Income

A. Gross Income
1. Economists concept Haig-Simons
a. Imputed income
b. Accretion in value (Glenshaw Glass)
2. Tax Law concept
GROSS INCOME
- 62 decductions
= adjusted gross income
- personal exemptions $ deduction (standard or itemized)
= taxable income
x tax rate
= gross tax liability
- credits
= net tax liability or refund
a. Realization requirement 1001(a) (see timing)
Policy justifications:
1) hard to measure
2) may not have cash on hand
3) still faces risk of loss if subseq decline in value nature of investment
has not changed
4) mobility of capital

Eisner v Macomber - while not constl req as in this case, embedded in tax
code that we do not tax unrealized gainst in prop values tax
transactions or taxable events realization
Helvering v Bruun - realization of gain need not be in cash derived from the
sale of an asset. Gain may occur as a result of exchange of property,
payment of the taxpayer's indebtedness, relief from a liability, or
other profit realized from the completion of a transaction. Therefore,
improvements to a leased property are recognized income (though
this specifically later superceded by 109).
Hort v Comr amt received for cancellation of the lease must be included in
gross income substitute for rental payments specifically identified
by 61(a)(5) as income 0 no carved-out interest
Woodsam Associates (2nd Cir) pet argued that her debt refinancing, going
from recourse to nonrecourse, shd have been taxable event and so
no later basis readjustment augmenting existing mort
indebtedness not disposed in 1001(a), so gain postponed until
later sale
Cottage Savings taxpayer swapped interests w/o another financial portfolio
to realize loss SC said material difference is test of realization but
fact that they were econ subs or equivalents does not mean it fails
different homes, borrowers, legally distinct entitlements
Short Sales - 1259 constructive sale of an appreciated financial position
even if borrowing/shifting accomplished regs allowed to police
Specific listed 1259(c)(1)(A D)
Of if he has taken part in 1 or more transactions with substantially the
same effect as those listed 1259(c)(1)(E)

b. Receipt of economic benefit Old Colony

1) not borrowing 61(a)(12)
2) illegal gains included
James v US embezzled funds inc to embezzler
Gilbert v Comr but embezzler, who intends to repay, believes will be
approved, makes assignment, does not constitute income
acknowledged req to repay

3) rebate of puchase price not, just reducition on price

4) damages not if just to make plaintiff whole Glensahaw Glass

B. Examples of gross income

1. Compensation for services 61(a)(1) gross income
a. payments in kind Smith
b. Bargain-purchase Regs 1.61-2(d)(2)(i)
c. Compensation w/o receipt of cash or property Old Colony Trust
even if paid to
d. Excessive compensation
e. Fringe Benefits
1) In general
2) no additional cost services 132(a)(1)()

Income
General
61(a) all income from whatever source derived wages, interest
but not limited to these
Eisner v. Macomber (1920) gain derived from capital, from labor, or both
combined SINCE CLARIFIED that this is not limited
Commissioner v. Glenshaw Glass (1955) Congress applied no limitations as
to the source of taxable receipts, nor restrictive labels as to their
nature ... accession to wealth, realized
Haig-Simons: (1) mkt value of rights exercised in consumption + (2) change
in value of the store of property rights

Specifically included in Gross Income by statute

61(a)(1): Compensation for Services
61(a)(2): Income derived from business
Dealing in Property 61(a)(3) gains from dealing in property
amt realized over adjusted basis in prop 1001(a)
Basis

Usually Cost Basis 1012 cash paid and other costs of acquiring (broker,
etc) - e
Deferred payment amt party pays at time or agrees to pay in the future,
not incluing interest
Exchanges of property

Amt realized for prop given up is FMV of prop received 1001(b)

Tax cost basis FMV of property received (even if no payment made in
exchange)

Acquired from a decendent

FMV of property at decedents death 1014 stepped-up basisappreciation of value during decedents life evades tax

Effect is to encourage people to hold on to appreciate prop until gift

Test of estate inclusion if includible in decedents gross estate for
purposes of estate tax 1014(b)
Exceptions from estate tax apply 1014(a)(2), (3)
Community Property only 1/2 included in deceased spouses gross
estate, but 1014(b)(6) treats remaining share as though it is
acquired from decedent giving spouse stepped-up basis
Deaths door FIND THIS
1014(e) to stop abuse if acquired by gift w/in year of death and passes
back to initial donor, no stepped-up basis, instead transferred
basis equal to donors basis

Acquired via gift transferred basis adjusted basis is the same as in the
hands of the donee 1015(1)
Taft v Bowers (1929) yes gift of stocks value counts
Exception for losses 1015(a) - to avoid transferring loss to someone else,
do not apply transferred basis, instead consider FMV at time of
gift if:

Donors adjusted basis is greater than FMV as of date of gift AND

Donee disposes of prop at a loss
SPLIT BASIS:

for gains, used transferred basis

for losses, FMV at time of the gift

(could be bracket in between no consequences of sale)
Effect of gift tax gift tax and income tax only overlap to the net
appreciation in the value of the gift 1015(d)(6) increase to
basis = tax paid x (FMV of gift donors basis / FMV gift)
Part gift/part sale
Bargain sale to charity 1011(b)

So 1011(b) transferor in bargain sale to charity must apportion basis

between sale and gift portions: gain basis = adj
basis x (amt realized / props FMV)
Generally, no gain/loss if prop transferred for consideration = adj basis, and
if prop is transferred to charity, transfeor enitle to ded = FMV
consideration received 170 - So without 1011(b), this would
ordinarily permit prop to be transferred to charit in return for
consideration up to amt of adj basis w/o transferor realizing any
gain but recieiving benefit of ded, and unrealized appreciation
never taxable
Acquired from spouse treated as gift value excluded from income basis
is as in hands of transferor gift basis rules tdo not apply
Adjustments to basis/depreciation 1016
** CHECK THIS - ONLY for things subject to wear/tear, utilized in trade/bus
or held in investment
Increases 1016(a)(1) by cost of cap improvements

Generally
Benefit to count these
Reductions greater of amt taken or allowable 1016(a)(2)

ACRS (accelerated cost recvery system) depreciation - 168

Take a deduction each year in the amt ACRS, and adjust basis
accordingly
168 (c), (e), (f), (g) explain how quickly different types of assets
depreciate

Apportionment of basis normally basis applied to all prop, but later trans
make make it necy to apportion normal rule is to apportion
Inaja Land Co if impossible to determine, taxpayer permitted to treat
entire amt received for easement as recovery of capital (perhaps
influenced by involuntariness and valuation difficulty)

Uniform Basis Rule 1.1014-4, 1.1015-1(b) covered?

Personal Use Property converted to business lower of its cost basis or
date-of-conversion FMV 1.165-9(b)(2) H#6
Amount Realized amt realized over adjusted basis 1001(a)
FMV of consideration received included in amt realized
Crane v Comr - Includes receipt of services and other liabilities including
being relieved of a liability nonrecourse or recourse
Selling expenses reduce amt realized
Apportionment if several items sold for liump sum
Mixed motive transactions discepency between sale price and FMV
disregarded unless made for other reason
Role of liabilities if prop encumbered by liability disposed of, amt of liability
is included in amt realized value or property
Crane v. Commr if transferring prop & seller assumes liability buyer
realizes price + liability same result if byer merely takes
property subject to mortgage rather than assuming it
Commr v Tufts prop w/ FMV of 9k but encumbered by nonrecourse
mortgage of 10k transferred subject to the mortgage sellers
amt realized is still 10k onligation to pay relieved recourse
and nonrecourse the same

Depreciation of (ACRS)
Realized gain vs recognized gain 1001(c) entire amt is to be
recognized
Not recovery of capital
Allocation of cost sometime
Prizes and Awards 74(a) unless
117 Qualified scholarship (SEE EDUCATiONAL BELOW)
to extent it was used for tuition/books/fees
but NOT if payment for services (teaching etc)
threshold inquiry: compensation for employment, or paid to enable
studies or research that benefits grantor 1.117-4(c)
tuition and fees, books supplies and equipment, not meals, lodging,
laundry, travel 117(b)
Rev. Reg 77-264 IRS has never tried to treat athletic scholarships as
income
74(b) Achievement award and:
(1) didnt enter contest
(2) not required to render services
(3) transferred to charity
74(c), 274(j) Employee achievement awards to the extent the cost of
providing does not exceed amt deductible by employer
tangible pers property transferred as part of a meaningful
presentation in recognition of length of service or safety
achievement, but not disguised compensation 274(j)(3)
Alimony and Separate Maintenance Payments - 61(a)(8), 71(a),
215(a) (w/ deduction available to paying spouse)
Annuities 61(a)(9), 72(a)
Exception that permits recip to exclude from inc the portion of
annity payments recd which is attributable to his cost of
purchasing the annuity exclusion ratio under term - 72(b)
Dividends 61(a)(7)

Discharge of Indebtedness 61(a)(12), unless insolvent/bankrupt

85: unemployment
Regs 1.61-14 Punitive Damages (even if based in physical injury)

Not Included in Gross Income

Family
Child Support not treated as alimony to extent its fixed as amt payable
for child support - 71(c) no ded, no inc
fixed if it would be reduced on contingency (childs age, marrying,
dying) clearly associated 71(c)(2)
Diez-Argulles cant deduct value of child support payments owed
but not paid
Gifts and Inheritances
102(a) excludes value of property acquired by gift
Duberstein - retiree trier of fact determines dominant reason was out of
affection, respect, admiration, charity or like umplueses, or from
detached and disinterested gneresity

BAD LAW NOW at least wrt to because employer/employee now limited by

102(c)??
US v Harris widowers companions entitled to treat cash from lover as
gift as long as something more than payments for specific
sessions of sex donors intent critical consideration (wha117
tever donee thought)
Between spouses, assumed gift 1041(b)(1)
Tips arent gifts (1.51-2(a)(1)), nor craps dealer payments (Olk)
$10,000 limit to same person in year (estate tax)
102(c) employer-employee gifts not excludible
274(b) - can deduct only the first $25 of any business gift once per year,
per relationship - so that payments treated by payees as exempt
cannot be deducted as business expenses by payors
Does not apply to prizes, awards or scholarships

Turner v Commissioner - cruise to South America the court under such

circumstances must arrive at some figure and has done so

Barry Bonds ball wont be taxed, as when immediately decline a prize

102(a) bequest, devise or inheritance
Transfer between spouses or incident to divorce - 1051(a) no gain
or loss recognized
Future Savings
Int on State and Local Bonds does not include int received wrt onligs
issued by or on behalf of state and local govts 103(a)
Political subdivisions
Not fed bonds
EXCEPTIONS these two included in income:
Pvt Activity Bond which is not a qualified bond (used by pvt nongovt agents)
103(b)(1) - unless in one of 7 specific categories (141(e))
Arbitrage bond 103(b)(2) proceeds reasonably expected to be used by st or
local govts to acquire higher yielding investments
Registration requirement bonds w/ maturity of 1 yr or more must be in
registered form for exclusion to apply 103(b)(3)

402 qualified deferred compensation plan

employees not reqd to include until receive payments (401(k))
employers enitled to deduction for amts paid
earnings on funds paid into it and invested not taxed
Roth 401(k) employee taxed on amts paid into, but distribs taxfree
BUT may not discriminate comp benefits to all employees
BUT 83(a) - Special rules for prop (such as corp stock), subject to
restriction or risk of forfeiture inc = excess of FMV at time of
transferrable over amt paid
CASE Minor?

 83(b) employee may elect to include FMV amt paid at the time
of transfer, rather than waiting until prop becomes
transferrable
IRAs - 408
5k year may be set aside, and claimed as a deduction
includible when paid out
Roth IRA - 408A
Non deduction when paid in
But no income when paid out
Gross inc must be below 150k
Portion of annuities 72(a)
Exception that permits recip to exclude from inc the portion of annity
payments recd which is attributable to his cost of purchasing the
annuity exclusion ratio under term - 72(b)
Unpleasant
Life Insurance Payouts 101(1)(a)
Including savings element incentivizing it as savings vehicle with
certain limits:
BUT 264(a)(2) int paid on indebtedness incurred or continued to
purchase or carry a single premium life ins, endowment or
annuity K
254(a)(1) deny deduction for corp buying 1-year term ins for employee
with itself as beneficiary

Only benefits paid by reason of the death of the insured, not other (cashin)
Good deal if you die, lose the money if you

Terminally and chronically ill count 101(g)(1)

Installment payments
Lump sum or payments both excludible 101(a)(1)
But only date-of-death PV of later payments excludible 101(d)(1)
exclude principal, but later earnings taxable

But if ins co retains principal, and benefic received primarily interest, then
int 101(d) doesnt apply and full amt excluduble 101()c)

Transfer of Policy for Valuable consideration

Generally no exclusion 101(a)(2)
Two exceptions 101(a)(2)(A), (B):

1) transferee has transferred basis in the policy

2) if transferee is the insured, partner, in partnership with, or corp in which
ins is shareholder/officer
Ins provided by employer see sec 79 (up to 50k)
Annuities
Multiply each payment is exclusion ratio = investment in the K / expected
return under K 72(b)(1)

Investment in K generally amt of premiums paid 72(c)(1)

72(c)(3) expectued return multiply amt of payments by:
number of payments called for under K or
if its indefinite, acturarial value Regs 1.72, Table V
If tpayer Outlives vs. underlive:
Total amt limited by investment in annuity K 72(B)(2) and (4)
If death before payments received equaling investment, then deduction
allowed for unrecovered amt 72(B)(3), (4)
Compensation for Injuries or Sickness or Damages
Generally:
Damage for lost business profits, liquidated damages for breach of K,
punitive damages taxable (all would have been taxed anyway)
making the plaintiff whole for loss not income if does not exceed adjusted
basis in damaged property

damage to good will? Might be basis in that? 197

no basis in things you created (like personal good will) 197(c)(2)(B)

104 - Compensation for injuries or sickness excluded unless recipient has

taken deduction on acct of same medical expenses (viA 213,
BELOW), from:
Workmens Comp 104(a)(1)

Also certain govt employees and retired armed forces personnel 104(a)(4),
(5)
Personal physical injuries

Includes emotional distress if it had its origin on physical injury/sickness

104(a)
Emotional distress alone not enough, but it is to extent of the amt paid for
med care attributable 104(a)
But not punitive damages Glenshaw Glass, 104(a)(2)
Recoveries made under accident or health insurance excludable 104(a)(3),
unlimited, unless made to an employee either:

By the employer OR
Under a plan to which the employer made contributions excluded from
income under 106
But then they may qualify for exclusion under 105
whether as a lump sum or periodic payments 104(a)(2) nontaxation of
interest component creates incentive for tort victims to structure
settlements

106 payments for and recoveries under employer-provided accident/health

plans excludible by employee to the extent that tey exceed
7.5% of adjusted gross income (213)
self-employed inds generally not considered employees 105(g)
Amounts spent for medical care amts required to be included by 105(a) excluded
under 105(b) to the extent thay are paid to reimburse employee for med
exepenses incurrent for self, spouse & dependents

