Tax Questions Siegel

HYPO: If you're the payor spouse, and you have two properties each worth $1M, which should transfer if given a choice? 1) $100k/$1M 2) $850k/$1M

#1 because you are transferring the appreciation gain that will be realized when a future sale takes place. If you transfer that property to spouse, the payee/transferee spouse has to pay the taxes on the gain, not you. #2 you keep because it's also worth the same but since there's less appreciation, there's less GR to be taxed upon a sale/disposition of that property.

Mary consulted Rupert, a tax attorney to prepare and file Mary's income tax return. Rupert did so. Rupert neglected to claim a deduction to which Mary was entitled. After the three-year statute of limitations expired, Rupert's mistake was discovered. It was too late to file an amended return. Because of Rupert's mistake, Mary paid $8,000 more in taxes than she would have paid if the deduction had been taken on the return. To compensate Mary for his error, Rupert paid her $8,000 to replace the amount of additional tax she had paid plus interest in the amount of $1,000 B i.e., he paid her a total of $9,000. Because of receiving the $9,000 payment from Rupert, Mary recognized income of:

$1,000 The payment of interest for having deprived Mary of the use of the $8,000 overpayment is income to Mary. The $8,000 given to reimburse Mary for the overpayment of her income tax constitutes damages for her loss of property (i.e., cash). Cash is the equivalent of basis. So, the reimbursement of lost cash is the same as the reimbursement of lost basis. The $8,000 payment is not taxable. See, Clark v. Commissioner, 40 BTA 333 (1939), acq. 1957-1 CB 4; Concentino v. Commissioner, TC Memo 2014-186.

In Year One, Alex purchased 100 shares of Win All, Inc. stock for $5,000 cash. Win All is a closely held corporation. The price that Alex paid for the shares equaled their market value. In Year Ten, Alex sold the 100 shares of stock to an unrelated person for $6,500 cash. The actual market value of the shares that Alex sold was $7,500, but Alex sold at a below market price because he erred in valuing the shares. As a consequence of that Year Ten sale, Alex recognized a gain of:

$1,500 Alex recognized a gain to the extent that the amount realized on the sale exceeds his basis in the stock. § 1001(a). Alex had a basis of $5,000; his amount realized on the sale was $6,500; so Alex recognized a gain of $1,500. Since Alex sold the stock in an arm's length transaction to an unrelated person, the fact that the stock's value was greater than the price at which he sold. It does not change the amount realized by Alex or cause him to recognize disguised income.

In Year One, Henry purchased 100 shares of X Corporation stock for $5,000 ($50 per share). In Year Four, Henry purchased another 100 shares of X stock for $10,000 ($100 per share). In Year Eight, Henry sold 100 shares of X stock for $15,000 ($150 per share). Henry's stock was held for him by a broker in an account in his name. The 200 shares were held by the broker as a single certificate. Henry instructed his broker to sell the 100 shares of stock in Year Eight, but he did not tell his broker which of the 200 shares he held were to be sold. As a consequence of the sale of the 100 shares of X stock in Year Eight, Henry recognized a gain of:

$10,000 Unless the shares sold were adequately identified, the shares sold are those that were acquired by the taxpayer in the order of time in which they were acquired. Treas. Reg. § 1.1012-1(c)(1)(I). In this problem, there was no identification; so the shares sold are the 100 shares that Henry purchased in Year One. Henry had a basis of $5,000 in those 100 shares, and so he recognized a gain of $10,000 on the sale.

After celebrating Christmas at a party, John took a taxi home. The taxi driver was an employee of the company that owned the taxi. The cab fare for his ride is $10.00. The normal tip that is given a driver for a fare of that size is $1.00. In the spirit of Christmas and having imbibed a bit too much of liquid Christmas cheer, John gave the driver a tip of $100.00. As a consequence of receiving that tip, the driver recognized income of:

$100 Tips for services rendered are treated as income to the recipient. Treas. Reg. § 1.61-2(a)(1). There is a question whether the grossly exaggerated size of the tip and the circumstances surrounding it indicate that the $100 that the driver received, or a large portion of that item, was a gift (out of detached and disinterested generosity) rather than a tip for services. The IRS very likely will treat the entire $100 as a tip.

(g)What difference in result in (a), above, if when the land had a value of $10,000, Owner, a real estate salesperson, received it from Employer as a bonus for putting together a major real estate development? Owner paid $3,000 of income tax on the $10,000 fair market value receipt of the land.

$10K is GI to owner, that's why he paid $3000 in taxes Same outcome as (a), via 1.61-2(d)(2); total value received is the employee's AB ($10) [but this rule does not apply to the AB of property acquired by fringe benefit] * also received 61(a)(1) compensation gross income of $7K compensation income = FMV property - amount paid 10-3 = 7 This is International Freight case.

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

$10k GR (61(a)(12)) + 70k (61(a)(3)) = $80k 180-170 = 10k O.I. (since debt extinguished - Kennan) 170 AR - 100AB = 70k, O.I. (61(a)(3) gain from dealings in property) >§108, §61(a)(12) and §61(a)(3) is triggered ***If discharging a debt attached to property, look whether recourse or nonrecourse. Usually doesn't matter, but DOES matter here***. - If recourse, will have gains from property (61(a)(3)) AND discharge of indebtedness income REMEMBER - if recourse loan, the AR is limited to FMV (Tufts) - If nonrecourse loan, the AR is NOT limited to FMV. Include full debt. 180 - 170 = 10k discharge GI (61(a)(12)) 170 AR - 100 AB = 70k gains in property (61(a)(3)) - Tufts 80k total GI.

Patricia is employed by a real estate company. In Year One, the company sold Patricia 200 shares of common stock of an unrelated publicly held corporation. Patricia paid her employer $10,000 cash for those 200 shares of stock, and the fair market value of those 200 shares at the time of her purchase was $22,000. In Year Thirteen, Patricia sold those 200 shares of stock to an unrelated party for $35,000, which was the fair market value of the stock at that time. On the sale of the stock in Year Thirteen, Patricia recognized a gain of:

$13,000 Patricia recognized $12,000 income when she purchased the shares from her employer. She bought the stock at a bargain price, and the difference between its value and what she paid constituted disguised compensation to her. Patricia's basis in the stock she acquired was $22,000—the $10,000 amount she paid plus the $12,000 income she recognized in Year One on purchasing the stock. So, when she sold for $35,000, she had a gain of $13,000. *property received at a bargain price from employer takes as its basis the FMV value of the property at the time of the transfer to the employee* Patricia's basis in the stock she acquired from her employer includes the amount of income she recognized on her purchase of that stock

In Year Six, Ralph had the following listed gains and losses from sales of publicly held stock that were held by Ralph for the indicated times. GAINS $20,000 — Gain on stock held for two years $2,000 — Gain on stock held for eight months $14,000 — Gain on stock held for three months LOSSES ($4,000) — Loss on stock held for eight years ($3,000) — Loss on stock held for seven months. Ralph made no other sales in Year Six. Ralph's "net capital gain" for Year Six is:

$16,000 Correct. Ralph's long-term capital gains and losses are netted to determine his net long-term capital gain or loss. Then, Ralph's short-term capital gains and losses are netted to determine his net short-term capital gain or loss. Ralph's net capital gain is the difference between his net long-term capital gain ($16,000) and his net short-term capital loss, if any (none). So, Ralph's net capital gain is $16,000.

Ralph is unmarried and files a tax return as a single taxpayer. In Year Six, Ralph sold his personal residence which he had held and occupied for ten years. Ralph recognized a loss of $7,500 on the sale of his residence. In Year Six, Ralph also had the following listed gains and losses from sales of publicly held stock that were held by Ralph for the indicated times. GAINS $20,000 — Gain on stock held for two years $2,000 — Gain on stock held for eight months $14,000 — Gain on stock held for three months LOSSES ($4,000) — Loss on stock held for eight years ($3,000) — Loss on stock held for seven months. Ralph's "net capital gain" for Year Six is:

$16,000 Ralph's long-term capital gains and losses are netted to determine his net long-term capital gain or loss. Then, Ralph's short-term capital gains and losses are netted to determine his net short-term capital gain or loss. In determining Ralph's net long-term capital gain, *the loss that Ralph recognized on the sale of his residence is not taken into account because that is not deductible*. There is no statutory provision allowing s a deduction for a loss on the sale of a personal residence; and a deduction is denied by § 262. Recognized capital losses are taken into account only to the extent that they are taken into account in computing taxable income. § 1222(2), (4). So, Ralph's net long-term capital gain is $16,000. Ralph's net capital gain is the difference between his net long-term capital gain ($16,000) and his net short-term capital loss, if any (none). So, Ralph's net capital gain is $16,000.

(h)What difference if Owner is a salesperson in an art gallery and Owner purchases a $10,000 painting from the art gallery, but is required to pay only $9,000 for it (instead of $10,000 because Owner is allowed a 10% employee discount which is excluded from gross income under § 132(a)(2)), and Owner later sells the painting for $16,000?

$16K AR, but what is AB? S.132 - QED $9000 - S.1012 says AB is cost What is consequence of $9K? Higher gain, more tax paid Thus, the $1000 exclusion ends up being included and taxed. Just postponed from date of receipt to date of later sale

(f)What result under the facts of (d), above, if instead Mortgagor gives the land subject to the mortgages and still worth $300,000 to her Son? What is Son's basis in the land?

$180 NR debt/$120 equity in property Does son want? YES! Still a gift! Can sell and get $120K This is a part sale part gift situation! Why? Because son takes subject to mortgage $120 gift (the equity in property) $180 debt = TAKING ON THE 180 DEBT IS EQUIVALENT OF PAYING 180 FOR PROPERTY *Mortgagor* (person gifting to son) 180K AR (Why??? ---> because son "relieved" mortgagor of debt.) 100K AB *$80K GR & Recog* *Son's AB?* 1.1015-4: greater of gift (120) or sale (180) = *$180KAB*

Martin was employed by a sole proprietorship owned and operated by Arthur. In Year Fifty, after having worked for the firm for 40 years, Martin died. During that forty-year period, Martin and Arthur had become good friends; they and their spouses had vacationed together; they had seen movies and sports events together; and they had been dinner guests in each other's homes. Upon Martin's demise, the firm made a "gift" to Martin's widow of $20,000. As a result of receiving that payment, Martin's widow recognized gross income of:

$20,000 Section 102(c)(1) provides that the exclusion for gifts does not apply to a transfer from an employer to an employee. Consequently, the transfer of property to an employee will be included in the employee's gross income. While Martin's widow is not an employee of the firm, the payment is made in respect of the services Martin had provided as an employee. Section 102(c) was adopted to eliminate the difficult task of determining whether payments to a retired employee or the estate or survivor of a deceased employee is a gift or compensation for past services. The subjectivity of that issue makes it especially difficult to resolve. The situations that had arisen in which that issue arose included payments to a surviving family member. It is virtually certain that the IRS and the courts will treat the payment to Marvin's widow as subject to § 102(c) and included in her gross income. Despite the unequivocal language of § 102(c), there are exceptions where it will not apply. Prop. Reg. 1.102-1(f)(2) states that an extraordinary transfer to an employee who is a natural object of the transferor's bounty will not be income to the recipient if the recipient can establish that the transfer was not made in recognition of the employment. The recipient has a heavy burden to establish that there was not a compensatory purpose to the transfer, and that burden will be extremely difficult to meet when no special circumstances are present, such as a birthday gift to an employee who is also a member of the employer's family. Martin's friendship to his employer is not likely to be sufficient for his widow to meet that burden.

Mildred worked as a domestic for Rachel and her family. Mildred cleaned Rachel's home, did the laundry, and performed other household chores. Rachel died in Year Thirty. At the time of Rachel's death, Mildred had worked for her for Twenty-Eight years, and had come to be treated as a member of the family. In her will, Rachel bequeathed Mildred a pecuniary bequest of $25,000. Upon receiving the bequest, Mildred recognized:

$25,000 income The explicit terms of § 102(c)(1) treat a bequest to an employee as includible in the employee's gross income. Although the title to § 102(c) reads "Employee Gifts," the text of § 102(c)(1) states that subsection (a) shall not exclude from gross income any amount transferred by an employer to an employee. Subsection (a) is the provision that excludes from income gifts, bequests, devises, and inheritances. While there is no authoritative decision on the issue, and despite the explicit language of the statute, there is a plausible case to be made that § 102(c) should not apply to bequests. The prospects for prevailing on that contention are not high. In any event, even if § 102(c)(1) were held to be inapplicable, the bequest would likely be treated as compensation for services rendered by Mildred.

