Federal
Personal Income Tax Code Outline
I.
Gross Income
§ 61 – Gross income: everything is income unless it is specifically excluded somewhere.
§ 62 – Adjusted gross income:
§ 102(c) – cannot have a gift between employer and employee
§ 1.61-2(d)(3) – meals
§ 1.19-1(c)
§ 1.19-2 – place of business; where employee performs services
§ 1.119(1)(a)(2)
§ 1.119(1)(d) -
II.
Fringe Benefits
MEALS AND LODGING:
§ 119(a) – shall be excluded from gross income if furnished to employee, spouse, or dependent by or on behalf of the employer for the convenience of the employer if:
1) Meals: are furnished on the business premises of employer or
2) Lodging: employee is
a. req’d to accept such lodging,
b. on the business premises
as a condition of his employment
§ 119(b) – SPECIAL RULES:
1) In determining whether meals or lodging are for the convenience of the employer DO NOT TAKE INTO ACCOUNT an employment K or State statute fixing terms of employment (not determinative).
2) For MEALS: DO NOT take into account whether or not there is a charge for the meal or whether an employee can accept or decline.
3) Certain Fixed Charges for Meals will be excluded if:
a. Employee is req’d to pay a periodic fixed charge AND
b. Furnished for the convenience of the employer
c. (3) ONLY APPLIES if payment is req’d regardless of whether the employee eats the meal.
4) All meals provided on the premises will be considered to be for the convenience of the employer if more than ½ of the employees to whom such meals are furnished are furnished for the convenience of the employer. (§119(b)(4))
Only meals not money (cash) for meals; groceries is arguable.
§ 132 – CERTAIN FRINGE BENEFITS:
§ 132(a) – Exclusion from Gross Income:
· No-additional cost service
· Qualified employee discount
· Working condition fringe
· De Minimis fringe
· Qualified transportation fringe
· Qualified moving expense req.
§132(b)- No-additional cost service – any service provided by an E’er to an E’ee for use by such E’ee if:
1) service is offered for sale to customers in the ordinary course of the line business of the employer for which the employee is performing services AND
2) E’er incurs no substantial additional cost (including forgone revenue) in providing such service
§132(c) – Qualified employee discount - any E’ee discount with respect to qualified property or services to the extent such discount does not exceed:
1) Property – the gross profit % of the price at which the property is being offered by the E’er to customers OR
2) Services – 20% of the price at which the services are being offered by the E’er to customers - count in excess of 20% (don’t count up to 20% then count discounts over 20%)
Gross Profit % - i) the excess of the aggregate sales prices of property sold by the E’er to customers OVER (minus) the aggregate cost of such property to the E’er, is of ii) the aggregate sale price of such property.
3) E’ee discount – the amount which:
a. The price at which the property or services are provided by the E’er to an E’ee for use by such E’ee is less than
b. The price at which such property or services are provided by the E’er to customers
4) Qualified property or services – any property (other than real property and personal property of a kind held for investment) or services which are offered for sale to customers in the ordinary course of the line of business of the E’er in which the E’ee is performing services.
§132(d) – Working condition fringe – any property or services provided to an E’ee of the E’er to the extent that, if the E’ee paid for such property or services, such payment would be allowable as a deduction under §162 (Trade or business expenses) or167 (Depreciation).
§132(e) – De minimis fringe – any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the E’er to his/her E’ees) so small as to make accounting for it unreasonable or administratively impracticable.
Treatment of certain eating facilities – if: 1) located on or near the business premises of the E’er AND 2) revenue derived from such facility normally equals or exceeds the direct operating costs of such facility.
See discrimination clause (p. 96 of code)
§132(f) – Qualified transportation fringe – any of the following paid for by the E’er:
1) transportation in a commuter highway vehicle (at least 7 people) if transportation is connected to travel between E’ee’s residence and place of employment
2) transit fee
3) qualified parking
See limitations and definitions (p. 97)
§132(g) – Qualified moving expense reimbursement – any amount rec’d from the E’er as a payment for (or reimbursement of) expenses which would be deductible as moving expenses under §217 if directly paid or incurred by the individual.
§132(j) – SPECIAL RULES:
this section only applies to highly compensated E’ees if no discrimination
on-premises gyms and other athletic facilities: 1) on premises; 2) operated by E’er; 3) substantially all use is by E’ees (their spouses, dependent children)
REV-RULES:
TREASURY REGS:
1.61-2(a)(1) - Compensation for services, including fees, commissions, and similar items: all (compensation for services, commissions, tips, bonuses, severance pay, rewards, jury fees, wages, salaries, etc) included in income unless excluded in another section.
1.61-2(d)(1) – Compensation paid other than in cash – property paid for services (use FMV) included as income; services paid in exchange for services (FMV unless a price is stipulated) also included as compensation.
1.61-2(d)(2) – Property transferred to employee or independent contractor – property transferred at below FMV to an employee or contractor, the difference is between the sale price and the FMV is considered compensation. When computing loss for such a transaxn, the basis is the amt paid + difference included in gross income.
(ii)(a) – cost of life insurance paid by employer is included as GI.
(b) – group-term life insurance on the life of a spouse or dependent is also included.
1.61-21(a)(1) – ex of fringe benefits include employer provided: flights, autos, vacations, discounts on property or services, membership, tickets to entertainment etc.,
(2) – fringe benefits excluded from income include – employer provided: tuition discounts, meals and lodging (for the convenience of the E’er), no-additional-cost services, etc.,
(3) – fringe benefits provided in connection with the performance of services are considered to be given as compensation (what does this mean? Included in GI??)
