IndivTax Class Notes

8/14/2019 IndivTax Class Notes

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I. Deciding tax matters (order)

a. IRC

i. The Law Go no further if not ambiguous

b. Treas Regs ONLY if IRC is ambiguous

i. Called Treas Regs even though written by IRS

ii.Regs are good so long as they dont go beyond what Congressintended

1. Essentially, they are good unless proven otherwise (rarely

invalid)

II. Process creating Regs

a. Proposed Reg

i. Could take a long time or go though speedily

b. Permanent Reg

i. Proposed Regs that sit for along time are essentially as good as

law

26 USC 61

(a) General definitionExcept as otherwise provided in this subtitle, gross income means all income from whateversource derived, including (but not limited to) the following items:(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;(2) Gross income derived from business;(3) Gains derived from dealings in property;(4) Interest;(5) Rents;(6) Royalties;(7) Dividends;(8) Alimony and separate maintenance payments;(9) Annuities;(10) Income from life insurance and endowment contracts;(11) Pensions;(12) Income from discharge of indebtedness;(13) Distributive share of partnership gross income;(14) Income in respect of a decedent; and(15) Income from an interest in an estate or trust.(b) Cross referencesFor items specifically included in gross income, see part II (sec. 71 and following). For itemsspecifically excluded from gross income, see part III (sec. 101 and following).

Substance over Form Doctrine: No matter how you prepare your taxes in

order to make them look like the taxes are legit (form), the substance of what

they really are (substance) will overrule and force you to pay the taxes

55% ESTATE TAX for people worth over $10M at death: Gone in 2010, but

comes back in 2011
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DEDUCTIONS

Taking amount off of your income

Deductions for all Itemized Deductions OR Standard Deductions

HOME OWNERSHIP: If you own a home, you usually want to do Itemized

Deductions as opposed to the normal Standardized Deductions ($5,350 for

indivs and MFSep, $10,700 for MFJointly).

CREDITS

Subtraction from Tax, not just income (like Deductions)

EXs:

Earned Income Tax Credit: Supposed to be substitute for welfare; low

income earners who are working

Lifetime Learning Credit: ($1,500) dollar-for-dollar credit if you owe a

tax; be full-time student

August 28, 2008Filing Status

Individual (not married) Married filing jointly generally pay less this way Married filing separately generally pay more this way

If you have a client filing for divorce, have them file separately toextinguish J&S Liab b/c IRS will go after whoever is easiest to collectfrom

Surviving spouse Preferential rate made by Congress b/c males/wage earners die first

and Cong wants to help out widows

Can file as married or year of death and then HofH or next 2years but only if you still have a dependant (under 19 or 24 [Full-

Time School]) Not married (by death or divorce), but have a dependant

Head of household

Status determined on last day of year (Determined 31, 2008)

Joint and Several Liability J&S Liab Rule 6013(d)(3): Spouses are J&S liable for deficiencies on tax

returns Innocent Spouse Rule 6015:

(a) Must file a joint return 3 ways to qualify for Innocent Spouse

(b)Traditional InnSpouse Relief: 5 Requirements

Joint return filed

There was an understatement

InnSpouse didnt know, or had no reason to know ofthe understatement

Cant stick head in the sand


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It is inequitable to hold the other indiv liable for thedeficiency

The non-at-fault spouse elects the benefit of this sectionno later than 2 years after the secretary has beguncollection activities

(c)Separate Liability: Intended to be Retroactive MarriedFiling Separate

Prereqs: (1) no longer married, separated, or not livingw/each other for 12+ months + (2) no actualknowledge of the item that makes up the deficiencyOR w/knowledge but under duress + (3) Make electionyourself w/in 2 years

No refunds! Even if you would otherwise qualify for arefund

Cheshire v. Commr(H takes out retirement and W knowsabout transaction, but not that it was illegal to not pay taxes onsome of retirement $)

Actual Knowledge Rule: It doesnt matter thatthe spouse doesnt know that the item is illegal,they just need to know that the transactionhappened

Duress: Physical abuse and sometimes emotional abuse (f)Equitable Relief: (1)Equitable relief if no relief under (b)

or (c)+ (2) Inequitable to hold InnSpouse liable under the circs

Decided by the IRS Means that this rarely everhappens!

CProp States: Govt can still come after the innocent spouse in thatthey can come after the marital communitys CP.

REVIEW

Gay/Lesbian relationships cannot file jointly b/c ofDefense of Marriage Act(DOMA)

File jointly in State, and file separate Federal returns

IRS wont look at sex of couple and will just look at SSN, but it is ILLEGAL!

Tax System s Progressive Tax System: The more money you make, the higher your tax

bracket ( 1) 5 incremental brackets (10% - 35%) Higher tax isnt going to hurt the rich as much as the poor What the US follows

Regressive Tax System: Flat tax percentage that everyone pays You shouldnt be penalized for being rich This hurts the poor more than the rich which is why they call it

regressive

What is Taxable Income? Minuses

Itemized Deduction v. Standard Deduction These are below the line deductions


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Exemption: Credit:

Exemptions and Deductions, while different, they have the same effectDecreasing your taxable income

Personal Exemptions 151-152 1 exemption for self 1 exemption for spouse 1 exemption per qualifying child Phase Out: If you make too much $, you will be proportionally phased out of

specified exemptions Applies to Itemized deductions as well If youre divorced and are getting phased out, take child(ren) off of

your return and have the other spouse take the child even if you havedone everything to take care of the child

Phase out begins at $239,950 for couples (151d3C)

Dependancy Exemptions (152) What is it? Getting an exemption depending on how many people you aresupporting

Who qualifies as a dependant? 152 Dependant: (1) a qualifying child or (2) a qualifying relative 152cQualifying Child

Bears relation to taxpayer Child, brother

Same principal residence as taxpayer Age requirements (under 19 or under 24 if student) Didnt meet over 50% of their own support

152(d)Qualifying Relative

S Not a lot of audit for claiming someone generally, unless a person is claimed

twice (e)Divorced parents

Custodial parent gets exemption even if not providing over 50% ofsupport

If joint custody, then 50%+ providing parent gets exemption Exemption can be bargained away to other parent b/c youre being

Phased Out in order to receive other stuff (more alimony, etc.) Supposed to be transferred in writing and attached o tax return

(not often done, but IRS doesnt care so long as not doublereported)

Child: (step)son, (step)daughter, qualifying foster and adopted child Student: Full-time student at accredited institution Missing Children: Still qualify for exemption if child presumed to be kidnapped

by non-family member and, previous to kidnapping, child maintainedprinciple abode with exempting taxpayer

CREDITSDependant Care Credit (21)


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Rule: If you have someone taking care of your kids while you work, then youcan get a credit

Meant to take place of welfarePush to work and subsidized fordoing so

Child care provider cant be another one of your dependants (you of yourother kids)

AMOUNT: get between 35% (make under $15k) to 20% (1% off for every 2kabove 15k) up to $3k for 1 kid or $6k for 2+ kids

Who qualifies for credit? Qualifying indiv, but not older than 13 unless disabled

Employment-related expenses Both spouses must be gainfully employed or in full-time school cant

sit at home and get daycare provided Must file a MFJ return Both must be gainfully employed Child-care provider cant claimed as dependant Child must be

(1) Dependant (2) under 13 yrs (3) reside in taxpayers place of abode for over time

Hope and Lifetime Learning Credits (25A) Cant do BOTH Hope and Lifetime Learning for the same person in

the same year (25A(g)(6))HOPE

Only applies for first 2 years of post-secondary education (Fresh and Sophyears of college)

Max is $1,500 Must be full-time student

Non-refundable: If you dont owe tax, you dont get the money (Can only goto zero tax) Cant have prior felony ((2)(D)) (only on HOPE) Only covers tuition and fees (not living expenses)

LIFETIME LEARNING $2k max (20% of up to $10k in tuition) Non-refundable: If you dont owe tax, you dont get the money (Can only go

to zero tax) Loans count for tuition b/c they have to be paid back, but scholarships dont

count towards tuition fees Dont have to be full-time student

Accredited school Phase out Only covers tuition and fees (not living expenses)

IRS Publication 970, Tax Benefits for Education

Table 3-1. Comparison of Education Credits

Lifetime Learning Credit Hope Credit

Up to $2,000 credit perreturn Up to $1,650 credit pereligible


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Lifetime Learning Credit Hope Credit

student

Available for all years ofpostsecondary education and forcourses to acquire or improve jobskills

Available ONLY until the first 2 yearsof post-secondary education are completed

Available for an unlimitednumber of years Available ONLY for 2 years per eligiblestudent

Student does not need to bepursuing a degree or otherrecognized education credential

Student must be pursuing anundergraduate degree or otherrecognized education credential

Available for one or morecourses

Student must be enrolled at least halftime for at least one academic periodbeginning during the year

Felony drug conviction rule doesnot apply

No felony drug conviction on student'srecord

Withholding Credit

You get $ withheld as a down payment on taxes Its your money that will be paid back to you W-2 form is where you claim your exemptions

The more exemptions, the less they withheld

Earned Income Credit (32) Supposed to take place of welfare to not have people sit on butts

.:, this is for low income-paying jobs REFUNDABLE b/c can get over and above what you paid in tax!

