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125 Cards in this Set
- Front
- Back
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What main policy categories control tax legislation? |
Administrative convenience (wage withholding and sales tax relatively simple) Politics: [a] power - lobbyists [b] fairness Behavioral/Economic: Consumption
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Where does a tax bill start? |
The House of Representatives under the constitution - begins in the Ways and Means Committee (they get campaign contributions..) |
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Where does the tax bill go after a house proposal? |
Senate Finance Committee then to the Senate and then to the combined Senate Conference Committee. Then it is voted on. |
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What is a Treasury Regulation? |
Issued by the Treasury Department pursuant to Administrative Procedure Act. Binding on everyone: IRS taxpayer etc. Judicial Review uses arbitrary or capricious standard |
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What is a Private Letter Ruling? |
Issued to an individual taxpayer for a specified transaction. Binding on the IRS and the taxpayer only with respect to the transaction at issue. |
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Can anyone view a Private Letter Ruling? |
Yes: they are public under FOIA. |
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What is a Revenue Ruling? |
IRS ruling issued by bulletin, binding on the IRS but not on the courts or the taxpayers (because the IRS was issuing rulings to win at court). Best to follow them as best practice. |
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Revenue Procedures |
Similar to Revenue Rulings but procedural - same binding structure (not on courts/taxpayers) |
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What is the only court a taxpayer may appeal to before they have paid a tax at issue? |
The US Tax COurt |
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How can you appear before the Tax Court? |
[1] T receives a notice of deficiency after which [2] T has 90 days to either petition the Tax Court or pay the tax otherwise [3] the IRS levies on property |
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Can you get a jury trial at the US Tax Court? |
No. Judges handle issues of law and fact. The judges travel around the country. |
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T may sue for a refund in which courts? |
US court of Federal Appeals US District Courts |
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What court handles most tax cases? |
The US Tax Court handles 90% (b/c the T does not have to pay tax before suit) |
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Where does an appeal from a tax case proceed? |
US Circuit Courts of Appeal for the US Dist. Courts and for the US Tax Court. Tax Court is bound by the decision of the court of appeals where the taxpayer lives. |
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What is acquiescence? |
An IRS statement that it will comply with a Federal Court ruling moving forward, as opposed to a non-acquiescence when the IRS warns taxpayers that it will continue to fight the courts over the enforcement of an issue. |
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What is the basic formula for taxable income? |
Income minus deductions. |
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What are above the line deductions? |
Business expense and other deductions made in arriving at AGI but before taking the standard/itemized deductions 'below' the AGI line on the tax form |
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What is the standard deduction in 2015? |
$6200 |
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What is the Head of Household IRS rate category? |
Basically for single parents, provides relief in graduation of tax rates over a single person but less not as favorable as married. |
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When is married filed separately used? |
Less favorable than just two single filers, but if a married person does not trust the spouse, they may not want to sign the spouses shady joint return. |
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What is recapture? |
Gain recognized from decrease in basis under Section 1245 |
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How is Section 1245 gain taxed? |
Ordinary income subject to provisions. |
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What type of property is excluded from Section 1231 scope? |
Real property |
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How are gains in personal property taxed? |
Characterized as a capital gain |
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What are two exclusions to capital assets? (Section 1221) |
Property used in a trade or business subject to depreciation and real property |
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What does Section 1231 govern? |
Gains made on property excluded from capital asset treatment: real property and depreciable property used in trade or business. |
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How does Section 1231 treat the taxpayer favorably? |
1231 gains are treated as capital gains while 1231 losses are treated as ordinary losses |
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What is an involuntary conversion? |
Fire, condemnation, etc. |
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Do involuntary conversions get treated as sales under Section 1231? |
Yes |
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How did Section 1231(c) limit it's benefits. |
After a gain is recognized (as a LTCG) you look back five years and aggregate the 1231 losses. The amount of LTCG treatment allowed is reduced by this total (it is taxed at the ordinary rate)
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What is an installment sale? |
A sale in which the seller receives at least one payment after the close of the year of disposition. |