Arnold asked his niece, Myra, to come and live in his home and care for him for the rest of his life. Arnold was 82 years old. Arnold promised Myra that if she would come and care for him, he would leave her a bequest of $200,000 on his death. In addition, Arnold agreed to pay Myra a salary of $2,500 per month. Myra agreed and came to live with Arnold. Arnold paid Myra her salary for four years. In the fifth year, Arnold died. Arnold left Myra a bequest of $250,000. As a result of receiving that bequest, Myra recognized gross income of:

$250,000 While the contract with Myra called for a bequest of $200,000, the actual amount left to her was $250,000. It could be argued that the extra $50,000 was given out of affection rather than as compensation. That contention is unlikely to succeed. Section 102(c)(1) is a significant obstacle. The literal terms of that provision treat the entire amount of the bequest as gross income to Myra. There is a reasonable contention that despite the literal terms of that statute, it should be limited to inter vivos transfers and should not apply to testamentary bequests. Regardless of whether § 102(c) is held to be applicable, the existence of the oral contract and the fact that Myra worked for Arthur in an employee capacity makes it very likely that the entire $250,000 will be included in Myra's gross income.

Employee has worked for Employer's incorporated business for several years at a salary of $80,000 per year. Another company is attempting to hire Employee but Employer persuades Employee to agree to stay for at least two more years by giving Employee 2% of the company's stock, which is worth $100,000, and by buying Employee's spouse a new car worth $30,000. How much income does Employee realize from these transactions?

$250k total $80K - yes, salary is gross income under 61(a)(1) $100K - yes, Stock is gross income under 1.61-2 reg $30K car given to spouse of employee Precedent: Old Colony YES! Indirect receipt. Economically better off, just like employer paying income tax, employer buys wife a car. Indirect economic benefit/indirect receipts count to GI also Transfer arose out of course and scope of employment Doesn't pass Duberstein test: Gifts must be made out of "detached and disinterested generosity; love, charity, etc"

Ralph is unmarried and files a tax return as a single taxpayer. In Year Six, Ralph had taxable income of $123,000. In Year Six, Ralph had the following listed gains and losses from sales of publicly held stock that were held by Ralph for the indicated times. GAINS $20,000 — Gain on stock held for two years $2,000 — Gain on stock held for eight months $4,000 — Gain on stock held for three months LOSSES ($8,000) — Loss on stock held for eight years ($23,000) — Loss on stock held for seven months. Ralph had no other sales in Year Six. Of the ($31,000) of total losses that Ralph recognized in Year Six, he can deduct in that year:

$29,000 Section 1211 limits the extent to which capital losses (otherwise deductible) can be deducted. Ralph can deduct his capital losses to the extent that he has capital gains (long or short) plus $3,000. The total amount of Ralph's capital gains is $26,000. The total amount of Ralph's capital losses is $31,000. So, Ralph can deduct $26,000 of those losses against his capital gains of that amount, and he can deduct another $3,000 against his other income. So, Ralph can deduct a total of $29,000 in Year Six. The remaining $2,000 of his capital losses is carried over to subsequent years under § 1212.

Employee receives a $5,000 trip on Employee's 50th birthday. To pay for the cost of the trip, Employer contributed $2,000, and fellow employees of Employee contributed $3,000. Does Employee have gross income?

$2K is GI $3 from employees is gift

Michael is an attorney, and Jane is an interior decorator. Jane comes to Michael's office in order to obtain his legal services. Michael tells Jane that he and his wife need the services of an interior decorator for their home. He offers to provide her the legal services she requested if she will do the decoration of his home. Jane agrees, and both perform the services requested. The value of the legal services provided by Michael, and the price he would have charged for those services, is $3,500. The value of the services provided by Jane, and the price she would have charged for those services, is $2,800. As a consequence of those transactions, Jane recognized gross income of:

$3,500 In a barter arrangement for an exchange of services, the amount of income recognized by each party is the value of the services that that party received. Treas. Reg. § 1.61-2(d)(1). Jane received services valued at $3,500 so she must include that amount in her gross income.

Ralph is a salesman for a real estate development company. Ralph wished to purchase a house from his employer that was for sale in one of its developments. The purchase price for the house that would be charged to a customer of the company is $100,000. The company makes a gross profit percentage of 25% on its sales. The company sold the house to Ralph for $70,000 because of his employee status. Because of making that purchase at a discount, Ralph recognized gross income of:

$30,000 The qualified employee discount provision does not apply to the purchase of realty. § 132(c)(1), (4). Ralph recognized all $30,000 of the discount as gross income. Even if § 132 (a)(2) had applied, Ralph would still have recognized $5,000 of income because his discount exceeded by that amount the employer's gross profit percentage of the price at which the item was sold to customers.

In Year One, William purchased Blackacre (unimproved land) from Paula. Paula's basis in Blackacre was $20,000. Blackacre was encumbered by a mortgage in the principal amount of $30,000, and the mortgage debt bore adequate interest. Paula had no personal liability to pay the mortgage debt which therefore was a nonrecourse debt. At the time of William's purchase, there was $3,000 of interest owing on the mortgage that Paula had failed to pay. William paid Paula $25,000 cash for Blackacre and took Blackacre subject to the $30,000 principal amount of the mortgage debt plus the $3,000 defaulted interest. Any interest paid by Paula on her mortgage debt would have been deductible by her. Since Paula reported her income on the cash method, she had never taken a deduction for any of that defaulted interest. As a consequence of the sale to William, Paula recognized a gain of:

$35,000 Under the Crane doctrine, the amount realized by Paula on the sale includes the nonrecourse mortgage to which Blackacre is subject in the hands of the purchaser. *In the Crane case, the Commissioner did not include in the seller's amount realized the defaulted interest on the mortgage debt because he believed that the seller could deduct that interest if she paid it. Crane v. Commissioner, 331 US 1, f.n. 6 (1947). Accordingly, the amount realized by Paula does not include the $3,000 of defaulted interest.* Paula realized $55,000 ($25,000 cash plus the $30,000 nonrecourse debt to which the property was subject) on the sale, and she had a basis of $20,000. So, Paula recognized a gain of $35,000.

In Year One, Shirley purchased 12 acres of unimproved land (Blackacre) for $100,000 cash. At that time, no part of Blackacre had any greater value than any other part. So, if instead, Shirley had purchased only 3 acres of Blackacre, the value of those 3 acres would be $25,000 regardless of where those 3 acres were located. In Year Fifteen, Shirley sold 3 acres of Blackacre for $60,000. The 3 acres that Shirley sold had become more valuable than other parts of Blackacre because of their location. At the time of the sale of the 3 acres by Shirley, the fair market value of the 12 acres of Blackacre was $150,000, but the fair market value of the 3 acres that Shirley sold was $60,000. As a consequence of the sale of those 3 acres, Shirley recognized gross income of:

$35,000 When a portion of property is sold, the seller's basis in the entire property must be equitably apportioned so that a part of that basis is allocated to the portion that was sold. Treas. Reg. § 1.61-6(a).The apportionment is made in accordance with the relative values of the parts of the property as of the time that the seller acquired it. In Year One, when Shirley acquired the property, the value of the 3 acres she sold subsequently was $25,000 (1/4 of the $100,000 value of the entire 12 acres). So, Shirley had a basis of $25,000 when she sold the 3 acres and recognized a gain of $35,000. It does not matter that the value of the 3 acres she sold in Year Fifteen constituted 40% of the value of the entire 12 acres at that time. The apportionment of basis is made in accordance with the relative values at the time that the property was acquired.

Helen owned a boat that she used for personal enjoyment. The boat was damaged by a storm and sank. The boat was a total loss. The fair market value of the boat at the time it sank was $22,000. Helen had a basis of $16,000 in the boat. Helen collected $20,000 cash from the insurance company that insured the boat. Helen did not replace the boat by purchasing another boat. Helen did not claim a tax deduction for the loss of her boat. As a result of those events, Helen recognized:

$4,000 gain Helen realized a gain to the extent that the damages she received exceeded her basis. Since Helen did not purchase a replacement, the nonrecognition provision of § 1033 cannot apply, and so Helen recognized all of her realized gain. § 1001(c). The gain is treated as a capital gain by §165(h)(2)(B).

Henry purchased Blackacre (unimproved land) for $20,000 in Year One. In Year Six, the fair market value of Blackacre had risen to $80,000. In Year Six, Henry sold Blackacre to his cousin, Barbara, for $40,000. Henry intentionally sold Blackacre to Barbara for one-half of its value in order to make a gift to her of the difference between the selling price and the value of the land. At the time of the sale to Barbara, Henry had a basis of $20,000 in Blackacre. There was no gift tax on the transaction between Henry and Barbara. Immediately after acquiring Blackacre, Barbara's basis in Blackacre is:

$40,000 Barbara's basis in the land is the greater of Henry's basis ($20,000) or the amount she paid for it ($40,000). Treas. Reg. § 1.1015-4. So, Barbara's basis in the land is $40,000.

George sued his former employer for having discriminated against him because of his race. The employer settled the suit by paying George the following amounts for the stated injuries. $50,000—loss of wages because of discrimination $350,000—punitive damages $400,000—Total As a consequence of receiving that settlement, George recognized gross income of:

$400,000 *Since George did not incur a physical injury*, his recovery for lost wages is included in his gross income. All punitive damages are taxable so the $350,000 George received as punitive damages is included in his gross income.

Patrick owned Greenacre (unimproved land). In Year Three, Patrick made a gift of Greenacre to his niece, Katherine. Patrick had a basis of $40,000 in Greenacre, and the fair market value of Greenacre at the time of the gift was $100,000. For gift tax purposes, Patrick was not allowed any annual exclusion for the gift, and so the amount of the gift to Katherine for gift tax purposes was $100,000. The gift tax on the $100,000 gift was $10,000, and Patrick paid the $10,000 tax to the IRS. After acquiring the gift, Katherine had a basis in Greenacre of:

$46,000 Katherine's basis in Greenacre equals the $40,000 basis that Patrick had plus the gift tax paid on the appreciated element of the land. § 1015((d)(6). The appreciation of Blackacre was $60,000 (the fair market value of Blackacre less Patricks basis). The gift tax paid on the gift is $10,000. The portion of the $10,000 gift tax that is attributable to the appreciation of the property is $6,000 (60,000/100,000 X $10,000 = $6,000). § 1015(d)(6). So, Katherine had a basis of $46,000 in Greenacre ($40,000 + $6,000).

In Year One, Henry purchased 100 shares of X Corporation stock for $5,000 ($50 per share). In Year Four, Henry purchased another 100 shares of X stock for $10,000 ($100 per share). Henry's stock was held for him by a broker in an account in his name. The 200 shares were held by the broker as a single certificate. In Year Eight, Henry gave written instructions to his broker to sell the 100 shares of X stock he had purchased in Year Four for 150 per share; and the broker promptly acknowledged in writing having received that instruction. The broker then sold 100 shares of X stock. As a consequence of the sale of the 100 shares of X stock in Year Eight, Henry recognized a gain of:

$5,000 Henry's instructions to the broker to sell the 100 shares purchased in Year Four followed by a promptly written acknowledgment by the broker constitutes an adequate identification. Treas. Reg. § 1.1012-1(c)(3). Consequently, the 100 shares sold in Year Eight were the 100 shares purchased in Year Four, and. Henry had a basis of $10,000 in those 100 shares. Henry recognized a gain of $5,000 on the sale.

