gift 5.5m
iii) Is the income from property received as a gift or bequest income?
(1) Yes. 102(b)(1)
(a) Income earned from the gift is income- apt building is not income, but the
rent from the apt bldg. is income
iv) Does the recipient of a gift or bequest of income alone have income?
(1) Yes. 102(b)(2)
(a) This primarily is at issue in trusts- as the income comes out of the trust
you are taxed on it because all you were given is income
b) What basis does the donee of a gift take in the property
i) Donors basis for gain purposes. Lesser of donors basis or Date of gift FMV for
loss purposes 1015(a)
(1) If you received property that already has gain built into it we will tax you on
the gain accrued in donors hands, but if there is a loss built into it we will not
let you take advantage of the donors loss
ii) What basis does the recipient of a bequest take?
(1) Date of death FMV 1014(a)
(a) Anything you inherit you get a date of death FMV basis
(b) This rule has a lock in effect- causing people to hold onto property they
would otherwise transfer so they can transfer the basis
(c) There is the estate tax which works like the gift tax- you can leave up to
5.5m to anybody and ay no estate tax- married couple can leave up to
11m
(d) Private family foundation dedicate to charitable purpose- does carry utility
for the family can have provisions like
(i) Paid salaries in foundation
(ii) Pay for travel expenses to go to board meetings in exotic places
(iii)
Can stipulate only family members on board
(iv)
Can be courted by potential donees
(v) Even though you can not directly appropriate the use
iii) What basis does the surviving spouse take in her own half of the community
property
(1) She gets a Date of death FMV basis in her own half- big deal for community
property states 1014(b)(6) technical way that the property passes to the
surviving spouse
(a) In a common law state couples typically own property as a joint tenancywhere a survivor gets the whole thing- unless left to someone else
(i) But the other party will get the step up in the half that they are
deemed to receive from the deceding spouse, but keeps the old basis
in the half they already owned 1014b9 SLIDES POSTED WILL
DEFINITELY PUT ON TEST with 1014 b6
(b) In a community property state it does not matter how the property is
titled, both parties own half
(i) when the one party dies the property passes to the other party- she
inherits the whole thing and gets a basis step up in the whole thingequalizer- even though they did not technically inherit it

(c) this is a major dividing law between how married couples hold property
between common law and community property states
(2) Community property
(a) Each spouse is deemed to own half of marital assets
(b)
(3) Part sale- Part gift
(a) How is the donor treated if he or she sells the item for less than FMV?
(i) Sometimes it takes the form of a debt assumption- eg mom transfers
the house to the kids with a less than FMV mortgage on it
(ii) She has to realize gain, but only if the amount she receives is greater
than her basis but will never recognize a loss 1.1001(e) WILL BE ON
THE EXAM
Assignment # 4
Skim Chapter 5
Discharge of Indebtedness, posted supplement on website
c) Discharge of Indebtedness
i) US v Kirby Lumber- 284 U.S. 52 (1931) the repayment of a debt at less than its
face amount constitutes income to the debtor
(1) Codified in 61(a)(12)
(a) Facts. Kirby Lumber, Plaintiff, issued bonds for $12,126,800 and received
par value. Later the same year it purchased some of the same bonds back
at less than they sold them for, with a difference of $137,521.30.
(i) The IRS claimed that the $137k was taxable as gross income. Kirby
disagreed.
1. The IRS argued Congress defined the term gross income to include
"gains or profits and income derived from any source whatsoever."
2. The IRS argued that the relevant Treasury Regulation explicitly
stated that when a company buys back its own bonds at less than
what they sold them for, the difference is taxable.
(ii) Kirby argued that all they were doing was getting rid of debt, and
that's not the same as making money.
(iii)
The Trial Court found for Kirby. The IRS appealed.
1. The Trial Court based their decision on Bowers v. KerbaughEmpire Co. (271 U.S. 170 (1925)), a case in which a loan repaid in
devalued German marks was not considered to be a taxable gain
for the taxpaying company.
(iv)
the Appellate Court reversed and found the profit to be
taxable.
1. The Appellate Court found that if a corporation purchases and
retires bonds at a price less than their face value or issuing price,
the excess amount of the purchase price over the issuing price is a
taxable gain.
2. The Court noted that Kirby had clearly made a profit on the
transaction, and there was no reason why that profit shouldn't be
taxable.
(v) Basically, the point of this case is that since you must pay taxes when
you "buy low then sell high," you are also equally liable when you "sell
high then buy low."
(vi)
Theories to rationalize
1. Kirby balance sheet theory- an increase in net worth due to the
cancellation of liability

2. Discharge of the obligation removes the justification for not paying

taxes at the time of the original borrowing
ii) Exceptions - statutory and judicial
(1) Contested liability or disputed Debt exception
(a) if a taxpayer disputes the original amount of a debt in good faith and later
settles that dispute, the settled amount is treated as the amount of
recognizable debt for tax purposes
(i) Preslar v Commissioner
(ii) When a debt is unenforceable the amount of the debt is in dispute- 3 rd
cir.
(2) Bankruptcy and insolvency exception
(a) When taxpayer has no means to pay tax, Congress added 108 to exclude
discharge-of-indebtedness income in certain circumstances
(i) Title 11 cases
1. Bankruptcy under chapters 7, 11, 12, or 13
2. If taxpayer under jurisdiction of the bankruptcy court and granted
by court
(ii) If discharge occurs when the taxpayer is insolvent
1. Maximum amount excluded cannot exceed the amount by which
the debtor is insolvent
2. A taxpayer is insolvent to the extent hi liabilities exceed the fair
market value of his assets determined on the basis of assets and
liabilities immediately before the discharge
a. Contingency debts (like cosigning a loan) Taxpayer must prove
that it is more probable than not that taxpayer will have to pay
the debt in order to include it in the calculation
(3) Cancellation is a gift 102
(a) examine intent of lender, must be detached and disinterested generosity
(b) forgiveness in a business setting will almost never constitute a gift
(4) Forgiveness of student loans
iii) Discharge of Recourse Debt in Property Transactions
(1) If debt is more than FMV of property,
(a) FMV 100,000
(b) Adjusted basis is 80,000
(c) Loan is 120,000
(d) This generates 20k in gain (FMV-AB) and 20k discharge-from-indebtedness
income (Loan-FMV)
(i) This makes a difference for
1. the 20k of discharge-from-indebtedness income can be excluded if
the taxpayer is insolvent
2. the 20k of gain is taxed at capital gains lower rates
iv) Tax treatment of the lender
(1) Lender may be entitled to a bad debt deduction under 166
d) Preslar v. Commissioner
i) Facts. Purchased 2500 acre ranch for 1m, financed by Moncor bank at $66,667
per year with 12% interest, final payment due 9/1/98
(a) Sold 19 lots and was credited 200k against the principal on their loan (no
record of interest payments credited)
(i) Used the installment sales contracts (from the lots) to repay loan at
95% of stated principal contract price (regardless of actual payments
received from the purchaser)
(2) 1985 Moncor declared insolvent, FDIC appointed as receiver

(a) FDIC refused to accept contracts as payment and ordered Preslars to

suspend sales of cabin lot
(b) Preslars complied with suspension but made no payments
(3) Preslars filed an action for breach of contract, FDIC agrees to accept 350k as
full payment
(a) Reduced the debt by $449,463, claimed under 108e5 that it was a
purchase price adjustment
(i) Commissioner responds that is only when the seller adjusts the price
(4) Tax Court rules, sua sponte, invoked the contested liability doctrine because
the unusual payment arrangement brought the whole debt into question
ii) Rule of Law. Taxpayers who have incurred a financial obligation that is later
discharged in whole or in part, recognize as taxable income the extent of the
reduction in the obligation
(1) Theories
(a) Increase in wealth due to reduction in valid claims against taxpayers
assets
(b) Cancellation of obligation removes the reason for the original exclusion
(2) Tax Court held the contested liability/disputed debt exception to the general
discharge of indebtedness income rule rendered the write-off nontaxable
iii) Dissent.
iv) Discussion.
e) CLASS NOTES 9-9-14
i) How is the donor treated if he or she sells the item for less than the FMV
(1) Corollary rule on the basis side
(a) The donee takes the donors basis for gains purposes 1015a
(b) But for loss purposes we use the lessor of the loss- if loss built into gift the
done does not get the benefit of the loss
(i) From a planning perspective a donor is ill advised to give property with
losses, give gain property where done can use the adjusted basis and
sell the loss property so that the loss can be realized and deducted
form income for an advantage
1. Otherwise the loss is lost forever
(c) Part sale part gifts
(i) A straight gift is not an income recognition event for the donor
1. But if the donor receives some consideration the donor may
recognize if it is greater than the basis- 1001-1e WRITE
THIS INTO YOUR CODEBOOK
(ii) How is the donnee treated if he she buys the item for less than FMV1. Answer..
2. donnee has no income
3. done takes the basis for the greater of either the donee basis or
what they paid whichever is greater- 1015-4
a. so if donee recognizes gain goal is to only tax the gain once
b. does not want to force the donor to recognize income
(d) the basis step up is hard to justify from a pure tax policy stand point- it is a
political giveaway- everyone benefits but the top 1% get the most benefit
(2) questions
(i) takes donors basis for gain purposes, FMV for loss purposes
(ii) bequest recipient takes date of death FMV for basis
(iii)
1014 b9 and b6 address half of the property

f)
8)

1. Community property state- community property surviving spouse

takes date of death FMV in her half of the property as well as the
half she inherited- basis step up in the whole property
a. This is true even if the husband leaves hi half to his secretary
2. Common law state- joint tenancy property surviving spouse keeps
her old basis on the half of the property that she already had, if she
is left the decedents half she will get the basis step up to FMV at
death
a. Survivor automatically gets the decedents half- he cannot leave
it to his secretary
(3) Pg 49 problems
(a) 1a. year one no income event, year two income from gift is taxable income
(b) 1b. the trustee has no tax- it is not to his benefit, he holds bare legal title
to the assets that sit within the trust, does not hold beneficial title
(i) Betty is taxed (102b2) as the income is doled out (when the trust was
created she did not get anything)
(c) 1c- skipped- an employer cannot make a gift to an employee almost
always deemed compensation- Walder
(d) 1d gown and necklace- 10k for the use- compensation
(i) swag bag- quid pro quo- Duberstein analysis (detached and
disinterested generosity)- donors intent given the circumstancespayment for services- taxable compensation- section 74a says that a
prize or award is in income
(e) 1e given annuity, looks like compensation for past services, but no legal
obligation to make the payment see 174 F2d 893. This was a gift out of
love and affection- what was the real motivation of the donor for the
transfer
(f) 1f son is a gift, pool boy is a gift, nephew quit smoking argue that in gift
tax law we do not treat a detriment to the donee as a quid pro quo
situation- she wasnt getting anything so it really was a gift,
(g) 2a. 102a gift; 40k AB, 90k amount realized, 50k gain realized.
Clicker questions on gifts and Cancellation of indebtedness

Chapter 6 Fringe Benefits (Omit problem 4)

a) RULE: Congress allows exclusion of a number of fringe benefits while continuing to

permit the employer to deduct the costs of those benefits
i) If a fringe benefit is not excluded in the code it is gross income under 61a1
b) POLICY:
i) To encourage employers to provide the excluded benefits
(1) Advantage: Which potentially encourages the offering of the benefits at the
expense of salaries (due to the tax benefits to both the employee and the
employer)
(2) Disadvantage: Can have the ancillary effect of eroding tax base, which causes
higher taxes to make up for the deficit so the employees tax rate is not
reduced overall
ii) The difficulty in valuing the benefit
iii) The administrative inconvenience for all parties in not having to account for the
benefit
c) Creates Seven categories of excludable fringe benefits- we focus on four
i) No-additional-cost services
(1) Ordinary customer service that can be extended to employee at no significant
cost

