Federal Income Tax

I. Introduction The rule is whatever Congress says it is. - If theres a tax issue, there has to be an answer, and Congress has to draft the answer. - The answer emanates from the code. The answer is prescribed by Congress in the statute The answer is whatever Congress wants the answer to be They are controlled by nothing The code is the ultimate authority - We have to convince the forum that our interpretation wins. - The ultimate argument has to tie the issue back to the statute Right after the statute is the regulations. - The regs explain what the statute means Legislative Process - Code: codified body of tax law - Congress amends the code sometimes by tax legislation (only congress can make the law) - Starts as a bill - Under constitution all tax bills begin in the house Begins in the ways and means committee Ways and means committee holds hearings (public) Then they go to executive session - Chair of W and M committee is telling staff lawyers what they want in broad, general terms - Lawyers go into a drafting session, they come up with the actual language, and then it goes back to W and M committee for approval Then it goes to the House for a vote (yes or no no amendments) Then it goes to the Senate - During the drafting session the Senate could agree with the House, or amend, or completely change It then goes to the floor (if the two bills are the same, it goes to the President) If theyre not the same, goes to a conference committee (members of the W and M committee and Senate conference committee) It then goes back to Senate and House and once agreed upon it goes to President for signature and becomes law - Immediately after passage no decisional precedent but we do have tons of legislative history (joint committee report) - Once statute enacted there are a group of lawyers that have a job of

interpreting it and have the duty of writing the regulations. Regulations are presumed to be correct - IRS promulgates from time to time revenue rulings IRS states some facts, the tax law, and their conclusion. Revenue rulings are given deference by the courts - But, if the T/P has a better argument, it will throw out the ruling..whereas, regulations cannot be overlooked. Judicial Process - Tax system is a self-assessment system. - Individual/business file taxes every year if you owe pay, if refund due get a check - 3 years is the statute of limitations for IRS to challenge what youve returned, six years if drastically understated, unlimited if didnt file - Audit: Correspondence = letter Office = Have to go into IRS office Field = Agent goes to T/Ps business - Once audit begins, it could end up in court Agent comes up with a report - T/P can agree, but if does not give up, agent has district office review - Dist office will then issue a 30 day letter to the T/P - T/P can give up and pay, or can file a written protest - Protest goes before appellate conferee (this person has authority to settle the claim) IRS would rather be right they do not settle easily - If no settlement, then IRS issues a 90 day letter styled as a statutory notice of deficiency Reason is the IRS wants to seize and cant do so right away because of constitutional restraints - The 90 day letter allows T/P to pay it or fight it. - T/P can file in the tax court Judge decides exclusively tax cases T/P can litigate w/out first paying the tax (this is why tax ct has become popular, downside is judges deal strictly with tax cases) - If T/P loses he has to pay liability and fair amt of interst - No jury in the tax ct judge only - Loser has right to appeal to court of appeals in the appropriate circuit. Loser at ct of appeals level can file for cert at the Sup Ct. - If T/p gets 30 day letter and doesnt want to protest through appellate conferee can request the 90 day letter or when you get the 90 day letter and dont file in the tax ct have to pay the tax.

 T/P can then argue paid and IRS now wrongly has the T/Ps money and T/P can bring suit/claim for refund from the IRS Usually IRS will say claim denied. T/P then has up to two years to file suit in District Ct. - T/P entitled to a jury in the District Ct - District Ct. judges hear all kinds of Fed claims and are not specialized in only tax law. Why do we have an income tax? - Its a revenue raising vehicle We need a Fed govt, and they need money to operate the only way to raise that revenue is through tax Our federal income tax system is referred to as the most fair. In 1913 Congress decides base of tax system should be income - Three cornerstones to choosing a tax system: 1. Equity fair 2. Efficiency economic efficiency enact an income tax that has the least effect on economic motice 3. Simplicity must be understandable Example: Govt needs $21K this year. A = $100K of income B = $100K of income - How should the tax system operate? - Govt should take $10,500 from each of them known as horizontal equity - But what counts as income, whats equally situated? Example: A = $100K B = $200K A pays $7K B pays $14K - This is an example of vertical equity they pay proportionally Example: A pays $6K B pays $15K - This is an example of progressive equity We have a progressive tax system - The more you make, the more you pay. - The more layers of income you have, the more proportionally you pay

The internal revenue code is not just for revenue purposes, it has also become an incentive device. - Example: A = $100K B = $100K

$75K salary $25K interest income (paid to MA) A gets taxed on interest income and B does not because the state doesnt tax on interest income paid to municipals. - Why does Congress do this? To provide people an incentive to buy municipal bonds. The government also spends money by giving tax breaks (as per Surry). - Example: A = $100K B = $100K $75K salary $75K salary $25K interest income $25K interest income $(25K) renter $(25K) homeowner B gets a deduction for $25K and A does not - Surry says that if the govt should be taxing and theyre not its the normative equivalent of collecting the tax and then writing a check to the individuals doing what we want them to - All Surry is saying, is that these tax breaks should be quantified so the public knows also so T/Ps can look at the tax expenditure budget and really look at how much is being spent on each program - Congress spending money and tax breaks are the same! Old Colony Trust Company v. Commissioner (p. 68) - Facts: William Wood is president of American Woolen Co. In 1913 Congress enacts an income tax. Wood sees a problem coming since its a 70% tax. Wood goes to his employer and employer passes a resolution to pay all income taxes on his salary so his take home pay remained the same. - Issue: Whether the pymt of income tax paid by the employer should constitute additional income? - Holding: Yes, it is income Its a gain derived from the employees labor. - From employers view they are voluntarily increasing their expenses on their income statement, and yet they say sure in order to keep Wood. - Wood argues he never got the cash and the co paid the money directly to the govt so he had no right to the money Wood says its unconstitutional to tax him on $ he never received, nor had any right to - Taft says it is income = the payment of the tax by the employer was a gain derived by the employee from his labor The tax is Woods obligation, thus when the employer paid it, it was satisfying Woods obligation The income tax is not a tax on money, it taxes income, earnings, [increase in wealth] therefore since Wood did not have to pay the taxes, he derived an increase in wealth.

$75K salary $25K interest income

 Form of the receipt is irrelevant taxing accretion to wealth * Note: Constructive receipt didnt actually receive it, but constructively received it, so going to treat as if actually received it. - Now its substance over form if the effect of the transaction is to make you richer, were going to tax you. - Wood also attempts to argue that would result in a tax on a tax. $978K salary + $681K taxes paid = $1.6M income So T/P still owes $420K employer sends check for $420K Now his income will be $2.1M so owes an additional tax of $300K, and so on Woods attorney argued that if taxes paid are income that would lead to payments, increase in tax, payments, etc. - In theory taxes would never be paid. - Woods is arguing that Congress could never have intended this Justice Taft looked to how Congress would have intended to tax this factual scenario they would have handled it in this manner because otherwise it would be unfair A says needs $50K a year and taxes are $14K services are worth $64K. Bs employer pays him $64K and the taxes the employee will pay is $21K, so goes home with $43K. - In this scenario A would owe more tax because really made $64K and thats only fair If Justice Taft went the other way, B would say this isnt fair bc hes being taxed more only bc the difference in the way he and A are compensated. B would then have his employer renegotiate his employment contract to pay the taxes like As employer. - There would be a sharp division between how the employment contract would be structured - Also, ees for B cos would leave and go to work for A cos This is the worst possible case if its not economically neutral then its doing positive harm to our economic system Hypo: - Mother pays your law school tuition. Is it income? Yes its an accretion to wealth mother is paying an obligation owed by the child. No could argue its not income bc the pymt made by the mother was out of kindness, not as a pymt for services. Similar to Old Colony its a benefit of an obligation being pd by a 3P - Doesnt matter what the form was theres an economic benefit. 61 Gross Income means income including(a long list of

items)compensation for services. - If something of economic benefit happens to you, must look at 61 to see if Congress meant to tax it. - If not compensation for services, could still be income 1. Have to find accretion to wealth 2. Then have to categorize it under 61 (ex: gifts not income) II. Compensation for Services and Indirect Payments A. NonCash Transactions 1. Revenue Ruling 79-24 (p. 87) - Facts: (1) Lawyer helps housepainter. Both are members of a barter club. Housepainter painted lawyers personal residence in return for lawyers services. (2) Individual owned apartment building, received work of art in return for the rent free use of apartment for six months. - Holding: All four must report as income. - Regulation 1.61-2(d)(1) If services are paid for other than in money, the fair market value of the property or services taken in pymt must be included in income. This is consistent with Old Colony because its an accretion to wealth We see economic benefit, it doesnt matter than we didnt see money - Is this fair? Yes, because otherwise we would return to a barter system and our economic tax system would fail. - What about the fact that economically theyre all breaking even? Thats now how we measure income for income tax purposes. 61 defines income - Administrative issues with the revenue ruling? How do we determine the fair market value. According to revenue ruling we presume the services exchanged are of the same value, but if not, you are taxed on the fair market value of the goods/services received. * We dont tax cash we tax economic benefit. 2. Rooney v. Commissioner (p. 88) - Facts: Accountants have clients for whom they provide accounting

services. Accountants bill the clients. The clients had no money. Accountants threatened to hire a lawyer. Not successful. Bills $1000K to restaurant, restaurant in return gives 50 meals at $20 a meal. Same this with gas station in return for four $250 tires. Same thing with pharmacy. (This is called cross-accounting). Firm reports $3000K in gross receipts for the goods received, but then says they made a mistake bc some of the goods were overpriced and some services were not satisfactory, so they file an amended return. - Issue: The issue is not whether there is income. The question is how much? Whether the pship in computing its income may discount the retail prices of the good/services by considering the pships subjective determination of value? Commissioner argues the amount is the fair market value Whether voluntary or involuntary, you performed services for which in return you received goods/services, which is income and regulation says fair market value. The accountants dont agree the fair market value is what goods/services were worth to them - The court cites Koons v. US: Facts: ER agrees to pay EEs relocation expenses for the EE. Issue: Was it income? Holding: Yes, the ER in consideration of services is paying the EEs personal expense. - Koons argues he could have moved himself for a much cheaper cost, and wanted to be taxed on the cheaper amount. - The court rejects Koons argument. FMV is not based on the subjective measure of value. - Because the price would vary from person to person = it wouldnt be fair bc people would be paying different amts of inc tax The use of any such subjective measure of value . . . would make the administration of the tax laws in this area depend upon a knowledge by the Commissioner of the state of mind of the individual T/P. - Its to individualized! - Holding: The tax system is pushing for an objective fair market value. Rule: Fair market value = objective based on the market with which you dealt. - Hypo: Accountant paid $1000 (in services) for tires, but found some tires for $750. This is different from Koons, bc the value of the tires are

being based on two objective values. Shouldnt T/Ps be able to argue for the lowest price available? No it was the T/Ps choice if found tires cheaper in another location then needed to buy from there. - If we allowed system to take into acct multiple market values the commissioner would also argue for the higher market value. - Eds gas station has sticker price on tires of $1000, but hes never sold bc price was to high. Forced purchase: Accountants are arguing they never would have purchased the tires from Eds and never for that price. Court rejects this argument this was not a true forced purchase. - Ex. of a forced purchase would be if the tires would be last thing left in clients gas station, and the police were coming shortly to lock place up bc of bankruptcy. - Hypo: Dentist (sister) fixes brothers tooth. Brother (lawyer) drafts will for sister. Strictly by the statute its income, but its really two favors. Gift for gift. (Family circumstance) This is not I will only fix your tooth if you draft my will = No Income - Hypo: Lawyer next door neighbor to dentist. Lawyer mows dentists lawn. $200 value. Dentist says thanks. Dentist does same for Lawyer next time hes away. Gift for gift Then Lawyer says lets do this everytime we go away. Technically they would be swapping services and theyve agreed. - Due to the relationship between parties and the low level value, Metzger says the tax system doesnt go this far (not going to be considered income) Patterson v. Thomas (p. 94) - Facts: ER has a sales force says to EEs whoever gets most in sales goes to HI for 12 days. Addison does it and goes to HI on all expense pd trip. $9000 value. - Issue: Is it income? - Holding: Yes, its income Vacation travel expenses pd by ER as a reward for job

performance are gross income, such as a convention or seminar, if the primary purpose of the trip is pleasure. McDonnel v. Commissioner (p. 93) - Facts: EE and wife sent on a customer trip to HI for 12 days. ER paid for it. Had to accompany customers at all times. - Issue: Is it income? - Holding: No income. It was a command performance to work. Substantially all of their time was devoted to the employers objectives. Even though EE may have enjoyed the trip, he was on the clock at all times. US v. Gotcher (p. 92) - Facts: Gotcher works for Economy motors selling VWs. VW and Economy pay Gotchers trip to Germany to see VW plant. - Issue: Is it income? - Holding: No income. What if Gotcher always wanted to go to Germany and enjoyed himself? - Doesnt matter. Still not income. - Rule: One does not realize taxable income when hes serving a legitimate purpose of the party paying the expenses. (Primary purpose) Tax consequences are to be determined by looking to the primary purpose of the expenses and the first consideration is the intention of the payor. - In McDonnel case, even if EE absolutely enjoyed himself its still not income bc hes on the clock. - In Patterson case, even if EE was miserable the whole time its still income bc the primary purpose was pleasure. - The subjective view of the T/P does not matter!! - Is the thing being provided the business purpose itself (not income), as opposed to the ER providing the EE items of necessity, entertainment, personal benefit, etc (substitutes for salary and thus constitute income)

B. Deferred Compensation Arrangements 1. United States v. Drescher (p. 94)

- Facts: Drescher worked for B&L and B&L purchased an annuity policy as part of retirement. Annuity you pay money to co, for which they pay money back to you. The co invests the money for the payor for whatever the term is, and then the co pays the payor a monthly amt for another term. B&L goes to insurance co and says we want to buy an annuity that will give Drescher a certain monthly amt. They buy in year 1 an annuity that cost $5K. Drescher wont receive payments under the K until hes 65. - Issue: Does the T/Ps delay in control over the annuity effect the definition of gross income and whether its includible as income? - Holding: No the T/P still received an economic benefit. I
- single premium - non-forfeitable - beneficiary

II
- T/P did not have choice to take cash - T/P salary was not reduced (was not a substitute)

III
- B&L took possession so own and could not accelerate - Drescher could not assign it, could not borrow against it - Had no cash value

- Commissioner will focus on I facts and T/P will focus on III facts (Court doesnt seem to care about II facts) - Hypo: What if ER said were giving you a $5K bonus so Drescher could take care of his retirement. It would be the same net effect, but in this case it would be very clear income to Drescher. - Hypo: Suppose ER says well give you $5K cash or an annuity and you decide what you want. Still income really no different than 1st hypo. Constructive receipt if he has a choice to take $5k and takes the annuity its as if he has decided and purchased the annuity - Hypo: Suppose Drescher concerned with retirement and ER says cant afford anymore than $50K. Drescher says do $45K in cash and $5K in annuity. No change to tax consequences still being paid $50K in cash its Dreschers choice to have the $5K annuity paid for with $5K of his annual income. - Therefore, if either (1) choice decision made by T/P, or (2) substitute for cash/salary would have occurred it would have been income. - Commissioner pounding on I facts because show the T/P benefitted. There needs to be an economic benefit before we even think of 10

taxing something. Commissioner argues as soon as the annuity was purchased Drescher was richer bc he had something he didnt have before. - Court talks about Ward v. Commissioner: Facts: ER purchased EE a single premium annuity, where EE got the annuity and it was assignable. The annuitant owned it. Ward and Drescher end up in the same place, but in Ward it was found to be income at the time the annuity was purchased. Ward could have argued didnt get cash, but the form of receipt is irrelevant. Ward could have argued the K was nothing but a right to get money in the future, so shouldnt be taxed until he gets it. - This doesnt work bc we dont wait till you get the money, we tax you on the value of the benefit at the time you receive it. - Drescher argues that he is not Ward. He couldnt assign it, couldnt accelerate it, it was not given to him. Could argue he didnt even get it. The argument is, how can it be a raise if you cant spend it. We dont tax property that is so restricted the benefit cannot be realized. - The court held that Drescher was enriched at the time purchased and was thus income. - Drescher argues there are so many contingencies that he gets no benefit until some future date. - Court disagrees. In this case the co expended $5K for Dreschers benefit and co had no control over it so was a benefit and thus income and thus taxable. Just like Ward, if ER provides irrevocable benefit, even if cant spend it yet, then its income. - Next the court must determine the value for tax purposes. Drescher argues the annuity has no present value - Value is zero because couldnt spend it that year. Court rejects this argument and finds even though cant spend it, Drescher still has an economic benefit this year. - Drescher received some value of less than $5K but more than $0 (In Drescher the T/P had the burden of proving the value of the annuity was less than $5K and since he did not do that he was taxed on the full amt) - Dissent: The value, established on an objective value market place, is $5K. That was what B&L paid for the annuity and w/ the restrictions it had, therefore the value should be $5K (fair market value)