(4) – fringe benefits are included in the income of the E’ee even if the E’ee is not the person receiving the benefit (e.g., mother in law living in E’er housing).
1.61-21(b)(1) – Valuation of fringe benefits – include in GI the amount by which the FMV exceeds the sum of i) the amount paid for the benefit and ii) the amount specifically excluded from GI by some other section of the IRS code.
(2) – FMV – determined on the basis of all the facts and circumstances. Specifically, the amount the fringe would have been worth in an arm’s-length transaxn.
NOTE:
§ 129 – Dependent Care Assistance – Gross income doesn’t include income paid out for DCA
§ 152 – Dependent defined. (???)
§67(b) – list is of things that are not misc. itemized deductions; everything else (not listed) is misc itemized deductions.
III.
Realization
IV.
Damages
§104(a) – Compensation for injuries or sickness – Gross income doesn’t include:
1. workmen’s comp for personal injuries or sickness
2. any damages (other than punitive) rec’d on account of personal physical injuries or physical sickness; ED is not treated as a physical injury or sickness – this does not apply to an amount paid in excess of the amt paid for medical care attributable to ED (i.e. if ED due to physical injury or sickness then it is excludable??)
3. amts rec’d through accident/health insurance for personal injuries or sickness
4. amts rec’d as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces or a disability annuity payable under the provision of §808 (Foreign Service Act)
5. amts rec’d by an individual as disability income attributable to injuries incurred as a direct result of a violent attack determined to be a terrorist act while working as a US e’ee Outside of the US.
All damages resulting from a physical injury are not taxed. Exception for ED if damages for nonphysical injuries do not exceed medical costs. CHECK
Compensatory damages are excluded. Punitive damages are taxed.
§1033 – Involuntary conversions - $ rec’d from an involuntary conversion (stolen or damaged equipment) which is put toward new equip (replacement) is not taxed.
TREASURY REGS:
1.61-6(a) – Gains derived from dealings in property – gain realized on the sale or exchange of property is included in GI unless excluded by law. Generally, gain is the amt realized over the unrecovered cost or other basis for the property sold or exchanged. When parts of a larger property are sold, the cost or basis of the entire property shall be equitably apportioned among the several parts, and the gain or loss on the part of the entire prop sold is the difference between the selling price and the cost or other basis allocated to such part. Gain or loss is determined at the time of sale and treated as separate transaxns. See p. 1026 in 1999-00 code for examples.
TAXES:
Gross Income
- non-itemized deductions (§62 and other sections) [above
the line deductions]
=Adjusted Gross Income (AGI)
- personal exemptions (always
get theses)
OR - standard
deductions OR itemized deductions
[below the line deductions]
=Taxable
income x rates = Tax – credits = TAX BILL (what you owe
IRS)
§67(a) – 2% Floor on MISC Itemized deductions – general: for individuals, the misc itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 % of the AGI.
(b) – Misc. Itemized Deductions – all itemized deductions EXCEPT those listed:
1. deductions under §163 (interest)
2. deductions under §164 (taxes)
3. deductions under §165(a) for casualty or theft losses described in (2) and (3) of §165(c) or for losses described in §165(d).
4. deductions under §170 (charitable, etc., contributions and gifts) and §642(c) (amts set aside for charitable purposes)
5. deduction under §213 (medical, dental, etc., expenses)
6. any deductions under allowable for impairment-related work expenses
7. deduction under §691(c) (estate tax in case of income in respect of decedent)
8. any deduction allowable in connection with personal property used in a short sale
9. deduction under §1341 (computation of tax where taxpayer restores subst. Amt held under claim of right)
10. deduction under §72(b)(3) (annuity payments cease before investment recovered)
11. deduction under §171 (amortizable bond premium)
12. deduction under §216 (in connection with cooperative housing corporations)
§68(a) – Overall limitation on itemized deductions – if AGI exceeds the applicable amount (100k or 50k for separate return by married individual), the amount of the itemized deductions otherwise allowable for the taxable year shall be reduced by the lesser of:
1. 3% of the excess of AGI over the applicable amt OR
2. 80 % of the amt of the itemized deductions otherwise allowable for such taxable year.
V.
Tax Benefit Rule
Tax benefit rule – rule of inclusion - (Bad Debt Deduction) - if you loan someone money and don’t get paid back you can take a bad debt deduction (e.g., you can take the entire loan and exclude it from income when you realize they will not pay you). If at some point you do recoop the $ then you must claim it as income. (notes 9/13/00)
Bliss Dairy – was “fundamentally inconsistent with the deduction” v. nonrecognition. CHECK (notes 9/13/00)
Hillsboro – bought cow feed; ct. said that Tax Benefit Rule is broader than “actual recovery.” Test is: “fundamentally inconsistent with deduction.” Cites §162(a). (notes 9/18/00)
§ 111 – Recovery of Tax Benefit Items
§ 111(a) – Deductions – GI does not include income attributable to the recovery during the taxable year of any amt deducted in any prior taxable year to the extent such amt did not reduce the amt of tax imposed by this chapter (e.g., if deduction didn’t do you any good – i.e., reduce your taxes - then you don’t have to include in income when you do recover)
§ 111(c) – Treatment of Carryovers – an increase in a carryover which has not expired before the beginning of the taxable year in which the recovery or adjustment takes place shall not be treated as reducing tax imposed by this chapter
Rev-Rule 93-75 – What portion of a recovery or refund is included in GI under the tax benefit rule? Examples for 3 situations.