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What is the installment method of payment recognition? |
The portion of each payment received that is gain is calculated as that payment times the ratio of the gain recognized over the total payments received. |
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Does Section 453 apply to publicly traded securities? |
No. Securities that can be traded on the market give the T an option to liquidate without using installment sales |
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What types of property does the installment sale treatment under 453 apply to? |
Section 1231 property |
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How does Section 453(e)(1) limit the installment sale treatment of gains? |
When a sale is made to a family member and that person then sells (within 2 years), the original owner is treated as having received all of the money when the family member sells. |
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What are the four primary employee benefits excluded from income under section 132? |
No-additional cost services Qualified Employee discounts Working condition fringes De Minimis fringes |
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What are no additional cost services? |
Things like rooms for hotel workers or standby tickets for airline employees. Difficult to collect tax on this because it is hard to value and tax - would you withhold taxes? Easier to just exclude. |
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What are the rules to qualify a no additional cost service? |
Must be a service in the course of ordinary work for the benefitting employee The company may not incur expense as a consequence of the service The benefit must be offered on a non-discriminatory basis |
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What is the key factor to examine in determining whether a service is a no additional cost benefit and excluded from income? |
Whether a substantial amount of time or money is spent to provide the service to the employee. The benefit must be incidental to other services provided. |
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Would an airline ticket have to be standby to qualify as an additional no cost benefit exclusion? |
Yes. A dedicated seat would cost the airline the ability to market and sell that seat. |
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What if the employee pays for the benefit and then gets a refund from the company? |
No difference in the no additional cost services analysis - the benefit is not included in income. |
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What about the spouse and children of an employee are able to use opportune no additional cost services? |
That also was grandfathered in - it is not included as income. |
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What if there is a reciprocal agreement (like an airline jump seat agreement) where you can enjoy the services of another company for free? |
The no additional cost service exclusion to income applies to these benefits as well. |
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What if a service is made available for senior executives only? |
The no additional cost service benefit exclusion would not apply - the benefit would need to be included as income. |
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Can an employee who works for a subsidiary receive no cost services from the parent in an area unrelated to his employment and not have that count as income? |
No. The employee must provide the substantial service in the types of services included as no cost benefit services. |
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What limitations apply to qualified employee discounts? |
[1] the employee must work in the line of business in which the discount is offered [2] the discount does not exceed the gross profit margin (i.e. it cannot be sold below cost) [3] services may be discounted 20% [4] they must be offered on a non-discriminatory basis |
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What is a working condition fringe benefit? |
Any benefit that would have been deductible had the employee paid for the benefit themselves: example - business travel. The employee could write off the expense if incurred, so as a company paid benefit it is not income. |
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What is a de minimus benefit? |
Some food money, cocktail parties, picnics |
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What is the tax consequence of receiving personal injury damages? |
They are not included as income, whether through judgment or trial. |
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What sort of injuries qualify for tax exempt damages? |
Personal physical injuries - emotional harm does not qualify. |
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What does it mean that excludable personal injury damages must be 'on account' of the injury? |
They must be [1] paid by the person who caused the injury and [2] because of the injury - - pain and suffering - lost wages - medical expenses NO PUNITIVE |
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What is a Section 1033 election? |
An election to to not recognize the recovery of insurance for an involuntary conversion if the proceeds are reinvested in similar or related service or use. |
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What conditions must be satisfied to qualify under a section 1033 conversion? |
The replacement property must be acquired within two years of destruction and be similar or related in service or use |
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What doe similar or related in service or use mean under section 1031? |
Same use. Narrower than 1031 - your cannot go bowling alley to bar. Same kind of business. |
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What must a landlord do with a new property acquired with insurance proceeds in order to qualify as a 1033 election? |
Simply rent it out. (type of business may not matter...) |
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What is boot with respect to a 1033 election? |