Refundable Credits: Can receive back taxes paid to the govt +payments (subsidy) from the govt Not many refundable credits around

Gets larger and larger the more kids you have (Can also get as a single indiv) ELEMENTS Both H&W have to be wage earners (have to work and make $, not

investments) Make under a certain amount Refundable (get it back even if dont have taxes)

No child 7.65% (capped at $4,220) One child 34% (capped at $6,330) 2+ kids 40% (capped at $8,890)

INCOME

I. Haigs-Simon (Economic Theory of Income): Anything that brings youbenefita. Requires a yearly re-appraisal of all your stufftoo cumbersome to

calculate and keep up onII. Code Definition of Income: No income until benefit is realized(your

stuff is sold)


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III. Eisner v MacomberStock split of 2,200 shares up to 3,300 shares, but samevalue of the sharesdoes she have a realized benefit?:

IV. Glenshaw GlassAre back profit AND punitive damages income as defined byMacomber?: Ct says both are income (including punitive damages) b/cincome is income from whatever source derived (16th A.) and 61a isnot an exhaustive list of what income is

a. Current Defn of Income: Undeniable accessions to wealth, clearlyrealized, and over which the taxpayers have complete dominionMEMORIZE!!!!

V. TREASURE TROVE CesariniMoney found in piano and paid on taxes andthen rescinded:a. Cesarinis 3 Arguments

i. Not Income: Govt says just b/c income is not enumerated in16th A and 61, it doesnt mean its not an accession to wealththat is realized and in complete dominion and control(Glenshaw Glass)

ii.If income, then includable in 1957 and so the SOL hasrun: SOL doesnt start running until treasure trove is found

1. Treasure trove, to the extent of its value in US currency,constitutes gross income for the taxable year in which it isreduced to undisputed possession (found) T.R. 1.61-14even if it is not cash

a. Laymans Defn: This means that its taxableincome the minute the treasure trove is found andyou are in sole possession, regardless of whetheryou sell it

i. Mark McGuire baseball exception whereTax Commissioner said they wont tax untilcatcher sells the ballnot the norm!!!

1. Can make a good argument that otherproperty should be treated the sameway as the baseball

iii.Capital Gain: This isnt a capital gain, but is cashnotdiscussed in class

Barter Clubs Rev Ruling 79-24a. IRS put out Rev Ruling (says what position IRS would likely take in a case

not binding)II. Trading services for services to get out of paying taxesIII. Rule: On Scotts outline

EmbezzlementJames v USAre embezzled funds included as Gross Income in the year ofmisappropriation?

I. Wilcox (earlier case) said there was no claim of right as gross incomeII. James ct overrules Wilcox saying that you dont need a legal claim of

right, just possession and practical control (not legal control)

Compensation for ServicesCompany Paid Trips


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I. McCann v USGood salesmen gets trip to Vegas for retreat even though Cotried to make it look like biz trip to not have to pay taxes

a. Dominant Purpose: US v GotcherWhere do you draw the line b/twork trip and play trip? What was the dominant purpose of thetrip?

i. Treated as Vacation for every non-necessary parties (ie,

spouses)thus, it is income for the non-necessary partyMeal Allowances

II. Commissioner v KowalskiAre cash payments for meal allowances taxableincome and, if so, are they otherwise excludable under 119 (housing & mealsprovided for convenience of employer)?

a. Cash for meals is income (giving the literal meal wouldnt be incomeunder the 119 exception) b/c the money could have been (and likelywas) spent on non-meal things.

b. The higher rank you are, the more meal money you get =compensation

FRINGE BENEFITS

I. 61Fringe Benefits are Incomeunless otherwise stated in IRC (mostin 132)

II. 132Exceptionsa. See Scotts outline

III. Read Pub. 15-B from TWEN site Employers tax guide to fringebenefitsa. Page 5 Chart into the outline!!!!

IV. Whether or not the firm goes over the fringe benefit limit, it is still countedas a deduction

V. Is a perk income? TESTa. Is the perk a condition of employment?b. Is the perk for the convenience of the employer (not of the emp-ee)?

c. Is the perk on biz premises of the employer? (cafeteria, housing)?

GIFTSI. If you receive a gift, theres no tax to you Duberstein (detached and

disinterested generosity)II. If you give a gift, you can be taxed if you give too much Olk v USGiving

tips (tokes) to casino dealersi. Question of fact Erroneous standardii.Question of law - De novo standard

LOANS AND CANCELLATION OF DEBTI. General Axioms

a. A loan is not gross income to the borrowerb. The lender may not deduct the amount of the loanc. The amount paid to satisfy the loan obligation is not deductible by the

borrowerd. Repayment of the loan is not gross income to the lendere. Interest paid to the lender is included in the lenders gross incomef. Interest paid to the lender by the borrower maybe deductible by the

borrower


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II. The real issue is what happens you have part of a loan you owedischarged?a. 108 and 61a12 say that Discharge of Indebtedness is incomeb. US v Kirby Lumber issued bonds (borrowed) $12.1m, paid back

$11.9m = $137k left over; Is the $137k income to borrower?i. Indebtedness discharge rule: The excess of the issuing price

or face value over the purchase price is gain or income for thetaxable year (Kirby) unless youre going through Chapter 11bankruptcy (108) or youre insolvent [liabilities > assets](108) [or if farm something or other or qualified biz discharge]

III. (E) On Dec 31, 2007, the following became effective: The indebtednessdischarged of qualified principal residence indebtedness dischargedbefore 1/1/2010 b/c of the foreclosure boom of 2007-08

IV. Zarin v Commissioner: Gambler keeps getting credit by casino and racks upbig debt; Commissioner says no more extensions of credit, but casino keepsgiving $ and he has $3.4M in debts but settles for $500k and has $2.9M (+ $2.3Min interest) of DOI (discharge of indebtedness)

a. Indebtedness = (1) liability OR (2) property

b. Appellate court says he has no liability b/c casino should have not keptgiving him money

c. Ct also says the chips are not property and have no economicsubstance but of course he could gamble and buy a room and the likew/the chips

i. Likely, this is the ct feeling bad for the guy

BASISI. Look at IRS Publication 551!!! On TWEN

a. Page 5 chartII. Definitions / Basics

a. Basis = Costb. Amount realized = What you receivedc. Realized Gain = Amt Realized Basis

i. Is it Recognized on your taxes?1. EX: 121 Primary residence non-recognition of $250k of

gain per spouse for owning 2+ yearsIII. 1001 Determination of gain

a. Gain is the excess of the amount realized over the adjusted basisb. Amount realized is the sum of money received plus the FMV of the

propc. Unless theres an exception, all gain shall be recognized

IV. 1011 Adjusted Basis

a. Adjustments to costb. Adjusted basis is the basis adjusted by 1016c. Pockets of money

i. Start out with cost (basis)ii.Cost Recovery Adjustment: by putting $ in pocket, youre

recovering money somehow and so theres a decrease in basis1. This means that the gain gets larger2. EXs: Cost recovery (straight line depreciation over the #

of years required by IRC)


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a. 1/10th of the cost is going back into your pockets soyour costs (basis) goes down and your gain getslarger

3. NO home depreciation and cost deductions and write offs,except for interest and taxes(for primary residence only)!

iii.Cost Addition Adjustment: by spending money and taking it

out of your pocket, your costs go up and so theres an increasein basis

1. This means that gain gets smaller2. EXs: Addition to a house, Permanent improvements to a

houseV. Helvering v Bruuntenant w/99 yr lease term; cant meet term and has to

give back to landlord; But, tenant put bldg on prop

a. Does landlord have realized gain even though he hasnt had a taxableevent?

b. Adding of an asset (the house) makes for a realized gain and it istaxable

i. Realizaeable events dont necessarily have to be a sale.

ii.But, Landlord cant pay taxes b/c there was no taxable event1. Congress enacted 109 and 1017 in reaction

VI. City of Philadelphiataxpayer has bridge and lets City of Philly use it inexchange for giving him RR rightsa. Theres a transfer of something, so even though theres no sale,

theres possibly realized gainb. Is there a gain?

i. If you cant determine value of what youre giving up for cost,look at the product youre getting and its value in order todetermine the value of what youre giving up

VII. 1016 Adjustments to basisa. 1016(a)(2) Even if you dont take as much depreciation as you could,

you still have to deduct the amount allowedVIII. Gifts and Inheritances

a. Gifts are tax free to the receiver, but you will have a tax consequencewhen you sell it

b. What is basis on a gift? (b/c you didnt pay anything for it)i. 1015 says you uses carry-over basis the basis of the

GIFT giver1. Carry-over Basis: Donee takes the donors basis if prop

has appreciateda. Appreciating Prop: Donor buys for 10k and gives

to done w/FMV at 20k = donees basis is 10k =donors basis carries over

b. Depreciating Prop: Donor buys for 10k, gives todone at FMV of 5k = basis is FMV

ii.1014 INHERITANCE from a WILL the FMV at date of deathstep up in basis

1. Stepped up basis: Take date of death value orAlternate valuation date(allows for valuation of adecedents stuff to date of death or on the date 6 months


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later [not any day of the 6 months, just the 6-monthdate])

a. This is all for determining the basis for when theinheriting party sells (when a taxable event occurs)

2. Stepped Down Basis: For property that has lost valueIX. US v DavisH txrs stocks for divorce obligation

a. Ct says its a taxable eventb. Congress doesnt like this and passes 1041 which says (1) txrs b/t

spouses or former spouses shall not bring a recognition ofgain, but there is a (2) carry-over of basis (acts like a gift)

CAPITAL GAINS

When is something taxable?

What is taxable?

