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43 Cards in this Set

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1.Insured died in the current year owning a policy of insurance that would pay beneficiary $100,000 but under which several alternatives were available to Beneficiary

(a) What result if Beneficiary simply accepts the $100,000 in cash?
§101(a)(1) gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured.

The $100,000 is excludable from gross income per §101(a)(1).
1.Insured died in the current year owning a policy of insurance that would pay beneficiary $100,000 but under which several alternatives were available to Beneficiary

(b) What result in (a), if beneficiary instead leaves all the proceeds with the company and they pay her $10,000 interest in the current year?

(a) What result if Beneficiary simply accepts the $100,000 in cash?
§101(c) – If any amount excluded from gross income by subsection (a) is held under an agreement to pay interest thereon, the interest payments shall be included in gross income.

The $10,000 interest is includable as gross income in the current year per §101(c)
1. Insured died in the current year owning a policy of insurance that would pay beneficiary $100,000 but under which several alternatives were available to Beneficiary

(c) What result if Insured’s Daughter is Beneficiary of the policy and, in accordance with an option she elects, the company pays her $12,000 in the current year? Assume that such payments will be made annually for her life and that she has a 25-year life expectancy?
§101(d) The amounts held an insurer with respect to any beneficiary shall be prorated over the period or periods with respect to which such payments are made.

(Beneficiaries (§101(d)) under insurance K's have a special rule for pmts. 25 yrs x 12k = 300k. Her policy was just 100k, so the extra $200k was interest. $100k policy proceeds, $200k interest. §101(d) tells us how to prorate this: Take the lump sum of $100k and divide by the life expectancy tables of the insurance company.

§1.101(3)(a): says 101 c & d are mutually exclusive. If only a little bit of principal is being paid out, use c. Lots of principal being paid out? Use D.
1.Insured died in the current year owning a policy of insurance that would pay beneficiary $100,000 but under which several alternatives were available to Beneficiary

d). What result in (C ) above if Insured's daughter lives beyond her 25 year life expectancy and receives $12,000 in the 26th year?

(c) What result if Insured’s Daughter is Beneficiary of the policy and, in accordance with an option she elects, the company pays her $12,000 in the current year? Assume that such payments will be made annually for her life and that she has a 25-year life expectancy?
§1.101-4( c): To the extent that payments received in each taxable year do not exceed the amount found from the above calculation, they are prorated amounts of the amount held by the insurer and are excludable from gross income of beneficiary without regard to whether he lives beyond the life expectancy.

(§1.101-4( c): If she lives beyond life expectancy you just continue to exclude the $4k (same exclusion if you live beyond the life expectancy). However if she dies before the end of her life expectancy, she doesn't get any extra deduction on her last tax return. Exclusion disappears beyond the $4k for the year.
2. Jock agreed to play football for Pro Corporation. Pro, fearful that jock might not survive, acquired a $1 million insurance policy on Jock’s life. IF Jock dies during the term of the policy and the proceeds of the policy are paid to Pro, what different consequences will Pro incur under the following alternatives?

(a) With Jock’s consent Pro took out and paid $20,000 for a two year term policy on Jock’s life.
§101(a) – gross income does not include amount’s received under a life insurance contract, if such amounts are paid by reason of the death of the insured.

The proceeds are excludable from gross income per §101(a).
2. Jock agreed to play football for Pro Corporation. Pro, fearful that jock might not survive, acquired a $1 million insurance policy on Jock’s life. IF Jock dies during the term of the policy and the proceeds of the policy are paid to Pro, what different consequences will Pro incur under the following alternatives?

b). Jock owned a paid up 2 year term $1mill policy on his life which he sold to Pro for $20k. Pro being named beneficiary of the policy.
§101(a)(2) – In the case of a transfer for valuable consideration of a life insurance contract the amount excluded from gross income by paragraph (1) shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts paid by the transferee.