§68(a) – (see above for rule) -
§111(a) – partial codification of the tax benefit rule.
HOLDING: The portion of recovery or refund that is includible in GI in the year of receipt equals the difference between the prior year’s itemized deductions (after the application of §68) and itemized deductions that would have been claimed (the greater of 1) the itemized deductions after the application of §68 or 2) the standard deduction) had the TP paid the correct amt in the prior year and not rec’d a recovery or refund in a subsequent year.
(p. 33-35, West book)
VI.
Donee’s Basis in Gifts
FMV>Basis = appreciated property, use: Donee’s basis=Donor’s basis
FMV<Basis = depreciated property then 1) gain basis use Donee’s basis OR 2) loss basis use FMV at the time of gift.
For part sale/part gift:
Donor/Seller NEVER recognizes a loss.
Donee/Buyer – takes basis of which ever is higher (unless
FMV is lower than basis):
1) donor/seller’s basis OR
2) amount paid by donee/buyer
§ 102 – Gifts and Inheritances
(a) – GI does not include the value of property acquired by gift, bequest, devise, or inheritance.
(b) – Income – (a) does not exclude from GI: 1) the income from any property referred to in (a); OR 2) the amt of income from property that was a gift, bequest, devise, or inheritance.
(c) – Employee Gifts – (a) does not exclude from GI any amt transferred by or for an E’er to or for the benefit of, an E’ee. (Cross Reference 102 with 74(c) and 132(e))
§ 1014(a) – Basis of Property Acquired from a Decedent – In general: basis of property in the hands of a person acquiring the property from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be –
1) the FMV at the date of the decedent’s death,
2) in case of an election under either §2032 or §811(j) of the IRS Code of 1939 where the decedent died after 10/21/1942, its value at the applicable valuation date prescribed by those sections,
3) election under §2032(A) , its value determined under such section, OR
4) to the extent of the applicability of the exclusion described in §2031(c), the basis in the hands of the decedent.
§ 1015(a) – Basis of Property Acquired by Gifts and Transfers in Trust –
Gifts after Dec. 31, 20 – For property acq’d after 12/31/20, basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acq’d by gift, except that if such basis (adjusted for the period before the dated of the gift as provided in §1016) is greater than the FMV of the property at the time of the gift, then for the purpose of determining loss the basis shall be such FMV. If facts are not known then Secretary shall obtain facts necessary. If no facts then Secretary will obtain the FMV at the date of the last preceding owner.
§ 1015(e) – Gifts Between Spouses – the basis for gifts transferred as described in §1041(a) shall be determined under §1041(b)(2) , not this section.
TREASURY REGS:
1.1001-1(e) – Transfers in part sale part gift – the transferor has a gain to the extent that the amt realized by him exceeds his adjusted basis in the property. No loss is sustained on such a transfer if the amt realized is less than the adjusted basis. See §1.1015-4 to determine basis of property in the hands of the transferee. Bargain sale for charitable organization, see §1.1011-2. See page 1676 (Code 1999-00) for examples.
VII.
Taxation of Gifts
§ 86 (a) – GI includes SS benefits in an amt equal to the lesser of A) ½ of the SS benefits rec’d during the taxable year OR B) ½ of the excess described in (b)(1).
If amt under (b)(1)(A) exceeds the adjusted base amt, the amt included in GI shall be equal to the lesser of:
A) the sum of
i. 85% of such excess PLUS
ii. the lesser of the amt determined under (1) or an amt equal to ½ of the difference between the adjusted base amt and the base amt of the taxpayer
B) 85% of the SS benefits rec’d in a year.
(b) subsection (a) applies to a taxpayer where:
A) the sum of
a. the modified adjusted GI of the taxpayer for the taxable year, PLUS
b. ½ of the SS benefits rec’d during the taxable year exceeds
B) the base amt
Modified AGI –1) determined w/out regard t this section and §§135, 137, 221, 911, 931, and 933 AND
2) increased by the amt of interest rec’d or accrued by the taxpayer during the taxable year which is exempt from tax.
(c) Base Amt and Adjusted Base Amt –
Base Amt:
A) except at otherwise provided in the paragraph, $25,000,
B) $32,000 for jnt return, and
C) zero for a taxpayer who
a. is married (§7703) but does not file a jnt return for such a year
b. does not live apart form his spouse at all times during the year
Adjusted Base Amt:
A) except as otherwise provided in this paragraph, $34,000
B) $44,000 for jnt return
C) zero in the case of a taxpayer described in paragraph (1)(C)
§102 – GIFTS and INHERITANCES
(a) – GI does not include the value of property acquired by gift, bequest, devise, or inheritance.
(b) – Income – (a) shall not exclude from GI:
1) income from any property referred to in (a); OR
2) amt of income from property which was a gift, bequest, devise, or inheritance.
(c) – Employee Gifts:
1) subsection (a) shall not exclude from GI any amt transferred by or for an employer to or for the benefit of an employee
2) Cross reference – see 74(c) - excluded certain E’ee achievement awards from GI; see 132(e) – excludes certain de minimis fringes from GI
PROP. REG:
1.102-1(f)(2) – GIFTS AND INHERITANCES - E’er/E’ee Transfers – for purpose of §102(c), extraordinary transfers to relatives of an employer will not be considered transfers to, or for the benefit of, an employee if the employee can show that the transfer was not made in recognition of the E’ee’s employment . §102(c) shall not apply to amts transferred between related parties (e.g., father/son) if the transfer can be attributed to the family relation and not the employment. (p. 1062 in tax code)
REV. RULE:
73-87 and 63-136 – Welfare benefits are not included in GI. (p. 222-223 of Teal book)
GIFT: Look at whether it is detached and disinterested generosity, if yes then gift.
