Complete Income Tax Problems

Camilla built a shed in her yard, which cost her $5000. A few months after it was built, a neighbor accidentally backed his truck into the shed, destroying it. The neighbor's insurance company appraised the shed at $6000 and wrote Camilla a check for $6000. What are the tax consequences to Camilla?

$1000

1. Assume T purchases Blackacre, worth $2000, with $1000 of cash and a $1000 mortgage on which he is not personally liable, i.e., the debt is nonrecourse. What is T's basis? (a) Two years later, T sells the Blackacre to X in exchange for $1000 cash and X's assumption of the mortgage. (Assume Blackacre's fair market value is still $2000.) What is T's amount realized?

$2000; importantly, this property is not underwater

Grandma gives her Grandson a gift of $1,000. What are the tax consequences to Grandma under our tax law? What are the tax consequences to Grandson under our tax law?

For grandma, she cannot deduct the gift. No tax consequences for Grandson (for federal income).

Facebook's CEO, Mark Zuckerberg, is guaranteed $5 million in cash salary each year. Can Facebook deduct the salary?

No problem under 162a1 but under 162m1 it's up until 1mil It's a public company!

Imagine that you can earn $100 per hour practicing law. Assume you also need to get your house painted, and it will cost $80 an hour to pay a painter to do it. You can either spend ten hours practicing law or you can spend ten hours painting your house, but you cannot do both. Assume that you have a marginal tax rate of 30%. After taking tax into account, what will you do?

Paint my house. If you do that, you're down $100.

T trades in farmland used in her business for a parking lot to be used in her business. The farmland is worth $15,000 and has an adjusted basis to T of $10,000. The parking lot is worth $40,000. To even up the exchange, T also gives cash worth $25,000. What are the tax consequences of the exchange to T? What is her basis in the parking lot?

Realized gain: 5k 0 recognized (no boot received) Basis: 35k - 0 + 0 = 35k

Given the Pevsner decision, should Stevie Nicks have been allowed a deduction for her clothing expense? What about the clothing expense of outfits worn on stage by Lady Gaga?

Stevie Nicks probably can't but Lady Gaga probably good—all of it depends on whether the clothes objectively could be adaptable to general use of clothing.

Grandma gives her Grandson a gift of $1,000. Now imagine that Grandma has a marginal tax rate of 35% and Grandson has a marginal tax rate of 15%. Is denying Grandma a deduction under our tax law still offset by Grandson not having to include the gift in income? So Grandma would pay $350, and Grandson wouldn't have to pay $150. This would not offset Grandson not having to include the gift.

This is a loser for the gov - they'd lose $200.

Nancy purchases a car by agreeing to pay the seller $25,000 in 30 years. A few months later, Nancy and the seller agree to settle the debt for $18,000. Does Nancy have COD income? (Consider 108(e)(5))

We should assume there's interest on the loan, so why might someone take this? If interest rates have gone up, the seller might want to reloan it on the new interest rates. Also for the borrower, that's a windfall for you (Kirby Lumber). Another reason is that Nancy is potentially insolvent. But assuming she's not out of money, maybe there's something wrong with the car and Nancy doesn't think she owes that much money anymore. At that case, we wouldn't think she has COD income. 108e5 is an administrative simplicity and just say it's not COD. So Nancy's basis is now 18k.

T trades in farmland used in her business for a parking lot to be used in her business. The farmland is worth $15,000 and has an adjusted basis to T of $10,000. The parking lot is worth $40,000. To even up the exchange, T also gives cash worth $25,000. X, the other party to the exchange in the preceding problem, has an adjusted basis of $50,000 in the parking lot transferred to T in the exchange. What are the tax consequences of the exchange to X?

X realizes: 10k loss (40k - 50k) X recognizes: 0 Basis: 50k - 25k + 0 = 25k

Kevin purchased a light general purpose truck for use in his business on June 5, 2016. His adjusted basis in the truck is $100,000. a. How much is Kevin's depreciation deduction for 2016? For 2017? (Use the $100,000 basis as your starting point). b. Kevin sells the truck for $50,000 on Aug. 11, 2019. How much depreciation can he take for 2019? How much gain or loss on the sale?

a. Five years 200% Double declining depreciation Half year convention - half of depreciation of first year and half of depreciation in the middle of year 6 100k / 5 = 20k (20%) 20k for 2016 80k x 40% = 32k New basis, 48k b. Full year depreciation was 11,520, apply ½ year convention is $5760 AB = 100k - 76,960 = 23,040 50k - 23,040 = 26960

In which of these circumstances is the meal deductible: a. Lawyer takes their client to lunch to discuss the case. b. Client pays for the lunch with lawyer where they discuss the case. c. Lawyer takes their client to a friendly lunch to maintain the business relationship but not to discuss the case. d. A partner takes a law firm associate to lunch to discuss a pending case. e. Two partners go to lunch once a week to talk about a case.

a. Yes! b. Not deductible for lawyer, but might be deductible for client c. Pre-TCJA was nondeductible, but now is deductible d. Yes! e. Yes! Not running into issue with Moss

Nathan has $100,000 in a savings account. He uses the $100,000 to buy a new Tesla and the next day borrows $100,000 from a bank to finance the purchase of a food truck that he intends to use to sell tacos. a. Is the interest on the bank loan deductible? b. What if the loan was taken out to buy the Tesla and he spent his cash on the food truck? Is the interest deductible?

a. Yes, going toward a trade or biz b. No Keep separate accounting! Burden of proof of deductions is on the taxpayer

Tony (landlord) leases his property to Teresa (tenant). Tony, who is an accrual method taxpayer, makes Teresa pay one additional month's rent upfront, when her lease begins. If she pays all her rent over the term of the lease and keeps the premises in good order, Tony will give the one month's rent back to Teresa at the end of the term, with interest. When, if ever, must Tony include this one month's rent in income?

get notes from Hillary lol

Dev has the following capital assets (all of which are potentially eligible for the 20% rate on "net capital gains" under § 1(h)(1)(D), depending on the outcome of the netting rules under § 1222, and none of which falls under a special rate for capital gains such as under §§ 1250, 1231, etc.). Dev makes the following sales in the current taxable year. What are the tax consequences? **Check Capital Gains Problems**

get notes from hillary

Imagine that a colleague of Lana's, who works in the same office, instead lives in Raleigh, right next to the office. Imagine that this colleague used her saved gas money to purchase video games. Would the purchase of the video games be deductible?

no.

