Basic Income Tax

Front 1

When does realization of income happen?

Back 1

Realization happens when a transaction is made on an object,
IOW, when its converted to money and thus income

Front 2

What is an asset's basis?

Back 2

It is the amount paid for an asset,
although adjusted basis includes amounts later expended on the asset

Front 3

What is Fair Market Value (FMV)?

Back 3

FMV is the price a willing buyer will pay a willing seller:
both being apprised of all relevant data,
AND neither being under compulsion to engage in the transaction

Front 4

Explain what an improvement to an asset is

Back 4

is something that either:
1) improves the asset
2) OR prolongs its life

Front 5

Explain what a repair means

Back 5

A repair means:
something that restores the asset to present value/working condition

Front 6

Which controls, the substance or form of the transaction, and why?

Back 6

The form controls, b/c:
the taxpayer chose the form of the transaction, they are stuck with it

Front 7

Is $4,467 discovered in a piano income? (Cesarini)

Back 7

Treasure-trove or found money is ordinary, taxable income

Front 8

If a third person pays my taxes for me, is that income? (Old Colony Trust)

Back 8

Third person payment of taxes for another is taxable!
This is pyramiding.

Front 9

Are travel credits converted to cash subsequently taxable? (Charley)

Back 9

Travel credits converted to cash are taxable

Front 10

What is the Haig-Simons theory of G.I.?

Back 10

Haig-Simons is sum of:
(i) taxpayer's personal expenditures plus (or minus)
(ii) increase (or decrease) in taxpayer's wealth

Front 11

Is rental value, latent, by itself G.I.? (Independent Life Insurance)

Back 11

Dormant rental value of a building is not G.I. alone?

Front 12

Is the rental value of a home occupied by corporate shareholders income? (Dean)

Back 12

Rental value of a home occupied by shareholders of the corporate owner of the home is theoretically taxable

Front 13

When are employer-provided meals excluded from G.I.? [119(a)]

Back 13

119(a), when:
(i) employer furnishes meals to employee/spouse/dependents
(ii) meals are provided for convenience of employer
(iii) meals are provided on business premises of employer

Front 14

When is employer-provided lodging excludable from G.I.? [119(a)]

Back 14

119(a), when:
(i) employer furnishes lodging on biz premises
(ii) for employer's own convenience
(iii) employee required to accept lodging as condition of employment

Front 15

Re: 'Furnished' requirement, what if employer provids a cash meal allowance instead of food? (Kowalski)

Back 15

Kowalski: cash reimbursement is not a meal

Front 16

Re: 'Convenience of employer' requirement, what if employee is required to be on-call even when not working, can meals then provided still be included in G.I.? (Benaglia)

Back 16

Benaglia: manager may exclude value of meals and lodging at hotel b/c manager was continuously on-duty

Front 17

What two things are required for employer-provided benefit to be an excludable no-additional-cost service? [132(b)]

Back 17

132(b)
(2) benefit is service imposing no substantial additional cost on employer
(1) service is offered in ordinary line of biz, and employee is in that line of biz

Front 18

How may an employee discount be excluded? [132(c)]

Back 18

132(c)(1)(A) Goods: Employee purchasing goods can exclude discount up to employer's gross profit percentage

132(c)(1)(B) services excluded if discount is 20% of price offered to customers

132(c)(4) all discounts limited to goods/services in line of biz where employee provides services

Hint 18

First for goods,
then for services,
then restriction covering both

Front 19

What is a working condition fringe benefit? [132(d)]

Back 19

132(d)
Any property/services that:
i) would fall under O&N thru 162
ii) OR depreciation under 167

Front 20

What transportation fringe benefits qualify as exclusions? [132(f)]

Back 20

132(f) includes:
B) Any transit pass
C) Qualified parking, on/near employer's biz premises
A) Trans in communter highway vehicle, but:
i) seating capacity of 6/more
ii) AND 80% of mileage incurred in transporting employees at half/more capacity

Front 21

What are the limitations on transportation fringe benefits? [132(f)(2)]

Back 21

132(f)(2) limits it to either:
(A) $100/month
(B) $175/month for qualified parking

Front 22

Can funeral home operator exclude lodging from taxation, even though he was his own employer? (Herbert Hatt)

Back 22

Herbert Hatt: • Funeral home operator can exclude the value of his on-site apartment, even if he is also the owner

Front 23

Do cash reimbursements qualify for exclusion under no-additional-cost services? [Reg. 1.132-2(a)(3)]

Back 23

Reg. 1.132-2(a)(3):
Exclussion applies whether service provided at no charge OR reduced price,
OR if partial OR total cash rebate of amount employee paid

Front 24

May an employee stay in hotel of a rival chain under written reciprocal agreement where employees pay 50% normal rent?

Back 24

132(i) Yes, provided:
(1) there's a written agreement
(2) no substantial additional costs

Front 25

Employee is salesman. Store had $2million sales and $1million cost of goods sold. Employee buys a $5,000 widget for $3,000. Does the discount qualify?

Back 25

132(c)(2) Gross profit % here would be 50%. The employee discount is only 40%. It would qualify.

Front 26

If employer provides employees with happy hour cocktails at his bar on Fri evenings, is this excludable?

Back 26

Perhaps De Minimis under 1.132-6(e)(1); depends on how much provided, how often it happens

Front 27

Employer puts a gym in biz facilities for use of employees only. Is this excludable for employee?

Back 27

132(j)(4) Not excludible.
On-premises atheletic facility must:
(i) be located on biz premises
(ii) be operated by employer
(iii) be substantially for use of employees, spouses, and dependents

Front 28

Berlusconi told Duberstein the information he had been given was helpful so he wanted to provide him with a gift; was transfer of property gift/income? (Duberstein)

Back 28

Duberstein: • For purposes of income tax, the gift tax definition does not apply
• A gift must proceed out of charity and detached affection and generosity, and the transferor's intent is the most important consideration
• Here, it is compensation, and thus it cannot be a gift

Front 29

If there is a compromise agreement between the heirs of an estate, is the inheritance exempted/income? (Lyeth v. Hoey)

Back 29

Lyeth v. Hoey: Exemption applies even when a deal or compromise is struck for inheritance

Front 30

Napoleon gives Thomas Jefferson the Louisiana Territory. How is the Federal Code tax this gift?

Back 30

102: GI does not include value of property by gift/bequest/devise/inheritance

1015: donee takes donor's basis

Thus, Jefferson's basis is the blood, sweat, and wine-soaked tears of dozens of French soldiers

Front 31

Russia bought Iceland for 1quadrillion rubles. Russia gave it to Putin when Iceland's FMV was 500trillion rubles. Iceland gave Putin 600trillion rubles for its country back. What is Putin's tax treatment on this transaction?

Back 31

"Gain rule" = donee takes donor's basis
"Loss rule" = donee's basis is FMV at time of transfer;

Here, the gain rule does not apply. So the loss rule is employed, but the FMV value increased since when Putin was gifted Iceland. So Putin has neither a gain/loss, and is not taxed.

Front 32

Putin received Iceland worth 500trillion rubles and held it until his death. At his death Iceland was worth 2quadrillion rubles. Putin bequeathed Iceland to Medvedev in proper fashion. What is Medvedev's G.I., if any?

Back 32

1014(a)(1) Property acquired by reason of death takes basis in hands of beneficiary equal to FMV on date of death.

