Fed Tax 5

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§1041(a)

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(a) No gain or loss shall be recognized on a transfer of property from an individual to

(1) a spouse or

(2) a former spouse but only if incident to divorce

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§1041(b)

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(b) The property described in subsection(a)

(1)Transfer treated as a gift

(2) basis is the adjusted basis for the transferor

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§1041(c)

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(c) Incident to divorce if

(1) within 1 year

(2) related to cessation of the marriage.

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§1014(a)

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(a) the basis of property in the hands of a person acquiring the property from a descendant, or to whom the property passed from a descendent shall if not sold be the fair market value of the property at the date of the death.

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§1014(b)

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(b) it will be considered to be from a descendant if

(1) from bequest, devise, inheritance, or estate of decedent

(2,3) property in trust dealing with death regardless if the descendant has access to the trust and

(4) property without full consideration.

(6) surviving spouse ½ share also considered in this section.

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§1014(e)

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(e) appreciated property acquired by descendant within one year of death (A) if appreciated property was acquired by the decedent by gift one year before death AND
i) (B) property is acquired from the decedent by the donor of such property
ii) (Flush) the basis in the hands of the donor is the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent.

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International Freighting Corporation v. Commissioner

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2) Rule: One may assume that the item that is given in exchange for services has a basis of its fair market value. (AR is often FMV)

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Crane v. Commissioner

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(1) The amount of nonrecouse liability relieved is included in the amount realized.
c) SIDENOTE
(1) If Crane had a recourse debt, it would be added to the AR without going to court. This is because via Old Colony Trust it is a discharge of an obligation by a 3rd party and could be considered to be money or other property received

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§1.1001-2

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AR from sale includes amount of liabilities from which the transferor is discharged as a result from the sale.

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Commissioner v. Tufts

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1) The assumption of a non-recourse mortgage constitutes a taxable gain to the mortgagor even if the mortgage exceeds the fair market value of the property.

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§101(a)(1)

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(a)(1) GI does not include amounts for (1) life insurance if paid for (2) reason of death.

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§101(a)(2)

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(a)(2) If one transfers insurance for consideration, the buyer can only exempt AB

Except if (A) transferred basis [see 1041 trans. Between spouse]

Except if (B) transferred to insured, or company, or partnership where they are.

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§101(c)

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(c) If insurance holds contract, and pay interest, one must pay GI

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§101(d)

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(d) If one pays later than death, in installments, on must prorate and include the excess of prorated face value into GI.

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§101(g)

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(g) Exception to death benefits for terminally or chronically ill (exception to death)

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§72(a)

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(a) except as otherwise provided, GI includes any amount received as annuity under an annuity, endowement, or life insurance contract.

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§72(b)1

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GI does not include amount that bears ratio to amount of investment
Taxable income = AR (investment in K/ expected return of capital)

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§72(c)1

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Investment of K is what you have paid

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§72(c)3

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Expected return is aggregate amount received (payment x expectancy)

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§72(b)2

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Exclusion is limited to the If taxpayer lives longer than expected, next payment is fully taxed.

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§72(b)3

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If taxpayer dies during annuity period, they get unrecovered investment as deduction.

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§61(a)(12)

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GI includes income from discharge of indebtedness

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§108

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GI does not include amount which would be includable in GI by reason of discharge of indebtedness if (A) chapter 11 (B) taxpayer insolvent

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§1.1001-2(a)

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a) includes amount of liabilities from which the transferor is discharged as a result from the sale.

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§1.1001-2(b)

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(b) AR from the sale that secures a recourse liability does not include amounts that are income from the discharge of indebtness under §61(a)(12)

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1.001-2(c) example 8

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F transfers to a creditor asset FMV of 6K and creditor discharges 7,5K which F is personally liable.
a) AR on asset is FMV of 6K
b) Income from discharge of indebtness of 1,5K

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§1.61-12

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Income from discharge of indebtedness one whom performs service for a creditor to cancel debt has realized income in the amount of the debt compensation

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§108(a)(1)

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Gross income does not include any amount which would be includible in gross income by reason of the discharge of indebtedness of the taxpayer IF

(A) Discharge occurs in a title 11 case,

(B) Discharge occurs when the taxpayer is insolvent.

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§108(d)(3)

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(1) Insolvent means excess of liabilities over (-) FMV (more liabilities)

(2) Amount which taxpayer is insolvent determined on basis of assets before discharge.

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§108(a)(3)

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Insolvency exclusion limited to amount of insolvency.

a) [liabilities – assets = max amount of exclusion]

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§108(b)(1)

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Reduction of tax attributes

If you can use (A) or (B) in §108(a)(1) the amount which was excluded will reduce tax attributes.

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§108(b)(2)

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Order of reduction (A) Net operating loss (B) Business credit (C) Minimum tax credit (D) Capital loss carryover (E) basis reduction.

If (E) Basis reduction §108(b)(2)(E)(i) says to go to

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§108(b)(5)

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Election

Taxpayer may elect to apply to the portion of discharged debt excluded as income [used to reduce tax attributes] directly to §1017 to lower basis.

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§1017(a)

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Discharge of indebtedness

(a) IF (A) you exclude GI under §108(a) AND (B)Under §108(b)(2) OR §108(b)(5) any amount is used to reduce basis, you reduce basis the year following the discharge

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§1017(b)2

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(b)(2) If you discharge under (A) or (B) the reduction of basis shall not exceed

i)aggregate of bases after discharge – aggregate of liabilities after discharge.
This does not apply when §108(b)(5) applies

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Raytheon

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In order to assess if damages are includable as GI, the test is not tort or contract but in lieu of what were the damages awarded for.
2) Remember Return on/of Capital
a) Return of Capital - is when the basis is returned.
b) Return on Capital - is when any excess of basis is returned
3) Goodwill (generally) = [FMV – FMV of assets]; property interest (thus cite §1001)

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§104(a)(2)

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GI does not include damages (not punitive) on account of personal injuries or sickness. Payments may be lump sum or periodic.

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§104(a) Flush

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emotional distress shall not be treated as a physical injury or sickness.

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§104(a)(3)

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GI excludes amounts via accident or health personal injury or sickness that is paid by employee.

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§106(a)

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Contributions by employer to accident and health plans

§106(a) GI does not include employer-provided coverage under these plans.

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§105(a)

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Amounts received under accident and health plans by employee for personal injuries or sickness are included in GI.

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§105(b)

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GI does not include the money used to reimburse medical care.
i) RR 69-154: The amount of medical expenses to be considered paid by each policy is proportionate to the benefits received from each policy.

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§213 Medical expenses

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expenses are deductible if from own money in the amount that they are over 7.5% of AGI.

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§104(a)(Flush)

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emotional distress shall not be treated as a physical injury or sickness] last sentence - this shall not apply to an amount of damages not excess of the amount paid for medical care under §213 attributable to emotional distress.