1. T is anxious to exchange his farm worth $750K for an apartment building of similar value owned by Y. T seeks nonrecognition treatment under § 1031. Y is interested in selling his property, but only for cash. X wants to purchase T's property for cash, but T would prefer an exchange with Y. a. Since no one can figure out a better way to do it, T sells his farm to X for cash, and then uses the proceeds to purchase Y's property. Does this qualify for tax-free treatment? b. As T's counsel, what alternative sequence of transactions might you suggest to accommodate all the parties involved, while providing T with a more favorable tax result?

this is the triangle thing - focus on who wants the 1031 treatment!

This year Margaret, a single taxpayer, incurs $20,000 of medical expenses. Her AGI is $100,000. How much, if any, of the medical expenses may she deduct under § 213(a)?

12,500 (7.5% is 7,500; 20k - 7,500 = 12,500)

Imagine that Lana has to stay overnight in New York City for her business trip. As a result, she has to pay for a hotel and meals. Are these costs deductible?

Under 162a2, yes because she's away from home.

In Year 1, Skyler purchases an apartment building (a "wasting asset") for $100k. It declines in value $20k each year for 5 years. Skyler is allowed to depreciate the building on a straight-line method (creating a $20k depreciation deduction each year for 5 years). In Year 6, Skyler spends $100k on the building, restoring it to its shape at the time of purchase. After the final depreciation deduction is taken, what is Skyler's basis in the building? When Skyler spends $100k in Year 6, is she able to deduct the $100k?

$0 at the end; treat it like she bought the building again, starts the depreciation all over again

In year 1, T purchases land from Y for $12,000, consisting of $3000 cash and a $9,000 nonrecourse purchase money note (i.e., a loan from Y to T secured only by the land). In year 4, the land has declined in value and is worth only $6,000. At that time, T transfers the land back to Y, who takes the land in full satisfaction of the nonrecourse debt. The balance of the loan at that time was still $9,000. T's adjusted basis at the time he transferred the land back in year 4 was $8,000, due to deductible losses that he incurred. What is T's amount realized on the transfer back to Y? What is T's gain? Review Reg. 1.1001-2(a)(1) & 1.1001-2(c) Example 7.

$1000 of gain; so $9000 AR for T (i.e., amount of NRD)

Roy donates $5000 to his favorite charity and the charity sends him a gift certificate to a local restaurant for $100 as a "thank you." Roy hates the restaurant and throws the gift certificate in the trash. What is the amount of Roy's charitable contribution?

$4900

Andre purchased stock several years ago for $200. Andre decides to sell all of the stock for $700. What's his gain on sale?

$500

Assume the same initial facts as problem 3, except now the $9,000 debt is recourse (i.e., T is personally liable). T transfers the land back to Y when it's worth $6,000 and Y agrees to forgive the $9,000 recourse debt. T's adjusted basis in the land at the time is $5,000, due to deductible losses that he incurred. What is T's amount realized? What is T's gain? Does T have any other income from the transaction? Review Example 8 from 1.1001-2(c).

$6000 AR Gain on the sale = $1000 (6k-5k) + $3000 of COD (9k RD - 6k FMV) - Keep gain and COD separate!! Use the FMV! In this case

Keeley attends a silent auction for a charitable organization. All of the items in the auction were donated to the organization. Keeley bids $100 for a bottle of wine, which sells at a store for $25. Keeley wins the bottle. How much can she deduct?

$75

Imagine that you can earn $100 per hour practicing law. Assume you also need to get your house painted, and it will cost $80 an hour to pay a painter to do it. You can either spend ten hours practicing law or you can spend ten hours painting your house, but you cannot do both. Assume that you have a marginal tax rate of 30%. What is the amount of imputed income that you create from painting your house?

$800

C is the CEO of company Q, which is headquartered in New York. C takes a 5-day business trip to Austin, flying there and back on the company jet. C's spouse, D, also comes along for fun. Tax consequences to C?

- 132(h)(2)(A): any use by the spouse shall be treated as use by the employee o But only for a(1) or a(2)! o There is no spouse rule here - So if it's nontaxable to C, then it's also nontaxable to D - This is a working condition fringe! - Income attributed to the employee, not the spouse - Anyone they bring along if they get a free seat

Zoey purchased 100 shares of stock several years ago for $100 ($1/share). The price of the stock has since skyrocketed. Today, Zoey decides to sell one share of stock, and the sales price for the one share is $200. What is the basis in the share sold? What is the gain from the sale?

- If all the shares are worth $1, then that's the basis; $199 of gain - $99 basis in the rest of the block

1. What are the tax consequences (if any) to S (S, a senior vice president of D, a retail department store, purchase a refrigerator from D's appliance department. D's policy is that employees can purchase any appliance for 20% off the retail price. Refrigerators retail for $1000 at the store. D buys the refrigerators wholesale for $800.) except that only senior executives at D are eligible to get a 20% discount?

- It would be taxable because it would not qualify under the nondiscrimination clause in 132(j)(1) - This is only for a(1) and a(2)

What are the tax consequences (if any) to S (S, a senior vice president of D, a retail department store, purchase a refrigerator from D's appliance department. D's policy is that employees can purchase any appliance for 20% off the retail price. Refrigerators retail for $1000 at the store. D buys the refrigerators wholesale for $800.), except that the wholesale price of the refrigerators is $900?

- It would be taxable because the gross profit percentage would only be 10% - "To the extent" so you can have your discount be a fringe benefit up until the gross profit percentage - 10% of the discount is excluded under 132; the additional 10% of the discount is income; thus $100 would be taxable

F, a flight attendant of airline company A, decides to fly to Iceland for vacation. As is common for airlines, A allows its employees to fly standby for free with their families. F and F's spouse fly standby for free to Iceland under this policy. Are there tax consequences to F?