I.

a. Capital Gains b/c taxed at a lower rateb. Capital Losses b/c limited and not as good as ordinary losses

II. Reasoning for Capital Gains ratesa. Promote future investmentsb. Inflationc. Bunching

III. Txr of a capital asset brings Captial Gain or LossIV. Capital Asset: Prop held for investment or personal-use purposes (and

not for the conduct of an active biz) usually qualifies as a capital assetV. Timing of Income

a. North American Oil v BurnetDispute over when Oil Co has to pay tax

on $171ki. If taxpayer receives earnings under a claim of right and w/orestrictions as to its disposition, he has received income whichhe has to claim on taxes, even if it can still be claimed that he isnot entitled to retain the money, and even though he may stillbe adjudged to restore its equivalent

b. Todays Rulei. When a taxpayer acquires earnings, lawfully or unlawfully, w/o

the consensual recognition, express or implied, of an obligationto repay and w/o restriction as to their disposition, he hasreceived income which he has to claim on taxes, even if it canstill be claimed that he is not entitled to retain the money, and

even though he may still be adjudged to restore its equivalent(NA Oil)c. Commissioner v Indianapolis Power & Light Co ???????

VI. Assignment of Incomea. Lucas v EarlH tries to make his income into 50/50 jt tenancy w/his wife

i. This is before joint tax returns were allowedii.Ct says H cant do jt tenancy b/c he earned the moneyNo

assignment of income!1. Fruit belongs to tree from which it grew


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b. Helvering (Commissioner) v Horst Dad earns coupon and gives to kidsi. IRS says this is just like him taking the coupon cashing it in and

giving a gift; He could give the bond and the coupon to the sonand escape liability but when he just gave his coupon to his kid Dad has to pay the taxes on it, not the kids

1. Substance over Form

c. Salvatore v CommissionerW gives her gain on inherited from H gasstation to kids; W reports that as gift and kids report as income

i. Ct says this is her income b/c W and kids agreed to gift, thenthey divided the property

1. Substance over Formd. Tax Planning Estate of Stranahan v CommissionerPaying off

deficiency, needs more income to maximize deduction, sells future dividendsto son and son buys dividends for FMV

i. Ct says this is selling-purchasing and not assigning rights (likeHelvering and Salvatore) b/c there was proper consideration

ii.Learned Hand: Tax planning is just fine!e. Commissioner v Banks/ Commissioner v BanaitisIs attys fees

payment in a contingency case income?i. When a litigants recovery constitutes income, that income

includes the portion of recovery that went to the atty for fees incontingency cases

1. B/c this is income, the attys fees are deductible as a MiscBiz Expense that is limited to only 2% of AGI and onlyshows up on Itemized Deductions

2. The big thing w/this is that this shows back up on Alt MinTax, which disregards Itemized Deductions (EX: Winningparty is worse off after taxes than before setting uplawsuit)

ii.Policies

1. The IRS says this is like Wage Garnishment b/c you neverget the $ even though its yours

2. This is a joint venture b/c atty ~ paid unless they winCtrejects this; $ is co-earned (lawyers work and lawsuit ofit)

iii.62(a)(20) Attys fees are now above-the-line deductions whichmeans no 2% haircut and no Alt Min Tax implications

1. Doesnt apply to defamation claims, invasion of privacy

Whats fueling the recent bust? Are Itemized deductions too generous?

Mortgage interest

RE taxes Exclusion provision ($250k gain tax-free per spouse every 2 years)

Tax Treatment of taxpayer CostsI. Depreciation: Recovering costs over time

II. Test way of writing out essay


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a. 162 General Rule: For biz expenses or investment expenses, ifordinary and necessary, the cost of the item can be taken as eithera deduction or an expense

b. 167: Can you write it off over time or can you write it off in the firstyear?

i. Year 1 write off (Deduction) OR

1. Current deductionsii.Over time Write-off (Expense)

a. Capitalized expenses2. Depreciation3. Depletion4. Amortization

III. Trade or Biz162: Can deduct ordinaryANDnecessary expenses incarrying on any trade or biza. Reasonable traveling expenses

IV. Production of Income212: Ordinary AND Necessary in carrying our bizfor Reasonable expenses

V. General Prohibition Personal, Family, and Living Expenses262: No

deduction for personal expenses, unless another in IRC allows for itVI. Depreciation167: Depreciation deduction is allowed for wear and tear if

used in: (1) trade or biz OR (2) held for production of incomeVII. Accelerated Cost Recovery168: Unless otherwise stated,

depreciable tangible prop shall be depreciated on a straight linedepreciation schedule (not sure if this is correctly written)a. Be familiar w/the dif types, but not the intricacies

VIII. Amortization (same as deprec) of goodwill and certain otherintangibles197: Same as depreciationa. Natural resources = Depletion

IX. Capital Expenditures263: Permanent improvements or bettermentsthat increase value of a prop are depreciable if they are Capitalizeda. 263A: The prop must be capitalized in order for depreciation

X. Commissioner v Idaho PowerDo you look at the item itself or the use ofthe item to determine how long it will take to depreciate the item?

a. Ct says you have to look at what the item does to determine thedepreciation schedule

b. Youre looking at matching income and cost to determine how longto depreciate the item

c. 263A codified this ruleXI. FedEx v USWhere we really get the rules

a. How do you determine what the asset is (the engine or the plane) soas to know how long to depreciate it?

b. What does the cost relate to? Use 4 factors testi. Part of larger unitii.Economic useful lifeiii.Can the 2 assets function w/o each other? (the key)iv.Can the smaller asset be fixed while attached to the larger

asset?

XII. Repair v Restorationa. Repair: Current deductionb. Restoration: Expense over time (capitalize it)


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c. Rev Ruling 2004-62Fertilizing treesi. 3 TESTS FOR REPAIR V IMPROVEMENTT.R. 1.263a-1

(Proposed Regulation FYI)1. Does the asset materially add value to the other asset?

OR2. Does the asset appreciably prolong its life? OR

3. Does the asset adapt the other asset to a new or differentuse?

ii.If Yes to any of these 3 questions, then you have to Capitalizeover time

1. EX: Improvements, restoration, replacementsiii.If No to all 3 questions, then Current Deduction

1. EX: Repairsd. Midland Empire Packing Co v Commissioner Neighbors excess oil

would run into meat packing cos basement; had to repair basement to keepup their own biz.

i. Does the repair to the basement add value to the prop or is itjust a repair?

1. Ct says its a repair b/c youre just fixing a problem,not trying to add value

a. = Present deductionii.Ct uses the Rev Ruling 2004-62 tests and Test #1 says not

adding valuee. Mt Morris Drive-in v Commissioner: Drive-in H2O drains to neighbor;

neighbor complains; D-In fixes land

i. Is it a repair or restoration?ii.Ct says its a restoration b/c if they had properly taken care

of land upon original construction, they would haveneeded to capitalize this fix to make it ready for biz use

1. If they had properly fixed hill the first time, then that

would have adapted the hill to a new or different use2. Also, dont want to reward person for not properly caring

for prop 1st timeiii.Dissent: It didnt improve prop or change the prop much, so it

should be a repairXIII. De Minimus Rule Proposed T.R. 1.263a-2d4 Dont have to capitalize if

it falls under the de minimus rulea. De Minimus Rule: Its de minimus if cost is less than or equal to the

lesser of:i. .1% of taxpayers gross receipt ORii.2% of taxpayers depreciation or amortization expenses

b. De Minimus rule applies to all depreciation/amortization matters!

Acquisition of Intangible AssetsI. INDOPCO v CmsrUnilever Friendly Taking Over National Starch

a. ISSUE: Can takeover expenses be deducted or must they beamortized?

b. Rejection ofLincoln Savingsc. Creating or enhancing a separate and distinct asset has to be

capitalized over time under 263


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i. But, this isnt the only circd. Long-term benefits of the assets that are fought over are not

controllingi. This is still impo and even is the predominant characteristic

for capitalization, but not everythinge. Deductible expenses that bring long-term benefits but that dont have

to be capitalizedi. Advertising expenses, Haz waste clean up, Severance benefits,

Conservation expenditures, Training costsII. Hostile Takeovers: Can deduct expenses up until the agreement is made

b/c the pre-takeover time is only investigatory and post-agreement islong-terma. B/c of this, everyone said their takeovers were hostile to deduct the

investigatory stuffb. IRS looks at documents (minutes of mtgs) and interviews to determine

whether or not its hostileIII. PNC BancorpCosts for processing auto loan applications &LychukCar loan

costs

a. ISSUE: Must the costs be capitalized?b. Pro Deductions Arg (PNC Bancorp 3rd Cir): Routine costs relating to

your business, not actually part of the loan, so you can deduct thecosts

c. Anti-Deduction Arg (Lychuk Tax Court): B/c these costs relate to along-term loan, they must be capitalized

IV. INDOPCO Regulationsa. $5k rule: Contract negotiation costs up to $5k can be deductedb. 12 Month Rule: Current deduction for costs to create an intangible

asset if (1) resulting benefit wont last over 12 months and (2)resulting benefit doesnt last past the year after the taxable year whenpayment was made