Political Contributions – not GI if they are used for a proper political purpose. IRC §527 If used for personal use then politician must prove that donor intended contribution to be an “unrestricted gift” under Commis.v. Duberstein (p. 208 of Teal book).
Tips to dealers – look for three factors:
1) regularity of flow of income
2) viewed as compensation by the donee
3) equal distribution between employees
VIII. Cancellation of Debt
If debt is cancelled without consideration.
TRANSACTIONAL VIEW: what was the end result? Total increase in net transaction. Was there a gain after everything was said and done? (see Kerbaugh case)
§108 – INCOME FROM DISCHARGE OF INDEBTEDNESS
(a) – Indebtedness excluded from GI if:
A) discharge occurs under Title 11
B) discharge occurs when taxpayer is insolvent (see (a)(3) – amt excluded not to exceed the amt by which the taxpayer is insolvent),
C) the indebtedness discharged is qualified farm indebtedness, OR
D) the indebtedness discharged is qualified real property business indebtedness (if not a C corporation).
(b)(1) – Reduction of Tax Attributes – In general, see (2) for order of reduction.
(2)(E) – see §1017 basis reduction of property of the taxpayer
(3)(A) – exclusion should be dollar for dollar
(5) – Election to Apply Reduction First Against Depreciable Property
(e)(1) – General Rules for Discharge of Indebtedness (Including Discharges not in Title 11 Cases or Insolvency) – No Other Insolvency Exception – no insolvency exception from the general rule that GI includes income from the discharge of indebtedness. (i.e., if not a bankruptcy case then discharge of debt will be considered income???)
(2) – Income Not Realized to Extent of Lost Deductions – no income shall be realized if discharge of debt payment would have given a deduction.
(5) – Purchase Money Debt Reduction for Solvent Debtor Treated as Price Reduction – IF:
A) reduction in property debt to the purchaser of property
B) reduction does not occur in i) Title 11 case OR ii) when purchaser is insolvent
C) but for this paragraph, reduction would be treated as income to purchaser from discharge of debt.
(6) – Indebtedness Contributed to Capital – if a debtor corporation acquires its indebtedness from a shareholder as a contribution to capital
A) §118 applies
B) such corp shall be treated as having satisfied the debt with an amt of money equal to the s/h’s adjusted basis in debt
§1017 – Discharge of Indebtedness
§1001(c) – Recognition – unless otherwise provided for, the entire amt of a gain or loss, determined under §1001, on a sale/exchange of property shall be recognized.
TREASURY REGS:
1.61-12(a) – Income from Discharge of Indebtedness – In general: discharge of debt in whole or part may result in income (e.g., compensation for services, reduction in debt, s/h forgives debt may lead to contribution to capital).
REV. RULE:
67-200 – Tax Benefit Rule trumps CX of debt rule
IX.
Claim of Right
§ 1341 – Computation of Tax Where TP Restores Substantial Amt Held Under Claim of Right – “normal” itemized deduction (i.e., not misc itemized).
(1) – an item included in GI for a prior year because it appeared that the TP had an unrestricted right to the item;
(2) – a deduction is allowable for the tax year because it was established after the close of such prior tax year that the TP did not have an unrestricted right to such item or to a portion of such item; AND
(3) – the amt of such deduction exceeds $3,000,
then the tax imposed by this chapter for the tax year shall be the lesser of:
(4) – the tax for the tax year computed with such deduction; OR
(5) – an amt equal to:
A) the tax for the tax year computed without such deduction, minus
B) the decrease in tax under this chapter for the prior year which would result solely from the exclusion of such item from GI for such prior tax year.
§1341(b) – Special Rules:
1) Refund available if under (a)(5)(b) decrease in tax exceeds the tax imposed for this taxable year.
2) §(a) does not apply to any deduction allowable with respect to an item which was included in GI by sale or other disposition of stock in trade of the TP (or other item in inventory) or property held by TP for sale in the ordinary course of trade or business (e.g., the washer/dryer scenario –Prob. 8, #4).
3) If tax imposed for the year is the amt determined in (a)(5) then the deduction in (a)(2) shall not be taken into account for any purpose of this subtitle.
4) See this section to determine whether (a)(4) or (a)(5) applies
5) See for Net Operating Loss under §172 and §1212
X.
Annuities and Time Value of Money
XI.
Nonrecognition
Recourse – personal liability for repayment, “assume” loan
Non-Recourse – a specific piece of property is subject to the loan; no personal liability
Amt Gain Gain Gain Basis
Realized Realized Recognized Not-Recog
“Like Kind” – refers to the general nature or character of the property not its grade or quality. Much looser with requisites for business use/investment (can be improved or unimproved).
“Boot” – if TP rec’d like kind and non-like kind property in §1031 exchange then the non-like kind property is called “boot.” Realized gain is recognized to the extent of the boot (§1031(b)). TP never recognizes more than her realized gain. The presence of boot does not permit the recognition of loss (§1031(c)).
Basis = Old
Basis – Cash Rec’d +/- (gain/loss recognized)
Check basis by looking at gain not recognized (amt deferred) and old basis
Basis = Old
Basis – Cash Rec’d + Gain Recog – Loss Recog.+ Mortg assumed – Mortg given up
Gain Realized
= Amt realized – Old Basis – Mortg assumed
Amt Not Recog
= Gain Realized – Gain Recog (Cash + Mortg Assumed – Mortg Given Up)
Amt Realized =
FMV of new land + Cash + Mortg Given up
Gain if sold
today = FMV of new land – New Basis
§ 1031 – Exchange of Property Held for Productive Use or Investment - does not apply to stocks or bonds. ONLY RECOGNIZE GAIN TO THE EXTENT YOU HAVE BOOT.