- No because the airline is in the business of selling flights - Classic no-additional-cost service (132b) - Employer is not incurring a substantial additional cost - If they knew ahead of time and booked it, then it would be taxable because the employer could be forgoing revenue 132h—ONLY for a1 and a2 do spouses and dependents count as employees

S, a senior vice president of D, a retail department store, purchase a refrigerator from D's appliance department. D's policy is that employees can purchase any appliance for 20% off the retail price. Refrigerators retail for $1000 at the store. D buys the refrigerators wholesale for $800. Is S taxed on the 20% discount?

- No; 132c1 (qualified employee discount)—does not exceed the gross profit percentage, which was also 20% - The rule is that employers have to recover their cost

You are a law firm associate who occasionally works late nights. On those nights, your employer pays for you to order takeout and eat it at your desk while you sadly toil away, trying not to think about how much fun your friends are having. Taxable to you?

- Not taxable because could qualify under 119 because it's for the convenience of the employer to have you keep working - Also this falls under de minimis! 132(a)(4); the key word here is "occasional," also if it was more frequent, then it could be 119 o Flagging that this is not a working condition fringe because food is not a business expense o Notice that's different than summer associates eating lunch—that's a business lunch, so it'd be a working condition fringe

Margaret also paid $11,000 of property taxes on her home this year. How much can she deduct? Would your answer change if she didn't incur any medical expenses this year?

10k (limit in 164b6) (per household)

Let's change the facts of Encyclopaedia Britannica (EB) such that instead of hiring outside writers, EB does the writing in house. What if EB had not hired an outside firm to compose the books but instead added it to the work load of their existing employees? Any different result?

263A would say same result if you pay someone outside versus inside—expenses capitalized.

If a taxpayer purchases a building that will be used as a rental building, must the cost of the building be capitalized or can it immediately be deducted?

Capitalizable (Section 263): rental income generates over many years. This is a wasting asset, so it will take a depreciation deduction.

Grandma bought stock for $500. Now imagine she dies in Year 5, when the stock is worth $1400. At that time, she leaves the stock to Granddaughter in her will. Granddaughter sells the stock in Year 7 for $1400. Who recognizes income now? In what amount? What is the amount realized? Basis?

Amount realized is $1400 - so what's her basis? i. Basis would be $1400 because that's what it's FMV at the time of transfer (1014) ii. So the gain/loss is $0 So where did the $900 of tax go in THIS context? - IT DISAPPEARS!

Joey owns a successful little café. He spends $100k paying rent for the café and employee wages in the current year. These are operating costs that don't produce any particular asset, like land. Should he be able to deduct the costs immediately? (Consider why or why not by thinking about the Haig-Simons definition of income.)

Deduction—the money hasn't been converted to some other asset that we can point to, it's gone and spent. - Juxtapose with spending it on vacation—not deductible because personal consumption

Shawn is single and is a solo practitioner lawyer.[1] After deductible business expenses, he had $200,000 of net income from his law practice for 2022. How much is Shawn's section 199A deduction? (Sole proprietor and claims standard deduction)

He's a lawyer, so his taxable income is 200k - 12,950 = $187,050 He is over the taxable income threshold for single individuals, and is in a specified service T/B ("law"), so he gets no 199A deduction.

Devante has $60,000 of salary income. He also won $20,000 playing blackjack. He has lost $25,000 playing poker. What is his taxable income for the year?

First, he needs to include the gross amount of his gambling winnings (20k) less the cost of the specific wagers. He can deduct gambling losses up to the amount of the winnings. So he'd be taxed on his $60k salary. 165(d) This is basketing! Your losses can't exceed the gains you got from the activity. Facts and circumstances determine whether or not you're in a trade or business—business expense (above the line) versus itemized deduction (below the line); impacts where you take the deduction, which does matter. Above the line is better.

Jack is standing on the corner one day when he sees an automobile, driven by a drunk driver, strike and seriously injure his wife, Diane. Diane sues and recovers $450,000 for medical expenses, $35,000 for lost profits (from being out of work during her recovery), and $500,000 for punitive damages. She also recovers $50,000 for her emotional trauma. Jack also sues and recovers $200,000 for loss of consortium and for the emotional trauma he suffered as a result of seeing the accident and the injury to Diane, plus $30,000 for his psychiatric bills. What amount, if any, should be reported as income by (a) Diane and (b) Jack?

For Diane, she'd have to report 500k of income because she can't report punitive damages under 104. You can't take both your medical expenses and then pay for them and take a deduction. Lost profits here is tied to a physical injury. The 50k is excludable because it's tied to her injury, but standing alone, she wouldn't have been able to. For Jack, unless the emotional trauma is tied to an injury, he cannot use 104 for deductions. Thus he'd report the total 230k as income. Congress did not say that it has to be limited to the actual limited person—the limit is in tort law.

Grandma gives her Grandson a gift of $1,000. Imagine that Grandma and Grandson both have marginal tax rates of 35%. How much tax revenue is raised or lost as a result of the transaction under our tax law? Does the transaction affect tax revenue differently if, instead, we gave Grandma a deduction for the gift and required Grandson to include the gift in income?

For Grandson, $350 is lost. But for Grandma, she pays the $350, so nothing is lost in total. The transaction would not affect the revenue differently. A gift is a nonevent for tax purposes! The benefit of a deduction is the amount of the deduction times the tax rate.

Sam owns Google stock, which he purchased for $500. It is now worth $2000. Sam swaps it for a $2000 painting. Is there realized gain? If so, how much? See 1001(a) and Treas. Reg. 1.1001-1(a).

Gain of $1,500 If you swap and it's materially different, than that's going to be included in gain The value of what you got is the amount realized

Henry decides to start a taxicab business. As a result, in year 1, he uses $50k to buy vacant land, $100k to purchase taxicabs, and $7k to buy gasoline (all the gas is used in year 1). The $50k land retains its value throughout the year. The taxicabs decline in value by 10% (as a result of the wear and tear from use) over the course of the year. What, if any, deductions should Henry be allowed? (Consider your answers in light of the Haig-Simons definition of income.)