V. Problem Sets 4-2 and 4-3i. All of this is just a matter o degree b/c diff reasonable minds can

have different ideas of what appreciates the value of a houseand what maintains the value of a house

b. 4-2, pg 191i. A - This is like the oil in the basement case; Murphy says a

current deduction is ok b/c there are safety issues, but IRS saysit shouldnt be current

ii.B - Improvement could go either way b/c one ct says .iii.C - Midland Ham case; Repair at point of damage (deductible)

and Improvement for helping from future damage (capitalized)iv.D This seems that it should be Deductible b/c its repairing a

safety risk, but ct said Capitalized b/c the improvement isadding to the value of the house (Murphy still thinks it should bedeductible b/c this repair is just maintaining the value of thehouse)

v.E fixing a roof = repair; new roof = improvementvi.F depends b/c diff minds can see it differentlyvii.G trees and shrubs are long-term, so capitalize; fertilizer and

h2o are short-term so deductible


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c. 4-3, pg 2011. Easy test is 12 month rule (something lasting over 12

months = capitalize it)2. Tougher test: How long will the product last? Reasonable

minds can differii.Laptop Capitalize it (may depend on work)

iii.Pens and paper deductibleiv.PC printer capitalizev.Toner and paper deductiblevi.Reference books capitalize, unless the info they have changes

frequentlyvii.Illustrator services Safest to say capitalize it!; deductible

unless being used for over 12 months; but, the art lasts beyond12 months and continues to sell the book for more than 12months, so it could be argued either way

viii.Attorneys review of K deduct b/c the work being done is lessthan 12 months even though the benefit may last beyond 12months (Tangential Benefits)

VI. 179Election Provision: You can elect to say something is currentlydeductible

VII. 162 4 Partsa. Ordinary and Necessary

i. Welch v Commissioner Indiv paying debts of a Corp1. FACTS: Thomas Welch is paying off corps debts b/c hes

wanting to establish his own personal credit for future usew/Kellogg and other grain companies even though he was

just the secretarya. This is NOT ordinary, its extraordinary so you

have to capitalize it!!!!2. General Rule: If you want to do a current deduction,

then paying debt for someone else (the corp) it needs tobe ordinary AND necessary

3. Ordinary: Common and accepted AND4. Necessary: Appropriate and helpful

a. Pretty easy to reach5. Lead tax case to say taxpayer has BOP

ii.JenkinsConway Twitty (indiv) paying debts of Twitty Burger (corp)1. FACTS: Conway Twitty is paying off corps debts b/c hes

wanting to keep his own personal public view as a countrysinger

iii.Trebilcock: Deducting costs of having reverend come in and sayprayers and do gopher type of work

1. Can deduct for gopher work, but not spiritual work (~ordinary)

iv.Harolds Club: Dads casino salary is too high andunreasonable

1. A biz exec was paid too muchb. Paid or Incurred

i. **************** Find this out!!! ***********c. In connection with


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i. Estate of Rockefeller Fords VP after Nixon (Pres) and Agnew (VP)had been ousted; Rock was Gov of CA and then went out and did diffwork and then spent $$$ on VP hearings. Can he deduct the VPhearings $ he spent? Was he carrying on trade or biz fromgoing from Gov of CA to VP of USA?

1. Ct says gov and VP are diff duties and so they are

different trades or biz = VP hearing $ is NOT deductible2. In Connection With Rule: Where a taxpayer is seeking

employment in a new trade or biz activity, the 162(a) isappropriately denied b/c the taxpayer is not yet carryingon that biz; The indiv must already have the employmentin order for the expense to be in connection with and :.,deductible

ii.Joel E SharonCan already licensed atty (licensed in other state)deduct bar exam, review, and licensing fees for bar in other state?

1. Cts say yes, but you cant deduct it in one year, but mustdeduct it for however many years you are expectedto workaccording to the death tables

2. BUT, student lawyer cant deduct it at all b/c(Murphy doesnt know why, theres no real answer)

d. Trade or Businessi. Cmr v GroetzingerIs gambling a trade or biz?

1. The IRC doesnt define Trade or Biz at all, but its notedall over IRC

2. Need a profit motive or intent3. How do you reconcile b/t 162 Biz Expense and 212

Investment Expense (income producing activities)?a. At the time, would be subject to Alt Minimum Tax

and would have to pay more $4. Frankfurter Gloss (Concurrence): Have to hold yourself out

as willing to work/gamble for others to be a trade or biza. Majority says you dont have to hold yourself out

5. Trade or Biz Rule:Involved in the activity w/Continuityand Regularity w/intent to make a profit (even if youdont make a profit)

a. Enough regularity to call it a biz, but notnecessarily full-time

b. Based on case-by-case analysis6. Regular Gamblers Rule: Must report income, but still

may report 50% of the loss. Normally, personal loss is notdeductible, only where Congress allows. Casinos give youa 1099 Form.

a. Only Professional Gamblers can take full loss, soIRS wants these types of gamblers to be full-timeand will be strict w/them

ii.TellierGuy guilty of securities fraud; Can you deduct something ifits in connection w/illegal activities?

1. Can you deduct legal fees for your lawyers fees?

2. Ct says theres no public policy in tax after Tax Courtdidnt allow deductiondeduction stands!

iii.Statutory Disallowances of Deductions for Public Policy


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1. 162c1 Illegal Bribes2. 162e Certain lobbying expenses3. 162f Fines paid to govt for violations of law4. 162g Treble damages payments on guilt for federal

antitrust laws5. 280E Expenses for illegal sale of controlled substances

iv.Vitale v CmrAuthor writing Prostitution book1. Can he deduct brothel research expenses?

2. No, b/c visiting prostitutes is too personal in naturePub Policy ~ allow this b/c dont want to be on front pageof paper even though Tellier says nothing in IRC aboutPub Policy

NOTES FROM JON BACHISON

Code Sections

212Expenses for production of income: the test is essentially the same as 162,ordinary and necessary.

195Amortization: Start-up expenses: start-up costs have to be capitalized. Newversion of code says that $5,000 can be deducted unless the start-up expenses areless. Must be amortized over 180 months.

179Election to expense certain depreciable business assets: certain property can beelected to be deducted in the first year. From now until 2011 the limit is $125,000. Thepurpose of this is economic stimulus, encourage repeat expenses. (likely there will bemore of this in the future).

197Amortization of goodwill and certain other intangibles: must be amortized over

15 years.

Treatment of Capital Expenditures 12 month rule, do not worry about methods of deduction, only what must be deducted.

Simon v. Commissioner: If something does not decrease in value, can you still take adepreciation deduction. There was a special Tourte Bow. It was purchased for$30,000. The rules normally say that there was a five year write off. The bow does notdecrease in value because it is a work of art. In reality the bow has increased in value50% by the time of trial. The commissioner says that there is not depreciationvalue. The rule for depreciation is there need only be wear and tear. There were somereplacement parts. However, this is a very high quality bow that endures time. Ifdepreciation costs are allowed it decreases basis as well. Therefore when the item is sold,tax will be paid anyway. The real issue is about timing. The majority decided that wear

and tear is all that is needed, no need for ascertainable life.

Treatment of Intangibles

Selig v. U.S.: a guy is a part owner of the Brewers and he buys a franchise of a Seattleteam. He has to determine what is tangible and what is intangible. The ball players aretangible, the franchise is intangible. Ball players have a shorter useful life. Franchise isuseful for a longer time. The owner put most of the cost on the players 10.2 M and only.6 on franchise, and the court said no way. He did this to get his amortization


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faster. Court looks at 197, 15-year rule for goodwill. The bottom line is to not be sogreedy.

Independent Contractors Employees

Gets 1099 Form (misc. income)

No tax withholdingFile quarterly statements, pay the tax

Pay all of your own social security 15.3 %

Full business deductions

Taxes are withheld

Employee only pays of social security 7%Do not have to file until April of next year.

May claim some business expenses, can onlybe included in the itemized expensesdeduction. There is a 2% haircut One canonly deduct what exceeds 2% of adjustedgross income.

If one makes income doing both, they get a schedule C form. You avoid the 2%haircut

In order to make a distinction b/t independent contractors and employees, it depends on

whether you are your own boss? Who makes the decisions? Who provides the materialsand tools? 20 Factors

The court will tend to go after employers rather than individuals. There is no section in

the tax code. It is included in a tax act. 530(d) of Revenue Act of 1978.

There are 20 factors that are looked at to determine if one is an independent contractor or

employee.

The most important factor is control.

I. Independent Contractor v Employee (look at TWEN site!!!)a. 20 factors to determine IC v Emp-ee (question of fact)

i. Control is most important

1. The important part of control is controlling the way

something is done

ii.Intructions

iii.Training

iv.Work Integrated w/rest of Co

v.Did they render work personally?

vi.Did they hire, supervise, or pay assistants?

vii.Continuing relationships

1. Longer it lasts, the more likely it is to be an employee

viii.Set hours of work?

ix.Full-time v hired out

x.Do you do the work on the emp-ers premises?

xi.Who sets order or sequence of the work

xii.Do you have to file a written or oral report?

xiii.Paid by the hour/week/month/piecemeal/salary?