§101(a)(2) applies b/c the policy was transferred here! $1 mil – 20k = 980k GI
2. Jock agreed to play football for Pro Corporation. Pro, fearful that jock might not survive, acquired a $1 million insurance policy on Jock’s life. IF Jock dies during the term of the policy and the proceeds of the policy are paid to Pro, what different consequences will Pro incur under the following alternatives?

c). Same as (b above, except that Jock was a shareholder of Pro Corp.

b). Jock owned a paid up 2 year term $1mill policy on his life which he sold to Pro for $20k. Pro being named beneficiary of the policy.
§101(a)(2) – In the case of a transfer for valuable consideration of a life insurance contract the amount excluded from gross income by paragraph (1) shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts paid by the transferee. This sentence does not apply in the case of…

§101(a)(2)(B) if such transfer is to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer.

§101(a) – gross income does not include amount’s received under a life insurance contract, if such amounts are paid by reason of the death of the insured.

The §101(2)(B): he was a shareholder in company so this applies: you do not apply (a)(2) even if there was a transfer! So it is excluded from gross income. Ex: corp sells the property back to the insured. 2a doesn't apply.
3). Insured purchases a single premium $100k life insurance policy on her life for a cost of $40k. Consider the income tax consequences to insured and the purchaser of the policy in each of the following alternative situations:

a). Insured sells the policy to her Child for its $60k FMV and, on insured's death, the $100k proceeds are paid to child.
§101(a)(2) – In the case of a transfer for valuable consideration of a life insurance contract the amount excluded from gross income by paragraph (1) shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts paid by the transferee.

§101(a)(2) says kid has to pay taxes on everything above what he paid for policy! $100k- $60k = $40k GI she dies: general rule says he'd exclude the whole amount BUT there was a transfer!
3). Insured purchases a single premium $100k life insurance policy on her life for a cost of $40k. Consider the income tax consequences to insured and the purchaser of the policy in each of the following alternative situations:

b). Insured sells the policy to her spouse for its $60k FMV and on Insureds death, the $100k of proceeds are paid to Spouse.
§1041(a) No gain or loss shall be recognized on a transfer of property from an individual to (1) a spouse.

§1041(b) In the case of any transfer or property described in subsection (a) (1) for purposes of this subtitle, the property shall be treated as acquired by the transferor by gift, and (2) the basis of the transferee in property shall be the adjusted basis of the transferor.

§1041 applies! Her gain is not recognized on the sale of the policy. Just ignore her gain. Spouse takes her basis. 101(a)(2)(a) does not apply. Apply general rule whole 100k is excludable!
3). Insured purchases a single premium $100k life insurance policy on her life for a cost of $40k. Consider the income tax consequences to insured and the purchaser of the policy in each of the following alternative situations:

c). Insured is certified by her physician as A terminally ill and she sells the policy for its $80k FMV to viatical settlement co. who collects the $100k of proceeds on Insured's death.
§101(g)(1) –For purposes of this section, the following amounts shall be treated as an amount paid by reason of the death of an insured: (A) any amount received under a life insurance contract on the life an insured who is terminally ill individual.

§101(g): nobody's died yet, normally there'd be a gains and not excluded. BUT 101g treats certain amounts as if it has been acquired by death. The viatical settlement co is subject to 101(a)(2)--no exclusion for them b/c 101g only applies to the sick seller, not the buyer.
1). In the current year, T purchases a single life annuity with no refund feature for $48k. Under the K, T is to receive $3000 per year for life. T has a 24 year life expectancy.

a)to what extent, if at all, is T taxable on the $3k received in the 1st year?
§72(b)(1) – Gross income does not include that part of any amount received as annuity under an annuity, endowment, or life insurance contract which bears the same ratio to such amount as the investment in the contract.

§72(b)(2) – The portion of any amount received as an annuity which is excluded rom gorss income under paragraph (a) shall not exceed the unrecovered investment in the contract immediately before he receipt of such amount.

($48k divided by $72k = .66666 factor. .666 x $3000 =$1999 principal, $1000 is income and 2000 is excludible per §72(b)(2)
1). In the current year, T purchases a single life annuity with no refund feature for $48k. Under the K, T is to receive $3000 per year for life. T has a 24 year life expectancy.

(b) If the law remains the same and T is still alive, how will T be taxed on the $3000 received in the 30th year of the annuity pmts?
§72(b)(2) – The portion of any amount received as an annuity which is excluded rom gorss income under paragraph (a) shall not exceed the unrecovered investment in the contract immediately before he receipt of such amount.