Gas fully deductible—fully used in year 1 and is not converted into an asset or is PC. For the taxis, a portion should be deducted (10% of 100k) - don't give a full deduction when it still has value (give a depreciation deduction) Land is not a deduction, no change in wealth there

1. Rachel has the choice to invest in one of the following two assets: a. A $10,000 bond that will pay $1,000 interest each year for two years (which is taxed at ordinary income rates). b. $10,000 of stock that will pay no dividends and that Rachel expects to be worth $12,100 in two years when she will sell it. (Gain on sale will be taxed at the 20% capital gains rate.) If Rachel were otherwise indifferent between these investment choices, how might tax considerations influence her behavior? You should assume that she is in the 37% marginal tax bracket.

Get notes from Hillary lol

A single taxpayer purchases a house for $1M and sells it for $1.5M. The taxpayer has been using the house as his principal residence for the past 5 years. What, if any, income from the sale of the house is included in the taxpayer's gross income?

Given that this has been his principal residency and he hasn't used the exception in the past two years, the sale can be excluded up until $250k. So, the other 250k is reported as income.

Assume that, instead of selling the stock, Grandma gifts it to Granddaughter in Year 3 when the stock has appreciated to $1100. Granddaughter then sells the stock in Year 5 when it is worth $1400. Who has income on sale? In what amount? What is the amount realized? The basis?

Granddaughter has income on the sale. Her taxable income will be $900. The amount realized is $1400, but her basis will be the original $500 because it is the original value of an asset for tax purposes. We're comfortable that this is a gift here. But with basis for a gift, we go to 1015 - be mindful if the FMV is greater or lower than it

In 2022, Toby purchased a new machine for use in his business for $2,000,000. What amount, if any, can he deduct in 2022? (See Section 168(k).)

He can deduct everything! Basis is 0

1. Imagine that you can earn $100 per hour practicing law. Assume you also need to get your house painted, and it will cost $80 an hour to pay a painter to do it. You can either spend ten hours practicing law or you can spend ten hours painting your house, but you cannot do both. Assume that you have a marginal tax rate of 30%. a. Prior to taking tax into account, what will you do?

Hire a painter. Practice law.

Consider a couple trying to figure out their family finances. One partner earns $50,000 and is the primary wage earner. The non-primary wage earner has two options: (a) working and making $10,000, or (b) not working. If the non-primary wage earner decides to work, the couple will have to hire someone to care for their house and children. This will cost $8,000. The $10,000 that the non-primary wage earner earns would be taxed at a 30% rate. In a world without taxes (and assuming that the couple just wants to maximize their economic return), what would the non-primary wage earner do?

Hire the nanny. They can make $2000 more

What if instead of giving use of the ski condo, Wendy gives Sandy and Teresa each a check for $2000. Are Sandy and Teresa taxable on the amounts received? Is it important to know if Wendy deducted the $2000 payments as a medical expense?

I think this is still taxable (akin to the tips situation). Why does giving cash different than the Duberstein test? Same form of payment for the services that you received. Also, cash has a bearing on state of my mind because it feels more transactional than a personal gift. So while there may be a rule that family can't give cash to each other, it feels more like a social norm. - Calling it something in the hopes that it's treated a certain way, does not mean it's going to be treated that way.

In the Flowers case, what if Mr. Flowers continued to practice law in Jackson while also traveling to Mobile for the railroad's work? Would he be allowed any "away from home" deductions?

If he is working as a lawyer and doing it with the railroad, if he's traveling to Mobile this is now a biz trip. If it's two different jobs, and you can only have one tax home, what's the principal place of biz? The minor job is "away from home." This is answered by facts and circumstances.

1Joe the plumber (single) earns $100,000 of net income working as a sole proprietor. Jack the plumber (single) earns $100,000 of net wages working as an employee of Plumber Co. Assuming they both take the standard deduction and have no other income, is their tax liability the same?

Joe gets 199A deduction even though being a plumber may be a reputational/skill as principal asset because he's below the threshold. Jack's going to look like 87,050. Joe's going to look like $67,050 (100k QBI x 20% = 20k 199A deduction); 100k - 20k - 12,050 = 67,050. Is this fair? There are certain risks that come from being a sole proprietor

If a taxpayer hires a construction company to build a rental building herself, must the taxpayer capitalize the construction costs or can they immediately be deducted?

If you go outside and don't do it internally, that's clearly capitalizable.

Dustin purchases a truck by agreeing to pay the seller its value in five years. As a result, the seller has loaned Dustin the value of the truck. Later, when it comes time for payback, the seller/lender claims the value of the truck was $30,000 and Dustin says it was $20,000. They settle at $25,000, and Dustin pays that amount. What, if any, COD income does Dustin have? Under what doctrine?

In this case, it would be treated that the agreement was originally 25k under the contested liability doctrine. If you never agreed on the loan, then no COD!

Philip and Elizabeth each have $120,000 that they need to decide how to invest. Prior to investing their money, both Philip and Elizabeth rented homes for $1000/month, or $12,000 per year. Elizabeth decides to invest her $120,000 in taxable bonds, which will earn 10% interest, or $12,000, per year. Philip uses the $120,000 to buy a house (outright - with no mortgage). Philip's house does not appreciate or depreciate at all over the course of a year. Since Philip now owns and lives in his house, he no longer has to pay rent. Elizabeth still has to pay rent How are Philip and Elizabeth taxed on their investment returns? Is there a difference? Is it fair?

Interest is taxed! (61a definition). Elizabeth is taxed on $12k income and Philip won't have a taxable income (he has $12k imputed income).

A German car manufacturer makes 10 limited edition cars. The cars are each made individually, but they have identical design and parts and are virtually indistinguishable. Each car was assigned a serial number, 1 through 10. CJ and Evangeline, who are neighbors, each purchase a car for $500,000. CJ gets car #7 and Evangeline gets car #8. The cars are shipped with the title documents, which reflect the serial number. By the time the cars arrive in the United States several months later, the market price is $750,000. Evangeline calls CJ and says, "Call me superstitious, but 7 is my lucky number. Would you be willing to swap our cars?" CJ calls you for advice. Should he be worried about the tax consequences of the swap?