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- Majority says were not concerned with what was paid for the annuity, rather taxable income is based on the value received by Drescher. Present Value Valuation Technique - Drescher year 1 ER promised him in year 10 would get $12K. The $12 K is absolute and guaranteed. T/P says he didnt get anything in year 1. Shouldnt be taxed until he gets the money. - Court says thats not how the tax system works. We tax you when youre enriched, doesnt have to be in cash. Here Drescher received something he didnt have before, so he was enriched. - But how much? (If its not cash, the next question is how much was the T/P enriched) Drescher said can only tax on present value and that was zero because he couldnt spend it. - Court said present value is a valuation technique. The valuation system technique: - The amount youre going to receive in the future back to its present value - Rule: Whats the lump sum I would need right now, that if I placed in a bank acct with a fixed interest rate and let it sit for ten years would give me $12K The answer is $5K - This is discounting a future amount to a present value. Inflation - Starts with $110 and uses it to buy asset X for $110 at the end of the year. (Inflation over the year was 10%) Economists would say you could have bought it for $100 at beginning of year, so $10 gain. Economists are more interested in the purchasing power of money - Economists look at accretion of wealth in terms of purchasing power - For tax purposes inflation is ignored (so is deflation) C. Time Value of Money If client owns money, the longer he holds the money, the more he makes. T/P has $10K after engaging in a transaction. $1K tax on the $10K is due this year. Lawyer finds tax provision that says bc transaction happened in a certain way, can defer taxation for 10 years. By deferring the tax and holding onto the money, he can make money.

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 A tax delayed is a tax forgiven (just by postponing the date) This is the time value of money its equivalent to getting from the government an interest free loan. Congress can always vary the rules. - For example Congress enacts qualified pension plans because it wants to encourage retirement planning. - Enacts whole code series which states if your ER in return for your services puts money in a qualified pension plan the code now says not income to the EE. Theoretically its income and conceptually its income, BUT congress comes along and says its not income. T/P will be taxed on the money when it comes out. But for an ER to take part in a qualified pension plan, it must be provided to all EEs. III. Income from the Disposition of Property Doyle v. Mitchell Brothers Co. (p. 193) - Facts: T/P buys lumber (property) for $800. Years later T/P sells property for $1000. - Issue: Did the T/P have income? T/P most aggressive argument = no income. Commissioners most aggressive argument = income - T/P argues theres been no increase in wealth. He had $1000 worth of lumber and exchanged it for $1000 in cash. Both assets were of equal value just a conversion = no income However, theres a fallacy in T/Ps argument: Cannot use the value of the lumber at the time the wood was sold, have to look further back. - Otherwise sale of inventory would never be taxable and congress could not have intended this. - Commissioner T/P went from no cash to $1000 in cash. Congress enacted income tax and defined income. Cong did not allow a T/P a deduction for the cost of the goods it sold. Commissioners argument was rejected even though cong did not specifically allow for a deduction of the costs, the statute clearly says income. Proceeds is not income. The income is withdrawing from the gross proceeds the cost of the thing sold. - Rule: For income tax purposes measuring the proceeds of the sale against the cost of the thing the T/P gave up.

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 Therefore, in this case there would be a tax on $200 - A constitutional protection within the concept of income when looking at proceeds of cash have to take out the T/P money back return of capital. Thats making the T/P whole. A point of sale is a significant event thats the point we measure gain for tax purposes bc its the point you terminate your connection with the investment - - - how much did you put in and how much did you get out of it. Anything over the return in capital (capital infusion) is gain and is therefore income. (Proceeds is not income.) A. The Realization Requirement 1. Eisner v. Macomber (p. 72) - The only case where a tax statute has been found unconstitutional Statute holding stock dividends as taxable = unconstitutional - Facts: A,B,C get together want to pool their resources to make money. They want to invest. They form a corp. and each invest a $100. Theres a corp structure. In return for their contribution they each get one share of stock. Year 1 earns $150. Year 2 earns $150. Its balance sheet when started had $300. At end of year 2 has $600 in assets. The corp retained the earnings. $300 from original contributions and $300 in retained earnings. At the end of year 2 the corp decides to issue a stock dividend distributes one share of stock to each sh that holds one share of stock. So theres now six shares outstanding, so each share is worth $100. Congress enacts a statute a stock dividend is taxable. - Issue: Whether stock dividend was includable in T/Ps gross income? Commission argues each S/H received a share of stock worth $100 thus has income of $100 and should be taxed. T/P argues not a taxable event unconstitutional this is not income. - Holding: Stock dividend was not a realization of income by the T/P for purposes of the sixteenth amendment. By definition, a stock dividend means everyone who owns shares gets another share equal to that they already held. Each S/H got a piece of paper representing that each S/H still owns the same share of the co. that they previously owned. Each owned 1/3 before and each own 1/3 after. Each S/H had one share of stock equal to $200, or two shares of stock each equal to $100. The corp became no poorer, so the S/Hs could not be any richer

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 This sounds like the argument made in Doyle (lumber): - $1000 lumber exchanged for $1000 cash In both Doyle and Eisner the T/Ps are richer - Doyle = $800 lumber to $1000 cash - Eisner = $100 infused to $200 assets The Commissioner argues that in Doyle the T/Ps started with $100 in shares and now have $200 in shares. - Whats different between Doyle and Eisner? In Doyle he receives cash now - in Eisner he invested $100 and it went up in value but its still invested in the corp. - Sup Ct says no income in Eisner bc distribution of a share of stock is pretty much an act of futility. S/H still owns 1/3 of the corp. - When proportional ownership is given to each S/H its not income theyre all standing still bc they own the same thing they each owned before getting the stock dividend. Stock dividend is a one of a kind distribution Hypo: A Built garage in FL and only cost $800K bc built where no one lives. A day later Magic Kingdom built by another guy in FL. A gets calls to buy garage by people offering $1M. Economically hes richer he put in $800K and its now worth $1M Not taxable to him at the time offer is made - Hes like Eisner nothing has happened. - Its like Doyle to Doyle had appreciation, but no taxable gain until sold the lumber All three of these cases reflect a gain an economic gain theyre richer than they were before. Gain alone is not enough! - Gain means enrichment between two points in time Mere appreciation is not enough, BUT appreciation or economic gain with a sale is enough. We need gain and an event/transaction = a realization event. No realization in the Disney/garage hypo No realization in Eisner There is a realization event in Doyle = the sale The Eisner court grappled with this realization event and jumped on the notion of severability: - proceeding from the property, severed from the capitalfor his separate use and benefit (p. 74) - We want the asset to be severed from the capital.

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 Then along comes Helvering v. Bruun. 2. Helvering v. Bruun (p. 76) - Facts: T/P is a landlord. Has land with a building on it and in 1915 leases it to a tenant for 99 years. 1929 tenant demolished existing building (worth $13K) and constructed a new one (worth $64K). Agreement was that tenant would surrender the land with all buildings and improvements. 1933 tenant defaulted on payment and landlord took possession. - Issue: Whether or not improvement made to a leased property are considered a gain and thus income? Commissioner argues you had an old building and received a new building landlord gained $51K has something of greater value than he had before. T/P accepts comms arguments, but argues he could not be taxed, bc while he may be richer, theres been no realization event. - Enrichment is not enough, and according to Eisner we need gain, but the gain has to be severed from the underlying capital. - Holding: A T/P realized a gain after repossessing property improved by a tenant, and thus it is income. This case does not specifically overrule Eisner. - They say Eisner used language to describe the realization event, but applied only to a stock dividend. - The court held there has to be a gain coupled with a realization event and as in Bruun [the lease terminates and landlord came back into possession of property he already owned] The court says this was enough to be a realization event significant enough to realize gain. - Sup Ct described the realization event requirement as: Founded on administrative convenience and as representing the last steptaken by which [the T/P] obtains the fruition of economic gain which has already accrued to him. (p. 78) - While it is true that economic gain is not always taxable as income, it is settled that the realization of gain need not be in cash derived from the sale of an asset. (p. 78) * Bruun shows us that realization event can occur prior to a sale - Congress of course can change the rules whenever it sees fit - Realization requirement: Sup Ct in Bruun swept away the Eisner limitations the requirement is simply one of administrative

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convenience. - Now congress, after Bruun, has a lot more elbow room to decide when to tax. Ex: Congress could look at Bruun and say yes the landlord is richer, and yet its a realization event, but just doesnt seem right to tax when landlord takes possession. Congress enacts 109 But while its not taxed now, when it comes time to tax the landlord, he gets loss of a depreciation deduction. - 475 T/P whos a dealer in stocks and securities If they own stock on 12/31 they have to report gain for that calendar year even if they still own the stock Theres no realization event This is proof positive Eisner has not vitality * We need gain and we need a transaction/realization event. - The transaction/realization event is predicated on administrative convenience (1) Need a gain (2) There also has to be a realization event = doesnt have to be a sale, but has to be something - Most important thing is economic gain/accretion to wealth BUT now tax laws say we cannot deal with a system that attempts to tax economic gain only This would mean T/P would have to know the worth of everything they own on the last day of the taxable year. - Its an intolerable system be we would have to get everything appraised every year. Hypo: A $1000 X stock $100 cash div. B $1000 Y stock sale $1100 C $1000 Z stock up to $1100 no sale

- Economically all are the same - A certainly has $100 income - 61(a) cash dividends are taxable - B (is Doyle) compare the $1100 he got out to the $1000 he put in = $100 gain - C (is Disney hypo) is as rich as B, who is as rich as A all of them did equally well, but C is not taxed - Is that the right thing to do? Yes, its an economic gain, but not taxable bc the investment is

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not over yet - B in year 1 says Y is best stock, C says Z is best stock. End of year 1, B says going forward Z is a better investment. He would get rid of Y stock and invest in Z. Suppose C does not sell Z stock, and he still thinks Z is the best stock? In order to keep the economy the strongest and most efficient we dont want to deal with a tax changing peoples minds. We want it to be the least intrusive possible - Deciding not to sell is an economic decision = we hope at the end of every year (or day) they make the decision to stick with it or sell. - Only way B can get from Y to Z stock is pay tax on the $100 gain (whether sells or transfers both are realization events) Bc of tax sys, B has to ask how much of a better investment is Z than Y. If just a bit, then have to weigh ig the tax consequence is worth it. So the tax system is interfering with economic decisions. The Lock In Effect: - T/P owns property w/ so much accrued gain in their investment that theyre reluctant to reinvest their proceeds. Dare not change bc will release all that gain. This is a real impediment to the economy. Hypo: T/P owns property, going up in value everyday, she may have no money, but is richer because property is going up. But tax system says mere appreciation is not enough bc of administrative convenience - The tax sys has always said we cant go that far - We dont tax accrued gain, we tax realized gain. Summary: - Eisner Gain severed from the capital drawn apart so he can spend it Based on constitutional principles - Brun Court says we didnt really mean that its not really based on constitutional principles, rather its based on administrative convenience. - Also need a realization event An even the administrator feels is appropriate enough time to tax the gain realized - The court says we can tax it in Bruun (when landlord repossessed) but 109 says: Landlord comes back into possession of rental property and theres been an improvement landlord does not have to report the gain (unless the new building is in lieu of rent)

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IV. The Relationship of Basis to Income Recognition Background: - T/P sells lumber for $1000 that he originally purchased for $800. The first $800 of proceeds is a return on the T/Ps investment. (The $800 is the basis = the T/Ps after tax investment in property). - The T/P is responsible for knowing his basis. So when realization event occurs, he knows how much is taxable bc does not include the basis. - Hypo: T/P bought land for $100, built a building for $200, building wood $50. T/P invested $350. Sells for $500 = $150 gain. Doesnt have to be just initial purchase anything over the period of ownership. A. Gifts of Property: Transferred Basis 1. Taft v. Bowers (p. 235) - Facts: Father buys property for $1000 (capital investment/starting basis) goes up in value to $2000. Has economic gain but no tax bc holds onto it. Gives it to his daughter when it was worth $2000. Daughter sold it for $5000. - Issue: How much of the appreciate is taxable (thus considered income)? Commissioner argues investment sold for $5000 and it only cost $1000 (total infusion capital investment was $1000), therefore there is $4000 of gain and its taxable. Daughter argued cant tax on $4000 gain bc she cant be taxed on gain that belongs to someone else (the appreciation value while it was still owned by her father). She only personally realized a gain of $2000 (bc she got the stock when it was worth $2000) - If daughters argument was valid, would have to tax the additional $1000 of gain that accrued while father owned it to the father. That would be a tax on a gift and congress decided early on that it did not want to tax on gifts. - Holding: The whole appreciated amount is taxable income. Theres nothing in the constitution stating that the gain resulting from increased value can be treated as income only for the increase amount that occurred while in the hands of the T/P. - 1015 a donees basis in gifted property is the donors basis. Therefore, whatever the fathers basis was is her basis

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- Daughter attempted to argue this was unconstitutional, but Sup Ct says Congress wanted to do this in essence its like a lien When daughter took the property, she took it subject to any lien and so the $1000 while in the fathers hands is taxable. - Gift is not a realization event so no tax on the $1000 gain while in fathers hands, but the gain is built into the hands of the donee. - Is building the gain into the hands of the done worth it? Yes: 1015 (1) Always better if donee pays tax on donors gain amt bc the tax will be later and thus the tax is being deferred (2) Tax liability shift suppose father at higher tax bracket and daughter at low tax bracket the tax is then payable at realization event but at the daughters lower tax bracket. (Goes the other way to so if daughter gave the property to father whos at the higher tax bracket would be better off selling the property and giving the proceeds to the father.) - Hypo: Father buys stock for $1000, depreciates to $800. Gifts the stock to daughter. Daughter sells stock for $800. Under normal transferred tax basis - Daughter would have a loss on the stock, BUT congress says this would allow people to make a gift of a loss congress doesnt like it - 1015 says for purposes of determining loss the donees basis is the lower of the donors transferred value or the fair market value at the time of transfer Can give gains to lower tax bracket T/Ps but not losses B. Transfers at Death: Fair Market Value Basis Hypo: Father buys property for $1K, leaves it in a will to daughter, daughter gets when dad died valued at $5K, daughter sells for $5K - No gain Free step up in basis 1014 starting basis of property in the hands of an heir is the fair market value at the time of death Summary: 1015 not bad allows postponing tax and transfer of basis 1014 allows gain to vanish - If youre willing to wait long enough the accrued gain may never be realized - Sometimes its worth the wait to steer out of 1015 and into 1014