(2) Not available to highly compensated employees unless widely available to all
employees
(3) Includes retired, disabled employees and surviving spouses of deceased
employees
ii) Qualified employee discounts
(1) Not to exceed employers gross profit for goods or 20% of the retail price for
services
(2) Must not discriminate in favor of highly compensated employees
(3) Employee can only access exclusion within the line of business in which the
employee works
(4) Includes retired, disabled employees and surviving spouses of deceased
employees
iii) Working condition fringes
(1) A benefit given to an employee which if the employee paid for the benefit it
would be deductible under 162 (business expense)or 167 (depreciation
expense)
(a) Examples include business travel, auto reimbursements
(b) Not subject to discrimination rules in favor of highly compensated
employees
iv) De minimis fringes
(1) A benefit so small it is not worth accounting for
(a) Examples include personal calls on a company cell phone
(b) Not subject to discrimination rules in favor of highly compensated
employees
(2) Other benefits
(a) Frequent Flyer Miles
(i) Will not tax as long as do not convert to cash
(b) Meals or lodging for employers convenience
(i) Excluded when those benefits are provided as a condition of
employment for the convenience of the employer
(ii) Includes spouse and dependents of the employee
(iii)
Only available for meals and lodging when furnished on the
business premises of the employer
1. An employees separate dwelling owned by the employer and
serving an important business function has been found to be an
employers business premises.
v) Employment related payments from third parties
d) Lodging TEST- must meet all three
i) The lodging is furnished on the business premises of the employer
ii) The lodging is furnished for the convenience of the employer, and
iii) The employee is required to accept such lodging as a condition of his employment
(could not otherwise properly perform the duties of his employment)
e) Converting travel credits to cash is income and taxable
i) IRC 61 provides that gross income means all income from whatever source
derived
f) Problems page 77
(1) Stephen Jobs
(a) No tax- in the normal course of business offered to customers, and not
below cost of goods,
(i) For tangible property discount equals to the gross profit percentage of
20%
(b) Same as above1.132-2a3

(c) Not within his line of business, will pay tax

(d) Same as a- he gets benefit of both lines 1.132-4a1iii
(e) 132j- basic nondiscrimination rule
(f) no tax- 132h2a dependent child exception
(2) Amelia Earhart
(a) No tax- line of business
(b) No tax
(c) No tax 162, travel for business
(d) No tax- parents also get benefit 132h3
(3) Billy Crystal See 1.162-17(b)(2); using the charley principle- the value he
receives in excess of his actual cost- effectively selling his frequent flier miles
(a) Taxable- Income from any source; pg 81 announcement 2002-18, 2002-1
CB 621
(b) Taxable- Income from any source; pg 81 announcement 2002-18, 2002-1
CB 621
(i) His partner may have recvd a gift which could also be analyzed
g) CLASS NOTES 9/15/14
i) Cancellation of indebtedness income
(1) Borrowing does not increase wealth or create income
(2) But if that debt is forgiven cancellation of debt is a form of income
(a) 61a12
(3) how do we distinguish COI from amount realized
(a) cancellation only arises when the lender forgives the debt
(4) every time a lender forgives a debt we do not have COI income- it depends on
context
(a) it could be a gift or compensation
(b) it may depend on whether the loan is recourse or non-recourse
(i) how is a discharge treated when the lender takes back the property?
1. Relief of recourse debt, not in excess of FMV of property
surrendered is amount realized
a. If debt is less than the FMV of the property the relief from the
debt will be treated as amount realized
2. if we have recourse debt in excess of the FMV of the property and
the lender forgives the whole debt, any forgiveness of debt above
FMV is COI income 1.1001-2(a)(2) rev rul 90-16
(ii) COI= cancellation of indebtedness
(iii)
Recourse debt requires the lender to take further action to
relieve the debt (which is a realization event) where is in non-recourse
debt the lender has no additional action they can take
(5) If the debt is nonrecourse- then the full amount of the debt relief is the
amount realized no matter what
(a) Relief of non-recourse debt upon transfer is always amount realized (even
when it exceeds FMV of property surrendered)
(6) Disputed debt doctrine applies when the amount of debt in the beginning is
disputed or uncertain not to differentiate recourse v non-recourse debt
(7) There are a lot of exceptions to cancellation of indebtedness rules 108- we
wont force you like when you have a bankruptcy or insolvency
(a) Student loan forgiveness does not create income
(8) A lender 166 can claim a tax deduction for the part of the debt that they
forgive, claims it as a loss
h) FRINGE BENEFITS
i) Compensation other than wages or salary

(1) Eg, health ins, life ins, pensions plan (deferral like 401k, but when you pull the
money out in 40 years it will be income) , free coffee, free parking, free gym
membership
ii) How do taxes work
(1) Every tax involves the application of a rate to a base
(a) When you exclude these things from income you have not lessened your
tax need so the rates are bumped
(i) Any think you should try to keep the base broad so you can keep the
base low
iii) 132
(1) no additional cost services
(a) family members are treated as the employee- they too can get the benefit
(b) limitation- if the business has multiple lines of business, the employee can
only get the benefit if they work within the ine of business for which they
are receiving the product or service
(c) non-discrimination rules applies- this provision must apply to highly and
lesser compensated employees equally
(d) 119 excludes meals and lodging provided to an employee by the
employees employer when:
(i) the employee must receive the meal for the convenience of the
employer
(ii) the employee with respect to lodging is required to accept the lodging
to accept the position
(iii)
the meals must be provided on the employers premises
(e) excludes most employer provided health benefits 105 and 106 this is the
single largest subsidy in the tax code
(i) this provision debated by economists because it has a distorted effect
1. creates bias in favor of employer provided as opposed to self
financed health insurance
2. creates bias in favor of compensation paid as health insurance
rather than wages
3. May encourage spiraling costs
4. Tends to favor the haves over the have nots
(ii) Elderly are the only group that we cover medical expenses for once
they turn 65
1. And yet children are more likely to succeed if they have good
health care
(iii)
(2) qualified employee discounts
(a)
(3) working condition fringes
(a)
(4) de minimus fringes
9) Chapter 7 Business and Investment Expense Deductions (Omit problems
3 & 4).
a) CLASS NOTES 9-17-15
i) Business Expenses- above the line deductions
(1) Sections 162 and 212
(2) In order to fairly measure income we must deduct the costs of producing
revenue from the revenue
(3) Expense= an expenditure that benefits the current year only (CAPITAL
EXPENDITURES ARE FOR LONGER PERIODS)

(4) What deductions does section 162 authorize

(a) ORDINARY AND NECESSARY EXPENSES ARISING FROM CARRYING ON A
TRADE OR BUSINESS
(5) What is deductible- difficult to be certain about
(a) Spiritual advice is not tax deductible (having a minister come pray at the
office)
(b) A horoscope consultation is tax deductible(i) Think about Welch and Twitty cases- came out differently
1. Welch paid old debts to build new business reputation- forming a
business
a. Not a current expense it was a capital expense
2. Twitty paid off debts to maintain his reputation- continuing a
business
(c) Liposuction could be a health or business expense- if needed for your line
of work
(i) This includes botox and plastic surgery
(d) Designer clothes for Nordstrom employees (case in book) only deductible if
required for employment- clothing that has a specialized utility for your
work in general
(i)
(e) Courts look to what is customary in that type of business
(6) Current year v. future year
(a) It can be a business expenditure- but if it helps to produce revenue over
more than a year it is not an expense
(b) Meals
(i) 50% rule 274n1
(ii) special exception for employees 274n2, see 274e3
1. does not apply to reimbursed meals to employees- do not take
deduction and do not report as income- meals includes reasonable
tips
2. employees treat as a wash 1.62.2
(7) travel expenses 162a2 READ THIS RULE FOR LBAM
(a) deductible when they are incurred while away form home in pursuit of
business
(b) taxpayers have one tax home pg 99
(i) creates a tax planning opportunity to own your home elsewhere
1. claim Idaho as tax home and when in Laguna all meals and home
are tax deductible
(8) a taxpayer can have no tax home- traeling salesman without a permanent
residence
(a) Henderson, Rosenspan pg 99
(9) What is required for business travel for tax purposes
(a) Stay overnight and it must be for business purposes, sleep or rest rule
(i) You may be able to just get a hotel room to write off a day trip
1. Fly form Moscow to seattle to do business for the day- the plane
tickets is deductible either way, but lunch by yourself would not be
deductible because you were not away from home in the pursuit of
business- unless you were having lunch with a client, generally
speaking do not look behind your own choices for extravagancelook to customary business practice
(ii) Business purpose- great meaning for commuters- choosing to live
farther from your business is not deductible

1. writing a book in Hawaii does not justify traveling to Hawaii to write

the book
2. traveling to france to enrich your experience does not count either
(10)
principle place of business is your tax home (not your residence)
(11)
temp. assignment expenses deductible with a one year limit
(12)
fees paid in the acquisition of stock are added to the cost basis of the
stock, not used as a separate tax deduction
ii) Welch v Helvering 1933
(1) Expenses deemed capital outlay to buy the goodwill necessary to launch a
business- not a necessary and ordinary business expense
(2) business expenses have to be necessary and ordinary ( in the line of work
he is in- not that the cost incurred needs to be a regular expense, it could be
once in a lifetime) to be deducted as an expense (otherwise they may be start
up expenses or capital expenditures)
iii) Jenkins v. Commissioner memo
(1) Court looks to the primary motivation for making the payments(a) For Conway Twitty there was a proximate relationship between the
payments made to the holder of Twitty Burger debentures and petitioners
trade or business as a country music entertainer.
(b) Petitioner was furthering his business as a country music star and
protecting his business reputation
(c) He was not launching a new business
iv) Henderson v Commissioner 1998
(1) Need business reasons for having both homes in order to deduct the lessor
income producing one as a business expense- otherwise it is just a commute

(2) Home means the taxpayers abode at his or her principal place of employment
(3) Intent is to deduct duplicate living expenses both maintained for business
reasons - there has to be required duplication
(4) Factors:
(a) The business connection to the locale of the home
(b) The duplicative nature of the taxpayers living expenses while traveling and
at the claimed home
(c) Personal attachment to the claimed home
b) CLASS NOTES
i) Principle place of business is a taxpayers home; rev rule 75-432 (if the primary
residence is elsewhere are different)
(1) Note: A few cases have ruled that the primary residence is the tax home
ii) Cannot deduct lawyerly suits because in your day to day life you could wear a suit
to another occasion
iii) People with two businesses have a planning opportunity to deduct their expenses
(1) Inherently challenging to deduct the difference between the personal and
business expenditures
iv) 262- personal family and living expenses are non deductible stands at odds with
the rule that says business expenses are deductible
v) you can not be on a business trip that lasts more than a year 162a- your tax
home will shift to where you have traveled to
vi) see reg 1.274-4d2v traveling days on business trips
(1) if you are working on day one and day three of a business trip, day two is also
treated as a working day- these down days are treated as business days for
deducting your meals etc

(a) delays for whatever reason could also qualify- like a storm closes the
airport and youa re stuck for a couple extra days
(b) miller- wrote an article, Taxation and the sabbatical: doctrine, planning and
policy, 63 Tax Lawyer 375-410 (2010)
(i) article on ssrm- free database for scholarly articles
1. can be faster publishing than a law review which helps stake out an
idea while you wait for some agreed upon pfuture publish date
(2) an employee who is reimbursed does not have to report reimbursement or
take a deduction- the employer will take the deduction 1.162-17b and 1.62-2c
(3) 162 does not cover investment expenses
(a) investing is not a trade or business
(b) so congress enacted 212- ordinary and necessary expenses relating to
being an investor (to produce or collect income)
(i) 212 does for investing activities what 162 does for business
(ii) deductible for tax advise
(4) education subsidies ch33 in book
(a) are deductible when it is deemed to be a business expense
(i) maintain or improve skills in current employment1.162-5a1
(ii) meet employer or linesure to keep your present job1.162-5a2
(b) not deductible- education to maintain the minimum expenses for a job (JD
Not deductible)
(c) or are to qualify for a new trade 1.1652-5b (LLM requirements can be
deductible if meet 1.162 because it is not acquiring skills for a new trade
or business)
(5) 262a personal and living expenses are non deductible- creating tension with
162 when the expenditures have both a business and personal benefit
(6) office can be fancy IRS has rarely succeeded in extravagance claim- as long
as there is a legitimate business expense
(7) expense- expense that benefits current year only
(8) capital expenditure- expense that benefits more than the current year
(9) 162 allows deduction for ongoing/running the business expenses- not start up
(10)
Problems pg 93
1. Chiang Kai-Shek
a. What was subscribed to at the office for a magazine
subscription is deductible- but if subscribed for at home and
then brought to the office it is not deductible
i. Even though it is the same magazine- It is not the nature of
the asset it is the nature of the relationship with the asset
ii. Maintain skills 1.162-5
iii. Childcare expenses are not a business expense
iv. Paying homeless people to stay out of his doorway is
debatable-if it were unlawful it would change the analysis
v. Probably the close fall within the Pesner rule that they can
be worn in other settings so not deductible
vi. Office cleaning (even if son) is deductible- TAX ADVANTAGE
a child of a certain age can have an individual retirement
account (he recommends Roth which is established with
post tax dollars) that money can sit there and become
several hundred thousand dollars
b. If it is customary to give out free samples and he has a basis
then he can deduct his basis