Thus, Medvedev has no taxable income, but has a 2trillion ruble basis in Iceland.

Front 33

Are a waiter's tips G.I. to the waiter?

Back 33

Reg. 1.61-2(a)(1) Tips that constitute compensation for services are included in G.I.

Front 34

What are the four questions we ask about income?

Back 34

1st Question - Is it income?
2nd - When is it income? (Annual system)
3rd - Whose income is it?
4th - What is the character of the income?

Front 35

In what manner does the tax code collect the initial investment on annuities?

Back 35

72(b) Sets an exclusion ratio = (cost of K)/(expected return). Tax is excluded acc2 exclusion ratio through to life expectancy, and tax is applied fully for any years lived past life expectancy.

Front 36

So, there is an annuity with a $1million investment, 15-year life expectancy, $100,000/year disbursements, lives for a full 20 years. How is this annuity taxed?

Back 36

Ratio here is $1million/$1.5million, or 2/3ds. 2/3ds or $66,666 of $100k/year disbursements are taxed for 15 years. For the last 5 years, all $100k is taxed.

Front 37

An annuity has a $1million investment, 15-year life expectancy, $100,000/year disbursements, but beneficiary lives for a 10 years. How much in deductions should the estate receive?

Back 37

The estate will receive $333,333 in tax deductions, since only $666,666 out of $1million in tax has been excluded.

Front 38

Define an annuity

Back 38

An arrangement where one buys a right to future money payments

Front 39

When are life insurance proceeds excluded from G.I.? [101(a) & 101(g)(1)]

Back 39

101(a) Proceeds are tax-free provided:
i) Insurer agreement to make payments upon the insured's death to the insured's estate or designated beneficiaries
ii) AND Payment is by reason of death
101(g) Reason of death includes:
(1) acceleration for terminally OR chronically ill individuals
(2) OR amount paid to viatical settlement provider deductible

Front 40

When is a person terminally ill? [101(g)(4)(A)]

Back 40

101(g)(4)(A):
Physician certifies individual not expected to live longer than 24 months

Front 41

When is person chronically ill? [101(g)(4)(B)]

Back 41

101(g)(4)(B):
Medical personnel certifies individual:
(i) is unable to perform two/more activities of daily living
(ii) OR is disabled
(iii) OR cognitive functioning so impaired requires supervision to avoid harm

Front 42

When is an entity a viatical settlement provider? [101(g)(2)(B)]

Back 42

101(g)(2)(B): Is party
i) licensed in State (if necessary)
ii) to engage in trade/business of purchasing life insurance Ks
Note: if license not required, individual must be chronically ill/terminally ill

Front 43

If owner of the insurance policy is an employer, how much is excluded?

Back 43

101(j) Exclusion = permiums + other amounts paid

Front 44

If insurance policy is transfered, how much is excluded from G.I.? [101(a)(2)]

Back 44

101(a)(2) exclusion limited to consideration paid + premiums + other amounts paid by transferee

Front 45

What kinds of prizes are excludible from G.I., and to what extent? [74(b)]

Back 45

74(b): Award must be for listed acheivement of excellence and
(1) recipient was selected w/o any action on his part
(2) substantial future services not required as condition to receive the prize/award, AND
(3) the prize/award is transferred by the payor to a gov't'l unit or charitable organization

Front 46

What kinds of employee achievement awards are excludible from G.I., and to what extent? [74(c)]

Back 46

74(c)Employee achievement awards (see also 274(j))
□ Cannot exceed $400
□ Must be tangible property
□ employee for at least five years

Front 47

What's the athletic scholarship rule?

Back 47

Athletic scholarships are excludible if:
(1) University expects but does not require student to participate in a particular sport
(2) AND requires no particular activity in lieu of participation
(3) AND Scholarship is not cancelled if student does not participate

Front 48

What kinds of scholarships are excludible from G.I., and to what extent? [117(b)&(b)]

Back 48

117(b) Excludible to extent covers tuition, related fees, books, supplies (but not room/board)

117(c) but not to extent that scholarship is compensation for services

Front 49

What is the Amount Realized? [1001(b)]

Back 49

1001(b) Amount realized = money rec'd + FMV rec'd (other than money)

Front 50

What is gain and loss? [1001(a)]

Back 50

1001(a)
Amt real - basis = gain
Basis - amt real = loss

Front 51

How does a property encumbered by liability affect the amount realized? (Crane)

Back 51

Crane: In a sale, the Amount realized = money + cash + liability transferred

Front 52

Define recourse and non-recourse mortgages.

Back 52

Recourse mortgage = owner is personally liable

Non-recourse mortgage = land is security for the obligation

Front 53

If someone pays for land with a 20% down payment and 80% non-recourse mortgage instead of a recourse mortgage, how does this affect the seller's gain?

Back 53

It does not affect the seller's gain.

Front 54

Employee purchases a $10,000 painting from his employer, but receives a 132(a)(2) employee discount, and pays only $9,000. When he later sells it for $12,000, what is his basis in the property and the resulting gain? (Philadelphia Park)

Back 54

The basis is the FMV of the property received, not what was paid. Therefore, the employee's basis in the property is $10,000. Amount realized ($12,000) - basis ($10,000) = $2,000 gain

Front 55

If A owns a widget with $4,000 basis and $6,000 value, and exchanges it for B's painting which has a $5,000 basis and $6,500 value, what are A & B's gains and cost bases respectively?

Back 55

A's cost basis was $4,000, amount realized $6,500, so his taxable gain is $2,500. B's cost basis was $5,000, his amount realized is $6,000, so his taxable gain is $1,000.

Front 56

A gives B a piano. A's basis in the piano was $1. The piano is worth $1,000. What is B's basis in the piano? [1015(a)]

Back 56

1015(a): Basis for gifts is as it would have been in the hands of the donor or the FMV, whichever is less;

B's basis in the piano is $1

Front 57

A gives B a pot of myrrh. A travelled by plane to Yemen to harvest it by hand and came back, incurring $7,500 for the myrrh. But the myrrh is only worth $5,000 on the open market. What is B's basis in the myrrh? [1015(a)]

Back 57

1015(a): Basis for gifts is as it would have been in the hands of the donor or the FMV, whichever is less;

B's basis in the myrrh is $5,000

Front 58

Lessee rents when Lessor's basis in Blackacre is $4,000. Lessee constructs a fence, which adds $500 to Blackacre's value. When lease ends, Lessor sells the property for $5,000. What is Lessor's gain? [109]

Back 58

109 Lessee's investment/improvement in property (that is not rent) does not count as gross income to lessor

Lessor's taxable gain is only $500.

Front 59

Golddigger received stocks before marriage to be held, "for her benefit and protection in the event that Sugardaddy should die . . ." In their pre-nup, Golddigger acknowledged the gift of the shares "in consideration of the promise of marriage, and consummation of promised marriage." Does Golddigger take Sugardaddy's basis b/c it was a gift? (Farid-Es-Sultaneh)

Back 59

Farid-Es-Sultaneh:
Since she performed the K under its terms, she receives the stock as if it were a purchase, and not a gift

(Thus, only the amount received - her basis is taxable, and not - his basis)

Front 60

Property had cost Donor $1,000, but had only a $800 FMV at time of the gift. Donee sold property for $900. What is Donee's gain/loss on the transaction? [Reg. 1.1015-1(a)]

Back 60

Reg. 1.1015-1(a) Anytime you sell property between the split basis, you have no loss nor profit;

So, Donee has neither a gain nor a loss.