Janet purchased Whiteacre as an investment in Year One. Whiteacre is a building that is situated on leased land. Janet paid $20,000 cash and took Whiteacre subject to a $500,000 mortgage. Janet assumed personal liability to pay the mortgage, which therefore was a recourse debt. In Year Eight, Janet declined to make any more payments on the mortgage debt because the fair market value of Whiteacre had declined. Prior to that default, Janet had made all of the payments on the mortgage debt on time. The mortgagee foreclosed on the property and sold it for $400,000 at a foreclosure sale. The fair market value of Whiteacre at the time of foreclosure was $400,000. The balance owing on the mortgage at the time of foreclosure was $450,000. Because of her personal liability, Janet owed the mortgagee $50,000 for the amount of the mortgage debt that was not satisfied by the foreclosure sale. The mortgagee decided not to seek to collect that $50,000 from Janet even though she was solvent. Janet's basis in Whiteacre at the time of the foreclosure was $350,000. As a result of those events, Janet recognized a gain on Blackacre of:

$50,000. The Crane (or Tufts) doctrine does not apply to recourse debts. At the time of the foreclosure, the value of Whiteacre was less than the balance of the recourse debt that encumbered the property. In that situation, the amount realized by Janet is limited to the fair market value of Whiteacre ($400,000). Since Janet had a basis of $350,000, her gain from Whiteacre was $50,000. But the outstanding balance of the debt was $450,000; and only $400,000 is treated as an amount realized from the foreclosure of Whiteacre. How is the remaining $50,000 of unpaid debt treated? That $50,000 is treated as a cancellation of debt since it results from the creditor's decision not to enforce Janet's personal liability to pay that amount. Treas. Reg. § 1.1001-2(c), Ex. 8. The cancelled debt will be ordinary income to Janet unless one of the exceptions to that doctrine is applicable. If, instead, the creditor chose to seek to collect the $50,000 unpaid balance from Janet, there would be no cancellation of debt unless and until it was determined that some part of that debt would not be paid.

In Year One, William purchased Blackacre (unimproved land) from Paula. Blackacre was encumbered by a mortgage in the principal amount of $30,000, and the mortgage debt bore adequate interest. William paid Paula $25,000 cash for Blackacre and took the land subject to the $30,000 mortgage debt. Immediately after the purchase, William had a basis in Blackacre of:

$55,000 This problem illustrates the Crane doctrine (it is sometimes called the Tufts doctrine). Under that doctrine, *when a person acquires property subject to a liability, the amount of the liability is included in the purchaser's basis in the property*. So, William has a basis of $55,000 in Blackacre ($25,000 cash paid plus the $30,000 mortgage which encumbers the property).

In Year One, William purchased Blackacre (unimproved land) from Paula. Blackacre was encumbered by a mortgage in the principal amount of $30,000, and the mortgage debt bore adequate interest. At the time of William's purchase, there was $3,000 of interest owing on the mortgage that Paula had failed to pay. William paid Paula $25,000 cash for Blackacre and took Blackacre subject to the $30,000 principal amount of the mortgage debt plus the $3,000 defaulted interest. Any interest paid by Paula on her mortgage debt would have been deductible by her. Since Paula reported her income on the cash method, she had never taken a deduction for any of that defaulted interest. Immediately after the purchase, William had a basis in Blackacre of:

$58,000 Under the Crane doctrine, the amount of mortgage that was encumbering the property when William acquired it is included in his basis. The question then is whether the defaulted interest is also included in William's basis? In the Crane case, the Commissioner did not include in the seller's income the defaulted interest on the mortgage to which the purchaser of the property was subject because the Commissioner believed that the defaulted interest would have been deductible by the seller if she had paid it. Crane v. Commissioner, 331 US 1, f.n. 6 (1947). That does not affect the determination of the basis of the purchaser. William cannot deduct the defaulted interest when he pays it, and it is part of the purchase price he paid for Blackacre. See, David R. Webb Co. v. Commissioner, 77 TC 1134 (1981), aff'd 708 F.2d 1254 (7th Cir. 1983). So, William has a basis of $58,000 in Blackacre.

Arthur purchased a building and the land on which it is situated from Millie. At the time of the purchase, the property was subject to a mortgage of $650,000. Millie had made all of the required payments on the mortgage when they became due. In payment for the property, Arthur paid Millie $250,000 cash and took the property subject to the mortgage. The mortgage was a nonrecourse debt—that is, neither Millie nor Arthur had any personal liability to repay the debt. The market value of the building was $700,000; and the market value of the land was $300,000. Arthur was able to purchase the property for less than its market value because Millie needed to sell quickly. Arthur used the property in his business. Arthur was not allowed any depreciation deduction for his basis in the land; but Arthur was allowed to take depreciation deductions for his business use of the building; and the amount of that depreciation depends upon the amount of basis that Arthur had in the building. Immediately after acquiring the property, Arthur's basis in the building was:

$630,000 The tax law's treatment of nonrecourse debt was established in Supreme Court's landmark decision in Crane v. Commissioner, 331 U.S. 1 (1947). As a consequence, the tax treatment of a nonrecourse debt is often referred to as the "Crane doctrine." Because a subsequent Supreme Court decision in Commissioner v. Tufts, 461 U.S. 300 (1983) elaborated on the doctrine primarily by repudiating a dictum in the Crane case, the tax treatment is sometimes referred to as the "Tufts doctrine." The Crane doctrine addresses the basis that a purchaser obtains in property acquired subject to a nonrecourse debt, and the amount a seller realizes when he sells property subject to a nonrecourse debt. When a person acquires property subject to a nonrecourse debt, the amount he paid the transferor includes the amount of the nonrecourse debt that encumbers the property. It is assumed that the acquirer will pay the debt in order to retain the property, and so the acquirer includes the debt in his basis in the property. When Arthur purchased the property from Millie, he paid her $250,000 cash and took the property encumbered by a $650,000 nonrecourse debt. His purchase price and basis in the property is $900,000—the sum of the $250,000 cash he paid and the $650,000 nonrecourse debt that he is expected to pay eventually. The $900,000 basis must be allocated between the building and the land in proportion to their respective fair market values. Treas. Reg. § 1.61-6(a). Since the value of the building constitutes 70% of the value of both properties, Arthur's basis in the building is 70% of the $900,000 basis that he has in both properties. So, 70% X $900,000 = $630,000

HYPO: Corp X (gives 35/100 share of stock) --> Employee Employee (gives services) --------------> Corp X (implied, may not be stated in hypo)

$65K GR to Corp X, recognized as GI The consideration received by the TP from the EE is equal to the value of the shares of stock. Not at gift, but disposition of shares for valid consideration (the EE's services to Corp X) [International Freight case]

(d)Plaintiff's suit was based on a claim of injury to the goodwill of Plaintiff's business arising from a breach of a business contract. Plaintiff had a $4,000 basis for the goodwill. The goodwill was worth $10,000 at the time of the breach of contract. (1)What result to Plaintiff if the suit is settled for $10,000 in a situation where the goodwill was totally destroyed?

$6k GR. Remaining 4k is just return of capital. Raytheon case. Think of as if sold property. 10AR - 4AB = 6

(b)What result in (a), above, if Beneficiary instead leaves all the proceeds with the company and they pay her $6,000 interest in the current year?

$6k interest included in GI per 101(c) is O.I

Sarah is an attorney. She joins a barter club in which she agrees to perform services for other members of the club. She receives points for the work she does for other members. She can use those points to obtain the professional services of other members of the club. In Year One, Sarah earned 1,000 points for legal work she performed for members. The fair market value of those 1,000 points was $750. In Year One, Sarah used some of her points to have a professional housepainter paint two of the rooms in her house, and she used up 600 points (having a fair market value of $450) to have that service performed for her. The fair market value of the housepainter's services in painting those two rooms was $500. As a consequence of those events, Sarah recognized income in Year One of:

$750 ordinary income. The authors consider this to be the best answer. When Sarah received the 1,000 points for her services, she had ordinary income of $750, which was the fair market value of those points. Rev. Rul. 80-52. The points she received were an item of property since she could use them to purchase the services of other members. The points are the equivalent of cash and are taken into account when received. Sarah was paid for her services with property, and she has income in the amount of the value of that property. When Sarah used points to obtain the services of the housepainter, there are two alternative plausible tax consequences. (1). The consequence that the authors deem to be correct is that the there was no tax consequence to her using the points for the housepainter's services. The use of the points is comparable to the exercise of an option, or the exercise of a convertible feature of convertible stock, or the use of a prepaid phone card to pay for a phone call, all of which ordinarily do not cause the recognition of income. (2). Alternatively, the use of the points could be treated as a taxable exchange of the points for the housepainter's services. If so treated, Sarah would have received $500 of services for points in which she had a basis of $450, so Sarah would have recognized a short-term capital gain of $50. The authors believe that the proper rule is that the use of the points does not cause income to Sarah. While not asked as a question, note that the housepainter would recognize income for receiving points in exchange for his services.

TP, who is an employee of a law firm, in the current year has $100k of AGI, and the following allowable itemized deductions: What difference for joint TP's deductible interest is $10k, the state income taxes are $12k, and the TP has a $5k charitable contribution

$75k taxable income. 10k of itemized interest 10k of 12k state tax +5k charitable 25k itemized deductions - 100k AGI = 75k taxable income

What do you do if you have part sale, part gift? EX: Dad gives son $20K FMV car for $12K. How much is a gift?

$8 gift. Amount realized subtracted from FMV is gift amount.

(e)Same as (d), above, except that the value of the stock on December 30 of year two was $45 per share and on January 4 of year three was $48 per share.

(Dec 30 yr 2) 4500 - (Dec 30 yr 1) 5000 = -500 LTCL

(f)T's father bought 100 shares of stock on January 10 of year one at $30 per share. On March 10 of year one when they were worth $40 per share he *gave* them to T who sold them on January 15 of year two for $60 per share (see § 1223(2)).

(Jan 15, yr2) 6000 - (Jan 11, yr 1) 3000 = 3000 LTCG (*carryover basis tacked on*)

Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate. When the land is worth 300k he takes out a 2nd mortgage of 100k to buy stocks. (g) What results if Mortgagor gives the land to her Spouse when it has FMV of 300k? What is Spouse's basis in the land? What is Spouse's basis in the land after Spouse pays off the $180,000 of mortgages?

*Mortgagor?* 180K AR (to the extent of liability relieved, it is treated like a sale) 100K AB 80K GR, but NOT recognized (1041) *Spouse's AB?* 1041(b)(2) 100K *AB is NOT increased by mortgage payments*

Homeowners purchased their vacation residence for 180k (20k of which was allocable to the land). When it was worth 160k (20k of which was allocable to the land) they rented the property and properly took 10k of depreciation on it. What result when they subsequently sell the property for 145k

*loss basis rule* Since they sold it for a loss, and the 160 FMV of the property at the time of conversion was less than the 180AB, the rules require that we use the FMV of 160k. 20k land, and 140AB allocable to the building minus the 10k ACRS to calculate our AB to subtract from the 145k AR. [1.165-9(b)(2)] Regulation states that for purposes of determining a loss, we use the FMV minus depreciation. 145 AR - 150 AB (20 land + [140 building - 1k depreciation]) = 5 loss realized and recognized (Horrmann: where no actual rental)

P brought suit and successfully recovered in the following situations P, a professional gymnast, lost the use of her leg after a psychotic fan assaulted her with a tire iron. P was awarded damages of $100k

- 100k excludable (104(a)(2)) Recovery for 104(a)(2) compensation for Personal Injury. Full 100 is excludable from GI

Jury also awards P $200k in punitive damages

- not excludable Punitive are always GI

(d)Plaintiff's suit was based on a claim of injury to the goodwill of Plaintiff's business arising from a breach of a business contract. Plaintiff had a $4,000 basis for the goodwill. The goodwill was worth $10,000 at the time of the breach of contract. (2)What result if Plaintiff recovers $4,000 of cash because the goodwill was partially destroyed and worth only $6,000 after the breach of contract?

0 GR since only recovering investment. 4k is return of capital and 0AB in remaining goodwill (a non-divisible asset)

60k:

0 deductible, 60k amortized

Two conditions for loss basis rule?

1) Depreciated property 2) Sold at a loss

HYPOS TP owns the asset below (used in biz and held for more than one year); upon sale produces the gains/losses indicated (asset sold separately unless otherwise indicated) 1. Office Building - $35K GR&R 2. Office furniture - $50K LR&R 3. Sell both in the same year

1) Result: ordinary loss 2) Technically not capital asset, BUT! 1231 gives capital treatment 3) $15K loss (net), thus is treated as 35K ordinary income; 50K ordinary loss

Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate. When the land is worth 300k he takes out a 2nd mortgage of 100k to buy stocks. What results to Mortgagor if the land declines in value from $300,000 to $170,000 and Mortgagor transfers the land by means of a quitclaim deed to Bank?