It's probably realization because the bar for realization is so low. BUT maybe you could argue they're materially the same thing—the property entitlements are the same.

Joyce loans Jim $100,000 in year 1. In year 5, Joyce decides to forgive the debt. Does Jim have income and, if so, in what amount? Why? What if Joyce were Jim's sister?

Jim must include in income the amount of the discount (Sec. 61a12). If it's cancelled as a gift, the borrower does not have to include the discount in income. Jim no longer has the liability, so he's better off and now has 100k of income (cancellation of debt (COD) income). Relatives should make us think of gifts!

Jake signs a contract with an employer in Year 1, which is notarized. In this contract, the employer promises to pay Jake for his Year 1 services on Jan. 1 of Year 2. Jake is a cash-basis taxpayer. Does he have income in Year 1?

Neither doctrine applies. Doesn't have a right to get paid until year 2 (no constructive receipt). No economic benefit applies because the money hasn't been set aside like the Pulsifer case! It's just an unfunded promise—money is not sitting anywhere. Just a promise won't trigger economic benefit. - Subject to the payor's creditors: if the employer has a bunch of debt, it's still under the payor's creditors

1. Piper purchased a house for $100K. She paid for the house in cash. During the first 5 years, it appreciates in value. During the next 5 years, it depreciates in value. Did a realization event occur in any of these years? a. In year 12, when the house is worth $120K, Piper borrows $120K from the bank on a nonrecourse basis (using her house as security for the debt). Has there been a realization event in year 12? b. In year 13, she sells the house for $120K. The buyer agrees to take the property subject to the mortgage, so no cash changes hands. What are the tax consequences to Piper?

No! a. No b. Now there has been a realization event. AR of 120k - 100k of basis = $20k of gain

Lana the lawyer pays a daycare center to watch her 2 children while she goes to work each day. Are the daycare fees a deductible business expense? Why or why not?

No! Family costs are nondeductible.

Imagine that, in Midland Empire Packing Co., there had been no oil seepage necessitating the concrete lining. Instead, the taxpayer installed the concrete lining to provide better insulation, thereby allowing the meat to "keep" longer. Should the taxpayer be permitted an immediate deduction for the cost of the lining?

No! This is more of an improvement that prolong the life of property, make it adaptable to a different use, increasing the value. Key fact is that there's no oil seepage.

1Lindsay (also single) is an architect who earned $300,000 of net business income (after expenses) for 2022. Lindsay is the sole owner of her business, has no employees, and rents her office space. How much is her section 199A deduction? (Sole proprietor and claims standard deduction)

None - you don't own depreciable property or pay employees, is over the wage limit, even if she's not in the banned service

I paint your house and you agree to pay me for this service in 3 years. Later, you say the paint job was worth $500 and I say it was worth $1,000. We settle on $750 and you pay that amount. Does 108(e)(5) apply? Is there COD income?

Not 108e5—this is contested liability problem. Also, this is not property! This is what happened in Zarin—the chips were not property, so doesn't implicate 108e5.

Carly is a tax lawyer but also fancies herself to be a social media influencer. Carly spends $3000 each year buying clothing and make up for her social media posts in the hopes of securing lucrative brand ambassador opportunities. She creates these posts at night and on weekends when she is not working at her law firm. After 6 years, Carly (sadly) has not earned any revenue from her social media presence. Can Carly deduct the $3000 she spends on clothing in make up in year 7 as a business expense?

Not unless it passes the test under Pevsner. Leaving aside Pevsner, whether this was actually a hobby or not, truly in pursuit of profit as a trade or business *Sec. 183 hobby deduction rules suspended until the end of 2025 under TCJA; allowed hobby deduction, but limited to hobby earnings (like gambling) Year after year and nothing is changing—but if you are generating a profit 3 out of last 5 years, then you are a biz

Consider a couple trying to figure out their family finances. One partner earns $50,000 and is the primary wage earner. The non-primary wage earner has two options: (a) working and making $10,000, or (b) not working. If the non-primary wage earner decides to work, the couple will have to hire someone to care for their house and children. This will cost $8,000. The $10,000 that the non-primary wage earner earns would be taxed at a 30% rate. In a world with taxes, what will the non-primary wage earner do? Do you think this is good tax policy?

Not work. They'd be down $1000. No! To fix this, with childcare, is to let people take a deduction. Taxing people on the imputed rental income? So one doesn't become more favorable than the other? But it's administratively hard.

Rebecca and Ted both have AGI for the current taxable year of $100,000. Rebecca donates $25,000 to charity. Ted incurs $25,000 in medical expenses. How much may each deduct?

Rebecca can deduct the full 25k. Ted can deduct $17,500. Once you're over the floor, your deduction is unlimited whereas the ceiling is the opposite.

Dani has a portfolio of stocks and bonds worth $200,000. The annual income from the portfolio is $12,000. Dani borrows $50,000 from a bank and uses the proceeds to buy a Mercedes. Since he bought a car, the interest on the loan is personal interest. What might he do to maintain the same economic profile but achieve a better tax result?

Sell 50k worth of stock to buy the car, then borrow 50k from the bank to invest in more stock. If you use the loan to buy stocks and bonds, that's deductible interest.

Philip and Elizabeth each have $120,000 that they need to decide how to invest. Prior to investing their money, both Philip and Elizabeth rented homes for $1000/month, or $12,000 per year. Elizabeth decides to invest her $120,000 in taxable bonds, which will earn 10% interest, or $12,000, per year. Philip uses the $120,000 to buy a house (outright - with no mortgage). Philip's house does not appreciate or depreciate at all over the course of a year. Since Philip now owns and lives in his house, he no longer has to pay rent. Elizabeth still has to pay rent. a. How did Philip's and Elizabeth's economic positions change as a result of their investments? Are they richer and, if so, by what amounts?

She adds $12k because of the interest, and Philip is also better off by $12k because he no longer has the obligation to pay rent.