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V. General Principles of Gross Income A. Income 1. Increase in Net Worth a. Commissioner v. Glenshaw Glass Co. (p. 64) - Facts: Goldman theaters trying to make money and sell movies. Lowes becomes so aggressive its illegal. Goldman sues under antitrust for $125K in lost profits. Goldman wins. Verdict for $125K compensatory damages but due to treble damages gets $375K. (Extra $250K in punitive damages to punish the defendant) - Issue: Are the punitive damage payments includable in gross income? - Holding: Yes it is includable as gross income. Court says of course the $250K has to be reported. Tax system defines income broadly Goldman is richer and can do whatever they choose with the $250K so its income. Here, there was clearly an accession to wealth, clearly realized, over which T/P has complete dominion - Both lower courts said it wasnt income bc they focused on the source of the payment. Here it was clearly a windfall. Looked to Eisner not capital or labor so not income. - The sup ct rejects this finding bc Eisner strictly dealt w/ stock div. - Glenshaw Glass makes clear that the source of an increase in net worth is irrelevant for income definition purposes. B. Imputed Income (p. 83-86) Examples: (1) Painter has truck needs fixing. Pays mechanic $300. Painter paints mechanics house, mechanic pays painter $3000. (2) Painter has truck issues, cant afford to fix. Mechanic needs house painted. No money exchanges hands. (3) Painter cant/doesnt want to pay $3000 so fixes his own truck. Mechanic paints his own house. In all three scenarios, mechanic has a painted house and painter has a fixed truck. First two scenarios are taxable, last one is not. - Economically theyre the same end up with assets w/ improved value in all three scenarios. Whats the difference? - Administrative difficulty imputed income

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 Imputed Income: A flow of satisfactions from durable goods owned and used by the T/P, or from goods and services arising out of the personal exertions of the T/P on his own behalf. - The value of services people provide for themselves (painting your own house, fixing your own truck) If we tax imputed income, that would encourage laziness. However, if we dont tax imputed income it may discourage specialization. VI. Damage Awards and Settlements and Insurance Recoveries A. Damages Received on Account of Property and Lost Profits 1. Clark v. Commissioner (p. 302) - Facts: Tax counsel advised couple to file a joint return, but if they had filed separate returns they would have saved $20K. The T/P ends up paying $60K in taxes instead of $40K (if filed separately). Due to the counsels error, counsel pays the T/P $20K. - Issue: Whether the payment made to the T/P by his counsel to compensate for his loss due to erroneous advise is includable as income? Commissioner argues the T/P must pay taxes on the $20K bc its income. The T/P argues its not like Old Colony - and the ct agrees. - Why does the Commissioner think its like Old Colony? Theres an accretion of wealth in both cases taxes paid directly to the commissioner The commissioner argues the counsel is defraying the $60K in taxes the T/P already paid - Holding: Not income! More like a return of capital than a gain-Doyle T/P argues he paid $60K, but lawyer paid him $20K bc T/P couldve only paid $40K Commissioner counters the T/P chose to and voluntarily paid $60K and under the legal joint return that was the amt owed. - In Old Colony the ER paid EEs taxes as additional compensation. Here, the $20K is compensation for a suffering = loss In Old Colony, when the ER paid the EEs taxes he acquired more wealth. Whereas in Clark, the lawyer in effect reached into Clarks portfolio of wealth and caused a dimunition of $20K of Clarks wealth. Made him $20K poorer. Cant just look at the second transaction, have to look at the whole transaction (in which he broke even) - Court calls this repairing Clarks capital

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2. Raytheon Production Corp v. Commissioner (p. 303) - Facts: Raytheon manufactured rectifying tube. RCA then licensed a competing tube to many of the same manufacturers, w/ a clause that required the licensees to buy from RCA. These antitrust practices lead to the complete destruction of Raytheons business. 1926 = $450K, 1927 = $150K, 1928 = $10K. RCA was selling radios with the clause included in the licensing agreement. Raytheon makes agreement with RCA to make tubes for them for a royalty. Raytheon has to agree to not sue RCA, unless someone else sues RCA under antitrust. Raytheon owes RCA $410K, an acknowledged liability under their agreement. Raytheon has an antitrust suit against RCA so refuses to pay money. The parties settle. RCA says keep the $410K and in exchange well settle the suit. (We know this is the same as RCA paying Raytheon $410K.) At the same time of settlement, RCA buys the patents Raytheon owned (included in the $410K) Of the $410K Raytheon constructively received - $60K was claimed on their taxes as payment for the patents. The $350K additional is whats at issue? - Commissioner says its taxable, Raytheon says its not. - Issue: Whether damages received by Raytheon because of settlement of antitrust case is income to them or not? In the lower tax court: - Commissioner argues the damages are K like the $350K was meant to compensate Raytheon for lost profits they would have made If damages are a substitute for the profits Raytheon would have earned, then its taxable. Profit substitutes are profits and thus taxable. - T/P argues damages are tort like a tort like recovery is meant to make the T/P whole not enrich him. Predicated on the notion that T/P had something, was illegally stripped of it, and is then paid back for it. - Holding: Damages for violation of antitrust act are treated as ordinary income where they represent compensation for lost profits. Court says here it is not a substitute for profits, its RCA destroying a business asset of Raytheon. The damages are tort like, but the tax consequences do not turn on whether an underlying action is in tort of contract, the appropriate question to ask in regards to damages is in lieu of what were the damages awarded? - If in lieu of lost profits would be taxable.

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- Here it was not for lost profits. A cos ability to make money = goodwill an intangible business asset was destroyed. - We then need to do a second tier analysis: What is your basis? If paid more than your basis, the overage is income. Court says to Raytheon, you received $350K for your goodwill for tax purposes its the same as if Ray sold their goodwill for $350K Raytheon argues they cant be taxed bc RCA paid an amount equal to what they took Court says its not based on the value of what they gave up, its the cost of what they gave up This goodwill accrued to Raytheon and thus most likely cost $0. Raytheon didnt buy the goodwill. Therefore its all gain! - Tort recovery in return for property may be taxable, may not be - Second step analysis got $ for the property, thats a realization event, must then measure the value of what you got. - Hypo: Suppose Raytheon built a building on their property for $5K, someone burnt it down, sues and recovers $50K (the building at time burnt down was worth $50K). Even though damages, doesnt change the fact that theres still $45K gain - In lieu of what were damages paid for? If lost profits = income If not, have to do second tier analysis. Is Raytheon similar to Clark? - In both cases tort like recovery for damages of lost property. Raytheon = all taxable Clark = none taxable - Both situations T/P is made whole, but only taxable in Raytheon. The reason is Clark had a basis of $20K bc thats what he paid in excess for tax services. Whereas in Raytheon the $350K received was in repayment for the $350K worth of property lost, but for which he paid $0 B. Damage Awards for Personal Injury (p. 309) Hypo: Jackie O was sunbathing on her island, paparazzi published pics, Jackie O sues and recovers $1M Hypo: Burt Reynolds agreed to pose for centerfold, deal is you pose

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$1M. Publisher doesnt pay. Burt sues and recovers $1M Both cases T/P sues and results in award of $1M. But hypo 1 is tort like and hypo 2 is contract like Prior to 1996 the law would have looked to the notion of contract vs. tort. Hypo 1 would not be taxable and hypo 2 would have been taxable - In hypo 1 not meant to be a gain, in repymnt of rights violated. If Raytheon applied would say not automatically income, but doesnt mean not taxable would apply the second tier analysis. Would determine the basis for the personal rights, which would probably be zero, so it would all be gain. 104(a)(2) Income does not include damages received on acct of personal injury. Saying not automatically income, but in essence the code is using the second tier analysis and is pretty much saying were spotting you a basis (by excluding it from taxation) Roemer v. Commissioner (p. 310) - Facts: Business man in CA. Received credit report that was wrong saying he was a deadbeat. He sued and recovered. Recovery was due to decline in profits after credit report came out. Recovered compensatory and punitive. Commissioner argued its all taxable bc being compensated for loss in his earnings. - The court said if they were damages for lost profit would be income. BUT its not. The T/P showed the damage to the business by showing a loss in profits. The basis of the suit however was in defamation. - 014(a)(2) allows for exclusion on acct of personal injury and defamation fit within the terms of the statute. In 1996 Congress changed the statute to read damages are excluded on account of personal physical injury. Punitive damages are always income, even if the T/P sues for personal physical injury. - Punitive damages are received to punish the wrongdoer, not to compensate you for your injury. Raytheon is our model, but 104(a)(2) says even though recovery over basis could be income, were going to exclude it.

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 Hypo: A injured in auto accident. A sues under tort claim of negligence and gets money in return for the tort done to him. - 104(a)(2) says all damages, since physical, are excludable from income (except punitive damages received) - For example damages for hospital bills, lost wages, lost earning capacity are all excluded (except punitive) if underlying action is due to physical injury. - Even if sues for emotional distress still excludable if the distress on acct of underlying phys injury - Damages could be received by someone other than the victim Ex: Mother sees child hit by a car and mother suffers from emotional distress mothers damages are excludable since on acct of phys injury Tort recovery for personal damage not physical - Ex: Defamation - Dignitary torts are not phys and are not excluded - They are decided and reviewed under the second tier Raytheon analysis Statute makes clear emotional distress, even if coupled with phys symptoms damages are not excluded - The emotional distress has to be on acct of a personal phys injury Under this new statute could have a portion of damages recovery excluded and part taxable. - If the recovery amount is delineated then its simple - Problem is when the jury award comes back unapportioned If theres a settlement, will usually draft an agreement that says damages awarded are compensatory good for both parties Comm doesnt abide by the agreement normally looks to the original complaint to see how recovery requested Amos v. Commissioner (p. 316) - Facts: Rodman kicks camera man. Therefore its a battery, sues and recovers $200K. Clearly a personal injury of the physical character. - Court looked to the settlement where T/P agreed to certain conditions (would not disclose, would not bring criminal action, etc) So Tax Ct said getting $200K for two things 1. The kicking 2. Keeping his mouth shut Therefore some is taxable. $120K is for the kick and is nontaxable and $80K is for keeping his mouth shut and is

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taxable. If T/P sues and recovers, all jurisdictions have an award of not just judgment amt, but of post judgment interest as well. - If judgment is $1M, but pay a year later, interest must be tacked on income and its taxable. - Regardless of whether damage for phys injury or not interest is always taxable. Hypo: Client hurt in auto accident, ins co ready to settle for $2M. But our client is young. Lawyer and client interested in getting the $2M and investing it for the client so it accrues interest or taking the $2M and buying an annuity. - Question is how much is excluded? Just the $2M award If you get $2M thats excluded, and buy $1M annuity thats taxable. But if you get $90K for thirty years Congress has said if you take a deferred payoff its all excluded - That doesnt work if you take the award and buy your own annuity VII. Employee Fringe Benefits A. Exclusions Based on Tax Policy and Administrative Convenience Restructure this portion of outline pp. 100-118 Courts interpret income broadly if youre enriched = its income - Starting point under 61 is gross income - We dont tax gross income, we tax taxable income Deductions some items are not included in taxable income bc congress has decided we ought not to tax them (even though they are clearly economic income and gross income) ER providing in kind benefit general rule is its income - However, there are certain in-kind benefits that clearly fit into definition of economic income, BUT Congress said even though EE benefited, for various reasons were not taxing it. 132 Its not even a deduction, its simply excluded ER sends EE to HI to chaperone customers = NOT income - Its not income, even if EE getting enjoyment out of it, if its viewed as a condition of employment Whether makes you happy or not s not the measure Condition of employment

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 Convenience of ER If ER provided benefit to EE but is doing so for the convenience of the ER = NOT income - The ER has made a business choice to benefit the business, not to benefit a particular EE. Goldburgs view: - Condition of employment is whatever society would think an ER should provide at the workplace Ex: safety glasses If a tool is necessary to do the job = NOT taxable If however, this being provided is of pure, clear, personal nature, its function to EE at the workplace is minimal then its likely to be income. Commissioner saw lots of benefits at the workplace not being taxed: - ER provided parking spaces - Airlines free fares to pilots Commissioner says if theres a reason not to tax, Congress has to address it. Congress then stepped in and enacted a statute telling the Commissioner not to tax any fringe benefit not recognized as taxable up until that point. - Hearings are held with new Commissioner: Careful balancing of equity and administration Where an EE gets a benefit not really tied to employment, but so small its a pain in the butt to report, may not need to tax it. - Hearing held with Asst Sec for Tax policy: Practical problem with distinguishing between fringe benefit and condition of employment Fringe benefits should be taxed unless benefit of a de minimus nature Criticisms against excluding fringe benefits: - Exempting fringe benefits gives a strong incentive for ERs to exchange cash benefits for in-kind benefits this will lead to an erosion in the tax base, also leads to inequities among T/Ps, also failure to put limits on fringe benefits encourages ERs to provide further noncash benefits and thus restricts EEs freedom of choice, also discriminates ERs The condition of employment and convenience of ER were arguments made prior to the statute being enacted. It was against this backdrop that Congress enacted 132 it tells us whats excluded from income. - If EE has benefit paid for by ER its a benefit, hes richer and

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thus he has to report it UNLESS it isnt - 132 tells us if it isnt. Problem 1: Free parking space 132(f)(1)(c) = Qualified parking 132(f)(5)(c) Defines qualified parking 132(a)(5) excludes from income any fringe benefit qualified as a qualified transportation fringe Gross income shall not include this is the golden egg your client wants you to find it and fit them into it 132(f)(2)(b) qualified parking may not exceed $175 a month. Bc the benefit may replace a large amount, there is a ceiling placed on the nontaxable amount If the parking benefit is $250, the taxable amt is the difference Also, the statute has a built in inflation adjustment 132(f)(6) - Therefore the number limitation changes every year -What if $231 parking spot, but 2010 fringe limitation is $230 would that mean $1 income? Could try to argue de minimus fringe - But it wont work - 132(f)(7) de minimis fringe cannot be used with qualified transportation fringe. - What if hotel, instead of a parking spot space, gives EE a parking sticker for a lot next door - $230 a month? Its still excluded 132(f)(5)(c) says on or near Also 132(f)(3) says includes a cash reimbursement to EE from ER for qualified transportation fringe - ER tells all EEs can either take a parking sticker or take the cash (in the amt it would cost for the sticker). 132(f)(4) If EE has choice and takes cash = income, BUT if EE had choice and takes sticker = NOT income. - The fact that EE had choice does not make it includable in income. - Generally tax law says if you have choice between benefit or cash, the choice is the functional equivalent of you getting cash and then buying the same thing (constructive receipt) BUT 132(f)(4) reverses that general tax rule Why would Congress do this? - Public policy Dept. of Energy got Congress to put (f)(4) in bc otherwise youre now providing a handcuffed rule to ERs by saying cant give EEs the choice

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- Tom lives in the Marriott, but still gets parking spot. 132(f)(5)(c) Qualified parking shall not include any parking on or near property used by the EE for residential purposes. - This means if you live near your work, then the qualified parking space does not apply. Tom could still argue that he parks there based on his employment arrangement w/ the hotel. (He lives there bc the ER makes him live there, its part of the job) - Suppose Tom is not an EE of the hotel, but is an independent contractor? 132(f)(5)(e) Employee does not include an individual who is an EE within the meaning of 401(c)(1) which talked about self-employed. - So a self-employed individual (independent contractor) is not included and would not get the exclusion under the qualified transportation fringe. Problem: T/P allowed to use swimming pool at work. Is it excludable? - 132(j)(4) on premises gyms and other athletic facilities Located on the premises of ER Operated by the ER Substantially for use by the EEs - Regulations 1.132-1(e)(1) includes a pool If the regs say it, and its in our favor, we win - What if T/P talking about the pool and weight room that are available in the hotel is it now includable? The athletic facility exception doesnt work bc has to be substantially for the use of the EEs Qualified EE discount work 132(c) - If service not taxable unless more than 20% discount - If property so long as not sold to T/P for less than cost - If a discount, the qualified property or service must be the property or services for sale to customers in the ordinary course of the line of business. Here the pool could be considered a qualified property or service bc its being sold w/in the ordinary course of business (everyone wants a pool when they stay at a hotel) - But the pool across the street us $100 and here its free. Its over the 20% amt allotted as excludable Would then just be includable for the 80% ($80) - De minimus fringe exclusion work - 132(e) (Doesnt seem to apply to the pool/weight room issue) Benefit is so small makes accounting for it unreasonable or administratively impracticable