100/170 -----------------> bank 180K NR debt *Include outstanding principal balance* 180-100 = 80 GR and Recog

Injured and Spouse were injured in an automobile accident. Their total medical expenses incurred were $2,500. In the year of the accident they properly deducted $1500 of the expenses under 213 on their joint tax return and filed suit against Wrongdoer. In the succeeding year they settled their claim for $2500. What income tax consequences on receipt of the $2500?

1000 excludable, 1500 included in GI Within 104(a)(2) since a personal injury Can't take a deduction and then an exclusion (double tax benefit not allowed). The amount of the deduction reduces the potential exclusion.

In the current year, T purchases a single life annuity with no refund feature for $48,000. Under the contract T is to receive $3,000 per year for life. T has a 24-year life expectancy. (a)To what extent, if at all, is T taxable on the $3,000 received in the first year?

1000 includable as GI; 2000 excluded

(d)If B inherited the income interest and B and the remainderperson R both sell their interests to a third party with B receiving $60,000 for B's interest?

1001(e)(3) applies If sell with remainder interest, then zero basis rule does NOT apply 60 AR-50AB = 10 GR & Rec LTCG

Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate. (a)What is Mortgagor's cost basis in the land?

100K

(d)What is Mortgagor's basis in the land if the $100,000 of mortgage proceeds are used to purchase stocks and bonds worth $100,000?

100K (not put into land, so doesn't affect AB)

TP, who is an employee of a law firm, in the current year has $100k of AGI, and the following allowable itemized deductions: $6000 in interest, $6500 in state income taxes, $1500 in unreimbursed employee travel expenses, $200 in tax preparation fees, and $300 bar association dues. What difference if TP is a married couple filing a joint return?

100k - 24k standard deduction for married filing jointly = 76k. *Remember* that married couple can't have one person itemize and one take standard deduction. If one itemizes, they both have to.

Business person borrows $100k from Creditor to start an ambulance service and then purchases ambulances for use in the business at a cost of $100k. Assume the ambulances are Businessperson's only depreciable property (look out for insolvency) and, unrealistically, that after some time their adjusted basis and value are still $100k. What consequences in the following circumstances? (a) Businessperson is solvent but is having financial difficulties and Creditor compromises the debt for $60k.

100k - 60 = $40k GR discharge income

Single TP, who is an employee of a law firm, in the current year has $100k of AGI, and the following allowable itemized deductions: $6000 in interest, $6500 in state income taxes, $1500 in unreimbursed employee travel expenses, $200 in tax preparation fees, and $300 bar association dues. What is TP's taxable income for the current year?

100k AGI (so 62 deduction already happened) 67(b) shows interest (6000) and taxes (10k ceiling) are allowed. 67(g) disallows the rest since he's an employee: 1500 travel, 200 tax prep, 300 bar fee Thus, he has a total of 12,500 itemized deductions, which is greater than the 12k standard deduction for single individuals. Should itemize. ***Note, if lawyer was self-employed, those $2000 expenses that were MID above now become ATL T/B deductions! His 100k AGI would be reduced to 98k.

P brought suit and successfully recovered in the following situations $50k of the recovery in (a) is specifically allocated as compensation for scheduled performances P failed to make as a result of leg injury. -

100k excludable since compensatory damages are excludable under 104(a)(2) Same as (a); Raytheon. Comes from the same claim.

Insured purchases a single premium $100,000 life insurance policy on her life for a cost of $40,000. Consider the income tax consequences to Insured and the purchaser of the policy in each of the following alternative situations: (b)Insured sells the policy to her Spouse for its $60,000 fair market value and, on Insured's death, the $100,000 of proceeds are paid to Spouse.

101(a)(2)(A) - carryover basis rule (1041), exception to the exclusion Insured - 60AR-40AB = 20 GR, NOT recognized since 1041(a)(1) Spouse - 100AR-40AB (carryover 1041) = 60GR, NOT recognized since 101(a)(2)(A) exclude entire amount

EX: What result if Bob's mom had given the policy to him for his bday?

101(a)(2)(A) exception: gift, so carryover basis, then gets full exclusion of $5M

If Brad taken that property with basis of 500, FMV of 400 and transfers to kid instead who sells for 350k, very different outcome:

1015 gives child a FMV basis of 400k instead of transferred (if sold at loss, because of *loss basis rule*). 50k loss.

(c)What is Mortgagor's basis in the land if the $100,000 of mortgage proceeds are used to improve the land?

1016(a)(1), capital expenditure to improve land, $200K

Employer gives all of her employees, except her son, a case of wine at Christmas, worth $120. She gives Son, who also is an employee, a case of wine, worth $700. Does Son have gross income?

102(a) - receipt of a case of wine at Christmas might meet Duberstein's "detached/disinterested" gift 102(c) - but son is an employee Fact other employees got win hurtful to case that it is a 102(a) gift However, the fact that the wine is worth more is helpful 1.102-1(F)(2) - [proposed regulation, doesn't have force of law] - if family member employed, then if can show NOT a gift made due to employment, then 102(a), but if due to employment, then counts as GI under 102(c) Perhaps $120 taxable under 102(c), and $580 not taxable gift under 102(a)

If the Wolder case arose today, would § 102(c) apply to resolve the issue?

102(c) doesn't apply to Wolder because attorneys are NOT employees of their clients

(h)Same as (g), above, except that T was executor of T's father's estate and as such T sold the stock on January 15 of year two for $60 per share to pay the estate's administration expenses.

10k GR&R, LTCG. Same, executor treated the same as beneficiary

What if Sally borrowed 10k money from parents, not 3P lender. They cancel the loan when she graduates.

10k discharge, but gift so excludable under 102

What if Sally's employer pays lender the 10k she borrowed in full?

10k is NOT excludable since discharge of debt is a means of compensation, s.102(c)

Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with: (d)Services, in the form of remodeling Rich's office, which are worth $10,000?

10k services → debt fully paid, so ZERO discharge income However, DOES have 10k services income 61(a)(1)

(i)Employee sells insurance and employer Insurance Company allows Employee 20% off the $1,000 cost of the policy.

132(c)(1)(b) - QED, can exclude all $200 However, if 30% discount, can only exclude 20%

(p)Employer puts in a gym at the business facilities for the use of the employees and their families.

132(j)(4) - yes, excluded

Residential real estate Tycoon, desiring to diversify her investments, incurs expenses in investigating the possibility of purchasing a professional sports team

162 - no, not the same T/B 195 - not until commencement

Determine the deductibility under 162 and 195 of expenses incurred in the following situations Tycoon, a doctor, unexpectedly inherited a sizeable amount of money from an eccentric millionaire. Tycoon decided to invest a part of her fortune in the development of industrial properties and she incurred expenses in making a preliminary investigation

162 doesn't apply. Not a disbursement relating to current trade or biz; try 195 - but just investigating is not enough. Must actually start/commence business

Tycoon, was a successful developer of residential and shopping center properties decided to invest a part of her fortune in the development of industrial properties and she incurred expenses in making a preliminary investigation

162: can try to argue this is part of her "real estate developer" biz, but different type of development. Industrial vs. residential. Close call. IRS could say too different. If not successful with 162, try 195(b) election, but need to start business first because can take deduction

Investor incurs investment interest of 100k. To what extent is it deductible in the current year if: Investor's only investment income during the year is 80k of interest on a corporate bond, and she has 10k in deductible state intangible taxes on investments? Are there any other tax consequences to Investor?

163(d) limits interest deduction only to the extent of net investment income. Here, investor has 80k investment income and 10k of deductible state taxes. Thus she has 70k net investment income, and can only deduct 70k of her 100k investment interest in the current year. However, she has a 30k carryover 163(d)(2). Note, although premature, that if the investment expenses had been for investor advisor fees, the deduction would have been a nondeductible miscellaneous itemized deduction under 67(g). She would have 80k of net investment income, and she would deduct 80k of interest in the current year and carryover 20k.

53K. What is the amount of the 2019 amortization deduction if the biz started in 11/5/19?

2 months, doesn't matter if 5 days into the month or 30 days, get the full month; so even if it started on 12/13/19, you get one month for 2019. Month the biz starts is what is important, not day. 51k divided by 180 months, times 2 months = $566.66 amortization deduction per month, plus the initial $2k deduction

T, who is single, a child of X and a full-time law student has gross investment income of T qualifies as a dependent of X for the year. See 63(c)(4), 7(B) T has $1000 of earned income and $3k of investment income

2(b). With $1k E.I. + $3k investment income, T's taxable income here is $2,750. Again T qualifies as a dependent of T's parent and is subject to §63(c)(5). Now T's standard deduction is equal to T's $1,000 earned income plus $250 under §63(c)(5)(B). Thus T's taxable income is $4,000 less $1,250 or $2,750.

What difference in result if T has #13k of earned income and no investment income?

2(c). With $13k E.I. and no investment income, T's taxable income is $1,000. T's basic standard deduction of $12,000 is potentially limited under §63(c)(5). Since T's earned income of $13,000 exceeds the basic standard deduction, T may fully deduct the $12,000 standard deduction. §63 (c)(2)(C), (7)(A)(ii). Thus T has taxable income of $1,000 ($13,000 less $12,000).

Landlord L owns two contiguous parcels of land. L leases both parcels to Tenant T for $1,000/month per parcel or a total of 24K/year; rent payable at the end of each year. The lease is for a 10 year period. Upon the following events, which occur more than one year after the lease is signed, what are the results? To L if T pays L $20K to cancel the leases on both parcels?

20k OI, Hort case

What if TP's AB in the car in (b) if TP incurs $17k fixing the car?

22AB - 15 from insurance = 7k AB - 5k loss (1016(a)(1) = 2k AB + 17k capital expenditure to restore = 19AB

What result in (a) if instead she sells the shares for $2500 paying a $45 commission on the sale? 165(c)(2)

2455 AR - 3050 AB = 595 LR & Recognized under 165(c)(2)

(c)Plaintiff's suit was based on a breach of a business contract and Plaintiff recovered $8,000 for lost profits and also recovered $16,000 of punitive damages.

24k GR; 8k compensatory + 16k punitive

Sally borrows 10k from 3P lender, she repays $8k in full payment of loan.

2k G.I. from discharge of indebtedness

Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with: (b)A painting with a basis and fair market value of $8,000?

2k GR & R

$53k:

2k deductible, 51k amortized; 5k - 3k excess = 2k

Speculator buys 100 shares of Sound Company stock for $3k, paying her broker a commission of $50 on the purchase. Fourteen months later (over a year!) she sells the shares for $4k paying a commission of $60 on the sale. Are the commissions 212 expenses? (see 1.263(a)-1(e)(1))

3000 cost basis + 50 commission (transaction costs are added to basis) = $3050 AB Not deductible under 212. Subtract the $60 commission from the amount realized = 3940. 3940 AR - 3050 AB = 890 GR & Recognized. LT Capital Gain. Commission on acquisition = included in AB Commission on disposition = subtracted from AR

(b) The facts are the same as (a) except that in two years Taxpayers have reduced the outstanding principal balance of the mortgage to $200k and the FMV of the residence has increased to $400k. In the later year, Taxpayers take out a second mortgage for $100k secured by their residence to add a fourth bedroom and a den to the residence.

300k A.I. (1st and 2nd mortgage). Taxpayers may deduct 100% of the interest paid on the total indebtedness secured by their residence. Still qualifies as AI, except here the 2nd mortgage for 100k is used to substantially improve a qualified residence. Qualifies because it is secured by a qualified residence and the AI does not exceed $750k. 400k FMV value important because it covers the $300k AI, thus securing it.

Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with: (a)A settlement of $7,000 of cash?

3k GR & R

(d)Plaintiff's suit was based on a claim of injury to the goodwill of Plaintiff's business arising from a breach of a business contract. Plaintiff had a $4,000 basis for the goodwill. (3)What result if Plaintiff recovers only $3,000 of cash because the goodwill was worth $7,000 after the breach of contract?

3k return of capital. No gross income, and a 1k AB in goodwill. 3 AR - 4 AB = 1 AB; remaining in goodwill because it was not destroyed completely. No GI because no excess of recovery (all went to AB)

(j)Employee is a salesman in a home furnishings store. The prior year the store had $1,000,000 in sales and a $600,000 cost of goods sold. Employee buys a $2,000 sofa from Employer for $1,000.