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xiv.Do they pay biz expenses?

xv.Do they furnish tools?

xvi.Do you make a signif investment?

xvii.Do you realize a profit or loss?

xviii.Do you work for more than one firm at a time?

xix.Do you make services available to the public?xx.Do you have the right to discharge a worker?

xxi.Do they have the right to terminate the relationship

b. EXAMPLES

LOSSES

I. A loss occurs when the adjusted basis is larger than the amount realized

a. Adjusted basis > amount realized

II. Loss provision allows for a lossunless another provision does not

allow for the loss

III. 165Major Exception:a. 165 tells you (1) if you can take a loss and then, if you can (2) what

type of loss you can take (capital or ordinary )

i. Capital Losses limit how much loss you can take in any given

year (thus, the )

1. You get loss to the extent of the gain you had + $3k

2. EX: WAMU stock - $40k loss in 2008 and walmart stock

gain of $5k = $8k loss to be deducted ($5k of gain + $3k)

ii.Ordinary loss allows you to get it all in that year

b. 165closs has to be incurred (1) in trade or biz, (2) transactions

entered into for profit, or (3) casualty and theft personal losses(all other personal losses are not allowed)

c. d Non-professional wagering losses: Non-professional losses are only

allowed to the extent that there are gains from the transaction

i. Pros can take like a normal loss (out of $50k at end of year =

$50k loss you can take)

ii.But, for NON-pros, this is a gift

1. EX: Win $600on Friday and cash it out (income b/c

accession to wealth); Lost $1k on Sat, can only take $600

as loss b/c they dont otherwise have to allow the loss, so

you only get to take your gain down to $0

d. e theft losses occur on the year of discovery

e. Limitations h your loss for casualty loss are allowed except for $100

+ net casualty loss must be worth more than 10% of AGI

i. Each casualty is limited by $100

ii.Take 10% haircut for anything above $100???????

iii.Unless you have a fairly catastrophic disaster, this wont help

much


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iv.Bad b/c this is an itemized deduction, not an above-the-line

deduction

v.GET THIS FROM JON AND EMILY!!!!!

f. i Disaster losses: to be taken into account for the taxable year

immediately preceding the taxable year in which the disaster occurred

i. Disaster in 2008 allows you to amend 2007 taxes immediatelyand get disaster relief right away instead of having to wait until

next years tax returns

IV. Cases

a. Miller lends friend boat, boat gets damaged, friend gives $200 (felt bad), claimed rest of $542 as a loss

i. 165c allows for this b/c it was Shipwreck loss

ii.Ct said taxpayer is allow the deduction regardless of his

insurance or lack of filing his insurance

1. He didnt file his $100 insurance premium b/c he had too

many claims (prob worried theyd drop him)

iii.Ct said that legis history shoes that they are going to cover

losses not compensated for by insurance (not losses not

covered by insurance)

1. NOW you do have to file for insurance coverage b/c IRS

doesnt want the public paying for your loss when your

insurance could have paid for it

b. Casualty and Theft LossMazzei v Cmsr2 guys working together and

convinced a guy they had $ making machine. Can you deduct a loss in ataxable year on account of being defrauded in a scheme to produce

counterfeit $?

i. This case goes agst Tellierii.Ct holds

c. Revenue Ruling 79-174: Casualty Loss must be (1) sudden, (2)

unexpected, and (3) unusuali. Bugs killing trees

ii.Sudden b/c otherwise you should fix the problem

iii.Unusual does not mean You live in FL, :. Expect hurricane

damage

d. Carpenter v CmsrH poured ring down the drain, garbage disposaled it,

and the question is, Is this casualty loss even though its his ownfault?

i. Ct says it is a casualty loss and the question is how much

ii.Get whole loss (FMV v Present value post-wreck)

iii.TR 1.165-7(a)(3) Automobiles: If you get into a car accident

w/o insurance or deductible as to be paid

1. Whatever you have to pay out of pocket (Deductible) is

qualifying loss so long as you take off $100 + 10% of AGI

2. Caveat: No willful act or willful negligence


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a. DWI likely = no qualifying loss

V. Timing of Theft/Casualty Losses

a. Theft Year of discovery

b. Casualty - ????????????? General Rule ?????????????

i.Exceptions

1. Disaster Area can take loss right away by amendinglast years 1040 and get your refund fairly quickly

2. TR 1.165-1(d) Take the casualty loss on the year theres

a reasonable certainty that compensation will be

recovered (Pending Litigation)

i. Question of fact Reas minds can disagree

b. If you appeal and win the next year, you dont have

to amend and add the income to the previous year,

just tack it on to the year of the appeal

c. (d)(2)(ii) 1961 $10k fire, insurance covers only

$8k, sue for the $8k and you get it in 1962

i. Loss in 1961 of $10k

ii.Gain of $8k in 1962 o be tacked on in 1962

VI. Principle Residence Cant take loss for a home

a. 165 only allows for biz, investment, theft/casualty lossesNOT

primary residences

b. IRS Pub 547 (pg 7/18): figuring casualty loss

i. Take off $100 for each casualty

ii.Take totall losses together

iii.Take off 10% of AGI

iv.This equals your total deduction

VII. Net operating Lossesa. 172 Carry back 2 years, and then carry forward 20 years (back 2

years, then back 1 year, then forward up until losses zeroed out)

b. Losses can be good b/c they wipe out income

c. Only biz and/or investment losses (biz making ventures)not

personal or theft/casualty

d. No limit on how much loss you can wipe out

VIII. Capital Loss/Gain

a. Capital Gains are for long-term (> 1 year) gain and gets a preferred

tax treatment (20% tax for highest tax bracket)

b. Short-term gain (1 year or less)is deemed Ordinary Income and getsordinary income tax treatment (higher than long-term)

c. Loss has character and so you have to net the gains and losses against

each other in an attempt to get rid of short-term gain as much as

possible

i. Run the total for long-term and short-term separately and then

net them together to see what you come out with

d. Limited as to how much loss you can wipe out


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i. Rule: Can take losses every year up to the amount of capital

gain plus $3k

ii.Can keep this going in propitiation

Essay schematic

I. 165 (Biz, Investment, Theft/Casualty)II. Capital v Ordinary Loss

III. Net Operating Losses

Hills and Miller are overturned Now you have to try to get the insurance before

you can get loss relief for casualty loss

A THIRD LOOK AT THINGSI. Annuities 72

a. Annuity: When you pay in for a stream of payment later

i. Some people like these b/c theyre a future stream of income

b. How do you get taxed on the annuity?

i. The basis is the cost of the annuity

1. EX: pay $1,000 now to get $500/yr over 10 years 15 years

down the road

ii.Exclusion ratio: Treat part of return as income and other part

as return of basis in order to get basis back over time

II. Exclusion of Life Insurance Proceeds101a. Rule: If the proceeds are paid out b/c the person died, the beneficiary

wont get taxed

i. Policy: B/c it used to where H worked and W ~ work, when H

died, W needed all of that $ and so not cool to tax W

b. (a)(2) But, if the life ins is sold before death, then there is no exclusion

beyond the valuable consideration paid for it

c. (c) Interest is NOT excluded

d. (g) Terminal or Chronic illness payments paid out of life ins proceeds

shall be excluded

III. 74Gross income includes amounts received asPRIZES ANDAWARDS, unless otherwise provided for in 74 or 117

a. Transfers to Charity74

i. Not income if award made primarily in recognition of religious,

civic, charitable org, but only if:

1. Recipient didnt seek out award

2. Recipient doesnt have to render future services as a

condition of receiving the prize or award AND


24/43

3. Award is transferred to a govtal or org described in 170c

(a 501c3 corp)

b. Employee Achievement Awards74

i. Exclusion only work for awards not worth over $400

c. Qualified Scholarships and Fellowships117

i. Even though 74would include scholarships as a prizeor award, 117 allows for (1) qualified scholarships and

(2) qualified tuition reductions

ii.Qualified Scholarships: Tuition, fees, equipment that the

student doesnt get to keep foreverBUT NOT meals and

housing, or equipment that student gets to keep in perpetuity,

or any other form of income (teaching, researching

grants/scholarships that make you work to keep your

scholarship) (:., they are considered income)

1. Teaching or Research: Exclusion IS TAXED WHEN

receipt of scholarship is predicated on teaching or

research

iii.Qualified Tuition Reduction: Employees that get undergrad

tuition reductions for their family so long as reduction is given to

all employees

1. Cant discriminate to only highly compensated emp-ees

2. Family can go to that same institution or a sponsoring

institution (GU emp-ee families can go to any Jesuit

school)

3. If private company giving same tuition reduction, Rev

Proc 76-47 says its the same thing as Qualified Tuition

Reductioniv.Athletic Scholarships: Rev Ruling 77-263 says that

exclusion holds up only if the university does NOT REQUIRE: (1)

participation in a particular sport; (2) participation in some

particular activity in lieu of participation in a sport; and (3)

forfeiture of the award if the student doesnt participate in the

particular sport

1. IRS says athletes are exempt

v.Problems 5-3 and 5-4 Look in book

vi.Frequent Flier Miles: IRS says miles meet the Glenshaw

Glass (accession to wealth w/complete control) test, but b/c ofPub Policy they said that so long as the miles are used for

flying only (not trading in by buy other stuff), they are not

income

vii.Savings Bonds: 135 If used for education, then not taxable

when you cash it in

IV. Compensation for Injuries and Sickness104


25/43

a. PI Rule: Physical injuries or sickness received whether by lawsuit or

agreement

i. The nature and character of the claim is whats important, not

validity of the claim

ii.The intent of the payment of the $ is closely scrutinized

iii.Taxpayer saying they qualify for the exemption has BOPb. Excluded:

i. Damages due to Physical injuries or sickness

ii.Emotional (if medical care)

1. So long as you can tie the Emo to medical needs, you

should be fine. But, this isnt really well defined overall

c. Included:

i.All otherdamage awards

ii.Punitive damages

iii.Emotional (no medical care)

