Tax I Notes

Front 1

Generally, when does taxable gain occur?

Back 1

On the sale of property where AR > Adjusted Basis

Front 2

What sections cover adjusted basis?

Back 2

Section 1011 and and 1012

Front 3

What makes up the adjusted basis (three factors)?

Back 3

(OC + I) – D = AB
1) Original cost, including any non-recourse debt = “original basis”
2) Plus, costs of improvements
3) Minus amt of depreciation deductions allowed or allowable to T

Front 4

Treatment to T on Disposition of Property with Recourse Debt?

Back 4

Any discharged debt = ordinary income
Excess of FMV over AB = capital gain on sale or disposition of property

Front 5

Treatment of T on Disposition of Property with Non-recourse Debt?

Back 5

No taxable oridinary income on discharge of debt; but
Difference b/w T’s unpaid principle and property’s adjusted basis = capital gain to T

Front 6

What section covers constructive sales?

Back 6

Section 1259

Front 7

What is a constructive sale?

Back 7

Transactions that effectively take an offsetting position to an already owned position are considered to be constructive sales.

Front 8

What is a capital asset?

Back 8

Property held by taxpayer, subject to Section 1221 exclusions

Front 9

What is depreciation recapture?

Back 9

Converstion of some capital gain into ordinary income;
Any gain over the recomputed basis will be taxed as a capital gain (1231, 1245)

Front 10

What sort of property does 1245 provide for depreciation recapture?

Back 10

1245 applies to depreciable nonreal property (Gain on sale of asset that would otherwise be a capital gain is taxed as ordinary income to the extent of all prior depreciation deductions on the property.)

Front 11

What sort of property does 1250 provide for depreciation recapture?

Back 11

Real property (Gain on sale of asset that would otherwise be a capital gain is taxed as ordinary income to the extent of all prior depreciation deductions on the property.)

Front 12

Three types of basis?

Back 12

Ordinary basis - original basis of an asset is usually the value of a taxpayer’s investment in the asset. (See IRC § 1012

Adjusted basis – (OC + I) - D

Recomputed basis - adjusted basis recomputed by adding all adjustments reflected on account of deductions allowed or allowable to the taxpayer for depreciation.

Because the taxpayer received a deduction from ordinary income for the depreciation of the asset, any gain the taxpayer receives, up to the depreciation amount, must be included as ordinary income to offset the earlier deduction.

Front 13

What is SLM?

Back 13

Straight Line Method (of accounting ): Adjusted Basis / POCR (years)
SLM (yearly deductions) = [(Asset’s basis) – (Salvage value)] / (Estimated service life)

Front 14

What is the Accelerated Method?

Back 14

Allocate more depreciation to early years and lower depreciation to later years

Front 15

Why is has Congress provided for faster appreciation methods?

Back 15

To encourage capital investment

Front 16

In principle, what should the relationship of tax depreciaiton be to economic depreciation?

Back 16

Should be equal

Front 17

How is economic depreciation calculated?

Back 17

Subtracting from the value at the beginning of each period, the value at the start of the next period.

Economic depreciation equals the market price of an asset at the year’s beginning less the market price at the year’s end.

Front 18

What is expensing?

Back 18

Deducting the entire cost of an asset during its first year of use.

Front 19

Under Section 168, property in which POCR category is depreciated by SLM?

Back 19

Longer POCR-term property (27.5, 39 years, and 50 years)

Front 20

What happens when T conducts a transaction which, in substance, his economic interest in the property is unchanged?

Back 20

Nonrecognition of any gain or loss (Section 1031); Redwing Carriers: 1031 cannot be avoided by using intermediate cash step

Front 21

Under what conditions can the lessee of a property take depreciation deductions?

Back 21

Helvering v. Lazarus: where it has been shown that a lessee using property in trade or business must incur the loss resulting from depreciation of capital he has invested –and-- If T leases property for its entire useful life

Front 22

Under what conditions can the lessor of a property take deductions?