Does not apply if employee has taken deduction in any prior year or
if am recived is in excess of med expenses
If emp receives a recovery which qualifies for exclusion under
105(b), and receives a recovery qualifying for exclusion

uner 104(a)(3), allocation of expenses incurred must be

made to determine amt excludible
Payments unrelated to absence from work amts included by 105(a) may be
excluded 105(c) to extent payment for perm loss of limb/disfigurement of
emp/sp/dep

Discharge of Indebtedness 61(a)(12) loan proceeds are not

included, but discharge of indebtedness is:
US v Kirby Lumber Co KL borrowed $12m, wasnt inc bec had obligation
to repay, but when they later were able to buy up outstanding
bonds for $10m , had to pay tax on $2m in income
Gilbert v Comr but embezzler, who intends to repay, believes will be
approved, makes assignment, does not constitute income
acknowledged req to repay

Nonrecourse loan to acquire/improve prop - not inc, added to basis

Crane v. Commr if transferring prop & seller assumes liability buyer
realizes price + liability same result if byer merely takes
property subject to mortgage rather than assuming it
Commr v Tufts prop w/ FMV of 9k but encumbered by nonrecourse
mortgage of 10k transferred subject to the mortgage sellers
amt realized is still 10k

Regs 1.0001-2(a), (c): Nonrecourse loan to acquire/improve prop:

bifurcated approach
1) Debt discharge is incuded in amt realized on proper up to FMV of prop
2) any additional discharge recognized inc

EXCEPTION NOT INCOME IF:

Bankruptcy and Insolvency not income if discharge if occurs in bankruptcy or
to extent taxpayer is insolvent 108(a)(1)(A), (B) applies to extent that
liabilities exceed FMV of assets immediately prior to discharge

Reduction of Tax Attributes if all goes well and taxpayer has profits - 108(B)
(1) if income excluded under bankruptcy/insolvency, various tax
attributes must be reduced by amt so excluded 106(B)(2):
1) NOL
2) certain tax credit carryovers
3) capital loss carryovers

4) adj basis if property

5) passive activity loss & credit carryovers
6) foreign tax credit carryovers
OR as alt, may elect to first reduce basis of depreciable prop and real prop
inventory 108(b)(5)
Reduction of Basis if basis required to be reduced under 108, special rules
of 1017 must be applied to effect the reduction in the basis of
prop which the taxpayer holds at the beginning of the taxable yr
following yr in which discharge occurs
Solvency or Partial Solvency income included except to extent taxpayer is
insolvent, but some other exceptions:

1) Purchase Price Agreement if indebtedness arising out of

purchase of property is reduced/discharged by seller,
reduction is treated as reduction in purchase price of
property rather than income 108(3)(5) (cost basis also
reduced)
2) Gratuitious Debt Forgiveness cancellation that constitutes
gift/bequest not included
3) Equity for Debt 108(e)(8)
4) Student Loans discharge not included if bec of work fo period of
time in certain professions 108(f)
But does not apply to loans made by certain insts if on acct of
services performed by such services 108(f)(3)
5) Qualified Farm Indebtedness though subject to reduction of tax
attributes rules above 108(a)(1)(C)
6) Qualified Real Property Business Indebtedness cancellation of
debt incurred in acquisition or improvement of real prop
used in trade/bus discharge may be excluded
7) mortgage forgiveness 108(h) up to 2m of qualified principal
residence indebtedness when lender foreclose on taxpayers
principal residence

Welfare not included

workfare also if:
received directly from welfare agency
need-based, funded entirely by TANF
size of payment determined by welfare law, and hours worked limited

86: social sec excludible depending upon income

123: ins receipts for extraordinary costs excludible insofar its used
to cover living expenses that she wdnt have incurred if not for
calamity
Pleasant
Achievement Awards 74(b) WHEN
74(b) Achievement award and:
(1) didnt enter contest
(2) not required to render services
(3) transferred to charity

74(c), 274(j) Employee achievement awards to the extent the cost of

providing does not exceed amt deductible by employer
tangible pers property transferred as part of a meaningful presentation in
recognition of length of service or safety achievement, but not disguised
compensation 274(j)(3)

117 Qualified scholarship (SEE EDUCATiONAL BELOW)

to extent it was used for tuition/books/fees
but NOT if payment for services (teaching etc)
threshold inquiry: compensation for employment, or paid to enable studies or
research that benefits grantor 1.117-4(c)
tuition and fees, books supplies and equipment, not meals, lodging, laundry,
travel 117(b)
Rev. Reg 77-264 IRS has never tried to treat athletic scholarships as income
Educational
117(a) qualified scholarships
threshold inquiry: not compensation for employment, or paid to enable
studies or research that benefits grantor 1.117-4(c)
tuition and fees, books supplies and equipment, not meals, lodging,
laundry, travel 117(b)
Rev. Reg 77-264 IRS has never tried to treat athletic scholarships as
income

117(d) qualified tuition reduction provided to employee of an education inst

(below grad level)
117(d)(5) special rule for grad students teaching or researching
117(d)(2)(B) also to spouse, dependent and in some cases surviving
spouse
117(d)(3) may not discrim in favor of highly compensated employee

111: recovery of tax loss

Clark v Commissioner tax counsel cost customer money and then repaid it
not obligated to report as income
121: Sale of Principal Residence
Gain excluded if owned by taxpayer and used as principal res for periods
totaling 2 yrs during 5 yrs before disposition 121(a)
But if acquired in a like-kind exchange, must be held at least a full 5 yrs
121(d)(10)

Principal residence - if more than one, only principal applies depends on

all facts & circums gf
Two limitations:
Max excludible is 250k, or 500k for spouses filing jt return if either spouse
meets ownership test and both spouses meet use test
Can only use once every 2 years 121(b)(3)

Limited exclusion for those who do not satisfy 2-yr ownership and use tests
if bec of change in place of employment, health or other unfioreseen
circums 121(c)(1)
Multiply 121(a) exclusion amt (250 or 500)
By fraction denominator is 2 years, numerator is shorter of:

Time period since 121(a) was applied to a previous sale

Time period house was owned and used as a principal residence
Recognition of gain attributable to depreciation if used for inc-producing
purposes, must include gain from sale of property to the
extent of the depreciation deductions taken after 5/6/97
121(d)(6)
If acquired in a like-kind exchange (per 1031), exclusion will not apply unless
prp is helf for a full yrs 121(d)(10)
Loss on sale correspondingly cant be deducted bec its personal expense
some specific rules if it were used as inc-producing property ...
1202: sale of qualified stock
Work
106(a) health insurance paid for by employer excluded
Meals and Lodging Furnished to Employees 119(a) for the
convenience of the employer his spouse or any of his
dependents
Meals
On the business premises
For the convenience of the employer

Substantial noncompensatory business purpose 1.119-1

Not reimbursements (probably not groceries) Kowalski

If lodging provided, meals excluded
119(b)(2) fact that charge is made, and employee may accept or decline,
not taken into account

BUT reg 1,11801(a)(3)(i)?

119(b)(3) excludible in the amount of fixed charge?

Lodging
On the business premises
as a condition of his employment 119(a)(2) surplusage?

Benaglia hotel manager (over dissent which noted that he had called it part
of his compensation)
Certain Fringe Benefits - 132
132(a)(1), (b) no additional cost services
132(b)(1) offered in the ordinary course of the line of business AND
132(b)(2) no substantial additional cost

132(a)(2), (c) qualified employee discount

Property limited to gross profit percentage avg markup 132(c)(1)
(A), (2), (4)
Services may not exceed 20% of price at which services offered in
ordinary course of business 132(C)(1)(B)

132(a)(3), 132(d) working condition fringes (company car) to extent

would be entitled to deduction if employee purchased
132(a)(4), 132(e)(1) de minimis fringes - impracticable
132(e)(2) extends to certain eating facilities even if otherwise exempt if
located on or near bus prem & price charge is > or = costs of
operating
Reg 1.132-6(d) special rules but must be OCCASIONAL, not if its
routine

132(a)(5) qualified transportation fringe

between residence and place of employment 132(f)(2)(A)

up to $100/month aggregate of:

commuter highway vehicle OR
seats at least six adults
used 80% of mileage to transport res -> work or transport at least 3
on bus-related trips
transit pass
qualified parking 132(f)(1)(C)

$175/month, inflation adjusted

on or near bus prem, or place where commute via transit pass,
commveh or carpool
limitations

132(f)(4) if choice between fringe or cash, income only if chooses

cash
132(f)(3) reimbursements qualify, but
132(a)(6) qualified moving expense reimbursement - to the extent
would have been deductible
132(a)(7) qualified retirement planning services advice, but not
related services
132(j)(4) on-premises athletic facilities operated by emp,
substantially all use by employees
Additional Considerations:
Nondiscrimination rules - 132(e)(2), (j)(1), cant discriminate towards highly
compensated employees with:

No-additional cost fringes

Employee discounts
Employer provided eating facilities
Expanded definition of employee for:

No-additional cost fringes

Employee discounts

Athletic facilities
For those, employee includes:

Spouse
Dependent children
Parents (in limited sits)
Former emps separated by retirement or disability
Widows and widowers of inds who died while employed, retired or
disabled
Corp jet flights if 50% or more employees, other family member
hangers-on free - Regs
Valuation Regs 1.161-21, 1.132-1 to -8, fair market value, safe
harbor values (1.61-21).

125 cafeteria plans choose whether to take noncash benefits or

cash authorized but
limited to:

group-term life insurance (up to 25k)

129: DCAP (dep care assistance program) - permits emp to make up
to 5k available for child-care expense through DCAP as
part of 125 cafeteria plan but have to choose between
this and 21 credit - tax-planning choice
adoption assistance
excludable accident and health benefits
elective contributions to 401k
use-it-or lose-it 125(d)(2)(A) if you take the benefit and dont use all of
it, its lost cant be paid out or carried forward

2002-10 IRB 621 frequent flyer miles just gave in

129: DCAP (dep care assistance program)
permits emp to make up to 5k available for child-care expense
through DCAP as part of 125 cafeteria plan but have to
choose between this and 21 credit - tax-planning choice
BUT LIKE 21, must be necy for gainful employment
21(d)(2): Spouse students count for period full-time

Group-Term Life Ins Purchased for Employees employee may

exclude up to 50k- 79a

Personal Deductions, Exemptions, Credits

Profit-Related Deductions and Allowances
Trade and Business Expenses 162?!?(a), (b) 162:
1!) ordinary and necessary usually means good bus purpose
Welch v Helvering (US, 1933) attys fees to defend lawsuit is common and
accepted in bus cmty, even though had never happened to this
particular def BUT paying off the debts of company taking over
found not ord/necy not clear why, it was pretty ordinary, and
Moss v. Comr (Posner) regular coordination meeting at Caf Angelo every
right to insist it be a real bus necessity meal itself was not an
organic part of the meeting
Danville (8th Cir) super bowl trip doesnt count common & accepted
Gilliam v. Comr denied ded for civil settlement from flipping out on an
airplane while traveling for work
2)! Current expenses, not cap expenditures no ded for cap
expenditure at time (though may give rise to deds for depreciation or
amoritization at a later time)
capital expenditures vs. repairs
Regs. 1.263(a)-2: CEs include costs of acquiring or constructing bldgs, machinery,
equipment and other tangible or intangible prop which has a useful life
substantially beyond the taxable year

Encyclopedia Brittannica (7th Cir 1982) where inc is generated over a

period of years, shd be capital out of normal method of doing
bus
Rev. Ruling 94-38 groundwater treatment facilities useful life beyond
construction must be capitizalied Reg. 1.162-6: BUT some items which have short life or small cost may be
dedle
1016(a)(1): Amt added to the basis of prop
Regs. 1.263(a)-1(b): CE also include amts which add to the value of property,
substantially prolong useful life, or adapt property to different use

Mt. Morris Drive-In (TC 1955) drainage system necy for operation of drive-in
at time theater constructed, obvious drainage system would be
required, so cap investment incomplete until added did not
merely restore, created a new cap asset
ER: dont know from these opinions how much he foreseeability might factor
in my sense is that it doesnt thing that is distinct from
other thing is capitalization
Rev. Rul. 94-38 soil remeditation and ongoing groundwater treatment did
not produce perm improvements ER: thing that is distinct from the other thing
Regs 1.162-4: repair merely keeps prop in ordinarily efficient operating
condition take ded and do not change basis

Midland Empire Packing Co. (TC 1950) expenditure to oilproof basement

does not add to value or prolong life, merely keeps in ord working
order
Intangible property must also be capitalized if provide significant benefits
which extend beyond year
INDOPCO, Inc. v. Comr (1992) exps incurred engaging investment banking firm
acquiring another corp cap expends, because benefits of acquiring corp
extend beyond tax year
BUT IRS prefers to use instead Regs 1.263(a)-4, capitalization required of:

1) amt paid to acquire, create or enhance an intangible asset

2) amt paid to create or facilitate a sep and distinct intangible asset

3) amt paid to create or enhance a future benefit indentified in the Fed

Register or Internal Revenue Bulletin
4) amt paid to facilitate acquisition or creation of an intangible asset
Advertising
Reg. 1.162-1(a): for products and services dedle
Reg. 1.162-20(a)(2): also, for instl or goodwill such as ads for Red Cross, etc
Despite the fact that benefits of ads may extend beyond taxable year

However, if medium of the ad material is such that it will have useful life
significantly more than one yr amt may be cap expend
195: start-up expenditures dedle:
amts paid investigating creation or acquisition of an existing active trade/bus, which
are not dedle because they violate carrying on requirement of 162
limited to amt = lesser of expends, or 5 reduced by amt of expends that exceed 50k
for taxable yr

263A: Uniform Capitalization (UNICAP) rules

ER: what I want you to know is that for large bus (over $10m) capn of salaries and
overhead is serious have to allocate to all of your products recover
costs not immediately but only as you sell
263A(b): costs of producting inventory and other self-created assets must be
capitalizaed

Rev. Rul 94-38 constructing groundwater treatment facilities = production,

so required to cap direct costs and allocable share of indirect
Regs. 1.263A-1(e): costs of producing goods must be added to cost of ivnenvory
and deducted when sold

Environmental remeditation costs subjetc to capitalization ... costs incurred

to clean up plan must be included in inventory costs
Regs. 1.263A-1(e)(4): marketing, ad costs, costs of exps not related to
sale/prpdocution not required to be capitalized
263A(b)(2)(B): excluding retailers and wholesalers w/ annual gross receipts less
than $10m also freelancers

carrying on
Henderson v. Comr (TCM 1983) sufficient nexus exps and carrying on
trade/bus decorating ofc with plants and print only tangentially, if
at all, aided in performance working as Asst AG for St of SC no
evidence either necy or helpful in performing her required svcs
ER: bad decision because ordinarily the courts dont look all that closely at
ord & necy

3!) trade or business (not personal)

