Table of Contents Income.2 Personal Deductions..36 Non-Cash Benefits..2 Meals and Lodging...2 Fringe Benefits.3 No additional Cost Benefits..

3 Qualified Employee Discounts.3 Working Condition ringes..! De "inimus ringes.! Cafeteria Plans.! Awards and Prizes! Windfalls..# Personal Injury Damages..................................................................# Business Injury Damages.6 Gifts..6 $nter%i%os&'estamentary...6 Business( Impact of a!es on Gifts...( )ifts %ia trusts...* )ifts %ia deat+..., Life Insurance/Annuities/Pensions-. Gambling.-. Loans !ortgages-Income from disc"arge of inde#tedness...-ransfer of property su#ject to de#t.-Misconcei$ed Disc"arge "eory..-2 De"reciation-3 Big Transactions..-! Gain%Loss from t"e sale of a "ome....-! &ale of easements..36 Gain%Loss from In$estment Property-! #$"ress Non-%ecognition Pro&isions.-# Boot Basis.-# '"en( Installment( and Deferred-6 %etirement..-( )toc* '"tions.-* !arriage.2. Charit+2Interest22 '&erall Deductions ,"ersonal and bu-. ... 23 Income Producing...................................................................................23 'acation (omes23 (ome )ffices.2! Goodwill2# -

/. $ncome0 a/ Whate&er I%) sa+s0 It has 1ritten &er+ broadl+ ,and circularl+. and courts still tr+ing to define a. 16-0 2)ross income means all income from 3+ate%er source deri%ed4 5. 2instances of undenia5le accessions to 3ealt+6 clearly reali7ed6 and o%er 3+ic+ t+e ta8payers +a%e complete dominion.4 a. Glens"aw Glass % Commis+0 mi8 of capital gi%en for damages under anti9trust and lost profits. 5. /lternati%es :;aig9<imon= a. %ery 5road0 any 5enefit6 from any source :car6 3as+er6 dis+3as+er6 etc= 5. Imputed Income :e8cluded= c. >se of 2+ouse+old dura5les4 and t+e performance of ser%ices for personal 5enefit or t+e 5enefit of one?s family. a. $ssues0 lack of +ori7ontal e@uity. a. A3ner %s renter. 5. C+ild9care credit intended to relie%e some ine@uities t+at result from ta8ing t+e income of a 3orking mom 5ut not ta8ing imputed income of a stay at +ome mom. c/ Income ma+ be s"lit b+ a married cou"le if source of income is 2ointl+ o1ned ,e&en if controlled b+ 2ust 3 "erson. a. Poe $ &ea#urn0 couple Bointly o3n e%eryt+ing6 file independently 5. Does not apply if personal ser$ice #y one person:not Bointly o3ned= a. Lucas $ *arl0 ;us C?d to 3ife +alf of all income&property as Boint tenantsD +e 3as a la3yer6 s+e a +omemaker a. ;eld0 :;olmes=6 intent is to ta86 not allo3 ppl to C around it d/ Income cannot be restructured as a 4loan5 if not arms length transaction ,but an e$ce"tion is here. a. Al+(a,im- 5allplayer 2loaned4 entire amount to +is agent6 no interest. a. ;eld0 /llo3ed to defer 5. Eo5inson0 s+ouldn?t +a%e 5een B. Non9cas+ Benefits a. )eneral0 a. $f didn?t ta86 people 3ould 5arter muc+ more and it leads to less efficient6 more ine@uality. 5. 16- ne%er e8plicitly says non cas+ 5enefits is income6 5ut is inferred a. E@ui%alent to "F 5. /rms lengt+ transactions 5. Gro5lems0 a. ;ard to kno3 t+e %alue of some of t+ese t+ings 5. ;ard to kno3 5est 3ay to ta8 it 2

c. ;ard to enforce :5igger fis+ to fry6 +ard to detect6 etc= c/ !eals and Lodgings a. If Pro$ided to *mployeesa/ If meals and lodging are "ro&ided for the con&enience of the em"lo+er( not ta$able to the em"lo+ee/ a. *!tended also for meals pro$ided to t"e spouse or dependents of an employee. i. Benaglia6 codified and e8tended in 1--, 5. Definitions0 a. 2Meals4 i. :a=:-= H meals are not groceries -. Congress did not 3ant to deal 3it+ t+e %aluation pro5lem. 2. $t could 5e argued t+at t+e rule recogni7es t+e restricted preference concern associated 3it+ forced consumption. /s a result of t+e restricted preferences t+e %alue of t+e meals to t+e employee 3as less t+an t+eir "F. 5. 2Con$enience4 i. urnis+ed on employers 5us premises

ii. /s condition of employment c. Benaglia $. Commissioneracts0 ;otel manager in ;onolulu recei%es -.C in salary6 meals6 lodging and tra%el e8penses. ;e only includes t+e -.C and tra%el e8penses as income. 5. ;eld0 "eals and lodging are a 5enefit for t+e con%enience of t+e employerD deducta5le. But 3ife?s meals s+ould +a%e 5een ta8a5le :o%erruled in --,=. i. Ct looks to -= compensatory moti%e and 2= if not6 3+ere t+at means t+ere is no incomeI -. 'rumped 5y employer con%enience 5. If pro$ided to anyone else0 a. )enerally6 personal6 li%ing and family e8penses are non9 deducti5le. 1262 5. ;ousing is not special e8pense 5ecause e%eryone +as to pay it 3 a.

a. $ts an 2after ta8 e8pense4 c. Notes0 a. 2'ransformation40 a. an after ta8 e8pense :ie +ousing= into a ta89free receipt&non9includa5le item of compensation 5. Golicy issues0 fair and e%en6 pre%ents creeping d. 6ringe Benefits are all deductable 1-32 a. /o additional cost ser$ices : ree flig+ts for airline employees= a. $ncludes spouse and dependents 5. Non9discrimination re@uirement 5. 0ualified employee discounts :/mEagle discounts= a. 20ualified40 3orks in t+e line of 5usiness 3+ere t+e item at issue is offered for sale to customers 5. $ncludes spouse and dependents c. Non9discrimination re@uirement c. 1or,ing condition fringes :parking6 gym mem5ers+ips6 etc= d. De Minimus Fringes :nig+ttime ta8i6 etc= a. Deff0 Falue so lo3 t+at accounting for t+em 3ould 5e 2unreasona5le or administrati%ely impractical.4 e. Notes0 a. $f any of t+e a5o%e are transferred into cas+6 almost certainly 3ill 5e considered as income 5. C"arley $. Commissioner0 'G H an employee H used a comple8 sc+eme to con%ert first class fre@uent flyer upgrades into cas+. a. ;eld0 $ncome 3+et+er miles 3ere compensation or a disposition of property :+is 5asis in t+e miles 3as 7ero=. c. Gro5lems0 a. Faluation6 enforcement and political acceptance. 5. /dded in -,*! as a result of interest group politics e. Cafeteria Plans are deductable0 a. Deff- *mployee may c"oose among a num#er of non+cas" nonta!a#le #enefits or ta,e cas" 1-2# a. Non9discrimination re@uirement 5. Cannot roll o%er unused portions to ne8t year or con%ert to cas+ t+en eit+er :2>se9it9or9lose9it Eule4= 5. /llo3s 'Gs to reduce ta8a5le salary 5y taking certain non9cas+ 5enefits in lieu of cas+. f/ Insurance0 a. Life Insurance0 a. )roup life insurance premiums are ta8ed to t+e employee as income6 e8cept first #.C of premiums :1(,= a. Non9discrimination re@uired 5. $f paid 5y employer6 deducta5le for employer 1-62 a. >nless employer is 5eneficiary :126!:a=:-==

c. $f paid to 5eneficiaries 5y reason of deat+6 t+e proceeds are not ta8ed 1-.5. (ealt" insurance0 employer pro%ided insurance is a. not income for employee 5. deducti5le for t+e employer 1-.!9-.6 c. Miscellaneous insurance pro$isions0 a. Deducta5le0 a. prepaid legal ser%icesD 1-2. 5. employer pro%ided transportation 1-2. c. education assistance is not includa5le up to J#62#.6 1-2( 5. Not deducta5le0 a. dependant care pro%ided 5y t+e employer 1-2, g. A1ards Pri-es( :caug+t 5ase5alls6 etc.= a. '+eoretically6 are included and are ta8ed at "F 1(! 5. Gractically0 $E< doesn?t usually go after people sal%aging6 5ig game +unters6 ppl 3+o catc+ famous 55alls6 until t+ey try to turn it into cas+ a. '+is determines "F c. Autlier&alternati%e case0 a. urner $. Commis"0 Won cruise tickets on radio6 traded in first class for a fe3 coac+ a. ;eld0 Difference is 5et3een t+e "F of t+e tickets and t+eir su5Becti%e %alue to t+e 'G. Considered su5Becti%e %alue :%ery rare to look at t+is=. -. Weren?t 3ort+ t+e face %alue since a= non9transfera5le 5= non9sala5le and c= certain restrictionsD +o3e%er since t+ey got room and 5oard6 pleasure6 so need some kind of 3ort+ to report 2. Kooks like t+e court took +is figures and court figures and split it in 5et3een +. '+eories on non9cas+ 5enefits0 a. Dead 1eight loss Hemployee takes 5enefit 3ort+ less to +im t+an t+e employer pays for it to lessen +is ta8 lia5ility. E@ual to t+e difference. a. /lso6 3+en people do t+is6 economic ripple effects. 5. Im"uted income :ser%ices you produce any3ay=

Windfalls0 >ne8pected6 unearned6 or sudden gain :$ncludes gifts6 litigation a3ards=

i. Income literall+ found0 ta8ed as gross income a. Cesarini0 "oney found in a piano purc+ased at auction is income. /. Eeco%ery from Gersonal $nBuries:Kitigation= a. A%erall principal0 "a+ment of an e$"ense that belongs to an indi&idual is income for the reci"ient6 unless stated some3+ere else in t+e code b/ Personal "h+sical in2ur+ ,sic*/in2ured. mone+ is not included( regardless of 1hether settlement/trial( "eriodic/lum" sum,378. a. Worker?s comp #

5. $nsurance c. Damages :e8cept puniti%e= d. Kost income e. G+ysical inBury&sickness resulting from ser%ice in t+e armed forces c/ If "ersonal in2uries and structure it( interest is non-ta$able a. Could also punis+ party 5y making t+em 5e ta8ed on income annually and deduct after ta8es d/ Puniti&e damages are ta$able as gross income a. Commissioner $. Glens"aw Glass Co.a. /lt+oug+ Eisner %. "acom5er definition of income H gain deri%ed from capital6 la5or or 5ot+ H 3ould not encompass puniti%e damages. 5. Kea%es unans3ered @uestions H 3+at constitutes a gain and 3+en is income clearly reali7ed. 5. Golicy0 Damages could only 5e e8cluded if reduced incenti%e to 5ring suits :ta8es6 etc.=. Not currently t+e case. e/ #motional damages ,onl+. are ta$able ,39:. a. $f getting 5ot+ emotional and p+ysical6 need to split it up to get proportion accordingly 5. "ay 5e a5le to c+aracteri7e if mental6 not emotional a. <ome legislati%e +istory supporting an argument t+at a spouse may e8clude funds reco%ered for loss of consortium. B. Eeco%ery from Business $nBuries a/ All damage a1ards are ta$ed in the +ear recei&ed0 a. lost "rofits :Burnet= 5. "uniti&e damages :)lens+a3 )lass= c/ for destro+ed or damaged "ro"ert+ a. 'o t+e e8tent t+at it e8ceeds t+e 'G 5asis in t+e property. a. 'a8ation may 5e deferred under 1-.33 if rein%ested in a similar or related use. C. )ifts0 :Depends on c+aracteri7ation= a. 'rdinar+ Ti"s0 $ncluded on t+e t+eory t+at t+ey are a. Gayment for ser%ices rendered. 16.#3 5. $n part6 you are also considering t+e e8pectation of t+e recei%er. 5. Pri-es( A1ards ,see abo&e.0 a. Gri7es and a3ard are income 99 1(! c. )cholarshi"s and 6ello1shi"s 99 1--( a. Gortion re@uired to 5e used for 5ooks6 fees and tuition is e8cluded 5. Gortion 3+ic+ represents payment for teac+ing or researc+ is included d. Be;uests ,"ro"ert+ &ia 1ill.0 e8cluded 1-.2. 6