Back 22

Frank Lyon: so long as the lessor retains significant and genuine attributes of the traditional lessor status, the form of the transaction adopted by the parties governs for tax purposes.

Front 23

Under what circumstances is a court likely to find a conditional sales agreement?

Back 23

- If the lessess will acquire title automatically after certain payments have been made
- The rental payments are above FMV
- Title can be acquired at nominal option price (cheap)
- Some portion of rental payment = interest

Front 24

Under what conditions is the lessor likely to be found as true owner in a leveraged lease transaction?

Back 24

- The lessee has no right to purchase property except at FMV
- The lessee has not lent to the lessor
- Lessor must demonstrate that it expects to profit (not solely based on tax)
- Lessor maintains minimal investment = 20% cost

Front 25

What case provides that rights, duties, and obligations of parties should be considered in determining whether a lease = conditional sale?

Back 25

Swift Dodge

Front 26

What are common characteristics of abusive tax shelters (four factors)?

Back 26

1) Sale of a depreciable asset at an artificially high price.
2) Payment of all or most of the price with a nonrecourse note, secured only by the asset.
3) Little or none of the principal due before maturity.
4) Leaseback of the asset to the seller on a net basis with the rent equaling payments of interest and principal (if any) due on the note before maturity

Front 27

When is an owner of real property considered “at risk”?

Back 27

Section 465; the owner of real property is considered “at risk” with respect to nonrecourse financing if provided by an independent third-party lender. Nonrecourse financing provided by the seller will generally not qualify.

Front 28

What is “passive activity”?

Back 28

Any rental activity and any trade or business in which the taxpayer does not materially participate (469)

Front 29

What constitutes “material participation”?

Back 29

Involvement, on a regular, continuous, and substantial basis (469)

Front 30

What is the income tax treatment of below market loans?

Back 30

To the extent that a taxpayer obtains a loan that does not provide for adequate interest (below-market-rate loan), the taxpayer must include the amount that she saves in gross income (BUT does not mean that includes the whole amount of loan) i.e. interest-free loans from parents to children – kid treated as having paid the interest and may be entitled to deduction

Front 31

What happens when property is transferred incident to divorce?

Back 31

1041, no gain or loss shall be recognized, g/l only recognized when transferree spouse disposes of property

Front 32

Under what circumstances is there no constructive receipt?

Back 32

Income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions

Front 33

What five items are excluded from capital gains treatment (i.e. non-capital assets)?

Back 33

1.Stock or inventory held for sale in business;
2. Real or depreciable property used in trade or business;
3. Copyright or similar;
4. Accounts Receivable – 1221(a)(4);
5. Supplies of a type regularly used in OT/B.

Front 34

What is the purpose of capital gains exclusions?

Back 34

Intended to deny capital gains treatment for the ordinary gains and losses from operating a trade or business

Front 35

What is "arbitrage"?

Back 35

Taxpayer investing borrowed money in tax-exempt bonds is not permitted to deduct the interest paid on the borrowed money, even though putative tax between tax-exempt and taxable bonds

Front 36

What code section consitutes an "anti-arbitrage" provision?

Back 36

Section 469 - Passive activity losses and credits limited; interest on passive activity debt may be deducted
only against passive activity income.

Front 37

What code section covers deductions of investment interest?

Back 37

163(d) allows noncorporate taxpayers to deduct investment interest only
against investment income.

Front 38

How are capital expenditures treated for tax purposes?

Back 38

Under 263, no deductions are allowed for any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate.

Front 39

What sections cover "personal interest"?

Back 39

§ 163(h) disallows deductions for all personal interest, except for interest on qualified education loans and “qualified
residence interest.”

Front 40

How does the code treat personal consumption expenses?

Back 40

Under 262, generally no deduction allowed for personal, living, or family expenses.