c. If he has no basis it is harder to deduct- unless we spread all of

his costs under the premise that there are no free samples so
the cost can be spread across the purchases
2. Elizabeth Blackwell
a. Cannot deduct the cost of driving to work Flowers case; cannot
deduct meals while at work because she is not with a client or
having a business meal; office rent is ordinary and necessaryeven two offices
i. Generally speaking the govt does not second guess the tax
payers business judgment
b. Driving between the offices she can deduct the mileage, 1.1622a deductible as a business expense- once at work traveling
falls into the ordinary and necessary category (keep records of
mileage and reference what you were doing and calculate the
standard deduction the IRS allows) you do not have to report it
because you would have to deduct it so it is considered a wash
by the employee; lunch with in-house accountant or coworkers
is not considered deductible Moss v Commissioner where
partners held weekly meetings at a nice restaurant- the court
ruled no- the meal while traveling however would have been
deductible with or without a client- every meal is a business
meal; however if the accountant was a third party business
there may be cause to deduct half the lunch
i. BNA is the go to source for a quick tax answer- sample forms
are available with in the portfolios as well
ii. 119 meals provided on the premises for the convenience of
the employer
c. small apartment located at smaller office, IRS view is her
principal place of business is measured by the larger revenue,
so her smaller business travel expenses are deductible
d. court accept the IRS view that where you make the most money
is where your tax home is- test is where is the money being
generated
3. NOTE- traveling is still 50% reimbursement, but the employee does
not have to claim any income- the employer only gets 50% though
a. Some employers give a state rate (Idaho $46) for a per diemtoo little
vii)CAPITALIZATION
(1) When we make an expenditure that benefits more than one year it is a capital
expenditure
(a) An expense only benefits the current year (a consumable item or the
wages for an employee)
(2) 263a- you can not deduct a capital expenditure currently, we capitalize it
instead
(a) to capitalize an expenditure
(i) we place it on the balance sheet as an asset
(ii) we recover the cost of an asset to offset our income, two choices
1. we depreciate it
2. we recover our basis when we sell it
(3) Balance Sheets
(a) Fundamental equation
(i) Assets = liabilities + equity

(4)

(5)
(6)

(7)

(8)

(ii) Equity (net worth) = assets -liabilities

(iii)
Liabilities = assets equity
(b) On balance sheet
(i) Left column: List assets by liquidity- the most convertible to cash go at
the top/ what we own
1. Cash 150k
2. Building 100k
3. Land 100k
4. TOTAL 350k
(ii) Right column/ how we got what we own
1. Liabilities 50k
2. Owners Equity 300k
3. TOTAL 350
(c) When buying something from the left hand column cash and converting
it to an asset that is not cash the balance sheet will still balance
(i) LEFT COLUMN
1. Cash 100k
2. Bulldozer 100k
3. Building 100k
4. Land 100k
5. TOTAL 400k
(ii) RIGHT COLUMN
1. Liabilities 100k
2. Owners equity 300k
3. TOTAL 400k
(d) Balance sheets are historic numbers (not the cash) but the other assets
may be quite different so the balance sheet is just the starting placeCapital expenditure is what you acquire that is expected to help you generate
income for more than a year
(a) Long lived assets (buildings machinery, IP)
(b) Costs of constructing long lived assets (buildings machinery, IP)
(c) Costs of improving real property(d) Transaction costs to acquire any of these things
With depreciation we recover our basis in smaller increments which is
correlated with a statutory number
When do we not have to capitalize
(a) We do not capitalize expenses that benefit the current period only
(b) Examples of other things we do not capitalize even though they enhance
the value of the property (so these are expenses that can be deducted
currently):
(i) Routine repairs or maintenance 1.162-4, 1.263(a)-3(g)(1) scheduled
maintenance, minor repairs, patching leaky roofs, replacing broken
windows etc. but see 1.263(a)-3(i)(5) ex 13
(ii) Materials and supplies 1.162-3(a)
Capitalization required for NEW ASSETS
(a) A cost that results in the acquisition or production of a unit of real or
personal property 1.263(a)-2(d)(1). See 1.263(a)-3(e) for definitions of
unit or property- usually it means an asset having a useful life
substantially beyond the taxable year
(b) Document when you are using an accountant for consultation so you cover
your ass
Improvements

(a) A taxpayer must generally capitalize expenditures that result in an

improvement to a unit of property. A unit of property is improved if the
amount paid
(i) Resulted in betterment of the property 1.263-3(a)-2(j)(1)
1. Changes that
a. Fix a defect
b. Material addition to the property
c. Materially increases productivity, efficiency, strength, quality or
output of the unit
(ii) Restore the property
1. Restorations are a major renovation or refurbishment of the unit
1.263(a)-2(j)(1)
(iii)
Adapt the property to a new or different use Treas reg 1.2633(a)-2(j)(1)
1. 1.263(a)-2(j)(1)
c) DEPRECIATION AND AMORTIZATION
i) We recover our cost for a capital expenditure by depreciation, amortization, or by
basis recovery upon sale
(1) Depreciation = The decline in value of an asset due to wear and tear and
obsolescence
(a) Depreciation in a tax sense- is the gross income deduction authorized by
sections 167 and 168
(b) Property must be used in trade or business to qualify for deductions: Not
all property owned by a tax payer gets the tax benefit of section 167 and
168- it leaves out personal use property
(i) Business personal property is depreciable
(ii) Personal car is not depreciable for tax purposes
(c) CALCULATE:
(i) Start with adjusted basis 167(c) our cost under section 1012
(ii) ON EXAM Reduce our adjusted basis by the annual depreciation
allowed or allowable by 1016(a)(2)- once we have recovered our
basis investment we no longer get the depreciation
1. Not discretionary whether you take the deduction or not- you can
not choose not to depreciate- you will lose your basis whether or
not you claim it,
2. NOTE: a1 increases basis when you improve like adding a fence or
landscaping
d) Chapter 9 Depreciation and Amortization (Omit problems 1(e)

& 3)
e) CLASS NOTES 9-24-14
(a) In order to calculate the depreciation you must know (four things)
1. THE BASIS
2. THE APPLICABLE METHOD
3. APPLICABLE REOVERY PERIOD
4. APPLICABLE CONVENTION
(ii) For our purposes you only need to know two methods- (which both
assume a zero salvage value 168(b)(4))
1. straight line 168b1
2. double declining balance 168b3
(b) straight line method

(i) divide 100 by useful life and multiply times the same basis each year
(ie. Equal deductions each year)
1. get a straight line percentage- two steps
a. A ten year and basis is 200
i. 100/10-10%
ii. 200x10%-20 each year
(ii) double declining basis
1. take the straight line percentage and multiply times the remaining
basis
2. eg s/l-10%x2=20%
3. yr1 200x.20=40 (200-40=160 remaining basis)
4. yr 2 160x.2=32 (160-32=128 remaining base)
5. switch to s/l in year when remaining useful life divided into 100 is
greater than DDB percentage
6. switch to straight line to get to zero by switching when the straight
line value is more than the double declining value- double declining
basis will never get you to zero
a. this is a way to get more deduction up front instead of using a
straight line for all years that you can depreciate
(c) the applicable convention
(i) tangible persona property- everything other than real estate
1. half year for tangible personal property 168(d)(1), (d)(4)physical, movable property (intangible personal property does not
require the physical component)
a. you get the second half of the depreciation when you dispose of
it
b. mid month for real estate 168d2
2. personal use property- not for business use- and is not depreciable
3. the convention applies in both the year of acquisition and the year
of disposition
4. half year convention has an anti abuse rule that applies the mid
quarter convention
(ii) 179
1. even though this is a capital expenditure we are going to let you
deduct it upfront- applies to tangible property and computer
software
2. section 179 allows expensing in year of purchase in some cases
179a
a. applies to section 179 property 179d1
i. tangible personal depreciable property
ii. computer software
b. has dollar limits on purchase amount 179b1 and 2
c. has taxable income limit 179b3
d. reduce basis
3. bonus depreciation is highly volatile in congress may change before
the end of the year and be retroactive
(iii)
framework for applying 179- apply it ahead of the regular
depreciation rules, and then apply the regular rules for the same yearremember 179 will reduce your basis so it will impact the application of
the regular rules
1. determine the 179 property
2. apply dollar limits

3. apply taxable limit

4. etc get from slides
(iv)
168k
1. 50% bononus depreciation in year of acquisition
2. expires jan 1, 14
3. applies after 179 and before regular depreciation deduction
4. may reenact this year so should keep an eye on it
(d) Simon v Commr
(i) Professional violinists buy two Tourte bows
(ii) Bows were subject to wear and tear, but they increased in value
(iii)
Violinists claimed depreciation deductions
(iv)
IRS challenged for lack of determinable useful life
(v) HELD: that as long as it was subject to wear and tear or obsolences
1. Determinable useful life no longer applies
(vi)
Eg
1. Land is not depreciable because it does not have a terminable
useful life
2. Stock is not depreciable because a company has no determinable
life span
ii) Problems Pg 129- see slides
(1) Oriana buys equip. for 300k, 8 year class life, and a 5 year prop under 186c
(a) Straight line
(i) Depreciation base $300k 167c, going down under 1016a2
(ii) Method straight line
(iii)
Recovery time five years
1. 168e 8 yr class life is a five year property- has a five year life
(iv)
300xpercentage of 20% x.5=30k
(v) takes six years to depreciate a five year property because we only got
a half year in year one
(b) using double decline balance method, year four it would be the same
deduction so switch in year five
(i) 300 x .4 x .5 =60k
(ii) 40% percentage
(iii)
60k deduction
(iv)
basis at end of year one 240k
(v) 240 x .4 no half life = 96k
(vi)
basis at end of year two 144k and so on
(c) have to take a half year deduction because selling nov. 1 for 100k
(i) amount realized is 100k
(ii) basis 69120
(iii)
gain realized 30,880
(iv)
applicable convention applies in year of disposition as well as
acquisition
iii) automobiles- NOT ON TEST
(1) 280f
(a) caps auto depreciation at lower levels
(b) numbers are adjusted for inflation
(c) originally targeted luxury autos but now applies to most autos
(d) for 2014
(i) 1st yr 3160
(ii) 2nd yr 5100
(iii)
3rd yr 3050

(iv)
4th yr 1875
iv) dual use property (business and personal use) NOT ON TEST
(1) 280f
(2) where personal use exceeds 50% TP must use stragith line method of
depreciation 168g, 280fb1, d4
(3) only get to depreciate the business portion of property use
v) AMORTIZATION 197
(1) Allows amortization of intangibles
(2) Straight line method
(3) Straight 15 year useful life for recovery
(4) 197d1 lists included intangibles
f) what is intangible property- any item whose intrinsic value is non physical, the
physical thing is merely representative of the underlying value
g) KNOW: 1.197-2b defines in more detail
i) what is goodwill
(1) an intangible asset that reflects an expectation of earnings than a fair return
on capital invested in the business- your reputation with your clients
ii) what is going concern value
(1) the value of a business as a operating business as compared with separate
sale of its assets
(a) some businesses worth more as a business than as separate assets
h) some intangibles have a determinable useful life- the ones that don't include stocks
and goodwill
i)
10)
Chapter 10
Deductible Personal Expenses: Casualty and

Theft Losses

a) 1001- a loss is when the basis exceeds the amount realized

b) deduction of losses governed by 165- authorizing business and investment losses
i) personal expenses not deductible, unless it is a personal casualty loss:
(1) 165c3- if such loss arise from sudden, unexpected or unusual events like:
(a) fire, storm, shipwreck, or other casualty, or from theft
(2) for property losses only (not losses like income)
(3) The deduction is for the adjusted basis or the decline in FMV- whichever is less
(a) Minus any reimbursements for the loss (insurance)
(b) Insurance payments and disaster relief grants for out-of-pocket expenses
are not considered property loss reimbursements and do not reduce the
deduction
c) Restrictions:
i) Must be over a $100 threshold to qualify for tax deduction- based on single
event not each piece of damaged property in the event
(1) Multiple owners each have to pass the $100 threshold
(2) Married couple s are treated like one individual
ii) The net casualty loss (loss minus reimbursements) is only deductible to the
extent it exceeds ten percent of adjusted gross income 165h2A
(1) Deduct ten percent of adjusted gross income form the total net loss for the tax
deductible amount under a casualty
iii) The casualty tax deductions also reduce the adjusted basis for the same amount.
(1) So if the casualty deduction is a net $1600, then the adjusted basis is reduced
by $1600 too
d) Chamales v. Commissioner (2000-33)
i) Two elements to a casualty loss