Insurance proceeds that are kept or used in something other than the restoration/reconstruction of the destroyed 1033 property. |
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What is the basis calculation in a 1033 election property (post election) |
Basis = original basis increased by gain recognized and decreased by any boot received. |
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Why is there an assignment of income issue? |
Those with higher tax brackets find ways to transfer income with those in lower brackets to save tax liability |
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What is the general rule of assignment for income for services and property? |
Services - the person who performed gets the income (and tax liability) Property - the person who owns the property pays on the gain |
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What if a professor working for a school clinic earns attorney fees for the school? |
The professor does not need to pay on the income because he is an agent for the school who has to pay. |
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Can you set up a personal service company to keep your income away from you (like Bill Russell)? |
This is no longer helpful in part because corporations are taxed at similar rates that individuals are. |
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What result if a plumber begins a church (tax exempt) which then pays him a wage? |
The plumber wrote a book, and the IRS audited him. The church was found to be a sham religion, and the plumber was taxed. |
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Can an owner of more than one business use more than one accounting method? |
Yes. |
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Describe the income inclusion timing under the accrual method of accounting: |
Income is included in gross income when all of the events have occurred to fix the right to receive such income and the amount thereof can be determined with reasonable accuracy. |
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What happens when a taxpayer receives money prior to earning the right to receive that income? |
The money must be included in gross income. |
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How did the accrual method pertain to AAA payments? |
SCOTUS: taxpayer could not establish that it would ever have to perform services for money received. Payments must be payed as received. |
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How was a baseball team taxpayer treated with regards to ticket sales received in the year prior to actually playing the game to earn the money? |
SCOTUS: you will have to perform the services with a high degree of certainty. Taxable in the year the game is played. (IRS disagrees with this) |
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What if a taxpayer receives payments for future goods/services over a period of years? |
The taxpayer may claim only the amount received in year one but must claim the entire balance in year two. |
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How are deductions computed in the accrual method? |
The deduction may be taken only when: [1] all the events have occurred that establish the fact of the liability [2] the liability amount can be determined with reasonable certainty [3] economic performance has occurred |
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When does economic performance occur for a tort judgment? |
When the defendant pays the settlement. This way deferred settlements cannot create a windfall for tortfeasors (trucking injury example) |
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When has economic performance occurred for services and property obligations of a taxpayer? |
Only when the services have been performed (strip mining recovery example) |
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(33) Losses deductible by individuals fall into what three categories? |
[1] trade or business losses (focus of tape 33) [2] losses incurred from a transaction entered into for profit [3] casualty losses (very limited) |
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(33) If property used in business is lost due to damage (fire etc.) how is the loss computed? |
It is a realization event. The deductible loss is the lesser of: [1] the economic loss [2] the adjusted basis in the damaged property (you cannot deduct more than you spent) |
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How is the AB of the property affected when one takes a loss for damage against the property? |
The basis is reduced by the amount of the loss deducted. |
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(33) how does the receipt of insurance proceeds for business property destroyed in an accident effect the taxpayer? |
The taxpayers economic loss is reduced by the amount received and the AB of the property is also reduced by the amount received (return of capital). |
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(34) What two categories of property are depreciable? |
[1] property used in a trade or business and [2] property held for the production of income |
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(34) What is the applicable (or default) convention for property depreciation? |
The half-year convention meaning that property is treated as being placed into service half way through the year (and may take half a years worth of depreciation) |
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(33) how long does it take to fully depreciate 5 year property under the half year convention? |
6 years because the first year only half the depreciation is taken and doesn't 'count' |
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(33) In what instances can another method of depreciation be used? |
The taxpayer may elect to use straight line depreciation (but there is little reason to) or the mid-quarter convention is required due to time of purchase. |
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(33) When is the mid-quarter convention convention required? |