1. 213d1A & B defines Medical Care

d. Dennis RodmanDR kicks cameraman and causes injury

i. Settlement for $200k

ii.IRS says only $1 of it for physical injury and rest b/c DR is rich

and youre a money grubber; Cameraman argues that its the

character and nature of payment, not validity of claim is what

the ct is to look at

iii.Ct sides w/Cameraman, but says that only 60% ($120k) was for

physical injury and other 40% ($80k) is for non-physical injury

probably b/c they dont trust himBUT they dont give any

reasoning for those numbers

1. Practical Tip: Since you dont know what a judge will do,write in on the settlement what percentage is for physical

and whats for non-physical

e. Punitive Damages: Not excluded

f. EmotionalDamages: Not physical (and :. Not excludable), unless

theres some medical care is reqd for it (stress)

g. Insurance Policies

i. 106 Employer Provided accident and health insurance

coverage is excluded

ii.105 Total Excluded Amount =Total award less already

excluded amount of worth to employeeh. Murphy v USCan compensatory damages for emotional distress and loss of

reputation be excluded from income?

i. s args

1. This is just a return of capital

2. 104a2 is ~const.al b/c 16th A says

ii.J/H / Procedure and args


26/43

1. DC Cir Ct of Appealssays 104a2 is unconstitutional b/c

theres not really gain as defined by Glenshaw Glass when

youre given compensatory damages for emotional

distress and loss of reputation b/c there was no accession

to wealth, which means theres no income, which also

means that 16th A doesnt allow for this b/c it only allowsfor taxing gain

a. 104 is ~const.al to the extent that it taxes things

that arent wages

b. Return of Capital Arg: Return to status

quo/wholeness and not an accession to wealth

c. _(blank award)_ In lieu of income Arg: Is the

award in lieu of the income she otherwise would

have received?

i. Ct says no!

d. No gain Arg: This award is not a gain; its just her

getting back what she lost

i. This arg could be made for anything

2. En banc Re-hearing says 104a2 Is const.al under Art 1,

8

a. Art 1, 8 Cong has power to lay taxes, duties, and

excises so long as (1) it is uniform and (2) theres

no capitation or direct tax unless in proportion to

the census

i. Direct Tax: Tax on real or pers prop (in

proportion to census)

ii.Ct concludes this is an indirect tax b/c it is atax on a transaction so as long as its

discriminatory and applied to everyone

equally it will be const.al

1. We didnt see this in original opinion

b/c govt didnt bring it to our

attention

b. Overall, nothing was lost precedentially

i. The Re-Hearing Law is the law to

follow!!

V. Other Exclusion Provisionsa. 103Exclusion for Interest on Certain Municipal Bonds

i. State issues bonds to pay for things (ie, schools, roads, etc)

ii.Bonds sold to people in the community as investors to pay for

the schools, etc

iii.B/c of public policy to help local govt, the interest is excluded

from income


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b. 107Parsonage Exclusions

i. A minister of the gospel gets 2 things excluded:

a. Applies to the head honcho of any religious

community

2. (1) Rental value of home furnished to them as

compensation OR3. (2) Rental/Mortgage allowance paid as compensation to

the extent the allowance is actually used for rent or

mortgage payment

ii.Warren v CmsrPriest gets rental $ = to full amount ofcompensation (possibly to get out of taxes totally)

1. Isnt this an Establishment Clause issue as based upon

what Chemerinskybrought forward? Chem says theres

an Estab Clause issue, but the case settled; also Chem

didnt have Standing and neither would a normal citizen

c. 109Exclusion of Tenant Improvements

i. Old RuleHelvering v Bruun Permanent Improvements to a

landlords prop by a tenant is gross income to the LL when the

LL reclaimed possession of the premises following the tenants

vacancy

ii.New RuleCong enacted 109 saying that it is income, but you

dont have to pay on it until later and your basis goes down

d. 111Exclusionary Arm of the Tax Benefit Rule

i. If you took a benefit you werent entitled to, you have to report

it in the subsequent year

e. 121Exclusion of the Gain from the Sale of a Principal

Residencei. $250k of gain per spouse (if filing MJF)

ii.Ownership: Must own the prop

iii.Use: Must show that you lived in it 2 out of last 5 years

iv.1 sale every 2 years

f. 139Exclusion for Qualified Disaster Relief Payments

i. Payments for

1. Reas and necessary personal expenses

2. Repairs to personal residence or furnishings

3. Common carrier by reason of death or physical injury

(bereavement flights)4. Governmental agency

ii.Rev Ruling 2003-12 Sources of payments

1. Govt, Charity, Employer All excluded if intent was for

disaster relief

iii.Rev Ruling 2003-115 9/11 payments are excluded

Chapter 6: TimingWhen does the money become income?


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I. Methods of Accounting

a. Cash Method: Income is included upon receipt, and deductions are

claimed when paid (mostly indivs)

b. Accrual Method: Income is included when earned, and deductions are

claimed when incurred (mostly Corps)

II. Hornung v CmsrGB Packer player wins a Corvette in Green Bay on Dec 31,1961 and car was in NY; Ceremony on Jan 6, 1962

a. IRS says income was in 1962 and player says it was in 1961, if there

was any tax at all (says that b/c SOL would have run)

i. SOL is normally 3 years from date of filing

b. Question of Constructive Receipt

i. Constructive Receipt Doctrine: Although not actually

reduced to possession, income is received by a person in the

year that they are made available to him, unless control of its

receipt is subject to substantial limitations or restrictions

c. Ct says tax is in 1962 b/c he couldnt car until 1962 even though he

won it in 1961

III. 6501STATUTE OF LIMITATIONS (on Assessment)

a. General Rule: 3 years from date of return filing

i. If you file early (before April 15th): SOL runs on April 15th 3

years from return

ii.If you file on April 15th or later: SOL runs on date of filing + 3

years

b. Exceptions

i. False Return: SOL doesnt run

ii.Willful attempt to evade tax (Civil Tax Evasion): SOL never

runsiii.Civil Fraud: SOL never runs

iv.Failure to File: SOL doesnt run (b/c by not filing you never

started the SOL time)

v.Substantial Omission / Understatement (Omit 25%+ of

income you did report on original return): SOL is 6 years

vi.6531 Criminal Tax Evasion or Fraud: 6 years SOL (crim

requires an SOL)

1. Diff b/t Civil & Crim tax evasion depends on who evader is

or what person did mainly (celebs [W. Snipes] get Crim

b/c it brings good press)2. These charges are not done on a whim, so dont talk to

them without your atty being present

c. 6501 Extension by Agreement: People will agree to extend (1) to

bargain w/IRS that limits them to only look at certain issues , (2) allow

the IRS agent more time to give you a better report, or (3) to get out of

Crim Evasion


29/43

i. Notice to taxpayer of right to refuse or limit extension:

IRS has to tell taxpayers that they dont have to extend

d. SOL on Collection: 10 years

EXAM STUFF


30/43

The info she gave us was from 2000 (just essays); she does them diff now

Our Test: multiple choice and essay

2-3 slightly longer than the practice exam questions essay questions

(6-8 issues per essay)

Its about issue spotting

25 Multiple Choice About the same as the practice questions

5 possible answers

Essays and MC are equally weighted, so 1.5 hours per

Usually theres an answer

Shes not trying to be sneaky and hide the ball

Time should not be an issue

Limited characters

About 1.5 sides of a legal size piece of paper

Its never been a big issue

Purposely made hard to help for the curve Tested against each other

Highest score is the bar

Cite to IRC Section Numbers!!!!!

EXAM QUESTIONS

Question Three: Aunt Enid and dead Uncle Harold

1. Can she file MFJ w/ Harold?

Yes, b/c he died in previous year (6013a3)

2. Can she file as a Surviving Spouse?

2a Without a dependant that wont work (this would have been bonus points to look at this)

3. Charitable Contribution of $200 to The Shack

170(c)(2) allows for religious, charitable, etc. contributions so

long as they are a proper charity as noticed by IRS and [the FMV

of the breakfast is deducted out (TR 1.170A-1h2)]. This does not

seem like an improper charity. The FMV of the breakfast is to be

estimated by the taxpayer, so if she determines the FMV to be

$5 per person, she can deduct $195 unless she also was paying

for the other 4 people and then the FMV would be $25 and she

deduct $175. Today, charities are supposed to tell you howmuch the FMV is. Also, if its real cheap and small-time stuff,

then it is deminimus.

Charitable Contributions are itemized deductions (not above the

line), so she must itemize her deductions in order to get the

deduction

4. Casualty Loss

160c - You can take a loss on biz prop


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We dont know what the basis is, so we dont know if theres

been a loss

165 Casualty loss this is mainly for acts of god, not

murderers, so this is a hard fight to make

But, we know its been a biz prop b/c its an apt bldg

Question Four: Different Law Firms plans Take right out of the equation all of the same stuff

61 says all Fringe Benefits are taxable. We are looking for exclusions

Weear, Slime

Coffee and pastries kick out b/c de minimus

132e; TR 1.132-6e

Lunch if for convenience of emp-er, then excluded by 119a

Athletic facilities 132j4 so long as onsite and owned by emp-

er, then it is excluded

Occasional theater tickers TR 1.132-6e de minimus

Undergrad courses at UW - 127 Edu Assistance Programs maxexclusion of $5,250 without discriminating for higher paid

employees

No distinction b/t undergrad and grad

Day Care - 129 can exclude up to $5k if married if not discrim

towards higher paid emp-ees and some other limitations

Sweat and nosleep

Snob Club 1.132-1e This is income!