(1) Event must qualify as a casualty

(2) The damage sustained must be such that it is deductible under 165
ii) A sudden event is not limited to those flowing from nature and may include
manmade events
iii) Damage must be
(1) physical damage, not just reputational damage, or
(2) permanent character changes to area (not something that will blow over in a
few years)
e) Blackman v Commissioner (1987)
i) Can he deduct the loss for a fire he started?
ii) Courts typically disallow deduction if against public policy- like arson and
domestic violence
(1) Conviction of a crime is not necessary to prove frustration of public policy
(2) Regular taxpayer negligence is not a bar to casualty deduction- but gross
negligence is
f) Problems page 147
i) Judy Garland
(1) Adjusted gross income 50k
(a) $12,100 (FMV of car)- $100 threshold- $5,000 (10% of adj. gross income)=
$7,000 deduction
(i) NOTE: if it had been a gift use the basis of the giftor to get the lessor of
basis or FMV
(b) $40,000- 5,000= $35,000 deduction
(c) $15,000 deduction
(d) $185,000 (minus insurance payout)
ii) Paul von Hindenburg
(1) Negligent fire
(a) Deductible loss
(b) Still may not be gross negligence
(c) May be gross negligence- in which case he would not get the deduction
because his acts would frustrate public policy
iii) Alfred Kinsey
(1) Sex offender moves in next door
(a) Maybe, he would have to overcome the hurdle of a lack of physical
damage
(i) if the sex offender would be considered a significant irreversible
change in the character of the neighborhood he could get it
(b) no. it is a temporary situation and the deduction is not meant to cover
fluctuations in value
11)
Chapter 11
Other Deductible Personal Expenses: Taxes,

Interest, Charitable Gifts, Moving Expenses, and Medical

Expenses (Omit problem 4).
a) Itemized Deductible personal expenses include:
i) Home mortgage interest 163h3Bi (applied per residence not per taxpayer)
(1) Two kinds of indebtedness (qualified residence)
(a) Acquisition indebtedness- to buy or improve the property secured by the
property
(i) 1m limit
1. secured by the residence to improve the residence includes
debt arising form the financing and points if paid from
separate funds

(b) Home equity indebtedness(i) 100k limit

1. pg 14 and 15 of Keiths outline
(2) qualifying property (up to two)
(a) is the principal residence and one other residence selected by taxpayer
(i) could be a boat or a trailer
(ii) the second property must be used for:
1. more than 14 days, or
2. ten percent of the days the home is rented out
(3) prepaid points must be capitalized and deducted over the life of the debt
(a) however points, paid from funds separate than the loan, for home
acquisition can be deducted 461g2
ii) State and local taxes
(1) Through 2013 may not apply now
iii) Charitable gifts 170
(1) If the contribution base limit is exceeded the excess deduction carries over to
the next year
iv) Moving expenses 217
(1) Expenses involved in moving in order to change or find a job
(2) Meals are not deductible
(3) Two requirements
(a) Distance- must be at least 50 miles farther than the previous residence
from work
(b) Time- must be employed at new job for at least 39 weeks in the next 12
months
v) Medical expenses 213/1.213-1e1
(1) Limited to the expenses that exceed 10% of adjusted gross income
(2) Most cosmetic surgery expenses are not deductible
(3) To the extent that a medical improvement to property does not enhance the
property it is deductible
(4) Requirements
(a) Must be an essential element of treatment
(b) Must not have otherwise been incurred for nonmedical reasons
(5) Eg
(a) Breast reconstruction after cancer is deductible
(b) Laser eye surgery is deductible
(c) Teeth whitening is not deductible
b) Problems page 163
(1) Maggie May and Rod Stewart- Married couple buys a home, loan secured by
the property
(a) The points are deductible 461g2 because they came from a separate
account, and the interest on the home loan is deductible up to 1m
163h2d
(b) The 250k mortgage interest is deductible on their primary loan (up to 1m)
and 100k is deductible on their equity line
(i) 100k reinvested is acquisition interest and falls under the 1m limit for
both loans (under the FMV of home)
(ii) 100k invested in education is the home equity indebtedness
(c) The interest on the 300k :
(i) 100k in refinancing of acquisition indebtedness falls under the 1m rule
and is deductible
(ii) 100k falls under equity line (can be spent on anything)

(iii)
100k is not deductible
(d) They are in the cabin for more than 14 days, and more than 10% of the
days the home is out, so they can deduct the interest up to 1m
(i) Aggregate of both homes- is up to 1m limit so they get the 300k for the
primary home and 700k for the cabin that would be deductible; so the
last 100k can be applied to the home equity 100k and still be
deductible
(ii) When there are multiple owners
1. It is 1m per residence
2. And 1m per taxpayer- or entity considered one taxpayer
(2) Ty Cobb; No his new job is only 45 miles from his former residence- he needed
to be more than 50 miles farther from his old residence to his new job 217
(3) Cole Porter; Medical expenses
(a) The 20k for home modifications id deductible; under rev rule 87-106
(assuming the changes did not improve the value of the home)
(b) the 10k for the elevator that exceeded the 5k home value enhancement is
deductible; under rev rule 87-106 (assuming the changes did not improve
the value of the home)
(c) $3,000 incidental medical expenses is also deductible
(d) $33,000 is his total deduction
(4) Baron Vladimir Harkonnen ; under 213/1.213-1e1
(a) Gastric bypass is deductible- is an essential element of treatment
(b) Liposuction is not- not an essential element of treatment, cosmetic
probably not considered a deformity of his disease- but if it were he could
deduct it too.

Chapter 12
The Deduction Hierarchy: Adjusted Gross
Income, Taxable Income, the Standard Deduction, and the
Personal Exemptions (Omit problem 3).

12)

a) Two main categories of deductions

i) Above the line
(1) Above the line are Better deduction because you Always get them no
matter what and you still get the standard deduction
(2) If you itemize you have to choose between itemizing and taking the standard
deduction
(3) Reimbursed employee business expenses are above the line (leaves out
unreimbursed employee expenses which fall below the line)
ii) Below the line
b) In the case of an individual the aggregate of an itemized deduction must exceed
2% of adjusted gross income
c) Key provisions for computation of tax are in 61, 62, 63
d) Computation Flow
i) 61 gross income
ii) 62 adjusted gross income
(1) 63a itemized deductions and 67 misc itemized deductions, OR
(2) 63b standard deduction
iii) 63 a and b- personal exemptions
e) Above the line: Section 62 allows for deduction to arrive at adjusted gross incomei) it does not create tax deductions- it authorizes where deductions should be taken
ii) TYPES of 62
(1) Business expenses
(2) Investment expenses

(3) Attending college

Below the line: Section 63 allows for deductions from adjusted gross income
(mostly personal expenses) less desirable because in order to take you have to give
up the standard deduction
i) Itemized deductions that are calculated to arrive at taxable income
(1) Must exceed 2% of adj. gross income
(2) Subtract the 2% from the itemized amount to come to what the allowable
deduction is
ii) Both authorizes where deductions can be taken AND authorizes the standard
deduction
iii) TYPES of 63
(1) Interest
(2) Property and state income taxes
(3) Casualty losses
(4) Medical expenses
(5) Charitable deductions
(6) Misc itemized deductions 67(a) 62a2- unreimbursed employee business expenses are only deductible as
to the amount that exceeds 2% of adj. gross income
g) Standard Deduction- can be taken in lieu of itemizing for below the line deductions
63 b and d
i) Married couple $12,200 ; listed in the annual revenue procedure 2013-15
(1) 2014 goes to $12,400 for married couples (Rev Proc. 2013-35)
ii) Single $6100
iii) Over 64 and blind get an extra $600 each
h) 63 a and b- personal and dependency exemptions
i) everyone gets a personal exemption unless the are someone elses dependent
151b and c
ii) personal exemption statutorily set at $3900 (married people get two) (2014 will
be $3950)
(1) qualifying children-must share same household more than half time, who do
not provide over half their own support, meeting age requirements, children
who are away at school still are deemed to live at home- and educational
scholarship is not considered income
(a) type 152c1, c2, f1b
(i) biological
(ii) siblings and their descendants
(iii)
step
(iv)
adopted
(v) descendants
(b) over 18, or if a student over 23, 152c3
(c) children of divorce- 152e2/152d- custodial parent can transfer righto
deduct
(2) Qualifying relative- must receive more than half of support from taxpayer and
have less income than the exemption amount
(a) Child
(b) Descendant of child
(c) Sibling
(d) Parent
(e) Step parent
(f) Ancestor of parent
(g) niece or nephew
f)

i)

j)

(h) aunt or uncle

(i) most in laws
(j) OR a person who has shared the taxpayers home for a year, receives more
than half their support from taxpayer and is a member of the taxpayers
household
(k)
problems page 175 START HERE FRIDAY
(1) x
(a) not deductible- general upkeep of personal property 262
(b) deductible above the line as an expense 162 or 212
(c) deductible below the line itemized per 163h, 164, listed in 67 so not
misc.
(d) deductible above the line as an expense to making money, 162
(e) deductible as on going education above the line 162
(f) then they can deduct- they cannot deduct it if they do not report it as
income
(i) 1.62-2c4
(g) deductible. Above the line education expense 62 and 221
(h) deductible under 215a; 62a10
(i) 212 misc. itemized deduction for an individual
(j) deductible as a business expense above the line 162
(2) x 152c
(a) deductible under dependency exemptions, meets age req, 1.152
(i) if qualify for both relative and child take the child
(ii) 152f5- scholarship disregarded in this calculation
(b) same as a
(c) deductible- qualifying relationship- does not have to live with and Jed
provides more than half support
(d) still has to share a household, because she is no longer in the right
relationship, if at had been his aunt 152d2F it would be OK- but a great
aunt I snot
(e) deductible below the line as a dependent 152d2H
(f) 2013-17 it doesn't matter where you reside if you were lawfully married we
will treat you as married for IRS tax purposes- could also qualify under
152d2H
(g) basic rule 152c4B custodial parents get exemption- unless 152e deductible
if arrangements were made in the divorce to transfer the exemption
CLASS NOTES 9/29/14
i) 165c- lets us deduct business and investment losses and casualty losses
ii) 262 denies deduction of personal expenses (personal, family, living)
(1) congress has run several provision counter
(a) 163, 164, 170, 217, 213
iii) utility bills are not deductible when it is your personal use property
iv) 164
(1) STATE INCOME TAXES ARE DEDUCTIBLE
(2) 164b5- authorizes deduction of sales tax instead of income tax- expired at the
end of last year but may be passed again retroactively
(3) property taxes on real estate are common deductions
(a) one of the tax advantages to owning your own home
v) fairness- Horizontal equity E and Vertical E
vi) Efficiency- tax but not too much
vii)Neutrality- tax equivalent transactions the same

k) Every tax involves the application of a rate to a base

i) If you create a deduction and shrink your base, the rates have to go up to make
up the difference
l) Progressive taxation based on ability to pay
i) Graduated rates- the higher your bracket the more important each deduction
becomes
(1) If you are in a 10% you only save 10%
(2) But if you are in a 40% bracket you save 40% of the deduction
m) Home mortgage interest 163
i) Like 165a, section 163a starts out broadly ad then cuts back
n) Qualified residence interest
i) Acquisition indebtedness up to 1ms interest
ii) Home equity indebtedness up to 100ks interest
iii) Beneficiaryo) Deductions v credits
i) Deductions reduce income BEFORE applying the tax rates
ii) Credits reduce tax liability AFTER applying the tax rates
p) Charitable deductions 170- not covering in this course
i) Contributions to a recognized charity
ii) Many limitations for noncash gifts- see ch. 20
iii) 50% of contribution base limit
iv) cash contributions are fully deducitble up to 50% of your contr. Base limit is
almost as high as adj. gross income
q) moving deduction- 217
i) must be 50 miles farther from home than last residence and employer 217c1
ii) if no previous job, then the job causing the move must be 50 miles from former
residence
r) Medical deduction
i) 213a allows for expenses that exceed 10% of taxpayers adjusted gross income
ii) Medical expenses can include travel expenses and some capital expenditures as
they relate to medical care
iii) Elective cosmetic procedures are generally excluded
s) Practice tip- check current laws on line- which are the most current (books take
month sto publish so even a current book can be old)
13)
Ch. 13
Timing Rules and Related Principles. Skim section III.C.2.a
on inventory accounting (omit 1(g) & 2)
a) Methods of accounting 446 (accrual, cash, or other allowed)
i) May use different method for different businesses
ii) Must get permission of Secretary to change method
b) Limitation of Cash Method 448
i) Cannot be used by C Corporations, where C Corporations are partners
c) Rules for Taxable Year Inclusion
i) 451a determine what period the income should be accounted in
ii) 451h1- if using the cash method, the cash option for a qualified prize is not
considered when determining the period the prize is includable as taxable income
iii) 451h2(a) qualified prize option means cash, in lieu of receiving a qualified prize,
that is exercisable no later than 60 days after entitled to collect prize
(b) A Qualified prize must not relate to any past services or future services by
the recipient, and is payable over a period of at least 10 years.
d) Rule for taxable year of deduction
i) 461a- take the deduction as proper for your method of accounting