When more than 40% of a property is placed into service in the last quarter of the year. |
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What does Section 168(k) add to change depreciation of assets? |
Qualified property may be depreciated 50% of the qualified basis in the year it is placed into service. It's a yearly stimulus provision that keeps coming back. |
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What does Section 179 add to improve the depreciation of property used in a business? |
Elective treatment of property used in a business (not held for investment). You treat the entire cost of an item as an expense. |
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What are the limits on Section 179? |
The amount that may be expensed in a given year under Section 179 is phased down to 25K after 2015 (but may get extended). Until it expires the limit is 500k. |
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What limit applies to total depreciable property placed into service for a year under Section 179? |
There is a dollar for dollar phase out of the 500K limit once the amount placed into service in a given year exceeds 2M. (must be extended for 2015 or 2M goes down to 200K) |
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How do Sections 179, 168(k) and 168(a) work together? |
[1] elect 179 and reduce the cost of up to 500K. [2] deduct 50% of the remaining cost under 168(k) [3] Apply 168(a) under normal depreciation |
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What is Section 280(f) with respect to depreciation of automobiles? |
280(f) limits depreciation for passenger automobiles to specific dollar amounts per year. It takes almost ten (more for expensive cars) years to fully depreciate a car. |
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What else does 280(f) cover? |
cars, TV's video cameras, cell phones etc. Employees cannot get in on depreciation and self employed have to use property for more than 50% as a business use. If less than 50% business use the depreciation is strictly limited. |
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What is the significance of depreciation with land? |
Land is not depreciable - the cost of land must be subtracted out before depreciation is computed. |
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What method and convention is used for residential and other real property? |
Straight line depreciation using the mid month convention. |
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(38) What is the basic limitation on deductions under Section 262? |
Personal, living or family expenses are not deductible. |
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What does Section 183 allow for deductions that would otherwise not be allowed? (this is for ranches for the wealthy - the hobby limitation) |
There are deductions for expenses incurred for activities not for profit that end up making a profit. These can not exceed the profit earned. |
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How are expense deductions taken under Section 183 prioritized? |
Itemized deductions related to the 'not seeking a profit' income must be taken against the income first, and only after this is done can the other expenses be deducted. |
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What factors will the IRS used to determine whether an activity is personal or profit seeking under Section 183? |
[1] is the activity conducted in a businesslike manner [2] the expertise of the taxpayers [3] Time and effort expended [4] Expectation of profit [5] T's financial history/other activities [6] Financial status of T - is there other income to shelter [7] Elements of personal pleasure of the activity - does it look like a hobby? |
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How is a personal residence defined by the IRS? |
If the home is rented out for more than 140 days it is not a personal residence so long as the owner does not use it for personal purposes for more than 10% of the rental time. Below 140 days, personal residency is triggered above 14 days of personal use. |
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What may be deducted if a property is used ONLY as a residence? |
[1] Qualified residence interest [2] State property taxes |
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If a home is rented for part of the year how are expenses for repairs, etc. treated? |
They are only deductible against the income related to that home, similar to Section 183 (hobby) expenses |
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When, as far as rental days per year, do deductions for the rental income of a home become allowable? |
Only after the home has been rented for more than 14 days of a year. |
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How are the rental expenses for a home only rented fora portion of the year determined? |
The expenses (like interest, utilities etc.) are prorated: days rented/365 and the deduction is limited to offset only rental income |
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What are the requirements for a qualified home office? |
The area of the home must be used exclusively on a regular basis: [1] as the principal place of business (may be administrative/management if there is no other location doing this) - not available for employees or [2] as a place used to see clients, patients etc. or [3] is a separate structure
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How does one calculate home office expenses? |
Subtract from business income allocable to the office any interest and state taxes deductible irrespective to the office first, and then deduct those expenses ordinarily not allowed (personal such as utilities, depreciation, rent). Expenses can only offset that income |
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(38) How does Section 267 limit losses allowed in the sale of property? |
In the sale of property at a loss to a closely related person, the buyer takes a basis in the property the same as the seller (as if it were a gift), and loss on the sale for the buyer is disallowed and goes away forever. (close relative cannot take a loss on sale b/c of gift rules) |
