Tax Cases

Front 1

Higgins v. Smith

Back 1

Only realized losses are deductible; realization must occur not just in form but also in substance. The sale of property to an entity dominated and controlled by the seller is a sale in form only, not in substance.

Front 2

Woodsam v. Commissioner

Back 2

The mortgaging of property to secure a nonrecourse loan is not a realization event because: (1) the owner is still the beneficiary of any increase in land value, even though the risk of loss in value has been transferred to another party; and (2) the owner continued to actually manage and operate the property.

Front 3

McWilliams

Back 3

§267’s prohibition on deducting a loss resulting from a sale to a family member applies in substance, if not in form, where there was a coordinated effort between spouses where one sells property and another buys substantially similar property.

Front 4

Welch v. Helvering

Back 4

Payment of discharged debts does not qualify as a deductible business expense because it is not an "ordinary and necessary expense" .

Front 5

Indopco

Back 5

Advice received by a law firm and investment bank for an acquisition are capital expenses. (Treasury): the creation of a separate and distinct asset from the business is a necessary condition for capitalization.

Front 6

Helvering v. Lazarus

Back 6

The taxpayer entitled to a deduction is the taxpayer who bears the burden of exhaustion, wear, and tear. A 99 year sale & leaseback is a mortgage, not a sale because seller retained long-term use of the property.

Front 7

Swift Dodge

Back 7

Lazarus applied to non-real property; owner in substance eligble to take depreciation deductions is party who retains some significant economic risks associated with the property

Front 8

Estate of Franklin

Back 8

Sale & leaseback at an inflated price with no net cash flow is a sham transaction designed to create depreciation tax shelter. Buyers likely to default on balloon payment at maturation with no recourse and no result in change of land possession

Front 9

Hudspeth

Back 9

The sale of real estate by parent to child where seller financed and where payments are equal interest and principal is a genuine sale.

Front 10

Mayerson

Back 10

Sale of depreciable real estate seller-financed with a nonrecourse mortgage providing for payment of principal as a balloon payment is a genuine sale, as the purchase price (mortgage principal) does not exceed the fair market value of the property.

Front 11

Idaho Power

Back 11

Capital expenditures for new buildings and permanent improvements are non-deductible; but where costs are incurred for these purposes they are added to the basis of the property (capitalized). Here, this includes the portion of use of company-owned trucks in the construction of a new power plant.

Front 12

Dean v. Commissioner

Back 12

An interest free loan produces no taxable income for the lender. But see § 7872

Front 13

Capital Expenditures

Back 13

(1) depreciable assets, including Indopco expenditures; (2) non-wasting assets; (3) amounts paid for new buildings, (4) for permanent improvements or betterments made to increase the value of any property or estate;' (5) Interest paid or interest paid on other indebtedness during the production period of property with: (a) a long useful life, (b) production period in excess of 2 years, (c) estimated production cost in excess of $1m

Front 14

Depreciable asset

Back 14

expected to provide benefits over a limited number of years but beyond end of current year – so cost deducted over a period of years

Front 15

Expensed Asset

Back 15

Not expected to provide benefit beyond end of current year – so immediately deductible in full

Front 16

Non-wasting

Back 16

Expected to provide benefits and last indefinitely – so no deduction for cost until sold

Front 17

Effect of misclassifying capital expenditures

Back 17

When misclassified as a non-capital expenditure, are the equivalent of allowing the income produced by the expenditure to be taxed at a zero rate.

Front 18

§ 453

Back 18

Taxable gain from a deferred payment/installment sale characterized as recaptured excess depreciation under §§ 1245 & 1250 is taxable in the year the transaction occurred. In the case of stock, all gain taxable in year of disposition.

In a deferred payment/installment sale between related parties, if the buyer resells to a third party, the basis of the original seller is the amount realized in the second sale.

Front 19

Obstacles to taxing "unrealized gain"

Back 19

(1) liquidity; (2) Measurement (unless publicly traded)

Front 20

Capital loss

Back 20

Only first $3k may offset ordinary gain, remainder can only be used to offset capital expenditures. Individuals can carry them forward three years; corporations can carry them backwards 3 years and forwards 5 years.

Front 21

Effect of § 7872 on Unstated Interest

Back 21

Prevents tax avoidance through shifting taxation from a lender in a higher tax bracket to a lendee in a lower tax bracket.

Front 22

Burden of § 7872(b)

Back 22

Requires immediate tax payment on interest income that will not actually be received until maturity.

Front 23

Passive Activity Deductions

Back 23

Losses from “passive activities” may be deducted only against income from “passive activities," where passive activity is any rental activity and any trade or business in which the taxpayer “does not materially participate."

Front 24

Lincoln Savings

Back 24

To qualify for deduction under § 162(a), “an item must (1) be ‘paid or incurred during the taxable year,’ (2) be for ‘carrying on any trade or business,’ (3) be an ‘expense,’ (4) be a ‘necessary’ expense, and (5) be an ‘ordinary’ expense.”

Front 25

Inaja

Back 25

Where a sale or easement of a portion of a property occurs, and the amount realized is less than the total basis, and apportionment of basis is impracticable, the amount realized shall be treated as a return of capital and therefore result in a reduction of basis.

Front 26

Midland Empire

Back 26

Repair costs are immediately deductible because they are equivalent to deductible a casualty cost and capitalizing the repair cost.

Front 27

Tax Arbitrage

Back 27

the use of a loan with deductible interest to finance the creation of tax-exempt income.