Moller v. U.S. (US, 1983) investment activity of couple is not a trade/bus (and
therefore may not deduct home office via 280A) relevant
considerations are investment intent, nature of inc and frequency of
transactions return on investment was mostly dividends and int, longterm holding of secs, not short-term profits
U.S. v. Gilmore legal fees expended in divorce proceedings not dedle, even
though necy to protect trade/bus stockholding, because arose from
personal (marriage) not from trade/bus
Accardo v. Comr (7th Cir) convicted mobsters can deduct costs of defending
racketeering lawsuit because part of trade/bus of being criminals, but
acquitted ind cant

though 212 makes available anything incurred in production or

collection of inc, or dealing w/ prop held for prod of inc, even if not
trade or bus
But still relevant to:
62(a)(1): determining gross inc (before itemizing)
280A(c)(1)(A): deds to bus use of portions of persona residence
469: limits on passive inc
67 23% rule

salaries
162(a)(1): reasonable salaries and compensation
Regs 1.162-7(b)(2): reasonable in light of nature/extent of circums, arms-length
Regs 1.162-7(b)(2): only for personal sevices actually rendered (not payment for
property, distribution of dividend

162(m): limits on deductibility of executive salaries:

if company registered via Sec Exchan Act
only compensation in excess of $1m and to five covered emps (CEO & next 4
highest paid)
does not apply to ind commissions, or contingent on pre-existing perf goals
does not apply to contrubs to tax-free retirement plans and excludable things like
fronge benefits

280G: golden parachute restrictions

traveling expenses ded 162(a)(2) 3 reqs from Flowers, must be:

1) reasonable and necy
162(a)(2): not if lavish or extravagant (rarely enforced)
Regs 1.162: cost of travel itself (tickets, taxis), as well as meals, lodgings,
expenses incident to travel (phone calls, sample roms, tips, baggage
charges, launry, helpers for handicapped)
Comr v Flowers traveling fom Mobile to Jackson exps are only bec of tps desire
to live in Jackson, not dedle

2) incurred while away from home

Hantzis v Comr law student traveling NY/Bos expense shd be the result of bus
exigencies
Temp. employment doctrine allows ded for second home if temp less than
yr if bus connections to both

Hantzis but this has no application where she has no bus connection to first
home!
162(a): If period away from home exceeds one year, no longer temply away from
home
(weird case ER told us about from 1st Cir in which he split 6 mos each place
allowed to ded entire 6 mos expenses bec you can only have one tax
home)
background principle: duplicating expenses? IRS usually argues that thats the
underlying principle but they havent always won on that point

3) incurred in the pursuit of trade/bus

Regs 1.162-2(b): only if primary reason for trip relates to trade/bus
Rudolph v. U.S. (though before the statute, and only concurrence discusses it)

overnight rule
Rev. Rul. 75-170, 1975-1 C.B. 60: lodging and meals (50%) only dedle if tp away
long enough to require stop for substantial sleep or rest
US v Correll traveling salesperson breakfasts and lunches not allowed

Foreign travel:
274(c): if travel outside US lasts more than 1 week, or if nobus acts constitute 25%
or more of time traveling outside US, only portion of exps dedle even if
primary purpose is trade/bus

Reg. 1.274-4(g)
274(h): addl restrictions for conventions in certain foreign locations

Water transportation
274(m)(1): restirctions for transpo by water/convention, seminar, cruise ship
limited to 2x highes per diem allowance for fed emps travel
274(h)(2) & (5): does not apply to convention/mtg ON ship, but specific limits

Other persons traveling

274(m)(3): no ded for spouse, dep or person accompanying
UNLESS also an emp traveling on bona fide bus reasns and expends otherwise
deductible

Legislators
162(a), first sente following subpara 3
162(h)

National Guard/Reserve
62(a)(2)(E)
162(p)

Meals
274(k): not if lavish/extravagant or tp not present (rare)
274(n)(1): limited to 50% of cost (ER: wholly arbitrary figure)
bona fide bus conversation
274(a): unless traveling, treated as ent exp and only dedle if
directly related to or associated with trade/bus
Moss v. Comr (Posner) regular coordination meeting at Caf Angelo every right
to insist it be a real bus necessity meal itself was not an organic part of
the meeting

Food/bev incurred by traveler also treated as ent exp unless eats

alone or with persons who are not bus-connected (and then,
only 50% qualifies)
education dedle if one of two tests of deductability are satisfied
and neither of two tests of nondeductability are violated
tests of deductability (Reg. 1.162-5(a)), EITHER
maintaining or improving skills required by him as an employee (Reg. 1.162-5(c)
(1)) OR

Carroll v. Comr (7th Cir 1969) police officer cant deduct costs of courses
generally and basically unrelated to duties as a policeman
Krist v. Comr (2nd Cir 1973) before additon of 274(m)(2) schoolteacher
had tried arguing her six-month travel was education before this
section was added did not bear a direct relationship to
improvement of travelers particular skills
Ruehmann (TC 1921) had already passed GA bar in his 2L year so tried to
ded for cost of 3L year and a LLM Year sharpening his skills as a
lawyer TC ruled he cant ded 3L bec while he was a bar member,
getting a JD was a de facto requirement of working at his firm
but LLM year costs can be deducted
Wassenaar (TC 1979) couldnt ded LLM year because, while he had done
some legal work, and had passed bar, the kind of work (summer)
he did was not substantially the same as t/b of being a lawyer,
and he had yet to accept membership in the bar despite passing
meeting requirements of employer or law (Reg. 1.162-5(c)(2))

tests of nondeductibility must be incurred in trade/bus, so

nondeductibilite if either:
minimum educational requirements if laws, regs, or prof standards require
to meet min ed reqs of trade/bus (Reg. 1.162-5(B)(2)(i))

1.212-1(f): bar fees not deductible

OR
qualification for new trade/bus but rule does not apply if for new duties if
w/in same general type of work (Reg. 1.162-5(b)(3))

Sharon (TC 1976) no ded for lawyer taking bar prep course in different
state
274(m)(2): travel as education not deductible
Krist v. Comr (2nd Cir 1973) schoolteacher had tried arguing her six-month
travel was education before this section was added did not
bear a direct relationship to improvement of travelers
particular skills
222: qualified tuition and related expenses
incurred by tp, spouse or deps
above the line
tuition and fees required for enrollment or attendance at eligible inst for
instruction
max amt dedle:

4k if inc < 65k alone/130k jt

2k for AGI > 65/130 but < 80/160
none If higher
222(c)(1) & (2): no ded for exps dedle under some other provision, for
amts allowed as ed credits, and amts excluded under AGI
222(c)(3), (d)(4) & (d)(5): no ded for ind who may be claimed as dep, to
married filing sep returns, or certain nonres aliens

221: can ded interest on ed loans up to $2500

529, 530: education IRAs (function like Roth IRAs)
exception to cancellation of debt income for forgiven sch loans in
exchange for pub int service
taxes 164: ded for payment of specifically enumerated st, local
and foreign taxes
but NOT for tax paid in connection w/ acquiring and disposing of prop
instead, added to cost basis (if paid by buyer) or subtracted from
amt realized (if paid by seller)
`Reg. 1.164-1(a): if not listed in 164, but not disallowed in 275, may be ded if
incurred as ord and necy bus expenses
clothing
1) type specifically required as condition of employment
2) not adaptable to general usage
Pevsner v. Comr (5th Cir) bec of admin necessity, objective test w/o reference to
ind taxpayers style clothes could have been worn, so not dedle
Practicallspeaking, means it has to be uniform - logo
Nelson v. Comr (1964 TCM) Ozzie and Harriet can ded too heavey for use in
Southern Cal, wear/tear in poduction, no time to wear clothes off set

3) is not so worn
substantiation requirements
274(d): specifically disallows deds w/o substantion of amt, time/place, date
& description, bus purpose, bus relationship to donee, for
traveling exps
bus gifts
ent exps
bus meals
listed prop

autos
cell phones

pers computers
Reg. 1.274-5: specified acceptable substantion
280F(d)(4): adequate record or evidence
public policy exceptions
Tank Truck Rentals cant deduct fines
Nonbusiness expenses mostly investment related 212: all ord and
necy expenses (w/ similar principles as 163 2?!?):
212(1) for production or collection of inc
Reg 1.183-2(b): primary purpose tp bears burden of proving bona fie
expectation of realizing profit, even regardless of reasonableeness of
expectation factors:
Nickerson v Comr (7th Cir) need only prove operated farm w/ epectation
would later reap profit, not just from current level of act but
eventually
U.S. v. Gilmore (US, Harlan) legal fees turns on nature of the claims,
not the consequences of a failure to litigate must arise in
connection w/ profit-seeking activities marriage isnt, so legal
fees defending, not deductible
1) businesslike manner
2) expertise of tp or advisers
3) time and effort
4) expecation that assets uses may appreciate
5) success in similar/dissimilar acts
6) history of inc/losses wrt act
7) amt of occasional profits
8) financial status of tp
9) elements of pers pleasure/rec (not necyly exclusive)

Nickerson absence of alt explanation for tos actions in renovating farms

Regs 1.212-1(b): may be dedle even though inc not realized in same yr as
expense paid
Regs 1.212-1(k):
inc = rents, divs, int, alimony and other current recepits, and inc from disp of prop
expenses protecting ones rights to prop or inc, as heir or beneficiary = cap expend,
not dedle

212(3): attys fees incident to cdiveroce generally nondedle, may be to

extent attributable to obtaining alimony or are related to tax advice
1.212-1(f): job-seeking expenses not allowed
EXCEPT WHEN REIMBURSED by potential employer due to obscure Rev. Rul.
which seems to be based in the fact there is less of a concern about
abuse, as with someone gallivanting off the Hawaii and claiming its to
find a job

Whitten v Comr (TC Memo, 1995) losses incurred wrt appearance on

Wheel of Fortune at best misc itemized deds
212(2) for management of property held for production of inc
Regs 1.212-1(b): even if prop not currently producing inc or unlikely
disposed of at a gain
Not for prop held for personal purposes though can change relationship
212(3) for dealing w/ tax matters
incurred or paid in connection with determination, collection or refund
of ANY tax
misc. itemized deds,- only for itemizers
subject to67 2%/AGI limit
added back for AMT purposes
Losses
Generally, deduction allowed for any loss sustained during a taxable
yr not compensated for by insurance of otherwise 165(a)
165(c) - Inds may take deds only for losses:
incurred in a trade or bus
incurred in trans enter into for profit

generates receipts that iares included in income

Gervitz intitially planned to rent it, then decided to live in it claime had
always been motivated by profit but denied treated as personal
Weir owne shares in apt bldg, but was himself a tenant dedle bec his
capital was being used to generate inc
certain casualty losses

Regs 1.165-9(a) loss on sale of principal residence not deductible Amount of Loss excess of adjusted basis of prop over amt realized
1001(a)
If there is no realization event (ie damages by fire), amt is lesser of
difference in FMV or adj basis 165(b)
Reg. 1.165-1(c): Loss deduction capped at adjusted basis its the
decline in value or the adjusted basis, whichever is lower
Reg. 1.165-7(b): however, if prop is totally destroyed in casualty loss, can
deduct full amt of adj basis even if its greater than
If converted from pers to bus use , and if FMV is less than adj basis on date
of conversion, loss is limited to FMV of prop Reg. 1.165-7(a)(5))
Classification of Losses
Trade/Bus (using concepts in 162) dedle
Demolition Losses
Gambling Losses limited to extent of gains from gambling during taxable
year 165(d)

SUBSTANTIATION REQUIREMENTS
ATL IF PROF GAMBLER
BTL OTHERWISE, BUT NOT LIMITED BY 67
165(c)(2): Trans entered into for profit dedle
165(g): special rules for worthless securities
165(j): registration requirement

165(c)(3) - Personal casualty losses have special rules (see personal losses
below)
Bad Debts - 166(a): allowed for any debt which becomes worthless during
year
Bona fide debt
Tp burden of demonstrating worthlessless
166(b): amt of ded limited to adj basis of debt
Special Rules for Business Bad Debts
165: ded allowed is an ordinary loss
debt which is neiher nonbusiness debt nor a security
166(a): for ind, allowedf for debt which becomes wholly worthless during yr,
or to extent it becomes partially worthless during yr
Special Rules for Nonbusiness debts
166(d)(2): debt which is debt other than created in connection
166(d): For inds, must become wholly worthless, and amt is short-term cap
loss, dedle as such
Special Rules for Worthnless Securities (165(g)
Property
167(a): Depreciation Deds for prop which by its nature is subject to being
exhausted worn out or being obselete (NOT inventory, prop held rforo
sale, or used for personal purposes)
167(c): reference to Cost or other basis
280F limitations if not used exclusively for bus purposes

over salvage value

Useful life
Amoritization for intangibles

Methods:
Straight-line:

basis salvage value = depreciable base

1 / useful life = depreciation rae

declining balance (reg. 1.167(b)-2)
sum of the years-digitis

dep allowance limited in total to cost-basis

168: ACRS
168(e): recovery period (useful life irrelevant) use one of 10 classes
3 yr (tools, racehorses)
5 y (computers, trucks, etc)
7r
10 yr
15 yr
207r
Simon violinist can deduct a collectible bow, which is the sort of thing
that degrades even though this one didnt

salvage value irrelevant assume zero

any tangible property
anti-churning rules between related persons (168(f)(5))
Special Rules for Personal Property, if used in t/b or held for prod/inc,
may qualify for bonus dep in addition to ACRS
179 Depreciation: may elect to expense cost of any section 179 prop in
the yr placed in service
tangible personal prop 1245
limitations:

dollar limits 179(b)

income 176(b)(2)
recapture 179(c)(1) & (d)(10)

168 ACRS
167 Depreciation
260F Limitations:
Luxury Autos

280F(a)(1)(A) & (B): deds may not exceed:

$2560 for first yr in service
$4100 second yr
$2450 third yr
$1475 succeeding yrs until basis zero
280F(d)(7): adjusted annually
280F(d)(1): amts deducted under 179 treated as depreciation deds
for these purposes
Listed Property

280F(d)(4): includes:
1) any passenger auto
2) any other prop used as transpo
3) any prop generally used for enertainment, rec or amusement
4) any computer or peripheral equipment
5) any cellular phone
6) any other prop in regs
280F(b)(1): if less than 50% of use is for qual bus use, dep deds
must be determined by alt dep system of 168(g) in
current and subseq yrs
280F(b)(2): if exceeds 50% in previous yrs, but falls below in this
yr, amts of deds that would have been allowed must be
recaptured included in gross inc in current year
Also, 274 substantion reqs

Net Operating Loss Deduction

Normally, annual accounting system, no negative taxes in one
year to be offset
Burnet v Sanford&Brooks harsh result
But Deduction in taxable year for NOL carryovers and carrybacks for
the year 172(a)
NOL = excess of allowable business deductions over gross income over
taxable year 172(c)
Carryback to each of the preceding 2 years (sometimes 3) 172(b)(1)
Carryover to each of the 20 taxable years following 172(b)(1)
172(d) - For inds, primarily business losses, NOT
investment losses
personal exemptions authorized by 151
unused non-62 deductions
personal dependency exemptions
other nonbusiness deductions

Personal Deductions and Allowances

Family
Personal Exemptions 151: $3,650 in 09, adjusted by COL (151(d)(4))
Taxpayer and spouse 151(b): for each of couple if filing together, or
if filing separately taxpaying spouse can claim 2x if spouse
has no inc and is not anyones dep
151(d)(2): may not claim if claimed as dep
151(d)(3): phased out for AGIs above threshold amts