Front 61

Spouse transfers to Ex, pursuant to a divorce, a vase with a $100 basis and $1,000 FMV within the year. Ex immediately sells the vase for $1,000. What is Ex's gain/loss? [1041(a)(b)&(c)]

Back 61

1041(a) No gain/loss recognized on transfer of property to former spouse incident to divorce
(b) Transferee has transferor's basis
1041(c) Property transfer must be:
(1) within year of date of end of marriage
(2) related to cessation of marriage

Thus, Ex's gain is $900.

Front 62

Decedent has a $1,000 basis in Blackacre. Decedent dies and leaves Blackacre to Heir when the FMV is $10,000. Heir sells Blackacre for $11,000. What is Heir's taxable gain? [1014]

Back 62

1014 If property passes by reason of death, then basis becomes the FMV of the property at death (i.e., the value calculated for the property for the purposes of the estate tax)

Heir's taxable gain is $11,000 - $10,000, or $1,000.

Front 63

B bought Greenacre with a $20,000 down payment and a $180,000 non-recourse loan. When Greenacre is worth $300,000, B takes out another $100,000 non-recourse mortgage. What is B's income from the non-recourse mortgage? (Woodsam)

Back 63

Woodam

Subsequent non-recourse borrowing is not included in the initial basis that investor invested into the property (unless borrowing is used to improve the land)

B has zero income from the non-recourse mortgage, b/c he is expected to pay it back

Front 64

Blackacre is encumbered by $10,000 in non-recourse loans. Blackacre has a FMV of $20,000. B sells Blackacre for $12,000 in a quit-claim deed making Blackacre still subject to the mortgages. What is B's amount realized? (Tufts)

Back 64

Tufts

When taxpayer sells or disposes or property encumbered by a non-recourse obligation, taxpayer must include among the assets realized the outstanding amount of the obligation. The FMV is irrelevant.

B's amount realized for Blackacre is $22,000.

Front 65

A purchased Blueacre for $100,000. A gave it to B, paying a $50,000 gift tax on the transfer, when Blueacre was worth $250,000. B later sold Blueacre for $300,000. What is B's gain/loss on Blueacre?
[1015(d)(6)]

Back 65

1015(d)(6) Net appreciation = (FMV - donor's adjusted basis before gifting)
(Net appreciation)/(value of the gift) * gift tax paid = 1015(d)(6) ratio
Thus, to get the donee's basis add donor's basis to 1015(d)(6) ratio, which will never exceed the gift tax paid.

Thus, here, net appreciation is $250,000 - $100,000 = $150,000. $150,000/$250,000 or 3/5 * $50,000 = $30,000.

$30,000 + $100,000 = $130,000 adj basis. $300,000 - $130,000 = $170,000 gain realized

Front 66

Are punitive damages taxable? (Glenshaw Glass)

Back 66

Glenshaw Glass, Punitive damages are an undeniable accession to wealth, over which the taxpayer had complete dominion. Thus they are taxable, although compensatory damages are not

Front 67

Is the recovery of damage/destruction of property (in settlement/judgment) taxable income? (Raytheon)

Back 67

Raytheon, Damage to property is taxable only to the extent that it exceeds the cost basis

Front 68

What is the general rule of thumb for determining whether the recovery of damages is taxable? (Raytheon)

Back 68

Raytheon, Taxability of a recovery of damages can be determined partly by identifying the nature of the injury; ask the question, "In lieu of what were the damages awarded?"

Front 69

Biz expenses are deductible only if "ordinary & necessary." (162 & 212) What does ordinary mean? (Welch)

Back 69

Welch: Ordinary is:

A variable affected by time, place, and circumstance

Does not mean habitual/normal in sense that same taxpayer will pay them often

"Life in all its fullness"

Front 70

Biz expenses are deductible only if "ordinary & necessary." (162 & 212) What has been included as ordinary & necessary?

Back 70

Ordinary & Necessary expenses:
Defense of criminal charge out of taxpayer's business

Corporation's contribution to: Civic improvement fund when half city was employed
AND A hospital when two-thirds of city was employed

Payments of debts discharged by bankruptcy, but to be revived by new promise

Additional compensation allowed to officers of a corporation for services previously rendered

Front 71

Biz expenses are deductible only if "ordinary & necessary." (162 & 212) What are two rationales for not defining ordinary & necessary?

Back 71

Complexity of biz dealings make clear-cut rules impossible

AND courts reluctant to question taxpayers' biz judgment

Front 72

B flies to all biz meetings for $10,000/year. But B can fly in coach class for only $5,000/year. How much transportation cost is deductible? (162)

Back 72

162: All $10,000/year is deductible, provided there's a good biz purpose. Executives fly 1st class often.

Front 73

Employee incurred O&N biz expenses on biz trip. She was entitled to reimbursement upon filing a voucher. Insead, she deducted costs on her income tax return, are the costs deductible? (Heidt)

Back 73

Heidt: the taxpayer voluntarily gave up reimbursement. He is thus attempting to convert the employer's right to a deduction into a right of his own. This he cannot do.

Employee cannot deduct expenses.

Front 74

Is $5,000 expenditure for lining basement walls/floor to oil proof it against an oil nuisance deductible as O&N biz expense? (Midland)

Back 74

Midland: To repair is to restore to a sound state or to mend, while a replacement connotes a substitution

Cost of property acquired for business use is a charge against income that it helps to earn, ratably over the expected useful life of the property;

Expenditures enabling the taxpayer to use the property for THAT expected period and planned purpose are deductible expenses

Yes, deductible

Front 75

Are professional expenses for I-banker incurred by target corporation in course of friendly takeover deductible as O&N biz expenses?
(INDOPCO)

Back 75

INDOPCO:
○ Deductions for professional expenses usually disallowed
○ While creation of a separate asset may be sufficient to require capitalization of an expenditure, it is not a necessary condition
○ The takeover transaction produced significant benefits that extended beyond the tax year in question, thus costs were to be capitalized

Expenses for I-banker's services are capitalized

Front 76

What three kinds of biz expenses are generally capitalized?
(Reg. 1.263(a)-4(b)(1), -5(a))

Back 76

(Reg. 1.263(a)-4(b)(1), -5(a))
Capitalize:
(1) amount paid to acquire/create/enhance intangible asset
(2) amount to facilitate acquisition/creation of intangible
(3) amount to restructure/reorganize biz entity or stock issuance/borrowing or recapitalization

Front 77

$1 to paint three rooms of Landlord's apartment. Deductible repair or Capital expenditure?

Back 77

Depends on the purpose; but here the purpose is probably to enhance the value of the apartment, and thus must be capitalized

Front 78

$2 to replace Landlord's roof over apartment having suffered termite damage. Deductible repair or Capital expenditure?

Back 78

Reg. 1.162-4 Repairs: A repair of a roof is an attempt to restore the life of the apartment to its present expected term of use; and thus is deductible

Front 79

$3 for Landlord to add carport to apartment. Deductible repair or Capital expenditure?

Back 79

263(a): This is an addition to enhance the value of the apartment and thus is not deductible

Front 80

$4 for Landlord to advertise tenant to occupy vacant apartment. Deductible expense or Capital expenditure?