(a) – Nonrecognition of Gain or Loss from Exchanges Solely in Kind:
(1) No gain or loss shall be recognized on the exchange of property held for use in a trade/business/investment if property is exchanged solely for property of like kind which is to be held either for use in a trade/business/investment.
(2) – Exception: this subsection shall not apply to exchanges of:
(A) stock in trade or other property held primarily for sale
(B) stocks, bond, or notes,
(C) other securities or evidences of indebtedness or interest
(D) interests in partnerships
(E) certificates of trust or beneficial interests or
(F) choses in action.
A partnership with a valid election under §761(a) to be excluded from subchapter K shall be treated as an interest in each of the assets of such partnership and not as an interest in a partnership.
(3) – Requirement that property be id’d and exchange be completed not more than 180 days after transfer of exchanged property – Any property shall be treated as property which is not like-kind property if:
(A) property is not id’d as property to be rec’d in the exchange on or before the day which is 45 days after the date on which the TP transfers the property relinquished in the exchange OR
(B) such property is rec’d after the earlier of
i) the day which is 180 days after the dated on which the TP transfers the property relinquished in the exchange OR
ii) the due date for the transferor’s return of the tax imposed by this chapter for the tax year in which the transfer of the relinquished property occurs.
(b) – Gain from Exchanges Not Solely In-Kind: if an exchange would be within the provisions of (a), §1035(a), 1037(a), or 1037(a), if it were not for the fact that the property rec’d in exchange consists not only of property permitted by such provision to be rec’d without the recognition of gain, but also of “other property or money” then gain shall be recognized but in an amt not in excess of the sum of such money and the FMV.
(c) – Loss from Exchanges Not Solely In-Kind: if an exchange would be within the provisions of (a), §1035(a), 1037(a), or 1037(a), if it were not for the fact that the property rec’d in exchange consists not only of property permitted by such provision permitted to be rec’d without the recognition of gain or loss but also consists of “other property or money” then no loss from the exchange shall be recognized.
(d) – Basis: see p. 474
(e) – Exchanges of Livestock of Different Sexes: Livestock of different sexes are not property of a like kind (thank god they cleared that up!!).
(f) – Special Rules for Exchanges Between Related Persons:
(g) – Special Rules Where Substantial Diminution of Risk: the running of the period set forth in (f)(1)(C) shall be suspended during the period if paragraph (2) applies see p. 475 of Code.
§ 1032 – Exchange for Stock for Property:
(a) Nonrecognition of gain or loss – no gain or loss shall be recognized to a corporation on the receipt of money or other property in exchange for stock of the corp. No gain or loss shall be recognized by a corp with respect to any lapse or acquisition of an option to buy or sell its stock
(b) Basis – see §362
§ 1033 – Involuntary Conversions –
(a) If property is compulsorily or involuntarily converted
(1) Conversion into Similar Property – into property similar or related in service or use to the property so converted, no gain shall be recognized.
(2) Conversion into Money – into money or into property not similar or related in service or use to the converted property, the gain shall be recognized except to the extent hereinafter provided:
(A) Nonrecognition of Gain: by election of the TP; gain is recognized only to the extent that the amt realized upon conversion exceeds the cost of such property or stock.
i) replacement cannot be purchased prior to the disposition of the converted property
ii) unadjusted basis of property/stock must be in the cost within the meaning of §1012.
(B) Period Within Which Property Must be Replaced: 2 years (see p. 476 for details – i.e., when time period commences and ends)
(C) Time for Assessment of Deficiency Attributable to Gain Upon Conversion:
(D) Time for Assessment of Other Deficienceis Attributable to Election:
(b) Basis of Property Acquired by Through Involuntary Conversion
(c) Property Sold Pursuant to Reclamation of Law
(d), (e), and (f) deals with livestock.
(g) Condemnation of Real Property Held for Productive Use in Trade or Business or for Investment
(h) Special Rules for Property Damaged by Presidentially Declared Disasters
(i) Replacement Property Must be Acquired from Unrelated Person Certified Cases
For Involuntary Conversion
Problems:
Basis in New Prop = Cost of
replacement – Gain realized
Gain Recognized (or gain not
reinvested) = Amt realized – Cost of replacement
Gain Realized = Amt Realized –
Old Basis
Amt Realized but not recognized
= Gain Realized – Gain Recognized
From Prob 9, #8
TREASURY REGS:
1.1001-2 : Discharge of Liabilities – (a) (1) amt. realized on a sale include the amt of liabilities from which the transferor is discharged as a result of the sale or disposition.
(a)(2) – Discharge of Indebteness
(a)(3) – Liability Incurred on Acquisition
(a)(4) – Special Rules
XII.
Taxable Income
§ 1(h) – Maximum Capital Gains Rate
§ 3 – Tax Tables for Individuals
§ 61 – Gross Income: all income from whatever source derived
§ 62 – Adjusted Gross Income: GI minus.. see list starting on p. 44 of Code.