40% GPP; got 50% off. So has to pay taxes on 10% of $2000; $800 excludable; so $200 GI must be reported

(c)What result if Insured's Daughter is Beneficiary of the policy and, in accordance with an option that she elects, the company pays her $12,000 in the current year? Assume that such payments will be made annually for her life and that she has a 25-year life expectancy.

4000 exclusion, 8000 included in GI

(d)What result in (c), above, if Insured's Daughter lives beyond her 25-year life expectancy and receives $12,000 in the twenty-sixth year?

4000 exclusion, 8000 included in GI [unlike an annuity where ALL would be GI]

HYPO: $40AB/$100FMV ----> Donee $50 Gift tax paid by donor (this would only happen if already busted through $11.4M lifetime cap). What is donee's AB?

40K (carryover) + 30K (gift tax upward adjustment) = 70K How to get that 30K?: 50 (gift tax paid) X [100FMV - 40AB) / 100] = 30K ***Keep in mind: the gift tax adjustment CANNOT raise the Donee's AB above FMV**

Taxpayer goes to San Antonio for the annual 5-day state bar convention. Following the convention she visits and stays the weekend with her parents who live in Austin. She incurs the following expenses: Airfare, San Antonio Hotel and Meals; Austin Hotel and Meals. See 1.162-2(b) combining biz and personal.

5 days biz; 2 days personal. If primarily biz - deduction. If primarily personal - no deduction. Airfare = entirely deductible San Antonio = full lodging, ½ meals Austin = not deductible

If B sells the right to one quarter of the income interest for $15,000?

50 AB divided by 4 = 12,500. 15k AR - 12.5 AB = 5000

How much of meals deductible away from home?

50% if you stay overnight (Correll case "overnight rule")

HYPO: Mary purchased biz equipment several years ago for $50k, ACRS deductions of 30k allowable, but she claims 25k in ACRS deductions [see 1245(a)(2)(B)]. What is her GR, and what is its character?

55kAR - 20AB = 35k GR AB is 20k (since you reduce AB by the greater of amount allowed or allowable. 30k was allowable) RB: 45 (20AB + 25k allowed) - lower, so use RB AR: 55 45-20 = 25k of gain recharacterized as OI under 1245; 10k as LTCG under 1231

Decedent owed Friend $5k and Nephew owed Decedent $10k At Decedent's death Friend neglected to file a claim against Decedent's estate in the time allowed by state law and Friend's claim was barred by the statute of limitations. (Let's defer our concern for Nephew.) What result to Decedent's estate?

5k GI (OI). 61(a)(12) CODI (whether in the jx the SoL extinguishes or merely bars an action on it; doesn't matter).

$8k:

5k deductible, 3k amortized

Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with: (c)A painting with a value of $8,000 and a basis of $5,000?

5k includes 3k CG (exchange of painting) AND 2k O.I. (since no S/E because debt extinguishes)

(g)T's father purchased 1000 shares of stock for $10 per share several years ago. The stock was worth $50 per share on March 1 of year one, the date of Father's death. The stock was distributed to T by the executor on January 5 of year two and T sold it for $60 per share on January 15 of year two.

60-50=10k GR&R, LTCG (FMV Basis 1014 decedent)

(b)T bought 100 shares of stock on February 28 of year one at a cost of $50 per share. T sold them on February 29 of year two, a leap year, for $60 per share.

6000-5000=1000. Start counting 3/1-2/29. NOT long term

Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with: (f)Same as (a), above, except that Poor's Employer makes the $7,000 payment to Rich, renouncing any claim to repayment by Poor.

61(a)(1) - 7k; 61(a)(12) - 3k = 10k GI

Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with: (e)Services that are worth $8,000?

61(a)(1) - 8k; 61(a)(12) - $2k = $10k total GI

Employee is an elementary school teacher who buys $350 worth of classroom materials in the current year.

62(2)(D) allows $250 ATL deduction, the rest is 67(g) MID

Same as (a) except that Employer, an individual, rather than Employee, incurred the expense.

62(a)(1) ATL deduction. Employer's transportation expenses are deductible from GI for all T/B costs (other than that incurred by employee). Includes travel, meals (50%), lodging

Employee deducts 1000 of interest on student loans.

62(a)(17) - ATL. Employee's $1k of interest on student loans is deductible under 221 and is also deductible ATL from GI under 62(a)(17) in arriving at AGI

Same as (d) except that the taxes and interest relate to a residence that Employee rents to tenant.

62(a)(4) authorizes as ATL. Significant: rental activity. If a T/B rents and royalties under 212, they are an ABOVE THE LINE deduction. Income-producing property under 62(a)(1) or (4). Medical and charitable are still itemized 67(b) deductions

Assume the following expenses are properly deductible. Does the deduction fall under 62 (ATL), 67(b) itemized, or does it fall into the Code's 67(g) MID black hole? Employee salesperson (not "outside") pays the cost of business transportation is not reimbursed by Employer

67(g) MID. EE T/B expenses is a MID. The employee disallowance includes not only transportation expenses, but also lodging, meals, education expenses, uniforms, dues, fees, etc.

Alice acquired an asset for $100,000 cash, its fair market value at the time. The asset increased modestly over the next two years and was appraised at $120,000, at which time she conveyed the asset to her daughter, Bonnie, as a college graduation present. Bonnie put the asset to use in her business and took ACRS deductions for the next two years totaling $23,000 and was eligible to take $32,000. On Imelda's wedding date, Bonnie then transferred the asset ($60,000 FMV) to her daughter, Imelda, for Imelda's cash payment of $38,000. Her sale for $70,000 will produce a $__________ GR/LR (fill in the blank and circle the correct result). Alternatively, her sale for $50,000 will produce a $__________ GR/LR (fill in the blank and circle the correct result).

70K = 2K GR; 50K = 10K LR

What are the tax consequences to Injured if the case was settled, and in the settlement, D purchased an annuity with the payments paid directly to Injured who had rights to the payments but no other rights in the annuity including no right to receive the fund paying the annuity?

72(a) annuity rule applies to D, but NOT to P, who gets full exclusion 104(a)(2) The amount is totally excludable as long as Injured only has right to annuity payments, but NO right to the underlying sum that purchased the annuity (producing the periodic payments). The D has the annuity consequences, the P still gets full exclusion. Similar to (c), getting payments from D, but just getting payment to P

Insured purchases a single premium $100,000 life insurance policy on her life for a cost of $40,000. Consider the income tax consequences to Insured and the purchaser of the policy in each of the following alternative situations: (c)Insured is certified by her physician as terminally ill and she sells the policy for its $80,000 fair market value to Viatical Settlement Provider who collects the $100,000 of proceeds on Insured's death.

80AR-40AB = 40GR, NOT recognized since fully excludable Viatical Settlement: 100AR-80AB = 20GR, IS recognized since transfer for value under 101(a)(2)

Plaintiff brought suit and unless otherwise indicated successfully recovered. Discuss the tax consequences in the following alternative situations: (a)Plaintiff's suit was based on a recovery of an $8,000 loan made to Debtor. Plaintiff recovered $8,500 cash, $8,000 for the loan plus $500 of interest.

8k is just return of capital. Not income. 500 is interest, recognized GI under 61(a)(4)

What difference would it make if the $14k paid by A were for an item that was deductible above the line rather than being a below the line deduction?

A $50,000 - 14,000 ATL = $36,000 AGI - 12,000 Std. = $24,000 TI BIG DIFFERENCE! ABOVE THE LINE DEDUCTIONS RULE.

Frances died and devised Redacre (unimproved land) to her nephew, Edwin. At the time of her death, Frances had a basis in Redacre of $112,000, and the property had a fair market value of $200,000. Six months after Frances died, Edwin sold Redacre for $212,000. As a consequence of that sale, Edwin recognized:

A $12,000 long-term capital gain Redacre is a capital asset. Edwin's basis in Redacre is equal to its fair market value at the date of Frances's death ($200,000). § 1014(a). Even though Edwin actually held Redacre for only six months before selling it, Edwin is treated by § 1223(9) as having held Redacre for more than one year. The amount realized by Edwin on the sale is $212,000, and so he recognized a gain of $12,000. Since he is treated as having held the land for more than one year, his gain is a long-term capital gain.

Sophia purchased 50 shares of stock of the Bilt Rite corporation for $8,000 on September 12, Year One. On March 8, Year Four, the value of the 50 shares had declined to $5.000. On that date Sophia made a gift of the 50 shares to her nephew, Paul. Sophia's basis in the 50 shares at the time of making the gift to Paul was $8,000. There was no gift tax on the gift to Paul. The value of the stock increased after Sophia made the gift to Paul. On February 2, Year Five, Paul sold the 50 shares of stock to an unrelated person for its then value of $9,000. As a consequence of that sale, Paul recognized:

A gain of $1,000 Since no gift tax was paid on the gift, for purposes of determining gain on a disposition of the stock, Paul's basis was equal to the $8,000 basis that Sophia had in the stock. On selling the stock for $9,000, Paul recognized a gain of $1,000.

In Year One, Ralph purchased Greenacre (unimproved land) from Dinah. Ralph paid Dinah $250,000 cash, and Ralph took Greenacre subject to a mortgage, the outstanding balance of which was $650,000. Neither Dinah nor Ralph was personally liable to repay the mortgage debt, which therefore was a nonrecourse debt. In Year Eight, Ralph sold Greenacre to Hilbert, who is not related to Ralph. All payments of principal and interest that were payable on the mortgage debt while Ralph held Greenacre had been paid on time. The outstanding balance due on the mortgage debt was $550,000 at the time of the sale to Hilbert. To purchase Greenacre, Hilbert paid Ralph $450,000 cash and took the property subject to the mortgage debt of $550,000. As a consequence of making that sale of Greenacre, Ralph recognized:

A gain of $100,000. Under the Crane doctrine (sometimes referred to as the Tufts doctrine), the amount realized by Ralph on his sale of Greenacre includes the nonrecourse debt of $550,000 that encumbered the property. So, Ralph received total consideration of One Million ($1,000,000) Dollars ($450,000 cash plus the $550,000 nonrecourse debt. Ralph's basis in Greenacre was $900,000 which is the sum of the $250,000 cash he paid and the $650,000 nonrecourse debt that encumbered the property when he acquired it. Under the Crane doctrine, Ralph's basis in Greenacre included the amount of the nonrecourse debt that encumbered the property when Ralph acquired it. Since land is not depreciable, and since no facts were stated that would have altered Ralph's basis, his basis in Greenacre at the time of the sale was still $900,000. So, Ralph recognized a gain of $100,000 ($1,000,000 minus $900,000).

Arthur owned an automobile for personal use. Arthur's car was damaged by Paul in a car collision. Immediately before the collision, the fair market value of Arthur's car was $30,000. As a result of the collision, the car's value was reduced to $10,000. Arthur had a basis of $24,000 in the car. Arthur did not claim a tax deduction for the damage done to his car. Paul's insurer paid Arthur $26,000 for the damage done to the car by Paul's negligence. As a result of those events, Arthur recognized:

A gain of $2,000 Since Arthur recovered from Paul's insurer $2,000 more than his basis, Arthur recognized that amount of gain. In determining his gain, Arthur is permitted to use all of his basis and does not apportion it between the amount of decline in the car's value and the value that remained.

Henry purchased Blackacre (unimproved land) for $20,000 in Year One. In Year Six, the fair market value of Blackacre had risen to $80,000. In Year Six, Henry sold Blackacre to his cousin, Barbara, for $40,000. Henry intentionally sold Blackacre to Barbara for one-half of its value in order to make a gift to her of the difference between the selling price and the value of the land. At the time of the sale to Barbara, Henry had a basis of $20,000 in Blackacre. There was no gift tax on the transaction between Henry and Barbara. As a result of the bargain sale to Barbara, Henry recognized:

A gain of $20,000 The bargain sale between Henry and Barbara was a part-sale, part-gift transaction. Since the amount realized by Henry ($40,000) exceeds his $20,000 basis in the land by $20,000, Henry recognized a gain of $20,000. Note that the donor-vendor does not apportion his basis between the part sold and the part donated. Instead, the donor is permitted to use his entire basis in the property to measure the gain on the sale, and none of the basis is allocated to the gift element of the transaction. Treas. Reg. 1.1001-1(e).