Back 80

Reg. 1.162-1: advertisements are indeed an ordinary business expense and thus currently deductible

Front 81

Can individuals deduct travel expenses made on trip to examine newspapers and radio properties for future purchase? (Morton Frank)

Back 81

Morton Frank: cannot deduct expenses incurred in preliminary investigations re: investments w/o prior activity in that business

Front 82

What is the general rule for start-up expenditures? [195(a)]

Back 82

195(a) Generally, no deductions for start-up

Front 83

What are start-up expenditures def'ned as? [195(c)]

Back 83

195(c): Any amount paid/incurred which would be allowable if were normal trade/biz which is in connection w/
(i) investigating creation/acquisition of active trade/biz
(ii) creating active trade/biz
(iii) any activity for profit & production of income in anticipation of & before trade/biz begins;

Front 84

What are the time/money limitations on start-up expenditures? [195(b)]

Back 84

195(b) $5,000, which phases out dollar-to-dollar starting after start-up expenditures amount to $50,000

Limited to taxable year

AND deductions over $5,000 (or beyond phase-out) may be ratably deducted over 180-month period from when trade/biz actively begins

Front 85

Tycoon, desiring to diversify investments, incurs expenses in investigating purchase of Chicago Cubs. But after two years, Tycoon sells the Cubs at a loss. What happens to deferred investigation expenses?

Back 85

165(c) covers losses, so she can take all of the remaining deduction in year that she sells the business

Front 86

Is being an employee constitute "carrying on" a trade/biz? (Primuth)

Back 86

Primuth: Yes, an employee carries on a trade/biz

Front 87

D completed secretarial school. Soon thereafter, D incurred employment agency fees, but D was unsuccessful in finding employment. Are Agency expenses deductible?

Back 87

D never carried on as secretary; so she is not an employee engaged in the trade/business, and thus not deductible under 162

Front 88

D completed secretarial school. Soon thereafter, D incurred employment agency fees to successfully find a job. Are agency expenses deductible?

Back 88

195: D can deduct pre-employment expenses, b/c employment is to a 3rd-party

Subject to 195's limitations

Front 89

D was laid off from her secretary job in Omaha. She paid Agency to find employment as a secretary in Louisville. Agency and D are unsuccessful. Are agency expenses deductible?

Back 89

Agency expenses are deductible here b/c D was already carrying on trade/biz as secretary. Success of pursuit does not matter.

Front 90

What is the deductibility cieling for compensation that a publicly held corporation may provide for remuneration for services? [162(m)]

Back 90

162(m): Cap is $1million, excluding commissions

Front 91

Detail the reasonableness test for determining reasonable compensation given to an employee

Back 91

Reasonableness test:
a. Type of services
b. Employee qualifications
c. Scarcity of employees
d. Net earnings of employers
e. Prevailing compensation to employees with comparable jobs
f. Profitability of employer

Front 92

Detail the independent investor test (and the three associated questions) for determining reasonable compensation given to an employee

Back 92

Independent investor test: If company's earnings on equity (considering all facts and circumstances) remain at a level that would satisfy an independent investor, then compensation is reasonable;
○ Is salary in excess of those ordinarily paid?
○ Do payments correspond to stockholdings?
○ Was it freely bargained?

Front 93

What is the goal of travel/entertainment expenses limitations?

Back 93

Goal to permit deductions for travel/entertainment expenses serving a genuine purpose. The personal consumption historically has involved taxpayer abuse. (Two martini biz lunch)

Front 94

What are three requirements for taxpayer to deduct travel expenses, including half of meals & all lodging? [162(a)(2)]

Back 94

162(a)(2) expenses must be:
(I) reasonable & appropriate
(II) incurred away from home
(III) motivated in pursuit of trade/biz

Front 95

If travel is a mixed purpose of biz and pleasure, what factors are considered? [Reg. 1-162-2]

Back 95

Reg. 1-162-2:
○ Travel expenses to and from must meet the primary purpose test
§ Facts & Circumstances
§ Amount of time spent most important:
□ If business days greater than non-business days, you do meet primary purpose test
□ And vice versa
§ Primary purpose test is an all or nothing determination for travel expenses
○ Lodging and meals are done on a day-by-day basis

Front 96

What is the significance of 'major post of duty?' (Andrews)

Back 96

Andrews refers to the 'away from home' requirement for 162(a)(2) travel expenses
Taxpayer reasonably expected to locate home at major post of duty
□ Determining major post
® Which is greater amount of time?
® If employee at both places, which is greater amount of income?
□ Living expenses are duplicated only at minor post of duty

Front 97

Where is the home for Rosenspan test?

Back 97

Rosenspan
Home is primary residence;
If you do not have a home, you cannot take the deduction

Front 98

What is the rule for 'luxury water travel'? [274(m)]

Back 98

274(m) No luxury water travel shall be permitted as travel expenses
Except insofar as expenses are twice the per diem amounts for days of such transportation

Front 99

What is the rule for foreign travel, and what is the exception? [274(c) & (c)(2)]

Back 99

274(c) Certain foreign travel allows only deduction in proportion to amount of time spent for business (i.e. if it is 60-40 business-pleasure, only 60% is deductible, not all)
(2) Exception when:
(A) Travel less than a week
(B) OR if time of travel abroad is less than 25% of time travel total

Front 100

What is recognition of income? 1001(c)

Back 100

1001(c): Recognized income is that designated as taxable; all gains/losses are default recognized

Realized gains/losses only taken into account to extent that they are recognized

Front 101

What is the shorthand to explain provision 1245?

Back 101

1245: Gain will be ordinary to the prior extent of depreciation deductions taken

Front 102

What is the statute of limitations to amend prior income tax returns?

Back 102

Three-year SoL

Front 103

1250 only applies to accelerated depreciation on real property, so what is the practical effect of 1250 depreciation?

Back 103

1250 depreciation only applies to older property before the provision forbidding accelerated depreciation on property;
AND to the property you own for less than a year.

Front 104

If liability is non-recourse liability, what is used to determine the sellers' amount realized? (Tufts)

Back 104

If non-recourse, Tufts uses amount of liability as amount realized;
But only practically applies when FMV is less than the liability.

Front 105

When you are travelling for medical care, is 50% of meal/all of lodging deductible?

Back 105

Unclear, but unlikely.

If meal/lodging is provided on the facility, it is deductible as a MEDICAL EXPENSE;

If you are an outpatient, there's some disagreement as to whether it is deductible.

Front 106

What are the three situations in which meals can be deducted?

Back 106

162: Biz travel, if you are 'traveling away from home,' if your travel extends long enough that you need a period of rest (meals are tied to lodging)

274(n)(1) 50% Entertainment expense under O&N biz requirement which is either:
associated
OR related to biz discussion

213 As medical expense deductions, subject to:
lodging at medical facility
AND more than 7.5% of GI

Front 107

What are two situations in which a donee realizes income on a gift?

Back 107

1015(d)(6) There's a net gift and a gift tax greater than the basis;

OR (Tufts) you give a gift subject to the liability and the liability is greater than the adj basis

Front 108

Generally, a taxpayer cannot deduct commuting expenses under 162. If taxpayer is travelling from residence-to-work, what must taxpayer show to deduct expenses?

Back 108

Rev. Rul. 99-7: 1st, the work site must be temporary, i.e., a location at which taxpayer works a year or less

2nd, Work site must outside metro area where taxpayer lives/works

Front 109

Generally, a taxpayer cannot deduct commuting expenses under 162. But what are the two conditions in which a taxpayer's commute w/in a metropolitan area are deductible?