Dependents - 151(c): additional ded for exemption amt for each dep,
either:
Qualifying child - 152(c)(1):

Related - 152(c)(2):
Child or descendent of child

152(f)(1): child = step, eligibl foster, adopted children

Brother, sister, stepbro, stepsister or descendant of any such

Lives in same hh for more than half year
Is under 19, student under 24, or permly disabled
Has not provided more than half of her own supp
If claimed by 2+ tpayers tiebreaker - 152(c)(4)(A):
Parent
If none parent, highest gross inc
If parents do not file jt return, 152(c)(4)(B): child will be treated as of parent
with whom child resided for longest time
If tied, highest gross inc
Qualifying relative - 151(d)(1):

Related - 152(d)(2):
Child or desc of child
Bro, sis, stepbro, stepsis
Father or mother or ancestor of either
Stepfather, stepmom
Nephew/niece
Unclue/aunt
Son-, daugher-, father-, mother-, brother-, sister-in-law
Has same principal place of abode as tpayer and is member of hh (but not
spouse)
Gross inc less than exemption amt
Provids more than half of support
152(d)(3): OR multiple support agreement
no one may contrib. over onehalf of inds suppt

but over half must be provided by qualified rels

tpayer must contrubute oer 10% of support
each person related to ind who furnished over 10% of deps syppt must file written
dec that they will not claim exemption for that ind

Not qualifying child of any tpayer

Children of divorced /sep parents - 152(e)(1): if:

Child receives more than of her suppt from parents, but

parents divorced, separated or living apart during last 6 mos, and
King v Comr (2003, TC) applies to any parents wort marital status as long as they
lived apart all of last 6 mos not just those married but living apart
(causing revision in 2004)

in custody of one or both prents for more than of the yr

then treated as aulifying child of custodial parent
152(e)(2): but if cus parent signs written dec stating will not claim child
and noncustodial attaches to return, may claim
King v. Comr (2003, TC) parties stiupulated that she released claim

152(e)(5): does not apply if multiple suppt arrangement

Also:

152(b)(2): Cannot be dep if filed jt return

152(b)(3): dep must be citizen, resident, or res of country contiguous (other
than certain adoptees)

Alimony - 215 allowed for amts paid during taxable yr for alimony or
separate maintenance payments
Planning for the future
219 IRA contributions
162 health ins for self-employed
220, 223 med savings acct contribs
221 student loan int
Interest generally personal int not deducible - 163(h)(2) but 163(a):
ded allowed for int paid or accrued for one of six situations:
1) trade or business int - 163(h)(2)(A): other than services as employee
2) investment int - 163(h)(2)(B): paid or accrued incurred to purchase or
carry prop held for investment
163(d)(1-2): limited to amt of net investment inc for that yr any in excess
may be carried over

163(d)(4): net investment inc = excess of gross inc and gains foom
investments over deductible expsnes directly connected
with prod if investment inc
3) int in connection w/ passive activity - 163(h)(2)(C): to extent allowed
under passive activity rules, deductible
4) qualified residence int - 163(h)(2)(D), if secured by qualified res 2
types:
acquisition indebtedness - 163(h)(3)(B): incurred acquiring, constructing or
substantially improving qual resx

limited to $1m
if refinanced, that debt qualifies up to amt of refinanced in
home equity indebtedness - 163(h)(3)(C): other than AI (for other things)

cannot exceed lesser of:

excess of FMV of res over amt of AI
100k
unlike AI, no restriction on use of funds borrowed

163(h)(4)(A): res need not be primary residence, but limited to 2, and if 2, one
must be principal

including your yacht!

net effect is that int on the first $1.1m of principal is deductible

5) int payable on estate tax deficincies - 163(h)(2)(E): in certain

situations, time for payment of est tax may be deferred, but int must
be paid those payments dedle
6) int on education loans - 163(h)(2)(F), 221(a):
max is $2500
phased out ratably for inc 50-65k, 100-130 for jt filers
to pay expenses of tp, spouse or any dep
not allowable for any payment otherwise allowable under other section,
such as HI indebteness
not dedle if from related person
allowed in calcultating AGI need not itemize to make use

Tracing determine int by use of loan proceeds (not source,

securitzation). Reg 1.163-8T
Unstated interest deds may be allowed tofr int not actually paid but
imputed and deemed to be paid under:
installment purchases rules of 163(b)
interest on deferred payments rules of 1274 or 483
original issue discount rules of 1272, 1273
loans w/ below-mkt rates rules of 7872

Year of Deduction
If accrual method in year in which int arises
If cash method - yr in which tp pays the int

However, 461(g) int paid on a laon which extends beyond taxable

yr in which the int is paid, is protated over period of loan
and deductible in the yrs to which it is apportioned

This rule does not apply to int in the form of points paid on a loan made to
purchase or improve principal residence
408, 408A Retirement savings
Health Savings Accounts (HSAs) - 223
Must have - 223(c)(2):
Ded of at least 1k and not more than 5k for self-only
Twice that for family coverage
Annual adj for inflation

Ded for lesser of - 223(b):

Amt of deductible
$2,250 (self-only) or $4,500 (family coverage)

Treated as adj to gross inc and therefore may be claimed by

nonitemizers
Not phased out under 62, not subject to AMT
Unpleasant Events
Taxes
164(a), (b)(5): ded for:
St, local and foreign real prop taxes

164(c): imposed on ints in real prop, levied for gen pub welfare
164(c): charges imposed for local benefits of a ind tending to inc
value of prop (special assessments) are not dedle
164(d): if real prop sold mid-year, may only ded amy of taxes
attributable to portion of year owned
St and local personal prop taxes

164(b)(1): ad voleremx tax (proportional to value) imposed on an

annual basis in respect of personal prop
St local and foreign taxes on inc, war profits, and excess profits
Sales tax tp may elect to ded in lieu of deding st or local inc taxes (primarily for
benefit of people in sts with no inc tax):

Imposed on retail sale of a broad range of items (exceptions for

food, clothing, med supplies and motor vehicles)
IRS table used to approximate amts
Future of this ded rmains uncertain
164(b)(2): st or local = imposed by st, possession of US, pol
subdivision (muni, county, sch dis), or DC
also taxes incurred in carrying on a trade/bus or producing inc
but tax paid in acquiring or dosposing prop may not be ded added
to basis or reduces amt realized
Extraordinary Medical Expenses - 213
Expenses actually paid during taxable year
Henderson v Comr (2000 TC Memo) modified van for treatment of
spina bifida modifications allowed but not depreciation
not expense paid
Not compd by ins or otherwise
For medical care - 213(b) & (d)
(d)(1)(A): diagnosis, cure, mitigation treatment or prevention of disease or for the
purpose of affecting any structure or function of the body

213(d)(9): not cosmetic surgery

Taylor v. Comr (TCM, 1987) severe allergy not allowed ded for
amts paid to have someone mow his lawn seemed to care
that there was no showing citing:
Altman v Comr (TCM 1987) playing golf not ded despite being
recommended for treatment of emphysema
Ochs v Comr (2nd Cir, 1952) children being around caused
nervousness and irritation cost of sending them to
boarding sch not ded difficult to draw line but
expenditures for one family member benefit others as well
- unlikely Congress intended to transform family expenses
into med expenses
(d)(1)(B)transpo primarily and essential for such med care
(b): prescribed drugs and insulin

(d)(1)(C): qualified long-term care svcs

MORE HERE RE C
(d)(1)(D): ins covering such med care
(d)(2): lodging up to $50/night per ind, while away for rom home primarily for med
are if care itsl is provided in hosp and no significant element of pleasure
or vacation

Available for care of:

Tpayer

213(c) if dies, med expenses paid by estate for care w/in 1 yr

deemed paid and deductible when incurred (rather than
paid)
Spouse
Deps (defined in 152)

Child or
213(d)(5): Child of divorcees dep of both
qualifying relative 152(d)
provides one-half of inds support for yr
direct relative (child, sibling, ancestor, step, uncle/aunt, dir in-law, and
cohabitant)
213(d): To extent that expenses exceed 7.5% of adj gross inc
10% for purposes of AMT

Alternatively, might be better off

Personal Casualty and Theft Losses fire, storm, shipwreck or other
casualty, theft 165(d)(3)(B) or similarly sudden event
Permitted only to extent not compensated by ins or otherwise, like
all losses 165(a)
165(b) - As w/ profit-seeks deds, limited to lesser of:
change in FMV or
adj basis

165(h) no loss to extent reimbursed by ins

Amount - 165(h)(1) allowed only ro extent that amt of loss arising
from each casualty exceeds $100
personal casualty gain = recognized gain from invol conversion (165(h)(3)(A))
amts paid by an insurer
personal casualty loss = theft or casualty loss reduced by $100 floor (165(h)(1)
& (3)(B))
If PCL for yr exceeds PCGs, losses only allowed to extent:

Amt of PCG +
Amt by which excess of PCLs over PCGs exceeds 10% of adj gross
inc
PCL up to amt of PCGs treated as ded allowable in computing adj gross inc excess
is treated as itemized ded
Reg. 1.165-7(b): if prop is totally destroyed in casualty loss, can deduct full
amt of adj basis even if its greater than

FORMULA:
(VALUE BEFORE VALUE AFTER) any compensation for ins - $100 10% of AGI
But if this exceeds basis, can only deduct amt of basis

Regs 1.165-7(a)(3) automobile not if willful act or willful

negligence
Basis reduced by ded amt
suddenness comparable to that caused by fire, storm or shipwreck
Rev Rul 63-232, 1963-2 C.B. 97
termites and dry rot dont count
Dyer neurotic cat, even though having its first fit, isnt enough
Ring cases - disposal is sudden, flushing is too gradual
Chamales OJs neighbor, not sudden

Physical damage required by tax court Chamales force was not exerted upon the property itself

*SPLIT - 11th Cir rule, Finkbohner v US need not be physical, but still must
be permanent

Not if gross negligence white v. Commr TC

Blackman set his wifes clothes on paper -

Not where frustrate articulate public policy Comr v. Heininger, and

Commr Heininger
Blackman burned wifes clothes MD policy vs arson and burning

Sustained in yr where
Admirable Events
Charitable Contributions 170(a): ded authorized for any charitable
contribution made w/in taxable yr
TAKE DED IF ITS QUALIFIED
CHECK TO SEE IF 30% LIMITS REACHED
BUT IF BARGAIN SALE, GOING TO ADD SOME TO AGI apportion some of basis to
sale and some to gift and take gain over basis

Qualified Donee - 170(c), (g): charitable contribution = contrib. or

gift to or for the use of:
fed, st or local gov

only if for exclusively pub purposes

Ottawa Silica Co not if donor receives, or anticipates reciving a substantial
benefit in return
religious, charitable, scientifie, literary or education organizations
certain war vets orgs
domestic fraternal lodge-system societies or orderies
cemetery companies
ALSO amts paid to maintain foreign exchange student
BUT NOT if clearly contrary to public policy (mainly discrim)

Bob Jones University -

Contributions
With donative intent and w/o consideration Rev. Rul. 71-112, 1971-21 CB 93
(and Ottawa Silica)

Ottawa Silica Co v US (1983 Fed Cir) mining co donates land for sch but
benefitted thereby by having roads provided argued they were
substantially
Case
If partial consideration received, ded allowable to extent amt exceeds partial
consideration net contribution

170(l): special rule for higher ed where entitled to purchase athletic tix
80% of amt transferred treated as charitable contrib.
Bargain sale if for amt less than FMV - 1011(b) adj basis must be
apportioned between sale and gift: sale portion = adj basis X
(amt realized / FMV)

Amount of Contribution
If Cash: amt consideration received

170(f)(17): cash/check contrib. must be verified by bank records or

documentation from recipient
If property, = FMV at time contrib. value of consideration, subj to further
reduction via 170(e) (?)

Vehicles 170(f)(12): if claimed value exceeds $500, must receive

contemp written acknowledgment from donee, including
VIN and cert by donee how it intends to use veh, or
whether it intends to sell it, and donor must attach
acknolwedgement to tax return if donee sells shortly
after, ded limited to gross proceeds
Clothing and household goods - 170(f)(16): no ded if minimal monetary
value, and even if greater value, must be in good condition
Includes furnioture, furnishings, electonic apps, linens, and similar
But not food or art, jewelery and similar
If value excess of $500, must accompany qualified appraisal

Ord inc & short-term cap gain prop = 170(e)(1)(A): amt reduced by amt
of gain which would have been ord incor short-term cap
gain if onor had sole prop at date-of-contribution FMV
long-term cap gain prop
170(e)(1)(B): amt reduced by all of amt of gain which would have
been long-term cap gain if donor had sold prop at its
date-of contrib FMV, AND if contrib. is:
1) of tangible personal prop the use of which is unrelated to exempt purpose of
donee, OR
2) to or for the use of a nonoperating pvt foundation

170(e)(5): reduction does not apply to contribs of qualified appreciated

stock to nonoperating pvt foundations
QAS = stock for which mkt quotations are available. 170(e)(5)
may not exceed 10% of value of all outstanding stock of corp. 170(e)(5)(C)

prop disposed of by donee

170(e)(1)(B)(i)(II), (7)(C) & (D): if tangible pers prop w/ claimed value of
more than $5k, and donee sells before end of yr,
ded limited to taxpayers basis in prop
unless donee certifies that prop is intended to be used for purpose related to
exempt purpose

170(e)(7): if disposes of prop after yr, but w/in 3 yrs of contrib., donor
must include in gross inc for that yr the amt by which ded
exceeds donors basis
If services no ded

Reg. 1.170A-1(g) -unreimbursed expenditures incurred may be

170(i): if car used, may ded either amt of actual expenses or 14
cents per mile
170(j): no ded for traveling expenses unless no significant element
of pleasure, recreation or vacation
If partial int in prop, ded only in limited circums (170(f)), but these limits do
not apply if donor makes charitable contribs of all of tpayers ints
in prop (170(f)(2)(D))

Transfers in trust
170(f)(2)(A) transfer of remainder int only ded if trust is charitable
remainder annuity trust, charitable remainder unitrust or pooled
inc fund (general thrust = adequately preserved for charitable
org)
170(f)(2)(B) transfer other than remainder int ded only if int is in the
form of guaranteed annuity, or if specified fixed percentage of
FM must be distributed annually to charitable org (same general
thrust)
transfers not in trust: 170(f)(3) & (h): ded only if:
partial int in prop which would be ded if transferred in trust (above)
remainder int in pers res
remainder int in farm
undivided portion of donors entire int
qualified conservation contribution
Limitations
contribution base - 170(b)(1)(G): amt of adj gross inc w/o net operating loss
carryback
public charities 50% limitation 170(b)(1)(A): ded contributions to (but for
the use of) public charities ot extent total does not exceed
50% of contribution base

Reg. 1.170A-8(a)(2): contrib. of inc int in prop, or contrib. of prop

to be held in trust is considered for the use of rather
than to subject to 30% limit Private foundations - 30% limitation 170(b)(1)(B): may ded contribs made,
other than contribs TO pub charities, only to exten total does not
exceed lesser of:

1) 30% of contribution base

2) excess of 50% of contrib. base over amt of charitable contribs allowable
under 50% limitation rules
(so max ded to pvt foundations is 30%)

170(b): amts that exceed contrib. limits may be carried over and treated as
a contrib. of same character/classification of donee in the 5
suceedig taxable years (15 for qualifified conservation)

more generous than casualty losses or med expenses

Further limits on cap gain prop

170(b)(1)(C): may be deducted only to extent doesnt exceed 30% of

contrib. base if:
Sale of prop would produce long-term cap gain or gain whose character is
determined under 1231 (cap gain prop) AND
Reduction rules of 170(e)(1)(B) do not apply
Alternatively, may elect to have amt of charitable contrib. reduced under
tules of 170(e(1)(B), thereby subjecting to 50% limit rather than
30%
170(b)(1)(D): contibs of cap gain prop other than contribs to 50% orgs, may
be deducted only to extent the total am does not exceed lesser of:
1) 20% of contrib. base
2) excess of 30% of contrib. base over the amt of contribs of cap gain prop
to pub charities
cap gain prop = prop which if sold would produce long-term cap gain or
gain whose character is determined under 1231 in additon, the
amt of contrib. opf cap gain other than to 50% orgs may be
required to be reduced under rules of 170(e)
carryovers - 170(d): if total amt of contribs exceed s lmits, may be carried
over and treated as charitable contrib. of same type of prop to
the same class of charity made in each of 5 succeeding years
amt carried over is excess of amt initially carried over less any
amt treated as contrib. during intervening succeeding yr

Year of Deduction- generally, ded only in yr paid or carryover yr (not

pledge) even if using accrual
Verification - 170(a)(1): ded allowed only if verified
170(f)(11): Prop for more than $500 ded must attach descro[ption, and if
claimed value in exceess of $5k, appraisal

170(f)(17): cash/check/monetary gify bank record or written

communication from donee that shows name of donee org, date,
and amt of contrib.
170(f)(8): contrib. $250 or more by time of return, acknowledgement from
donee amt of cash given, description of any noncash prop
given, statement as to whether donee provided goods/services in
consideration for gift value therof

but not required in case of an intangible religious

6115(a): charitable orgs which receive payment of more than $75 which
is partly a contrib. and partly a payment for goods/services msut
provide written statement to donor which:

1) informs donor that only excess amt of payment over value is deductible,
AND
2_ provides good faith est of value of goods/services provided
Donation of prizes awards 74
Work
Moving Expenses - 217(a): generally may ded qual moving expenses
incurred in connection w/ beginning work at new principal place of
work (82: and reimbursements not included as inc provided not
fring)
217(c): Conditions for allowance - BOTH
Distance 217(c)(1): new work at least 50 miles father (measured by shortest of
more commonly traveled routes) than

Old work
Or res (if doesnt have old worl)
Employment-Duration, 217(c)(2), either:

Employee test
During 12-mo period following arrival in general loc
Full-time emp in gen area for at least 39 weeks
Self-employed test
During 24 mo period immediately following arrival in gen loc, either

Full-time emp, OR
Performs svcs as self-emp ind on a fulltime bus
In that gen area for a period of 78 weeks which at leas 39 weeks must be
suring furst 12 mos of 24-mo period
Self-emp ind = performs pers svcs as sole properietor, or partner in
partnership performing trade/bus

217(d)(1): waived if death/disability, or would have satified but

emp involuntarily seps him from employment
Qual Moving Expenses
217(b)(1): rle amys spent for moving hh gooda dn pers effects, and traveling there
(incl lodging but not meals)
217(b)(2)(C): including exps incurred for members of hh

Time for Ded

Taxable yr in which exps incurred, according to acting method
217(d)(2): if havent satisfied emp-duration during yr:

may claim ded if still possible to satisfy, OR

Reg. 1.217-2(d)(3): but if she later doesnt satisy, must include in
gross inc amt = amt of earlier ded
may file w/o claiming and then file amended return if qualifies later

217(g)-(i): Special Rules for armed forces, foreign countries

Jury Duty Pay - 62(a)(13): if receive payment and remit to emp in
exchange for compensation, as required by emp
Certain educator expenses - 62(a)
212: unreimbursed emp bus expenses

Restrictions on Deductions
262: Personal living and family expenses generally not allowed unless
specific provision
Smith v. Comr cost of having kids not dedle despite being but-for cause of
employment (tax credit available though)
Illegal Activities
162(c): no ded for kickbacks, etc.
162(f): no ded for fines for violation of laws paid to the government
Tank Trucking - ER thinks PA was just using this to raise revenue
Stephens v. Comr restitution paid pursuant to fraud conviction is dedle
primarily remedial measure, not fine, and made to Raytheon, not
govt
162(e): nothing for political contributions, initiatives
183(a): hobby losses - no ded for expenses attributable to an activity
not engaged in for profit
183(c): = other than one allowable under 162 or 212(1) or (2)
183(d): Activity presumed to be for profit if Gross inc exceeds ded
attributable during at least 3 out of the 5 consecutive years ending
with the current yr
5 of 7 yrs for horseracing
183(e)(1): tp may elect to defer this determination until close of 4th yr
following yr in which first engages in activity
Reg 1.183-2(b): primary purpose tp bears burden of proving bona fie
expectation of realizing profit, even regardless of reasonableeness of
expectation factors:
Nickerson v Comr (7th Cir) need only prove operated farm w/ epectation would
later reap profit, not just from current level of act but eventually

1) businesslike manner
2) expertise of tp or advisers
3) time and effort
4) expecation that assets uses may appreciate
5) success in similar/dissimilar acts
6) history of inc/losses wrt act
7) amt of occasional profits
8) financial status of tp
9) elements of pers pleasure/rec (not necyly exclusive)
Nickerson absence of alt explanation for tos actions in renovating farms

183(b): even if not engaged in for profit, deds still allowed:

1) to the extent ded would be allowed under authority of some provision
other than 162 or 212
2) to extent expenditure would be allowed under 162 or 212 if activity was
engaged in for profit but only to extent act produces gross inc in
excess of deds allowed under 1)
274: T&E expenses generally not allowed unless meet criteria
274(n): Limited to 50% of cost
274(a)(1)(A): Activity
directly related to active conduct of t/b or
Reg. 1.274-2(c): trade/bus acts go on, during ent, or

associated with t/b AND directly precede or follow substantial

and bona fie bus discussion
Reg. 1.274-2(d): clear bus purpose in making expenditure
Danville (8th Cir) super bowl trip doesnt count building goodwill alone
insufficient
Moss v. Comr not allowed to ded lunch w/o clients, coordinating, etc
Churchill Downs purely social event event ws not attended by tps primary
customers, just to generate goodwill

Limits
274(a)(1)(B): nothing for facility used
274(a)(3): nothing for dues paid for club orgd for bus, pleasure,
rec, or other soc purpose
Ent Tickets
274(l)(1): no ded for ticket unless to qualifying charitable sports
event
Danville (8th Cir) super bowl trip doesnt count 274(l)(2): Skyboxes limited to sum of face alue of same number of
nonluxury tix available to gen pub
274(d) Exceptions for emps to emps on bus premi, copensation, reimbursed
exps, bus mtgs for emps, sholder s or dirs
274(d): Substantiation
274(e): exceptions
465: Deds limited to amt at risk
465(a), (d): ded only to extent tp is at risk from act at close of yr 465(b)(6): at risk = wrt act:
amt of money and
adjusted bases of prop contributed and
amts borrowed

if personally liable
or net value of prop pledged as security (assuming not prop used in
act)

465(b)(5): any loss disallowed by this rule treated as ded in next yr

may be allowable depending on risk in that yr
465(d): loss = excess ded allocable to the act over the inc derived
465(c): generally applies to trade/bus or inc production
465(e): recapture if amt at risk less than zero , must include negative as
gross inc, an = amt is ded in succeeding yr
469: Passive Activity Limits
469(c): passive activity = involves conduct of trade/bus (per 212) in
which the tp does not materially participate
469(h): involved in th ops on a regular, continuous and substantial
basis
Temp. Reg. 1.469-5T(a): objective tests/factors
469(h)(2): limitied partner generally not materially participat
469(c)(2) & (4): rental activities generally not even if materially
participate
469(c)(7): but not treated as rental at if involves rendition of significant personal
services

469(c)(3) & (4): working ints in oil and gas prop generally not
Passive Act Loss or Credit
469(d)(1): PA Loss = excess deds from passive acts over total inc
from passive acts
469(d)92): PA Credit = excess of sum of tax creidts attributable
to passive acts over liability allocable to passive acts
469(e)(1): portfolio inc (int, divs, annuyities, royalties) not taken
into acct
Treatment: 469(a)-(d): PALs/PAC only allowed to extent it exceeds PA
inc from yr remainder is carried over to subseq yrs
469(c)(7): special rules fo real estate rental more than of all person sevs
perfmroed (and more than 750 hrs) performed in real prop
trades/bus in which mat participates
469(i):*PROB NOT ASSIGNED special rule for not actively but not materially
participate in rental real estate
469(f):*PROB NOT ASSIGNED former passive acts
**469(g): taxable dospo of passive act
**469(j): nontaable dispo of passive act
Interrelationship with other code provisions
Generally, apply other limits on losses (267, 465 at-risk) before passive
activirt
Deds for int paid wrt passive act not subject to 163, so must first run
469 gauntlet

PACs on ther other thand limited first under 469 before applying limits on
max amts of bus creidts (38(c))
But limits on increasing research acts (41) applied first
163(d)(1-2): limited to amt of net investment inc for that yr any in excess
may be carried over

163(d)(4): net investment inc = excess of gross inc and gains foom
investments over deductible expsnes directly connected
with prod if investment inc

280A: Business Use of Home and Rental of Vacation Homes

Definition of used as a residence = used for personal purposes for
more than the greater of:
14 DAYS OR
10% of days rented at FMR
used for personal purposes
1) tp or any member or family uses
2) someone uses it and tp thereby becs entitled to use some other dwelling unit
3) any ind (other than emp entitled to exlude rental value from inc under 119)
uses it and pays less than fair rental
First two apply w/o regard to whether fair rental charged unless rented at fair rental
to someone for use as that persons personal res

IF NOT USED AS A RES, expenses dedble as ord/necy or production of inc.

LIMITS:
280A(e): if used for some pers purposes, may deduct only fraction of
the expenses that are dedble only if dwelling is rented
fraction = days rented at mkt rate / days used (rented + personal)
Separate the deds available for all purposes, and those only allowed because its
rented
Multiply the renting deds by the fraction

183: hobby losses if under this section, tp rental bus not engaged in for
profit, then deds limited to inc from activity
469: Passive Activity Loss rules generally limit inc from passive activities
to gain
469(i): inds may still recognize 25k of losses annually phased out for high-incs
469(c)(7): rules exempt inds who perform more than 50% of svcs in real prop
trade/bus in which they materially participate

IF USED AS RES, RENTED FOR 14 DAYS OR LESS, no ded for any exps
and rent excluded from gross inc (280A(g)) (too trivial)
IF USED AS RES, RENTED FOR 15 DAYS OR MORE, rent is inc via 61(a)
(5), 280A(b) allows certain exps routinely dedle by homeowners to
be deducted (mort int, prop taxes)
Take any deds available in any case (taxes, mort int, brokers fees)
Additional exps dedle only for period of ratio
Circuit split

Basketing but deds limited to the amt of rental

LIMITS:
280A(c)(5): limits deds to gross inc from rental (other than those routinely dedle)
280A(e):

280A(f)(3): hobby loss rules do not apply

280A(a): no ded allowed wrt use of dwelling unit used as res by tp
(**REBREAK THIS DOWN BY ERS HANDOUT)
260A(f)(1): dwelling unit = house, apt, condo, mobile home, boat
or similar, ut not any portion of unit ised exlusively as hotel,
motel, or inn
280A(d): use as a residence
FOR greater of:

15 days OR
**DOUBLECHECK THIS: DOESNT COUNT TIMES
excess of 10% of number of days rented during yr for fair rental
260A(b): does not apply to expenditure which are dedble w/o
regard to whether they are connected to tps trade/bus or
inc-producing act, such as qual res int or st/local taxes
280A(c): does not apply to extend dedble item allocable to portion
of the unit devoted to
certain bus uses
1) principal place of bus for any trade/bus

280A(c)(1): principal place of bus = includes portion of dwelling used

for admin or mgmt acts of tps trade/bus provided there is no
other fixed location where such acts conducted

Soliman anestheologist not allowed to ded home ofc despite exclusive use
for bus and no other location - made bad law by this stat
Popov (9th Cir) violinist practicing consider two factors: 1) relative
importance of acts performed in each location & 2) time spent
in each case relative impt doesnt help but significantly more
time sent practicing at home dedle
Moller v. U.S. (US, 1983) investment activity of couple is not a trade/bus
relvant considerations are investment intent, nature of inc and
frequency of transactions return on investment was mostly
dividends and int, long-term holding of secs, not short-term profits
Henderson v. Comr (TCM 1983) sufficient nexus exps and carrying
on trade/bus decorating ofc with plants and print only
tangentially, if at all, aided in performance working as Asst AG for
St of SC no evidence either necy or helpful in performing her
required svcs
ER: bad decision because ordinarily the courts dont look all that closely at
ord & necy
2) place of bys used by pats, clients or customers in normal course of
trade/bus
3) in connection w/ tps trade/bus, if prop is sep structure

artist studo
280A(c)(1): if emp, exclusive use of unit must be for the conveninence of
his employer

280A(c)(6): no circumventing by renting prop for use by emp in performing

services
certain storage use - 280A(c)(2):
if unit is the sole fixed loc of trade/bus, involves selling prods wholesale
or retail
deds to extent allocable to space used on reg basis to store inventory or
prod samples

use in providing day care - 280A(c)(4):

to extent allocable to portions used on reg basis
in trade/bus providing day care for:

children
inds 65
physiacally or mantally incapable of caring for themselves
280A(c)(5): limited to excess of:
gross in derive from the bus uses over
sum of
deds (such as mort nt and taxes) allocable to that portion of the unit plus
bus deds other than those attributable to the use of the dwelling
amt in excess be carried over to next yr, subject to same limits

Rental of Dwelling Unit

280A(g): de minimus rule rental inc excluded if less than 15
days/yr (and no other ded allowed, such as for dep or
repairs)
Rented for more than 14 days, not res
If not used for pers purposes on any day, ded limits of 280A dont apply,
but 183 might if activity not engaged in for profit
If used for person purposes on one or more days, ded limits of 280A(c)(5)
do not apply,but limit of 280A(e) does apply

Rented for more than 14 days and used as res

Rent is income
Deds wrt dwelling unit subject to restrictions of both 280A(c)(5) & (e)
280A(e): reqs allocation of those exps not generally allowable twixt rental & pers
use days
Provisions of 183 not applicable for such year

Rental of Principal Residence

280A(d)(4): ded limits of 280A(c)(5) do not apply to principal res if only use
occurs before or after qual rental period
qual rental period = consecutive period of 12 months or more, or shorteter
period ending w/ sale or exchanged, during which unit is rented or
held for fair rental
67(a): MISC Itemized Deds - 67(a): only to extent total amt exceeds 2%
of AGI notably:
deds claimed under 212
ded claimed by employees under 162

The Timing of Income

Methods of Accounting type regularly used in keeping books
(446(a)) but IRS can require change to different method if it
does not clearly reflect income ( 446(b))
Cash Receipts and Disbursements Method 451(a) generally include
inc in yr actually or constructively received, takes into account
deductions in year paid
Constructive receipt Reg 1.451-2(a) must include when constructively
received (may not postpone inc by merely failing to collect it)
Credited to his account
Set apart for him
Or otherwerwise available to draw on at any time
Arend v. Comr wheat sale delivered but did not have right to money until
following Januaru bona fied arms-length transaction failure to receive
money not of his own volition

Or could ave drawn upon if notice of intention to withdraw had been

given
Pulsifer v Comr Irish minor prizewinners all that was needd to receive was for
legal rep to apply for funds so econ-benefit thyu -

NOT if risk of nonpayment

NOT if receipt subject to substantial limits or restrictions
Minor v US doctor and deferred comp plan but merely credits fund, mere promise
to pay funds not income at that time

As long
Concern for matching income & deductions if possible
Also remember imputed interest rules (7872, OED) which may require
recognition of income not yet received see above
Disbursements gemerally, take allowable deds in yr of payment (461(a),
BUT
Prepaid expenses
If expediture creates asset w/ useful life extending substantially beuond end of
taxable yr, ded must be spread out over taxable yrs used. Regs 1.4611(a)(1)
461(g)(1) must capitalize all prepaid int and deduct ratably over period of
loan - Ded for payment of int only in yr in which into s properly allocable
prepayment in one year will be spread out over taxable years loan is
expanding.