a. But sometimes difficult to distinguis+ 5et3een 5e@uests and 5elated compensation for ser%ices rendered. e. Welfare "a+ments H e8cluded :not 3it+in 16-= f. Alimon+0 deducti5le to t+e payor and ta8a5le to t+e payeeD a. But c+ild support and property settlements are not deducti5le& ta8a5le g. )ocial )ecurit+ "a+ments under 32k are e8empt +. To "olitical organi-ations0 ta8ed 5y donor immediately 1*!. i. Gifts gi&en b+ li&ing "erson :inter%i%os or testamentary transfers= <37: a. /ot included in gross income w"en donor grants it wit" t"e moti$ation of 2detac"ed3 disinterested generosity45Du#erstein6 a. No bright line test for definition e8cept0 a. "ore t+an commercial intent&acti%ity 5. "arriage 5et3een man&3oman pro%es it i. Eegardless of lengt+ or @uality c. $f prostitution in%ol%ed6 al3ays ta8ed d. <ticky in middle ground0 is t+ere detatc+ed and disinterested generosityI 5. /ll facts and circumstances s+ould 5e considered c. Gro5lems0 gets into intrusi%eness #. ransferees intent is irrele$ant 5(arris6

c. A#sence of o#ligation does not ma,e somet"ing a gift automatically a. Commissioner %. Du5erstein0 / Cadillac for a referralD Donor deducts as a 5usiness e8pense. Donee claims it as a gift. a. <CA'>< +olds t+at it is a gift . 5. 7nited &tates $. (arris- /n old man and t+e t3ins. '+e t3ins did not report transfers as income on t+e grounds t+at t+ey 3ere gifts. Commissioner c+arges 23illful e%asion.4 Du5erstein does not control 5ecause old man?s state of mind and t+e t3ins? state of mind are rele%ant. a. Ald man is dead so don?t kno3 +is true intentD

i. Commis+ says no intent 5 5ecause didn?t pay t+e gift ta8D t3ins pro%ide t+e lo%e letters. 2/ Businesses Gifts0 =" to >:? is treated as gift@ after this amount is ta$ed a. "ese issues all depend on c"aracterization of transfer a. Garting gift or se%eranceI 5. o &ur$i$ing &pouses0 not included in general income :5ut no3 limited6 like all 5usiness gifts6 to J2#= a. Goyner0 Gayments 5y corporations to sur%i%ing spouses of deceased e8ecuti%es. Corporation deducted t+e payments and t+e spouse claimed t+at t+ey 3ere a gift. Court of /ppeals +eld t+at it 3as a gift. c. *mployer to employee is allowed a. Du#erstien- :see a5o%e=0 Est t+at corp can gi%e gifts 5. &taunton :consolidated 3it+ Du5erstien=0 5onus upon retirement 3as +eld to 5e a gift@ transferor 3as a c+urc+ and t+e employment relations+ip 3as ending c. Congressional Eeaction to t+ese cases0 2(!:5= limits deduction for 5usiness gifts to J2#D t+is trumps 1-62D 5ut anyt+ing in e8cess is non9deducta5le d. If gi$en gift for performance of ser$icea. Not a giftD ta8a5le as income 5. Ceeps ppl from 5artering */ Gift Ta$0 a. /nyt+ing o%er -2k is ta8a5le gift 5. No ta8es on tuition c. iled annually on calendar year 5asis if

d. <teeply progressi%e D. "ec+anics of ta8es 3it+ gifts0 a/ Polic+ o"tions0 a. Donor pays income ta86 Donee pays not+ing :Current= a. <till possi5ility of strategic 5e+a%ior. *

5. Congress0 if gifts 3ere income6 %ery costly to administrate 5. Donor gets deduction6 Donee pays income ta8 a. $ssues0 a. <till possi5ility of strategic 5e+a%ior 5. Enforcement is intrusi%e 5. /ffect0 '+e recipient is 5etter off and deduction gi%es an incenti%e to donate H seems fair c. Donor pays income ta86 Donee pays income ta80 :Dou5le ta8ation= b/ Transfer of =nreali-ed Gain b+ Gift While the Donor is Ali&e a. Background0 a. 1-..-0 )ain&Koss L /mount Eeali7ed :J recei%edM "F of property recei%ed=H /dBusted Basis :original cost of property6 5ut if can?t pro%e it adBustment6 assume .= b/ Basis is( effecti&el+( the onl+ ta$-free gift 5. Eecording t+e Basis for )ifts0 :1-.-#a= a. If Gain0 donee?s 5asisL 3+ate%er donor?s 5asis 3as 5. If loss0 donee?s 5asisL donor?s 5asis or t+e "F at t+e date of transfer6 3+ic+e%er is less. c. Effects0 a. Ceeps 'G from gi%ing ta8 losses to ot+er 'G 5. Basis of gift is increased 5y t+e amount of gift ta8 paid6 5ut cannot e8ceed t+e "F at time of transfer c. Basis is protected from ta8 :-.2= 5ut appreciation gets ta8ed :-.-#=D good policy d. W+o 5enefitsI a. Wealt+ families transferring to kids :lo3er 'a8B= 5. /llo3s ppl to control 3+o pays ta86 3+en6 5y controlling 3+en gift is sold :5y 3+oe%er is lo3er= c. 'ransferor must pay ta8es on any increase in %alue from time donor ac@uired it until sold. :carryo%er 5asis for property appreciation= d. $llustration0 ,

a. 'aft % Bo3ers0 grandfat+er gi%es gdaug+ter gift of stock. ;e 5oug+t for -...6 ga%e 3+en 2#..6 s+e sold at #.... <+e 3anted +er 5asis to 5e 2#... 5. ;eld0 1-.-# is la3ful. $f +er 3ay6 3ould +a%e appreciation 3it+out ta8. E. )ifts of Di%ided $nterest :trusts= a/ Ao1 to characteri-e0 a. $f immediate enBoyment and income for termI $ncome 5. $f postponed enBoyment and remainder after term of yearsI gift 5. Pro"ert+ itself is e$cluded :-.2a= c. Income from "ro"ert+ is not e$cluded :its income= :-.25= a. Irwin $. Ga$it0 ) dies and lea%es +is granddaug+ter6 "6 a -# year CD 3ort+ -..C. $t is placed in a trust. '+e interest on t+e CD is to 5e paid out annually to "?s fat+er6 3+o is o5ligated to use it for "?s care. '+e CD 3ill 5e turned o%er to ") at t+e end of -# years. a. ;eld0 $ncome from property transferred as a gift is income. a. at+er must include t+e interest payment as income.

5. ") 3ill not 5e ta8ed on t+e underlying property as it 3as t+e gift. d. If "ro"ert+ gi&en to trust is sold 1ithin : +rs( ta$ed at donors rate :6!!= e/ %ationale for not ta$ing both remainderman ,end reci"ient. and holder0 a. Difficult to apportion ta8 5. Could ta8 remainderman 5efore +e gets any cas+ in9flo3 f. A+"othetical0 ' creates a trust. ;is 5asis in t+e property is 3..C. $t generates 2#C annually. '+e trust creates t+e follo3ing interests0 $ncome to C for life and remainder to D. W+en t+e trust is created t+e "F of t+e property t+erein is !..C. $t is an inter%i%os transfer and t+e trust is irre%oca5le. a. $ncome ta8 conse@uences for '0 a. '+is is not a ta8a5le e%ent t+ere is no 2@uid pro @uo.4 5. '+roug+ application of 1-.-#6 t+e 5asis of t+e trust is 3..C. 5. $ncome ta8 conse@uences for C0 a. 2#C 3ill 5e treated as income. -.

c. $ncome ta8 conse@uences for D. a. '+ere is no immediate conse@uence. ;e takes t+e property upon C?s deat+ 3it+ a 5asis of 3..C as a result of 1-.-#. d. $f t+is +ad 5een a testamentary trust6 t+en t+e trust 3ould +a%e 5een entitled to take a stepped9up 5asis under 1-.-!. '+is stepped up 5asis +o3e%er could not 5e passed on to D6 5ecause 1-.-# says you take t+e 5asis of t+e last person 3+o o5tained t+e property ot+er3ise t+an 5y gift. . 'ransfers and $ncome at&from Deat+ :Be@uest6 de%ise6 or in+eritance= a/ Ta$ed as transfer b/ Basis B lo1er of a. 6!C at time of death or b. 9 mnths from d/o/d/ <3738 a. No 2stepped9up4 5asis if it +ad 5een transferred 3it+in preceding -yr 5. Eationale0 deat+ is not a ta8 s+elter c. /ffects0 a. )reat potential for strategic 5e+a%ior a. Encourages ppl to +old onto increased %alue of property to ena5le +eirs to a%oid gain ta86 3+ile selling t+e ones t+at 3ill 5e a loss so t+ey can count t+e losses against t+eir estate 5. "ig+t encourage property immo5ility :+old on= c/ #state Ta$0 a. Currently0 "ust 5e o%er J2 million :t+e ceiling= a. Anly reac+es -92N of estates 5. $n 2.-.0 no estate ta8 unless Congress c+anges somet+ing d/ Income/"ro"ert+ in res"ect of a decedent ,earned during life( "aid after death. 9D3 a. a!ed as ordinary income for w"oe$er is getting it :or estate=

5. Property a. $f already C to sell0 a. get :decedents 5asis9e8cess= from time of sale 5. W+oe%er recei%ed it 3ill get income ta8 deduction 5. $f no C to sell0 --

a. Basis is "F at d.o.d. c. *state ta! conse8uences will always #e "ad d. Intent0 ensure ta8 o5ligations are filled ). Kife $nsurance6 /nnuities6 and Gensions a/ Premiums "aid for insurance gets no deduction <:9: a. $t?s a personal e8pense b/ As stated( all "roceeds b+ reason of death are e$cluded from income a. /pplies to 5ot+ sa%ings generated and insurance portion 5. Certain 2single premium4 policies are included :((.2= c. Note0 '+is does not result in symmetry. $n t+e aggregate6 more is paid out t+en is paid in. '+us6 more escapes ta8ation. c/ If collect before death ,term life "olic+.( the amount that e$ceeds "remiums "aid is ta$able ,E:e3. a. #$ce"tion0 'erminally ill patients can get accelerated 5enefits. Fiatical Golicies :1-.-:g==. d/ TPFs can ta*e go&ernment loans to bu+ "olicies ,Ta$ Arbitrage. a. $mpact0 'G can transform a non9deducti5le payment of an insurance premium into a go%ernment su5sidy t+roug+ t+e use of t+e loan. 5. But can?t deduct interest payments on loans used to purc+ase life insurance and annuities. 126!:a=:2= c. Doesn?t apply to certain 2single premium4 policies :((.2= e/ Annuities ,an agreement to "a+ a certain sum annuall+ to the annuitant for a "eriod of +ears or for life. are e$cluded until ca"ital is reco&ered a. Performed o$er series of payments to collect initial in$estment a. E8clusion ratio L capital reco%ery :1(25= 5. :initial in%estment=&:life e8pectancy=:annual payout= L amount e8cluded c. /nyt+ing left at deat+ is deducted on final return :(253= 5. All remaining proceeds are includa#le. :1(2:5=:2==. c. All internal #uildup on policy is not ta!ed. -2