Back 109

Either if:
1) taxpayer has 1/more regular work locations AND a temporary work location, but deduction restricted to temporary work location
2) taxpayer's residence is taxpayer's principal place of biz (per 280A(c)(1)(A)); deduction applies whether other work location is regular/temporary

Front 110

Commuter travels often between office and court house to file papers; how much of Commuter's transport/meal costs may he deduct?

Back 110

Commuter may not deduct meals, as they do not arise out of exigencies of biz.

Commuter may deduct cost of transportation

Front 111

Taxpayer lives w/ husband and children in City and works there. Employer sends her to Metro on biz, working there three day and spending two nights in an apartment she maintains in metro. What, if anything, is deductible?

Back 111

She may deduct travel expenses and half of all meal expenses and lodging;
Living expenses are duplicated only at minor post of duty, which might be at the apartment, but could be her home in Metro (since home may be determined by major post, and major post may be where she works three days of the week)

Front 112

T works for Employer in City, where T and family lives. Employer sends T to Branch City to supervise office there for 9 months. T's family stays in City and he rents an apartment in Branch City. Are T's Branch City expenses deductible?

Back 112

Yes, because its in another metro area and job is for less than a year, lodging, half meals and travel are deductible for T, but not for his family under 274(m)(3)

Front 113

T flies from tax home to biz meeting in another state on Monday. Meeting ends late Wednesday, and T flies home on Friday afternoon after two days in the sunshine. What, if anything, is deductible?

Back 113

Travel expenses to-and-fro are fully deductible b/c 3 days biz, 2 personal make it a dominant biz purpose;
But 50% meals and lodging are pro-rated by day,

Front 114

T flies to Mexico City on Thurs, conducted biz on Thurs, Fri, Mon, Tues, and returned home on succeeding Fri night. To what extent are T's transportation, meals, and lodging deductible?
[274(c)(1)&(2)]

Back 114

If Friday is business day and Monday is a business day, then the weekend acts as business days; (perhaps also nat'l holidays), in which case 2/3ds of the travel expenses are deductible.

Under 274(c)(1) & (2), travel expenses are rated proportionately b/c
(A) travel time is > week
(B) personal time is =/> 25% of total time of such travel

Front 115

Under what two conditions are education expenses deductible as 162 O&N expenses? [Reg 1.162-5]

And what are two cases in which education is never deductible as O&N biz expense?

Back 115

Reg 1.162-5
(1) Education maintains/improves skills required in his trade/business/employment
(2) Meets the express requirements of individual's employer imposed as a condition to retention for status/compensation

HOWEVER, two cases which render education non-deductible:
(b) Education that meets the minimal standard for the field
Ex: 3-year law school for a lawyer
(c) program of study which will lead to qualifying him in new trade/business
Ex: An engineer studying at a 3-year law school

Front 116

Is a law school education deductible as a 162 O&N biz expense?

Back 116

No, b/c a law school education is the minimal requirement to practice in the field.

Front 117

Is specialist education, such as a dentist enrolling in post-grad orthodontics, deductible as a 162 O&N biz expense?

Back 117

Yes, the service does not recognize specializations as minimal requirements to practice within a new field.

Front 118

Are travel, 50% meals, and lodging deductible when an individual travels away from home to obtain an education?
[Reg 1.162-5]

Back 118

Reg 1.162-5: Yes, provided the purpose of travel was PRIMARILY to obtain an education.

Front 119

One may deduct 50% of a biz meal, but which two tests must the taxpayer first meet? [274(n)]

Back 119

274(n): § Directly related = business conducted during the entertainment
□ Must be substantial business discussion during lunch
□ Maybe Football game/opera, but uphill burden against presumption
§ OR Associated entertainment expenses =
□ Business purpose
□ Immediately preceeding/following a bona fide business discussion

Front 120

What are the core three 274(c) exceptions to allowing associated 274 biz expenses?

Back 120

274(c): Exceptions for
(1) food & beverages furnished on biz premises [but perhaps eligible under 132(e)]
(2) Expenses treated as compensation
(3) Reimbursement agreements, if reimbursement equal to the expense,
BUT, in effect, it need not be included in employee's gross income

Front 121

What may an employee deduct as cost of "carrying on" biz re: uniforms?

Back 121

○ Must be:
§ Required
§ Not of a type suitable for general/continued usage (can it double as street wear?)
○ Deducts costs for maintanance and obtaining uniforms only

Front 122

Are advertising expenses deductible as O&N biz expenses per 162? Or are they capitalized and depreciated under 167/168?

Back 122

If advertisements involve purchase of property, it is capitalized/depreciated (ex: billboard/ad sign)

If ads placed in mags, TV, etc, it is a present expense; only exception is bar on political contributions, thus ads in convention programs/publications of political parties are banned

Front 123

Are dues deductible under 162's O&N biz expenses?

Back 123

• Union dues
○ Are deductible
○ Except insofar as they are political
• Gym fees
○ Are non-deductible
○ General health
Professional fees (i.e., attorney's fees to local bar) are deductible

Front 124

If employee spends money to take three biz clients out to lunch, and biz is conducted during the lunch, may employee also deduct clients' $15 cab fare?

Back 124

Such deduction is allowed because it is incident to travel expenses

Front 125

Businessperson buys Broadway tickets for production following a bona fide biz meeting. B-person buys them from concierge $200 each for tickets w/ marked price of $100 each [274(l)(1)(k)]

Back 125

Since it is an associated expense following a business discussion, deduction is limited to face value per 274(l)(1)(a), only $50 each is deductible, half of the full marked price value

Front 126

T has 40 acres w/basis of $20k. T trades it to A for apt building worth $80k, which has a basis of $25k. B also transfers to T $2k in cash and 50 shares of X Corp. stock held for 5 years with a basis of $30k but FMV of $23k. What is T's realized gain, recognized gain, basis in the stock, and in the building?

Back 126

TBD

Front 127

T has 40 acres w/basis of $20k. T trades it to A for apt building worth $80k, which has a basis of $25k. B also transfers to T $2k in cash and 50 shares of X Corp. stock held for 5 years with a basis of $30k but FMV of $23k. What is B's realized gain, recognized gain, basis in the stock, and in the building?

Back 127

TBD

Front 128

What are the six requirements for a payment to be alimony? [71(b)]

Back 128

71(b): any cash payment that . . .
(A) . . . Received by (or on behalf of) a spouse under a divorce/separation instrument
(B) . . . Instrument does not designate it income to payor
(C) . . . Payee and payor spouses are not members of same household when payment is made
(D) . . . Includes no liability after death of the spouse
AND Payment is not for child support

Front 129

If A pays the mortgage for his ex-wife's separate house, and it meets all the other five requirements for alimony, is the third-party payment a suitable substitute in lieu of cash? [Regs: 1.71-1T(b)(Q6)]

Back 129

Regs: 1.71-1T(b)(Q6)
Yes, third-party payments for rent/mortgage/any obligation may serve as payments;
provided the obligation is not under the ownership of the payor.

Front 130

Are ex-spouse's A's payments of ex-spouse's B's premiums for life insurance taxable? [Reg. 1-71-1T(Q6)]

Back 130

Reg. 1-71-1T(Q6) For term and whole-life insurance on the payor's life, made under terms of divorce/separation agreement, will qualify as payments of behalf of the payee spouse to the extent that the payee spouse is the owner of the policy

Front 131

Taxpayer has three investment properties, only one of which has a lessee on which rent is being paid. Does taxpayer have to pay the value of the rent for the other two vacant investment properties?
(Independent Life Ins. Co.)