Front 41

What is the tax treatment of municipal bonds?

Back 41

Interest is generally tax-exempt, but interest expense on loans "purchased to carry" munis is not under 265(a)(2).

Front 42

Under the tracing rule provided by 163(h) what are the five by which interest expenses can be allocated?

Back 42

1) Trade or business interest—generally deductible without limit;

2) Home mortgage interest—deductible within fairly liberal limits;

3) Investment interest—deductible only to the extent of investment
income;

4) Tax shelter (or other passive activity) interest—deductible only against passive activity income; and

5) Interest on all other personal consumption loans—not deductible

Front 43

Three basic categories used to classify cost of assets in "for profit" activity/when they can be deducted:

Back 43

1) Costs subject to expensing
2) Costs depreciable over years
3) Nonwasting (Costs that can only be deducted to offset AR when the item that has been purchased is resold)

Front 44

What constitutes capital expenditure for tax law purposes?

Back 44

A capital expenditure for purposes of tax law does not include all expenditures for property but only expenditures expected to produce significant benefits beyond the end of the current year.

Front 45

What are quasi-capital assets and how are they treated?

Back 45

Assets described under Section 1231, gain is treated as preferential capital gain

Front 46

What is an intangible asset and how is it capitalized?

Back 46

If of use in trade or business for limited period = may be subject to d/d (ex. patents, copyrights)

If useful life not lim'd = no d/d (ex. "goodwill" per Welch case)

Front 47

What constitutes a repair and how is such an expense treated?

Back 47

Repair = expenditure for tkeeping property in an ordinarily efficient operating condition. Does not add to the value of the property, nor does it appreciably prolong its life.

Repairs = deductible

Front 48

What is the effect of characterizing a payment or a business or capital expense?

Back 48

Business expenses are currently deductible, a capital expenditure usually is amortized and depreciated over the life of the relevant asset, or, where no specific asset or useful life can be ascertained, is deducted upon dissolution of the enterprise.

Front 49

What is the test used by the Courts for which an expense can qualify for a deduction under 162(a) in Lincoln Savings?

Back 49

“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 50

In Lincoln Savings test, what is a "necessary" expense? An "ordinary" expense?

Back 50

Necessary = minimal requirement that exp. be "appropriate and helpful" for T's business

Ordinary = transaction of common or frequent occurance

Front 51

What restrictions does Reg 1.165 place on deductions of losses?

Back 51

Loss must be evidenced by *closed and completed transactions*, *fixed by identifiable events*, and, except as otherwise provided . . . actually *sustained during the taxable year*.

Front 52

What section covers losses on exchanges of property between related parties?

Back 52

Section 267 - no deductions allowed

Front 53

What section covers "wash sales" and what are they?

Back 53

Section 1091: Wash sale - purchase and sale of identical security w/in 30 day span. Loss is NOT deductible.

Front 54

What constitutes a capital loss under Section 1211?

Back 54

Capital losses - losses from the sale or exchange of
investment property—may be deducted only to the extent that the taxpayer has
recognized capital gains (1211 – Limitation on capital losses).

Front 55

What provisions are there for "carryover" of losses under Section 1212?

Back 55

Capital losses that may not be deducted under § 1211(b) can
be applied to other tax years. Corporations may carry the losses backward up to three years and forward up to five years. Individuals may carry the losses forward only but are allowed to do so indefinitely.

Front 56

Reg. 1.1001 limits recognition of gain or loss on exchange of property to what transactions?

Back 56

To transactions in which property is exchanged for ‘other property differing
materially either in kind or in extent.

Front 57

What is Cottage Savings treatment of the 1031 "like-kind" exception?

Back 57

T’s underlying economic position is essentially unchanged when the taxpayer continues to own the same kind of asset

Front 58

How have courts generally treated sale-leaseback provisions (i.e. Jordan Marsh)?

Back 58

Treated as sales for which recognition is permitted.