An employer puts money in a bank account in Abby's name in Year 1, but the money cannot be withdrawn until Year 2. Does Abby have income in Year 1?

She hasn't constructively received the money because she is not standing in the way of her own money. In terms of economic benefit, is time the only thing standing in your way—but do the employer's creditors have access to this? Assuming nothing stands in the way in terms of Abby and getting that money (employer's creditors can't get it), THEN she'll have income in year one under economic benefit.

1. In Year 1 T purchased property ("Blackacre") from S for $2000, which was Blackacre's fair market value. What is T's basis in Blackacre if T funds the purchase in the following alternative ways? (Assume T is personally liable for all borrowings, i.e., the debt is "recourse"): (a) by paying S $2000 in cash from T's own pocket and then borrowing $1000 from a bank; (b) by paying $1000 from his own pocket and paying S another $1000 that T borrowed from the bank; (c) by assuming an existing mortgage of $1000 encumbering the property and paying $1000 of T's own cash to S; or (d) by paying S $1000 cash, executing a note for the $1000 balance, and giving S a purchase money mortgage.

The answer to them all is 2000! This problem is about variations of the same thing. RULE: Include recourse debt in basis as if taxpayer paid cash. I have a 2k basis in property if: - I paid cash and later took out a loan to reimburse myself - Paid for the property directly with the proceeds of a loan - Paid for the property by assuming existing debt on the property - Paid for the property with purchase money dept (giving an IOU to the seller)

Hawkins Corp issues $5,000,000 of bonds to a group of banks (often called a syndicate). The bonds pay interest at 3%. Interest rates rise and, as a result, the banks and Hawkins Corp settle the loan for $4,000,000. Why are the banks agreeing to less than their principal amount? Does Hawkins Corp have cancellation of debt income and, if so, in what amount?

The banks are agreeing because given the interest rate rose, the banks could resell the loan at the higher interest rate. Hawkins would recognize the discharge of indebtedness income of $1mil (61a12). When the banks settle, Hawkins has 1mil in equity/COD income. What's in it for the banks is the interest, so if interest rates go up, they don't want to be stuck in this loan, so it might make sense to take less in return if they can get it back now so resell. This is a windfall for Hawkins! It has gained $1mil and it is taxed on that windfall.

Earl gets run over by a train, and his wife Ruby collects $500,000 of life insurance. Does Ruby have taxable income from the insurance proceeds?

The proceeds would be tax-free under Sec. 101. Otherwise without 101, this is clearly income! That's why we need a statute from Congress, just a policy choice to not discourage people from getting life insurance. Bet element like annuity, but it's the opposite bet—you're betting that you're going to die.

Beatrice has $100k in cash. She uses the $100k to purchase vacant land, which retains its value throughout the year. Should she get an immediate deduction for the cost of the land? (Consider why or why not by thinking about the Haig-Simons definition of income.)

Thinking about HS, she's exchanged 100k of liquid assets to land, nothing has changed. Her net worth has not gone up or down. So there's no basis for a deduction

Lana works out of an office in Raleigh. A lot of her family lives in Chapel Hill. As a result, Lana decides to live in Chapel Hill and commutes an hour to downtown Raleigh and an hour back every day. Are her commuting expenses deductible business expenses or nondeductible personal expenses?

This is a personal choice to live in Chapel Hill; therefore, the commuting expenses aren't deductible.

Lana the lawyer practices in Chapel Hill. Imagine that she was required to go on a one-day business trip to New York City to see a client. In order to do so, Lana has to fly to New York City and take cabs while there. Are these expenses personal expenses or deductible business expenses?

This is deductible because it's a biz trip. Chapel Hill is her tax home and she's going away from her home. This is not a commute—non-commuting biz travel is deductible under 162.

Sandy the surgeon successfully performs a difficult operation on accident victim Wendy. Therapist Teresa helps Wendy recover the full use of her damaged muscles. Wendy pays her bill and then, unexpectedly, offers both Sandy and Teresa free use of her ski condominium. Sandy and Teresa each accept Wendy's offer and each spends two weeks at the ski condo. Suppose that Sandy and Teresa ask your advice on whether they must, or should, report the value of the use of the ski condo as income. What do you tell them?

This likely would be taxable because it was a gift due to the services Wendy received from Sandy. Wendy's state of mind must be detached, disinterested (Duberstein). Closely connected to the services. But this is not a kickback for better service going forward because it's not guaranteed that you'll be going back. If we don't think about it from a medical sense, then we could argue that Wendy's state of mind is separate. Also, this isn't transferable, but that doesn't matter as much because we only look at the state of mind.

Lana has to drive from her office in Raleigh to Durham to go see a client. Should this expense be deductible?

Yes

Brenda owns a bakery. This year, the bakery earns 500,000 of gross income. Brenda pays Carl, the bakery's delivery boy, $30,000 in employee wages this year. As part of his job, Carl drives deliveries around town and pays for his own gas. He spends $1,000 in gas related to making deliveries this year. Can Brenda deduct the $30,000 expense? Can Carl deduct the $1000 expense? See Code section 62. Does your answer change if Brenda reimburses Carl's gas expenses?

Yes, Brenda can deduct the 30k expense (reasonable allowance for salary in 162; and she owns the business according to 62a1). Carl can't deduct the gas (he's an employee). He can subtract them if Brenda reimburses him. These are both business related/not personal Net zero for Carl to report; offsetting the reimbursement (non-event for tax purposes) What about if Brenda pays directly for Carl's gas? - No difference to Brenda - But for Carl—working condition fringe benefit! (132(d)) o Employer pays for stuff that's a biz expense, not income to you

Imagine that the lawyer from question 2 finds a housepainter who needs legal services. The lawyer and the housepainter agree that the lawyer will provide the housepainter legal work in exchange for the housepainter painting the lawyer's house. What are the basic tax consequences of this transaction?

You get taxed for the fair market value of the services you'd receive. Revenue Rules don't have the same authority, but the IRS will honor these. This is INKIND income - this is a market transaction, a barter exchange that we can quantify. These are subject to tax.