Back 131

(Independent Life Ins. Co.) Rental value of building does not alone constitute income (unless at least actualized)

Front 132

What does 'transfer of property incident to divorce' mean?

Back 132

Regs: Sec. 1.1041-1T(b) Transfer of property incident to divorce means:
(1) transfer occurs within a year of divorce
(2) OR the transfer is part of the divorce, meaning: Transfer must be pursuant to a divorce or separation instrument defined in Sec. 71(b)(2) and actual transfer occurs within 6 years of divorce

Front 133

If ex-spouse A transfers to ex-spouse B Greenacre in 2000 pursuant to a divorce decree 1995, w/ Greenacre having a basis of $10k and FMV of $100k, what is B's gain recognized? [1041(a)]

Back 133

1041(a) GENERAL RULE.—No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)—
(1) a spouse, or
(2) a former spouse, but only if transfer incident to the divorce

(b)(2) transferee takes transferor's basis

(c) INCIDENT TO DIVORCE.
(1) occurs w/in 1 year after the date marriage ceases, or
(2) related to cessation of marriage

Thus, there is no gain recognized and B takes A's adj basis

Front 134

What is the recapture formula?
[71(f)]

Back 134

71(f) FORMULA, where F, S, & T represent the values for the first-, second-, and third-years
○ S-(T+15,000) = F(4)
○ F - [15,000+(S-F(4) + T)/2] = F(3)
○ F(4) + F(3) = total recapture
○ Note: Neither F(4) nor F(3) will ever be an amount less than 0, b/c you can never have a negative excess

Front 135

Define child support.
(Note: do not define by 71(c) requirements)

Back 135

Legal obligation to maintain the child as to that child's accustomed standard of living;
In some states this is defined as shelter, clothing, food, basic necessities;
In others it is defined as being more than that

Front 136

Besides having a personal residence, what are the two requirements for earning exclusion from the gain of a personal residence? [121]

Back 136

121: Ownership and use as principal residence required for at least two of the past five years

Cannot take full exclusion if taxpayer has already taken exclusion w/in past two years

Front 137

Taxpayer sold first principal residence on December 1st, 2004. Taxpayer bought principal residence on January 1st, 2005 for $450k. Taxpayer sold it on 1-1-2006 for $550k, b/c he no longer liked the house. What is taxpayer's gain realized? [121(c)]

Back 137

121(c): Reduced exclusion is only available on grounds of change of employment, health, unforeseen circumstances;

So gain realized on the house is $100k.

Front 138

Taxpayer bought principal residence on January 1st, 2005 for $450k. Taxpayer sold it on 1-1-2006 for $550k, b/c his job required him to do so. What is taxpayer's gain realized? [121(c)]

Back 138

121(c) Taxpayer may exclude $250k * reduced ratio

Reduced ratio #1 = the
period of ownership & use divided by 2 years;

So there is no gain realized of the $100k, since the exclusion is limited to $125,000, more than enough to cover the $100k.

Front 139

Taxpayer bought principal residence on January 1st, 2005 for $450k. Taxpayer sold it on 1-1-2006 for $550k, but he used the principal residence exclusion on July 1st, 2004. What is taxpayer's gain realized? [121(c)]

Back 139

121(c) Taxpayer may exclude $250k * reduced ratio

Reduced ratio #2 = the
period of time between previous sale and current sale, divided by 2 years;

Here, there is 18 months divided by 24 months, so the 3/4ths ratio * $250k = $187.5k of exclusion.

Thus, taxpayer's gain realized is a full $100k gain on the sale.

Front 140

Taxpayer A & B each wish to take the principal residence exclusion. Taxpayer A's wife died a year ago, after living in the house for two years. Taxpayer B's wife divorced and left him and his house in a divorce decree a year ago, after living in the house for two years. May A & B take the principal residence exclusion, and if so, to what extent? [121(d)(2)&(3)]

Back 140

121(d)
(2) PROPERTY OF DECEASED SPOUSE.—an
unmarried individual whose spouse is deceased may include the period such deceased spouse owned and used such property before death
(3)(A) If transferee takes the transferor's basis under 1041(a), transferee must tack the holding period
(3)(B) Individual shall be treated as using property as such individual's principal residence during any period of ownership while such individual's spouse or former spouse is granted use of the property under a divorce or separation agreement;

A may take the full $500k exemption, and B may also take the full $500k exemption

Front 141

Taxpayer A and B are married and file jointly. Taxpayer A owned and lived in the principal residence for five years, whereas taxpayer B did so for only one year. To what extent, if any, may they take of the $500k exclusion on the sale of a principal residence? [121(d)(1)]

Back 141

[121(d)(1)](1) JOINT RETURNS.—If a husband and wife make a joint return for the taxable year of the
sale or exchange of the property, subsections (a) and (c) shall apply if either spouse meets
the ownership and use requirements of subsection (a) with respect to such property;

A & B file jointly, so they may take the entire $500k exclusion if need be.

Front 142

What does O&N mean for 212's for-profit non-biz deductions?
(Surasky)

Back 142

212: Broad construction to facilitate business expenses;

"Necessary" may mean expenditures were "appropriate and helpful;"

"Ordinary expense" = any necessary expense incurred in good faith to a particular business

Front 143

What are the three 212 O&N for-profit non-biz deductions?
(212)

Back 143

212: All ordinary & necessary expenses are deductible:
(1) For the production or collection of income
(2) For management, conservation, or maintenance of property held for the production of income
(3) In connection with the determination, collection, or refund of any tax

Front 144

If taxpayer A incurs legal expenses in defending the integrity of his title to property held for the production of income, how does taxpayer treat such expenses on his tax return?
(Bowers)

Back 144

Bowers:
• Legal expenses involved in defending/protecting title are not ordinary & necessary expenses and are not deductible
• Such expenses constitute a capital charge to be added to the cost of the property

Front 145

Individuals are limited to what three kinds of deductible losses? [165(c)]

Back 145

165(c) LIMITATION ON LOSSES OF INDIVIDUALS -
(1) trade/biz losses;
(2) losses incurred in any transaction entered into for profit, though not connected w/ trade/biz;
(3) losses of ANY property if arising from fire, storm, theft, or other casualty

Front 146

Taxpayer wishes to deduct for tax services incurred in managing his five investment leasehold properties. May he do so? [Reg. 1.212-1(l)]

Back 146

Reg. 1.212-1(l) Tax expenses are deductible, including:
Determination/collection/refund of any tax;
Tax counsel/preparation of tax returns

Front 147

If trader buys 100 shares of GM stock at $3,000, how does he treat the $100 brokerage commissions? What if the trader sells the stock for $1,500, at a significant loss?

Back 147

Trader's commissions expenses are not deductible; she adjusts her basis as a capital expenditure;
Trader recovers only $1,500 in the case of a loss

Front 148

Speculator owned 10% of outstanding GM stock, and incurred $500 in transportation, meals, and lodging to travel to annual shareholders meetings. May speculator deduct these costs under 212(2)?