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 Theres no specific dollar amount 1.132-6 Regulations 1.132-6(e) Examples (1) Benefits excludable (2) Benefits not excludable - Working condition fringe 132(d) Any property/services provided to an EE of the ER to the extent that, if the EE paid for such property or services, such pymt would be allowable as a deduction under 162 or 167 So if T/P bought pool membership himself and he could deduct it, then the membership could qualify under working condition fringe. - No additional cost service 132(b) Any service provided by ER to an EE if the service is offered for sale to customers in ordinary line of business, and the ER incurs no substantial additional cost. - Cost to the ER includes forgone revenue If it doesnt cost the ER anything were not going to tax it. (This is unreasonable under our tax system we look to the wealth of the receiver (EE), not how much it cost the ER). BUT congress doesnt care. This exception appears to apply to our facts. - What if only the Manager can use the pool? 132(j) (a)(1) and (2) nondiscrimination rule applies - What if Marriott had agreement with pool place down the street? 132(i) Reciprocal agreements - Service provided pursuant to a written agreement and neither ER incurs any substantial additional cost - What about use of company car? 132(d) Working condition fringe If used for personal use = income If used just for business = NOT income working cond fringe If used for both personal and business reasons have to divide the use for personal from that of business use (value usually based on mileage) - Here you can do working condition fringe and de minimis Ex: If on a business trip, go off highway to pick up a prescription, then right back on highway Hypo: Teacher paid salary and room/board as well. This is income. - But think about Benaglia case got room and board court found not income

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- Benaglia v. Commissioner (p.93) Facts: Manager of Royal Hawaiian Hotel. Received at not cost use of a suite of rooms for he and his wife and all their meals. Holding: Value of meals and lodging was not income T/P constantly on duty meals and lodging were entirely for the convenience of his ER - This hypo and Benaglia can be distinguished by job description. Benaglias ER providing room is like Metzgers ER providing him a library or books. ER doing it solely for efficiency/convenience purposes Commissioner argues that when an ER provides meals and lodging, the ER is relieving the EE of a personal burden/need. Therefore it should be taxed. Early courts said but its necessary to perform his duties of his job (Benaglia). - Old, old courts said if meals/lodging negotiated by EE, then its income. If the ER mandated as part of duties/job, then its not income. Courts face problems in trying to evaluate both a benefit to EE and an expense to ER all at the same time. - There was a lot of litigation - Congress writes statute 119 119 provides for exclusion of value of meals/lodging if test is satisfied: 1. Convenience of ER 2. Condition of employment 3. On the business premises For lodging all three have to be satisfied For meals only one and three have to be satisfied - Convenience of the ER: The test is met if furnished for a substantial noncompensatory business reason. - Condition of Employment: Is the provision necessary in order for the EE to properly perform his duties? How far will they go? Caratan v. Commissioner Farmer had to live on the farm. Commissioner argues there was a residual area to live right around the corner. Ct of App says if ER says for a sufficiently reasonable business purpose the Ct is not going to second guess the business decision. - On the Business Premises:

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 Commissioner v. Anderson hotel manager lives two blocks away from the motel. Its income. Ct says its not on the business premises - Means where you perform your duties Boykin House on same tract of land owned by ER not income. B. Employee Benefits Excluded from Gross Income to Further Social Policy Goals (pp. 118-125) These code sections are clear tax expenditures, but theres a countervailing social policy so were going to exclude it 1. Life Insurance (p. 121) 79 deals with a small amount of life insurance provided by ER not necessary to perform job rather simply ER paying premiums insuring the life of the EE - Its an in-kind benefit, clearly income but Congress excludes it Congress narrows it. - 79 limited to life insurance policy no greater than $50,000 - Life ins provided had to be a group term policy 79(d) anti-discriminatory provision EE receives a substantial economic benefit from the insurance protection and society receives a benefit bc its desirable to encourage ERs to provide life ins protection to their EEs 2. Educational Benefits (p. 122) Congress decided benefit to country if enact an education benefit 127 ER has an education plan, available to all EEs - Up to $2,500 is excluded from income - No option to take cash - Must be non-discriminatory 117(d) excludes from income to an EE of an educational institution if they or a family member attends tuition-free - Provided graduation is below the graduate level 3. Dependent Care Assistance Programs (p. 122) 129 ER provided daycare - Up to $5000 a year excluded - Nondiscrimination requirements 4. Adoption Assistance (p. 123) 137 Adoption expenses

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- Excluded up to $10,000 a year unless T/Ps income is to high, then it gets phased out - Must be nondiscriminatory 5. Cafeteria Plans (p. 123) 125 Cafeteria plan - Where EEs may choose among benefits consisting of cash and certain statutory nontaxable benefits, the right to choose will not cause a benefit otherwise excludable to be included in gross income. However, an EE that chooses cash remains taxable - Must be nondiscriminatory 6. Health Benefits (p.119) ER contracts w/ BCBS to pay premiums for EE. BCBS then pays $15K worth of Drs bills. - EE has been economically benefitted would be clearly taxable bc EEs bills have been paid by a third party 106 Gross income shall not include premiums paid by ER - Thus the premiums paid by ER to BCBS on behalf of EE are excluded 104(a)(3) - $15K payout not income unless the premiums are not taxable to the EE 105(a) Premiums not taxable to you, and payout is, but not if listed in 105(b) which excludes actual expended amounts for medical care. Problem 2: - $100 worth of health care benefits is worth more than $100 to the EE. - Suppose average tax rate of EEs is 28%. ER increased salary by $140. After tax EE would have $100 and some change. - $100 after tax satisfies the EE so ER could offer $100 worth of health ins. Since its not taxed to the EE the EE is getting equivalent of $100 after tax. This will only work if EEs want health care ins. - Theres a subsidy under 106 so both parties can be satisfied. Congress must be saying we know about this and we think its money well spent. - Three considerations called into focus by this tax exclusion: 1. Tax equity 2. Economic neutrality 3. Economic distortions 1. Tax Equity: - A young EE is in 15% tax bracket the $100 pd by ER is worth

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$120. To the 28% tax bracket T/P its worth $140. To the 35% tax bracket T/P its worth $160. Tax expenditure results in greater savings to the higher salaried EE. 2. Economic Neutrality: - A tax is always a financial impediment on transactions - Now our goal is to impose tax in a way that is least likely to affect the underlying transaction - Here, congress clearly encouraging health care to EEs, buts clearly affecting the transaction Because some people would choose not to buy it. - If they dont take anything from us, and were not taxed on the premiums paid by the ER its neutral Not true we need a tax system 3. Economic Distortions: - Ins co can charge more than consumers are willing to pay due to the fact that there is a subsidy allowed by Congress. VIII. Gifts, Inheritances and Similar Items A. Gifts and Inheritances 1. Commissioner v. Duberstein (p. 127) - Facts: Duberstein president of metal co in OH. Berman is president of metal co in NY. Known each other for 7 yrs, primarily interacted by telephone. Duberstein gave Berman info on potential clients. Due to helpful tips, Berman wanted to give Duberstein a gift, a cadillac. Duberstein says he doesnt really want it bc he already has two cars says Berman owed him nothing. Berman says youre taking the Cadillac. Duberstein gets deficiency notice for failing to include pymt in gross income. Duberstein paid and then sued. - Issue: Whether the transfer of the Cadillac was a gift and thus not includable as income? Commissioner argues the Cadillac is income bc Duberstein is richer than he was yesterday. Duberstein argues its not taxable bc its a gift and theres a statutory exclusion under 102 - If a gift its not income - We dont care the form, how much, who its from, etc - If we believe Duberstein, then he has a really good case for it being a gift and thus not taxable under 102 But the statute does not define what a gift is, nor do the regs

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- Here there was no K, no indication the Cadillac was given in return for services. But it does not appear to be a common law gift either. - What do we mean by gift as read in 102? The Sup ct says: Not a gift for common law purposes Gift is peculiar to the income tax statute - Why is the Commissioner going all the way to the Sup Ct to tax a Cadillac? Under a self-assessment sys, this sort of transfer of property in the commercial realm goes on all the time. Commissioner concerned w/ addressing the issue so govt can collect its fair share on taxes. - Commissioner is saying I know this stuff is going on so he wants the Sup Ct to give a standard of law on what a gift for income tax purposes is. - Commissioner proposes the test should be: Gifts should be defined as transfers of property made for personal reasons as distinguished from business reasons. If transfer occurs in commercial setting = its income If transfer occurs in family setting = its NOT income - Sup Crt says, no standard for you commissioner! - When congress enacted exclusion for gifts its a question of fact.not a question of law It has to be reviewed based on the trier of facts experience with the mainsprings of human conduct. - Holding: To be considered a gift, the item must be given w/ no expectation of getting something in return, or in response to receiving something of value. Here, the court found the Cadillac was a recompense for Dubersteins past services or an inducement for him to be of further services in the future. - The most important consideration is transferors intent! (Common law definition of intent/gift is irrelevant) If compelling cause of transfer is generosity, proceeds from love, respect or like impulses, then its a gift. Its not a gift if it comes from a legal duty to transfer, or if it proceeds from a moral obligation (you did something for me, so I feel I must do something for you), or if the reason is for past services or in hopes of future services. - We have to look in Bermans head and decide why he

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made the transfer. - The court found Berman was not doing it out of love/respect/generosity, rather he was doing it as a moral obligation. - Franfurter concurring: Agrees with the majority saying there is no standard of law, but he was willing to presume a transfer in family context was a gift, but if it occurs in a commercial setting would be presumed to be income. Majority of the Sup Ct did not subscribe to this theory Webber (1950s case) - Webber was a radio minister. Asked to receive contributions from the flock. The contributions spiked during period of bday and wedding anniversary. He wanted to slice off those portions as gifts. - court rejected no evidence the givers knew Webber personally Newspaper Publishing Co. (p. 140) - Newspaper co. going under, went out in community for a fund drive. Received $300K from non-subscribers. T/P argued this is something for nothing. - Court rejected its income pointed to overall commercial nature Kralstein v. Commissioner (p.140) - Threw dinner for Kralstein for his retirement. $60K from ticket sales for dinner. - Court held part was income, and part was not. Basically court said let me see the guest list. Those that were friends and family were doing it based on disinterested generosity, the rest did it based on business relationship Transfers to Surviving Spouses: - ER, after EEs death, gives money to surviving spouse. - The motivation could be a number of things, its not a contract benefit - Issue: Was it income to surviving spouse? Spouse argues gift. - A bunch of cases agree pymt not for past services, not in anticipation of future benefit this pymt looks gratuitous. - Other cases say not a gift ER making pymt bc of dead EEs years of service. - Estate of Carter v. Commissioner (p. 137) Facts: EE died, corp paid money to spouse. Commissioner audits ER. Claims court said ER could take deduction. Commissioner goes after surviving spouse saying its income. Spouse argues its a

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gift. The fact that a deduction was taken by the ER is a factor, but is not determinative. Tax court says its income not a gift not detached and disinterested given due to EEs service. Second circuit reverses its a gift court found when this issue came up in tax courts the commissioner almost always won, but when it comes up in District Ct the T/P has a much better chance of winning. - Ct of Apps did not believe the Sup Ct thought that to win youd have to pay tax liability and get the chance to go into district ct Commissioner argues the treasury is getting hit on both sides ER taking a deduction, and EE not including as income. Congress changes statute in 274(b)(1) if gift to recipient, the payor cannot take deduction (over $25 a year) - 1962 if a gift under 102 payor gets no deduction. - After this corps still making pymts to surviving spouses w/ a declaration that the pymt was being made as additional recompense for EEs services. Clearly stating its not a gift. Strike Benefits - Almost always considered income. - Kaiser v. United States (p. 139) Facts: EEs go out on strike. Another union (not theirs) gives money to strikers so they could stay out of work longer. Issue: Whether it was income? - Jury found it was a gift. - Trial judge enters a judgment notwithstanding saying its income. - Seventh circuit reverses finding the money was given on the basis of need making it look like a welfare pymt- not income. - Sup Ct (dissent) giving out on basis of need just to make money last longer (not a welfare pymt) - Sup Ct (majority) said its a gift, bc the jury had come in with the verdict of gift and the jury is supreme on the finding of fact, unless its clearly erroneous. - Subsequent cases have resolved the factual issue against the T/P. Tips - Income. Always income! - Relates to prior services not a gift. - Controversy here is how the Commissioner gets the T/P to report the tips received.

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 Congress enacted statute that restaurants have to aggregate all their sales, 8% assumed to be tips, and distribute to all EEs (on their W2s as assumed amt of tips) Law is the waiter needs to report the actual amt of tips received. - The 8% is simply a baseline. Business Gifts - EE gets something from ER and argues gift - Commissioner won most of these because very difficult to show disinterested generosity between EE and ER Ex: Individual owns business no friends, no family distributes stock to EEs based on years of service - EEs argue gift - Commissioner argues its income based on standard of Duberstein Tied to past services The longer you worked there the more shares rcvd ER now knows youre going to stay and work harder since your part owner (anticipation of greater profits) - 102(c) enacted by congress If its a transfer from ER to EE cant even argue gift. - What about ER (parent) transfers to EE (child)? Here Congress says can argue gift if can show reason for gift was not due to EE/ER relationship Bums/Panhandlers - In 1970s man by name of Stan McCabe conducted three wk course in teaching how to panhandle. Stan said best part of panhandling is its tax free. Determination of whether its income is whats going on in the head of the giver. - If its in under 102, its a gift and excluded, even though we know its income (accession to wealth) Inheritances - 102 excludes inheritances from income - If a gratuitous transfer from family member to family member at life its excluded, why not the same treatment for a transfer at death. Prizes and Awards - 74(a) = prizes and awards are income, UNLESS 74(b) excludes them - Cant argue gift under 74

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- History: Radio shows ppl would call in and win prize. T/P argues its a gift. Commissioner would argue its not a gift. Congress enacts statute to prevent this litigation. If its a prize or award its not a gift as per 74 UNLESS 74(b) excludes them. - Can exclude prize under 74(b) if: 1. didnt enter contest to win it, 2 the prize is given to you to acknowledge an achievement, 3. and not forced to render substantial future services. 4. gives it away to charity - Horning Facts: Football player QB of year gets an automobile as an award. Horning argues its a gift. Court rejects its not a gift, and according to 74 cant argue gift. Next Horning argues not income bc excluded under 74(b) - Didnt enter contest to win prize - Not forced to render substantial services So came down to whether award in acknowledgment of an achievement - Horning argues it was an artistic achievement, educational achievement, scientific achievement Court said nice try, its income! - The income would be the amt it would have cost him to buy the automobile. - If the T/P sold the car, he could argue that the value is the amt he could get when he sold the car. Value: Its a looser standard for prizes and awards. - Its not what it would cost you to buy it, but rather its what you could get if you sold it. - 74(b) was effectively repealed by Tax Reform Act. 1986 Treasury dept. says congress needs to makes changes to the code (fairness and efficiency was their goal) - Treasury wondered why exempting prizes/awards? Remember Glenshaw Glass = windfall gains are taxable 1986 Congress says lets repeal the exemption under 74 If you dont take prize its not income. But if you direct where it goes then its constructive receipt and is thus income. If its assigned prior to ever being received not income. - Congress amended 74(b) income unless its assigned to a charity (plus the three other factors have to be met as well)