In Year One, Zelda purchased a building from Rose. To purchase the building, Zelda paid Rose $100,000 cash; and Zelda took the property subject to a mortgage debt of $600,000. Zelda did not assume personal liability for the mortgage, which therefore was a nonrecourse debt. By Year Ten, the value of the building had declined so that the building had a fair market value of $450,000. The outstanding balance of the mortgage at that time was $510,000. Zelda declined to make any more payments on the mortgage. The mortgagee foreclosed and sold the building in a foreclosure sale for $420,000. As a consequence of depreciation deductions and a casualty damage that the building suffered from a fire, Zelda's basis in the building at the time of foreclosure was $430,000. As a consequence of the foreclosure, Zelda recognized:

A gain of $80,000. Under the Crane doctrine, Zelda realized an amount of $510,000 when the mortgagee foreclosed on the property since that was the amount of mortgage debt outstanding. The Tuft's case established that the property owner is treated as receiving an amount equal to the balance of the nonrecourse debt regardless of the fact that the fair market value of the property was less than the amount of the debt. So, the amount realized by Zelda on the disposition of the building was $510,000, and her basis was $430,000. She recognized a gain of $80,000.

Hilbert paid $10,000 to purchase 100 shares of Win All, Inc. stock on June 6, Year One. On January 5, Year Two, Hilbert transferred the 100 shares of Win All stock to his niece, Matilda, as a wedding present. The fair market value of the stock at the time of the transfer to Matilda was $14,000, and Hilbert's basis in the stock at that time was $10,000. There was no gift tax imposed on the transfer to Matilda. On August 12, Year Two, Matilda sold the stock for $16,000 cash, which was the fair market value of the 100 shares of stock at that time. As a consequence of that sale, Matilda recognized:

A long-term capital gain of $6,000 When the value of a gift exceeds the donor's basis, the donee's basis in a gift is equal to the basis that the donor had at the time of making the gift. § 1015(a). If a gift tax had been paid on the gift, there would be an addition to the donee's basis; but no gift tax was paid in ths problem. § 1015(d). So, Matilda had a basis of $10,000 in the donated stock, and she recognized a gain of $6,000 when she sold those shares. The gain is a capital gain. Under § 1223(2), Matilda *tacks Hilbert's holding period to her own holding period*, and so she held the stocks for more than one year when she sold them. Her $6,000 gain is therefore a long-term capital gain.

Sophia purchased 50 shares of stock of the Bilt Rite corporation for $8,000 on September 12, Year One. On March 8, Year Four, the value of the 50 shares had declined to $5.000. On that date Sophia made a gift of the 50 shares to her nephew, Paul. Sophia's basis in the 50 shares at the time of making the gift to Paul was $8,000. There was no gift tax on the gift to Paul. The value of the stock continued to decline, and Paul sold the 50 shares of stock to an unrelated person for its then value of $3,500 on February 2, Year Five. As a consequence of the Year Five sale of the 50 shares of Bilt Rite stock, Paul recognized:

A loss of $1,500 *loss basis rule* When the donor's basis in the donated property is greater than the fair market value of that property at the time of the gift, the donee will have two bases in the property—one basis for determining gain on a disposition of the property, and a different basis for determining a loss on a disposition of the property. For determining a loss, the donee's basis will equal the fair market value of the donated property. For determining a gain, the donee's basis will equal the donor's basis. In the instant problem, Paul will have a basis of $5,000 for purposes of determining a loss since that was the value of the property at the time of the gift and it is a lesser amount then Sophia's basis. § 1015(a). On selling the stock for $3,500, *Paul recognized a long-term capital loss of $1,500.*

In Year Five, Bridget owned Whiteacre (unimproved land) which she had owned for three years. The fair market value of Whiteacre at that time was $50,000, and Bridget had a basis of $80,000 in Whiteacre. In Year Five, Bridget sold Whiteacre to her cousin, Pearl, for $20,000. Bridget intentionally sold Whiteacre for less than its value in order to make a gift to her cousin. There was no gift tax on the transaction. Five months after acquiring Whiteacre, Pearl sold it to an unrelated person for its then fair market value of $40,000. On Pearl's sale of Whiteacre, Pearl recognized:

A loss of $10,000 Bridget sold Whiteacre to Pearl for less than her $80,000 basis and for less that land's $50,000 value. Pearl obtained two bases in Whiteacre—one basis for determining a loss ($50,000) and one basis for determining a gain ($80,000). For purposes of determining Pearl's gain on a disposition, Pearl's basis equals the $80,000 basis that Bridget had in the land. For purposes of determining a loss on Pearl's disposition of the land, Pearl's basis equals the $50,000 value the land had at the time that Pearl acquired it. Treas. Reg. § 1.1015-4. Pearl sold Blackacre for $40,000, which is less than her gain basis ($80,000), and $10,000 less than her loss basis of $50,000. So Pearl recognized a loss of $10,000 on her sale.

In Year One, Patrice gave Blackacre (unimproved land) to her husband, Jeffrey. At the time that the gift was made, Patrice had a basis of $150,000 in Blackacre; and Blackacre's fair market value was $80,000. No gift tax was incurred because of that gift. In Year Four, Jeffrey sold Blackacre to an unrelated party for its fair market value of $60,000. Jeffry's basis in Blackacre at the time of the sale was the same as it was when he acquired it. As a consequence of that sale in Year Four, Jeffrey recognized:

A loss of $90,000 *no loss basis rule for gifts between spouses* Jeffrey's basis in Blackacre is $150,000. He obtained the same basis in the property that Patrice had. § 1041(b). When Blackacre was given to Jeffrey, it was a depreciated asset since the value of the property was in excess of Patrice's basis in it. Under § 1015(a), the normal rule for gifts of a depreciated asset is that the donee's basis for purposes of determining a loss on a subsequent disposition of the property is equal to the fair market value of the property at the time of the gift. If that rule were applicable, Jeffrey would have a basis of $80,000 in Blackacre for purposes of determining the amount of his loss on the sale; and so Jeffrey would have recognized a loss of $20,000. But, for gifts between spouses, § 1015(e) provides that the donee's basis in the property is determined by § 1041(b)(2) rather than by § 1015. *Section 1041(b)(2) provides that Jeffrey's basis is the same as Patrice's ($150,000) regardless of the value of the property at the time of the gift*, and so Jeffrey recognized a $90,000 loss on the sale. Temp. Reg. § 1.1041-1T(d), A-11.

In 1976 A purchases an asset for $10,000. A pays the seller $1,000 in cash and signs a note payable to the seller for $9,000. A is personally liable for repayment with the seller having full recourse in the event of default. In addition, the asset which was purchased is pledged as security. During the years 1976 and 1977, A takes depreciation deductions on the asset in the amount of $3,100. During this same time period A reduces the outstanding principal on the note to $7,600. At the beginning of 1978 A sells the asset. The buyer pays A $1,600 in cash and assumes personal liability for the $7,600 outstanding liability. A becomes secondarily liable for repayment of the liability. Result to A?

A's amount realized is $9,200 ($1,600 + $7,600). Since A's adjusted basis in the asset is $6,90term-2050 ($10,000 − $3,100) A realizes a gain of $2,300 ($9,200 AR − $6,900 AB)

BEYOND TUFTS QUESTION A. From Tufts, what is Mr. Bayles AB in the property he acquired described below? $1.4M AB/ $1.4M FMV $1.8M Nonrecourse debt B. Consider Treas. Reg. §1.1001-2(a)(3) if Mr. Bayles were to sell the property above subject to the outstanding $1.8M debt. What result?

A) Most believe 1.4M is the appropriate answer B) If sells for 1.8M 1.8M AR 1.4 AB 400K GR, but 1.1001-2(a)(3) states: In the case of a liability incurred by reason of the acquisition of the property, this section does NOT apply, to the extent that such liability was not taken into account in determining the transferor's basis for such property.

HYPO: Suppose Start up New Corp paid following salary amounts each year to CEO Year 1: $100k Year 2: $100k Year 3: $100k Year 4: $800k Q: If the IRS were to challenge year 4 what could you argue that might help sustain deductibility?

A: As a start up, compensation will be low at first. You may also take less than you are really worth for the good of the new company. By year 4, more profitable. -Could provide evidence that you were paid more before start up -You are worth more but are taking pay cut to help sustain start up. -But now, profitable so making up "salary arrearage" -IRS has accepted this argument under similar facts

EX: Beneficiary gets $5M life insurance as a result of mom's death. She was originally the beneficiary. What is excludable?

ALL of it!

HYPO: Andre exchanges 40/70 land to Steffi for 50/70 equipment

ANDRE 70 (AR under 1001(a)) - 40 (AB) = 30 GR, but NOT recognized since spouses (due to 1041(a)(1) - thus no GI to report) 50 AB in equipment (1041(b)(2) - carryover) STEFFI 70AR - 50AB = 20GR, not recognized 40AB in land

HYPO: Andre sells property (40AB/30FMV) to spouse Steffi for 30K

ANDRE Note the depreciated property $10K LR, but NOT recognized due to 1041(a)(1) STEFFI Pays 30K cash AB 40K (carryover basis) 1041(b)(2) *No loss basis rule in transfers between spouses* Good for Steffi because she has a high basis and if sells to 3rd party have less (or no) GR and thus no GI to report

Owner purchases some land for $10,000 and later sells it for $16,000. (a) Determine the amount of Owner's gain on the sale.

Acquisition - $10K basis (1012a); 16K amount realized (1001b) a) $6000 gain realized (1001a); recognized as GI under 1001c

To what extent would the following taxes be deductible by Married Couple under s.164? A state income tax of $7k and a local property tax of $3k?

Added together they are deductible up to 10k cap.

In the Banks case, Justice Kennedy notes that "these cases likely would not have arisen" under the current Code as a result of the enactment of 62(a)(2) and (e). Those provisions, however, do not apply to all recoveries. For example, what result to Plaintiff if Plaintiff recovers $1M of compensatory damages and $2million of punitive damages in a physical personal injury case and Plaintiff's attorney receives a ⅓ contingency fee of $1M?

Admittedly, the enactment of "unlawful discrimination" cases (see §62(e)) to be an "above-the-line" deduction alleviates the Banks issue and creates a wash in such cases. However, §62(a)(20) does not apply to all law suits and the Banks issue lives in other cases, such as personal injury recoveries. In the problem posed here, Plaintiff would be allowed to exclude the $1 million of compensatory damages from gross income under §104(a)(2). However, the $2 million of punitive damages would be included in gross income as the §104(a)(2) exclusion is inapplicable to such damages. §104(a)(2)(1st parenthetical). However, the $1 million of attorney's fees are not deductible in computing taxable income. First, one third of the attorney's fees related to the excluded 104(a)(2) compensatory damages ($333,333) would not be deductible because of 265(a)(1). To permit such deductibility would provide the taxpayer with a double benefit. Second, the other $666,667 of attorney's fees would be deductible under 212(1). The inclusion/deduction result is of course required under the Banks case. However, the deduction is not an above the line deduction under 62(a)(20) and (e) because that allowance applies only to deductible attorneys fees and court costs in certain discrimination and other whistleblower lawsuits, and it does not apply to deductible attorneys fees and court costs in a physical personal injury lawsuit. As a result, the $666,667 deduction is a miscellaneous itemized deduction not deductible in computing taxable income as a result of 67(b) and (g).

In the current year, T purchases a single life annuity with no refund feature for $48,000. Under the contract T is to receive $3,000 per year for life. T has a 24-year life expectancy. (b)If the law remains the same and T is still alive, how will T be taxed on the $3,000 received in the thirtieth year of the annuity payments?

All $3000 in GI since beyond 24 year life expectancy

Employee makes payments for medical expenses and charitable contributions and for taxes on her residence and interest on a note secured by a mortgage on the residence.

All deductible (with 10k cap on taxes) as 67(b) itemized deductions. Only available if EE itemizes her deductions

What if the amount paid to Employee as reimbursement exceeds her actual expenses?

Amount in excess of reimbursement is GI

HYPO: Andre buys property for 40K, sells to spouse Steffi for 70K.

Andre: 30K gain realized, but NOT recognized Great deal for Andre! Doesn't have to report as GI, thus doesn't pay taxes on gain Steffi: 40K basis. Not happy since if she bought from non-spouse, she would take a 70K AB. Means that since she bought from spouse, she will pay more in taxes. Deferred tax consequences to transferee)

Suppose X buys property for 45k; gets offer from Y for $65K. What result to X?