ii) 461g- prepaid interest

(1) when the interest is paid for the use or forbearance of money for a tax year
that is in the future, then account for the payment as a capital expense to be
accounted for in the year benefiting?????
(2) EXCEPTION: points paid for primary residence if established as a common
business practice
iii) 461h1- the all events test is not met until economic performance occurs
e) Inventory
i) 1.446-1a4i- compute beginning and end of year inventory to in taxable income
ii) 1.446-1c1i- for cash accounting include what was actually received- cash and
disbursements; and deduct what was actually spent
iii) 1.446-1c1iiA- for accrual accounting claim income when all events and
performance have occurred to fix the sum owed with reasonable accuracy
iv) 1.446-1c2i- if necessary to use an inventory must use accrual method
v) 1.451-1a- general rule for taxable year inclusion
(1) accrual method- income claimed when it can be reasonably accurately
determined the amount owed, and all performance for that income has been
completed
(2) Cash method- income claimed when collected
(a) File amended claims for discrepancies found after year end
vi) 1.451-2a- receipt of income
(1) is when the income is within the taxpayers control- has been set aside,
credited to account, or otherwise made available so that he may draw upon it
at anytime
(a) income is not substantially limited if it is only:
(i) required to be withdrawn in certain increments
(ii) will not incur a substantial loss of interest if withdrawn earlier rather
than later
(iii)
vii)1.461-a1-2iviii) CLASS NOTES 10-6-14
(1) Timing rules slide
(a) income is determined on an annual basis
(b) thus, the timing of income and deductions matters
(c) The taxpayer wants to defer income and accelerate deductions
(d) The govt wants to accelerate income and defer deductions
(i) Leverage for business is how mobile capital is- businesses could move
their operations overseas
(ii) Hard to tax entities who have such flexibility in how they arrange their
affairs
(2) Ideally income and deduction should be matched to accurately depict taxable
income
(3) Two methods we will study
(a) Cash
(b) Accrual (in accordance with GAAP-generally accepted accounting
principles)
(4) When does income arise under cash method
(a) When income is actually or constructively received 1.451-1a
(i) Payment can be in cash, debt assumption, property or services, 1.611a
(ii) checks are treated- like cash

(iii)
or if a debt instrument that can be negotiated near its face
value
(b) constructive receipt- when payment set aside for us and no substantial
restrictions on control (cannot refuse to open your hand to accept
payment) 1.451-2a
(5) deductions under the tax method- get deduction when pay the bill- follow the
money 1.446
(a) effect of mailing a check- mailing a check is payment rev rule 54-465- get
the deduction the prior year- if mailed- wiring a check does not give you
the deduction, but the receiver
(i) credit card payments- cc are immediate payment rev rule 78-38
(6) manipulation of cash method
(a) income deferral
(i) delay sending out bills
(ii) delay accepting payment
1. when there is a requirement that you have to be asked to be paid
the rule is greyer
(iii)
delay applying for benefits
1. is there an affirmative action that can be delayed?
(b) accelerate deductions
(i) prepay expenses
1. there are various restrictions, and there are cases on this
a. simplified: you cannot pay more than 12 months out
(7) income under the accrual method
(a) have income when all events have occurred fixing the right to payment
and the amount 1.466-1c1iiA
(b) income also arises most of the time when payment is received if receipt
occurs before all events have occurred Schlude
(i) if fail to perform you will apply for a refund/amend your taxes
(c) deductions arise when 1.461-1a2i
(i) all events occurred
(ii) that establish the fact of liability and
(iii)
the amount due and economic performance has occurred
(8) principles that apply to both methods
(a) claim of right doctrine
(i) earnings held under claim of right (steal, embezzle, rob is included)
must be reported even if potentially refundable(ii) section 1341 applies if refund occurs (creates a deduction)
(iii)
claim of right applies to ill gotten gains
(b) tax benefit rule
(i) if you take a deduction in one year that is recovered subsequently
1. bad debt deduction 166
2. defaultor actually pays after you have claimed a bad debt
deduction that is later paid, so now you have to claim that payment
as income equal to the deduction taken earlier
(c) inventory accounting
(i) LIFO-FIFO
(ii) Bar codes and Just-in-time inventory
(9) Accounts receivable
(a) Cash method
(i) Income when paid
(ii) Zero basis until paid

1. Because we have not reported any income

(b) Accrual method
(i) Income when earned
1. We have a tax cost basis equal to the income earned (not based on
when it is received)
(ii) tax cost basis when earned 1.61-2d2
f) Problems pg 191
(1) Slim is cash, and Gator is accrual
(a) Slim is using the cash method so he has income on Dec 31 when the check
arrives, Gator has a deduction that same year
(i) The all events test is satisfied- performed their part of the bargain
(b) Same as a, Slim had receipt of the income when the money arrived
1.451-2a, Gator had completed performance and all events had occurred
to fix the sum owed with reasonable accuracy- so claim that first year
(i) Ames v commissioner?
(ii) Constructive and/or actual receipt
(c) Slim did not have receipt of the funds until January 2, so he would pay the
following year, Gator however would still pay year 1 since he had
completed performance and all events had occurred to fix the sum owed
with reasonable accuracy- deduction yr 1
(i) Slim does not have possession or control in yr 1
(ii) Gator has a deduction because all events test satisfied
(d) Slim has income when paid year 1, even though he had not finished his
performance, Gator does not have a deduction until year 2 when
performance was complete.
(i) Economic performance by Slim did not occur until year two- so Gators
deduction is yr 2
(e) Still has income year 1- claim and can either deduct the amount off of the
taxes for the year the dispute is settled or go back and do an amendment
1.451-2a
(i) Claim of right doctrine
(f) Slim has year one income of 100k, Gator 60k deduction year one, with 40k
of income from the stock
(i) Income recognition event under code 141
(g) omit
(2) Omit
(3) His basis was 1m which he would have to pay tax yr one, he had a 50k
business expense/deduction from the selling of his AR to the bank, had he
been on a cash system he would not have had to pay the taxes in yr 1 and in
yr 2 he would just have the zero basis of 950k income
(a) Basis in acct receivable is 1m- accrual method has to report right away1.61-2d2
(b) In both cases over two years his income averages out- the timing is the
difference
(4) 10m, 451h2, sum is payable over more than 10 years.
ii) CLASS NOTES
(1) GAAP- generally accepted accounting principles
(a) Polices used in the accrual method of accounting
14)
Ch 14 Ordinary Tax Rates and Taxpayer Classification
a) 1(a) married filing jointly and surviving spouse Calculations
b) 1(b) Heads of Household Calculations
c) 1(c) Unmarried Calculations

d) 1(d) married filing separately Calculations

e) 2a surviving spouse= spouse died within two years prior, survivor pays over half of
maintaining household, and has a qualifying child- who has not remarried or filed a
joint return under 6013a3)
f) 2b Head of Household= unmarried not a surviving spouse, who maintains a
household for dependents
g) 2c- taxpayer treated as unmarried if qualify as such under 7103b
h) 1(f)- phase out of marriage penalty in 15% tax bracket
i) 1(i)- 10% tax bracket for taxable income under 14k
j) 55(b)(2)
k) 56
l) 57
m) 58
n) 6013(a)
o) 7703(a)
p) Problems pg 209
(1) Laurence Olivier apply 2013-15
(a) $116,163.75+$39,600=$155,763.75
(b) under 7703 not married since they were not married at the close of the
year, so same as a
(c) $125,846+$19,800=$145,646
(d) non-community prop; table 4; $62,923 + 99000=171,823
(e) community prop; 62,923+9900=72823x2=$145,646
(f) still file jointly in year of death, not a surviving spouse- this an amendment
to the married rule- same as c
(g) Surviving spouse- same as c
(h) Timed out of surviving souse, so now head of household- table 2
(i) 121,364.5+ 29700= $151,094.50
(i)
q) CLASS NOTES
i) Section 1 sets out rates- but must look at the current years rates for adjustments
(1) Mildly progressive structure by historical standards
ii) 4 taxpayer individual classifications
iii) the same tax rates apply to the different classes of income- the top bracket you
fall into is for the last part of the money that is above
iv) marital status determined at end of year 7103
v) state law determines most of statuses for tax purposes
(1) DOMA sought to overrule this by declaring at the federal level that marriage is
between one man and one woman
vi) TODAY we are looking at joint filing
r) Tax Credits (Omit Problems 1(f) & (g) & Problem 2)
s) CLASS NOTES
i) Non-deductible deductions are deducted first
ii) Refundable credits
(1) The withholding tax credit 31
(2) the earned income credit 32
(a) incentive to work even if it is only for low wages (instead of residing on
welfare)
iii) Hope scholarship credit
(1) A provision that lays out a mathematical formula in words
(2) It is inflation adjusted
(3) Congress passed a temporary revision 25Ai (not worrying about it)

t)

(4) Applicable limit without inflation adjustment is 2k

(a) The applicable limit in excess of 1k is $500
(b) Maximum hope scholarship credit is $1500
(5) If you dont qualify for the Hope $1500 (first two years or have a felony) then
you can get the Lifetime earning credit which is 2k
(a) Lifetime earning credit is limited to 20% of $10,000 of qualified expensesregardless if more than one student, multiple students can aggregate
(i) Doesnt matter if the money is borrowed
iv) Start with part 1 f of the chapter 16 review
Chapter 16
First Review Problem
i) Part I
(a) Tommys gross income is +5k under 61a (1or2), and rev. rule 79-24
(b) It's a wash, 15k FMV and 15k reimbursed under 1.165-1(c)(4) (1001?)
(c) Do not have to declare a bargain as income, not a recognition event under
1001(b)(c)
(i) Not like Cessarini because there was nothing separate from what
purchased that was the treasure trove, the purchase was a bargain
(d) Gross income does not include the value of a gift 102a
(e) Income form a gift is taxable 102b1- Tommys income is +1k
(f) Tommy is on a cash basis and has not been paid, no income under 1.4511a
(g) Realization of 8k 1.451-1a (declare 9k-1k?) he has a zero basis in
accounts receivable so everything he gets is income
(h) Realization of $25,001-$1 investment, +25k to Pamela under 183
(i) Realization of $4k income 61a- whatever source derived
(i) If you have a good number for one side of a compensation you use that
number for the other side
(j) Realization of 5k of income- not in the line of business
(i) Under 132 the discount would be allowed for a qualified employee
(k) GROSS INCOME is 233k (surgery not included as income)
ii) Part II
(a) Tommy has 67k in above the line business expenses 62
(b) 10k above the line deduction under 179
(c) Pamela can deduct $3200 below the line, 3k travel and half her meals for
$200
(i) It is not disqualified under 170j (reimbursed employer expenses are
above the line)
(ii) Deduction under 162 and 274n
(d) Tommy can deduct 2k above the line under
(i) 62a2B- does not create a deduction only authorizes a deduction
above the line
(ii) pessnor v commissioner- can only deduct clothing when that clothing is
1. a requirement for employer
2. not suitable for ordinary clothing
3. and not worn for ordinary clothing
4. objective test
(e) Prof Organization can deduct $300, unreimbursed business expense 162,
subject to our analysis under 67 below the line
(f) Prof Organization can deduct $1k, ordinary and necessary self employed
business expense 162-15d union dues
(g) Can deduct below the line
(i) 4k in prop taxes under 164a2