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- Turner Won steamship tickets. Commissioner argued $2200 value bc thats the amt the tickets sold for. T/P argues the subjective value of $520 bc thats what the tickets are worth to the T/P Court decided on $1400 as income value bc its a prize/award - Court says its not a subjective value, its an objective value - Metzger says ct just picking a number as a compromise Employee Achievement Award (p. 146) - 74(c) exemption for employee achievement awards Cant be cash Scholarships (p. 147) - 117 Exemption for scholarships T/P argued it was gift like so congress enacted 117 Applied to degree candidate and non-degree candidate Broad enough to include tuition, rm and board, incidentals Even if have to perform services to keep scholarship, its ok, as long as everyone in the program has to do it - In 1954 117 enacted to tamp down litigation re scholarship The litigation revolved around what we mean by scholarship - Commissioner promulgated a provision: If getting money to go to school, but getting it in return for services, then its not a scholarship Scholarship is not money to go to school paid by ER - In 1986 Treasury dept. looked at 117 Took out non-degree candidate now for 117 to apply have to be a degree candidate Even for a degree candidate scholarship exception does not apply to room and board or incidentals only applies to tuition As for performing services (working in lab and everyone in program has to do it) from now on anyone that gets scholarship and is required to perform services to keep the scholarship the amt of the scholarship that represents the fair market value of the benefit the institution is getting should not be included in the exclusion. Government Subsidies - Fed govt says to shipping cos, we know its more expensive for you to operate (and fly an American flag) so Congress passes a law saying were going to give you some money thats income. Its money to them, close enough in relation to their business, regardless that its paid by govt so its income

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- Other side is welfare pymts. Checks the govt writes to people who are in need. (Ex: aid to family w/ dependent children). Theres no code section that says its not income but administrative practice has never indicated that its income. If pymt meant to promote welfare = its NOT income. - 1970s Congress enacts statute to get unemployed people back to work. Govt says lets train them and get them a job. One phase was educational setting would get minimum wage for hours spent in the classroom - Not income = promoting welfare Second phase was to take these people and put in an employment setting. - Private ER pd by govt, pd by ER - Municipal setting pd by govt, rest by municipal - Here govt said this is income. These people are getting paid for services. - In 1990s welfare changed to workfare. States workout program to encourage people to work. The need requirement has to be coupled with activity. - Notice 99-3 (p. 157) IRS says going to create a safe harbor. If satisfy all three requirements its not income: (1) Payment has to be made by a govt (2) Has to be based on a need (3) Amount has to be controlled by the state welfare statute If not in satisfaction of all three, doesnt mean its income, just means whether its income and how much will be based on prior law. - 85 Unemployment compensation is income. In effect its payment for past services. - 86 Social security payments can be taxed, but taxable on a sliding scale. In the old days it was not taxed. 15% of social security pymts are never taxed Other 85% can be taxed. - Measure you SS against all your other income. If have sufficient other income, then SS pymts are taxed. If you dont have sufficient other income, then SS is not taxed. - 103 Interest paid on state govt debt is not taxable. IBM wants to expand, wants to borrow money, could go out to

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marketplace and ask people to invest with them and will then be paid back. - Lets say IBM pays at 10% interest. IBM gives A a bond at 10% interest, so every year A gets $10K in interest Commonwealth of MA wants to do the same thing they sell a state of MA municipal bond. - A = 35% tax bracket = $3500 in tax yearly, so gets $6500 a year - B = 35% tax bracket due to exemption under 103 not taxable so gets $10K a year The Comm knows this and could offer 9%, 8% or 7% interest rate. The answer is 6.5% - T/P would still get $6500 back just like IBM, but its federally not taxed. - While the federal treasury is losing $3500 in taxes, but they see where the money is going the Comm is saving money. Fed govt is sharing revenue with its sister states Two problems with this: (1) States can borrow the money tax free, but entrepreneurs come in and says they need help or a company comes in to bring new jobs, etc. but needs help from state - State says will borrow the money and let you use it tax free - This the Fed govt is not ok with doesnt want states using the money for private activity (2) States that dont have a big project, but knows 103 sitting out there, so they go out and float the bond and take the money to buy more bonds at a higher rate (so getting a free 1%) - 103 says NO Then this is what happens: - 50 states trying to raise money and sell bonds, so ran out of 35%tax bracket T/Ps. So state says there are tons of 33% tax bracket T/Ps (these T/Ps would buy IBM bonds bc would get $6700). So states say going to raise interest rate to 6.7% rte. Then run out of 33% tax bracket T/Ps, so next bracket is 28%. If purchased IBM would get $7200. States then change interest rate on state bonds to 7.2%. - This is where treasury comes in and says if you sell at 7.2% all the 35% bracket T/Ps are going to buy it first. In this scenario the govt is spending $3500 and the Comm is saving $2800 the additional amt is going right in the pocket of the 35% tax bracket T/P Govt says to state this is an inefficient model Proposal:

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(1) Fed govt says let us repeal 103. State says without tax exemption wed have to pay 10%. Fed govt says we will send you the $3500 for every $100K borrowed. - State said no in four years there will be a new administration and you never know (2) Fed govt will leave 103 on the books but its getting more and more inefficient so well enact a parallel provision that gives the states an option to provide a taxable bond - But fed govt promises to send the states $3500 - The states say no. The states dont trust the fed govt B. Gifts and Inheritances of Split Interests 1. Irwin v. Gavit (p. 245) - Facts: Uncle dies w/ estate of $100K, has a niece (A) and a nephew (B). Puts$100K in bonds of trust, paying 5% interest and says pay income from bonds to A for 20 years and then to B. Each owner owns some together they own it all A has right to the income and B has right to the remainder intrst - At time of uncles death, A is richer bc she inherited an interest in property, she has right to accept all income from the property for 20 years and could even sell it (but buyer wouldnt pay $100K, but its certainly more than zero) A and Bs interests together are worth $100K. Metzger says for interests of discussion As interest is worth 50K and so is Bs - Issue: Whether the payments A received are income? A argues she shouldnt be taxed on it bc its an inheritance under 102, and thus its not income. B argues its also an inheritance and excluded under 102 - The flaw is that the $5K a year being paid to A is from the interest earned on the uncles estate in bonds. Its new, post death wealth thus its not a gift/inheritance and its taxable - Over the 20 year period the $100K turns into $200K The $100K the uncle died with and the $100k in earnings. Commissioner argues have to account for the $100K - 102(a) - $100K is excludable, thats the amt excludable

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- But the other $100K is income and its taxable - Justice Holmes wants to tax A on all $100K she received, and therefore when B gets the other $100K its tax free. The reason for this is bc A inherits income from the trust (taxable), and B will be receiving the corpus of the estate (non-taxable). - There may have been another option to treat A and B the same: The tax system could have taxed B on the $50K in gain of his original $50K interest over the next 20 years. A would pay tax at time of yearly disbursements (after $2500 exclusion), pays $2500 taxable income in taxes over 20 years. - Holmes says NO to this idea. While it may be fairer, from administrative convenience view it seems much harder. If we allowed taxed to A and to B, were going to delay tax on $50K until B gets it in 20 years (thats a huge tax advantage) lawyers would start planning for this when drafting wills. - For valuation purposes, we need to divide the property left by uncle, so looks like exemption should be split between them. But then they ask did A really inherit a piece of the corpus? No, truly A didnt inherit any of uncles property she inherited strictly income from the uncles property. IX. Loans and Other Receipts Balanced by Offsetting Obligations A. Loans Debt is not income - because its a loan and is offset by the duty to repay. - Its not income when the debtor gets it. - Years later when debtor pays back theyre no poorer. 1. Milenbach, et. Al. v. Commissioner (p. 163) - Facts: LAMCC loaned $6.7M to the Raiders for relocation purposes. The loan was to be repaid from 12% of the net receipts from the operation of luxury suites. Raiders never made any pymts to the LAMCC loan. Milenbach
City $6.7M to T/P (1982) T/P never repays

Irwin
City $10M to T/P T/P never repays

Frier
T/P lawyer estates $100K to T/P T/P never repays

- Common is all three T/P gets cash in year one and never has to repay

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- None of the T/Ps are arguing that theyre not enriched - The question in all of these cases is when is it income? Commissioner taxable in year its received (and then didnt pay it back) T/P theyre richer when they didnt have to pay it back - Knows theres income, but says not income when received bc at that time had an obligation to repay it (and thus there was no accretion to wealth) - Physically richer years later when city told him not to pay the loan back (and thus the IOU was destroyed) - Therefore in 1982 the Commissioner has to argue the $6.7M in 1982 was not a loan - Tax court in Milenbach says income in earlier year. - Tax court in Irwin says not income in earlier year In Milenbach the repayment terms were 12% of net receipts from the operation of luxury suites the Raiders were to construct The Irwin case on the other hand was very specific that the money had to be paid back, UNLESS city doesnt come up with the other $105M and rebuilds the football park. In Milenbach, the loan was non-recourse the city could not go after the Raiders. Repayment was just based on the 12% of net receipts from luxury suites. - In Milenbach the court though the deal was illusory and thus the loan was not enforceable in the earlier year so its income. - Definition of loan: must be an existing, unconditional, and legally enforceable obligation for the pymt of a principal sum. Here, both cases have conditions on repayments of money - Irwin Its a loan, even if there was a possibility would never be repaid - Milenbach Not a loan. Irwin they advanced the $10M, had to sign to repay unless we (the city) dont act on their part of the bargain. (The control over repayment was on the part of the city) Milenbach the tax court says if the repayment has to come out of skybox rentals and the Raiders get to decide if the skyboxes will be built. - Not a loan - Condition in the discretion of the debtor - Court of Appeals comes along and says it is a loan. Agrees with law as laid out in tax courts opinion BUT the agreement says Raiders were expected to build the

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skyboxes and have to do so within Raiders reasonable discretion - So wasnt if theybuild skyboxes, its when they build skyboxes. Frierden - Lawyer enters pawn, enters agreement with estate saying give me the $100K now and Ill repay it in year 2. The loan agreement lawyer agrees to repay $100K in year 2 or offset responsibility to repay with amount for services. - The loan agreement is unconditional agreed to repay one way or another. Nonetheless, court says income to him in year 1 Why? - T/P had no intention to repay the money, thus there was no loan. - If just looked at the document, its a loan, but T/P still loses because under the circumstances there was never an intent to repay. - If the substance of the deal is not there (form without substance) tax system will look right through it and say no deal B. Claim of Right Doctrine 1. North American Oil Consolidated v. Burnet (p. 169) - (Background):1917 WWI Wilson didnt want to do it. To pay for the war, Congress raised taxes to the highest tax year ever. - Facts: 1915 -The T/P drilling for oil making lots of money, govt says this is our land quit drilling. N.A. Oil Consolidated said no, they had a lease for the land. 1916 - Worst thing for the economy was to quit drilling, so agreed to keep drilling. A receiver was appointed and then they decide who owns the land. 1917 - N.A. Oil Consolidated wins and is paid profits from the receiver. 1920 US Govt appeals affirmed. 1922 US Govt appeals again cert denied. - Issue: When is the income (winnings received by N.A. Oil) taxable? T/P (N.A. Oil) wants 1916 or 1922, bc 1917 was a year of astronomical taxes - Tax Ct says should be paid in 1916. Sup Ct says taxable in 1917. T/P argues for 1916 bc thats when the income was earned - Has an equity argument as well if there was no lawsuit brought by the US govt, the T/P would have earned and pd taxes based on 1916 tax rate. Sup Ct says 1916 not the right year for administrative reasons - Bc in 1916 the T/P didnt receive it, and may never receive it

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 T/P also argued for 1922 since thats the year the litigation ended, so until 1922 they didnt know who it belonged to. - T/P trying to use Milenbach argument loan was not taxable until it was released from obligation to repay Sup Ct said no, in 1917 when the T/P recvd the funds they said the funds were theirs and it was controllable by them. Claim of Right Doctrine: (p. 170) - If a T/P receives earnings under a claim of right without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money and even though he may still be adjudged liable to restore its equivalent. Suppose District Ct finds in favor of N.A. Oil, govt appeals, and the ct says going to stay the action until litigation complete? - Not taxable then bc claim of right doctrine not satisfied T/P doesnt have control over the funds Suppose T/P wins. Ct says pay to N.A. Oil. N.A. knows govt will appeal so puts the money in escrow. - Taxable claim of right doctrine satisfied A self-imposed restriction on the funds does not count - First year received funds w/ claim of right and without restriction thats when its income. Even if T/P doesnt own the funds, he has dominion and claims them to be his. - So even if he ends up having to pay it back its still income in the year received. What if Sup Ct went the other way in 1922 and said the \ govt won and N.A. Oil had to pay every penny back? - N.A. Oil would then get a deduction - The deduction is taken In the year the funds have to be paid back. C. Illegal Income Simple rule illegal gains are income. Tax sys approaches these from a value neutral perspective Prior to James the court in Wilcox held embezzled money did not constitute taxable income. - Cases said there was an offsetting obligation to repay gains arising from embezzlement. Extortion money was taxable income bc extortionist had voidable title

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(the V handed the money over to him) - Whereas with embezzlement he/she has no title over the money

1. James v. United States (p. 172) - Facts: T/P embezzled money from his employer. Failed to report as income. - Issue: Were the embezzled funds income? - Holding: Its income, UNLESS theres a consensual, unconditional obligation for repayment. If the embezzled funds are ever paid back, the embezzler gets a deduction. - Whittaker says theres no enrichment. He has an offsetting obligation to pay. Theres also no claim of right so should not be income. - Black says I dont like this case bc Commissioner is trying to put a bad guy in jail its a criminal case. Commissioner is not prosecuting for tax purposes, rather its prosecuting to put the guy in jail. X. Income from the Cancellation of Indebtedness Its income there is enrichment as a result of cancellation of a debt T/P is richer by gaining something of value or by paying off a debt - So could have something even if dont gain anything of value through the year. - In the year the debt is cancelled, T/P has income Not income when get cash from a loan, but when obligation to repay is extinguished thats when its income. Two kinds of indebtedness cancellation income: - Good market transaction kind Kirby - Where T/P getting debt forgiven bc in financial trouble A.. United States v. Kirby Lumber Company (p. 321) - Deals with a debt transaction couched in terms of sale and repurchase - (Doyle) T/P buys stock for $10 and a yr later sells for $11. The sale is a realization event see what gain was in excess of capital infusion. - Facts: Kirby sold its own bonds (which means it borrowed money). Gets cash from people in market by selling them a bond for $11. Contract between Kirby and stockbuyer saying 10 years from now, buyer will get

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$11. Between know and then investor will be paid interest over 10 year period and then gets money back in 10 years. Suppose a year later, the original investor needs cash and wants to sell the bond. Goes to another investor and offers to sell for $11. Investor 2 says interested in buying bond but wont pay $11 bc the interest rate is going to fluctuate (when investor 1 bought bond was offered 5% interest) and over the course of a year when investor 1 goes to investor 2, the fair rate of interest now is perhaps 7%. So investor 2 going to go buy bond from somewhere else. Investor 1 then says pay me $9 for the bond to account for the higher fair rate of interest. (The discount in selling price for bonds makes up the lower interest rate.) - When they sell their own bond theres an investment flavor. Kirby floats the bon (sells for $11), a year later the interest goes up, value of bond goes down they go back in the market and buy back the bond for $10. Theres a gain - The difference is the sale precedes the purchase - In the year sold the bond = no income - In the year buys back at reduced price = its income Its like getting out of an obligation to repay by buying back at a lower amount Assets 1000 2000 OR 1000 1000 Liabilities 1000

- In either of these scenarios T/Ps net worth is increased The difficult part is tax sys finds income in the year the T/P doesnt receive anything - Kirby: Assets Liabilities 0 0 $11 ($11) - $10 ______ $1 $0 The other line of cases out there: - T/P starts business, disaster happens and loses $200. Creditors know not going well so agree to take $400 to cancel debt. Assets Liabilities

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$600 ($600) $400 _____ $0 $0 - Commissioner says $200 of gain We view the consequences of the debt transaction T/P borrowed $600, but then satisfied the debt for $400 - $200 richer - Before sitting down with creditors, T/Ps net worth was -$200 B. T/P getting debt forgiven bc in financial trouble - Caselaw, where T/P in financial trouble, courts forced on commissioner a more practical result saw theoretically where T/P was richer, but net worth was zero - Courts said NO created exception 108(a) If T/P is insolvent before and after the transaction, then there is no income The code then says if T/P but for this provision would have tax benefits (ex: losses) the code says you cant have it. You lose the benefit of the loss deduction. Client declares bankruptcy, comes out with $200 of assets - 108(a) if T/Ps debt absolved in bankruptcy proceeding, then no income (even though not insolvent). Goes along with theory of bankruptcy giving T/P fresh start. Result of cancellation of debt indebtedness: - T/P pays $20 to IBM for $100 equipment, so IBM is loaning $80. Months later IBM has new technology, so asset T/P just bought falls in value to $70. IBM says will write $80 of debt down to $50 (writing off $30 of debt) = literally its cancellation of debt T/P is richer by $30 Courts looked at cases like this and said it looks harsh looks more like a renegotiation of the purchase price between the parties. - Viewed in this light its not really cancellation of debt income = its a purchase price reduction 108(e)(5) Elected provision dealing with real estate - 108 codifies purchase price Reduction - T/P buys real estate for use in business, property loses value, creditor writes down debt. T/P owes less. 108 says T/P can by election exclude the cancellation of indebted income, cost is the T/Ps basis is reduced by that amt to. - Even if happens in personal property can exclude the cancellation of indebted income, but the cost is the same as with business property T/Ps basis is reduced by that amt to.