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(38) How does Section 1091 limit the losses of taken in the stock market with immediately repurchased stock? |
The loss in a stock repurchased within 3o days is disallowed. The basis in the newly acquired stock is the basis in the original purchase + any difference the T may have paid because the stock rose after the sale. |
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How does the IRS limit deductions on investment interest? |
Investment interest is only deductible against investment income. Interest creating a net investment loss must be carried over to the next year. |
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How does a tax shelter work (before the IRS made them ineffective)? |
Purchased property would essentially produce no net income (rents would pay loan, ect.) but would take large deductions on depreciation. |
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What is the effect of Section 469 on losses incurred by property considered a tax shelter? |
The loss is deductible only against income created by tax shelters - there is a basket approach. |
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How did congress define the tax shelter basket in order to partition tax shelters and keep its losses from being applied against other income? |
Section 469(c) describes 'passive activities' as conduct in a trade or business or a transaction for profit in which a T does not materially participate. |
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How is material participation described so that legitimate businesses may take deductible losses? |
Material participation includes: T's principal business T participates for more than 500 hours/year T is the primary worker or T works for more than 100 hours and nobody else works more than T |
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Given that income from stocks and bonds, etc. seams to fall outside of the definition of material participation, how did Congress keep this income out of the tax shelter basket? |
Section 469(e)(1) provides that ownership of these types of investments is not passive activity under 469. |
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What is the exception to the passive activity loss rule related to real estate investors? |
RE investors may take losses against other income if the actively (as opposed to materially) participate in the RE investment up to 25K phased out above 100K of income. |
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How do expenses related to the income earned illegally treated for the purposes of deductions? |
Expenses in generating the income (including criminal defense) are deductible but fines and penalties are not deductible. |
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What does Section 162 provide for? |
A deduction for ordinary and necessary expenses related to carrying on any trade or business. |
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What does Section 262 add regarding personal expenses? |
There is no deduction allowed (general rule) |
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What does ordinary and necessary mean under Section 162 business expenses? |
Appropriate and helpful |
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What are expenses not part of under section 162 business expenses? |
Capital expenses |
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What does paid or incurred mean within Section 162 business expenses? |
Refers to two different accounting methods: cash or accrual. |
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What does carrying on mean under Section 162 business expenses? |
T has begun the business already |
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What does trade or business mean in the context of Section 162, deductible business expenses? |
2 inquiries: [1] is T busy enough? i.e. not merely an investment? [2] are the expenses really made in order to make money or are they personal expenses? |
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What is an expense under Section 162? |
Something that is used up at the end of the year that you pay for in business. |
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How are the expenses incurred as a contractor building his own building treated wit respect to business expenses? |
A self constructor cannot deduct all expenses related to building a structure and must be treated the same as a purchaser and must capitalize the construction costs. |
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How are repairs to capital equipment treated? |
Incidental: do not add to value or appreciably prolong the useful life of an asset - deductible repairs (broken window) Larger things that add to value or prolong the life of the asset are capitalized |
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How could you get a deduction on a purchase (starr's estate) |
Buy under a lease to own for a nominal amount and take rental deductions for the 'lease' payments made. Courts disallowed. The lease and 'purchase' are one. But T's still do this using a wholly owned subsidiary to make the purchase after the lease is up. |
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How is carrying on a trade or business interpreted? |
Somewhat strictly: lawyer in one state v. another does not count. Neither does VP vs. governor. |
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How does Section 195 give favorable treatment for start up expenses? |
Expenses for investigation/startup which would otherwise be deducted may be deducted up to a limit of 5000 and the rest may be amortized over 15 years (180 months) |
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What is the test for whether something is deductible pay? |
Whether they are reasonable and in fact are purely for services. |
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How has congress attempted to limit executive pay through taxation? |
Corporate deductions for pay are not deductible if salaries exceed $1M. |