Bar exam fees Taxable b/c not an emp-ee yet

Bar review course Taxable b/c not an emp-ee yet

Season Tickets taxable b/c not occasional

Parking pass 132f Excluded up to $225 a month, so $175 /

month would be income

LLM - 127 Edu Assist Programs max exclusions of $5,250 w/o

discriminating for higher paid emp-ees

Overall, it looks like Weear, Slime is better financially

Question Seven: Bud Inski dissolution and exemption for Gilfriend

1. Is alimony paid deductible?

215 Yes

2. Is this alimony?

71b No, b/c there was no alimony required in the divorce

instrument

Voluntary payments dont count

The IRS wouldnt know about the instrument, but if she didnt

report it as income, but he is reporting it as a deduction, then

IRS will audit and look at instrument

But if they both record it, then IRS doesnt care

3. Can GF be a dependant?


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151 Gives dependant deduction

152 Defines a dependant

152d2H Qualifying Relative Definition: Same household

and financially taken care of (wholly ?) by taxpayer and

not illegal by state law (same-sex people)

Multiple Choice 5. A

6. B 166 Bad debts Biz v. Non-biz

7. E

8. C 221

9. C

10. A 152

Jons Class Notes from M, 11.3.08

I. Hornung: Greenbay packer with the corvette. Dec. 31, 1961, guy wins a car on

new years in Greenbay. The corvette is actually in NY. When is awarded the carhe does not get keys or title. He is on the cash method. IRS says he received the

car in 1962. In 1962 he recorded the sale of the corvette. He claims he got in

1961 under "constructive receipt". This is a term that is normally used by the

IRS. Basically under that concept one can not prevent receiving income to delay

tax liability. However, in this case he is using in a way against the IRS.

Constructive receipt is based on unfettered control by the recipient and he did not

have that. See pg. 356. It is not received if there are substantial limitations or

restrictions. In this case there were several. He loses this argument.

a. He next claims that it is a gift. However, there was no donative intent"detached and disinterested generosity". This was for publicity.

b. He then claims that it was a prize or award. He losses. Nothing fell under 117 or qualified under 74(b).

II. Davis v. Commissioner: IN which year was severance payment received. Itcame on Dec. 21, 1974. The mail carrier even attempted to deliever it in on the

31st. By the time she got home it was Jan. The court found that she did not

constructive receive the money in 1974, but 1975.

III. Veit: There is a contract and is supposed to get a bonus. He says do not pay methis year, but next year. IRS claims constructive receipt. He says no because

there was an agreement and it was going to be paid over 5 years by his

employer. The court said it was okay because it was at "arms length". The

agreement in this case was reached way before the money was earned.

a. Veit II: He gets a second bonus and the IRS losses again. It is critical that theemployer wanted to do this as well.

IV. Cowden: At the tax court the IRS losses. Advance royalties from a mineral leaseis what is at issue.

V. Pg. 365, the legal right of a tax payer to decrease his amount of taxes legally isallowed and can not be doubted. Is a promissory note the same as cash? The IRS

says that it is.

VI. See pg. 369.


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a. Payment by check is deemed to occur on the day that is is delivered.However, this does not count for a post dated check.

b. Deliverary of a promissory note under the cash method is not considered"payment" until the note is paid.

c. Payment by credit card occurs at the point of sale.

VII. Boylston: Fire insurance policy that is paid in advance for 3 or 4 years. Theexpense is paid up front. The court initially said that a party could take the full

deduction, but it is later overruled if it distorts income.

VIII. Zaninovich: extends this distortion for only one year ahead.

a. Example: lawyer, PI case, take case in 1999, in 2001 there is a settlementand the money is received. The cash method says this is received in 2001,

accrual method asks when was it earned (all three years). The way to report

this is by using the "all events test" pg. 381.

Wed, 11.5.08

I. 446: Permissible Methods of Accounting

a. Types: Cash, accrual, any other method allowed by chapter, any

combo of methods

b. If youve not used a method w/regularity, or if method does not clearly

reflect income, the Secretary will use that method that clearly reflects

income

i. Done all the time

c. Have to request change of method of accounting

i. Have to b/c some income could fall through the cracks

II. More on Timing

a. When you have a Net Operating Loss (NOL), can carryback 2 years [2

yrs back is kept open for purposes of NOL only], then back 1 year

b. Cash Equivalenti. Cowden:

1. General Rule: If paid in Promissory Note (promise to pay

in future), if its the equivalent of cash, then it will be

taxed right away

2. Facts: Advance royalties from a mineral lease payable in 3

payments [1 this year, 2nd next year, 3rd in the 3rd year]

3. Tax Court says this is all income in the first year, so it was

taxed

4. Taxpayer says there was no guarantee theyd get paid,

but Appeals Ct agrees w/Tax Cta. b/c of the financial stature of the financing

company

b. Rule: Prom Notes are not necessarily equivalent of

cash, but if the obligor is solvent, then itll be cash

III. Accrual Method (income when its earned, deduction when its

incurred)


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a. INCOME ALL EVENTS TEST for considering year of income (pg 381)

TR 1.1446-1c1iiA

i. PROCESS: (1) State 2 parts of All Events Test; (2) Do Earlier of

Test to prove Fixed Income prong; (3) Do reasonably

determinable prong

ii.(1) Right to income has to be fixed1. (1a) EARLIER OF TEST (Rev Ruling 74-607)

determines whether the income is fixed

a. Look at:

i. The required performance occurs, or

ii.When the payment is due, or

iii.When the payment is made

iii.(2) Amount of income has to be reasonably determinable

1. AAA Cases: Pay fee on Jan 2, but covers Jan-Dec; Issue: Whenis the income earned?

a. So, when do you get your service? You dont

get service until your car breaks down, we dont

know when that will be.

b. When does AAA put the payments into income?

i. AAA says end of the year

ii.IRS says beginning of the year

c. 3 Cases

i. 1. Ct says since they dont know when

service is needed, just put it in at start of

year

ii.2. AAA makes econometric reports, but Ct

says services are provided on demand, sopay at start of year

iii.3.They lose again; Ct says services are

provided on demand and since you dont

know when service will be provided, you

have to make it income upon payment

b. Flamingo Las Vegas Hotel: Dont need legal right to a debt to

c. White Sox Baseball: Sell tickets in 1962 to games in 1963; When isincome earned?

i. Ct says income in 1963 b/c you have a determined time ofservice

ii.Ct says they purposely ingored Earlier Of rule b/c they wanted to

match income year with baseball year

iii.Tampa Bay Rays: Same issue, same result

IV. When do you incur an expense?

a. DEDUCTION ALL EVENTS TEST (pg 409)

i. (1) Events have occurred that establish liability


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ii.(2) Amount of liability can be determined with reasonable

accuracy

iii.(3) Economic Performance

b. Gold Coast: (only looking at 1st and 2nd prongs b/c 3rd was stipulated to

(really just looking at (1)st prong) get points on a card for gambling; the

more points you get, the better the prize you get; Casino takes expense @time of getting 1,200 points and if people dont claim prize for certain time,

the casino will put the $ (value of points unredeemed) back in income

i. Arguments

1. Casinos arg: Once 1,200 points reached, then theres

liability; Accumulation method

a. Hughes: Casino case where casino (Hughes) wants

to take expense for %age of 2000 slot machine

winnings that were accumulated in 1999. IRS says

you get the expense at date of winner. Ct goes

w/Hughes

2. IRSs Arg: @ redemption of points, theres liability (b/c not

everyone redeems points)

a. General Dynamics: Emp-ees that are self-insured

and bill the company later. Get hurt in Year 1, pay

in Year 2 and then bill your emp-er. Ct allows emp-

ees to take expenses in Year 1.

ii.Ct relies on Hughes

c. (3) 461(h)Economic Performance: Services and prop provided to

or by taxpayer when the services or prop are provided for or by

taxpayer

i. If taxpayer is liable for payment to another person and arisesout of tort or workers comp, income occurs when payment is

made

ii.Recurring items: Income on year All Events Test is fulfilled

d. Tax Benefit Rule 111. Recovery of tax benefit Items: For

itemized deduction in Year 1, and then tax benefit received in Year 2,

have to report back the amount you actually benefitted from

i. Alice Phelan Sullivan Corp: Corp donated prop to a charity

w/some conditions on it (had to be used for religion or

education)

1. Get tax benefits for contrib. for $1,877.49 in 1939, 1940;

In 1957, get prop back from charity and so tax that would

be due b/c the owned the prop is $4527.60. Do they have

to pay the $1877.49 or $4527.60 deficiency?