(72(b)(2) says she'll be taxed on whole pmt as income.)
1). In the current year, T purchases a single life annuity with no refund feature for $48k. Under the K, T is to receive $3000 per year for life. T has a 24 year life expectancy.

c). If T dies after 9 years of payments, will T or T's estate be allowed an income tax deduction?
§72(b)(3) – Deduction where annuity payments cease before entire investment recovered. (A) in general – if – (i) after the annuity starting date, payments as an annuity under the contract cease by reason of death of an annuitant, and (ii) as of the date of such cessation, there is unrecovered investment in the contract, the amount of such unrecovered investment shall be allowed as a deduction to the annuitant for his last taxable year.

T will have recovered $18k of her investment, her final tax return will have $30k deduction on the last income tax return per 72(b)(3).
1.Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with:

a). a settlement of $7000 cash?
$3k GI per § 61(a)(12) income from discharge of indebtedness.
1.Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with:

b). a painting with a basis and FMV of $8000?
$2k, same as above reason, but using property instead of cash to pay for it). (note here disposal of property triggers 1001. AR is $8k not $10k. $8k was satisfied by painting, $2k by forgiveness. If creditor has not agreed to forgive $2k debt, $8k would have been satisfied, and Debtor would have still owed $2k. Look at discharge of debt issue.

§61(a)(12) discharge of indebtedness.
1. Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with:

c). A painting with a value of $8000 and a basis of $5000?
Poor has $5,000 includable as gross income §§1001(a) and 1001(c) and the adjusted basis of $5,000 for the painting per 1012.

Possibly a $3000 gain for the painting and a $2,000 discharge of indebtness.

§61(a)(12) discharge of indebtedness.
1.Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with:

d). Services, in the form of remodeling Rich's office, which are worth $10,000?
(108 has no application in this problem. No diff b/w debt amt and amt paid.)(No income from discharge of debt, but GI for services

§61(a)(1) Compensation for services
1.Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with:

e). Services that are worth $8000?
($2000 income in forgiveness + $8000 in income from services rendered.)

§61(a)(1) Compensation for services

§61(a)(12) discharge of indebtedness.
1. Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with:

f). Same as (a) above, except that Poor's employer makes the $7000 payment to Rich, renouncing any claim to repayment by Poor.
(Old colony: employer paid Poor's obligation, this is income of $7000 +$3000 in forgiveness of debt.)


§61(a)(1) Compensation for services

§61(a)(12) discharge of indebtedness.
2. Mortgagor purchases a parcel of land held for investment from Seller for $100,000 with $20,000 of cash paid directly by Mortgagor and $80,000 paid from the proceeds of a recourse mortgage incurred from Bank. Mortgagor is personally liable for the loan and the land is security for the loan. When the land increases in value to $300,000, Mortgagor borrows another $100k from Bank again incurring personal liability and again with the land as security. Mortgagor uses the $100,000 of loan proceeds to purchase stocks and bonds. Several years later when the principal amount of the mortgages is still $180,000, the land declines in value to $170,000, Mortgagor transfers the land to the Bank, and the Bank discharges all of Mortgagor's indebtedness.

a). What are the tax consequences to Mortgagor?
AR $170k (FMV)-AB<$100k> = Gain $70k

+ T has ordinary income from discharge of indebtedness of $180k -$170k= $10k notice the diff characterization of the RG + OI)

§1.1001-2(a): AR from sale or disposition of property includes the amount of liabilities form which the transferor is discharged as a result of the sale or disposition.

§1.1001-2( c): on recourse AR does not include amounts that are discharges of indebtedness that are income.
Example 8: In 1980, F transfers to a creditor an asset with a FMV of $6k and the creditor discharges $7500 of indebtedness for which F is personally liable. The amount realized on the disposition of the asset is its FMV ($6k). In addition, F has income from the discharge of indebtedness of $1500 ($7500-6000).
2. Mortgagor purchases a parcel of land held for investment from Seller for $100,000 with $20,000 of cash paid directly by Mortgagor and $80,000 paid from the proceeds of a recourse mortgage incurred from Bank. Mortgagor is personally liable for the loan and the land is security for the loan. When the land increases in value to $300,000, Mortgagor borrows another $100k from Bank again incurring personal liability and again with the land as security. Mortgagor uses the $100,000 of loan proceeds to purchase stocks and bonds. Several years later when the principal amount of the mortgages is still $180,000, the land declines in value to $170,000, Mortgagor transfers the land to the Bank, and the Bank discharges all of Mortgagor's indebtedness.