(ii) 9k in mort interest under164h2D

(h) 8k deduction under 170a1 below the line
(i) 7k state income tax deductible (the 3k in sales tax is not enough to be
worth it in the trade off) below the line
(j) 4k medical expenses is deductible below the line because the misc
itemized deductions exceed (is it 2% or 10%????) of adjusted gross income
under misc items 67
(i) however this is only an advantage when itemized deductions exceed
the standard deduction
(k) they have a 25k increase in the basis of their residence; 262 prohibits the
deduction of personal living expenses
(l) GROSS INCOME is 233k
(m)
ABOVE THE LINE DEDUCTIONS $80k
(n) ADJUSTED GROSS INCOME $153k
(o) BELOW THE LINE DEDUCTIONS $28,440
(i) $31,500 (pre 67)
(ii) 67 for seminar and dues: calculation- have to exceed 2% of
AGI= $3050
1. 3500- 3060 (the 2%)= 440
(p) 5 PERSONAL EXEMPTIONS- at $3900 each= $19,500
(i) Husband and wife
(ii) Two minor children
(iii)
Grandpa; because
1. provided more than half his support,
2. gross income is less than the exemption amount
3. he is in the right relationship
(q) TAXABLE INCOME $105, 060
(r) CREDITS
(i) Pre credit tax liability 18122.25=9982.50+8140
(32560x.25=8140)
(ii) Child tax credits= $1000 per child, $2000 total
1. Credit phases out by $50 for every $1000 of agi over
$110000
a. 153000-1100000=43000
b. 43x50= more than their credit would have been
(s) Tax bill $2122.50
(i) 18,122.50-16.=2122.50
iii) Part III: $108,000
(1) have 5 personal and dependency exemptions (dad (143) and two kids are
also deducted)
(2) had $32k in below the line deductions
iv) Part IV: $159,500 (after above the line deductions)
v) Part V: $6107.50
(1) $9,982.50 + 25% of excess over $72,500
(2) minus the 16k they had already paid
15)
a)

Part II: Characterization of Gains and Losses from Property

A recognized gain or ordinary loss is recognized as Capital or Ordinary
depending on:
i) The nature of the property
ii) The taxpayers holding period
iii) Whether the disposition of the property was a sale or exchange

b)

c)

d)
e)

f)

g)

Tax payers prefer

i) Gains to be classified as capital gains for a lower tax rate
ii) Losses to be classified as ordinary losses to avoid the statutory
limitation of only allowing capital losses to offset capital gains and
$3k of ordinary income IRC 1211b
Only long term capital gains get preferential tax status 1222(3)
i) Defined as a gain:
(1) From the sale or exchange
(2) Of a capital asset
(3) Held for more than one year
Short term capital gains are taxed as ordinary income
The Sale or Exchange Requirement 1222 (narrower than other
disposition in 1001)
i) A foreclosure is a sale or exchange- even though involuntary
ii) Voluntary conveyance through a quit claim deed is a sale or
exchange
(1) Even if not liable for non-recourse mortgage debt
iii) Insurance compensation for loss is not a sale or exchange
The Capital Asset Requirement 1221a is all property held by the
taxpayer- whether or not connected to trade or business (subject to
certain exceptions)
i) 3 categories of exclusions (inventory type property)
(1) stock in trade
(2) inventory
(3) property held by the taxpayer primarily for sale to customers in
the ordinary course of a trade or business
ii) POLICY: profits arising from everyday transactions are taxed at
everyday income rates just as wages are taxed
CLASS NOTES 10-15-14
i) Review
(1) Be sure to remember code section 1001 key terms
(a) Amount realized 1001b
(b) Adj basis 1012 basis is cost/1016 basis gets adjusted
(i) 1015 and 1015 basis provisions for gifts and requests
(c) Gain realized
(d) loss realized 1001a
(e) Gain recognized
(f) loss recognized
(g) FMV 20.203?
(2) 1001c presumption that we will recognize every gain or loss
realized unless there is an exception
(a) like 102or 165
ii) CAPITAL GAINS AND LOSSES

Ordinary income rates 1a-d

Net capital gain rates 1h (will not hold us responsible for this
section)
(3) Ordinary losses 165
(4) Net capital losses 165, 1211, 1212, 1222 (HAVE A WORKING
UNDERSTANDINGOF THESE!)
(5) If you can't find someplace that something is not a capital asset
it IS a capital asset- 1221 defines a capital asset as anything
that it is not (s defined in other statutes)
(a) Self created musical works CAN be capital asset treatment
1221b3
(6) A capital asset is determined not by the kind of property but the
relationship with the owner of the property
(7) Investment property is both depreciable and a capital assetunless you are in the trade or business of renting (depreciate
property used for business not a capital asset)
(8) Long or short term 1222(1-4)
(9) Various gains are netted twice
(i) See slide
(10)
WILL BE ON EXAM: Know net capital gain
(1222(11))and net capital loss (12229(10))
(11)
Net capital gains gain the benefit of 1h- you want the
benefit of the lower tax rates!
(a) Excluded from net capital gain are net short term gains
(12)
What are the capital gain rates? These rates are only
maximums
(a) 15% is the default
(b) 20% for the highest OI bracket
(c) 25% applies to gains derived from depreciation of real
estate
(d) 28% applies to collectible gains
(i) like artwork
(13)
Capital losses are first deducted against capital gains
1222
(a) If you have more losses than gains- the losses in excess of 3k
allowed to offset your ordinary income carry over to the next
year, in the same manner- they do not expire so can continue
to carry forward until loss is realized 1211b
(14)
ALWAYS TESTS ON: what if you have both net long term
capital losses and net short term capital losses- which one are
you going to use first?
(a) NSTCL 1212b- take the short term losses first and then apply
the long term losses, and carry over the balance
(1)
(2)

(b) Put together 1211b and 1212b

(i) 1212b has you construct a legal

fiction of a 3k short term

capital gain for purposes of calculating the loss carryover
(15)
KNOW THIS (it will keep coming up) Tacking of holding
period 1223
(16)

Chapters 28 and 29 are devoted to IP

CLASS NOTES 10-17-14

(1) NLTCG-NSTCL= net capital gain z1222(11)
(2) Only NET CAPITAL GAIN gets the benefit of the lower rates in
section 1h
(a) Main rate is 15%, higher tax payers get up to 20%
(b) 28% collectible gains
(3) capital losses offset capital gains
(a) 1211 and 1212 allow to offset all the gains you can take
another 3k of losses and offset ordinary income- anything
beyond that carries over to the next year
(b) net capital loss 1212b-the term correlates to the amount of
your carry over if you do not have net capital loss in excess
of the 3k to offset your income tax- you do no thave a net
capital loss
(4) deduct NSTCL (short term capital losses) first against Ordinary
Income (OI)
(5) 1223(1) tack holding period when property has exchanged
basis, eg 1031 exchanges
(6) tack holding period 1223(2) when property has a transferred
basis- gift property tacks holding to help achieve the 12 month
minimum for long term capital gains
(7) POLICIES for taxing capital gain at a lower rate
(a) Earned over more than one year
(b) Gain may reflect inflation
(c) Encourages investment and capital formation
(d) Estate and gift tax may catch it anyway
(e) Avoids lock-in effect
iv) Overview of limitations on taxing the wealthy
(1) Estate tax
(a) 5.4 million exemption
(b) 40% max rate
(c) many planning opportunities
(2) Social Security tax
(a) Capped at about $115,000 per year
(b) Does not apply to investment income
(3) Medicare tax
(a) About 1.5%
iii)

(b) Does

not apply to investment income

Ordinary income 40% max
Capital gains: mostly taxed at 15%-20%
Basis step up for inherited assets
Income exclusion for inherited or gifted assets
v) Sports and entertainment income earners want to look at differed
compensation to defer earnings to retirement income
vi) KNOW net capital gain 1222(11)
(1) Application of the taxing of net capital gains is tax payor
favorable- generally you can account for the higher capital gain
items first so your income is substantially the lowest categories
you qualified for
vii)Net capital gain does not include short term capital gain- if there are
both positive because the short term will be taxed at ordinary
income rates
viii) Account for short term losses first so even if both categories
have losses, if you can wipe out the short term with the 3k against
ordinary income the balance will be taxed at the long term lower
rates
ix) Short term losses are also carried over to next year (maintaining
their character as short term) even though a short term capital gain
return would have been income
h) PROBLEMS pg 227
(1) Jean Jolly
(a) Property- look at the relationship between the property and
the owner not the property itself
(i) 10,000 hangers- is a supply or inventory not a capital
asset
(ii) Machine, depreciable so not a capital asset
(iii)
building and land, depreciable property (167) and
real property used in a trade or business is not a capital
asset
(iv)
antique rug, 406m2b- a rug or other antique
1. depends on whether it is used in the trade or business
1221a2
2. the rug is subject to wear and tear so it is depreciable
3. not a capital asset
(v) self-painted portrait
1. self created- is excluded from capital assets
2. created by ones own labor- like patents and copyrightsthis is consistent with taxing labor at ordinary income
rates
(vi)
accounts receivable 1221a4
(4)
(5)
(6)
(7)

not a capital asset

trademark
1253 trademark- is a capital asset if the sale is
complete
i. 1235 refers to patents
(b) if you are selling an unincorporated business it is like a sale of
all the assets individually
(i) as the buyer this is the better option to get the higher
basis in the individual assets
(c) 500k capital gain realized, 1202a1 he can exclude 50% of his
gain for small business
(i) as the seller this is the better transaction to get the lower
tax rate
(2) Skip
(3) Mary- 6k LT loss
(a) 2k st loss
(b) 7k lt loss
(4) Abigail Adams, 300k OI, 10k lt gain, 4k st gain, 6k lt gain,
(a) 16k gain- 16LTCG, 4k STCG (so it would be ordinary income)
(b) 8k STCL loss= 12k gain total (after subtracting the 4k STCG)
(i) offset the short term loss against the highest loss firsthere that is the collectible antique
(ii) 10k regular rate for capital gain
(iii)
2k at collectible rate 28%
(c) 12k gain total
(i) 8k NetCG- taxed at 15%
(ii) 4k NSTCG- taxed at ordinary income
1.
(vii)
1.

i)

Assignment # 13 Chapter 18
Quasi-Capital Assets (Omit Problems 1(d) & 2).
i) Do we have a gain or loss realized
ii) Do we have a gain or loss recognized
iii) What is the character of the gain or loss
(1) Gain recogniciotn
(a) Capital gains
(b) Ordinary income
(2) Loss recognition
(a) X
(b) X
iv) 1231 applies to three categories of things
(1) NOTE 1245 OVERRULES 1231 DOES NOT APPLY IN ALL

CASES
(a) If you sell something depreciable for more than its basis, any
part of your gain that rises out of your depreciation will be
taxed as ordinary income- 1245 property overlaps heavily
with section 1231
(2) sales or exchanges used in trade or business

(a) has

to be held for more than a year- both depreciable and real

property used in a trade or business (like land which is not
depreciable) 1231b1
(i) because excluded from a capital asset it would without
1231 be taxed at ordinary income
(3) involuntary or compulsory conversions- property used in a trade
or business
(a) involuntary is like a casualty loss
(i) without 1231 this would be ordinary income see 1222
which requires a sale or exchange so it does not get capital
treatment
(ii) note that condemnation of a capital asset is treated under
1231 as a sale or exchange
(b) compulsory refers to situations like eminent domain
(i)

involuntary or compulsory conversions- of capital assets held for

more than one year
v) Sub-hotchpot
(1) Sub-hotchpot does not include condemnations only involuntary
conversions
(2) In the sub-hotchpot
(a) If gains and losses net to a gain they go to the main hotchpot
(b) The gains and losses do not net to a gain they are all
ordinary
(3) Even if you have losses here you can still have a gain out of he
main hotchpot
vi) Main hotchpot
(1) Netting losses are ordinary loss treatment
(2) Netting gains is capital gain treatment
vii)Recapture- losses due to 1231 over the previous five years are
recaptured as ordinary income if there is a gain in the fifth year
(1) Does not work the other way- if you have a gain year one and
losses the next five years you have a tax opportunity
viii) Start at fire pot
(1) Nets to a gain goes to the main hotchpot
(2) Nets to a loss goes to ordinary loss
ix) Figure out which items go into the subhotchpot gain and
what goes directly into the main hotchpot
x) Question:
(1) 10k loss sale of stock
(a) (capital loss- not under 1231)
(2) 5k loss on business vehicle theft
(a) (5k ordinary loss under 1231 in subhotchpot)
(4)

