Federal Income Tax Ch.

3: PROBLEMS OF TIMING

CH.4: PERSONAL DEDUCTIONS, EXEMPTIONS & CREDITS (331-335)

Personal deductions = deductions that are unrelated to the cost of producing
income
Itemized deductions = they are generally available only to TPs who elect to
itemize + file a schedule A with their 1040 Form.
Sometimes referred to as below the line deductions = they are taken
from adjusted gross income (i.e., the line in below the line) in arriving
at taxable income
above the line deductions = deductions taken from gross income in
arriving at adjusted gross income
TPs will only elect to itemize their deductions if the aggregate amount of those
deductions exceed the amount of the standard deduction
151
In addition to itemizing or claiming the standard deduction, all TPs are entitled to a
personal exemption deduction for themselves and for each of their dependents.
Personal exemption + standard deduction provide a zero-bracket amount
o So that no income tax will be imposed on income below a certain level
Evert TP gets a standard deduction = a certain amount of income that
will NOT be taxed.
For a family of 4 = $26,000
NOTE: approx.. 60% of US TPs do not have gross income in
excess of the zero bracket amount
Phase-out provisions reduct the amount available as a deduction as adjusted gross
income rises above certain threshold amounts. 151(d)(3), 68
o Controversial because they amount to little more than back-door increases
in marginal tax rates (still available today??)

Federal Income Tax Ch. 3: PROBLEMS OF TIMING

PERSONAL & DEPENDENCY EXEMPTIONS (383-384) Code 151; 152

151

Each TP gets a deduction for

a personal exemption
If a married couple file a
JOINT return
151(b) If a married couple files a
SEPARATE return

151(c)

An exemption for each

dependent (as defined in
152)

$3,800 in 2012; annually

adjusted for inflation.
there are 2 TPs thus, 2
exemptions
1 personal exemption
allowed for TP + second for
the spouse (if the spouse
has NO gross income and is
not anothers dependent)
To qualify, the person must
be either
(i) a qualifying child or (ii)
a qualifying relative

152 Dependent defined

152(c) qualifying child
1. is a child, a childs descendant, or a sibling of the TP;
2. is less than 19 years old or, if a student, less than 24 years old;
3. has not provided more than of his or her own support; and
4. has the same principal place of abode as the TP for more than one-half of [the]
taxable year
152(d)qualifying relative
1. is a child or a childs descendant, parent or parents ancestor, sibling, aunt,
uncle, cousin or in-law or has the same principal place of abode as the TP and
is a member of the TPs household;
2. has a gross income LESS than the exemption amount;
3. receives more than half his or her own support from the TP; and
4. is not a qualifying child of the TP

Federal Income Tax Ch. 3: PROBLEMS OF TIMING

CASUALTY LOSSES (335-345) Code 165 (a)-(c), (h)

165(c)(3) a deduction for losses from fire, storm, shipwreck, or other casualty or from
theft.
Can be viewed as the equivalent of an AGI-related deductible
no deduction is allowed until losses in the aggregate exceed the specified
threshold.
165(h)(4)(E) deductions for losses covered by insurance [i.e., under 165(c)(3)] are
allowed only if a timely claim was filed.
Since the premium is zero it cannot be adjusted for risky behavior on the TPs part,
such as living in a higher-crime neighborhood to save on rent.
Pg. 336
DYER v. COMMISSIONER (1961)
TPs claimed a casualty loss deduction under 165(c)(3) for $100 for damage to a vase
broken by their household Siamese cat
TPs argued that if the breakage was caused by the cats ordinary behavior they
would not be entitled to the casualty loss deduction
HOWEVER, because the breakage was caused by the cats extraordinary behavior
(in the course of having its first fit (cat had developed a neurosis)
The Court disagrees
The court uses the maxim of Ejusdem generis (used in statuary
interpretation) to construe the term other casualty under 165(c)(3)
Purpose of the rule is to give effect to all the words.

Ejusdem Generis: means of the same kind, class or nature. Where

general words follow specific words in a statutory enumeration, the general
words are construed to embrace only objects similar in nature to those
objects enumerated by the preceding specific words.
Example: statute that says apples, oranges, or other fruit. It says
construe other fruits to be of quality with apples and oranges.

