Fed Tax 4

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§117

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Qualified Scholarship [gross income does not include]

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§117(b)1

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qualified scholarship means any amount received for qualified tuition and related expenses

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§117(b)2

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qualified tuition and related expenses means (A) tuition and fess for enrollment or attendance or (A) fees, books, supplies and equipment required for course.

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§117(c)

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c) cannot be for payment for teaching, research or other services.

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Reg § 1.117-4

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Items not considered as scholarships of fellowships.
i) (c)(1) cannot be for compensation for past, present or future employment services. AND (c)(2) cannot be for primary benefit of the grantor.

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§127

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Educational assistance program
[gross income of an employee does not include]

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§127(a)2

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Employee can exclude up to $5,250 from gross income for amounts paid by the employer for educational assistance. (excess is income)

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§127(b)2

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Discrimination in favor of highly compensated employees not allowed

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§127(c)1

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Educational assistance means tuition, books, supplies and employer provided educational course but does not include sports, games, or hobbies, meals or lodging.

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§1001(a)

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Determination of amount of and recognition of gain or loss

a) The gain from the sale or other disposition of property shall be the excess of that amount realized over the adjusted basis [AR - AB = Gain or Loss]

The loss shall be the excess of the adjusted basis over the amount realized.

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§1001(b)

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Amount realized

is the sum of any money received plus fair market value for property (other than money) received.

Philadelphia Park will tell us FMV if unknown.

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§1011(a)

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(a) Adjusted basis for determining gain or loss Shall be the basis (when considering 1012 and 1016)

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§1012

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Basis of property (shall be the cost)

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§1016

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(a) proper adjustment in respect of the property shall in all cases made (1)for expenditures, receipts, losses, or other items properly chargeable to capital account, but no adjustment shall be made – (A) for taxes or other carrying charges OR (B) for expenditures for which deductions have been taken by the taxpayer in determining taxable income.

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§1001(c)

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Recognition of gain or loss

Except as otherwise provided, the entire amount of the gain or loss shall be recognized.

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§61(a)(3)

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Gains derived from dealings in property.

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§263(a)

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Capital expenditures expenditures

(a) no deductions allowed for any amount paid for new buildings or for improvements made to increase the value of property.

HOWEVER, the code allows for

§1016(a) proper adjustment in respect to the property shall be made in all cases made for expenditures…properly chargeable to capital account.

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§109(a)

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Improvements by lessee on lessor's property (when not in lieu of rent)

a) Gross income does not include income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such properly.

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§1019(a)

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Property on which lessee has made improvements

a) Neither the basis nor the adjusted basis of any portion of real property shall be increased or diminished on account of income derived by the lessor.

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§1.61-2(d)(2)(i)

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Property transferred to employee.

(i) if property is transferred by an employer to an employee, for amount less than FMV, then the difference between price and FMV is gross income.

(ii) In computing the gain or loss from sale, the basis is the amount paid increased by the amount of such difference included in gross income.

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§1015(a)

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Basis of property acquired by gift and transfers in trust

a)The basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift.
(1) This is called a Transferred Basis.

EXCEPT if the basis is greater than the fair market value of the property at the time of the gift, then for determining loss, the basis will be fair market value.
(A) Adjusted Basis must be greater than fair market value AND
(B) The property must be later sold at a loss.

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§1015(d)6

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Gift tax proceeds are includable in the cost basis.

The increase in the basis shall be an amount NOT in excess of the amount of tax so paid which bears ratio to the amount of tax paid so

(1)Net Appreciation [amount FMV exceeds donors AB of gift] bears to

(2)The Amount of Gift.

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§1.1001-1e

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Transfers in part sale and in part a gift

(in computation of gain or loss)

a)the transferor can have a gain of [AR-AB]

b)the transferor cannot have a loss.

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§1.1015-4

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Transfers in part a gift and in part a sale.

a)The basis of the property in the hands of the transferee is the greater of

(1)Amount paid by the transferee for the property
(A)Increase for gift tax

(2)The transferors adjusted basis

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Philadelphia Park Amusement Co. v. United States.

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a)Facts: Plaintiff exchanged bridge for franchise extension on rail.

b)Issue: what is the basis for the taxable transfer?

c)Holding:
(1)Basis is the fair market value of the extension.

(2)When exchange occurs with no apparent price consider

(A)The fair market value of what was received OR

(B)The fair market value of what was exchanged.

(i)Assumption that people exchange thins of equal value.

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1. Plaintiff brought suit and unless otherwise indicated, successfully recovered. Discuss the tax consequences in the following alternative situations:

a). Plaintiff's suit was based on a recovery of an $8k loan made to Debtor. Plaintiff recovered $8500 cash, $8000 for the loan plus $500 interest.

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(Plaintiff would have to pay tax on $500 as gross income, b/c he would have had to pay tax on it if the Defendant had paid it according to the terms of the note--it was Plaintiff's lost profit.)