Appreciation is NOT realized under Glenshaw Glass until actual sale. [Haig-Simons - yes, appreciation in value] Q: If X accepts offer, how much GI? $20K. Only the increment above the return of capital. Don't tax returns of capital

Taxpayer resides in the Champions area of Houston and travels via I-45 each day to her downtown law office. She also acquired a dessert and coffee shop several years ago. Suppose she drives from her law office to meet with a client located in the Galleria area?

Away from your tax home, so it IS deductible, as would be parking. Once you got to work, you then left your "tax home."

A lives in NY and B in Florida. Both are single and have very substantial all-salary incomes of identical amounts in the current year. Both incur $5k of deductible interest expense and A pays state income tax in the amount of $9000. B pays no state income tax. Assume that neither has any other cost, expense, or expenditure that could be claimed as a deduction. Which, if either, should claim the standard deduction?

B should use the standard deduction as B has only $5,000 of itemized deductions (interest) and use of the $12,000 basic standard deduction would reduce B's taxable income and tax liability. If A uses the standard deduction (unadjusted for inflation), A's standard deduction is $12,000 and §63(b) precludes deduction of A's $14,000 itemized deductions (interest + state income taxes). Since A's itemized deductions exceed A's standard deduction, A would elect to itemize. A - $5k interest; $50,000 - $14,000 Itemized = 36,000 TI $9k state income taxes B - $5k interest $50,000 - $12,000 Std. Ded. = $38,000 TI

Beneficiary B owns an income interest in a trust which B purchased several years ago. The remaining income interest has twenty years to run after the date of the sale described below and B's adjusted basis in the remaining interest is $50,000. What result: (a)If B sells the entire interest for $60,000?

B's interest is acquired by $50k purchase from Beneficiary and later sold for $60k. General Trust info: Grantor - creates trust, transferring legal title to trustee, usually a gratuitous transfer Trustee - runs the trust, has fiduciary responsibility to beneficiary Beneficiary - holds equitable title, can sell income interest to B for $50k 60 AR - 50 AB = 10k LTCG Watkins case distinguished: lottery winner. *Difference between future right to income (can be capital asset) and right to income already earned (ordinary).* ***Purchased right to future income is a capital asset

The congregation for whom Reverend serves as a minister gives her a check for $5,000 on her retirement. Does Reverend have gross income?

Because clergy, not GI. Otherwise would be. Separate exception Revenue Ruling 55-422 - suggested reverend/congregation relationship is NOT ER-EE relationship Proposed Regulation 1.102-1(f)(2) - clergy/congregation relationship is personal and thus not subject to 102(c)

Denise, a law practitioner from Seattle, goes to Florida for a year to participate in their LLM program. What expenses in addition to tuition and books may she deduct?

Being self-employed, D's education expenses may qualify for a deduction since they are incurred while "away from home" within the meaning of 162(a)(2) If deductible, her deduction would include tuition, books, transportation, lodging, 50% of meals, etc. 1.162-5(e); 274(n) If you take a break longer than a year, the concern is that you "abandoned" the T/B. Should keep T/B going to prevent going stale.

Same as (a), except that the land is transferred to satisfy a debt that Brad owes Jen. The land has a basis of $500k and a FMV of $400k at the time of the transfer. Jen sells the land for $350k.

Brad: 400 AR - 500 AB = 100 loss realized, NOT recognized (1041) Again, considered a sale or disposition. Transferring basis in exchange for relinquishment of marital rights. 100k loss is wasted to him. No deduction Occurs within one year of divorce, so 1041 still applies. *No loss basis rule.* Jen: 350k AR - 500 AB = 150k loss *Recognition is NOT automatic for her* recognized ONLY if 165(c) tests are met. 165(c)(1) - is it a loss related to T/B? 165(c)(2) - is it a loss related to a profit-oriented activity that is not a T/B? 165(c)(3) - is it a loss from casualty? If meets 165(c) tests, then next Characterize as capital or ordinary loss. Could potentially go into her tax matrix for netting capital gains and losses But if we don't meet 165(c), it's not deductible. It's over

HYPO: A gives property to B. Sometime later B gives the property to C. What's C's basis?

C's basis would be A's, BUT also remember there would be upward/downward adjustments to basis due to S.1016 (EX: capital expenditures, depreciation, etc.)

Taxpayer, a cash method, calendar year taxpayer, engaged in the following transactions in shares of stock. Consider the amount and character of T's gain or loss in each transaction: (a)T bought 100 shares of stock on January 15 of year one at a cost of $50 per share. T sold them on January 16 of year two at $60 per share.

CA? Yes. S/E? Yes. H/P? Start counting 1/16 of year 1, sold on 1/16 of year 2. Thus a LTCG. ***If sold exactly same day a year later, then LT*** Shortest period that can have LT treatment

Residential real estate Tycoon purchases a sports team. However, after two years Tycoon's fortunes turn sour and she sells the team at a loss. What happens to the deferred investigation expenses?

Can deduct under 165(c)(1) - losses of T/B [Can deduct the transactional stage under 165(c)(2) if don't commence]

(b)Jock owned a paid-up two-year term $1 million policy on his life which he sold to Pro for $20,000, Pro being named beneficiary of the policy.

Can only exclude to the extent of consideration paid. Balance includable $980k, exclude $20k [transfer for value rule 101(a)(2)]

$3000 for adding a carport to an apartment

Capital expenditure

Landlord L owns two contiguous parcels of land. L leases both parcels to Tenant T for $1,000/month per parcel or a total of 24K/year; rent payable at the end of each year. The lease is for a 10 year period. Upon the following events, which occur more than one year after the lease is signed, what are the results? To T if L pays T $20K to cancel the leases on both parcels?

Capital gain under Metro. Giving up a property interest T probably has 20k of LTCG (unless T is in biz of selling lease agreements). 1241 makes it clear that such a transaction is to be treated as an exchange. As regards T, T has exchanged property, T's leasehold interest

What result in (a) if the car had not been totally destroyed but was worth $10k after the accident?

Change in value 20k AB 22k. Lesser of 20 and 22 is 20k, minus 15k insurance = 5k deductible loss.

Hypo: Parent makes $415K gift transfer to child Tax consequences to child and parent?

Child pays no tax Parent can exclude first $15K Remaining $400K reduces lifetime cap on estate tax by $400K $11.4M (lifetime cap) - $400K = remaining cap $11M

HYPO Creditor ($5k debt note, paid $4K as investment) <--------> Debtor (2K/5K GM stock) Result and Characterization for Creditor and Debtor?

Creditor (Hudson case) 5 AR (GM stock) 4K AB (investment) 1K GR & R Debtor 5K AR (satisfaction of liability) 2K AB (in GM stock) 3K GR & R Even though the note is extinguished in that the debt goes away and he has nothing of value that he can sell, section 1271 treats as capital asset BUT! Always remember to ask these three questions in capital asset questions: 1. Capital Asset? 2. Sale or Exchange? 3. Holding Period?

EX: compute the amount of the currently deductible capital loss and any capital loss carryovers and their character for the following: D has a salary of $30,000 and the following gains and losses: LTCG ($1500) - LTCL ($2500) = $1000 Net LTCL STCG ($500) - STCL ($4000) = $3500 Net STCL

Current Year Deductions $5000 ($2000 of the $6500 capital losses will be deducted against capital gains [since that is the amount allowed to the extent of the total gains] and $3000 of the remaining $4500 of capital losses will be deducted against ordinary income) Carryover $500 STCL Carryover $1000 LTCL Carryover

$100 for advertising for a tenant to occupy an empty apartment

Currently deductible expense

(b)What result to Debtor under the facts of (a), above, if instead Debtor transferred some land worth $8,500 with a basis of $2,000 to Plaintiff to satisfy the obligation? What is Plaintiff's basis in the land?

D --> 2/8.5 land → P to settle judgment debt This is a sale or disposition via 61(a)(3) 8.5AR - 2 AB = 6.5 capital gain P's AB in land is 8.5 the "purchase price" received from the lawsuit (Philadelphia)

What result if Payor Spouse pays tax at 30% and Payee Spouse, who inherited money, pays a 35% tax. Would payee be better of under post-2018 tax arrangement and take the deal?

Deal. Under prior instrument, payor would pay net 70k and payee 65k, versus 70k each under amended agreement which could be to payee Spouse's advantage. 70k non-taxable is better than 100k taxable if in the 35% bracket

(m)Employer gives Employee a case of scotch each Christmas. See Reg. § 1.132-6(e)(1).

Deminimis, maybe if scotch not expensive

HYPO: $30K AB/$20 FMV - given to donee who sells property for $35K

Depreciated property BUT! Loss basis rule does NOT apply. Why? Because it must be sold for a loss Thus, $35K G, $30 AB = $5 GR

HYPO: Parent conveys property to child. Property has $200K AB and $150 FMV for $40k from child.

Depreciated property! Parent: 40K AR; 160K LR (not recognized) - loss basis rule applies to transferee's basis calculation, NOT transferor Child's basis if sells property at a loss (less than 150k FMV)?: $150K basis (loss basis rule)

Dick and Jane are unmarried co-owners of a principal residence which they acquired in 2018 at a cost of $1.2 million. Dick and Jane jointly borrowed $1M of the purchase price giving the lender a mortgage on the residence. To what extent may they each deduct interest on the mortgage?

Dick and Jane may each deduct the full interest on their $500k share. (Voss v. Commissioner 2015 - held that limits apply to unmarried co-owners on a per-taxpayer basis as opposed to a per-residence basis).

Law student's Spouse completed computer programming school just prior to student entering law school. Spouse contacts a talent search firm to help find a position as a part-time computer programmer (i.e. an independent contractor). Consider whether Spouse's search fees are deductible in the following circumstances. (based on Rev.Rul 75-120) Firm is successful in finding Spouse a position in New Town as a sales rep

Different T/B. Sales rep vs. programmer, but if you had job hunting expenses related to a failed search for programmer job, you can deduct those search costs. You don't have to succeed to deduct job search expenses. Denial letters could help prove you made good faith efforts. Can deduct expenses relating to programmer job search. Even if you fail, still deductible.

Law student's Spouse completed computer programming school just prior to student entering law school. Spouse contacts a talent search firm to help find a position as a part-time computer programmer (i.e. an independent contractor). Consider whether Spouse's search fees are deductible in the following circumstances. (based on Rev.Rul 75-120) (b) The firm is successful in finding Spouse a position

Doesn't matter. Same as (a). Not yet carrying on T/B.

(i)Father appointed Daughter executrix of his estate and made a $20,000 bequest to her in lieu of all compensation or commissions to which she would otherwise be entitled as executrix.

Duberstein intent not present, thus GI results

What are the tax consequences to Injured if the $1M is used by Injured to purchase an annuity to pay Injured $100k a year for Injured's life (20 year life expectancy)?

ER = 1M / (100k * 20 yr LE). ER = ½. Thus, of 100k per year, 50k excludable, 50k included in GI ½ ER; 1M/2M x 100k payments = 50k exclusion Original 1M excludable, but you can't just put that 1M in an investment and exclude the proceeds. Only the original amount is excludable

Employee salesperson (not "outside") pays the cost of business transportation but Employer reimburses How should employee treat the expenses and reimbursement on her return? What result to employer?

Employee: report reimbursement as GI and offset with ATL deduction to GI. Employer: 62(a)(1) deduction of expense. Comes out as a wash.

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

Exception to the exclusion so fully excludable - 101(a)(2)(B)

P dies as a result of the leg injury, and P's parents recover $1M of punitive damages awarded in a wrongful death action under state statute?

Excludable Under 104(c)

Consider whether it is likely that § 102 applies in the following circumstances: (a)Father leaves Daughter $20,000 in his will.

Excludable under 102(a) as bequest

Does 102 apply? (b)Father dies intestate and Daughter receives $20,000 worth of real estate as his heir.

Excludable under 102(a) as inheritance

Does 102 apply? (c)Father leaves several family members out of his will and Daughter and others attack the will. As a result of a settlement of the controversy Daughter receives $20,000.

Excludable under 102(a) under Lyeth; settlements still excludable

Does 102 apply? (d)Father leaves Daughter $20,000 in his will stating that the amount is in appreciation of Daughter's long and devoted service to him.

Excludable under 102(a), most likely unless clearly due to employment. 20K due to love and affection; still a bequest

Jury also awards P damages of $200k to compensate for P's suicidal tendencies resulting from loss of leg use.