f. Pensions0 a. 1"en pay+ina. E8clude amount of employee in%estment&O of payments anticipated 5. $f gi%en 5y employer6 deducta5le to employer and e8cluded 5y employee at t+at time 5. 1"en Payout0 a. 'a8es are paid on t+ese 3+en payments 5egin6 :a= '+e employee contri5ution is ta8ed 5efore it goes in6 5ut it 3ill 5e reco%ered as cost. ;. )am5ling0 :-6#= a/ Gains are ta$able 5. Kosses deducti5le to t+e e8tent of gains from gam5ling in t+at same year. a. Cant use comps to e8tend 2gains4 c. Enforcement0 'G is responsi5le for keeping t+e appropriate records to esta5lis+ gains and losses. d. 'rading in Bunk 5onds does not count as gam5ling. $. Koan transactions and 2$ncome from Disc+arge of $nde5tedness4 a. Loan "roceeds are not ta$ed as income :regardless of use or reporting= a. 9ationalea. A5ligation to repay :same net 3ort+ as 5efore= 5. Not 2undenia5le accession to 3ealt+4D temporary :)lens+a3)= b/ Interest "+mnts are deductable on some mortgages and educational loans a. A 28ualified residence4 allows for deduction of "ome mortgage loan interest :;<=5"65>6 a. $ncurred to 5uy6 5uild or impro%e residence :/c@uisition inde5tedness=D J- million limit1-6#:+=:3=:B= 5. or +ome e@uity de5t :+ome used for collateral=6 limited to -..k or "F of residence6 3+ic+e%er is lo3er :+3c= c. 1-6#:+=:2= H /ll ot+er interest not incurred for 5usiness or in%estment purposes is nondeducti5le personal interest. c/ Loan re"a+ments are not deductable d. 2True Discharge of Indebtedness40 a. 1"en pay #ac, less t"an amount #orrowed3 its income :16-:a=:-2== a. "ust include in income 5ase for t+at year 5. $nterest may affect net outcome6 5ut no affect for reporting c. Ki@uidity does not matter. d. 7nited &tates $. ?ir#y Lum#er Co.a. acts0 Corporation&'G issued some 5onds and reclaimed t+em a fe3 mont+s later for -3*C less t+an t+e price at 3+ic+ t+ey +ad originally sold t+em. -3

5. ;eld0 '+e 'G +as e8perienced an accession to income in t+e amount of -3*C. #. *!ception- 29elief Pro$isions4 a. De5t cancellation income may 5e e8cluded 3+en 'G is insol%ent or t+e income results from a formal 5ankruptcy proceeding. 1-.* a. '+en reduce ta8 attri5utes suc+ as NAK?s so t+e income 3ill s+o3 up later H pre%ents dou5le 5enefits. 1-.*:5= 5. $ncome from cancelling student de5t is e8cluded if de5t cancellation is from 3ork for c+arity&educational institution c. or farmers6 3 years allo3ance P. 'ransfer of Groperty <u5Bect to De5t :"ortgages= a/ When mortgaged "ro"ert+ is sold( > "a+s debt first 5. The seller has income reali-ed from cash recei&ed from sale G outstanding loan ,the amount TP 1as in debt. 5Crane6 5 ufts6 a. Commis" $. ufts0 'G 5orro3ed -.*" in non9recourse financing to construct a 5uildingD deducted !!.C6 so adBusted 5asis of -.!-". Kater sold0 outstanding mortgage 3as -.*#"6 5ut "F 3as -.!". a. ;eld0 'G 3as relie%ed from6 -.*#"D "F is irrele%ant +ere. a. Dissent :A?Connor=0 Bifurcation i. '+e property transaction0 /B H /E L small loss ii. Koan transaction0 Autstanding loan H "F :current 3ort+ of mortgage= L gain. iii. Anly difference0 gain is ordinary6 not capital. c/ Borro1ed funds are included in basis for the "ur"ose of com"uting annual de"reciation ,thereb+ allo1ing huge basis. a. Crane $. Commis"0 'G got property su5Bect to a mortgage. Depreciated 2#C o%er Q years and t+en sold 3+ile still encum5ered. d/ Basis must be annuall+ ad2usted to account for de"reciation C. "isconcei%ed Disc+arge '+eory a/ Not discharge of indebtedness if re"a+ment as "art of gift( com"ensation for 1or*( negotiation of "rice( liabilit+ is dis"uted b/ TP must ha&e debt0 be liable for it or sub2ect to 1hich TP holds "ro"ert+ a. @arin $ Commis"0 racked up 3.#" in gam5ling de5t. Casino 5roug+t suit to reclaim J and t+e dispute 3as ultimately settled for #..C. Commis+ says Casino s+ould 5e treated as full amount. a. ;eld0 '+e parties ultimately agreed t+at t+e de5t 3as #..C. 'G paid t+e full amount and 5ut no income from t+e disc+arge of inde5tedness. C+ips are not propertyD 5argaining tool. 5. Diedric" $. Commissioner0 Donor ga%e stock to t+e donee on t+e condition t+at t+e donee pay t+e gift ta8 o3ed 5y donor. a. ;eld0 Donor +as incomeD not a gift. '+e Donor&'G?s gain is e@ual to t+e amount 5y 3+ic+ t+e lia5ility :t+e disc+arge of t+e o5ligation= assumed 5y t+e donee e8ceeds t+e donor?s 5asis in t+e propertyD t+e rest is a gift. c. E80 /mt. Borro3ed student loans H #.C -!

a. Employer 3+o pays #.C i. 6-a-2 doesn?t apply ii. <till income t+oug+ t+ru 6-a5. Garents pay #.C i. No 6-a-2 issue ii. )ift to student :-.2 trumps 6-a-= c. <tudent negotiates6 repays for !#C i. '+ere is income %ia 6-a-2 ii. No -.2 issue K. Nonrecourse Borro3ing in E8cess of Basis6 Kosses a/ Negotiation of non-recourse mortgage does not constitute reali-ation b/ Borro1ing funds itself is not a ta$able e&ent ,recourse and non-recourse. a. Can adBust 5asis if use loan to impro%e property 1-.-6:a=:-= 5. Eeasoning0 for E6 5ears risk of decrease in property %alue c. Woodsam /ssociates %. Commissioner 0'G 5uys property for -#CD appreciates to *.C. 'G gets non9recourse loan of 6.C :mortgaged t+e property=. )ets foreclosed. 'G says paid too muc+ and 3ants refund. 'G claims t+at t+e ta8a5le e%ent 3as 3+en +e took t+e nonrecourse loan in e8cess of +is 5asis. a. ;eld0 '+e court reasoned t+at t+e nonrecourse loan in e8cess of 5asis 3as more like a mortgage t+en a sale. a. /rgument for sale0 Non9recourse 5orro3er is not 3orried a5out t+e do3nside risks so t+e o5ligation to repay is only tec+nical in nature. 5. /rgument for mortgage0 t+e lender does not see any disad%antage6 5ecause it can guard against t+e do3nside risk 5y c+arging a +ig+er interest rate. c/ An+ change in legal entitlement is a dis"osition ,ie reali-ation. a. or loans6 if c+ange is more t+an RN /ND its not a %aria5le rate6 t+an it?s 2significant4 5. <ufficient 5y +a%ing a claim against +ouse / in -,,, and 2.... c. Cottage &a$ings Association $. Commis"0 'G H a sa%ings and loan co. H 3as losing J so e8c+anged de%alued mortgages 3it+ de%alued mortgages +eld 5y ot+er companies. a. ;eld0 '+is is an ot+er disposition and t+e loss is deducti5le. '+e assets are materially different. '+e companies +ad different rig+ts to different +ouses. ". Depreciation and its effects a/ If an asset is used for business and "ur"ose of generating income( and the asset is 1asting( TP can reco&er the amount in&ested o&er a reco&er+ "eriod0 e$ce"t a "ersonal residence and including good1ill/ a. $f an asset a. 5usiness property 5. in%estment property c. intangi5le assets :patents6 licenses6 etc=

-#

a. $ntangi5les are usually re@uired to 5e done on <traig+tline 5asis 5. is 3asting6 a. Defined0 i. assets useful life is definiteD /ND ii. predicta5le life span -. Does not apply to land c. t+e ta8payer 3ill 5e a5le to reco%er t+e amount in%ested a. No immediate deduction is a%aila5le under 1-62 since it 3ill 5e used for more t+an - yr. d. using a met+od allo3ed in 1-6* o%er an applica5le reco%ery period a. t"e Accelerated Cost 9eco$er Met"od 5AC9&6D AE a. $ntended to 5e significantly s+orter t+an t+e useful life of t+e asset 5. /s if a portion of income 3as ta8 e8empt c. <trategy0 2Ke%eraged Kease4 i. /llo3s company /9 an unprofita5le company 3it+ a depreciating piece of e@uipment9 to sell t+e e@uipment to profita5le company B6 3+o t+en leases it 5ack to company / for an e8tended period of time ii. Effecti%ely allo3s unprofita5le company to sell its 5enefit to t+e profita5le one #. straig"t+line met"od a. i8ed amount deducted o%er Q years to reco%er full amount 5. Ta$es after de"reciation0 a. If you sell t"e asset after you "a$e reco$ered all of your costs t"roug" depreciation3 your entire amount realized will #e ta!ed. a. /ll gain up to t+e amount taken as depreciation is income. 5. /ll ot+er gain is capital :capital assets= a. Capital /sset0 $n a gi%en year6 if t+e 'G +as property used in a trade or 5usiness and it is sold at a gain6 you can get a capital gain. 5. Golicy0 $f capital6 not ta8ed at -..N so 5ig sa%ings 5. Notes0 a. Eeflects t+at depreciation doesn?t reflect reality 5. Golicy0 Deductions c. 'ther o"tions instead of de"reciation0 a. $mmediate deduction if profit acti%ity for less t+an one year a. E80 paper clips and soft3are 5. $f for longer t+an - year6 see 263 a. Gersonal residence is e8plicitly e8cluded c/ Ca"itali-e and not reco&er until sale/other dis"osition/ a. '+is is 3+at you must do 3it+ non93asting assets suc+ as land. d. )cra" it0 no gain or loss at all -6

d/ Polic+ Im"lications0 a. Congress allo3s it cause 3ants more in%estment in mac+inery a. Eeflects de5ate 5t3n affecting ta8es and in%estment 5. $n end6 original J gets 5ack to 'G t+roug+ t+is and final gain&loss c. Kimited to 'G 5asis&costD catc+es initial6 not su5se@uent6 in%estment Big Transactions0 +ome6 in%estment property6 N. )ain on t+e <ale of a ;ome a. Gain from the sale or e$change of a home is e$cluded 1hen0 <3:3 a. Property "as #een t"e PAs principle residence for an aggregate of B years wit"in t"e pre$ious fi$e years ending at t"e date of sale@ a. E8empt 2if sale or e8c+ange is 5y reason of a c+ange in place of employment6 +ealt+6 or6 to t+e e8tent pro%ided in regulations6 unforeseen circumstances.4 -2-:c=:2=:B=. i. W+en t+is occurs t+e upper limit on t+e amount e8cluda5le is also reduced. #. Limit of B=C? for indi$idualD =CC? for couple filing jointly i. Kimit is reduced if e8empt a5o%e c. And3 can only 8ualify for t"is deduction once e$ery two years. d. Any remainder is ta!ed A. )ains and Kosses from $n%estment Groperty a/ A""reciation becomes a ta$able e&ent 1hen it is reali-ed AND recogni-ed a. Eeali7ation0 c+ange in o3ners+ip :sale6 release from de5t6 a5andoned= 5. Eecognition0 ta8a5le e%ent 3it+ actual gain&loss controlled 5y 'G c. Eationale0 a. $lli@uidity :t+oug+ alone is not suff= 5. No c+ange in in%estment :3ant to encourage= c. Gotential pro5lem0 %aluation :admin 5urden= d. '+e failure to reac+ appreciation may +a%e a lock9in effect. e. *isner $. Macom#er0 stocks splitD no J at all and +ad same proportionate o3ners+ip of company a. "acom5er is 5ad ConKa3 5ut good ta8 la3 5. Tenant im"ro&ements are not treated as income unless the im"ro&ement is intended as rent :1-., and -.-,= a. >sed to separate income from property and income from 5usiness. a. $ncome from property is usually treated as a capital gain6 5. $ncome from a 5usiness is treated as ordinary income. 5. No adBustment in property 5asis. -.-, a. Ensures t+at income deri%ed 3ill 5e accounted for e%entually. c. E8 of old0 ;el%ering %. Bruun0'G leases property to anot+er party in -,-,D 5uilds 5uildingD lessee defaults so re%erts to t+e 'G. Commis+ says incomeD 'G claims t+at t+is is not income 2deri%ed from la5or6 capital or 5ot+ com5ined.4 a. ;eld0 'a8a5leD not appreciation. 5. Bruun demonstrates t+at it is possi5le for a ta8a5le e%ent to occur 3&o t+e 'G 5eing proacti%e. :ie 3indfall= a. Eo5inson says it is t+e gain t+at makes t+is so important -(