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 If cancellation from father to son = not income, bc its a gift Suppose T/P contracts business expenses, cant pay service provider. Would have been deductible. Here provider says forget it. Not income bc even though cancellation of indebtedness, its still not income since the deduction and cancellation cancel each other out. 108(f) if student loans are forgiven, not income as long as satisfy these provisions. XI. Life Insurance Death Benefits A. Annuities T/P buys annuity at a cost of $100K. Ins co takes money, invests it for the pd of time before they start paying it back, then once it matures starts paying T/P back. If pymts start 10 years from now, well pay you $1000 month for 300 months. Starting date arrives, ins co pays monthly pymts. In first year T/P gets $12K. - For tax purposes need to know how much is capital and how much is interest. T/P would argue cant tax her until she gets all of her capital back Commissioner would argue we know how much youre getting back over the next 300 months, its all income now. - Congress says lets treat each pymt received as part return of capital and part income. 72 establishes a simply and logical formula = exclusion ratio - $100K investment in the contract (capital infusion) - $300K T/Ps expected return - Ratio is 1/3 = 1/3 of everything T/P receives is return of capital and is not income (so $4K a year is not income) - Exclusion ratio is established when the annuity matures Once exclusion ration established it does not change Hypo: T/P buys $100K annuity with four $25K pymts. The number of payments and timing of pymts = were not concerned with the pricing. - For tax purposes, when the annuity matures is all were concerned with. All we need to know is how much it cost them. What if its not a fixed annuity? What if its a variable annuity? - T/P has $100K and ins will pay $1000 for life. For tax purposes we need exclusion ratio Only thing missing is what T/P is expected to get out

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- The ins co has already done this calculation they pay actuarys to do it by using tables - A person expected to live 300 mos, but only lives 270 mos has only received deduction of $90K, so has $10K of loss and can take is as a loss on their last income tax return - Suppose T/P lives 330 mos, but was only expected to live 300 mos. Code says exclusion ratio stops after the full capital amt has been paid back. After 300 mos, everything received is income no exclusion left. B. Life Insurance 101 Term policy pure insurance - T/P in 30s goes to ins co says thinks going to die in 12 mos. T/Pgives ins $1000 premium if dies w/in 12 mos T/Ps estate gets $100K. Ins co does it bc actuarys are saying 1 out of 100 of these T/Ps will die. So agree to the term life ins. Economists say this is income T/P puts in $1000 and gets out $100K Congress says no, we dont want to tax this, we want to encourage T/Ps to get life ins this is what 101 does - Proceeds payable on reason of death are excluded - There is risk T/P is passing off risk to ins co, ins co is passing off to a larger group Whole life insurance policy - $100K life ins policy, but charging T/P $2000. $1000 goes towards ins cos risk, the other $1000 goes into a bank account w/ T/Ps name on it. - Inside build up - the gain on the premiums you paid into the life ins 72 is rigorous in its pursuit of non-capital income. Every penny over original capital infusion is taxed as income (annuities) 101 when insured dies, the proceeds that go to the beneficiary when T/P dies says forgive it all its all excluded. No attempt to tax the inside buildup Annuity only taxable when gets pymts. Earning inside the policy are deferred until get pymts. Even then its taxed pro rata based on the exclusion ratio. Life ins its all forgiven, even the inside buildup. 101 applies only if proceeds payable as reason of death.

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XII. Expenses Involving Both Personal and Business Purposes DEDUCTIONS Gross income is our starting point - 61 (meant to be very broad) We have exclusions - 101 life ins, 102 gifts Taxes are imposed on a taxable income figure, not gross income. We get there, from gross income to taxable income by deductions. - Want to tax net income, not gross income = income net of expenses Deductions for business expenses - Why does the code allow for business deductions? You have to spend money to make money - Business deductions have always been allowed Suppose lawyer takes a case for $100K but had office expenses of $10K, travel of $10K and court costs of $25K - Net income takes into acct what the T/P had to spend to earn/generate the income. A. Moss v. Comissioner (p. 623) - Facts: Eight person law firm meet everyday at caf for business meeting and lunch. Moss is a partner and wants to deduct the lunches as a business deduction. (Moss wants a tax benefit for the cost of the lunch) The statute allows tax benefits for meals: 119 exclusion for meals by ER to EE for convenience of ER, on ERs premises - Doesnt apply here (not on ERs premises, etc) 162(a)(2) allows deduction if away from home - Moss is not away from home does not apply - The statutory conflict comes in under 162(a) 162(a) provides a very broad deduction for expense incurred by T/P for expenses incurred connected to his trade/business. Doesnt matter how much, but connection w/ business impt Commissioner acknowledges deduction as long as appropriately connected with business. BUT 262 says personal, family, or living expenses are not deductible. If code allowed everything to be deducted (personal and business), the only thing left to be taxed would be savings. - If business no matter what, its deductible. If personal - no matter what, its

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not deductible. Deduction 162(a) Business Expense 262 Personal Expense No Deduction

- Issue: How do we characterize this lunch? Metzger says appears to be business the lawyers were very busy, no doddling over lunch, were required to be there by ER, etc On the other hand its lunch, and everyone has to eat This lunch raises their personal welfare, but at the same time its conducive to the production of business - Judge starts with statutory construction if read literally the T/P wins. Statute isnt read literally. Theres a natural reluctance to read the statute literally bc it would lighten the burden on the T/P that had the burden lightened from an intermingling of pers and business expenses (ex: work w/ consumption). In most cases the intermingling usually occurs to the highest tax bracket T/P Could lead to all lunches being deductible Judge also says an option would be to disallow any deduction for business meals, but the result would be excessive taxation of people who spend more money than on business bc they are business meals than they would on meals if they were not working. Would be unfair bc to T/Ps actually conducting business on lunch doesnt get the true value of the meal that he would if it was a personal lunch (not getting their moneys worth) Judge says the economically correct solution would be to require the T/P to pay tax on the fair value of the meal to him, and then any amt over that fair value would be deductible. This solution would be an administrative impossibility Would also mean the same meal, same client would represent a different deduction amt depending on which ee took the client to lunch - Therefore the expense deduction is all or nothing! - There are some cases that are easier than this for ex when the business T/P takes a new client out to lunch. The court says the Commissioner has the right to demand a showing that the business meal was a real business necessity (Ex: this is met when the client to the business is a guest) Judge says meeting w/ a new client when sharing a meal fosters comraderie and makes business dealings friendlier and easier. The fun of the lunch is to engage in a social interaction on an even playing field so its accomplishing what he set out to

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accomplish. - This is not the case here here its just the lawyers t the lunch and they knew each other very well. If it was a big mammoth firm, and they have a luncheon once in a while that ok to its morale building. - What if client at lunch with attorney every few days for a year. Still deductible? No, like Hanson v. Commissioner where Dr. took other Drs to lunch 3-4 days a week, 52 weeks a year = not deductible Did it to much, therefore no deduction - Its all a matter of degree and circumstance; and particularly of frequency. - Real business necessity has to be shown to get the deduction. The meal at caf Angelo was convenient and inexpensive If they had gone to an inconvenient place or an expensive place would be easier for them to get the deduction If they probably wouldve eaten at caf Angelo anyway leans more towards personal - If its a real business meeting, then its a real business necessity. How do we get around this? They can deduct the meal if the meal is a real business necessity Here the meeting was absolutely necessary, but could have had the meeting w/out having the meal Whereas in the client issue - the meal helped to accomplish the business objective. But here the meal was not any part of the business objective. The cost of the meal could be attributed (or a portion of it) to rental space (ex: if caf Angelo charged $20 a month to use the back room) and would be deductible. - Holding: The court held the meal was necessary to accomplish their business objective and thus not deductible in this circumstance (not an organic part of the meeting) B. Travel and Related Expenses 1. Commissioner v. Flowers (p. 629) - Facts: T/P lives in Jackson and works in Mobile. When accepted position understood he would pay cost of traveling back and forth and living expenses in both places. T/P claimed deductions for traveling expenses and for meals and hotels.

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 T/P looks to 162(a)(2) deduction for traveling expenses while away from home in the pursuit of business. - To get deduction under 162(a)(2) have to meet three conditions: 1. Must be reasonable and necessary traveling expense 2. Must be incurred while away from home - Sleep or rest rule must be satisfied 3. Must be incurred in pursuit of business - Here theres no question the reasonable and necessary is met. - Commissioner argues factor 2 by saying that T/P is not away from home. Commissioner uses vocational definition of home which is the T/Ps principal place of business. Sup Ct. skirts this issue every time and says not deciding where the T/Ps home is - The Sup Ct instead focuses on the third prong - whether the expenses were incurred in pursuit of business. - Holding: The expenses were not incurred in pursuit of business. The expenses incurred were solely as a result of the T/Ps desire to maintain a home in Jackson. The added costs were as unnecessary and inappropriate to the development of the RRs business as were his personal and living costs in Jackson. The court says if T/P lived in Mobile, hed be at work everyday. The necessity of T/P accruing travel expenses is due to T/Ps personal choice of living in Jackson and therefore the costs are a logical result of the T/Ps personal choice. If T/P lived in Mobile the costs would not be deductible, so nothing is changed when the T/P makes a personal choice to live in a different area. - Commuting expenses are not deductible. The commuting expense was brought on the T/P by how own personal choice of where to live. 2. Hantzis c. Commissioner (p. 631) - Facts: Law student (T/P) living in Boston. Found summer job in NYC and worked there for 10 weeks and made $3750. T/P spent $3250 in living expenses in NYC for the 10 weeks. T/P wants a deduction for meals and living expenses and transportation while in NYC. T/P argues 162(a)(2) saying she was pursuing business in NYC and was away from home. Commissioner argues 162(a)(2) does not apply bc T/P is not away from home since her principal place of business in

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NYC is T/Ps home. - Tax ct says home is in Boston. How is this different from Flowers? Here, Hatzis employment is only temporary, but in Flowers the T/Ps employment in Mobile was permanent. Tax ct held it would have been unreasonable for the T/P to move residence for 10 weeks. - Court of appeals reverses and says no deduction. T/P is not away from home when shes in NYC. The court found that the T/P had no business purpose for the maintenance of the Boston home. Even though husband still lived and worked in Boston, it doesnt matter bc they are two separate people even though they file a joint return. - The issue often turns on where home is. If the T/P only has one home, then the case is easily decided. Moss Lived and worked in Chicago no 162(a)(2) issue If T/P has no home, case decided much more easily. Big issue is when T/P has two homes. The tax statute asks the T/P why do you have two homes? 1. If its for business reasons, then home is usually where you decided to live (residence) and its deductible. 2. If its for personal, then home is usually where principal place of business and is not deductible. - Holding: Court finds the maintenance of two homes was for personal reasons and thus not deductible. The fact that its only temporary employment and the fact that husband has to stay in Boston these are separate and distinct circumstances (no piggybacking) so no deduction under 162(a)(2) - The court is looking at Congresss underscored word in 262 which disallows a deduction for personal expenses. - Hypo: Mr. Hantzis is a lawyer abd teacher with a full time job. Drives from Boston to NE university no deduction since hes still at home. Suppose Mr. Hantzis took the 10 week job in NYC bc he has no teaching responsibility during the summer. Commissioner would argue his temporary NYC summer job was a personal choice. His employer (NE Univ) did not require T/P to take job in NYC over summer. In this hypo he has two employers two separate and

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distinct jobs and is making money in both places. As distinguished from Flowers, where T/P was only making money in Mobile, not in Jackson where he chose to live. Also, unlike Mrs. Hantzis where she only had an employment connection with NYC, so that was her home. Temporary Employment Doctrine - Why does T/P have two homes? Has Boston home bc thats where his permanent place of employment is. Has NYC home bc thats where his temp employment is - Since its a business reason, Boston is home and the expenses in NYC are deductible. - Why does the code allow a deduction in this case for meals and lodging? He works in Boston and needs a place to live in Boston = no Deduction Business is making T/P increase his expenses by maintaining two homes get a deduction for the duplicate expenses - Notion is duplicated business expenses are deductible bc business is forcing you to increase your expenses. - Home is where you work home is where your principal place of business is. - What if Mr. Hantzis employment in NYC changes from 10 weeks to 10 months and then actually ends up staying 10 years? At some point the code is saying to Mr. Hantzis- why are you maintaining two homes. Where between 10 weeks and 10 years have we turned from temporary to permanent in NYC? In 1992 Congress codified the one year rule temporary is defined as not exceeding one year. Temporary v. Indefinite - Commissioner says position in new place is indefinite if its reasonable to expect will be there for more than one year. - If when T/P takes position, if expected to last 10 mos (less than one year) its temporary and would be deductible. But after 9 months ER says they need T/P for an additional 4 months. At that point the reasonable expectation is that the whole stay will be longer than a year (now indefinite). This is when T/P goes from being Mr. Hantzis to being Mr.