Exception for points paid in respect of indebtedness incurred to purchase

or make improvements to principal residence 461(g)(2)
Farmers get to treat as current expenses a wide variety of costs other tps
would have to capitalize
263A & 464: attempt to distinguish between active farmers and passive
investors in syndicates as tax shelters ded feed, fertilizer, etc,
only when actually consumed

Accrual Method include iterms which fix right to receive and fix amount
Regs, 1.451-1(a) Spring City Foundry Co v Comr,
Lucas v North Texas Lumber Co (US, 1930) accrual not permitted or
required until goods or sves treansferred or performed, even where
booked and binding sale K entered into at fixed price seems
inconsistent w/ Anderson
Uncertainty reasonable expectancy
Economic contingencies 448(d)(5) sufficient if legal right has been
established and amt reasonably determined
Georgia School-Book Depository per K, publishers right to payment had arisen
need not pay if had no reasonable expectancy but this is an exception
and must not swallow up the rule despite econ situation and
nonpayment for 2 years, no reasonable expectancy they wouldnt be paid
St of GA is good for it, plus they kept supplying books which indicates
they expected to be paid

Legal contingencies
Of inc/inclusion:

Continental Tie implied distinction between basic liability (delay inclusion)

as opposed to amt (do not delay if reasonable estimate available)
NOT REALLY, CALLED INTO QUESTION
Of ded/liability

if subject of litigation, right not fixed until lit and appeals concluded, unless
cash flows 461(f) and (h)
overruling US v Consolidated Advance Payments generally income when received EXCEPT
Occasionally, prepayment relates to an obligation to perform
services that is not definite, not at discretion/demand of
customers may defer payment until services performed, so
as to match if sufficiently specific
Artnell Co (7th Cir) inc rec deferred for prepaid admission to baseball games
played in following yr time and extent of future services sufficiently
specific unlike AAA and Schlude
Westpac advance trade discounts, volume discount for purchasing as it made
purchases in satisfaction of required volume, subtracted pro rata the

earned pirtion had to pay money back if it did not meet commitment, so
properly considered a liability at that time, not an accession to wealth
IPL advance payments required of credit-suspicious customers analogous to loans
rather than advance payments

455 prepaid income from sibscriptions to periodicial may be

included in inc in which liability to deliver exists
456 membership organizations prepaid dues inc, entitling
member to services or privieleges over a period time beyond
end of yr (but w/in 36 months) may be included in inc in the
taxable yrs in which liability to priovde services exist
BAD LAW? AAA v US clear mandate from Congress in allowing section to explire
not allowing AAAs practice of reporting only portion of dues, ratably
corresponding to membership months covered by those dues
Schlude (after 456) dancing sch taxable in yr of receipt on amts paid by students
for lessons to be provided in the future

Security Deposits not taxable, unlike Payments

Westpac advance trade discounts, volume discount for purchasing as it
made purchases in satisfaction of required volume, subtracted pro
rata the earned portion had to pay money back if it did not meet
commitment, so properly considered a liability at that time, not an
accession to wealth
IPL advance payments required of credit-suspicious customers analogous to
loans rather than advance payments
Current Deductions for Future Expenses 461(h) can take if all
events test is satisfied, but not any earlier than taxable yr in which
econ performance occurs
461(h)(4), US v Anderson, and old common law, all events test =
all events have occurred which can determine fact of liability, and
amt can be determined with reasonable accuracy.

US v General Dynamics Corp (US, 1987) emp provided med benefits

claimed ded for services rendered but empl had not considered
claims all-events test not satisfied until claims submitted some
might fail to submit claims to which they are entitled refuse to
sanction expense accruals on the basis of estimates

 461(h)(2) & (3) economic performance =

if for services, services performed
if for property, property provided
if for use of property, property used
if to satisfy obligation, person paid
IRS has authority to provide in other cases

461(g) prepaid interest

Inventory method (per 471, used whenerver necy to clearly determine
inc):
FIFO method:
1) Cost value determined by actual cost fairly wide fluctuations in
inc
2) Cost or Market (whichever is lower) may be desirable where mkt
price fluctuate
LIFO method
Installment Method 453 - while normally inc recognized in year (
1001(c), installment method allows spreading the recognition of gain.
First apply 483 (unstated interest) or OID rules installment method
applies to what remains
Transactions under 453 - 453(a), (d)(1) gain from installment sale of
prop recognized under installment method unless tpayer elects not
but denied in certain circums
Installment sale - 453(b)(1) disposition of prop under terms were at
least 1 payment recd in yr subsequent to yr of dispo
Installment method - 453(c) recognize portion of gain in yr received
total amt of payments recd during table year X (gross profit ratio
gross profit / total K price )
Gross proft = selling price adjusted basis Reg. 15A.453-1(b)(2)(v)
ANYTHING RECAPTURED and taxed as ord inc
/
Total K price = selling price (any qualifying indebtedness assumed by
buyer Reg. 15A.453-1(b)(2)(iii)

qualifying indebtedness generally dealing with debt taken at time of

indebtedness if its taken subsequently,
IF THE RATIO IS HIGHER THAN 1, its because debt relief exceeds basis
thats taxed as ord income and ratio is just one

453 does not apply to:

losses
recapture income 453(i) - to the extent attributable to depreciation,
taxable currently, not via installment method ... remember to take
that ( i.e, gain would be characterized as ord income under 1245
or 1250)( recapture income any gain in excess of recapture inc
recognized in accordance w/ installment method
dealer dispos 453(b)(2) gain from dealer dispos or dospos of pers prop
inventory may not be reported
Second Disposition by related person 453(e) if sale made to related
person who disposes of it w/in 2 yrs, amt realized by seller in 2nd
sipos treated as recd by first seller
Election 453(d) once installment sale made, realized gain recognized
according to these rules unless taxpayer elects out w/ respect to one
or more sales made dyring taxale year on or before return due; once
made, only revocable w/ IRS consent amt realized is then
determined under OID
open transaction doctrine if impossible to determine DMV, may be
treated as open until actual payments exceed basis recover basis
first - Burnet v. Logan hard to imagine still being very possible

Judicial Doctrines
Claim of Right Doctrine
Must include in income amts received if has a claim to amt and
unrestricted use of it, even if may be obligated to return it
later North American Oil Consolidated v. Burnet
If later repaid, cant recalculate income but can take deduction in
year of repayment
Exception 1341(a) if included in earlier yr bec appeared unrestricted rt
(semblance of a right not error or embezzlement), and deduction
allowable now bec did established that she did not have, and
deduction exceeds 3k, can use one of 2 methods:
1) compute tax liability for current year, taking deduction
2) compute liability w/o deduction, but subtract amt by which tax liability in
earlier year would have been reduced if repaid amt had not been
included in

Does not apply to inc derived from sale of inventory - 1341(b)

Tax Benefit Rule
If deduction taken which later proves improper, must include in
gross income any amt later recovered
Exclusionary 111(a) if prior deduction did not reduce liability, recovery of
amt deducted previously need not be included
Inclusionary inc in amt of prior deduction must be included 111(b)
Alice Phelan Sullivan Corp v US transferred prop to charity, took
deduction, later it was returned although it just recovered
capital it had to include the amt of the previous deduction in
income

However, to the extent the prior deduction did not reduce the amt
of income tax in the prior year, its excludible 111(a)
Similarly, if there is a downward price adjustment of an already
taken deduction, then inc. in tax liability required to the
extent the prior credit resulted in a tax benefit 111(b)

Nonrecognition Provisions normally, gain realized is recognized in

taxable year (1001(a), (c)) but certain exceptions which postpone
recognition
Improvements by lessee on lessors property excluded, even when
lessee - 109
If improvements were not part of the rent for the use of the property 109
Reg 1.109-1(a): the more it increases the value of the
If excluded, basis may not be increased on account of the improvements
1019 (postpones recognition of gain, does not actually result in an
exclusion)
Must be fixtures (not moveable furniture & equipment) to be excludible
(previously, Bruun had established that before this statutory relief, this was
recognized income)
Like-kind exchanges 1031 exchanged solely for other qualifying
property of a like kind
Must be an exchange, distinguished from a sale
Qualifying property held for productive use in a trade or bus or
held for investment like for like 1031(a)(1) does not
included
Stock in trade, held primaryily for sale
Stocks, bonds, notes
Securities or evidences of indebtedness
Interests in partnership
Certs of trust or beneficial interests
Choses in action
Like kind nature/character, not quality (1.1031(a)-1(b), (c) real
estate for real estate, etc,., doesnt matter if unimproved for
improved, etc.

If not solely in kind boot received in excess of like kind property

recognized 1031(b) but loss not recognized 1031(c)
Deferred exchanges 1031(a)(3) - nonrecognition applies even if different
time even 3P transactions - but must not treated as like-kind if:
It is not identified as property to be reced on or before 45 days after
transfer other prop
It is received more than 180 days after transfer
Received after due date of tax return for year exchanged occurred

Liabilities/debt relief
liability assumed in the transfer treated as boot to transferor and is
recognized
BUT only if it is less than or equal to realized gain
So do realized gain = FMV recd + debt relief debt assumed old basis
Recognized gain is boot (as NDR) UNLESS it is greater than realized gain.
Recog. Gain is the lesser of NDR and realized gain. Can only
recognize as much as you realize.
New basis = old basis + NDR recog. gain

Related persons 1031(f) - recapture rule may require recognition, if:

1) between related persons, AND

1031(f)(3) members of family, or idns/entities w/ close econ ties

2) either party disposes of prop w/in 2 years

recognition on date of later transfer

1031(f)(2) does not apply if:

occurs in compulsory/involuntary conversion

after death of related party
neither exchange nor disposition had tax avoidance purpose

ONLY RECOGNIZE BOOT/NDR UP TO AMT OF REALIZED GAIN

1031(d) Calculating Basis: (keep your original basis) basis of prop
relinquished - $/boot received + recognized gain
only the boot is currently recognized
so the gain will be recognized later when you sell it
keep your original basis, take into account money you received, but then
take out what was currently recognized
Involuntary conversions 1033
1033(a)(1), (2) gain (but not loss) nonrecognized if:
1) prop converted into similar or related service or use as involuntarily
converted prop
2) prop converted into $ or other prop which is then used to purchase similar
property w/in time limit (2 years + whatever was left of taxable year
in which loss occurred)
1033(a) comp or invol conversion if:
partially or totally destroyed
stolen
seized
requisitioned
condemned
sole/exchanged under threat or imminence of seizure, requisition or
condemnation
sold pursuant to fed reclamation laws 1033(c)
certain livestock destroyed by disease or sold on acct of drought, flood,
certain weather conds 1033(d), (e)
Conversion of Similar Property nonrecognition of gain is
mandatory, need not be elected but loss is allowed to be
recognized 1033(a)(1)
Conversion into $/dissimilar property 1033(a)(2) must purchase
similar property or acquire control of corp that owns it if so,
must elect nonreconition only to extent that cost exceeds
amt realized

Purchase only if unadjusted basis of prop is it cost basis gift does not
qualifty 1033(a)(2)(A)(ii)
Qualifying corp stock control = 80% voting power and shares 1033(a)(2)(A)
and (E)(i)
Period for replacement w/in period beginning with date of disposition or
earliest threat and ending 2 years after close of 1st taxable yr in
which any part of the gain is realized 1033(a)(2)(B)
Similar property not defined
Owner-Users close functional similarity
Owner-investors reasonably similar in their elation ot the taxpayer
Condemnation of Real Property not as strict like kind or similar
1033(g)(1) period extend to 3 years 1033(g)(4), but no corp stock
1033(g)(2)
Basis reflect extent to which gain was not recognized basis of prop
involuntarily converted holding period of the old period is tacked
onto holding period of new property
If converted into similar prop directly basis = converted property
1033(b)(1)
If converted into $ or dissimilar prop basis = cost gain not
recognized 1033(b)(2)
If converted into corp stock if basis decreased bec of nonreconition,
basis of prop owned by corp is to be decreased by same amt
1033(b)(3)
Presidentially Declared Disaster no gain recongized upon receipt of ins
proceeds covering unscheduled pers prop in residence 1033(h)(1)(A)
(i) all other proceeds treated as common pool, when portion used to
purchase similar/related, may elect to nonrecognize does not mater
whether item is similar to particular item 1033(h)(1)(A)(ii) 4 year
limit 1033(h)(1)(B)
Transfer between spouses or incident to divorce - 1051(a) no gain
or loss recognized

Unstated Interest special rules when $ borrowed w/o payment of

reasonable rate of interest
Loans with Below-market interest rates treat for tax purposes as
through reasonable rate of interest has been paid 7872 aimed at
intrafamily loans, employee fringe benefits, etc.