G. E8press No recognition Gro%isions& 2Boot and BasisD4 a. Non-recognition occurs in follo1ing circumstances 11-.369-.!26 3#-6 (2a. Between spouses in conjunction wit" di$orce :roug+ly e@ui%alent ok= 5. Li,e ,ind e!c"anges :sports car titles6 etc= a. Does not apply to metal for metal :Ee%Euling *29-66= c. In$oluntary con$ersions6 e%en 3+en cas+ is transferred a. 2destruction 5y fire6 t+eft and imminent domain.4 :no timing= 5. "ust 5e for 2similar or related use of ser%ice4 c. W+en destruction is in 3+ole or e%en in part d. "andatory non9recognition if direct e8c+angeD %oluntary is receipt of cas+ first d. Eationale0 no J transfer6 difficult to %alue6 no c+ange in 'G loss&gain e. NA'E0 usually Bust results in deferral b/ =nless a transfer ties u" the TP in continual transaction( it is a recogni-able transaction/ a. Eordan Mars" Co. $. Commissioner0 <old property for a loss and t+en leased it 5ack. $f a sale +e can deduct t+e loss6 5ut if it is a like9kind e8c+ange t+e loss is not recogni7ed and 3ould 5e deferred. '+e Commissioner argues t+is is an e8c+ange0 5efore t+e transaction 'G +ad property in location Q and after t+e transaction t+e 'G +ad property in location Q. 5. ;eld0 '+is is a recogni7a5le transaction. '+e 'G 3as not tied up in a continual transaction.. c/ Non-recognition occurs for business acti&it+ 1hen > and e$change of goods occur together0 ,Boot ,>. Basis ,basis of "ro". 37H3. a. 1"en used for in$estment or re$enue generating purposesD /ND 5. li,e+,ind goods e!c"angedD /ND a. Defined in regs6 5ut generally re@uires0 a. <ame nature or c+aracter not same grade or @uality. 5. Eeciprocal transfer of property is not t3o sales. c. $ntent of t+e ta8payer may play a role in t+e ultimate treatment 5. Not %ery li@uid assets :in%entory6 stocks6 5onds6 notes6 securtis= c. F can #e t"rown in to sweeten t"e pot%#alance t"e deal a. Ane sided is ok d. 1-.3-:d=0 Basis L :/B of property transferred H any J recei%ed M :any gain recogni7ed H any loss recogni7ed== e. /ll t+e possi5le 5usiness scenarios0 a. 1-.3-:a= Hno 5oot :solely in9kind property= a. Eeali7ed0 Basis stays t+e same 5. Eecogni7ed0 No c+ange is allo3ed 5. 1-.3-:5= Ho%erall gain and mi8 of 5oot and like kind property. a. Eeali7ed0 L 'otal recei%ed "F95asis 5. Eecogni7ed0 t+e KE<<AE of i. '+e gain reali7ed from t+e s3apD or ii. '+e amount of t+e 5oot -*

c. 1-.3-:c= Ho%erall loss and mi8 of 5oot and like kind property. a. Eeali7ed0 5. Eecogni7ed0 No loss is recogni7ed d. /llocation of Basis to in9kind :@ualifying property= and 5oot :non9@ualifying property=0 a. Basis of @ualifying L 'otal 5asis H "F of non9 @ualifying 5. Basis of non9@ualifying L "F of non9@ualifying f. Eationale0 a. $lli@uid transactions 5. Continuous in%estment 5y 'G c. /dministrati%e concerns d. ;ard to find e8act e8c+anges for property Q. Apen 'ransactions6 $nstallment <ales6 Deferred <alesD a/ A transaction is o"en 1hen its limited in neither time or amount a. If plan is not funded 5mere promise to pay63 its open :Ee% Eule6.93-= #. If plan is funded3 automatic lia#ility 59e$9ule<C+>;6 c. Benefits of )pen ransactionsa. Deferral of ta8ation until 5ase is reco%ered and capital gain treatment of t+e gain :1aring65Basis irst rule= b/ A transaction is closed 1hen &alue of "a+ments are considered at the date of sale and gain or loss can be full+ determined c/ A transaction is o"en if future "a+ment is uncertain a. Burnet $. Logan a. acts0 'G sold some s+ares 5ack to t+e company for cas+ and it?s promise to make future payments. $E< says transaction is closed cause soldD s+e says its open 5ecause t+e future payments are uncertain. 5. ;eld0 transaction is open d/ Ta$ treatment for o"en transaction0 a. payments pay off t"e #asis3 and once e!ceed treated as capital 5. $f it is not open6 t+en t+e future payments are all ordinary income e/ If a "romise is unfunded or for "ro"ert+( can use installment method to di&ide basis and gain o&er multi"le +ears <8?H a. 27nfunded4 a. No J transfer no3 and t+ere must 5e risk of non9payment 5. Ee@uires0 a. /t least one payment in different ta8a5le year c. Not eligi5le for0 a. <ales of personal property under a re%ol%ing credit plan 5. <ales of pu5licly traded property c. <ales of in%entory items of dealers in real or personal property a. E8ception for times+ares0 5ut t+ey +a%e to pay interest on it d. /nyt+ing readily con%erti5le into cas+ :notes6 pu5lically trada5le de5t o5ligations= -,

d. "ec+anism0 a. Grocess interest as ordinary income for year :A$D rules= 5. Grocess rest t+roug+ installment met+od a. Eatio L Basis:ratio Q Gayment=&'otal Falue of future payments :less interest 3+ic+ 3ould already 5e separated out 5y t+e A$D rules= e. Can elect to pay all ta8 in yr - :considered closed=. 1!#3:d= a. Anly likely 3+en a loss carry9for3ard t+at is set to e8pire. 5. Calculate 5y "F9payments f. Eationale0 don?t +it ppl 3+en no ne3 cas+ E. Eetirement Benefits0 a/ General )trateg+ and %ules0 a. 9ot" #est w"en wanting to sa$e for college3 first time "ome3 or will #e in lower B t"an w"en wit"draw #. /ot 8ualified may #e more lucrati$e c. *$eryt"ing capped at ;<C, d. Must #egin dis#ursement in year following GC H age b/ Iualified em"lo+ee "lans are not ta$ed at an+ "oint until 1ithdra1n a. C"aracteristicsa. '3o types0 a. Defined 5enefit plans :specific amount 5ased on years&status&salary=D employer 5ears in%estment risk 5. Defined contri5ution plans :annual contri5ution= employee 5ears in%estment risk 5. Earnings paid directly in are not ta8ed c. /llo3ed e%en if continuous %ested rig+t to 3it+dra3 earlier d. Employers0 can deduct for 3+ate%er t+ey pay in e. Can allo3 2EA'; !.-k4 for employee to pay ta8es on 3+at is deposited no3 and 3ont pay 3+en 3it+dra3n #. &afeguardsa. Employer cannot discriminate 5y gi%ing su5stantially more to +ig+ly paid employees :look at ratio= 5. /fter certain time passed employer cannot remo%e 5enefits e%en if employee @uits or fired :EE$</= c. "ust meet in%esting re@uirements :e%al 5y professional= c. Penaltiesa. $f 3it+dra3 5efore #, S6 included in )$ and additional -.N a. E8empt if dies or 5ecomes disa5led d. Criti8ue- cap makes it unsuita5le for +ig+ly paid employees6 union 3orkers +a%e 5argained for 5ig 5enefits t+at fall outside t+is6 and doesn?t +elp unemployed&employed ppl 3it+ no employer plan c/ )elf-em"lo+ed "eo"le can ha&e a ;ualified "lan ,I%A and %'TA I%A. a. /llo3ed #k per year :catc+up allo3ed for ppl o%er 3#= 5. $ncome not ta8ed 3+ile accumulating c. /mounts not ta8ed at all if under certain amount d. Point 'G?s under J-#.k0 :EA'; $E/= 2.

a. Not deducta5le :pay 3it+ ta8edJ= 5. Can 3it+dra3 ta89free 3+en a. Gast #, S 5. Die/disa5led c. or +ig+er education :up to -.k= d. irst time +ome :up to -.k= d/ Non ;ualified "lans are ta$able for em"lo+ees at distribution a. C"aracteristicsa. Deferral of income for employee 5. Deduction for employers 3+en 3it+dra3n 5y employees c. Employer can currently deduct d. No one accounts for t+e internal 5uildup e/ If amounts are 4unconditionall+ "laced at his dis"osal5( its included a. 7.&. $. Dresc"er0 'G +ad a retirement account set up 5y employerD employer input t+e money. ;e +as t+e rig+t to accelerate payment. a. ;eld0 reconfirm Ward % Commis+ t+at t+e 'G is ta8a5le 3+ate%er 3as 2unconditionally placed at +is disposal4D +is 5eneficiary 3ould recei%e it if +e died 5. Amount not necc e8ual to amount paid :Dresc+er= a. Burden is on 'G to pro%e +o3 muc+ +e o%erpaid c. Does not include annuitiesD t"eyre not guaranteed a. Commis+ % Almstead0 seller of life insurance co6 3as going to 5e e8clusi%e for $o3aD 5oug+t out +is rig+ts 3& annuity. a. ;eld0 not guaranteed so not constru%ie receipt f/ When > is 1ithdra1n( he is not ta$ed on the amounts he alread+ "aid <. <tock Aptions6 Eestricted Groperty6 and At+er Employee Compensation a/ #m"lo+ee stoc* o"tions are ta$able( because the+ are com"ensation a. 16-:a=6 Lo#ue b/ Di&idends are included in gross income but ta$ed at ca"ital gains rate c. Ta$ them in H different methods :5ecause 3 different e%ents can 5e reali7ed= a. EQ/"GKE0 'G an employee of C recei%es an option in year one to 5uy - s+are of stock in year fi%e for an e8ercise price of J*. W+en t+e option is issued t+e stock is selling at J2. per s+are. 'G e8ercises t+e option in year fi%e6 3+en t+e stock is selling at J2# per s+are. $n year ten6 'G sells t+e s+are for J3#. a. $ncome upon receipt of t+e option0 recei$ed FM' of op in yr;. a. "ust determine t+e "F of t+e option :difficult= 5. /ssuming t+is is possi5le and t+e %alue is J-26 t+e follo3ing 3ould occur0 'G 3ould +a%e J-2 of ta8a5le income in yr-. No ta8 conse@uences of yr#6 5ut +is 5asis in t+e stock is J2. :%alue of t+e option plus t+e outlay=. W+en +e sells t+e stock in yr-.6 +e 3ill +a%e a capital gain of J-#. '+en deduction of J-2 in yr-. c. ound in LoBue3 c+anged 3it+ Congress 5. $ncome upon e8ercise of t+e option0 difference #twn e!ercise price and t"e FM'. 2-