§ 63 – Taxable Income: GI minus the deductions in this chapter (other than standard)
§ 67 – 2% Floor on Miscellaneous Itemized Deductions - see p.5-6 of this outline
§ 68 – Overall Limitation on Itemized Deductions
(a) If AGI exceeds the applicable amt, the amt of the itemized deductions otherwise allowable fo rthe taxable year shall be reduced by the lesser of:
1) 3% of the excess ofAGI over the applicable amt OR
2) 80 % of the amt of the itemized deductions otherwise allowable for such taxable year.
(b) Applicable Amount: means $100,000 ($50,000 for separate return by married individual)
(c) Exception for Certain Itemized Deductions: 1) “Itemized deduction” does not include deduction under §213 (medical, dental etc.,); 2) any deduction for investment interest (§163(d)); 3) the deduction under §165(a) for casualty or theft losses 165(c) para 2 and 3; losses under 165(d).
§ 151 – Allowance of Deductions for Personal Exemptions
(b) taxpayer and spouse are both allowed exemptions
(c) additional exemptions for dependents
(d) exemption amt = $2,000
§ 152 – Dependent: see p. 115-117 for details
§ 6013(a) – Joint Returns of Income Tax by Husband and Wife
§ 7703 – Determination of Marital Status (p. 662 of Code)
XIII. Alimony
– payor spouse gets a deduction, but payee spouse must include it in income if
qualified payments. If not qualified,
then payor gets no deduction and payee has no income. Look for issues of property settlement rather than
alimony.
Req.’s for alimony codes to apply:
1) Must be cash
2) Rec’d under divorce or separation agreement
3) Elective treatment
4) Liability must end at death of payee spouse
5) Can’t be in the same house
§ 71 – Alimony: GI included amts rec’d as alimony or separate maintenance payments.
(b) Alimony or Separate Payments Defined: see p. 51 of the Code (same as above).
(c) Payments to Support Children
(d) Spouse – included former spouse
(e) Exception for Joint Returns
(f) Recomputation Where Excess Front-Loading of Alimony Payments – 1) If excess alimony payments:
A) payor spouse shall include the amt of excess payments in GI for payor spouse’s tax year beginning in the 3rd post-separation year AND
B) payee spouse shall be allowed a deduction in computing AGI for amt of excess payments for the payee’s tax year beginning in the 3rd post-separation year.
2) Excess alimony payments means:
a. excess payments for the 1st post-separation year AND
b. excess payments for the 2nd post-separation year.
3) Excess payments for 1st post-separation year is the amt of the excess payment of
B) the sum of :
i) the average of
I) the alimony payments paid during the 2nd post-separation year, reduced by the excess payments for the 2nd-post-separation year, and
II) the alimony payments paid during the 3rd post-separation year PLUS
ii) $15k
4) Excess payments for the 2nd post-separation year is the excess of
A) the amt of the alimony payments paid by the payor spouse during the 2nd post-separation year, OVER
B) the sum of -
i) the amt of the alimony payments paid by the payor spouse during the 3rd post-separation year PLUS
ii) 15k
(g) Cross Reference to §215 – deduction of alimony or separate maintenance payments and §682 – taxable status of income of an estate or trust in the case of divorce.
§ 215 – Alimony, etc., Payments
a) There shall be allowed as a deduction an amt equal to the alimony or separate maintenance payments paid during such individual’s taxable year.
b) Alimony or Separate Maintenance Payments are as defined in §71(b) which is includible in the gross income of the recipient under §71.
c) Requirement of ID Number – may be req’d to furnish a TP ID #
d) Coordination with § 682 – No deduction shall be allowed under this section with respect to any payment if, by reason of 682, the amt thereof is not includible in such individual’s GI.
§ 682 – Income of an Estate or Trust in Case of Divorce, etc.,
a) Inclusion of GI of Wife
b) Wife Considered a Beneficiary
c) Cross Reference – see §7701(a)(17) for definitions of “husband” and “wife”
XIV. Business
Expenses
§21 – Expenses for Household and Dependent Care Services Necessary for Gainful Employment (see p. 10 of Code for details).
§62 – Adjusted Gross Income
a) AGI is GI minus the following deductions:
1) Trade or Business Deductions – cannot be an E’ee; must be attributable to the trade or business.
2) Certain Trade or Business Deductions of E’ees
a. Reimbursed Expenses of E’ees – non-itemized; subject to certain limitations.
b. Certain Expenses of Performing Artists
c. Certain Expenses of Officials
3) Losses from Sale or Exchange of Property
4) Deductions Attributable to Rents and Royalties
5) Certain Deductions of Life Tenants and Income Beneficiaries of Property
6) Pension, Profit-sharing and Annuity Plans of Self-Employed Individuals
7) Retirement Savings
8) Certain Portions of Lump-Sum Distributions from Pension Plans Taxed Under §402(d)(3) – repealed after 12/99
9) Penalties Forfeited Because of Premature Withdrawal of Funds From Time Savings Accounts or Deposits
10) Alimony - §215
11) Reforestation Expenses - §194
12) Certain Required Repayments of Supplemental Unemployment Compensation Benefits
13) Jury Duty Pay Remitted to Employer
14) Deduction for Clean-Fuel Vehicles and Certain Refueling Property - §179A
15) Moving Expenses - §217
16) Medical Savings Account - §220
17) Interest on Education Loans - §221
b) Qualified Performing Artist
c) Certain Arrangements not Treated as Reimbursement Arrangements
§67 – 2% Floor Miscellaneous Itemized Deductions – see above.
§68 – Overall Limitation on Itemized Deductions – see p. 6 and 14 of this outline
§82 – Reimbursement of Moving Expenses – except as provided in 132(a)(6), GI includes any amt rec’d or accrued, directly, or indirectly, by an individual as a payment for or reimbursement of expenses of moving from one residence to another residence which is attributable to employment or self-employment.