Does not apply to loans to which 483 or 1274 apply

Borrower considered as receiving gift/income in amt of interest computed,
and in some sits entitled to deduction for amt of foregone int
retransferred to lender 163
Lender treated as having made gift/paid income, and will also have int inc in
forgone interest
Determination of reasonable is by reference to applicable federal rate
7872(f)(2)
below-mkt loan if loan calls for no interest or less than applicable
fed rate
foregone interest = extent to which fed rate exceeds interest
7672(e)(1), (2)
Gift Loans below-mkt loan in nature of gift, such as family 7872(f)(3)
forgone interest considered gift, subject to the gift tax 7672(b)(1),
(d)(2) - forgone interest considered periodically transferred from
borrower to lender, included in gross income and generating
deduction 7872(a)(2)
Term Gift Loans made for specific period of time
amt of foregone int is PV, w/ discount value = fed rate, of all required payments
for purposes of gift tax, lender deemed to make gift = total amyt of foregone int on
date of loan 7872(b)(1), (d)(2).
But for purposes of income tax, deemed to pay payments of foregone int
attributable to pay payments of forgone int attributable to each
calendar yr the loan is outstanding, on the last day of calendar year
7872(a)(2)

Unlike term nongift, in which its all due initially

Demand Gift Loans - borrower may be required to repay the loan at any
time (so impossible to compute foregone int at the time)
Foregone int compute 12/31 of each year loan is outstanding gift in that amt
deemed made on that date, int deemed immediately retransferred by
borrower to lender as int 7872(a)

Exceptions
De minimis - on any day total amt of outstanding loans do not exceed 10k,
unless proceeds used to acquire inc-producing assets 7872(c)(2)

Not earning/investing - gift loan less than 100k made directly between inds,
amt of int imputed may not exceed net income from investments
for the yr (none if such income does not exceed 1k) 7872(d)(1), 163(d)
(4)

unless primary purpose was avoiding fed tax 7872(d)(1)(B)

Nongift Loans some nongift loans also subject, forgone interest
considered periodically transferred from borrower to lender, included
in gross income and generating deduction 7872(b)(2)
determined by relationship twixt lender & borrower 7872(c)(1)
Compensation-related loan = employee, independent Ker providing svs ->
forgone int is compensation 7872(c)(1)(B)
Corporation-shareholder loan = corp & shareholder -> forgone int is dividend
7872(c)(1)(C)
also if purpose is to avoid tax or have significant effect on tax liability 7872(c)(1)
(C)

Term nongift loans - forgone int = deemed transferred on date of

loan 7872(b)(1) int deemed repaid annually under rules
applicable to Original Issue Discount on an annual basis 7872(b)
(2), 1272
Demand nongift loans same rules as gift loans 7872 (a) consider
foregone int as additional compensation
Exception for de minimis - nonfigt loans which are comp-related laos or
corp-sholder loans on any day total amt of outstanding loans does
not exceed 10k, unless pprose is tax avoidance 7872(c)(3)
Original Issue Discount recognizing that when you buy, promising to pay
portion in the future, youve effectively borrowed money from seller
int shd ordinarily be paid zero coupon bonds 1274-75
Deferred Payments for Property
Debt Instruments Without Adequate Stated Interest
determine adequate by comparing interest with applicable fed rate
1274(c)(2), (d)
if not equal, portion recharacterized as int, ompute at rate equal to
applicable computed on daily basis, compounes seminannually,
included in inc of seller as int in taxable year 1272(a)(1), (3);
1274(b)(2), (d)(1)

Debt Instruments With Adequate Stated Interest adequate amt, but

does not provide for payment approp intervals
Force buyer/seller to account for amts of int annually 1272(a)(1), (3)

Exceptions 1274(c)(3)
Farm, less than $1m
Principal res
Selling price less than 250k
Publicly traded
Certain patents
Land sales between related persons
-> in which case we go to 483

Loans where borrowed amt is less than amt to be repaid OID = excess of
amt required to be paid at maturity over price for which it was issued
1273(a)(1) recharacterize portion of this amt as int and accrue
discount on a daily basis 163(e), 1272(a)(1) & (3)
Market discount bonds - 1276(a), unlike zero coupon bonds, ord income
need not be recognized until sold (so unlike the rest of the rules this
doesnt affect timing, its to keep gain from being capital gain rather
than ord income) gain is ordinary income to the extent of accrued
market discount pursuant to 1276(b), either choose simple way or
accurate way:
Mulptiply mkt discount when acquired bond by fraction = days held / days
between purchase and redemption date
Using OID number

Interest on Certain Deferred Payments if one of 1274(c)s exceptions

apply, int may be imputed under 483 RARE ALMOST NEVER GOING
TO HAPPEN, like for smaller scale transfer of property - treat portion of
deferred payments as int
483 does not affect timing of includsion taxpayers acting method
controls will not require imputing int payments on a yearly basis by
a cash-method taxpayer except to extent she receives cash (cf. OID
rules)
exceptions for sales or prop for 3k or less, patents, situations where OID
applies 483(d)
int imputed at max rate of 6% compounded seminannually on certain
transfers of land twixt related parties 483(e)
max discount rate is 9% compounded semiannually, in cases of debt
intstuments w/ stated principa of 2.8m or less which are given in
consid for sale of prop other than most items of new tangible prop
used in trade/bus or held for producing inc 483(g)(2); 1274A(a),
(b)

Special Rules related to

Annuities
Exclusion ratio = investment in the K / expected return under K
72(b)(1)
Investment in K generally amt of premiums paid 72(c)(1)
Expecture return multiply amt of payments by number of payments called
for under K or acturarial value 72(c)(3)
Total amt limited by investment in annuity K 72(B)(2) and (4)
If death before payments received equaling investment, then deduction
allowe for unrecovered amt 72(B)(3), (4)
Deferred Compensation
Nonqualified DC plans no limit on amt of comp deferred to future years
(Rev. Rul. 60-31)
mere promise to pay not taxable
But if placed in a trust/escrow out of control of employer, employee
taxed when money paid ... to escrow agent?
But only if no risk of forfeiture and right to withdraw

Minor v US doctor and deferred comp plan but merely credits fund, mere promise
to pay funds not income at that time

409A taxable when bargained for if plan allows to accelerate benefits

or shields assets upon deterioration of financial health
402 qualified deferred compensation plan
employees not reqd to include until receive payments (401(k))
employers enitled to deduction for amts paid
earnings on funds paid into it and invested not taxed
Roth 401(k) employee taxed on amts paid into, but distribs taxfree
BUT may not discriminate comp benefits to all employees
BUT 83(a) - Special rules for prop (such as corp stock), subject to
restriction or risk of forfeiture inc = excess of FMV at time of
transferrable over amt paid
CASE Minor?

 83(b) employee may elect to include FMV amt paid at the time
of transfer, rather than waiting until prop becomes
transferrable
IRAs - 408
5k year may be set aside, and claimed as a deduction
includible when paid out
Roth IRA - 408A
Non deduction when paid in
But no income when paid out
Gross inc must be below 150k
Stock Options
Comr v LoBue yes they are income
Incentive Stock Options - 422 capital gain to employee upon sale of
stock, no ded by employer, if:
Requires employee to retain stock at least 2 years after option, and 1 year
after receving stock 422(a)(1)
Option price no less than the FMV at time option granted 42(b)(1)
Pursuant to plan approved by sholders, after receiing info about how many
shares and which employees plan covers 422(b)(1)
$100k ceiling on value of stock that as yet unexercised options constituting
ISOs can cover 422(d)
effectively elective outside of 100k ceiling
ER: only collective idiocy could explain the deep mystery of why anyone uses
these
83 (in response to growth of nonstatutory stock options):
Income upon receipt of the option:
83(a) Mandatory includability if it has a readily ascertainable FMV
(rare) unless:

Nontransferable AND
Subject to substantial risk of forfeiture

Conditioned on employment, etc.

(in which case it is includable when either of those conditions lapse) 83(a)
(2)
83(b) Elective includability if doesnt meet 83(a), in which case FMV of
prop determined w/o regard to any restictions other than those
that will never lapse

83(b)(1): BUT that means you run a risk because you cant deduct later if
Preq to both mandatory and elective if, when granted, option lacks a
readily ascertainable FMV 83(e)(3)

Income upon exercise of the option if lacks readily ascertainable FMV when
granted
Only applies to grants of stock for services rendered - not sales
Amt realized: FMV amt paid
83(h): ded to empr in amt of amt realized
Pensions (qualified employer retirement plans) same but to
determine excluded basis, simplified method investment /
anticipated payments 72(d)

Who is the proper taxpayer?

Alimony, Child Support, and Prop Settlements
Alimony - 71, 215 ded allowed for amt paid, included in inc of recip
interdependent
DEFINITIONS: IF ALL OF ( 71(b), (c)(1) & (e)):
In cash
Received under a divorce or separation instrument ( 71(b)(2)):
Decree of divorce or separate maontenace or written instrument incident
Written sep agreement OR
Jud decree requiring that support or maintenace payments be made

Red directly by spouse/former souse or 3P for her behalf

Not designated as nonalimont in instrument
Not members of the same household at time payment made (if
under final decree of divorce/separation)
No liability to make payment or substitute after death of payee
Not for child support
Dont file jt return if still married
Default rule can be flipped electively 71(b)(1)(B) no ded, no
inclusion if both parties agree in instrument
Front-loading rules 71(f) - 2 additional limits to prevent parties to
structure prop settlement to qualify as alimony:
Amt of excess alimony payments required to be included in
payors income in 3rd post-separation yr recipient entitled
to ded - 71(f)(1)
excess alimony payments = anything more than 15k difference between year 2
and 3
For year 2, EAPY2 = Y2 payment (Y3 15)
For year 1, EAPY1 = [([Y1 - [([Y2-EAP1] + Y3)/2] 15
EAP = EAPY1 + EAPY2

EXCEPTIONS for temp alimony (71(f)(5)(B)), psments ease upon

death (71(f)(5)(A), or payments fluctuate (71(f)(5)(C))
Indirect Alimony payments to 3P on behalf of spouse may qualify if all
other reqs satisfied 71(b)(1)(A)
61(a)(10): may be subtracted from gross inc and therefore not subject to
limits on itemized deds
Child Support not treated as alimony to extent its fixed as amt payable
for child support - 71(c) no ded, no inc
fixed if it would be reduced on contingency (childs age, marrying, dying)
clearly associated 71(c)(2)
Diez-Argulles cant deduct value of child support payments owed but not
paid
Transfers of Property Between Spouses or Incident to Divorce -
1041(a) no gain or loss, no deduction, transferred basis
Treaed as if acquired by gift, value excluded under 102 basis will be same
as in hands of transferor 1041(b)
Incident = w/in 1 yr or is related to cessation of marriage 1041(c)
Pursuant to instrument AND
transfer occurs w/in 6 yrs of cessation
Nonrecontion rule does not apply if prop transferred to a trust and liability es
on prop exceeded adj basis
(previously, Davis and Es-Saltaneh held that it would be recognized gain at
the time)

Income-splitting/Marriage
Earl personal service inc taxed to person who does the work - not
allowed to assign inc to wife pursuant to K between them to share inc
and prop =ly
Whether services are to be rendered in future (Earl)
Or already completed at time of designation (Eubank trust from prior
work)
EXCEPTIONS:
Uncompensated services in kind apparently allowed to be excluded

BUT NOT where tp is member of family partnership

Although OK where employee of family corp

Patents, copyrights, etc free of the general rule donee reports inc as his
own
Blair Gifts of inc-producing prop - effective to shift future income to
donee (In Blair, transferred some portion of trust and could no longer
take it back), EXCEPTIONS:
donee has right to take prop back (Corliss) or use for himself to meet
own obligations (Wells)
Donee has right to redesignate donee at his own discretion (i.e., shortterm, limited number of payments) Clifford, Horst
Horst could still retain control in asset
Reservation of powers to manage and dispose of trust prop treated as =
continue ownership (Clifford)
BUT Poe v. Seaborn allowed inc-splitting that was pursuant to WAs cmtyprop law (limited to just to two, not to future deps)
And then, in 1948, extended to all states ...
Marriage Penalty
1(a): separate rate schedule for married tps
compute tax on total income, double it
1(c): separate rate schedule for unmarried tps

1(g): Kiddie Tax unearned inc of child under 18 (24 if student)

taxed as though to parent
1(g)(1): tax liability is greater of:
amt computed using rates applicable child, OR
amt computed by adding to the parents taxable inc the amt of the childs
net unearned inc, and using rates applicable to parents (allocable
parental tax)
net unearned inc = unearned inc (childs st ded amt ($950) + (the
greater of st ded amt ($950) OR if itemizes, deds directly connected
with producing the unearned inc) (1(g)(4)))
(remember the limits on deds)
1(g)(7): elective if all inc from int & divs, and between (($900) OR if
itemizes, deds directly connected with producing the unearned inc))
and 10x that

Characterizing Income
Policy arguments
Bunching
Lock-in effect
Inflation

Order:
casualty netting
overall 1231 netting
1231(c) recapture of previous year loss deds
1245/1250 recapture
Overall netting

Characterizing
1221: cap asset = all property, with exceptions:
If Prop, one of eight exceptions?
1221(a)(1): inventory or stock-in-trade of a bus, prop held
primarily for sale to customers in ord course of t/b
primarily for sale

Malat v. Riddell primarily = of first importance, principal

Biedernharn wrt real estate, Winthrop factors (substantiality/frequency of
sales, improvements, soliciatation & ad efforts, brokers activities)
indicate ord inc in his real esate subdivision efforts contuinous,
vigorosously improved, substantial frequent sales cannot write
BLL but in red letters once and investment does not mean always
an investment
Gangi v. Comr selling condo units, but still not rising to level of holding
properly primarily for sale wasnt primary intent
to customers

added to prevent stock speculator from trading on own acct

Biefeldt not a specialist, not a dealer, merely a trader speculating on price

fluctuations cannot claim ord loss (and therefore offset unlimited
amt), limited to 3k limit for cap expenses
Related to the tps bus -> substitutes for inventory

Corn Products futures trading was not separate & apart from manuf
operation vitally impt so must treat as ord losses
Arkansas Best CP doesnt mean its a motive test or that all things related
to bus are not cap assets listed exceptions are exclusive CP did
not mean a general exemption from cap-asset status for all assets
acquired for bus purposes just that hedging transactions that are
an integral part of inventory-purpose system fall w/in inventory
exclusion as substitutes for inventory
Reg. 1.2221-2: now allow ord gain/loss for broad variety of hedging
transactions but tp must identify in advance (Reg 1.2221-2(e)
1221(a)(2) real prop or deple prop used in a t/b
BUT 1231 SPECIAL RULES FOR FIXTURES

1221(a)(3) creative works material subject to copyright, letters

and memoranda (elective for some musical works) or similar
held by creators
for letters, memoranda also to those for whom prepared designed to deny
charitable deds for contributing papers to museums/libraries (Nixon)
Regs. 1.1221-1(c)(1): similar = , any other prop eligible for copyright, but not
patent/invention, or design protected only under patent and not copyright
law

1221(a)(4) accts recle

1221(a(8): supplies
Is it Property?
Goodwill
Baker State Farm employee had no ownership of any asset, and goodwill must
attach to an asset, so standing alone it doesnt qualify as cap asset

Right of Privacy or of Exploitation

Miller selling movie rights to Glen Millers life story is ord inc, not cap gain
Universal didnt pay for property, they paid for protection against such
a property rt later being declared

Might help her case that CA later called it a prop right? (Maybe, but IRS doesnt
necessarily need to care.)