a. Eationale0 Not+ing definite in yr-D mig+t not e8ercise. 5. /pplying t+is to t+e e8ample t+e ta8 conse@uences 3ill 5e as follo3s. $n year one t+ere 3ill 5e no ta8a5le e%ent. $n year fi%e6 t+e 'G 3ill +a%e -( of ta8a5le income and +is 5asis in t+e stock 3ill 5e J2#. $n year ten6 +e 3ill +a%e J-. of capital gain. C gets a deduction of J-( in year fi%e. c. $ncome upon sale of t+e stock0 w"en sale of t"e stoc,. a. Eationale0 only gain if t+e sale T t+e e8ercise price. 5. '+us in t+e a5o%e e8ample6 t+ere are no ta8 conse@uences in year one or fi%e. 'G +olds t+e stock 3it+ a 5asis of J* and e8periences a J2( capital gain in year ten. C gets no deduction. d/ 6or incenti&e stoc* o"tions ,I)'.( use o"tion C ,88:./ a. 2Incenti$e &toc, )ptions4 a. Must retain stoc, for at least two years after t"e grant of t"e option and at least one year after t"e stoc, is recei$ed 5. "e option price must #e e8ual or greater t"an t"e mar,et $alue of t"e stoc, at t"e time t"e option is issued c. ;CC? ceiling on $alue of t"e stoc, t"at is in une!ercised I&) options. 5. Employer gets no deduction :3+en granted or 3+en e8ercised= c. NA'E0 easy to fail to meet t+ese re@uirements and a%oid 1!22 e. 6or Non;ualified stoc* o"tions0 1*3 a. 7se )ption A if0 :a656and c= :option is d= a. "F is readily ascertaina5le :Cramer $ Commis"6 a. 'raded on esta5lis+ed market :optionMdifference= 5. mandatory inclusion if t+e transfer is not su5Bect to restrictionsD c. employee&transferee does not face 2su5stantial risk of forfeiture.4 d. Notes0 a. $f criteria6 can still include it and in doing so stipulates t+at t+e income is t+e difference 5et3een t+e "F and t+e e8ercise price. 1*3:5=. 5. Employer can deduct "F6 no affect 3+en e8ercsied 5. 7se )ption B if0 :a and c= a. No readily ascertaina5le "F a. Ceeps 'G from claiming . :Eeg. -.*39(= 5. 'G did not face mandatory inclusion and didn?t elect to c. Will 5e ta8ed 3+en option ceases to 5e nontransfera5le and su5Bect to a su5stantial risk of forfeiture. :1*3:a==. d. Note0 Employer can deduct "F 3+en e8ercised f/ If stoc* o"tions are not related to em"lo+ment( use o"tion C a. $f option +as 5een sold and ne%er e8ercised0 5uyer loss6 seller income '. 'ransfers $ncident to "arriage and Di%orce :e%eryt+ing is on c+aracteri7ing=

22

a/ Pro"ert+ settlement in incident to di&orce is not recogni-able( its 2ust di&ision of 1ealth ,includes "renu". ,3783. a. ransfer wit"in ;yr of w"en marriage ceasesD AE 5. 29elated to cessation of marriage4 H pursuant to di%orce or separation instrument an 3&in 6 years of end of marriage c. 7.&. $ Da$is- +us5and transfers -k s+ares to 3ife incident to di%orce in common la3 state :title6 unlike community prop 3& co9o3ners= a. ;eld0 Di%ision of property H no ta8 on di%ision of property 5&c not reali7ation e%ent d. $ssues0 a. $f not c+aracteri7ed 3ell6 amount of ta8a5le gain is a. /rms lengt+ transaction H "F of marital rig+ts L "F of stock 5. Can manipulate&5argain b/ Transfers bet1een s"ouses are not ta$ed ,no recognition0 37H3(HH(83. a. Does not apply to gain from accured interest 5. Eecogni7ed upon transfer c/ Transfers that occur "rior to marriage ,do1r+. are included as income a. $f agreed 5efore marriage6 5ut transfer after3ard6 its e8cluded 5. Farid+*s+&ultane" $. Commissioner0 ga%e stock as do3ry 2gift4 a. ;eld0 Was a C :promise to marriage 3as consideration=. 5. Eationale0 a. Pust 5&c gift under gift ta8 la3 doesn?t mean it s+ould 5e treated as a gift for income ta8 purposes. a. Not a5solute gift. Was contingent on +is deat+ 5efore marriage H didn?t +appen 5. Alimon+ is deductable for transferor( included for transferee :(-6 2-#= a. 9e8uirementsa. "ust 5e cas+ 5. "ust 5e directly to spouse :i.e. not insurance company= c. "ust 5e instrument of di%orce or separate maintenance :no oral agreements= d. Not alimony if paid after deat+ of spouse e. Cannot 5e mem5ers of same +ouse+old 5. Kimits0 a. Cant frontloadD ot+er3ise considered property settlement a. Easy to a%oid 5. E8empt if party dies c. <trategic 5e+a%ior0 a. to split income 5. 'o defer gain for transferee 3+ile no gain for transferor d. Apportunity to opt9out of alimony treatment H treat payments as nonta8a5le to payee and nondeducti5le to payor e. Kegal e8penses to reco%er alimony are reco%era5le :cause income= c/ Child su""ort is neither deductable for transferor ,though can deduct abo&e line( :3?.( nor included for transferee,E3. 23

a. E%en if not officially c+ild support6 appearance rules a. $f payment is reduced upon contingency :like 5ecoming -*= t+en its c+ild support 5. Gersonal e8emption for custodial parent or non9custodial6 in t+at order c. Eationale0 if payor +ad custody6 no deduction for t+eir support d. Kegal fees to collect C< not deducti5le 5&c C< not Uincome? e. '+ere is no deduction for dead5eat parents a. Die79/rgulelles %. Commis+0 parent claims 5ad de5t deduction for dead5eat dad :like a 5usiness 3ould a defaulted de5tor= 5. ;eld0 No deduction cause no 5asis a. Eo5inson0 ct 3rong since clearly out of pocket e8pense f. Kegal e8penses to reco%er are not deducta5le :not income= d/ Transferee assumes transferorFs basis in "ro" ,substitute basis( li*e gifts. e/ Does not a""l+ to accrued ,deferred. interest ,3783a. >. C+arita5le Contri5utionsD a/ A deduction amount is allo1ed for a 4charitable contributionJ"a+ment of 1hich is made 1ithin the ta$able +ear5 to eligible donees <3E7,a.,3. a. 2C+arita5le40 must 5e %oluntary :not part of plea deals6 etc= 5. 2Eligi5le40 a. '+e >nited <tates or any su5di%ision of itD 5. organi7ations t+at are 2organi7ed and operated e8clusi%ely for religious6 c+arita5le6 scientific6 literary6 or educational purposes.4 c. Non9political c. 2/mount4 a. c+urc+es6 ed6 med6 and ot+er pu5licly supported organi7ations up to #.N of 'G?s /)$. :1-(.:5=:-== 5. pri%ate foundations0 up to 3.N of 'Gs /)$ 1-(.:5=:-=:B= d. Cor"orations may deduct contri5utions only to t+e e8tent t+at t+ey e8ceed -.N of ta8a5le income. 1-(.:5=:2= e. /ny e8cess may 5e carried o%er for t+e ne8t fi%e years. f. Eationale0 $ncenti%i7e so 5urden isn?t all on go% b/ If contributing ca"ital gain "ro"ert+( if the sale of it 1ould "roduce long term ca"ital gain the deduction is the 6!C a. Limitationsa. 3.N of /)$ 5. 2.N if gift is to pri%ate foundation c/ Gifts 1ith ulterior moti&es ,"ri&ate. are still deductable unless the benefit to TP is substantial a. 2<u5stantial40 greater t+an t+ose t+at inure to general pu5lic from c+arita5le contri5ution :Atta3a= a. )ttawa &ilica $. 7nited &tates H donated portion of non9silica land to 5uild sc+ool a. ;eld0 orced 'G to -= defer ta8 and 2= limit it to ot+er +oldings 2!

d/ No deduction for &olunteer 1or* e/ An+ return &alue that the donor might get in return ,4recei"t of "ri&ate benefits5.0 a. /on+#usiness+related0 limits deduction to e8cess of payment o%er any 5enefit recei%ed 5y donor :if pay J#. donation for J-# music cd6 deduct J3#=D lo3 compliance t+oug+ :re@uires documentation= a. Gsyc+ic %alue :e80 >F/ 5ricks=0 no impact 5. Business+related deduction 0 no deduction at all f. !ust ha&e &aluation for all gifts o&er ?* :-.k for untraded stock= a. 2<u5stantiation40 must +a%e appraisal from @ualified appraiser signed a. $f not 2readily %alued40 T#.. t+en description 5. Big pro5lems 3it+ art 5. +a%e signed ackno3ledgement of receipt :or file t+e info 3it+ $E<= g/ )"orting tic*ets to collegial athletics is deductable u" to K7L of face &alue if 1ould ha&e been allo1ed but for charitable deduction <3E7,3. F. $nterest a/ A ;ualified residence allo1s for deduction of home mortgage loan interest <39?,h.,H. a. 2Qualified residence4 a. $ncurred to 5uy6 5uild or impro%e residence :/c@uisition inde5tedness=D J- million limit1-6#:+=:3=:B= 5. or +ome e@uity de5t :+ome used for collateral=6 limited to -..k or "F of residence6 3+ic+e%er is lo3er :+3c= c. 1-6#:+=:2= H /ll ot+er interest not incurred for 5usiness or in%estment purposes is nondeducti5le personal interest. b/ Deduction allo1ed for deduction on loans used to "a+ for higher education u" to >:(?77 <::3 a. G+ased out for 'G 3it+ modified /)$ o%er !.C :6.C if filing Bointly=. c/ 6or cities0 a. $nterest gained from certain state and municipal 5onds are e8empt :-.3= a. $f t+e 5ond is for a traditional go%ernment purposeD AE 5. / facility 5ond :for airport63+arf6 etc= or a %eterans 5ondD /ND c. Kess t+an J#. per resident or J-#. million :3+ic+e%er is lo3er= 5. Cannot use ar#itrarge 5selling #onds to in$est t"e F= a. 2 ransaction t"at would not "a$e ta,en effect #ut for its ta! effects4 d/ Interest gained from =/)/ sa&ings bonds are e$em"t if the bond is used for tuition/e$"enses and the "erson ma*es under 87* W. Business&Gersonal Deductions /ll "i8ed >p a/ Cacation Aomes de"end on the e$tent of "ersonal use &s business use a. /o personal use deduct all e8penses :N&/ for real estate agents6 5ut applies automatically to rental property= #. Permissi$e c. *!cessi$e0 deduct 3+en your not t+ere 2#

d. Purely personal use no deduction under 1262 b/ Pure business deductions are deductable under <39: ,deduct for 4ordinar+ and necessar+ e$"enses "aid or incurredJin carr+ing on an+ trade or business5 a. "uc+ is mi8ed 3it+ personal 3+ic+ is usually not under 1262D depends on c+aracteri7ation :3+at seems primary moti%e= 5. /ll or not+ing e8emptions and only for t+at ta8a5le year c/ Can ta*e deductions from the e$"enses deri&ed from generating income if 4continuous beha&ior5 from an+ source( including hobbies :3:( 3KH a. &o long as moti$ated #y t"e e!pectation of ma,ing future profits3 "o##y losses are includa#le 5e$en if not realistic6 a. /ic,erson $ Commis"0 /d e8ec 3ants to make running farm 3orkD loses lot and 3ants to deduct from 3ages a. ;eld0 it t+e a5o%e rule 5ecause i. Current profit isn?t necessary ii. 'ried to make profita5le :consulted6 spent e%ery 3eeked6 kept good records= iii. <+o3ed proper moti%e 5. Eo5inson factors0 a. %isited regularly6 5. educated +imself6 c. didn?t +a%e rec facilities6 d. amount of occasional profits #. If does not "a$e profit moti$e3 #uying pleasureD can still deduct some a. $ncome from it can offset t+e losses 5. No carryo%er c. If produces profit in B pre$ious = years3 Go$ says its profita#le ;I>d d. But still "as BJ "aircut d/ #m"lo+ees can onl+ ta*e deduction that e$ceed :L of AGI e. Passi&e Acti&it+ Losses ,PAL. deductions onl+ allo1ed to be bas*eted 1ith losses against gains ,not further deductions.1-626 !6, a. 2G/K40 no material participation :regular6 continuous6 and su5stantial= 5. indefinite carry9for3ard !6, f/ There are a certain number of miscellaneous deductions allo1ed ,9E. a. )nly t"ings not alloweda. $nterest 5. 'a8es c. Casualty d. C+arita5le contri5utions e. e3 ot+ers g. Aome 'ffices has general rule against( 1ith man+ e$ce"tions ,2*./= a. If used e!clusi$ely3 on regular #asis3 as principal place of #usiness3 for trade or #usiness0 t+en deduct a. Popo$ $ Commis"0 Grof %iolinst6 no e8ternal office +as dedicated room to practice daily :;eld0 see 5elo3= 5. 2Grincipal place of 5usiness4 'ests 26