1. Suppose C purchases stock for $2000 and gives the stock to her daughter, D, at a time when the fair market value of the stock is $1000. What amount of gain or loss (if any) is recognized by D on a sale for the following amounts? a. $2500 b. $500 c. $1500

a. $2500 i. Gain of $500 ii. If start to finish you have a gain, that's what you report! b. $500 i. Loss of $500 ii. For purposes of determining loss, you use the FMV; plugging in $1000 as the basis. If the property is going down at the time of the gift and down at the time of the sale, 1015 is saying only the donee has to pay their part for the loss. iii. We're gonna tax you on all your gain, but not let you deduct all the loss. a. $1500 i. Neither gain nor loss. ii. Depreciation while the donor held it, but then it starts appreciating but not enough to the original amount. So Congress says you can just report nothing.

1. In 2022, Chloe earned $55,000 driving for Uber at night (this includes tips, and is the amount she received after Uber subtracted its fee).[1] Chloe spent $5,000 during the year on gas and car maintenance expenses related solely to driving Uber customers. Chloe is also a fulltime employee of a company, from which she earned $40,000 of salary in 2022. She is single and has no itemized deductions. a. How much is Chloe's section 199A deduction? b. How much adjusted gross income does Chloe have for 2022? c. How much taxable income does Chloe have for 2022?

a. 10k 55k (Uber) - 5k (Uber expenses) = 50k QBI NOT THE SALARY (40k) b. AGI: 90k (55k + 40k - 5k) c. $67,050 (standard deduction for 2022 = $12,950)

1Randall purchased a nonresidential building to hold for investment for $390,000 on October 3 of Year 1 and placed it in service the same day. He held the property until February 7 in Year 5. a. What is his depreciation in Years 1-5? (How much in each year?) b. Randall sold the building on February 7 in Year 5 for $450,000. How much gain results from the sale?

a. 39 years because it's nonresidential property; straight line method; midmonth $10k/year But mid-month convention applies—2.5 months out of 12 months of the year; this equals $2083 for year 1 But when he holds it all year, it's 10k - we only worry about the convention when he doesn't hold it for the whole year b. Treated as selling the midpoint in February (1.5 months /12) = 1250 depreciation AR - AB = Gain But we need his adjusted basis 30k + 1250 + 2083 = 33,333 390,000 - 33,333 = 356,667 So, 450k - 356,667 = 93,333 GAIN

You represent a UNC football player who was selected first in the NFL draft by a newly established expansion team. The team has offered to pay your client a signing bonus of $1 million, payable at the end of five years. (The bonus is on top of salary and is not contingent on your client's performance.) You are concerned about the team's ability to pay the bonus after five years, because you know that a new football team is unlikely to be profitable in the first 5 years. The team operates as a corporation. All of the shares of the corporation's stock are held by a wealthy investor. Your client would like to not pay tax on money he hasn't yet received, but also wants to protect himself against the risk of not getting paid. What do you advise him about the following options for structuring the deal? a. The corporation buys an annuity in the player's name (i.e., the player is the annuitant). The annuity provides that the annuitant will receive one payment of $1 million after 5 years. The corporation pays $600,000 for the policy. It is nontransferable and cannot be accelerated. b. The corporation contributes $600,000 to a trust. The trustee is directed to invest the $600,000 in Treasury bonds. The interest on those bonds over the next 5 years will total $400,000. The player is the sole beneficiary of the trust, and the trustee is directed to pay the player $1 million after 5 years. c. Same as (b), except the corporation is the beneficiary of the trust. After 5 years, the corporation will use the trust proceeds to meet its contractual obligation to the player. d. The corporation signs a contract to pay the player $1 million after 5 years. The wealthy investor signs a guarantee of the corporation's obligation, which will make the investor personally liable to pay the $1 million if the corporation cannot meet its contractual obligation.

a. Looking more like a trust—taxable now under the economic benefit doctrine; money has been irrevocably set aside. But the corp's creditors don't have right to it because it's in the player's name. Year 1 should be 600k. Amt set aside for you is how much is in year 1. 600k basis with 400k interest under Section 72 (annuity rule). As if he was paid 600k and went out and bought an annuity, payout will be taxed. b. Same economic benefit doctrine analysis. 600k in year 1. c. Player gets his deferral; this is Minor. At the risk of payor's creditors, so he doesn't have to report it. d. Not taxed in year 1; not economic benefit or constructive receipt. Guarantee is not a trust, still leaves open the possibility that you won't get paid, still subject to creditors. No income until year 5. Anytime you see a K, you must see the terms. A mere contractual obligation to pay is not the same as funds being set aside for you (just a promise w/o money set aside).

1Kate is a taxpayer who pays an effective tax rate of 30% at all relevant times. On January 1 of this year, Kate buys a machine for a purchase price of $1,000,000 that will be useful in her business for 5 years. The salvage value of the machinery, that is, the estimated fair market value of the machinery at the end of its useful life, is negligible. a. May Kate deduct the full cost of this machinery upon acquisition, i.e., today? Why or why not? b. If Kate were entitled to deduct the full cost of the asset today, how much would she currently save in taxes? If she were required to wait until the end of year 5 to deduct any portion of her cost, how much would she save in taxes? If she were required to recover her cost in the asset by deducting a ratable portion each year she used it in her business, how much would she save in taxes? c. Of the three methods of cost recovery described above, which would Kate prefer and why?

a. No because it's a wasting asset and thus needs to be capitalized. b. 1mil X 30% = 300k; it all is broken up to be 300k of tax savings c. She would prefer to deduct it all up front because of the time value of money

1. Walter owns a barn used in his farming business, which he purchased for $100k. It is damaged by a tornado, and he fixes it at a cost of $5k. (a) May Walter deduct the expense of purchasing the barn immediately, or must he capitalize it? (b) When he repairs the barn, can he deduct the cost immediately as a repair or must he capitalize it? (c) Would Walter be eligible for a loss under § 165(c)? (d) If he is eligible for a loss under § 165(c), do you think he can take both a loss and a deduction for the repairs? (e) Describe the tax treatment if Walter takes a loss deduction under § 165. Describe the tax treatment if, instead, Walter takes a repair deduction under § 162(a).

a. No! b. Deductible, unforeseeable event c. Yes get d and e from Hillary

1. Joyce loans Jim $100,000, which Jim agrees to repay in 5 years. a. Does Jim have income on the $100,000 when he receives the loan? Why or why not? Consider the Haig-Simon definition of income. b. When Jim pays back the $100,000 to Joyce, does he get a deduction?

a. No, because even though he's temporarily ascending to wealth, it's offset by Jim repaying the loan. b. No!