2. Ct says it doesnt matter you have to pay back more b/c

each year stands alone, so they have to pay back

$4527.60.

e. Erroneous Deduction Rule


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i. Tax Court says: Years stand alone so dont have to report loan

payoff if erroneous deduction from years before (IRS should

have audited them years before)

ii.(Circuit Split) 9th Circuit says: You do have to report the loan

payoff

V. Timing for Deduction of Accrual (461f)a. EX: bought for $200k in 2004, city says its worth $270k in 2006 =

$270k x Tax Rate = Prop Tax Bill

i. Consolidated Edison: Taxpayer contesting home value govt

said it was worth to lower prop tax bill

1. Cons Edison still has to pay tax when contesting

2. Can ConsolEd deduct the tax in the year of liabilityCt

says nope, has to be year of ruling, not year of paying

ii.461f Cong changed the Cons Edison rule and said the

deduction can be taken in the year the tax is due

1. In year of ruling, you just count the money you get back

as income

VI. Claim of Right Doctrine

a. Lewis: guy gets $22k bonus in 1944, but had to remit $11k in 1946 back toemp-er b/c bonus was improperly given

i. Statute: Every year stands alone

ii.Lewis reports all $22k as income in 1944

iii.Issue: Does he amend 1944 return or do something in 1946?

iv.Claim of Right Doctrine: As long as he had a claim of right to

in 1944 and had it legitimately, he has to report it all as income

in 1944. Any variances to that money in a later year (i.e., returnof money) should be deducted in the year of return

v.In this case, SOL had run, so Lewis didnt get relief, but the

overall rule is still there

vi.Theres a diff in the amounts that taxpayer would get back if

amending old claim (get more $) v. deducting in current year

b. 1341: Computation of tax where taxpayer restores substantial

amount held under claim of right

i. Congs answer to Lewis

ii.Affects only those cases where the amount in question over $3k

iii.Compute the later years taxes to give you the benefit ofwhatever taxable income is less

iv.Rule: If theres over $3k amount in question, you can take

whatever is less

v.LOOK AT THIS MORE IN DEPTH!!!!!!!!!!!!

vi.B/c has to EXCEED $3k, this kicks out all situations where you

have a capital loss


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VII. Arrowsmith Doctrine

a. Report amount in income as a long-term capital gain (get preferential

rate) when they liquidate. Get sued by creditors and pay the creditors

back (Restoration of a Claim of Right). Arrowsmith wants to take an

ordinaryloss (get whole amount w/no limit )

b. Arrowsmith Doctrine: When you make the claim of right (LTCG), theloss has to have the same flavor [capital or not] as the gain (LTCL)

c. Skelly Oil: Looking at both 1341 and Arrowsmith Doctrine;

Overcharge from preceding year

i. 1952-57 overcharged

1. $505,536 in income , but special provision says that if

youre depleting natural resources you get an income

breakso only $366, 513 is taxable

ii.Restoring - paying back customers the $505,536.

1. Now, theyll get a deduction for paying back customers

and theyre trying to take the deduction for all $505,536

b/c each year stands alone

2. IRS says its only $366,513 b/c its not fair

iii.Ct looks at 1341 and Arrowsmith

1. Ct follows Arrowsmith and follows the IRS saying you can

deduct only to the extent that you had to report it as

incomeFairness Doctrine

iv.Ct says every year stands alone, but it doesnt stop from

looking at how the income was taxed (did it get special

treatment?) and its flavor

v.Dissent: Agrees, but says either each year stands alone or it

doesnt

Chapter 7: FLAVOR

I. Determining whether an asset is capital or not

II. If loss and capital asset long-term or short-term capital loss

III. If gain and capital asset long-term or short-term capital gain

ONE. Capital Asset

IV. 1221 (1) (8): Capital asset defineda. Important in Arkansas Best

b. Prop held by taxpayer, but DOES NOT INCLUDE these 8

things(everything else is a capital asset): (PARTIAL LIST BELOW

LOOK AT 1221 FOR MORE)

i. Stock in trade (the raw materials a taxpayer uses to

manufacture or produce his inventory prop)

ii.Inventory Property


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iii.Prop held primarily for sale to customers in the ordinary course

of biz

c. Regular biz income Regular rates

d. Capital gain (prop held for investment) preferential rates

e. Capital loss limited loss

f. Ordinary loss claim entire lossV. When looking at capital assets, youre trying to differentiate b/c regular

biz income and investment

VI. POLICY:

a. Want to encourage investment, so you give a better rate if stock or

prop is held long-term

b. Also, asset is increasing value at least partially b/c of the length of time

youre holding them

VII. What is Biz Income?Byram v USByram sells 22 parcels of RE b/t 1971-73

for $9 mil, w/$2 mil in profitDid he buy props for investment or was it his biz?

a. Fact specific determination: length of holding, day job, RE

knowledge, amount of props/value of props, whether or not props were

advertized, did he improve props

b. District Ct says its investment b/c not held out for resale/flipping

VIII. Arkansas Best

a. Corn Products Rule: If you hold something for investment reasons,

you will get preferential tax rates, but if its just a regular biz income,

then ordinary income rates Corn Products

b. THE RULE WE USE AK Best Rule: 1221s list of what is not a capital

asset is the beginning and ending of the analysis. If the asset is on the

list, then it is not a capital asset. If its not on the list, then its a capital

assetIX. Who is holding the prop? EX: Curt Cobains hand written notes go way

up in value after his death. If his estate/wife sell them, then its ordinary

income b/c it was part of his biz. But, if a collector buys the notes and

then sells them, hell get capital asset treatment b/c they were held for

investment purposes

X. Self-Assessment Questions (pg 487)

a. Machine used in trade or biz - Ordinary biz

b. Accts Receivable - Ordinary biz

c. Cash capital b/c not on list, but doesnt matter b/c theres not going

to be an exchanged. Patent - Capital b/c does not appear on the list

e. Personal Residence Capital, but you get capital gain treatment over

and above 121 $500K exemption but not a capital loss

f. Art bought from unrelated person capital

g. Art made by me ordinary

h. Art from related party by gift - depends on how it was held by that

person


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XI. Davis v CmsrIs amt taxpayer received in exchange for assignment of theirright to receive a portion of certain future annual lottery paymentsis ordinary

income or capital gain?

a. Guy gets $x per year, but in 1997 sells 11 payments to Singer in return

for a lump sum of $1.04M

b. He argues that since this assignment is not on 1221s list, as per AKBest, its cap gain

c. IRS says that if it was ordinary income before, its still ordinary income

d. Ct says its ordinary incomecant pull this trick! (4 Circuits have said

no now!)

XII. Timing

a. Short-Term Capital Gain < 1 year

b. Long-Term Capital Gain > 1 year

TWO. Sale or Exchange

I. What does sale or exchange under 1222 mean?i. Might suggest that some kind of bilateral transaction must

occur, but cts have defined the term fairly broadly

b. Kenan v CmsrKenan died and put estate in her trust

i. Is the trust, which says theres no sale or exchange, liable for thecapital gain (if its a capital gain)?

ii.Ct says there was a transfer regardless of what the will said, but

its capital gain b/c its a security and not on the 1221 list

iii.Purpose of Capital Gains provision is to treat an appreciation in

value, arising over a period of years but realized in one year,

that the tax will roughly approximate what the tax would have

been had a tax been paid each year upon appreciation of the

asset in value for that year.

II. Capital Loss

a. Capital Loss: Cap gain + $3k per year

b. EX: $10k cap gain, cap loss is $20k

i. You get cap gain plus $3k = $13k as a capital loss (not the entire

$20k)

ii.The difference (the $7k) you can take the next year

1. Not sure why!

THURSDAY, 11/13/08 CLASS NOTESc. Davis v Commissioner:

i. He won the lottery 13 millionii.Hes going to get 19 payments of 679,000/yriii.In 1997 he sells 11 payments to Singer (CA pays part to singer

and part to davis) in return for a lump sum payment of1,040,000

iv.Hes arguing that its capital gain because its not on the list in 1221


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v.Ct said no way it was ordinary when they were paid to you, itstays ordinary when you sell it.

d. Long term v short term capital gain:i. Long term: It has to be a capital gain (defined by 1221) and

must be held over 1 year to get the preferential rate. (so if its acapital gain, but not held for longer than a year, you dont get

the preferential treatment)e. what does sale or exchange of a capital asset mean under

1222?i. Kenan v commissioner:

1. Kenan dies, in her will she put her estate in the trust2. it was to pay her niece 5 mil on her 40th b-day.3. Trust pays the money part in cash and part in securities4. But the securities increases in value5. Is the trust liable for the capital gain (if its a capital gain)6. Trust says there is not sale or exchange (its just a

transfer) so its not a taxable event they dont need topay tax at all.

7. The ct says so what this is a recognizable event itcounts as a sale or exchange for purpose of capitalgain.

8. Ct says you have to pay tax but you get the preferentialcapital gain rate.

f. Capital loss:i. Rule: your capital loss is your capital gain plus 3,000 per yr.ii.Ex: 2008 capital gain is 10,000

a. Capital loss is 20,000b. You get the capital gain(10,000) plus 3,000 =

13,000 as a capital loss (not the entire 20,000)i. The difference (the remaining 7,000 of loss)

you can take it the next yr.ii.(if it was ordinary loss you could claim the

entire 20,000 loss)III. 1222 how to net capital gain and loss

a. 1222(50(6) short term capital gain plus short term capital loss = netshort term

b. 1222(7)&(8) long term capital gain plus long term capital loss = netlong term

i. then add the net short term and long term together (CHECKTHIS)

1. RULES: only long term capital gain (over 1 yr) getpreferential rate (usually 20%) but if the long term capitalgain is a collectable then its taxed at 28% rate (becausethis is not productive income (like stocks would be))

a. short term gain get regular tax rate. (34%)IV. 1231 special treatment for gains and losses from property used

in trade or business.a. trade or business gains and losses are treated beneficially

i. if you have a gain out of this, you treat it as a capital gainii.if there is a loss, you treat it ordinary


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b. congress passed this to benefit the business community.c. However, if they way they define trade or business is much more

narrow then in section 162i. property used in trade or business means - personal property

andii.Real property used in trade or business (see pg 520)

V. 1001 determination of amount of gain or lossa. GAIN = amount realized minus the basis

i. The entire amount of the gain is recognized unless anothersection says the IRS will not recognize it (typically means theywill recognize it later)

b. LOSS = when excess adjusted basis is higher than the amount realizedc. Amount realized = money plus

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