a. <oliman 'est0 2 primary considerations i. Eelati%e importance of t+e acti%ities performed -. Essential for Gopo% ii. 'ime spent at eac+ place -. ;ome office %s 25usiness office4 5. Drucker 'est0 2focal point of employment related acti%ites4 5. Does not apply to employees :5ut t+ey may 5e a5le to get it under "isc deduction of 16(= c. Big enforcement pro5lems +. #$"enses incurred from income "roducing unconnected to trade or business is not deductable 2*./ V "oller a. Moller $. 7&- 'G?s managed portfolios full time6 maintained +ome offices. Worked T!. +ours per 3eek. a. ;eld0 $ncome producing acti%ity6 5ut not trade or 5usiness. a. "aBority of t+eir income came from t+e di%idends and interest on t+ere in%estments6 not sale of stock. 5. Could deduct most under 2-26 5ut not office 5. Eo5inson0 could +a%e esta5lis+ed trade or 5usiness 5y trading more or trading for ot+ers c. Difficult to get a trade or 5usiness deduction 3+en purpose is to ser%e t+e o3ner&indi%idual rat+er t+an a t+ird9party. 5. 1"itten $ Commis"- took e8penses going on W+eel of ortune. 'ried to claim gam5ling 3innings. a. ;eld0 '+ese are not gam5ling 3innings or gam5ling e8penses. 5. Eo5inson0 a. "ig+t +a%e gotten off on -62 :trade or 5usiness = since +e 3as a cruci%er5alist :cross3ord pu77le 3riter= 5. <tuck on 2-20 2N +aircut i/ 'ffice decorating e$"enses are "ersonal( not deductable business e$" a. ;enderson %. Commis+0 'G 5uys framed print6 plant6 and parking. a. ;eld0 '+ese are personal :or employer 3ould +a%e pro%ided t+em= and not deducti5le under 1-62. 5. Eo5inson0 $t is possi5le for decorations to 5e deducti5le :Gediatrician e8ample= 2/ Good1ill0 #$"enses incurred in restoring good1ill are not deductable as current( but might be ca"ital a. o get anyt"ing3 must s"ow immediate impact on #usiness to ma,e it 2ordinary4 a. $f 5uilding personal rep6 its not ordinary 5. $f 5uilding 5usiness good3ill6 capitali7ed and reco%er 3it+ final sale :Dunn6 a. $f successful6 can 5e amorti7ed o%er -#yr lifespan:-,(= 5. $f self9generated0 Cost only reco%era5le on final sale. 5. 1elc" $. (el$ering0 /ttempting to do 5usiness as a commissions agents and to solidify +is rep +e made payments to t+e creditors of +is 2(

former company t+at +ad gone 5ankrupt. ;e argued t+at t+ese s+ould 5e deducti5le e8penses under 1-62. a. ;eld0 Not deducti5le under -620 may 5e necessary6 5ut t+ey are not ordinary. 5. 2Kife in all its fullness must supply t+e ans3er to t+at riddle.4 c. Eo5inson 2ordinary4 s+ouldn?t mean t+e normati%e conduct of similarly situated indi%iduals in 5usiness people 3+o succeed are t+ose 3+o do t+ings slig+tly differently. k. Note Cases0 a. Dunn0 'G allo3ed to deduct payments to employees 3+o +ad lent money to former company president 3+o died insol%ent. a. ;eld0 2$t 3as t+e kind of outlay 3+ic+ 3e 5elie%e many corporations 3ould make and +a%e made under similar circumstances.4 Gayment to retain e8isting good3ill. Q. Entertainment E8penses :Business= a. Cost of an+ acti&it+ considered 4entertainment( amusement( or recreation5 can be deducted if it 4directl+ related5 to business. 2(!a-/ a. Gossi5le end9run0 deducta5le if 2item directly preceding or follo3ing a su5stantial and 5onafide discussionassociated 3it+6 t+e acti%e conduct of t+e ta8payer?s trade or 5usiness.4 5. But does not include for good3ill 5. Items 1ith substantial "ersonal consum"tion elements ,meals and entertainment e$"enses. are limited to ?7L deduction :2(!n= c/ If for entertaining customers( must be 4ordinar+ and necessar+5 of 39: a. Dan$ille0 <uper5o3l trip for mi8 of friends and customersD claimed 3ould +elp 5usiness a. ;eld0 Not deducta5le 5ecause no real 5usiness acti%ity 5. Eo5inson0 could +a%e 3orked if a. <u5stantial 5usiness acti%ity 5. Kea%e family +ome c. Ceep good records c. Book says standard isn?t realisticD 2necessary4 is rarely used 5. C"urc"ill Downs $ Commis"0 '+e track6 as part of a C6 pro%ided parties and mealsD tried to deduct full amount 5y a%oiding t+e 2entertainment4 la5el and claiming full 5usiness deduction a. ;eld0 Grimary 5usiness is racing and t+ese e%ents 3ere 2social occasions and promotional parties4. /ttempt 3as to use t+em to inform t+e pu5lic6 not spend more J t+emsel%es c. Entertainment is income for recipient d. !ust be able to substantiate b+ 4ade;uate records or b+ sufficient e&idence5 details of the e&ent 2(!:d= a. 2&u#stantiation4 means 3+o6 3+en6 3+at6 3+y6 +o36 5. E8empt if under J(# e/ )"ouses on tri" cannot be deducted unless a. Is an employee of t"e person claiming t"e deductionD and #. (ad a #onafide reason for #eing on t"e tripD and 2*

c. Additional e!penses would ot"erwise #e deducta#le f/ 6oreign Tra&el is "artiall+ allo1ed for deductions a. No deduction allo3ed outside of Nort+ /merica unless 2reasona5le4 for t+e con%ention to 5e +eld t+ere. 5. Cruises are automatically disallo3ed W. "eal and 'ra%el E8penses :including meals and lodging on t+e trip=0 1-62 a. All about characteri-ation0 a. If c"aracterized as #usiness related3 deducta#le for #usiness and not employee income e$en if personal #enefit too #. If c"aracterized as non+#usiness related3 deducta#le for #usiness #ut included in employeeAs gross income b/ 'utla+s de"end on if it 1ould be deductable if "aid b+ em"lo+ee c/ Practicall+( if sufficient business 2ustification then the ct 1ill allo1 a. 9udolp" $ 7&0 salesmen 3+o sold certain amount got sent to NWC for con%ention /ND sig+tseeingD took 3i%es6 did little 3ork d/ Business lunches are usuall+ characteri-ed as business e$"enses a. /o #rig"t line separating #usiness e!pense from personal e!pense. #. )nly =CJ off meals w"en t"ey are also entertainment c. Eationale0 Code is tipping its +at to t+e /merican 3ay a. 2'+is greases t+e 3+eels of economic production.4 d. W+o is eating +as 5ig impact :3+at t+ey can talk a5out= e. Fre8uency- wee,ly is o,3 daily is not f. Moss $. Commis"0 'G is a partner in a la3 firm. Cost of +is lunc+6 3+ic+ +e ate in a restaurant near t+e court+ouse e%eryday6 so t+at +e and +is partners could +old a 5usiness meeting. a. ;eld0 No Deduction. $t 3asn?t necessary 5ecause t+e firm 3as small enoug+ t+at t+is 3as a con%enience. 5. 1--, is not applica5le 5ecause t+ey are not on 5usiness premises. c. Clearly trade or 5usiness6 :2= clearly 3ork status6 :3= so no3 t+e @uestion is 3+et+er it is sufficiently 5usiness related. e/ Tra&el e$"enses are deductible if meets the Tra&el )tatus Test ,rest or slee". and follo1ing criteria 39:a: a. 9easona#le and necessary tra$eling e!pense #. Incurred w"ile 2away from "ome4 a. ;ome L 3+ere t+e 'G 3orks t+e most&makes t+e most money c. Incurred in pursuit of #usiness 5t"e employers6 d. Commis" $. Flowers0 'G li%es in Packson and accepted a Bo5 in "o5ile. ;e maintained +is residence in Packson and commuted to "o5ile. ;e attempted to deduct t+e cost of tra%eling to "o5ile6 and t+e meals and lodging e8penses incurred 3+ile t+ere. a. ;eld0 Non9deducti5le. '+ere 3as no 5usiness :employer= reason for li%ing in Packson6 t+is is a commuting e8pense. f/ !o&ing e$"enses are deductable( but mutuall+ e$clusi&e 1ith tra&el e$"enses :3E a. "inimum residency of #* 3eeks at ne3 place 2,

X. Commuting E8penses a. Again( characteri-ation0 a. In"erently personalK /o deduction #. Certain e!penses personalK Deduct t"e rest c. *!plicitly allocatedK Allocate e$eryt"ing under t"e allocation d. Primarily #usinessK Fully deducta#le 5. Commuting e$"enses are non-deductable0 a. '+ese e8penses 3+ile cause 5y 5usiness are almost uni%ersal c. (antzis $. Commissioner0 a. acts0 'G is a la3 student 3it+ a summer Bo5 in NWC6 s+ares a +ome 3it+ +er +us5and in Boston. <+e attempts to deduct as a tra%el e8pense H +er e8penses in NWC. 5. ;eld0 No deduction. Ka3 sc+ool is not a Bo56 so no reason to +a%e a trade or 5usiness in Boston. //. Kegal E8penses0 a/ Deductible if in the "ure business conte$t under <39:/ 5. If it is not "ure business( the fee ma+ be deductible under <:3:. a. estsa. Gro8imate relations+ip to profit oriented acti%ity 5. Arigin of t+e claim0 c. Groduction or collection of income0 ' must s+o3 more t+an a remote contri5ution to conser%ation of income. d. "anagement of property +eld for production of income0 c/ Di&orcing legal fees 1ill most li*el+ not be included no matter 1hat a. Gilmore0 'G di%orce 3& serious legal fees H many of 3+ic+ result from defending a claim against o3ners+ip in a family 5usiness. a. ;eld0 origin of t+e claim test says did not arise from t+e 5usiness6 5ut as a result of t+e marriage H deduction denied. d/ Criminal defense charges ma+ be a""lied if con&icted( not if ac;uitted a. Accardo0 Not in t+e trade of 5usiness of racketeering 5ecause +e 3as ac@uitted. Deduction denied under 1-62. 5. Guzzino0 Con%icted of racketeering and 3as t+us a5le to take deduction under 1-62. BB. Deductions from Cost of Earning $ncome a/ T1o t+"es of deductions0 ca"ital e$"enses and current e$"enses a. Current- >sually continuing asset e8penses and minor e8penses a. No current deduction for farmland to gro3 cropsD must identify 3+en 3ill 5e sold a. Ee% Euling*#9*20 farmland 5oug+t in?*2 for immediate payment and su5se@uent payments for Q years. 5. Capital- costs incurred in ac@uiring property 3+ose useful life is 5eyond - ta8a5le year :Eeg. -.2630 tangi5le&intangi5le6 direct&in= a. Farious types0 a. )enerally6 ne3 assets

3.

CC.