Back 148

If S owned $300k of stock, and 10% of shares, traveling back and forth from stockholder meeting might mean management/conservation in a more ordinary/necessary sense; and is probably deductible

Front 149

To what extent may payee spouse deduct attorneys' fees incurred in getting a divorce?[Reg. 262-1(b)(7)]

Back 149

Reg. 262-1(b)(7) Generally, divorce attorney's fees are not deductible;
But, exception for part of attorney's fee and other costs of divorce or support decree includible in gross income under Sec. 71 are deductible by wife under 212;
To the extent attributable to tax advice and alimony

Front 150

What is acquisition indebtedness?

Back 150

◊ Is debt secured by a qualified residence incurred in: acquiring, constructing, or substantially improving a qualified residence
◊ Also includes refinancing of debt
◊ Capped at $1m
Acquisition indebtedness interest is deductible

Front 151

What is home equity indebtedness?

Back 151

◊ Is debt secured by a qualified residence to extent that aggregate amount of debt does not exceed the FMV of the residence reduced by the outstanding acq. indebtedness incurred by taxpayer with respect to such property
◊ Maximum amount of debt is limited to amount of taxpayer's "equity"
◊ In any case, may not exceed $100k ($50k single)
Home equity indebtedness is deductible

Front 152

• If you have an interest-free loan, do you have income in the amount of the interest you do not have to pay?

Back 152

Interest-free loan is a gift on the amount of interest of the market rate

Front 153

Taxpayer has residence w/ FMV of $400k, outstanding principal balance of mortgage is $200k, and they take out a 2nd mortgage for $100k secured by residence to add a 4th bedroom and den to residence. What kind of indebtedness do they have and how much of it is deductible?

Back 153

Acquisition indebtedness is debt secured by a qualified residence in acquiring, constructing or substantially improving such qualified residence;
Thus, the each loan here is acquisition indebtedness; The taxpayer may deduct interest on all $300k of the loans.

Front 154

Taxpayers purchase a luxury residence in FL for FMV of $1,250,000, financing $950k of the purchase price and use the house 45 days a year. How much, if any, of the indebtedness interest be deductible? 280A(d)(1)

Back 154

280(d)(1) Dwelling is qualified residence if taxpayer uses it for personal purposes which exceeds greater of -
14 days
OR 10% of # of days during year which it was rented at fair rental

Here, taxpayer did not rent the reisence, so 45 days is more than enough. Taxpayer may deduct interest on all $950k of indebtedness

Front 155

May taxpayer deduct State income and sales taxes from his tax return?

Back 155

Taxpayer may elect to deduct either State income or State sales taxes, but only one or the other.

Front 156

Are state taxes paid on cigarettes paid by customer providing it gratuitiously for customers deductible?

Back 156

Yes. If item is deductible as O&N biz expense under 162 or 212, then the state tax is deductible as well

Front 157

Father pays intangibles tax due by son as he pays his own intangible tax. May father deduct the tax paid, or is it deductible by the son?

Back 157

Father may only deduct taxes allocable to him
The son may deduct the intangibles, even though his father paid them (b/c father made a gift to son, which son used to pay tax)

Front 158

Charles works for Dr. Medic. Dr. Medi withholds X dollar to which she adds Y dollars and pays all of it to Fed gov't for Social Security. What can Dr. Medic deduct? What can Charles deduct?

Back 158

Dr. Medic can deduct X & Y as compensation for services
Charles is not entitled to a deduction for social security under Sec 275

Front 159

T is single, a child of X, and a law student. He has an investment income of $4,000 and no other income. X properly claims T as a dependent for the year. What is T's total taxable income for the current year after adjustments b/c of limitation on basic standard deduction? [63(c)(5)]

Back 159

Taxable income is $3,000 for and the standard deduction greater of $250 + earned income or $500.

Thus, T's taxable income is $3,500.

Front 160

When may a spouse take his spouse's personal exemption on his return if they are not filing a joint return? [151b]

Back 160

151b Taxpayer may take spouse's personal exemption when:
Spouse has no G.I.
AND Spouse is NOT claimed as a dependent of another taxpayer

Front 161

What are the "Qualifying child" dependency requirements?

Back 161

• "Qualifying child" dependency requirements:
1) Individual must be child of the taxpayer
Either blood or adopted;
OR descendent of child, brother/sister, step-brother/sister, or their descendents;
2) Individual must have same principal place of abode as taxpayer
Special circumstances not treated as absences, such as going away for education
3) Age requirement
Either under 19
Or student not yet reached age 24
4) Individual must not have provided over 1/2 of such individual's own support
Such as:
Clothing
Meals
Lodging
Other necesseties

Front 162

What is the "Qualifying child" tie-breaker when more than one taxpayer qualifies to take the deduction?

Back 162

○ First, dependency to individual's parent (If no parent, than individual w/highest adj GI)
○ Second, If both parents, goes to parent with whom individual resided the longest
○ Third, if residence time is equal, goes to parent with highest adj GI

Front 163

What are the "Qualifying relative" dependency requirements?

Back 163

• "Qualifying relative" dependency requirements:
1) Cannot be a "qualifying child"
2) Must bear a special relationship per 152(d)(2)
3) Individual cannot have GI in excess of the exemption amount for year involved
4) Individual must not have provided over 1/2 of such individual's own support

Front 164

Define capital gain (minimal definition)

Back 164

Defined as:
○ gain from sale
○ of a capital asset
○ (see Sec. 1222 for full definitions)

Front 165

What are the three factors necessary to determine whether a gain is capital or ordinary?

Back 165

Whether a gain is capital or ordinary depends on:
(1) Whether it arises in a transaction involving a "capital asset"
(2) Whether the capital asset has been the subject of a "sale or exchange"
(3) How long the taxpayer has "held" the asset

Front 166

What cap gains are taxed at 28% rate?

Back 166

28% Rate
• Gain from collectibles
○ Antiques
○ Gems
○ Coins
○ Stamps
○ Alcohol beverages

Sec. 1202 stock, which is limited

Front 167

What cap gains are taxed at 25% rate?

Back 167

25% rate
• Short-term cap gain on securities, investment land, other cap assets
• OR "Unrecaptured Sec. 1250 gain" Aka gains on sale of depreciable real property, to extent that depreciation has been previously allowed

Front 168

What cap gains are taxed at 15% rate?

Back 168

15% Rate
• Gain on most long-term capital assets
○ Stocks & bonds
○ Investment land
○ Other cap assets

Front 169

What cap gains are taxed at a 5% rate (0% after 2007)?

Back 169

5% Rate (0% after 2007)
• For poor ppl
• To extent adj net cap gains would fall into 10/15% bracket, such gains are only taxed at 5% rate

Front 170

What four items does a cap gain NOT include [1221(a)]?

Back 170

1221(a) Cap gains do not include:
(1) stock/inventory
(2) trade/biz real property or 167 depreciable property
(3) a copyright, a literary, musical, or artistic composition, a letter or memorandum, or
similar property (under specific circumstances)
(4) trade/biz accounts or notes receivable
AND others . . .

Front 171

Taxpayer makes $50k/year. T has transations of sale of cap assets: (1) a gain of $20k on a "collectable" held for 2 years, (2) a gain of $15k on stock held for 15 months. Assuming a flat 30% tax and no deductions, what is T's total tax liability?

Back 171

28% * $20k = $5,600
15% * $15k = $2,250
30% * $50k = $15,000

Total tax liability is $22,850

Front 172

What is taxpayer's net cap gain and how is it taxed if Taxpayer has long-term:
$5,000 gain from collectible
$5,000 unrecaptured 1250 gain
$5,000 gain from stock
$10,000 loss from stock

Back 172

First, net stock of the same character. Then, in a pro-taxpayer provision, taxpayer may choose to offset high rate gain with low rate loss.