Patents and Copyrights

1235: patent is L-T Cap asset, regardless of holding period, attachment to
underlying prop, etc.
1221(3) & 1231(b)(1)(C): author of copyrighted material cannot gain Cap Gain
treatment, but purchaser can

Touchstone: substitute for ord inc?

Cant let people easily turn ord inc streams into property to get cap gain treatment

Sale of a Business/Fragmentation vs. Unification

Williams v. MacGowan (2nd Cir 1945, L.Hand) when you sell a business, you
sell all the bits and pieces separately allocate cost to each portion,
whatevers left over must be goodwill - Congress meant to
comminute elements of a business cash, receivables, fixtures,
inventory all are ord inc except possibly the receivables depending
upon whether depreciable
Parties to agree upon allocation and report that to IRS

Sale or Exchange Requirement

sale = transfer of prop for a fixed price in money or its equivalent (Schelbe,
cited in Baker)
Regs. 1.1001-1: exchange = exchange of prop for another prop that is
materially different either in kind or in extent
Baker State Farm agent returning property in exchange for noncompete,
etc. key is deciding whether the benefits and burdens of
ownership have passed factors:
Whether legal title passes
Baker never had legal title to SFs materials, no indication he received payment in
exchange for hiring employees or for his telephone number

How parties treat the transaction

Present obligation to execute a deed, obligation to make payments
Whether right of possession is vested
Who pays prop taxes
Which party bears risk of los or damage
Which party recives profits from op and sale
Baker denied -

Correlation with Prior Related Trans

Recapture of ord income deductions - Merchants National Bank
judicially created analogue to recapture rule took ded from ord inc
for bad debt, but then later turned good then later cant claim
compete cap gain
Same principle applies to other losses (casualty, etc.)
Analogue to tax benefit rule
Arrowsmith (USSC, 1942) liquidated corp, and then in later years, there was
a judgment vs corp, which inds paid not allowed to claim ord loss,
because not based on any ord bus trans of theirs apart from the
liquidation of the company must
7. Special Provisions
Options - 1234(a) gain/loss from sale or exchange of option is cap
gain/los if prop would be a cap asset in tpayers hands
Dividends - 1(h)(11) div inc taxed as though it is net cap gain (15%), but
cap losses cannot offset dividend inc bec not classified as cap asset
165(g)(1): Worthless securities
166(d)(1)(B): nonbusiness bad debts

Quasi-Capital Assets Fixed Assets (1231) land, buildings

and machinery
Is 1231 property? (gains and losses arising from
sale of prop used in t/b or
from invol/compulsory conversion of prop used in t/b or
any cap asset hld for more than a year and held in connection w/ t/b
net casualty losses/gains:
1231(a)(4)(c): If losses from 1231 assets involving casualties exceed
gains, remove from calculation (those considered ord), then net
If losses do not exceed gain, all are included, along with other 1231 gains
and losses, and losses and gains netted
If final result is:
NET LOSS all 1231 gains & losses ord

1231(a)(1) : NET GAIN all gains and losses are capital

1231(c): except to extent of unrecpatured 1231 losses during
pervious 5 years

Recapture of Depreciation
Recapture all or portion of deds taken from ord inc (depreciation) when sold
1245:personal tangible prop:
1245(a)(3): applies to all depreciable prop other than RE anything subject
to depreciation under 167 (even if taken via ACRS or amoritization)
1245(a)(3)((D): not RE but some items that are considered RE under
local law (greenhouses)
gain on sale taxed as ord inc to the full extent of prior dep deds, 1245(a)
(1) & 61: ord inc =
lower of
recomputed basis OR

1245(a)(2)(A): adj basis + all adjustments from dep/amorization

if computing basis based on basis of other prop (i.e., like-kind), must include
deds from it as well including 179 deds
1245(a)(2)(B): if can demonstrate amts allowed exceed amts allowable, can
use that instread
amt realized (if sold, exchanged or converted) or FMV (if otherwise disposed)

MINUS adjusted basis

EXCEPTIONS:
1245(b)(1) & (2): gift, transferred at death
1245(b)(4): if like-kind or involuntary conversion, ord inc
recognized only to extent of of sum of:
(1) gain required to be recognized via 1031 & 1033 +
(2) excess of FMV of non-1245 property over (1)

1250: real prop: requires recapture of the accelerated portion of dep taken
wrt real prop to be recaptured upon sale multiply applicable
percentage to lower of additional depreciation or gain on property
NOW WE RECAPTURE JUST LIKE 1245, BUT RATHER THAN BEING ORD INC
WE TAX AT 25% RATE VIA 1(H)
1250(c): applies to real prop which is or has been subject to dep
allowances under 167
excluding any 1245 property
improvements to bldgs deple, not land itself
1250(b): additional depreciation = excess of
dep adjs attributable to specific periods of time after 12/31/63 OVER
amt of deds that would have been allowed via straight-line
1250(b)(5): must use useful life and salvage value, or if ACRS, straightline using
recovery period
1250(b)(1): if holding period of 1 year or less, means all dep adjs, not just those in
excess

1250(e): applicable percentage

1250(a)(1)(B)(v): 100% for most real prop depreciated since 1975
1250(d): same exceptions as in 1245
1245(b)(1) & (2): gift, transferred at death
1245(b)(4): if like-kind or involuntary conversion, ord inc
recognized only to extent of of sum of:
(1) gain required to be recognized via 1031 & 1033 +
(2) excess of FMV of non-1245 property over (1)

1244: small bus stock -

Treatment of Capital Gains and Losses

1. Capital Gains
Taxed via 1(h), normally at lower rates
1(h) & 1211: netting
first w/in each rate class (28%, 25%, 15%)???
net long-term (held >1 yr) / short-term (1222) / vs each other
net gains in both -> ST taxed as ord, LT usually 15%
net losses in both -> offset vs up to 3k of ord inc (unlimited carryforward)

what type is carried forward? LT, you use up the ST 1212(b)(2)

net gains in one, losses in other -> offset loss vs gain:

excess of S-T -> ord rates

excess of L-T -> 15%
loss exceeds gain -> offset vs 3k of income, unlimited carryforward
Dividends - 1(h)(11) div inc taxed as though it is net cap gain (15%), but cap
losses cannot offset dividend inc bec not classified as cap asset

2. Cap Losses
1211(a): ded allowed only up to amt of cap gain
1211(b): ded cap losses to extent of cap gain inc, plus 3k of ord inc
unlimited carryforward

Computing Liability
Gross Inc
- Above the Line deds (trade/bus)
= AGI
- personal exemptions
- itemized OR standard ded
= taxable inc
x tax rate
= tax owed
- credits

Adjusted gross income

Gross income (62(a) bus/investment deductions (above the line
deds) + personal exemptions) OR gross income (itemized
deds including personal exemptions
Gr

Taxable income
Standard ded subtract from adj gross income to arrive at taxable
income
63(c)(2) 11.4k married, 5.7k hh, 3k single
63(c)(3) & (f) - additional standard ded for 65+/blind

63(c)(4) amt of st ded allowed to tpayer for whom dep ded may
be claimed limited to greater of $500 or the sume of $250 and
inds earned income
Limits:

63(c)(5): amt of st ded allowed to tp for whom dep exemption may be

claimed by another tp is limited to greater of $500 or ($250 _
earned inc)
63(c)(4): amts adjusted for COL
63(c)(6): st ded = zero for:
1) married ind filing sep return whose spouse itemizes
2) nonres alien
3) ind filing return for a short period of less than 12 mos bec of a chance in
his txable yr
Itemized Deds wont have to know -68(a) if gross income exceeds 100k, itemized deds must be
reduced by 3% of excess amt, up to max of 80% of itemized
deds
68(d) appliea fter applying any other limits, including imisc itemized ded
limits
68(c) but otherwise allowable deds )med expenses, investment int, casualty
losses) not limited
68(f) & (g) phased out by 2010?
MISC Itemized Deds - 67(a): only to extent total amt exceeds 2% of AGI
67(b): misc itemized deds = all other than certain enumerated,
including:
int
taxes
casualty losses
charitable contribs
extraordinary med expenses

significantly, subject to the floor include:

exmployee deds via 162
inc producing via 212

other than prop held for rent or royalties

Whitten v Comr (TC Memo, 1995) losses incurred wrt appearance on
Wheel of Fortune at best misc itemized deds
attys fees for lawsuits Comr v Banks

62(a)(20): except discrim suits & whistelblowers allowed above the line

REMEMBER 162 deds (other than employee-reimbursement) are

ATL
Misc itemized means may not be deducted in calculating AMT
Overall limitation. 68(a): if AGI exceeds $159,950 (2008-9)
itemized ded must be reduced by 3% of that excess amt, up
to max of 80% of itemized deds does not apply to:
Med expenses (has its own limits)
Casualty losses (has its own limits)
Investment int
Personal Exemptions
63(a) & (b)(2): subtract deds allowable under 151 whether uses
standard ded or itemizes
151(d)(3): reduction for high-inc: reduced by 2% for each $2500 of AGI in
excess of threshold amt phased out by 2010?

Alternative Minimum Tax: 55

55(b)(2): Alternative Minimum Taxable Income (AMTI) = taxable inc
+ items of tax preference (which get added back in):
56(a)(1) & (b)(1): adjustments to taxable inc =
recomputing depreciation deds
disallowing misc itemized deds, personal exemption ded, st ded,
and deds for taxes
57(a): tax prefs include
deds for depletion and intangible drilling costs,
limited tax exempt int and
7% of amts excluded from sale of certain sm bus stock
55(b)(1)(A)(i)(I): tent min tax computed at rate of 26% of excess of
AMTI over exemption amt
55(b)(1)(A)(i)(II): jumps to 28% for amt over $175k
55(d)(1) & (3): exemption rate defined (currently, first $75k
exempt altogether)
55(a): AMT = excess of tent min tax over regular tax

AMT Creep - Didnt index to inflation, and much lower rates now than in
the 60s, so while initially some % of tpayers paid, but soon it will be
close to a third but now it generates too much revenue

Tax Credits not going to test on mechanics of these

Nonrefundable Personal credits (only up to amt of liability)
21: hh & dep care services necy for gainful employment tpayer who
maintains a hh which includes one or more qualifying ins allowed
credit = applicable percentage of emp-related expsnes paid
durintaxable yr
qual = deps under 13, deps or spouse incapable
% = 35% reduced by 1 for each 2k by which adk gross income exceeds 15k
(cannot below 20%)
amt subject to the percentage limited to 3k for 1 qualifying ind, 6k if 2+ (so
MAX TOTAL CREDIT is $2100)
emp related expsnes = hh services and care of qyal ind, if incurred to be
employed
Smith v. Comr (1940) had not previous allowed this
21(d)(2): student spouse counts for period fulltime student, but limits
percentage more

21(b)(2)(A): not camp

overruling Zoltan v Comr, which had allowed it

Cf. 129: DCAP (dep care assistance program) - permits emp to make up to
5k available for child-care expense through DCAP as part of 125
cafeteria plan but have to choose - tax-planning choice
22: elderly/disabled 15% of eligible inc:
qualified ind:
55 or older, OR
has retired on diability and when retired was totally and permly disabled

max amt of eligible inc (credit base) is $5000 (max credit $750) for
unmarried d taxpayers 65 and older
alts for others
credit base reduced by of AGI which exceeds :

$7500 for unmarried tpayers

$10k for married jt
$5k married sep
must be reduced by amts received as pension, annuity or disability bens
which are excluded from gross inc under SSA or certain other
provisions
23: adoption expenses
23(a)(3): max credit per child 10k
23(a)(3): available
if incurred in yr prior to adoption-> yr adoption finalized
if incurred yr of adoption or later -> yr incurred

special needs available for 10k in yr adoption final regardless of whether tp

has incurred expenses
23(d)(3): determined by st agency to place w/ adoptive parents because
of specifi factor or condition like ethinicity or handicap

23(b): phase-out ratably for tp with AGI above 150l, fully at 190k of mod
gross inc
23(f): must provide name age and TIN for child
23(b)(3): no credit for any expense for which ded / credit allowed under
other prov, or for which funds are received under fed, st or local
program
23(d)(1)(D): nor expenses which qualify for reimb under emp adiption
assitance program

23(d)(1): qual adoption expenses = rle & necy attors fees, ct costs,
adoption fees related to adoption of child
incapable of caring for self or
under 18 and not child of spouse

24: child tax credit

24(c)(1): qual child = under 17 who satisfies reqs of 152(c)
24(a): 1k per child
24(b) phased out
for mod adj gross inc in excess of certain threhold amts:

110k jt
75k ind
55k married filing seply
phased out at rate of $50 for each 1k of mod adj gross inc in excess of threshold

24(d): refundable to limited extent

25A: Hope Scholarship and Lifetime Learning Credits
Hope scholarship credit
25A(b)(1): max per student credit of $1500

100% credit for each students first 1k

50% credit for second 1k
25A(f)(1): tuition and academic fees nu tp, spouse or deps while pursuing
post-sec ed on at least half-time basis
25A(b)(2): limited to first 2 yrs of ed, only for max two tax yrs for each
student

Lifetime Learning credit as alt to HSC

25A(c)(2): tp, spouse or deps
24A(c)(1): amt = 20% of qua led exps paid by tp during any yr of ed (not just 2 yrs)
25A(C)(1): x credit per tp in any year limited to 2k
25A(c)(2)(B): includes instruction for acquiring or improving job skills

25A(g)(3): only parents claiming child as dep on return are eligible

to claim
25A(c)(2)(A): only one credit wrt any one student per year
Income:
25A(d)(2)(A) and (B): mod AGI of 40k or less (80k) jt entitled to max credit for both
25A(D)(2)(A) and (B): max credit phased out between 40-50k (80-100 jt)
25A(h): HSC limits and inc limts indexed for COL, inc limits for LLC also indexed but
max credit amts will not be

Miscellaneous nonrefundable credits after using the above first

Refundable Credits (above
Tax withheld on wages
32: Earned Income Tax Credit (EITC)
you will be baffled by the rules good policy to require this for low-inc
tpayers

Alternative Systems
Consumption Tax
Policy arguments inc tax discourages savings, punishes those
who dont consume, tax based on peoples use of resourcs
Types
Andrews cash-flow model
Investments deductible when made - departure
Wages/salaries/int taxable received, as now
Deductions justified just as now
Bus/investment loans inc to borrower when received, repayments and int
mde deductible
Consumer credit in thy treated like bus loans, but A suggest ignoring
entirely for simplicity
Consumer durables ded for purchase price (viewing good as a type of
invesmtnet), rather than just cap recovery overtime
Owner-occupied housing in thy, ded for purchase price, inc in amt of
imputed rental inc but since this might be hardship on elderly
homeowners, treat as consumer durables
Art, unimproved RE, mixed consumption/investment assume purchased for
investment
Cash balances unless large, leave them out, treat as consumed (as current
law)
Gifts and bequests no consumption tax liability

Yield-Exempt model tax earnings when earned but impose no tax

when later consumed
Wage tax with adjustments to avoid objection that labor is being
taxed fully over (exempting first amt earned, etc)
Sales tax and VAT
Current system closer to pure income tax but certain elements echo
consumption tax:
Deferral of income
IRA
insurance