5k loss on sale of vehicle

(a) (5k cap loss main hotchpot under 1231)
(4) 15k gain on business land sale
(a) (5k cap gain main hotchpot under 1231)
(5) Answer: gain is capital; 15k of losses are capital and 5k a of
losses are ordinary
16)
CLASS NOTES 10-29-14
a) 1016a2- whether or not you take the deduction the depreciation goes
down- the deduction is for allowed or allowable deduction
i) 1231 does not prevent ordinary gains because 1245 trumps
(1) 1245 gains arising from 1245 property are recaptured as ordinary
income
(2) if you sell a 1245/1231 property and you have more gain than
you took in depreciation deduction; the excess gain is 1231 gain
(a) EXAM: 1231 gain is a provisional term once you sell 1231
business property you have a 1231 gain until that gain is
channeled to ordinary or capital gain- you cant tell what the
final character of a 1231 gain is until you have all of the gains
and losses to run through the hotchpot analysis
(i) If he does not give all of the gains or losses for the year on
the test you can not net it out to establish the character- it
is held in interim as a 1231 gain
ii) 1245 property is depreciable personal property (including
intangibles)
(1) all depreciable property except for depreciable real property- not
office buildings or residential rental real estate
(2) know 1231 is property used in a trade or business
(a) 1231b1 that is depreciable that has been held for more than
one year or is real estate that is held for more than one yearthis is broader than 1245
(b) how much do we calculate the recapture gain for 1245?
(i) Lessor of AR-AB or recomputed basis minus the adjusted
basis
(c) What is recomputed basis?
(i) Current AB + 168 and 179 deductions and 197
deductions
(ii) Adding back in the previous deductions
(3) 1245 does not apply to gifts- but the deductions include
deductions taken by someone else- so the giftee is subject to the
recapture liability of the giftor
iii) 1250: depreciable real property
(1) real property provision for real estate
(2) essentially toothless
(3)

(a) only

recaptures as ordinary the depreciation taken on real

estate in excess of the straight line method- and for the last
20 years the only way to depreciate is the straight line
method so it is not recapturing anything
(b) but remember the 25% rate on unrecaptured section 1250
gain in 1h1D
(3)

Depreciation Capture
i) Problems page 257
(1) Charlie Allnut
(a) Taken 61.6k in depreciation so his basis is 38.4k at point of
sale; then he sold for 110k so his gain realized is 71.6k- so
does he recognize the gain? Yes because nothing says no in
some statute I did not get, so now we characterize the gain
(i) 100x.4x.5=20
(ii) yr 2 80x.4+ 32
(iii)
yr3 48x.4x.5=9600
(iv)
recaptured as 1245 gain: ordinary gain is the
recomputed basis of 100k (present basis with deductions
added back) his present basis is 38,400
1. take the lessor of AR- AB 71.6 or recomputed present
basis is the amount he takes as a ordinary income
2. what happens to the 10k difference that did not get recharacterized as ordinary as 1245- first go to 1231 and
then it gets thrown into the hotchpot to be calculated
with the other 1231 gains and losses for the year
(b) skipped
(c) 1245 classifies this as a gift- non-recognition event for giftor,
when giftee sells it is the same analysis as a
(d) reminds us of rev rule 59-47; converting property to personal
use does not trigger
(e) 1041 says transfers between spouses and former spouses are
treated as a gift even if there is consideration passing both
ways
(2) skip
c) CLASS NOTES 10-31-14
i) 280A- home offices and second homes used as rentals (not on
exam)
ii) focusing on 121 exclusion
(1) key requirements
(a) owned and used as principal residence 2 out of the last 5
years
b)

special needs will offer a fraction if 121c is implicated

through a forced change of employment, health or
unforeseen circumstances- a reduced exclusion is available
(b) limited to one sale every two years
(2) exclude up to 500k in gain for a married couple (250k for single),
if
(a) joint return
(b) both meet use requirement
(c) one meets the ownership requirement
(d) neither has used the exclusion in the last two years
(e) special rules for surviving spouses
(3) gain arising from depreciation deductions on the home is not
excludable IRC 121d6
(a) when the house is rented during the off three years out of the
last 5 and they depreciate the house as a business/rental
(4) 1.121-3 exception/exclusion for unforeseen circumstances
iii) problems page 285
(1) Rebecca Sharpe
(a) gain of 300k, single person can exclude 250k under 121, 50k
long term capital gain under 1221
(b) gain realized 300k, divide 12/24 for her fractional forced
exclusion of $125k under 1.121-3, 175k is LTCG
(c) 121-3 adopts 217 for moving expenses that the move has to
be at least 50 miles farther from the present place of
residence and your old place of work- does not qualify for safe
harbor; but you may still argue why this does not qualify
under the broader regulations; but safe harbor does not get
there
(d) gain realized 300k, new husband does not satisfy the use
requirement, b2B
(i) just because one spouse fails to meet the requirementsdoesn't mean the other spouse does not get the benefit
they are entitled to
(ii) so she gets the 250k deduction, plus the 18mo fractional
for him
(e) get the full 500k exclusion
(f) 1014- FMV step up basis for bequeathed property- but if
there was appreciation that occurred after her death we still
have to do the 121 analysis
(i) apply 121d2 which allows him to use her time investment
to qualify for the fractional deduction- or the 250k for her
filing alone
(ii) Know the basic numbers
(i)

basis
gain or loss
character
(g) 121d3A and B- cannot tack on her use time under this
provision so he does not get the exclusion from her use- but
he does gets to tack on her ownership
(i) see also 1041a
(ii) this divorce did not force the sale- so it is not an
unforeseen circumstance
17)
Chapter 24 Like Kind Exchanges
a) Non-recognition provisions that overrule 1001
i) This is a deferral of gain recognition- not an exemption
ii) Basis of property received is not stepped up
iii) Properties must be similar in nature or character,
(1) Generous with real property= any fee interest exchanged for
another fee interest, or farm land exchanged for an apt building,
investment property in exchange for property used in trade or
business
(2) Not generous with tangible personal property= gold for silver,
cows of different sex, etc
(3) Tangible personal Property Two Step ANALYSIS
(a) first look at the nature of the intangible property
(b) second
iv) PLANNING a three party exchange involves an escrow deposit
(1) cash held in escrow is not constructively received by the seller as
long as the sellers right to control receipt is subject to
substantial restrictions
v) TIMING
(1) Taxpayer must identify the replacement property within 45 days
after the transfer of the property given up
(2) Taxpayer must receive replacement property within 180 days
after the property is given up
vi) BOOT
(1) An equalizing payment of cash or transfer of non-like kind
property to make the deal happen when not an exact $ exchange
(2) Recipient of the boot must recognize the lesser of gain realized
or the value of the boot received IRC 1031c
(3) Giver of the boot does have recognized loss on that non-like kind
property
(a) Ex
(i) Taxpayer gives up land A FMV 80k and a tractor FMV 20k
for land B with a FMV of 100k
1. Taxpayer has an amount realized of 80k for land A
a.
b.
c.

Taxpayer has an amount realized of 20 k for the tractor

minus the adjusted basis (for a gain or loss)
3. The bases in land B is the aggregate of the bases in all
property given up plus any cash given or assumptions of
liability negotiated
(4) Non-recognition rules- grant deferral not exclusion- which is built
in to the basis in the new property
(a) 1041- transfer between spouses
(b) 351- transfers to a corporation by its owners
(c) 721- transfers to a partnership for a partnership interest
(d) 1031- like kind exchanges
(e) ALWAYS APPLY 1001 FIRST
(5) This Is a voluntary provision- if you have a loss and want to
realize it you can
(6) Real estate is almost always like kind to real estate 1.1031a-1b
&c, 1.1031b ex1
(7) Boot- any property or cash that is not like kind in the transaction
(a) Gain recognized is the Lesser of gain realized or boot received
(b) Loss is never recognized in a like kind exchange on the like
kind property 1031c- BUT a loss can be realized on the boot
(8) Always start with a gain or loss realization calculation under
1001; then consider whether gain or loss is recognized
(a) 1001c can be overruled by 1031?
(9) See page 319- when multiple properties are given, do a separate
1001 analysis with respect to each asset the person is giving up
to establish any gain or loss recognized
vii)0131d- aggregate basis in new property
(1) old basis (or aggregate if giving more than one thing, incl. $
paid) 1.1301d-1a
(2) then subtract any cash received
(3) increase basis by gain recognized
(4) decrease basis by loss recognized (only if you have given boot
that has a loss built into it)
(5) equals= new basis
viii) Basis in the boot: boot always takes FMV basis 1031d second to
last sentence
ix) Basis in the like kind property received: preserving gain that went
unrecognized on original transaction(1) Basis in receipt of multiple like kind properties is allocated
proportionally by FMV in multiple properties received
x) Tacking 1223(1)- when we recognize gain under 1231 we have to
characterize it
xi) 165c does not allow loss on personal property
2.

xii)cannot

exchange personal property for rental property and get the

benefits- must be rental/trade/business before and after exchange
xiii) one party can benefit form a 1031 exchange when the other
cannot
xiv)
b)

Problems pg 315
i) Earnest Hemingway- like kind exchange
(1) Earnest
(a) Gives1m in property, 10k cash, 40k truck
(b) Do 1001 analysis- Amount realized on the land is 1.95m
(i) he is giving 1.05m (land+truck+10k) for 2m property=
950k gain realized in exchange minus a 20k loss
recognized on truck/boot
1. aggregate adjusted basis is 1.07m (including loss from
truck)
2. deduction for loss recognized is 1031b
(ii) if you do not get any boot you are not going to recognize
any gain- unless you give boot and there is a gain on the
giving of the boot
(iii)
deferred gain through 1031
(iv)
he gets tacking of his holding period
(v) truck goes into the 1231 hotchpot since he held it for more
than a year
(2) Barbara
(a) Gives a property worth 2m, with an adjusted basis of 1.2m=
gain realized of 800k
(b) She got 50k in boot which will have to be recognized (as the
lesser of gain realized and boot received)
(i) Characterize that gain- do we view the apt building as an
investment property or trade 1231 property? Or 1221
property?
(c) Barbaras new basis is her old basis of 1.2m plus gain
recognized, then minus the 10k cash recvd and subtract the
40k for the truck
(i) 1.2 m old basis
(ii) -10k cash
(iii)
+50k gain recvd and recognized
(iv)
= 1.24m
(v) minus 40k (the FMV of the truck)
(vi)
= 1.2m as an adjusted basis (total of the gain not
recognized and the gain from the boot that was
recognized)
(d)

18)

1031d pg 1532
1. old basis
2. - cash recvd
3. + gain recognized
4. loss recognized
(ii) more than one like kind properties we allocate our basis
based on the FMV of each to the FMV over all
(iii)
what do we do with properties passed with liabilities
1. like a mortgage, lender generally has to consent
2. assumption of liability by a buyer is seen as a money
recvd by the seller
(2) ASSUMPTION LIABILITY IN A 1031
1. assumption of liability is boot like cash in 1031b
2. what if assumption of liability goes both ways- net the
two and only the person transferring the larger liability
has boot
3. assumption of liability does not offset cash receivedcash is always boot unless the liability is being assumed
with cash of the same value 1.1031d2???
4. can cash paid offset the assumption of liability by
transferee for boot purposes- if I gave a loan and cash
to a transferee there is no boot if they are for the same
amount
(b) recognize the lessor of boot recvd or the gain realized
(c) when looking for a new basis you both deduct cash recvd and
add back in the gain realized (they cancel each other out)
1031d
(3) hypo
(a) 100 prop recvd
(b) +75k mortgage transferred
(c) = total consideration 175k
(d) 50k mortgage she assumed
(e) = 125 amount realized
(f) 40k basis
(g) =85 gain realized 1001
(h) recognized gain is 25k- the difference between the two
mortgages, the net of the exchange is boot
(i) then characterize the gain
(j) then find her new basis
(4) have to recognize cash as boot even if there are mortgages
(a) when the mortgage is the lesser of the two then nothing in
equation

(b) when

mortgage is higher of two then take the difference with

boot
ii) Problems page 315 (1231 WILL BE ON ESSAY EXAM)
(1) Skip
(2) Jack Johnson
(a) equation
(i) 4m FMV for Montblanc
(ii) + 500k for mortgage transfer
(iii)
= amount realized 4.5m
(iv)
-2.5m his original basis
(v) = gain realized of 2m
(vi)
=recognized gain is 500k (his gain from transferring
mortgage)
(vii)
character of that gain is 1231 property (1221
excludes from capital gains depreciable or real property for
trade or business purposes)
1. 2.5m old basis
2. mortgage transfer 500k (like cash recvd)
3. add recognized gain +500k
(viii)
basis in new property of 2.5m
(b) equations
(i) 4.5m amount realized (mortgage given minus mortagage
assumed)
(ii) subtract basis of 2.5 m
(iii)
= 2m gain
(iv)
gain recognized is the 500k mortgage difference
(v) the basis is 2.5m ;
1. tacking of holding period so a fast sale of an
exchanged property still makes this a long term capital
gain because of the period of the previous ownership
that tacks onto the new property for assessment
(c) equation
(i) 4m FMV Montblanc
(ii) + 1m mortgage transferred
(iii)
-1.5m mortgage assumed
(iv)
= 5 m total consideration recvd
(v) -1.5m mortgage assumed
(vi)
=3.5m amount realized
(vii)
-2.5m basis
(viii)
=1m gain realized
1. had there been a loss 1031c would prevent it to be
recognized

you can recognize a loss on boot paid but not on the

lifetime property itself
(ix)
no gain or loss recognized, he assumed a greater
liability than he gave away- so he did not get any boot
(x) what is his basis? 3m is his new basis (once add the
additional mortgage assumed)
1. 2.5m old basis
2. +500k (increase by cash paid the 500k he assumed in
excess of what he gave away) could also say the two
mortgages get netted and only the party who gives
away the smaller mortgage has boot)
(d) equation
(i) 4m FMV Montblanc
(ii) +1m
(iii)
+100k cash
(iv)
= 5.1m total consideration recvd
(v) 1.5m mortgage assumed
(vi)
= 3.6 amount realized
(vii)
2.5 basis
(viii)
=1.1 gain realized
(ix)
gain recognized is 100k boot, because the actual
cash he recvd cannot be offset by the liability he assumed
(x) his new basis is
1. 2.5m old basis
2. +500k net of mortgage assumed against his
3. -100k cash recvd
4. +100k gain recognized
5. = basis is 3m
6. gain recognized is 100k ???
CLASS NOTES 11-14-14
Installment Sales
2.