§162 Trade or Business Expenses
§162(a) – deductions are allowed for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business:
1) a reasonable allowance for salaries or other compensation for personal services actually rendered; commuting while at “home” is not deductible.
2) traveling expenses (including meals and lodging other than lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business. Must sleep over one night to get this provision.
3) rentals or other payments req’d to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or has no equity.
Members of Congress reside in their home state; cannot deduct more than $3,000 in living expenses/year. TP is not considered away from home if away for more than a year. Does not apply to Federal E’ee when certified by Attorney General, etc.,
§162(c) – no deductions allowed for illegal bribes or kickbacks.
§165 (c)(2) – merely offering to rent is not enough; you must actually rent the house to convert to rental property from residential property. A more difficult threshold than §212.
§183 – Activities Not Engaged in for Profit: (by an S corporation) are not deductible.
(b) Deductions allowable: 1) deductions that are otherwise allowable whether or not they are engaged in for profit; 2) a deduction equal to the amt of deductions which would be allowable under this chapter only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the tax year exceeds the deductions allowable by reason of para 1.
(c) Not Engaged in for Profit: any activity other than one with respect to which deductions are allowable under §162 or §212(1) or §212(2).
(d) Presumption – If GI exceeds deductions for an activity for 3 or more years in a 5 consecutive year period then (unless Secretary establishes to the contrary) the activity is presumed to be for profit. (For breeding, etc., 2 years in a 7 year period).
(e) Special Rules – 1) determination of the presumption above shall not be made before the close of the beginning of the 4th year (6th for breeding, etc.,); 2) Initial Period; 3) Election; 4) Time for assessing deficiency attributable to activity.
§212 – Expenses for Production of Income - Deductions allowed for the ordinary and necessary expenses paid or incurred for: 1) production of income; 2) management, conservation, or maintenance of property held for production of income; OR 3) in connection with the determination, collection, or refund of any tax.
§212 does not have the trade or
business requirement only has to be for the “production of income.” Merely offering for rent is enough – easier
std. to meet. Can get maintenance
and repairs deducted. A non-itemized
deduction under §62(a)(4).
§217 Relocation costs are non-itemized
§262 – Personal, Living, and Family Expenses: No deductions allowed unless otherwise stated.
(b) Treatment of Certain Phone Expenses - any charge for basic telephone (1st line provided in residence) service shall be treated as a personal expense.
§263 – Capitalization and Inclusion in Inventory Costs of Certain Expenses – no deduction for capital expenditures.
§263(A)(a) – Nondeductibility of Certain Direct and Indirect Costs: Any costs described in (2): A) inventory in the hands of the TP shall be included in inventory costs; B) any other property shall be capitalized;
2) Allocable Costs – costs described in this paragraph with respect to any property are: A) direct costs of such property AND B) such property’s proper share of those indirect costs (including taxes) part or all of which are allocable to such property.
(b) Property to Which Section Applies: 1) Property produced by TP; 2) Property acquired for resale (except for TP with gross receipts of $10,000,000 or less);
(c)(1) – General Exceptions: Perosna us property (property produced by the TP for use by the TP)
(h) – Exception for Free Lance Authors, Photographers, and Artists – nothing in this section shall require the capitalization of any qualified creative expense. For details see p. 205 in Code.
§217 – Moving Expenses – see p. 188-190 of Code
§274 – Disallowance of Certain Entertainment, etc., Expenses
§274(a) – Entertainment, Amusement or Recreation – no deductions allowed (see details p. 214)
§274(e) – Specific Exceptions to Application of (a) – (a) shall not apply to: 1) food and beverages for E’ees; 2) Expenses treated as compensation; 3) Reimbursed expenses; 4) Recreational, etc., expenses for E’ees; 5) E’ee, Stockholder, etc., Business Meetings; 6) Meetings of Business Leagues, etc.; 7) Items available to public; 8) Entertainment sold to customers; 9) Expenses includible in income of persons who are not E’ees.
(k) Business Meals – no deduction allowed for the expense of any food or beverage item except: A) such expense is not lavish or extravagant under the circumstances; B) TP is present at the furnishing of food or beverage; EXCEPT: any expense described in (e)(2), (3), (4), (7), (8), or (9) AND any other expense to the extent provided in regs.
(m) Additional Limitations on Travel Expenses – No deductions for: 1) Luxury Water Transportation; 2) Travel as Form of Education; 3) Travel Expenses of Spouse, Dependent, or Other. a
(n) Only 50% of Meal and Entertainment Expenses Allowed as Deduction (see p. 220 for details).
§280(A) – Disallowance of Certain Expenses in Connection with Business Use of Home, Rental of Vacation Homes, etc.
a) No deduction allowable for TP’s residential dwelling.
b) Exceptions for interest, taxes, casualty losses, etc.
c) Exceptions for certain business or rental use; limitation on deductions for such use.
d) Use as Residence
e) Expenses attributable to rental
f) Definitions and Special Rules
g) Special Rules for Certain Rental Use
REV RULE:
75-120 (see West book p. 167)
94-47 (see West book p. 169)
93-86 (see West book p. 173)
NOTES on 11/1/00
Flowers Req’s to get a business deductions away from home (travel):
1) expense must be reasonable
2) away from home
3) must be incurred in pursuit of business
§62 deductions are non-itemized deductions
1.262-1(b)(8) - Uniforms are misc. itemized deductions
XV.