§61(a)(4) interest income

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1. Plaintiff brought suit and unless otherwise indicated, successfully recovered. Discuss the tax consequences in the following alternative situations:

(b) What result to Debtor under the facts of (a) above, if instead Debtor transferred some land worth $8500 with a basis of $2000 to Plaintiff to satisfy the obligation? What is Plaintiff's basis in the land?

a). Plaintiff's suit was based on a recovery of an $8k loan made to Debtor. Plaintiff recovered $8500 cash, $8000 for the loan plus $500 interest.

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(Plaintiff's basis in the land is $8500--the value of the thing received (Philadelphia Park). Debtor would have disposed of the land triggering §1001:

AR $8500 - AB<2,000> = Gain G $6500

We have to characterize this too! It was an exchange--if a capital asset, it was a capital gain. What was Plaintiff's basis in the land? $8500.

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1. Plaintiff brought suit and unless otherwise indicated, successfully recovered. Discuss the tax consequences in the following alternative situations:

Plaintiff's suit was based on a breach of a business contract and Plaintiff recovered $8000 for lost profits and also recovered $16,000 of punitive damages.

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(Lost profits and punitives are both taxable as gross income. $24k in gross income for Plaintiff.)

Punitive damages are includible in income per the Glenshaw Glass case

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1. Plaintiff brought suit and unless otherwise indicated, successfully recovered. Discuss the tax consequences in the following alternative situations:

(d) Plainttiff's suit was based on a claim of injury to the goodwill of Plaintiff's business arising from a breach of a business contract. Plaintiff has a $4,000 basis in the goodwill. The goodwill was worth $10,000 at the time of the breach of K.

1). What result to  if the suit is settled for $10,000 in a situation where the goodwill was totally destroyed?

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(in this problem we assume that company allocated part of the purchase price it paid for the co to goodwill basis. That's how they got a basis in the goodwill. $4000 will excludible and 6000 will be includible per the Ratheon case.

Ratheon – Compensation for goodwill in excess of its bases is income.


(§1001 applies when the sale or disposition of property. If property is totally destroyed, it’s a disposition! BUT, Hudson tells us no sale or exchange, so its not disposed of! You can't have a basis in goodwill, except if allocated at time of purchase. So you characterize it as gross income.

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1. Plaintiff brought suit and unless otherwise indicated, successfully recovered. Discuss the tax consequences in the following alternative situations:

(d) Plainttiff's suit was based on a claim of injury to the goodwill of Plaintiff's business arising from a breach of a business contract. Plaintiff has a $4,000 basis in the goodwill. The goodwill was worth $10,000 at the time of the breach of K.

2). What result if Plaintiff recovers $4000 because the goodwill was partially destroyed and worth only $6000 after the breach of K?

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2). 0 would includible as gross income.

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1. Plaintiff brought suit and unless otherwise indicated, successfully recovered. Discuss the tax consequences in the following alternative situations:

(d) Plainttiff's suit was based on a claim of injury to the goodwill of Plaintiff's business arising from a breach of a business contract. Plaintiff has a $4,000 basis in the goodwill. The goodwill was worth $10,000 at the time of the breach of K.

3). What result if Plaintiff recovers only $3000 b/c the goodwill was worth $8000 after the breach of K

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$2000 is a return of capital because the good will was reduce from 10k to 8k and 1k is includible in gross income.

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1). Plaintiff brought suit and successfully recovered in the following situations. Discuss the tax consequences to Plaintiff.

a). Plaintiff, a professional gymnast, lost the use of her leg after a psychotic fan assaulted her with a tire iron. Plaintiff was awarded damages of $100,000.

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§104(a)(2) excludes amounts awarded for physical injuries, and this was a physical injury, so $100k excluded from GI.)

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1). Plaintiff brought suit and successfully recovered in the following situations. Discuss the tax consequences to Plaintiff.

b). $50,000 recovery in (a) above, is specifically allocated as compensation for scheduled performances Plaintiff failed to make as a result of the injured leg.

a). Plaintiff, a professional gymnast, lost the use of her leg after a psychotic fan assaulted her with a tire iron. Plaintiff was awarded damages of $100,000.

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(§104(a)(2) says she can exclude any damages awarded "on account of" physical injuries or sickness: so these are excludable.

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1). Plaintiff brought suit and successfully recovered in the following situations. Discuss the tax consequences to Plaintiff.

c). The jury also awards Plaintiff $200,000 in punitive damages

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(§104(a)(2): punitives not excludable in personal injury cases, so $200k is taxable as GI.)

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1). Plaintiff brought suit and successfully recovered in the following situations. Discuss the tax consequences to Plaintiff.

d). The jury also awards Plaintiff damages of $200,000 to compensate for Plaintiff's suicidal tendencies resulting from the loss of use of her leg.

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(§104(a)(2) says that damages for emotional distress incurred on account of physical injury ARE excludable, this was on account of physical injury, so $200k excludable.)