19)
20)
a)

(1)
b)
c)
Assignment # 14
Chapter 19
Recapture of Depreciation (Omit Problems 1(b) & 2).
Part III: Real Estate Taxation
Assignment # 15
Chapter 22
Residential Real Estate (Omit III.A & B, Omit Problems 1 & 2, Omit Popov case
on page 285).
Skim Chapter 23 Hobby Losses

Assignment # 16
Chapter 24
Like Kind Exchanges
Skim Chapter 25 Involuntary Conversions
Assignment # 17
Chapter 26
Installment Sales
Skim Chapter 27 Limitations on Deductions
Part V: Family Taxation
Assignment # 18
Chapter 30
Assignments of Income (omit problem 5)
Assignment # 19
Practice Exam
Assignment # 20
Chapter 31
Alimony and Support (omit problem 2)
1.
d) Alimony
i) 71b
ii) five requirements
(1) cash recvd by or on behalf if payee
(2) not designated non alimony
(3) recvd under divorce or separation instrument
(4) not in same household
(5) no liability to pay after death
e) income to payee under 71a (unlike child support)
f) alimony is deductible above the line to the payor 215a, 62a10
i) payor wants it to be alimony
ii) payee would prefer it not be because it creates income
g) cash payments to 3rd parties can qualify as alimony if directed by court 171Tb
i) payee says I want you to pay my mortgage instead of paying me
ii) can be no benefit accruing to the payor
h) disguised property settlements
i) 71f prevents front loading
(1) if payments decline too fast they will be recaptured as income by payor and
as a deduction by payee (like if they are hiding a property settlement in the
alimony category)
(2) will recharacterize at least part as a property settlement
(3) not responsible for the mechanics of 71f
i) expenses to collect alimony
i) is tax deductible Wild 42 TC 706
j) expenses to defend against alimony claim are not deductible Fleischman
k) Child support is not deductible and not income 71c1
l) Support disguised as alimony
i) Payments that change by reference to the children are presumed to be child
support- 71c2, 1.71-1Tb
(1) Will check if payments change when children come of age or childrens
income is above a certain level
m) Failure to pay

i)

When payor owes both alimony and child support- the child support will be first
and the alimony deduction will be lost
n) Marvin v Marvin
i) Palimony- alimony trusts 682
ii) Contract law controls- payments either for services or to divide co-owned
property
iii) The trust will allow the payments out of the trust to be treated like palimony even
though the payor still owns the property
21)
PROBLEMS PAGE 413
(1) Henry and Catherine
(a) Payment in cash ceases upon the death of the payee
(b) Not cash- looks like a property settlement,
(c) 171Tb 3rd party payoff is OK as long as there is no benefit to the payor and
at the direction of the decree
(d) OK as long as she has made a written request
(e) It is OK to designate something as not alimony, (it has to meet the
requirements to meet a designation of alimony- but you can still designate
that it is not)
(f) Amount determined by reference to the child does not qualify as alimony
71c2A
(i) Disqualifies only the amount reduced by the amount being reduced in
reference to the children
(g) Henry loses the alimony deduction for the 5k he did not pay
(i) Child support is considered first then the alimony- 71c3; to the extent
there is a short fall alimony is deemed to be paid second, after child
support
(2) Skip
(3) If payments are designated as family support but meet the qualifications of
alimony they are treated as alimony
(a) Too specific on California law, will be deleting this question in future
versions
b) For Wednesday SECTION 1041 redemption of corporate stock in context of divorce
Assignment # 21 ON EXAM
Chapter 32
Transfers of Property Between Spouses or Incident to Divorce
1. Napoleon and Josephine
a. Under 1041 Nonrecognition for Napoleon, Josephine gets a
transferred basis of 10k, Josephine has a lurking tax
gain/liability in the stock when she sells
b. Napoleon has 490k in gain realized and recognized- straight
redemption which is not a nonrecognition event 302ab3
i. Josephine has no recognition event
c. Constructive distribution exception- Josephine is obligated to
buy stock- corporation is buying on her behalf
i. Napoleon has 490k non recognition of gain because he is
being bought out in the divorce 1041a
ii. Josephine has 500k in a dividend of pure income 1041b2
and 301 distribution (gain and no basis)
d. Napoleon has 490k in gain recognized/reaized after his basis is
subtracted
i. Corporation is still satisfying her obligation to buy
him out-

ii. Same as c for results- it doesnt matter where the stock

ends up
iii. Is there a carryover basis for Josephine????
iv. 1041a;
2. Charybdis and Scylla- The qualified domestic relations order
(QDRO)
a. 100% of tax liability is on earner, Scylla
i. in order for it to be seen as alimony it must terminate at
death- there must be explicit intent in divorce settlement
b. with a QRDO the tax liability is split between them
(b) 64 U colo Law Rev 1- Miller article on legal fictions in tax code
c) CLASS NOTES 11-21-14
i) LLM may be tax deductible under 1.162-5a1 or a2
(1) Scholarships are excludable- you have to spend money that is taxable
(2) Miller wrote an article in tax lawyer on The tax treatment of sabbatical
expenses
ii) Tax consequences of recoveries for personal injuries 104a2(a) nature of the claim is critical- try to get every claim to fall under
physical injury
(i) emotional distress is not excludable
(ii) if it is a physical injury then all recovery, even those not related to the
underlying physical injury, are excludable
(iii)
multiple claims are divided between physical and non-physical
claims for qualifying for exclusions
(iv)
(2) Damages on account of personal physical injuries or physical sickness
(a) Excludes recoveries for such damages from income
(3) Will not exclude punitive damages or medical expenses that were previously
deducted from taxes
(4) Probable Exclusions
(a) Physical acts that don't involve direct contact
(i) Coercion- pointing a gun and forcing someone to hurt themselves
(ii) False imprisonment- physical contact causes later physical harm
1. Does not include psychological harm that arises from physical
contact
(b)
Part VI: Tax Consequences of Litigation
Assignment # 22
Chapter 34
Personal Injury Recoveries and Punitive Damages (omit Problem 3)
d) Class Notes
i) 104
ii) lots of litigation on this
iii) look at the nature of the claim to see if it is what the statute would call a personal
physical injury
(1) excludes recovery for punitive damages
(2) includes a broad array of items
iv) 104a- peculiar language- recovery for emotional distress is not excludable except
when a physical injury generates emotional distressing situation
v) Amos- when there are multiple claims- the claims that are not injury based are
not excludable 104a2

vi) Probable exclusions

(1) Coercing, without physical contact, a physical injury
(2) Physical contact that does not initially cause physical harm but is followed by
an injury that rose form the initial physical harm, like False imprisonment
(3) Stadnyk- pure false imprisonment without physical harm is not excludable
(4) Eggshell plaintiff- physical sickness exacerbated and that arises from
emotional distress is excludable,
e) Problems pg 453
(1) Wyatt Earp shot by Doc Holliday
(a) All excludable except punitive damages because it arises out of a personal
physical injury
(i) Caveat- if he deducted those expenses the previous the recovery
would be includable because of the prior deduction
(b) 104a2 does apply because there is a physical sickness in the end- TC
Memo Parkinson 2010-142; or Domony TC Memo 2010-9
(c) excludable- here there is a physical act, even though the physical injury is
slight compared to the later repercussions- it falls within the exclusions
(2) settlement allocated to pain and suffering only
(a) confidentiality payment is not excludable so this would have been better
to have been allocated- if no allocation the IRS can come in and challenge
settlement agreement
(b) for our purposes there is a large area of black letter law that are coupled
with the fringe areas of the physical and nonphysical intersecting; Miller
sees developing a tendency for when there is a physical injury with a
tortious basis
(3) skip
(4) James Dean is in an auto accident
(a)
f) APPLICATION- start with how you draw up your complaint so that it sounds like it falls
within the statute , if you settle instead of a jury award draft the settlement
document to reflect tax opportunities
i) Negotiate to allocate favorably
ii) Always throw in a small (not de minimus) amount for the confidentiality
agreement to avoid a conflict over what is excludable
Skim Chapter 35 Attorneys Fees NOT ON EXAM
g) Class Notes 12/1
i) 162 and 212
ii) attorneys fees nondeductible if it is a personal expense or a capital expenditure
iii) Principle: Origin of the Claim
(1) Controlled by Gilmore
(2) Divorce is personal
(3) Collection is a business based need
(4) Acquiring a business is a capital expense
iv) 61a20 and 67 apply to whether it is above or below the line
Part VII: Deferred Compensation
Assignment # 23
Chapter 36
Retirement Resources and Deferred Compensation (omit Problems)
D. Class notes 12/1
a. Social security
b. See slides

c. Defined contribution accounts

i. Regular pension- tax deferred, pre tax dollars invested
ii. Roth pension- post tax dollars invested
d. Urges a roth plan because the account does not get a basis step up- heirs step
into your shoes under 1014, see 691
e. Designations outside the will
f. Errors made- on slide as list
i. Do not leave to an estate leave to a person to defer taxes more
effectively and avoid subjecting the money to estates creditors
ii. Print out a hard copy to makes sure the form is properly filled out
iii. Get confirmation of receipt fo filing of the form
iv. Community property states require spousal consent to leave to other
than the spouse
g. You can set up a trust receipt that spreads out disbursement over a longer
time to defer taxes
h.
i.
Part VIII: Business Entity Taxation
Assignment # 24
Skim Chapter 37
Overview of Entity Taxation
Class Notes 12-314
1) Contd Retirement
a) Annuities
i) Principal returns are tax free- above principal is taxable 72
b) Reverse Mortgages
c) Viatical settlements
i) Life insurance collected before death when terminally ill
d) Savings
i) Can be spent down or annuitized
ii) Home ownership is a form of savings
e) The time value of money
i) Basic economic assumption- the interest assumption
(1) Money has value over time!
(2) $100 today is worth more than $100 in a year because it can earn interest
ii) the power of compounding
(1) interest on interest causes geometric growth
(2) rte of growth accelerates oer time
iii) rule of 72
(1) interest rate divided into 72 tells you how long it takes for the money to
double
(a) 9 divided into 72=8 means in 8 years our money will double
(b) most of the return is at the end of the term of savings
(2) eg saving 5k every year for 41 years at 9% in 41 years you would have over
1.8m based on an investment of 205k
(a) time is really important
(3) eg save 10k for 21 years only generates 618k
iv) Miller suggests saving 15% a year if you are 30- to retire nicely
f) Business Entities
i) LLC no gain recognized by anyone when appreciated property is distributed
(unlike Corporations)

ii) S corp recognizes gain in redemption in liquidation- advantage is single taxation

at shareholder level
iii) LLC/Partnerships do not have gain recognized for gain in redemption in liquidation
iv) LLC- tax advantage of partnership and the limited liability advantage of a
corporation
g) Non recognition at PR and PP level
h) Both partner and partnership get a carry over basis
i) Gains and losses are there for recognized at the time of sale attributed back to
the partner who contributed in the first place
2) RETIREMENT NOT ON TEST
3) Can bring a calculator and codebook annotated
4) THERE IS AN INSTALLMENT QUESTION
5)
Skim Chapter 39
Partnership Formations
We will not likely reach the remaining assignments. If we do, they will be
addressed by brief overview lectures.
Part IX: International Taxation
Chapter 40

Overview of International Income Taxation

Part X: Estate and Gift Taxation

Chapter 41

Overview of Estate and Gift Taxation (Be sure to read the update
memorandum!)

Part XI: Tax Practice and Procedure

Chapter 42

Overview of Tax Practice and Procedure

Look at Taxprof.com