Ordinary and Necessary
§162(a) – all ordinary and necessary business expenses paid or incurred during the taxable year in carrying on a trade or business are deductible, including
1) reasonable salaries or other compensation for personal services actually rendered
2) traveling expenses (meals and lodging except if lavish under the circumstances)
3) rentals or other payments req’d to be made as a condition to the continued use or possession, for purposes of trade or business, of property to which TP has not taken or is not taking title or in which he has no equity.
Note re: Congress persons; TP must be away less than a year to use these deductions; traveling on behalf of the Attorney General.
§195 – Start Up Expenditures
(a) Capitalization of Expenditures – except as otherwise provided in this section, no deductions for start up expenditures.
(b) Election to Amortize – at the election of the TP start up expenditures may be treated as deferred expenses and may be prorated equally over such period of not less than 60 months.
(c) Definitions – see p. 177 of Code for details
(d) Election: when and scope (p. 177)
§263(a) – Capital Expenditures: no deductions for any amt paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. This does not apply to: §§ 616, 174, 175, 180, 190, 193, 179, 179A.
§263(A) – Capitalization and Inclusion in Inventory Costs of Certain Expenses
(a) – Nondeductibility of Certain Direct and Indirect Costs
(b) – Property to Which this Section Applies: Property produced by TP; Property for resale
(c) – General Exceptions: Personal Use Property; Research and Experimental Expenditures; Certain Development and other costs of oil and gas wells or other mineral property; Timber; Coordination with §59(e).
(f) – Special Rules for Allocation of Interest to Property by the TP.
§280(A) – see p. 20 of this outline and p. 225 of the Code
XVI. Depreciation
§167(a) – Depreciation deduction – a reasonable allowance for exhaustion, wear and tear (reasonable obsolescence) –
1) property used in trade or business
2) property held for the production of income
(b) – Cross Reference – see §168 for 168 property.
(c) – Basis for Depreciation – use adjusted basis provided under §1011 to determine gain on sale or other disposition of such property.
Special Rules for property subject to lease: property subject to a lease: A) no portion of adjusted basis shall be allocated to the leasehold interest
B) entire adjusted basis shall be taken into account in determining the depreciation deduction with respect to the property subject to the lease.
§168 –Accelerated Cost Recovery System
(a) – Depreciation deduction provided in §167(a) for any tangible property shall be determined by using: 1) applicable depreciation method; 2) applicable recovery period; 3) applicable convention.
(b) –
1) except as provided in para 2 and 3 the applicable depreciation method is:
A) the 200 percent declining balance method
B) switching to straight line for the 1st tax year for which using the straight line method with respect to the adjusted basis as the beginning of such year will yield a larger allowance.
2) 150 % declining balance method in certain cases – para 1 shall be applied by substituting 150% for 200 % in the case of
A) 15 or 20 year property
B) any property used in a farming business (see §263(A)(e)(4))
C) any property (except para 3 property) that the TP elects under para 5 to have the provision of this paragraph apply
3) Property for Which Straight line method applies:
A) nonresidential property
B) residential property
C) any RR grading or tunnel
D) TP elects under para 5
E) Property under (e)(3)(D)(ii)
F) Water utility (e)(5)
(c) – Recovery period (3, 5, 7, etc., - year property)
(d) – Applicable Convention: ½ year convention; mid month for real property (nonresidential, residential, RR grading or tunnel); (3) for property placed in service in last three months of year (p. 139); definitions.
(e) – Classification Property (see p. 141 of Code)
(f)(1) – Property to which section DOES NOT APPLY:
Certain methods of depreciation: TP elect to exclude property from this section; 1st taxable year for which depreciation would be allowed, the property is depreciated under the unit of production method or any method of depreciation not expressed in a term of years.
(g)(1) – Alternative Depreciation System for Certain Property:
any tangible property which during the taxable year is used predominately outside the US; any tax exempt property; tax exempt bond finance prop; imported prop by Executive order (para 6); and property under election (para 7) use §167(a) alternative depreciation system.
(g)(2) – Alternative Depreciation System – a) straight line method; applicable convention under (d) and recovery period – use table on p. 142 under (2)(C).
(g)(3) – Special Rules for determining class life.
(7) – election to use alternative depreciation system.
(i) – Definitions and Special Rules: Class life; Qualified Tech Equip; Lease Term; etc.,
§179 – Election to expense certain depreciable business assets – TP may elect to treat costs of any §179 property as an expense which is not chargeable to capital account.
See p. 172-4 of Code for details
§183 – Activities not engaged in for profit – no deduction is attributable except as provided for in this section. See p. 174-75 for exceptions.
§197 – Amortization of goodwill and other intangibles
§263(a)(1)(G) – No Deductions for Capital expenditures – this does not apply to
§179 property.
§280(A) –see above.
§1016(a)(2) – Adjustment to Basis – proper adjustment to property will be made in respect for exhaustion, wear and tear, obsolescence, amortization, and depletion…
XVII. Recapture
of Depreciation
§1245 (not (a)(4) and (b)(5)-(8)) – Gain from Dispositions of Certain Depreciable Property -
XVIII.
Capital Gains
§1(h)
§1221
§1222
§1211
§1212(b)
§1223(1),(2), (11)
§165(f)
XIX. Quasi
Capital Assets
§1231
§165(h), 1(h)
XX.
Anticipatory Assignment of Income
§1(g)
XXI. Anticipation
of Income
§1241
§273
§1001(e)
ITEMIZED - §
NON-ITEMIZED - §62
MISCELLANEOUS