Susan owns her own legal practice and rents an office space in downtown Chapel Hill. On nights and weekends, Susan often works at home in her study. Susan and her family also use the study for personal purposes. The use of the study is divided about equally between personal and work activities. (a) May Susan deduct half the cost of the study as a business expense? (See 280A(c)). b. Same as (a) except the study is used exclusively for work. May Susan deduct the cost of the study as a business expense? c. Same as (b) except Susan sees clients in the study. May she deduct the cost of the study as a business expense?

a. No. Not used exclusively as her business. b. No - it's not the principal place of biz. c. Must be in the normal course of trade or biz. Is this in the normal course of trade or biz? If this is normal, then it might qualify, but we need more facts. Unclear if it's subjective or objective, but court won't push back if you can prove how you operating according to your biz.

1. Which of these exchanges (if any) would qualify for section 1031? a. An exchange of Google stock for Facebook stock b. An exchange of $50,000 of farmland for $50,000 worth of farm equipment c. An exchange of $50,000 of farmland for $50,000 worth of farmland d. An exchange of $500,000 of farmland for a $500,000 apartment in New York

a. Not real estate, so doesn't apply. b. Farm equipment is not real property, doesn't qualify. c. It is real property for real property. Needs to meet the use property where the old property is held for trade or business or investment, and that trade or business can't be selling real estate. Need to know what the purpose of holding the farmland is. d. Applies for 1031. Doesn't matter that they're different types of property; they're still real property that fits the use requirement.

Diane pays $6000 for an annuity that will pay her $1000 per year for the rest of her life. Diane is expected to live for 10 years. (Total should be $10k) a. What is the exclusion ratio under 72(b)? b. What is Diane's income in year 1 from the annuity? c. What is her income in year 2 from the annuity? d. What happens if Diane dies on the first day of Year 3 (and therefore does not receive annuity payments after Year 2)? e. If Diane lives 11 years and therefore receives a $1,000 payment on the annuity in Year 11, what is the tax treatment to Diane from receipt of this $1,000 payment?

a. We'd say her basis is 6k—how do we allocate that between basis recovery and what she has to report? Make a fraction and multiply it by the payment 6k (just the basis—how much did you spend)/10k (expected return under the contract) = 60% (be careful! Sometimes it's how much to report as income, versus not) This is an EXCLUSION ratio; so 60% is excludable basis recovery b. $1000 is the total, she'd be taxed on 40% of it, so her taxable income is $400. c. Same thing—$400! d. $4800 of unrecovered basis (6k - 1.2k) - take a loss; when you die, you have one more tax return for the year you die, so she gets to claim this as a loss Where is this in the code?? 72b3—the amount of such unrecovered investment shall be allowed as a deduction to the annuitant for the last taxable year e. She's recovered her whole basis, all 6k (600 every year for ten years), so now she has $1000 in income (72b2)

Marie owns an apartment building. The building's roof is currently in violation of the city's safety code. Marie repairs the roof of the building to bring it into compliance with the city's safety code. Other than any benefit from complying with the city's safety code, the repairs do not increase the value of the building. Should the cost be deductible?

get notes from Hillary

A hires B to paint her office. They sign a contract in year 1 where A has to prepay for the services, which will happen in year 2. A makes the payment in year 1 and B paints the office in year 2, as planned. A and B are both accrual method taxpayers. Assume A's payment is a deductible business expense. a. When does B have income? b. When does A get a deduction?

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Gregory, an elementary school teacher, sells a wristwatch to Ava in year 1 for $1000.Under their agreement, $200 is received at the time of the sale and $800 is payable ineight equal annual installments (starting in year 2) of $100 each plus interest.Gregory's basis in the watch is $600. a. When is Gregory's gain reportable? How much gain? b. How does your answer to (a) change if Gregory is a professional watch dealer instead of a teacher? c. How does your answer to (a) change if the selling price is only $400, payable$100 down and $300 in future installments?

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Janine sells property with a basis of $100,000 for a total price of $300,000. Thepayments are split into 5 installments, payable by the buyer to Janine at the end ofeach year for 5 years according to the following schedule: $30,000; $60,000;$30,000; $60,000; $120,000. How much gain does Janine report of each of the 5years in which she gets paid?

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On January 1 of this year, Beth purchased a business, which consisted of a number of assets. In each case, describe how Beth should recover her investment in the asset: a. The business's goodwill. b. A patent. c. A covenant not to compete in which X promised not to compete with T for 5 years.

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Same facts as (2) and (3) above (Check Capital Gains Problem). However, Dev also has a loss of $15,000 on the sale of another vintage automobile, which was held for investment for 5 years. What tax result now?

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Same facts as in (2) above (Check Capital Gains Problems). However, also in the current taxable year, Dev has an additional capital gain of $3000 - from the sale of a vintage automobile that he held for less than 1 year (which you should also assume is eligible for the 20% rate on "net capital gains" under § 1(h)(1)(D), depending on the outcome of the netting rules under § 1222, and which you should assume does not fall under a special rate for capital gains such as under §§ 1250, 1231, etc.). How does that change the outcome?

get notes from hillary

1. Grandma bought stock for $500. A couple of years later, when it has appreciated in value to $1100, she sells the stock for $1100. a. What is the amount realized on the sale?

i. $1100

1. Grandma bought stock for $500. A couple of years later, when it has appreciated in value to $1100, she sells the stock for $1100. a. What is her basis in the stock?

i. $500

1. Grandma bought stock for $500. A couple of years later, when it has appreciated in value to $1100, she sells the stock for $1100. a. Does Grandma have gain or loss? How much?

i. Gain of $600