5. Cost of ac@uisition or construction of 5uilding6 mac+inery6 furniture6 etc. +a%ing useful life 5eyond ta8a5le year c. Copyrig+ts d. defending and perfecting title to property :including legal fees= e. arc+itect ser%ices f. Commission paid in purc+asing securities g. reorgani7ation of a corporation +. Cost of good3ill 5. *ncyclopedia Britannica0 'G&Co. contracts 3ork out for t+e completion of an entire 5ook and t+en attempts to take an immediate deduction under 1-62. a. ;eld0 $f in9+ouse it 3ould 5e current 5ecause impossi5le to segment out6 5ut t+is 3ill 5e performed o%er period of years. :first part later c+anged 5y CAN= 5. Will cause more ppl to do t+ings in9+ouse c. "ust t+en determine if can depreciate b/ '"tions to deduct business e$"enses0 a. 7seful life less t"an one year0 $mmediate deduction a. E8ample0 <alary for 3orkers :usually= 5. 7seful life #eyond one year0 Capitali7e 2636 and depreciate under 1-6(. :Grorated= a. E8ample0 actories :T-yr and 3asting=. c. 7seful life #eyond one year3 #ut non+wasting asset0 Capitali7e under 1263&263/6 5ut no cost reco%ery until final sale. a. E80 land :T-yr and not 3asting= c/ Costs of "roducing self-made assets are ca"itali-ed ,:9HA. a. E8ceptions0 :Eegulations= a. "arketing and ad%ertising costs 5. /dmin and general e8penses not relating to sale or production d/ Ca"ital assets need not be tangible or distinct a. I/D)PC)0 'G&Co. incurred legal e8penses in negotiating a merger. a. ;eld0 Capital e8pense. $t en+anced o%erall 5usiness operation. 2Ardinary and Necessary40 a/ No deduction for business e$"enses that 1ould not ordinaril+ occur a. Gilliam0 'G took drugs prior to getting on a planeD 3ent 5onkersD +ad to defend self criminally and tried to take current deduction. a. ;eld0 deduction is -= not ordinary and 2= not furt+ering trade&5usinessD it 3as only 5usiness tra%el a. '+e need to take drugs isn?t 5usiness6 its personal. b/ =nreasonabl+ high salaries 1ill not meet deduction standards a. actors0 a. Cinds of ser%ices performed H significant and important. 5. Compared 3it+ ot+er employees and across t+e industry c. W+at is t+e state of t+e employer?s profita5ilityI 3-

9 9 9 9 9 DD.

d. W+at is t+e pattern of o3ners+ipI e. W+at is t+e employer?s di%idend policyI f. ;istory of comp for t+e indi%idual in @uestionI 5. $ntent0 to distinguis+ 5et3een di%idend dis5ursement and salary :esp impt 3it+ close corps6 gifts= c. >sually deducted 5y employer :1-62:a=:-== d. Di%idend H included 5y s+are+older :16-= and not deducted 5y t+e employer. Sub C 9 Transferor 9 Transferee )alar+ 9 :Employer= 9 :Employee= Deduct $nclude Di&idend 9 :Corp= No 9 :<;= $nclude deduction :dou5le ta8ation= Gift 9 :Donor= No 9 :Donee= E8clude H deduction -.2 6ringe Benefit 9 :Employer -62a= 9 No inclusion :-32 Deduction et al.=

Eepair and "aintenance E8penses0 a/ No bright line bet1een the t1o b/ Incidental re"airs are current e$"enses a. Incidental0 smallD keep t+e asset maintained6 not for impro%ement 5. 9epair 0 maintain status @uo a. actors0 une8pectedD natural causesD no ne3 usesD continuation of old useD periodicD c+eap c/ %e"lacement must be ca"itali-ed :9H a. actors0 $ncrease useful lifeD cost of impro%ement is +ig+ compared to asset?s %alueD increase in assets %alueD permanent en+ancementD adaptation to ne3&different useD repair so 5ig as to o%er+aulD aging&anticipatedD part of maBor plan d/ #$"enses can be bifurcated ,"art current( "art ca"ital.( but rare and not it both actions are "erformed simultaneousl+ a. Ee%. Euling ,!93*0 a. Capital cost of 5uilding t+e ground 3ater treatment facitlities 5. Current soil remediation e8penditures and ground 3ater treatment e8penditures a. Did not constitute permanent impro%ements 3it+in t+e meaning of 1263. c. No reco%ery till sold 5. Northwest0 'G&Co. initiati%e to refur5is+ t+eir 5uilding and remo%e as5estos. 'G attempts to take a current deduction. a. ;eld0 No current deduction under 1-62 for any part of t+e initiati%e. No 5ifurcate cause +e performed t+e actions toget+er 5. Apportunity for <trategy0

32

a. Do c+anges seriatim capital e8penses first and t+en non9capital e8penses. :e%en if not efficient= e/ Midland Empire Packing Co.0 a. acts0 'G stores meat in t+e 5asement of its 5uilding. Ail refinery is put on adBacent property6 5egins to seep t+roug+ t+e 3alls of t+e 5asement. ;ealt+ inspectors told t+e company it 3ould +a%e to put in a concrete liner or stop using t+e 5asement. '+e company put in t+e concrete liner and soug+t a current deduction6 calling t+e liner a repair. 5. ;eld0 '+e e8pense is deducti5le under 1-62. a. '+is 3as a response to a sudden unforeseea#le c"ange. $t pro%ided no added&ne3 use for t+e 5usiness. c. Note0 'G mig+t +a%e 5een a5le to take a casualty loss deduction under 1-6#:a=. '+e deduction 3ould e@ual t+e "F of t+e cost of t+e repair. ;is 5asis in t+e property 3ould +a%e 5een reduced 5y t+e deduction. '+e cost of t+e repair 3ould +a%e 5een added 5ack to +is 5asis. /s a result6 +is 5asis in t+ eproperty 3ould 5e t+e same as immediately 5efore t+e loss. f/ Mt. Morris Drive-In0 a. acts0 'G 5uilt a dri%e in t+eatre. Because t+e land 3as cleared adBacent property 3as 5eing flooded 5y e8cess drainage. >nder t+reat of suit t+e company added a drainage system and attempted to deduct t+e cost as a repair under 1-62. a. ;eld0 Current deduction denied. 5. "is was a foreseea#le e!pense. :E8pected %. >ne8pected= g. actors to consider in placing an item on t+e continuum 5et3een a capital cost and a current 5usiness e8pense0 EE.$llegal or unet+ical pro%isions0 a/ Generall+( "rofitable illegal acti&it+ gets deductions li*e e&er+one else a. EQCEG'0 a. no deduction for illegal 5ri5es -62c 5. no deduction for fines and penalties f c. no deduction for antitrust pro%isions6 alt+oug+ damages are generally deducti5le. g d. drug related items 2*.E 5. &ulli$an $. Commis"0 Bookmaker allo3ed to take deductions for t+e cost of maintaining t+e 5usiness premises. b/ 'ccasionall+ I%) 1ill disallo1 others under 4"ublic "olic+ e$ce"tion5 a. Blackman:5urned clot+es6 set +ouse on fire6 tried to deduct= c/ No additional "enalt+ in the guise of a bar to deductibilit+ a. &tep"ens $ Commis" d/ While illegall+ deri&ed income is o1ed for ta$es( sometimes e$ce"tions a. Gil#ert $. Commis"0 ) pled guilty of illegally 3it+dra3ing funds6 intended to repay. Wit+dre3 t+e 5usiness and used it t+at 3ay. i. ;eld0 >ni@ue circumstancesD illegal 5ut not ta8a5le income. . Kimits on 'a8 <+elters :trying to do deferral6 con%ersion6 or ar5itrarge= a/ !ust be for a legit business "ur"ose of more than ta$ a&oidance 33

5.

c/ d/

e.

a. ?netsc" $ 7&0 C managed a scam t+at +ad no ot+er purpose ot+er con%erting ta8a5le incomeD no riskD 3asn?t allo3ed 5. Goldstein $ Commis"0 old 3oman relied on ad%ice of son to structure c. No3 'E E/ imposes penalty on people intentionally e8aggerating TP must materiall+ "artici"ate in the business acti&it+ in 1hich the losses stemmed to use against income 1!6, a. Defined0 1!6, H 2regular6 continuous6 and su5stantial.4 a. "ore t+an #.. +ours per year 5. "ore t+an -.. +ours per year and more t+an any ot+er person c. 2if facts and circumstances s+o3 material participation.4 4Passi&e Acti&it+ Losses5 can be used as an offset against gains from similar "assi&e acti&it+ losses and ha&e an indefinite carr+-for1ard/ TP cannot ta*e deduction for losses on an in&estment that e$ceed her amount at ris* in that in&estment/ <89? a. Definition0 2amount at risk40 cas+ in%ested plus loans for 3+ic+ t+e 'G is personally lia5le. 5. '+is controls le%eraging. c. *state of Fran,lin- E 2sold4 inn to 6 only real J c+anging +ands 3as a (#k 2pre9paid4 interest. At+er3ise t+e property 3as staying 3it+ E. a. ;eld0 cas+ 3ay 5elo3 "F6 no risk :could 3alk a3ay=. u"on sale/dis"osition the TP must account for all gain e;ual to or less than the amount deducted for de"reciation as ordinar+ income1-2!# a. 2Eecapture of )ain4 a. '+is limits con%ersion :uses recomputed 5asis= 5. Eecapture0 Congress enacted anot+er pro%ision :-23-=D capital asset yesM gain yearD property used in trade or 5usiness 3ill 5e used for :see page #!(D 1-2!#=D 3+ere neccisary6 to make ta8payer correctly account6 recapture to make it ordinary :C;ECC ';$<=

Getting Bac* !one+

C. Eeco%ery of Capital a/ When is cash that 1as originall+ "ut into in&estment 4reco&ered5M a. $mpact 3ould 5e anticipated or deferred ta8 payments b/ T1o "rimar+ a""roaches a. Eeco%ery of capital last :current approac+= 5. Eeco%ery of capital first6 income is deferred c. ;ypo0 'G +as -... s+ares of stock 3it+ a 5asis of #C. ;e e8pects t+at an *N di%idend or !.. 3ill 5e paid annually. ;e +olds t+e stock for -# years and t+en sells it for J#6-... a. Eeco%ery of capital last6 includa5le income anticipated.

3!

a. /pplication0 'a8 all of t+e di%idend payments :6C=. >pon t+e sale of t+e stocks for #.-C only -.. 3ill 5e ta8a5le. 5. Eationale0 Consistent 3it+ economic reality. $t cost t+e 'G not+ing to earn t+at money t+at year so it s+ould 5e ta8ed fully. 5. Eeco%ery of capital first6 includa5le income deferred. a. /pplication0 Do not ta8 any of t+e !.. di%idend payments until t+e 'G +as reco%ered t+e full #C. '+e remaining di%idend payments and t+e full #.-C 3ill 5e includa5le upon t+e sale. 5. Benefits0 Eecogni7es t+e risky nature of stocks dont ta8 until sure t+at t+e 'G +as actually profited from t+e in%estment. c. Quasi93rd met+od0 discount eac+ e8pected di%idend to present %alue at t+e *N rate. W+ate%er is left is credited against amount reali7ed. a. Gro5lem0 Ee@uires predicting t+e di%idend rate in ad%ance. D. Eeco%ery of Koss :$ndi%iduals only= a/ Cannot ha&e been reimbursed b+ insurance 5. %eco&er+ of losses is not ta$ed :ne%er stated e8plicitly= a. /pplies to income ta8 return as 3ell c. If losses are not reco&erable( deductable for an+ loss in an+ +ear 1-6# d. Clar, $. Commis"0 'a8 la3yer committed an error filing t+eir ta8es 3+ic+ resulted in a 2.C o%erpayment. '+e error could not 5e fi8ed 5ecause t+e <AK on filing amended returns +ad run6 so t+e la3yer paid t+e couple 2.C. a. ;olding0 '+is is not income. '+e la3yer did not make t+e couple 5etter off6 +e simply made t+em 3+ole. E. Eecognition of KossesD a/ 6or deductions to be ta*en for loss( must be closed and com"leted( fi$ed b+ an identifiable e&ent/ 39?,a. a. Ee%enue Euling *!9-!# a. 'G&/irline +ad route rig+ts t+at 5ecame 3ort+less %ia regulation. 'G attempted to take a deduction for t+e loss under 1-6#:a=. 5. ;eld0 Not deducti5leD not a closed and completed transaction marked 5y an identifia5le e%ent. 5. <trategic Be+a%ior0 "ig+t +a%e gotten deduction if s3apped routes