b). What are the tax consequences to Mortgagor if the liabilities had been non-recourse liabilities.
(There would be NO income from discharge of non-recourse debt if T disposes of all the property (rather than keeping it): See Rev Rul 91-32 about keeping the property & reducing the loan, a diff scenario…)

AR $180k-AB<$100k>=Gain $80k
3). Businessman borrows $100k from Creditor to start an ambulance service. He then purchases ambulances for use in his business at a cost of $100k. Assume the ambulances are his only depreciable property and, unrealistically, that after some time their adjusted basis and value are still $100k. What consequences under §108 and §1017 in the following circumstances:

a). Businessman is solvent but is having financial difficulties and Creditor compromises the debt for $60k.
No exclusion, T owes on $40k income. (Why doesn’t the contested liability doctrine apply? No contest b/w T & lender)

§61(a)(12) income from discharge of indebtedness
3). Businessman borrows $100k from Creditor to start an ambulance service. He then purchases ambulances for use in his business at a cost of $100k. Assume the ambulances are his only depreciable property and, unrealistically, that after some time their adjusted basis and value are still $100k. What consequences under §108 and §1017 in the following circumstances:

c). Assume the same facts as in (a), above except that Businessman is insolvent and his liabilities of $225,000 exceed his assts (the ambulances worth $100,000 ) by $125,000. Further assumes Businessman has no net operating losses, general business credit carryovers, minimum tax credit carryovers, or foreign capital losses, passive activity loss or credit carryovers, or foreign tax credit carryovers. Creditor discharges $40,000 of the $100,000 loan without any payment.
§108(a)(1) Gross income does not include any amount which would be includible in gross income by reason of discharge of indebtedness of the taxpayer if-(B) the discharge occurs when the taxpayer is insolvent.

Businessman is insolvent so $40,000 of discharge of indebtedness is not includable in gross income per §108(a)(1)(B).
§61(a) Gross Income defined
Gross income means all income from whatever source derived, including (but not limited to) the following items….
a) Most everything is part of gross income.
i) Except as otherwise provided [Exceptions exist - §102 (a) Gifts]
Cesarini v. United States
i) Taxpayer finds treasure trove in used piano.

b) Found money is taxable gross income in the year in which the taxpayer obtains undisputed control over it. (title obtained when under control)
§1.61
Miscellaneous items of gross income ["there are many other kinds of gross income…..treasure trove to the extent of its value in U.S currency]

Statute of limitations do not toll until taxpayer has undisputed control.
Glenshaw Glass
i)Everything that is income is gross income.

b)Accession of Wealth

i)Must have more than before

c)Clear Realization

i)Sale, exchange, or any other disposition of property.

d)Complete Dominion

i)Must be the taxpayer's item, property, or interest.

ii)Must not be co-owned.
Old Colony Trust
i)Corporation pays federal income tax for board members.

b)Satisfaction of a taxpayer's obligation by another person constitutes an economic benefit, resulting in income to the taxpayer.

§1.6-14(a) Miscellaneous items of gross income. {many other types of gross income….another person's payment of taxes}

i)Fact that corporation paid federal government directly does not matter.
§1.61-2(d)
Compensation paid other than in cash {if services are paid in property the fair market value…included as compensation} [transfer to 3rd party irrelevant detail] (Old Colony Trust)
1.61-8(c)
Rents and Royalties

{if lessee places improvements as a substitute for rent such improvements constitute rental income}
Revenue Ruling 79-24
Exchange (products and/or services)

i)A lawyer and a painter exchange services

b)Fair market value of services received in a “services barter agreement” are gross income under §61 Gross income.
§102(a)
(a) Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.
§102(b)
(b) subsection (a) shall not exclude

(1) the income from any property referred to in subsection (a) OR

(2) where it is of income from property the amount of such income.
§102(c)
(c) [employee gifts] subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.

(1)Property in this section means title, property, and services.
§132(a)(1)
no additional-cost service

i)Value to employee escapes gross income if

(1) (b)(1) Services are in ordinary course of the line of business of the employer in which the employee works

(2)(b)(2) Employer cannot incur substantial additional costs.