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1). Plaintiff brought suit and successfully recovered in the following situations. Discuss the tax consequences to Plaintiff.

e). Plaintiff in a separate suit, recovered $100,000 of damages from a fan who mercilessly taunted Plaintiff about her unnaturally high squeaky voice, causing Plaintiff extreme anxiety and stress.

Back 36

(Emotional distress itself is no a physical injury, and recoveries for ED are not excludable. She'd owe tax on the $100k has GI. Has to be "ON ACCOUNT OF" the physical injury! Except that she won’t have to pay taxes on the amount of damages she actually pays to cover her medical bills for the emotional distress.)


§104(a)2 only covers physical injuries

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1). Plaintiff brought suit and successfully recovered in the following situations. Discuss the tax consequences to Plaintiff.

f). Plaintiff recovered $200,000 in a suit of sexual harassment against her former coach.

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( b/c it’s a non-physical personal injury, sex discrimination claims are non-excludable. She'd owe tax on $200k as ordinary income.)

Non physical injury not exludible under §104(a)(2)

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1). Plaintiff brought suit and successfully recovered in the following situations. Discuss the tax consequences to Plaintiff.

g). Plaintiff dies as a result of the leg injury, and plaintiff's parents recover $1mil of punitive damages awarded in a wrongful death action under long-standing state statute.

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(Punitives are not ecludible per §104(c)1

§104(c)1 – The phrase other than punitive damages hall not apply to punitive damages awarded in a civil action (1) which is warngful death action.

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2). Injured and Spouse were injured in an auto accident. Their total medical expenses incurred were $2500.

a). in the year of the accident they properly deducted $1500 of the expenses on their joint income tax return and filed suit against Wrongdoer (W). In the succeeding year they settle their claim against W for $2500. What income consequences on receipt of the $2500 settlement?

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(the "EXCEPT CLAUSE" says that I & S would have to include amount they deducted from the previous year's taxes. So they'd exclude $1000 on their return. Per §104(a) that states amounts received in a settlement are excludible “except in the case of amounts attributable to and not in excess of deductions under §213

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2). Injured and Spouse were injured in an auto accident. Their total medical expenses incurred were $2500.

b). In the succeeding year Spouse was ill but, fortunately, they carried medical insurance and additionally Spouse had insurance benefits under a policy provided by Employer. Spouse's medical expenses totalled $4000 and they received $3000 of benefits under their policy and $2000 of benefits under Employer's policy. To what extent are the benefits included in their gross income?

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($1600 (or 40% of the total expense is allocated to be the amount the employer paid) and is deductible as actual expenses per footnote

med exps: $4k, ins bens: $3k,employers policy $2k, total bens: $5k

§105(b): applies to proceeds from employer paid ins policy. You only get to exclude amts paid directly to the health care provider to the extent of actual medical expenses. (No exclusion for any excess)

§104(a)(3): if T pays for policy by himself all benefits from policy are excludable.

Then you divide $2k by $5k to get 40% figure which you then apply to $4k in expenses = $1600 excludable under 105(b).

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2). Injured and Spouse were injured in an auto accident. Their total medical expenses incurred were $2500.

c). Under the facts of (b) above, may Injured and Spouse deduct the medical expenses

b). In the succeeding year Spouse was ill but, fortunately, they carried medical insurance and additionally Spouse had insurance benefits under a policy provided by Employer. Spouse's medical expenses totalled $4000 and they received $3000 of benefits under their policy and $2000 of benefits under Employer's policy. To what extent are the benefits included in their gross income?

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(§213(a)): (213(a) says that the deduction for medical expenses is limited to those not compensated by insurance or otherwise. They were more than fully compensated, so not deduction).

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3). Injured, who has a 20 year life expectancy, recovers $1million in a personal injury suit arising out of a boating accident.

a). What are the tax consequences to Injured if the $1mil is deposited in a money market account paying 5% interest?

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(Injured pays tax on the income from his settlement, but not on the settlement itself)

The 1M is ecludible from gross income per §104(a)(2), but the interest is includible in gros income per §61(a)(4) as interest income.

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3). Injured, who has a 20 year life expectancy, recovers $1million in a personal injury suit arising out of a boating accident.

b). What are the tax consequences to Injured if the $1mil is used by injured to purchase an annuity to pay Injured $100,000 a year for Injured's life?

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The $1M is excludible from the annuity payments as a return of capital per the exclusion ratio in §72 and the earnings from the annuity will be includible in gross income per §72(b)(2)

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3). Injured, who has a 20 year life expectancy, recovers $1million in a personal injury suit arising out of a boating accident.

c). What are the tax consequences to Injured if the case was settled, and in the settlement, Injured received pmts from Defendant of $100,000 a year for life?

Back 44

(like Rev Rule 79-313, the T did not have actual or constructive receipt, nor the economic benefit of the present value of the damage award, so all of it is excludable under §104(a)(2)).