Thus, ($5,000) from stock offsets $5,000 from collectibles. So $5,000 * 25% 1250 gain rate = $1,250 tax liability

Front 173

Are dividends capital gains?

Back 173

No. But dividends are taxed as capital gains:
○ But Congress did not repeal tax on dividends
○ See 1(h)(11)

Front 174

Taxpayer in 2008 has $100,000 in cap gains loss. May taxpayer deduct all these losses as ordinary income, and if so, how?

Back 174

Yes, the taxpayer may deduct all these losses as ordinary income. However, only $3k of cap gains losses are recognized as ordinary income losses in that year.

So, with a cap gains loss of $100,000, this will take 34 years to deduct
○ Possible due to carryover provisions

Front 175

Taxpayer has in 2008: $2k short-term cap gain, $3k long-term cap gain, $5k short-term cap gain, and $10k long-term cap gain. Taxpayer's taxable income is $25,000. In 2009, taxpayer will have $25,000 income and no cap gain or loss. What will taxpayer's income be (discounting other deductions) for 2008 and then 2009?

Back 175

First you net LTCGain/loss to get ($7,000) LTCL. Then you net STCGain/loss to get ($3,000) STCL. Remember to first net like (LTCG) with like (LTCL).

In 2008, taxpayer will have $22,000 income, eliminating the STCL entirely. In 2009, thanks to carryover, the taxpayer will also have $22,000 income.

Front 176

A buys B's mortgage from Citigroup. B manages to pay off the mortgage after being bailed out by the gov't. Is B's payment of debt cap gain? Is A's receipt of the debt cap gain?

Back 176

Purchase of a debt is an investment for creditor
○ Debt is capital asset only in hands of the buyer
○ Payment of a debt is not a sale/exchange
○ Different parties:
§ Purchaser of a debt does not get cap gain identification
§ Seller of a debt does get such treatment

So, A's gain is capital gain, but B's payment is not.

Front 177

Taxpayer bought an option to buy stock, and then sold it 13 months later. What is the characterization of this income? (1234)

Back 177

Under 1234 (option property),
○ Look at underlying property
○ If property is a cap asset, then the option is
○ And vice versa

Taxpayer's option for stock is characterized as long-term capital gain

Front 178

T bought 100 shares of GM stock on Feb. 28 of Y1 at $50/share. T sold 100 shares of GM stock on Feb. 29 of Y2 at $60/share. What is amount/character of T's gain?

Back 178

Since holding period is determined by calendar months and fractions thereof, here it has not yet matured into a long-term cap gain

T's gain is STCG of $1,000

Front 179

T told T's broker to purchase 1,000 shares of GM on October 29th, Y1. Stock was delivered on November 4th, Y1. T told T's broker to sell stock on October 30th, Y2. Stock was delivered to buyer on November 3rd, Y2. How is T's gain/loss characterized?

Back 179

Holding period for debentures acquired by purchase:
○ "Trade date" = date on which the contract to buy/sell the security is made
○ Exclude "trade date" of acquisition (purchase)
○ Include "trade date" of disposition (sale)

Delivery date is irrelevant

Clock starts ticking on Oct 30th, Y1 and stops ticking on Oct 30th, Y2. T's gain/loss is LTCG/L.

Front 180

T's warehouse was struck by fire. Toby's adj basis in warehouse was $60k. FMV of building was $80k. He rec'd $70k in insurance. What are the tax consequences?

Back 180

When calculating loss:
Start with adj. basis
AND subtract amount realized (insurance proceeds)

In partial loss, tax treatment is lesser of:
• Change in value of the property
• OR adj. basis

Here, adj basis of $60k - $70k means a $10k gain

Front 181

Taxpayer sold equipment used in trade/biz for $100k. It had an adj basis of $30k. Straight-line depreciation on equipment took up $80k. What are the tax consequences?

Back 181

1245 intervenes to recharacterize what would have been 1231 hotchpot income (depreciable property used in trade/biz) back into ordinary income.

1245 formula is recomputed basis or amount realized (whichever is lower) - adj basis.

Here, amount relaized of $100k is actually lower than recomputed basis of $110k. So $100k - $70k = $70k of ordinary income, which is all the gain from such property

Front 182

L leases two parcels for $12k/year each to T for 10-year period. Over a year after the lease is signed, L sells right to rents on both parcels to 3rd party for $200k. Tax consequences to L?

Back 182

The right to receive rents are ordinary income, so sale of such right is also ordinary income.

Front 183

L leases two parcels for $12k/year each to T for 10-year period. Over a year after the lease is signed, L pays T $20k to cancel both leases. Tax consequences to T?
What if T paid L $20k to cancel both leases? Tax consequences to L?

Back 183

T's receipt of money is incident to a sale of a cap gain, b/c lease in hands of tenant is a capital asset.

L's receipt of money is ordinary income, b/c right to receive rent money is ordinary income

Front 184

B is beneficiary of income trust he purchased two years ago. It has twenty remaining years to run with B's adj basis being $50k. What result if B sells entire interest for $60k?
What if B only sells a quarter interest for $15k?

Back 184

Whatever the gain, the gain will be capital gain.

Just take the amount realized and subtract the basis.

So $10k cap gain if B sells entire interest.

$50k/4 = $12.5k, so $15k - $12.5k = $2.5k capital gain

Front 185

To what kinds of assets does 1231 pseudo-cap gain apply?

Back 185

Generally, Sec. 1231 applies to:
§ Recognized gain on sale/exchange of property in trade/biz held for more than a year
§ AND Any recognized gain from compulsory/involuntary conversion into property/money of:
□ Property used in trade/biz
□ Any capital asset held for more than 1 year and is held in connection with a trade/biz or transaction entered into for profit

Front 186

Taxpayer leases land to Tenant. Taxpayer sells the land for $40k (basis of $35k) subject to the lease. What is the amount and character of the gain?

Back 186

Land leased to another is 1231 property

$40k - $35k = $5k 1231 hotchpot gain

Front 187

Do scholarships affect educational exclusions or credits? [25A and 222]

Are such exclusions and credits mutually exclusive?

Back 187

Yes. The Hope Scholarship, the Lifetime Learning Credit, and the 222 credit are:

mutually exclusive

AND reduced dollar-for-dollar by scholarships

Front 188

Grantor's trust instrument provides that corpus shall revert to Grantor only if son dies prior to reaching 21 years of age. Value of the reversionary interest exceeds 5% of the value of the trust corpus. What are the tax consequences? [673(a) & 673(b)(2)]

Back 188

673(b)(2) exception to 673(a)
Altho normally the grantor is owner of trust if grantor retains more than 5% reversionary interest, and is thus taxed, here the grantor is not taxed

This condition means the grantor is taxed upon the son's death before 21, and not taxed if son does not die

Front 189

Grantor owns two buildings subject to a long-term lease. For the first, she transfers the right to future rentals under the lease to a trust. For the second, she transfers the building along with the right to the rentals, and six months' rent has accrued on the lease at the time of Grantor's transfer. What are the tax consequences?

Back 189

As to the first, grantor cannot merely transfer the rights to income. Grantor is taxed.

As to the second, the property does become part of the corpus. Nevertheless, the six months of rental accrued is taxed to the grantor.