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Flowers. No longer deductible bc now its indefinite. - If youre expectation is that youll be there longer than a year, even if youre not, your tax home is shifted and expenses would not be deductible. - Some courts say for 162(a)(2) to apply when T/P has two business justifications (for example real job in Boston, summer job in NYC) there may have to be actual duplicate expenses. Sleep or Rest rule US v. Correll - Facts: Traveling salesman left early morning and returned home for dinner. Hes on the road all day traveling. T/P wanted deduction for meals on the road away from home. So 162(a)(2) should apply. Commissioner argues in order for T/P to be away from home have to satisfy the sleep or rest rule. Meaning youre so far away you need to sleep or rest. If make it there and back in one day no deduction The logic is there are very busy professionals that work straight through the day buying meal when she can and that is not deductible its a personal expense. So why should we allow a T/P that spends 11 hours behind the wheel get a deduction, but not the busy professional. - Away from home is satisfied only if the sleep or rest rule is satisfied Not going to define away by distance traveled or hours spent behind the wheel going to look only to rest or sleep rule. Transportation can be deductible whether sleep or rest rule satisfied or not, but not w/ traveling expenses where the sleep or rest rule must be satisfied. Bisonnette v. Commissioner - Facts: Capt. Of ferry boat voyages about 16 hours in length. Gets to where hes going and has a 6 hour layover. Demands of job so rigorous that has to rest on layover and sleeps on cot. Has two meals on the shift and they are deductible bc the T/P satisfied the sleep or rest rule. C. Traveling/Transportaion/Commuting Expenses Intersect T/P drives from home to office and back (everyday) classic commuting = no deduction (Flowers)

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 T/P gets up drives to office, checks in, then drives to deed, then goes to probate court, then goes to office, then home. - T/P can deduct for trips from office to deeds, to probate ct, and then back to office bc business is forcing T/P to incur these automobile expenses and are deductible under 162(a) T/P doctor has an office, practices at hospital and at clinic. M,T, and W works at each separate place - If T/P has more than one regular place of business traveling from home to each one not deductible = commuting. This is commuting, hes just commuting to a different place each day. Suppose on Thursday goes to office, then to hospital, then to clinic. - The trip gets you from personal mode to business mode is not deductible. But once checks in at office and then goes to other places of business those are deductible bc its transportation based on business necessity. - If has more than one regular place of business, transportation from one to the other are deductible as business transportation. Bankteller works in Springfield lives in Agawam. Goes to Springfield and told needs to fill in in Amherst. - Thats deductible bc its transportation based on business necessity. What if next day boss calls teller and says go straight to Amherst. - Looks like would be commuter expense and not deductible, but this is wrong. (Caused people to argue no deduction if goes straight to Amherst, but would get deduction if went into office first = makes no sense) - Traveling from home to temporary place of business is not commuting and will be deductible. Dr. works at office, hospital and clinic. But if Dr. went into office first and then to see a patient the visit to the patient would be deductible bc a business transportation. What about an employee that lives in Agawam, but has temporary work in Springfield, Ludlow, Chicopee, and Conway. - T/P tries to argue that hes like the bank ee that works in Agawam and lives in Springfield and was told one day to go to Amherst. In that scenario it was deductible because one regular place of business and goes to another place temporarily) - The difference here is its commuting. This is not like the bank ee going to a temporary place, rather this is all commuting just going to different places bc each place is temporary. T/P doesnt have a regular place of business.

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 1953 Revenue Ruling - Construction worker in Springfield travels to New Haven, CT to get work (due to lack of work). Goes back and forth everyday. Its deductible (even though temporary and even though no regular place of employment) - This is just kind of an exception. - Temporary location outside the metropolitan area in which the T/P lives. T/P lucky enough to run business out of home. What do we do when business and home are the same thing. - T/P doctor has home office, goes to office, hospital, and clinic. T/P would argue travel from home to office, hospital, clinic would be deductible because traveling from one office to another so its a business travel and deductible. This is the rule but its very hard to prove that your home is your principal place of business. - Especially if T/P has another place of business that he works out of. If its a place of business, then its not good enough. Rosenspan v. US - Facts: Traveling salesman did business in NYS (5 weeks), the rest of the year (47 weeks) he would be traveling. T/P argues Commissioner says home is principal place of business and NYC is home, therefore 47 weeks a year Im away from home. - Second Circuit says home is where you live. But also looked to whether expenses necessitated by business. - In order for 162(a)(2) to apply you have to have a home/residence to be away from. The reason for 162(a)(2) the first set of expenses on T/P, but if business requires you to pay for a second set of expenses now you can deduct it. Theres no duplication if you dont have a home to be away from. Later cases: - T/P gets PO box in Nevada. Away for 47 weeks a year. Mail drop is not enough (not a home) - T/P rents room from sister and is there one month out of the year. Court

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allowed the deduction due to the rental of the room all year. Some courts require T/P to show he had a second set of actual expenses.

D. Transportation of Tools T/P drives to work location and needs tools. When he commutes to work hes also transporting tools. But the drive from home to work accomplishes two goals commuting and transporting tools. How do we deal with this? Fausner v. Commissioner - Facts: Airline pilot transported flight bag with him everytime driving from place to place argued transportation was deductible due to transportation of tools. - Holding: Sup Ct says is if T/P can show an additional expense occasioned by the tools, then a deduction will be allowed for the difference. Revenue Ruling 75-380 - T/P has heavy tools and has to use trailer to transport. So previously only had car and now had to get a trailer. $2 for bus, $3 to take car and plus $5 for the trailer. Only gets deduction for $5. Measurement of additional expense depends on mode of transportation actually used. E. Minor/Major Place of Business Flowers was a personal expense we expect you to live where you work. What about if T/P lives near one place of work, but also has another place of work (could be one job with two poses of duty or two jobs)? - In such a case, if T/P lives near one hes done all he can do, so travel to the other is deductible. - Question is, which one should the T/P live close to, which one is T/Ps principal place of business? T/P doesnt get to choose needs to live near the principal place of business. Markey v. Commissioner (p. 643) - Facts: Lives and works in OH. Consults for GM in MI. Keeps home in OH, during time consulting for GM rents apartment, comes back to OH on

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weekends. T/P argues OHs home, so expenses in MI are deductible. - Holding: Court says for tax purposes, MI is home thats where more money is made and more time is spent so no deduction for MI expenses but can get deduction for travel to and expenses in OH. - 162(a)(2) applies to OH expenses, unlike in Flowers, due to the fact that hes in OH for business purposes as well. Minor/major post of duty in most cases is obvious. F. Moving Expenses T/P lives in Agawam and works in Springfield. ER says go see client in NYC. Trip to NYC is business travel and is deductible - all expenses fall under 162(a)(2). It turns into 50 months. At some point between o and 50 months its now indefinite and so why is T/P keeping home in Agawam. Tax home has shifted once it becomes indefinite. 162(a)(2) no longer applies. - As soon as reasonable expectation changes to knowing will be there longer than a year - its no longer temporary. When tax home shifts the cost of moving expenses under 217 are deductible. - Not all expenses, just direct moving expenses 82 all reimbursements by ER for moving costs are considered income 217 allows deduction only for direct moving costs - So if ER pays more than just direct moving costs, then have to report as income. Limitations: Also has to be same trade/business New trade or business First job Moving from job to job Two tests have to be satisfied to get deduction under 217: Time: must be F/T for at least 39 weeks in the first 12 months after moving to a new location Distance: 217 applies if new job location would force you to increase your commute by more than 50 miles - What about where T/P moving for personal reasons? Response of code is we dont want that to be deductible. BUT not going to make a motive test administratively wouldnt

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work. So that is why the time and distance tests have to be satisfied. Example: T/P commuted to Washington D.C. everyday which was 6 miles away. Now has a new job in Baltimore and will be commuting 51 miles to work. - 217 does not apply bc increase in commute is only 44 miles difference. - For first job the distance requirement is just if the more than 50 miles commute distance is met between the T/Ps home and the place of employment. Shortest of the most commonly traveled distances G. Business Meals and Entertainment 1. Churchill Downs, Inc. v. Commissioner (p. 646) - Facts: Churchill Downs is a racetrack. Hosted KY derby and many events during the KY derby week. Dinners, galas, hospitality tents, etc. costing approx $400K - Are these business expenses? YES theres a logical connection between the money they spent and the business or trade theyre in. VIPs, sponsors, media, etc were the guests. Theyre doing the events to popularize the race and are spending money to make more money. Therefore its a valid business expense under 162. (For most cases this is the end of our inquiry here however, bc were dealing with food and entertainment, we must look at code 274) Its very much related to a specific business purpose - Even though meets legitimate business expense under 162, 274 adds additional layer of requirements that have to be met if expense for entertainment is going to be deductible. - 274(n) limits the percentage that can be deducted to 50% of meal and entertainment expenses. Everyone is enjoying it somewhat on a personal level so the amt is simply 50% deductible as business (50% nondeductible bc personal) T/P argues 274(n) limitation does not apply in circumstances delineated under 274(e) - First T/P argues in the entertainment business, so when spend money on entertainment thats their product and so not subject to the limitation in 274(n) Ex: Fashion show by manufacturer to

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promote their product to a group of store buyers this would not constitute entertainment. Yacht salesman takes buyer on trip around the bay. Not entertainment bc in the business of selling yachts. 274(e)(7) If you provide goods, services and facilities to the general public (then not bound by limitations of 274(n)) - This is not the case here, bc this was by invitation Only. 274(e)(8) Expenses are sold by the T/P in a bona fide transaction with an adequate and full consideration in money - Not the case here, the tickets were gratuitous - Why cant T/P argue giving tickets for moneys worth consideration bc theres a chance media will write about it in the paper? Not what Congress has in mind doesnt satisfy 274(e)(8) Selling tickets for a defined price is what Congress intended - 274(d) requires strict substantiation of expenses. No receipt = no deduction Applies to all expenses weve talked about tonight - Meals, traveling/lodging, entertainment Satisfy requirement by: 1. Bill or receipt; 2. And you need a contemporaneous diary containing the following information: Time Place Amount Business relationship of person being entertained Business purpose for the entertainment Before 274(d) there was a famous case where T/P didnt keep records and he would estimate his expenses. Tax ct said if he had receipts that would be best, but if not well hear other evidence and come up with a number. People began overestimating bc knew it would be cut back by the tax ct Then changed and decided to put the burden on the T/P and need to keep good records of expenses.

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- How do we know if its an entertainment expense? Objective test (not subjective) whether reasonable person would consider event to be within an entertainment variety. Precludes argument by T/P that says, but in this context its just public relations = that is simply attempting to argue its really a business expense. - Court agrees theyre in the entertainment industry but the events were not part of the entertainment product. - 274 is more amorphous but the intention is explicit and deliberate. Its not an income section and its not a deduction section In effect 274 says dont even look at this section unless youre allowed a deduction under another section. 274 is a disallowance section - President Kennedy said The phrase, its deductible, ought to pass from our scene For entertainment purposes, why dont we have a rule that its never deductible? Congress says Mr. President were unwilling to disallow a deduction. In some cases its a legitimate business expense. - 274(a) expense of entertainment variety, find another code section allowing a deduction and then also have to satisfy: 1. Expense has to be directly related to a conduct of the trade or business Directly related/connected is satisfied under 274(2)(c)(3) T/P has more than a general expectation of deriving some income or other specific trade or business benefit. Here were looking for some specific benefit Other than goodwill of the person or persons entertained at some indefinite future time from the making of the expenditure. - For example: having events in hopes that some of the attendees will remember you in the future when needs a lawyer - 274(a)(1) is heightening the circumstance before a deduction will be allowed - Expenditures generally not deductible: 274(a)(1) particularly tough on social events where no business discussion has taken place

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 274(k) lavish or extravagant = no deduction - 274(d) Associated Entertainment Associated with active conduct of trade/business and the entertainment directly preceded or followed a substantial and bonafide business discussion - 274(d)(2) Associated Entertainment defined A clear business purpose in making the expenditure such as to obtain new business or encourage the continuation of an existing business relationship. St. Petersburg Bank and Trust (p. 652) - Facts: Bank claims deductions for expenses it incurred in connection with cocktail, dove shoots and bbqs - First, T/P argues directly related Court rejects bc while they were motivated by business considerations, it was equally clear that the benefit was of the goodwill variety. - Second, T/P argues its associated with business/trade Court rejects bc it did not immediately precede or follow a substantial and bonafide business discussion. - T/P argues associated with not only satisfied with same big substantial business deal and then a dinner break Rather it ought to be satisfied in a case where hes doing it for business reasons. Here president wasnt inviting them bc he wanted to be friends with them Says associated with should be interpreted more broadly - Court says no. If we interpreted as a watered down directly related test, then everyone that met directly related test would also meet associated with test. Congress could not have meant that they intended two distinct tests. Townsend Industries v. US (p. 633) - Facts: Iowa corp taking EEs to Canada each year on a fishing trip. - Holding: Deduction allowed! Talked specific business and solutions Invited EEs of specific divisions Children and spouses were not invited - This is more than a business expense 274(e) exceptions to 274(a) (where additional requirements to 274(a) are forgiven). - Examples:

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 If income to recipient, then not so concerned about payor taking a deduction De minimis fringe ??? Entertainment facilities (yachts, lodges, country clubs, etc) no deduction for a facility, even with a legitimate business motive, if used for entertainment. - Example: cost of facility (cost of yacht, maintenance of yacht, cost of crew, etc) - If uses facility 99% for business and 1% for nonbusiness purposes = no deduction Entertainment activity a deduction can be allowed - Not a membership to a golf club no deduction - But lunch at a golf club may deduct H. Clothing 1. Pevsner v. Commissioner (p. 663) - Facts: Pevsner (manager) works at a high end boutique. As a job requirement she has to wear YSL clothes to the boutique. Pevsner has a simple everyday lifestyle outside of work. If she didnt have the job, she would never buy the YSL clothes. Pevsner wants to deduct $1400, the cost of the clothing. T/P looks to 162(a) allowing deduction for ordinary and necessary business expense. Only wears clothes on the job Required by boss to wear the clothing Commissioner argues its a 262 personal expense. Its clothing everyone has to wear clothing its inherently personal - Here, the issue (clothing) expense is both business and personal. Although many expenses are helpful or essential to ones business such as commuting and costs of meals these expenditures are considered inherently personal and are disallowed under 262. (p. 664) Business expenses can be disallowed if theyre also personal. - Mrs. Pevsner has proven theyre business, but can still be disallowed so T/P has to show more. - We have a standard of deductibility for clothing: 1. The clothing is of a type specifically required as a condition of employment

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 This is a legitimate business mandate here (T/P would never pay this amt of money for her own clothing) 3. Clothing is not worn in personal activities only worn for business purposes. T/P satisfies this here T/P says she does not wear the clothing off the job 2. The clothing is not adaptable to general usage as ordinary clothing. This is the issue here! - Tax court T/P wins uses the same three prong standard Tax court found the clothing was not adaptable that the T/P would not wear the clothing outside of work (under prong 2) The tax ct found the adaptability to general usage is to be determined from a subjective view. - Would Sandra Pevsner ever wear this clothing in her normal life Tax court found subjectively it was not adaptable for general usage based on T/Ps (Pevsner) lifestyle. - Court of appeals reverses based on second prong (adaptability) and the fact that it should be viewed objectively. Not viewed from T/P subjective view Question is not whether she would ordinarily wear this clothing in general usage, rather it should be viewed from objective viewpoint whether general use of the clothing would be generally accepted for general usage. - Objective test is chosen for administrative convenience reasons also promotes substantial fairness. T/P or revenue agent only has to look at objective facts so both T/P and Commissioner have some certainty. Subjective test would provide no concrete guidelines Fairness If had two managers of YSL boutique on different socio-economic levels but with identical wardrobes - the two would be subject to disparate tax consequences depending on their particular lifestyle and socio-economic level. - Holding: Under the objective test this clothing is adaptable to general street use. - Uniform is an example of deductible clothing. Military dress uniforms are not deductible because can wear them off the base Costume Yes deductible