(a) Excess capacity only; cannot displace non-employee customer. [Reg 1.132-2(a)(2)]

(3)(b)(2) Cost to employee is irrelevant.

(a)Cash rebates irrelevant [Reg 1.132-2(a)(3)]

(4){Non discriminatory basis} Highly compensated employees many only take advantage of (a)(1) if the same service is offered to other regular employees [via §132(j)(1)]

(5)Offered by an employer to an employee

(a) §132(h) this provision includes (1) retired or disabled former employees, and (2) spouse and dependent children as employees.

(6) §132(i) Reciprocal Agreements with written agreement
§132(a)(2)
Qualified Employee Discounts

i)(c)(1) Exclude from gross income the value of "courtesy discounts" on items purchased from his employer for use by the employee. Defined as:

(a)(c)(4) Includes services and property (not real property or investments)

(b)(c)(4) Services are in ordinary course of the line of business of the employer in which the employee works.

(c)(c)(3) Employee discount means that the price paid by the employer is less than that which would be offered to a non-employee.

(d)(c)(3) Offered by an employer to an employee

(2)(c)(1)(a),(b) - (c)(2) Limits on exclusion

(a)May not exceed 20% of the price at which the services are offered by the employer to customers. OR

(b)Max discount is employer's gross profit margin

(i)Aggregate sales price (-)cost/ aggregate sales price =gross profit %

1.Any excess of gross profit % must be reported as income

(3){Non discriminatory basis} Highly compensated employees many only take advantage of (a)(1) if the same service is offered to other regular employees [via §132(j)(1)]

(4)§132(h) this provision includes (1) retired or disabled former employees, and (2) spouse and dependent children as employees.

ii)This provision may be layered with (a)(1)
§132(a)(3)
Working condition fringe

i)(d) Any property or services that if paid by the employee the amount would be allowed as a deduction under §162 or §167
§132(a)(4)
De minimis fringe

i)(e)(1) Any property or services the value whish is so small as to make accounting unreasonable.

(1)Reg § 1.132-6(e)(1) defines small as low market value

ii)(e)(2) Eating facilities

(1)(e)(2)(A) must be located on or near business premises of the employer

AND

(2)(e)(2)(B) revenue derived from such facility must be equal to operating cost.

(a){Non discriminatory basis} Highly compensated employees may only take advantage of (a)(1) if the same service is offered to other regular employees [via §132(j)(1)]
§132(a)(5)
Qualified transportation fringe

i)(f) Means

(1)(f)(1)(A) commuter highway vehicle [$100 limit, 6 or more adults]

(2)(f)(1)(B) transit pass [$100 limit, (pass, card, token)]

(3)(f)(1)(c) qualified parking [$175 limit, on or near facility, not home]

f)§132(j)(4) Gyms are included if on premises and used by employees, spouses, or dependents of employees.
§119
Meals and Lodging (shall be excluded from gross income)

§119 Meals or lodging furnished for the convenience of the employer

(a) meals or lodging must be for convenience of employer

(a)(1) meals must be furnished on business premises

Reg §1.119-1(a)(1) Meals
(i) must be furnished on the business premises of the employer

(ii) the meals must be furnished for convenience of employer

(2)(i) must be substantial non-compensatory business reason.

Example; working of Alaskan pipeline, no time to get lunch

(a)(2) case of lodging, employee must accept such lodging on the business premises as condition of employment.

Reg §1.119-1(b)(1) Lodging
Must be furnished on the business premises of the employer Where employer conducts portion of business or duties. (Anderson) Must be furnished for the convenience of the employer and The employee is required to accept such lodging as a condition of his employment.
Must enable him to properly perform the duties of his employment. Does not matter if compensation is given in lieu if (1)-(3) are met.

If this test is not met it will be deemed as property for services

§1.61-2(d) Compensation paid other than in cash {if services are paid in property the fair market value…included as compensation}
§74(a)
Prizes and Awards

(a) except as otherwise provided, gross income includes amounts received as prizes and awards.
§74(b)
(b)except if transferred to a charity [gross income shall not include]

(1) Recipient selected without any action in his part

(2)Not required to render substantial services

(3) Transferred by the payer to a organization
§74(c)
(c) except for certain employee achievement awards

(1) gross income shall not include if cost does not exceed amount allowable as a deduction.

(2) excess of allowance must be included.