Ejusdem generis Of the same kind, class, or nature. Where general

words follow specific words in a statutory enumeration, the general words
are construed to embrace only objects similar in nature to those objects
enumerated btye h preceding specific words. Where the opposite is found,
the doctrine restricts application of the general term to things that are
similar to those enumerated.
Does not work if the statue contains an enumeration of things that,
though specific in character, are not sufficiently similar to belong to
an identifiable class.
HOLDING = NOT a casualty loss
i. For a loss to be deductibe, it must appear that the casualty was of similar
character to a storm, fire, shirpwreck
ii.
The breakage of ordinary household items such as china/glassware through
negligence of handling or by a family pet is NOT a casualty loss

Federal Income Tax Ch. 3: PROBLEMS OF TIMING

As a result of this case CONGRESS enacted 165(h)(1)

165(h)(1) = for each casualty loss sustained by an individual, must reduce the
casualty by $100 if loss not related to profit-seeking activity (limited to
165(c)(3))
165(h)(2) = add up all allowable casualties and reduce the amount by 10% of
AGI
GROSS INCOME BUSINESS DEDUCTIONS
Note: AGI = wages
NOTES (pg. 337)
- the Suddeness Requirement : termites, dry rot & los rings
o termite damage is NOT deductible
bc it does not occur with the suddenness comparable to that caused by
fire, storm or shipwreck
o damage caused due to dry rot is also not deductible
- the suddenness requirement has led to different results in cases of LOST RINGS
o Stevens v. Commissioner (1947) = TP was duck hunting; while retrieving a
decoy his ring slipped off his finger and fell into the water
Deduction was denied because there was not intervention of any
sudden or destructive force.
o Keenan v. Bowers (1950) = Husband + wife stayed at a motel; before going
to sleep, the wife wrapped her diamond ring in tissue and put in on the
nightstand; during the night the husband used tissues to blow his nose and
in the morning gathered all the tissues (including the one with the ring) and
flushed them down the toilet
No deduction; not sudden
o Carpenter v. Commissioner (1966) = wife put her ring in a glass of water +
ammonia to clean it and placed the glass on the kitchen counter next to the
sink. The husband while washing dishes emptied the glass with the ring into
the garbage disposal and turned it on; the ring was a total loss.
Deduction allowed!
o White v. Commissioner (1967) = wifes ring was lost when the husband
slammed a car door on her hand
Deduction allowed!
o Kielts v. Commissioner (1981) = wife lost her ring with no explantion; thre
was evidence that good care had been taken and that the loss had been a
result of a sudden unexpected destructive blow to the ring -- but no
violent enough to have been noticed by the wife
Deduction allowed!

Federal Income Tax Ch. 3: PROBLEMS OF TIMING

CHAMALES v. COMMISSIONER (Memo 2000) couple bought a house near OJ simpsons
HOLDING:
Court agreed w/ commissioner that petitioners (the couple) have NOT established their
entitlement to a casualty loss deduction.
o The difficulties they suffered as a result of their proximity to the simpson residence
do NOT constitute the type of damage contemplated by 165(c)(3)
Court agreed w/ petitioners (the couple) that no additional liability for the 662(a)
accuracy-related penalty should be imposed
o Because the couple acted reasonable + in good faith in the preparation of their tax
return.

165
- to be allowable as a deduction, a loss must be both evidenced by closed +
completed transactions AND fixed by identifiable events 1.165-1(b)
- casualty loss within the meaning of 165(c)(3) arises when TWO circumstances are
present:
(1) the nature of the occurrence precipitating the damage to the
property must qualify as a casualty;
casualty as used in 165(c)(3) is defined through ejusdem generis by
analyzing the shared characteristics of the specifically enumerated
casualties of fire, storm, shipwreck.
Whenever unexpected, accidental force is exerted on property + the TP is
powerless to prevent the force because of its suddenness or some disability
the resulting direct + proximate damage causes a LOSS which is like or
similar losses arises from the causes specifically enumerated in 165(c)(3)
AN

UNDERSIGNED, SUDDEN + UNEXPECTED EVENT

OR
AN EVENT DUE TO SOME SUDDEN, UNEXPECTED OR UNUSUAL CAUSE

THE SUDDEN

EXCLUDES THE PROGRESSIVE DETERIORATION OF PROPERTY

UNEXPECTED EVENT IS NOT LIMITED TO FORCES OF NATURE (MAY BE A PRODUCT

OF HUMAN AGENCY)

(2) the nature of the damage sustained must be such that it is

deductible for purposes of 165
only physical damage to or permanent abandonment of property will be
recognized as deductible under 165
courts have refused to permit deductions based on a temporary
decline in market value
ACCURACY-RELATED PENALTY:
6662(a) and (b)(1) impose a penalty in the amount of 20% of any underpayment
that is attributable to negligence or disregard of rules and regulations.
o Negligence is defined in 6662(c) as any failure to make a reasonable
attempt to comply with the provisions of this title
o Disregard is defined as any careless, reckless, or intentional disregard
an exception in 6664(c)(1) =

Federal Income Tax Ch. 3: PROBLEMS OF TIMING

o no penalty shall be imposed if it is shown that there was reasonable cause
for such portion and that the TP acted in good faith w/ respect to such
portion.
TP bears the burden of establishing that this reasonable cause
exception is applicable
The commissioners determination of a penalty is presumed correct
[142(a)]