Accounting for Gain

. /nnual /ccounting and $ts Conse@uences0 a. #ach +ear is an insular categor+ for income ta$ :!!-=

3#

a. $ntent0 distortions result due segmenting economic acti%ity into a calendar year6 5ut go% needs to collect re%enue at a regularly. 5. Burnet $. &anford L Broo,s Co0 /nnual not 'ransactional /ccounting a. acts0 Company recei%ed an a3ard as a result of a 5reac+ of contract suit in -,2.. '+e contract gi%ing rise to t+e suit +ad resulted in 5usiness losses for t+e company in -,-36 -,-#6 and -,-6. '+e company did not 3ant to include t+is a3ard as income in its -,2. ta8 return6 5ecause of increased marginal rates. '+e company argued t+at t+e damage a3ard Bust made t+em 3+ole. 5. ;eld0 '+e court refused to take a transactional approac+. b/ TP can still choose to use accrual method c. Losses incurred in business can be carried bac* : +ears and for1ard :7 +ears 1-(2 :mitigates +ars+ effect of annual accounting= a. ;olds until t+e 5usiness +as -= reco%ered t+e 5usiness losses or 2= t+e 5usiness goes 5ankrupt or 3= 2. years is reac+ed 5. At+er parts0 a. '+e first loss must 5e completely a5sor5ed 5efore any interim losses can 5e a5sor5ed. 1-(2525 5. 'G can 3ai%e t+e carry95ackD once 3ai%ed you cannot e%er carry95ack. 1-(2:5=:3= c. Anly 5usiness losses can go to3ards net operating losses. :$N<'E/D A deductions = 1-(2:d= a. <o no interest6 di%idends6 capital gains d. Does not +a%e to 5e same transaction c. "ust 5e taken in current year or t+ey are completely lost. a. Golicy Eeasons0 :-= e@ual treatment of s+are+olders of fluctuating companiesD :2= stimulates enterprise&in%estment ). 2Claim of Eig+t4 and 2'a8 Benefit4 a/ 4Claim of %ight5 ,com"lete right to control. triggers ta$ liabilit+ a. /ort" American )il Consolidated $. Burnet0 a. acts0 Angoing dispute since -,-( o%er rig+t of oilfieldsD also ga%e income from it from -,-6D concluded in -,22. 'G 3anted to pay ta8 in t+e year it 3as earned or in t+e year t+e litigation 3as settled6 5ecause t+e ta8 3as +ig+est in -,-(. 5. ;eld0 $ncome 3as includa5le in -,-( 3+en t+e 'G possessed t+em under a claim of rig+t. a. '+e rig+t to claim is t+e fundamental difference 5. Eationale0 :-= practicality&administrati5ility H actual receipt of funds is easier to determine 3+en dispute is finally o%er. c. Gotential pro5lem0 difficult 3+en a person includes income under a claim of rig+t6 5ut is later Budged not to +a%e 5een entitled. b/ If an item 1as mista*enl+ included because of claim of right doctrine a. $f its o%er 3k 5. 'a8 for t+e later year 3ill 5e lesser of a. ta8 in later year minus t+is deduction or 36

5. ta8 in t+e later year 3it+ a ta8 credit in t+e amount 5y 3+ic+ +is earlier ta8 3as increased 5y t+e inclusion of t+e item c. De%elopment0 a. E8 :old rule=0 >nited <tates %. Ke3is0 )ot too 5ig a 5onusD 'G 3ants to amend H matc+ up t+e t3o e%ents. a. ;eld0 Cant amend earlier filing 5ecause t+e full amount 3as ta8a5le 3+en paid under t+e claim of rig+t doctrine. /ccording to t+e court6 t+e 'G 3as entitled to a current deduction. 5. Congressional Eeaction0 "itigate t+e +ars+ effect 3& 1-3!-. c/ Ta$ Benefit Doctrine ,deduct in +r3( reclaim in +r:.0 if "roduced ta$ sa&ings no1( subse;uent reco&er+ 1ill include it in TP income a. /llo3ed to e8clude any3ay if0 a. Gre%ious deduction did not result in a reduction of t+e 'G?s ta8 lia5ility for any yearD and 5. /ll loss carryo%ers resulting from t+e deduction +a%e e8pired 3it+out 5eing used. a. Note0 $t may take a long time to determine. ;. Constructi%e Eeceipt and Eelated Doctrines a/ I%) can hold "eo"le accountable using constructi&e recei"t or cash a. Constructi$e 9eceipt :/ccrual=0 all rig+ts necessary to assert o3ners+ip e8ist :credited6 set apart for +im6 made a%aila5le= Eeg-.!#a. Ceeps ppl from %oluntarily recei%ing in t+at year 5. "ere promises to pay are not constructi%e receipt Eeg. -.!#-92 a. "ay include trust amounts if don?t +a%e full control i. Minor $ 7.&.0 Doctors set up trust6 for same group t+at can 5e accessed at later date6 and can 5e forfeited if act in certain 3ay ii. ;eld0 Not constructi%e receipt since t+ey mig+t lose it if t+ey act +onora5ly as trustees c. Amend $ Commis"- armer pro%ides crop in /ug6 no rig+t to payment until Pan. Commis+0 year in 3+ic+ ser%ices rendered. a. ;eld0 Kacked accrual rig+ts. 5. Eeasoning0 /rms lengt+6 tradition 5. Cas" :undenia5le control=0 most 'Gs use t+is any3ay a. Pulsifer $ Commis"0 J 3on at track set aside in 5ank for kids a. ;eld0 ta8a5le in t+e year t+at it 3as 3on 5ecause of economic 5enefit. 5. Eeasoning0 '+e 5ank account is a cas+ e@ui%alent. b/ If not cleanl+ under the abo&e rules( Ct considers the follo1ing0 a. Can t+at cas+ e@ui%alent :promise= 5e sold for somet+ing close to time9%alue amountI 5. Gromise to pay t+at can 5e negotiated after t+e factI c. Note&instrument is taken as payment 5y t+e ta8payer. c. Absence of a Hrd "art+ inter&ention ,transferring to intermediar+. seems to bar economic benefit idea ,so is e$cluded. :)lmstead6 3(

d/ #&en if donFt negotiate at time( election not to do so doesnFt hold TP liable a. 5Minor $ 7.&.6

When Disaster )tri*es

e/ Casualt+ losses are allo1ed for both "ersonal and businessN<39?,c.,H.O a. 2Losses arising from fire3 storm3 s"ipwrec,3 or ot"er casualty3 or from t"eft4 1-6#:c=:3= a. $dentifia5le e%ent t+at is sudden6 une8pected6 and of unusual natureD :a casualty= a. taking its c+aracteristics from 3+at is present in fire6 storm6 or s+ip3reckD 5. <udden6 not slo3 erosion :termites6 dryrot= c. Not 5y pets&negligence&neutrotic fits of cats a. Dyer $ Commis"0 %ase6 neurotic cat6 3ort+ -.. #. *!traordinary and non+recurring a. '+ro3ing ring do3n sink6 Be3elery disintergrating in acid to clean it6 etc. does not 3ork 5. E8pert opinion 3ould 5e +uge in determining :not su5Becti%e= c. Must e!ceed F;CC loss 5losses from same e$ent are aggregated6 a. $ntends to screen out a%erage&incidentals 5. Koss is measured only to e8tent of 5asis c. E8ception0 5usiness property is allo3ed full deduction d. Must #e less t"an ;C.;J of AGI e. Must not "a$e #een eligi#le for reim#ursal 5insurance6 a. E%en if don?t file claim : ed is insurer of last resort= 5. No deduction for insurance premiums c. Gro5lem0 if don?t take6 noJD if do6 increase rates f. Must #e directly related to casualty a. $mmediate6 p+ysical6 and impact damages :no collateral6 no economic damages= 5. C+amales % Commis+0 +ouse ne8t to A.P.6 murder 5efore t+e +ouse closedD claimed deduction due to media damage6 5ut no p+ysical damage to property c. ;eld0 a. Not permanent damage 5. must +a%e +appened to t+e property c. "arket %alue suffereage isn?t enoug+ g. Cannot #e result of gross negligence or rec,less a. Blac,man $. Commis"0 set clot+es on fire6 5urns do3n +ouse a. ;eld0 3ould 5e against pu5lic policyD pro5a5ly allo3ed deduction for ordinary negligence 5. $ssue0 still effects a5ility to pay and already 5eing punis+ed t+roug+ criminal system c. Eegular negligence mig+t 5e ok a. accident resulting from negligent $. /lternati%e "inimum 'a8 3*

a/ An alternati&e minimum ta$ ensures that e&er+ indi&idual and cor"oration is ta$ed a certain minimum le&el ,1hiche&er is higher. a. For indi$iduals0 26 or 2*N #. For Corporations- BCJ c. Process- :/"'$9allo3ed e8emptions= Q rate b/ A!T disallo1s most deductions and "ersonal e$em"tions a. E8ceptions0 medical c/ A!T a""lies regardless of income a. ?lassen $ Commis"0 many kids6 claimed not intent #. Prosman $ Commis" P. <ale of Easements a/ An+ "roceed is offset b+ full basis of "ro"ert+ a. <o no ta8 unless t+at amount e8ceeds +is 5asis for t+e entire property. a. Groperty 5asis is t+en reduced accordingly. 5. Eationale0 a. "akes sense 3& condemnation and easement is perpetual. 5. '+e logic is undermined 3+en t+e easement is for a period of years6 3+ere it seems t+at t+e a3ard s+ould 5e treated as income. c. impossi5ility of allocating 5asis accurately to t+e easement alone. c. E80 Inaja Land Co. $. Commissioner0 6-C 5asis is reduced 5y t+e #.C a3ard. C. GEE<AN/K DED>C'$AN< and EQE"G'$AN< :5elo3 line= a/ Personal deductions are subtracted from Gross Income b+ itemi-ed list a/ Cannot go belo1 K7L of gross income ,after :737. a. Eeduced 5y 3N once income is a5o%e roug+ly -!2k :16*= 5. '+is is adBusted annually 5. /llo3s in%erted su5sidy0 ric+er get more deductions t+roug+ c+arity c. Eationale0 a. $n%oluntary and une8pected outlays t+at significantly effect a5ility to pay :i.e. medical e8penses and casualty losses= 5. $ncenti%e&su5sidies for good causes :i.e. c+arita5le contri5ution6 +ome mortgage= 5. Indi&iduals can deduct nonbusiness bad debt as short-term ca"ital loss ,u" to the basis. in the +ear it becomes com"letel+ 1orthless :1-66d= c/ Can o"t to ta*e standard deduction instead a. Eationale0 3& standard deduction ensures t+at no ta8 3ill 5e imposed on income 5elo3 a certain le%el 5. Germitted for eac+ 'G and @ualified dependent in +ouse+old 3,

d. #&er+one gets a deduction of amounts of >H(:77 "er "erson ,Ginflation. on state income ta$ and "ro"ert+ :not sales6 e8cise6 or ed$nc= a. "arried people0 Boint get 26 separately get - for 'GM- four spouse if not someone elses dependent 5. - 2deduction4 per dependent0 a. Qualifying c+ild0 i. / c+ild6 c+ild?s decendent6 or si5ling of 'GD 3+o ii. $s less t+an -,6 or if a student6 less t+an 2! iii. ;as not pro%ided more t+an +alf of +is&+er o3n supportD i%. ;as t+e same principal place of a5ode as 'G for more t+an S of t+e ta8a5le year 5. Qualifying relati%e a. C+ild or c+ilds decendent6 parent or parent?s ancestor6 si5ling6 aunt6 uncle6 cousin6 or in9la36 or 2+as t+e same principal place of a5ode as t+e 'G and is a mem5er of t+e 'Gs +ouse+old4 5. )$ is less t+an t+e e8emption amount c. Eecei%es more t+an +alf of +is&+er support from t+e 'GD and d. $s not a @ualifying c+ild of 'G

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