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 Clothing that constitutes equipment (helmet, safety shoes, etc) maybe (if it looks like a tool of the trade) - By saying cant wear it away from work does not work to make it deductible across the board only for military. Example: If Pevsners employer said she couldnt wear clothes outside of the boutique would not be found deductible because would lead to bootstrapping. Ex: New associates would take law firm job only if firm would make part of contract that suits purchased by the firm for the associate could not be worn outside the firm. - Deductibility should not turn on adaptability. I. Child and Dependent Care 1. Smith v. Commissioner (p. 667) - Facts: T/P arguing child care expenses are deductible. (Basic tax rule: we tax you on net income. Gross income minus money spent in connection with income gets a deduction. Classic but-for argument: But-for the child care expenses I couldnt take this job. So but-for the child care expenses I wouldnt make any money. Therefore its a business expense and its deductible. - Commissioner argues but-for your decision to have children you wouldnt have child care expenses. - Holding: Court finds child care expenses are always personal never a business expense/deduction. - BUT then Congress steps in and enacts 21. 21 allows a deduction (but not for business reasons) Up to $3000 for one child % deductions: Up to $6000 for two children 20-35% depending on
income

- There has to be an intimate or proximate connection between the expense and the income earned. Theres not enough of an intimate connection in this case. XIII. Determining When a T/P is Engaging in a Business or Profit-Seeking Activity Up until now weve focused on the particular expense, and whether its deductible. By focusing on the expense weve been assuming the T/P has a business/trade profit activity. 71

- But, now were that What if trade/activity is not for profit. 183 if youre engaged in an activity, but dont have a profit objective in engaging in the activity, dont expect us to subsidize hobbiers. A. Is There a Profit-Seeking Motive? Dreicer v. Commissioner (p. 606) - Facts: Born rich and died rich. In 1955 T/P wrote a book a spectacular flop. Thought must be bc he didnt do enough research, but that was not the case. A flop bc no one would publish it. Deducted all the expenses from traveling bc his objective was for profit. - Holding: Court said there was no honest profit objective bc the T/P would have done it anyway. If activity is found to be a for profit activity, then so to must be the expense. If activity not for profit, then cant take losses for the activity - 83 Legislative history says T/P must show a profit objective. - T/P doesnt have to have a reasonable expectation of profit. - As long as have a profit objective, then its a good activity for purposes of 83. Most issues come up when the T/P is engaged in an activity that might make money, and T/P says would like to make money, but theres no profit objective. - The reason the T/P is doing it is bc he likes doing it = hobby Loss activity. Its not good enough that T/P would like to make money Question is, would you be doing this even if knew wouldnt make money if so, its a hobby loss. 1. Peacock v. Commissioner (p. 596) - Facts: T/P had an auto dealership consultation business, then started entering fishing tournaments under PMSI. Majority of business went towards fishing activity. Tournaments paid trophies and cash. 19941997 more time fishing than auto dealership consulting. (Have been fishing recreationally since the 80s) Looks suspicious looks like theyre having fun - In both Dreicer and Peacock, the T/Ps had lots of income from other activities so can take a loss which will help their tax consequences.

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- When the Commissioner argued not for profit, the cases use to look at certain factors. Commissioner consults the cases and finds 9 factors that are now memorialized in the regs: Not all factors apply in every case. Not any one is determinative 1. Manner in which activity is conducted. Are you really running it like a business or not Ct looking for T/P to have conducted activity in a business like manner Maintain complete and accurate records/ abandonment of unprofitable methods - In Peacock there was no business plan, no stmt of corp purpose, no change in procedures when wasnt earning money 2. T/Ps expertise. Expertise, research and study of an activity, as well as consultation w/ experts. - In Peacock, tax ct said T/P is a fisherman and good business man but not good enough bc didnt combine these two talents. Didnt bring in consultants, never seriously studied tournament fishing from a business view. 3. Time and effort spent conducting the activity. Devotes personal time to the activity and withdrawal from another occupation to devote to the activity. - In Peacock, 3 mos out of the year, time not devoted all to fishing (frolicking w/ family and friends). Didnt leave the auto industry for fishing business rather left to spend time w/ wife. 4. Expectation that assets will appreciate in value. Applies when T/P involved in an activity that involves real estate 5. T/Ps success in similar or dissimilar activities 6. Activitys history of income and/or losses. Senses of losses beyond startup may be indicative of absence of profit motive. - In Peacock, fishing suffered losses year

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after year and petitioners took no meaningful action to reverse the tide. - Same scenario in Dreicer. The fact that in both cases T/Ps took no action, lends support to finding the T/Ps were indifferent as to whether the losing trend could be reversed. 7. Amounts of occasional profits. 183(d) if activity shows profit in last 3 of 5 years, theres a presumption thats for profit activity. Occasional profits may indicate a profit motive. - In Peacock, fishing activity never earned a profit. 8. T/Ps financial status. Substantial income from sources other than the activity may indicate that the activity is not engaged in for profit. - In Peacock, T/P had substantial income from other source used losses to lessen tax consequences. 9. Elements of personal pleasure. Presence of personal motives may indicate that not for profit Just bc derives personal pleasure does not mean lack a profit intent. - Holding: Court found not for profit activity. 20% penalty! 183(b) a deduction granting section. - Hypo: T/P buys yacht. Leases it out. Saying its for a profit activity. $1000 rent, but has $1300 in expenses. Notion of 183 is 162 doesnt apply bc it allows expense deduction in trade or business for profit. - 183(b) says going to allow deduction for an expense even if not for profit, but only up to amount of income. [For profit 162] [Not for profit 183(b)] - Get to take $300 - No loss loss deduction - Can only reduce taxable income to 0 If for profit and 162 would allow deduction, then: - 183(b) says if expense related to income would have been deductible if for profit, then you get the deduction but only up to the amount of

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income.

B. Business Use of Residence 280A expenses related to T/Ps residence - General rule is no deduction 280A(c) business use of property in residence (home office) can be deductible Newi v. Commissioner (p. 610) - Facts: T/P argues working at home. Commissioner says no. - Court says looks like legit business expense needs to be appropriate and helpful to his employer. T/P was allowed a 25% deduction of household expenses - Commissioner goes to congress and says it will be abused. Congress says we need to clamp down. - 280A(c) If T/P has home office, deduction is permissible. 1. Has to be used regularly and exclusively for business The room has to be used exclusively for business Regular = more than one or twice last summer 2. Space has to satisfy: Has to be the principal place of business for that trade or business; OR A place of business as long as he regularly meets clients or customers there. - 280A(c) applies only if T/P involved in an activity for profit (trade/business) Investment activities at home no good Commissioner v. Soliman (p. 616) - Facts: T/P a dr. Does office functions at home office. - Court says not a principal place of business. To judge, if principal place of business facts and circumstances test: Amount of time Activities performed there

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- Dr. Soliman performed main activities (surgeries) at the hospital. - Congress modifies rule says rule looks to harsh for some T/Ps Example: Painter. One office in his home. Any admin work performed there. T/P says thats the only fixed location, no other principal place of business. - Court says principal place of business is on job site where painting. - Congress changes rule: If T/P spends time in home office doing substantial administrative work, and theres no other fixed location for them to do their work then gets the deduction. - If T/P can meet the exception, then gets a deduction for the expenses directly allocated to the home office. Lighting, heat, etc are deductible on a prorata basis (usually on a square footage basis) - Statute has a built in no more than zero rule. Only allowed to the extent of the income from the activity, cannot take any losses. 1. Hamacher v. Commissioner (p. 610) - Facts: T/P an actor and also works as an ee of Alliance theater (teacher and administrator). Has an office at Alliance Theater. He rents an apartment with six rooms, one of which is used for nothing but business so wants to deduct 1/6 of the cost of his rent. General rule = no deduction If get a deduction have to meet the exception - 100% in home office, but its two prong: on one hand business related to his job as independent actor, on the other hand conducts business for Alliance Theater. Commissioner argues under 280A no deduction unless exclusive use two businesses, neither of which finds the activity in the room exclusive. - Court says exclusive means: exclusively business (not anything else) But if conducting two businesses in that one room, both have to meet requirements under 280A All or Nothing! - 280A has another requirement you have to meet if youre an EE: If an EE, in addition to other rules, have to prove the business

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conducted in home office has to be for convenience of ER. Hamacher fails that test has an office at the theater, doing it for his own convenience. Since flunks under Alliance business purpose, automatically flunks under the other (due to all or nothing) Sengpiehl v. Commissioner (p. 615) - T/P lawyer practices at home from home office exclusively. Living room used exclusively as a conference room. No entertaining at home. - Got deduction for living room and home office but not the dining room (bc occasionally used for family meals) XIV. Ordinary and Necessary Business and Profit-Seeking Expenses 162 Not all expenses has to be ordinary and necessary! A. The Ordinary and Necessary Limitation 1. Welch v. Helvering (Supreme Court Decision) (p. 378) - Facts: T/P starts a business, knock on doors of people he knows and gives them money bc there was a bankruptcy and he wants to get back in good graces w/ them for money/business purposes. T/P wants to deduct them. No legal or moral obligation Commissioner rejects the deduction not deductible under 162 since not ordinary and necessary - Sup Ct says we can assume that T/P thought was necessary (appropriate and helpful) in the conduct of his business. - Ordinary does not mean the expenses must be habitual or normal. The expense may happen once. Ordinary measured by community standard. If its customary in community = its ordinary - (community of similarly situated T/Ps) - Here the court found: Men do at times pay the debts of others without legal obligation or the lighter obligation imposed by the usages of trade or by neighborly amenities, but they do not do so ordinarily. The deduction is denied. 2. Friedman v. Delaney (Lower Court Decision) (p. 380)

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- Facts: Friedman was a lawyer doing a bankruptcy proceeding for his valued client, Wax. Wax couldnt come to a deal with his creditor. Wax had a $5K life ins policy that was free from creditors (only asset T/P has left). Friedman makes proposal to creditors, and they agree to take 10 cents on the dollar. Friedman guaranteed that if they agreed, the money would be there. Wax wont surrender the $5K life ins policy. Friedman pays the $5K deposit himself. Friedman wants to deduct under 162 as a necessary and ordinary business expense. - Voluntary payments are not deductible as ordinary and necessary business expenses or losses. Friedman argues not voluntary as a lawyer he gave his word, so he had to put the money up. - Majority says its necessary to consider the origin of the obligation Here, the obligation arose from Friedmans gratuitous assurance it (loss) was caused by the T/Ps voluntary obligation Why did T/P give his word? - It was his voluntary action, therefore whole thing was voluntary. - Magruder (concurring): Would have allowed the deduction if the agreement/pymt was completed. I dont think that the fact that the making of the deposit was voluntary is conclusive against deductibility. If co. spends money on advertising, thats deductible, and thats as voluntary as we can get. Sees a clear connection between the promise of payment and the practice of law - Note: Because the agreement was never affectuated, and Friedman left his money with the court and never filed a motion to get his money back this relinquishment made it no longer ordinary and necessary - For the expense to be deductible: Directly connected with and proximately resulting from carrying it on Those normally originating in a liability created in the course of its operation - Metzger says he doesnt really think the majority meant that if its voluntary, its not deductible really just based on the facts of this

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case. Voluntariness does not disallow it (depends on the facts of the case.

Milbank - Investment advisor, recommended buying land in Cuba in the 50s. Castro seized all the land. Investors were saying WTF. Milbank had no moral/legal obligation, but paid them all back. - Court says deductible. Pepper - Partner in firm, has a well liked client in getting advice, says hes paying to much tax. Partner tells him another lawyer has a client saving taxes through a shelter program. First client talks to second client and invests money. Second client is running a scam. Firm pays first client back for loss. - Court says deductible. Are these two cases any different from the facts of the Friedman case? It appears Magruders concurring opinion saying voluntariness makes it non-deductible. Giolardi - Retailer of Italian olive oil, supplier of Giolardis oil fell on hard times. Retailer pays the creditors of his supplier. (retailer and supplier were brothers) - Court says not deductible Theres oil all over Italy go get it. Judge wasnt second guessing the business decision he questioned the reasoning (brother relationship) Dinardo - T/P is a medical partnership in the sticks. There was one hospital and it fell on hard times. Medical partnership didnt want hospital to close, so they paid the creditors of the hospital. - Court says deductible. The difference could be in Giolardi the T/P couldve gotten another oil supplier. - But is that what we want to do do we want to question business decisions Henry v. Commissioner (p. 384)

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- T/P buys yacht, flies penet w/ 1040 on it. Was a tax lawyer, penet brought people/clients in. T/P argues bought yacht for business purposes. - Judge says not ordinary. No direct connection w/ trade or business. Really was personal motivation. Heidt (p. 386) - T/P is a corp exac. Oks expense of employees. When he spends money for the corp he does not submit a claim, he eats the expense himself. - Court says no deduction he could have been reimbursed and he chose not to. That was extraordinary not ordinary. - Metzger says the decision was a business decision and sounds like a valid reason. XV. Capitalization Client says his business, after normal expenses will make $80K. But to make it, needs a machine that costs $200K. 80 80 80 80 80 $200K - 200K - 120 80 80 80 80 = +200K - Looks like 4 good years and one disaster year. But thats not whats happening. In year one spending $200K and gets no deduction (bc its a conversion of capital) - After 5 years, the machine is junk, so it did cost him $200K, but the question is when? Over the entire 5 year period. Between year one and five the cost is being absorbed. True books are the $200K spread out over 5 years is $40K a year (spreading the expense over its period of use) - This is the capital expenditure requirement When money spent, we deny the deduction BUT 263 says were going to temper 162 Some business expenses will not be deductible, instead were going to capitalize it. 1. Encyclopedia Britannica Inc. v. Commissioner (p. 418) - Facts: EB in business of producing and selling books. Normally EEs of EB would build the book, it then will be published and sold over a series of years. EB is shorthanded, so they found another company (Stewart) that did the same thing. They got the book a year later, published and sold it over several years. EB paid Stewart royalties./ EB paid an advance

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on the royalties so Stewart could pay its EEs. - Issue: Can EB deduct the amount paid to Stewart? We have an admitted business cost spending money to make money Commissioner says capitalize the cost can take it into account, just not this year. - Tax ct says EB paid money to EEs of Stewart, dont know if deductible or capitalize. Two scenarios: 1. If EEs had time, they would have done the book and paying their own EEs would be deductible. 2. If Stewart on its own produced manuscript and presented to EB, and EB offered to pay $200K for the manuscript that would not be deductible (it would be capitalized) Tax ct says its closer to paying their own EEs than buying a manuscript bc at the time they did all the work and Stewart was just hired labor. - Court of appeals reverses. Posner starts: conceptually this is an easy win for the Commissioner. Even given the analogy to paying EEs, the purpose behind capitalization requirement is to match an expense with the income it generates. We want to tax on net income Even is paid their own EEs, bc their own EEs would be constructing an asset that would produce income in the future, so we have to capitalize. Example given by the court: T/P needs a building. T/P buys a building for $200K. The cost is capitalized. Suppose instead T/P hires builders to build a building. Paying them weekly. The cost is still capitalized. - If the work generates an asset that will bring in income over a period of years that cost has to be capitalized. Because capital expenditure requirement is trying to match the expense with the income it generates. - If the expense is a normal and recurring expense in the business of a T/P, then it doesnt have to be capitalized. Because if the expense cannot be allocated to a specific asset, then doesnt have to be capitalized. 2. INDOPCO Inc. v. Commissioner (p. 446)

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XVI. Depreciation A. Simon v. Commissioner (p. 468) XVII. Bad Debts US v. Sullivan Tank Truck Rentals XVIII. Capitalization Requirement A. Midland Empire Packing Co. v. Commissioner (p. 430) B. Mt. Morris Drive-In Theater v. Commissioner (p. 433) XIX. Expenditures Involving Both Personal and Capital Aspects A. Legal Expenses 1. United States v. Gilmore (p. 671) 2. Wassenaar v. Commissioner (p. 683)

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