Excludable, since emotional distress resulted from physical injury

Investor Higgins, who owns a substantial interest in X Co., incurs transportation, meals, and lodging expenses to attend X Co's annual shareholder meeting

Expenses are listed in 212(2), however, NOT listed in 62 or 67(b), so 67(g) MID. Be careful to note whether or not the person is running a trade or business. Also, if he had stock LOSSES, they would be deductible ATL (see f above)

TP has an automobile used exclusively in TP's biz which was purchased for $40k and, as a result of depreciation deductions, has an AB of $22k. When the car was worth $30k, it was totally destroyed in an accident and TP received $15k of insurance proceeds. What is TP's deductible loss under 165?

FMV 30k; change in value 30k AB 22k 22k since lesser of 30 and 22? Minus 15k insurance proceeds = 7k loss deductible. ***REMEMBER, if property used in T/B is held for more than one year, see 1231, including 1231(a)(4)(C) subhotchpot: if losses are greater than gains, then have ordinary losses. Gains/losses, no need to go to main hotchpot If losses exceed gains, then ordinary. If gains greater than or equal, then LTCG. Here, losses exceed gains (only loss, no gain). So ordinary and recognized, deductible loss of 7k. Better loss result as compared to a capital loss, because capital losses are limited to extent of capital gains plus 3k of O.I.

To what extent would the following taxes be deductible by Married Couple under s.164? A local property tax of 10k for which Married Couple became liable as owners of Blackacre on January 1, but which Buyer agreed to pay half of when Buyer acquired Blackacre from Married Couple on July 1?

Fact that the married couple is liable of the tax as of January 1 is not dispositive Local real property taxes are deductible under 164(a)(1) 164(d)(1) - requires allocation of local real property taxes between buyer and seller according to the portion of the year each owns the property. This applies whether or not buyer and seller actually apportion the tax. Here, Buyer and Seller are each allowed a 5k deduction. This is an exception to the general rule that only the person on whom the obligation falls may claim the deduction

What factors should be considered in determining the proper tax treatment for the payments?

Factors test or independent investor test. Also Must satisfy contingent compensation test: free bargain made before services rendered to secure services of EE and reasonable at the time created? If 248/250, can't be the product of a free bargain as required under 1.162-7(a)(2) Fails contingent compensation test, so go back to traditional reasonableness test. If you don't have a contingent compensation arrangement that's reasonable when entered into, you must consider whether compensation was reasonable when paid. (use factors or independent investor test)

Son, who is single, owns a home. Father pays Son's 14k annual property tax. May father deduct the tax paid?

Father cannot deduct the tax because he is not liable for the obligation. It is his son's obligation. See Cramer case. To allow the Father the assignment of the deduction would be just as inappropriate as to allow an assignment of income. Uslu v. Commissioner - interest deduction on mortgage allowed to equitable holder not legal title holder on residence where the equitable owner who occupied the residence and paid interest on the mortgage could not obtain a loan so title taken in legal owner's name

Alice recently sold some real estate she had owned for a number of years. Her sales price was $250k. She acquired the property for $50k and constructed a building on the land at a cost of $125k. Prior to selling the land, she had properly claimed an ACRS deduction under 168 amounting to $40k. a. Analyze Alice's federal income tax consequences b. How would your analysis change, if at all, if Alice claimed ACRS deductions totaling $35k rather than the $40k proper amount? c. $45k?

First bought property at $50K - ($50k cost basis under S.1012) Constructs building worth $125K (capital expenditure) - S.1016(a)(1) Value increased to $175K basis Depreciation/ACRS deduction of $40K - S.168, reduces basis to $135k. 250k AR (sales price) - 135k AB = 115k gain realized, added to GI. "Recognized" as GI under 1001(c) B & C) Reduce AB by "greater of" rule B) still $115k C) $120k

(c)T bought 100 shares at $50 per share on February 10 of year one and another 100 shares at $50 per share on March 10 of year one. T sold 100 of the shares on February 15 of year two for $60 per share. See Reg. §§ 1.1223-1(i) and 1.1012-1(c)(1)(i).

First in, first out. Absent adequate identification

Taxpayer resides in the Champions area of Houston and travels via I-45 each day to her downtown law office. She also acquired a dessert and coffee shop several years ago. Suppose the next day she leaves her house and meets with a client located in the Greenspoint area to get documents signed?

From residence to temporary location of T/B: this IS deductible under Rev.Rul 99-7. Don't have to stop at regular work location first.

What result to the estate in (a), above, (with Decedent still in cold storage) if instead Friend simply permitted the statute to run stating that she felt sorry for Decedent's widow, the residuary beneficiary of his estate?

GI = $0. Facts now appear to support donative intent (Duberstein) so that the debt discharge is medium used to make a gift.

Now, what result to Nephew if Decedent's will provided that his estate not collect Nephew's debt to the estate?

GI=$0. Testamentary version of Duberstein. Donative intent to make a bequest.

2. Father had some land that he had purchased for $100,000 but which had increased in value to $200,000. He transferred it to Daughter for $100,000 in cash in a transaction properly identified as in part a gift and in part a sale.* Assume no gift tax was paid on the transfer. (a)What gain to Father and what basis to Daughter under Reg. §§ 1.1001-1(e) and 1.1015-4(a)(1)?

Gain to Father = $0; basis for Daughter = $100K

HYPO: A & B are married and own some real estate as JTWROS. A predeceases B. What is B's AB in the property? FIRST! Note that since a JT situation, is a common law jx, NOT a community property jx.

Get FMV as to A's half Keeps her own AB for her share. surviving spouse keeps her original AB for her half, FMV AB for deceased spouse's half.

Boyfriend who has a "mental problem" with marriage agrees with Taxpayer that he will leave her "everything" at his death in return for her staying with him without marriage. She does, he doesn't, she sues his estate on a theory of quantum meruit and settles her claim. Is her settlement excludable under § 102?

Gift under Duberstein? NO, contract claim (quantum meruit), so 102(c) Unless you can prove common law marriage

What if Sally's parents pay off a 10k loan to 3P lender for her?

Gift, excludable under 102

(c) If B received the income interest as a gift (rather than by purchasing it, but assuming the same adjusted basis) and B sells the entire interest for $60,000?

Grantor -----> Trustee ------> Beneficiary sells income interest for $60k 1001(e) applies, so AB is ZERO 60 - 0 = $60k GR&R, LTCG Basis is disregarded

Sally is employed as a hostess at a restaurant owned and operated by Mega, Inc. In addition to owning the restaurant, Mega also owns and operates a retail furniture store. All employees of Mega are permitted to purchase any of Mega's inventory or meals at a 10% discount. Sally purchased a dining room set from Mega's furniture store for $900. The retail price that Mega would have charged a customer for that dining room set was $1,000. Mega's gross profit percentage on its furniture sales is 25%. Because of making that purchase of the dining room set at a discount, Sally recognized:

Gross income of $100. The qualified employee discount provision of § 132(a)(2) does not apply because Sally does not perform services in the line of business of Mega that sells dining room sets. § 132(c)(4). Sally recognizes gross income of $100—the full amount of her discount. See § 2.2200, 2.2240

Elizabeth is an Associate of the Wilshire law firm. Wilshire operates its law practice from a building that it owns and in which it is the only occupant. Wilshire has a dining room in its office building which it owns and operates for its staff. The dining room has a chef employed by Wilshire. No charge is made for meals in the dining room; so Wilshire derives no revenue from its operation of that facility. Employees of Wilshire are permitted to take their meals at the dining facility without charge provided that they do so during their working hours. The employees are not required to eat at the dining room. Wilshire offers its employees a choice. They can have their meals at the dining room or they can have a cash payment of $3,000 per year. Elizabeth chose to have her meals in the dining room and so forego the additional cash payment. The aggregate value of the meals she had in Year One is $2,600. As a consequence of the arrangement with her employer for meals, In Year One, Elizabeth recognized:

Gross income of $2,600. The exclusion in § 119 for meals provided by an employer on his business premises does not apply if the employee has the option of receiving compensation in lieu of the meals. Treas. Reg. § 1.119-1(e). Elizabeth has gross income in the amount of the value of the meals she received ($2,600). While Elizabeth could have received $3,000 in cash, that option does not constitute constructive receipt since, to obtain it, she would have had to have given up the right to the meals. Moreover, since the regulation includes the value of the meals in gross income if the employee has the option of obtaining other compensation in lieu of the meal, that suggests that the other compensation is not constructively received. *Since the law firm derived no revenue from its operation of the dining room, the de minimis fringe exclusion of § 132((e)(2) for providing certain eating facilities is inapplicable.* § 132(e)(2)(B). Section 132(e)(2) does provide that an employee who receives a meal that qualifies for exclusion from income under § 119 is deemed to have paid an amount for that meal equal to the cost of providing it; and if that provision were applicable, it would qualify the facility for the de minimis exclusion. But since all of the employees have the option of receiving cash in lieu of the meals, none of their meals are excluded by § 119; and so the dining facility does not qualify for the de minimis fringe exclusion. See § 2.2410, 2.4000

Peter is a flight attendant with Blue Sky airline. Blue Sky gave Peter a reserved round-trip ticket on flights from Atlanta to Seattle and return. Blue Sky did not charge Peter any amount for the round-trip ticket. Each of the flights that Peter took with the ticket had more than 2 empty seats so the airline did not lose any revenue by having Peter occupy one of its seats. At the time that it gave Peter the ticket, the airline was aware that it was very likely to have a few unused seats on those flights. The retail price for Peter's round-trip ticket that would have been charged to a customer of Blue Sky is $500. Blue Sky has a gross profit percentage of 30% on its sales of tickets to its customers. As a consequence of receiving the round-trip ticket, Peter recognized:

Gross income of $400. The no-additional cost service of § 132(a)(1) is inapplicable. By providing Peter a *reserved* ticket, the airline did forego potential revenue even though it turned out that the airline could not have sold any more tickets than it did. While the airline predicted that there would be some unused seats on the flights, it lost the potential to sell those seats if its prediction did not prove to be correct. The no-additional cost service provision does not apply. Treas. Reg. § 1.132-2(c), Ex. However, Peter can exclude part of the value of the ticket under the qualified employee discount provision of § 132(a)(2) even though he made no payment at all for the ticket. Treas. Reg. § 1.132-3(a)(4). Since Peter received a service from his employer, as contrasted to a receipt of property, the amount of the exclusion is limited to 20% of the price that the airline charged its customers for that seat ($500). So, Peter can exclude $100 from gross income, and he must include $400 in income.

HYPO: Billy is borrowing 200k on a recourse basis to finance the purchase of his new home. Lender is charging 3.5% interest and 2 discount points. Billy would like to deduct the $4000 in the year paid as opposed to over the life of the mortgage.

He may do this because of 461(g)(2) exception ***Keep in mind that the 461(g)(2) exception does NOT apply in a home mortgage refinance scenario. **** Discount points = upfront interest that is paid at closing. Those two discount points are $4,000.

Investor Buffet, who has substantial stock holdings, rents an office, hires a staff, and incurs additional costs in relation to his investment activities.

Higgins case scenario. Not T/B. 212 activity. However, not listed in 67(b), so 67(g) MID

What if at the time the contract was made Employee held only 10 of 250 shares?

If 10/250, that points to it being a free bargain, so contingent compensation arrangement is likely to be reasonable.

(f)What difference in result in (e), above, if Owner had previously rented the land to Lessee for five years for $1,000 per year cash rental and permitted Lessee to expend $2,000 clearing the property? Assume that, although Owner properly reported the cash rental payments as gross income, the $2,000 expenditures were properly excluded under § 109. See § 1019.

If lessee makes improvement; would have to include in GI of lessor since derived benefit, BUT s.109 provides exclusion. Do NOT include improvements of lessee in lessor's gross income. S.1019 - functions similarly for AB as s.109 does for GI. Do NOT include improvements by tenant in the basis AR $18K AB $10K = $8000

(e)If R sells R's remainder interest when it has an adjusted basis of $100,000 for $150,000?

If remainder interest sold alone, 1001(e) doesn't apply. So 50 GR/R

Law student's Spouse completed computer programming school just prior to student entering law school. Spouse contacts a talent search firm to help find a position as a part-time computer programmer (i.e. an independent contractor). Consider whether Spouse's search fees are deductible in the following circumstances. (based on Rev.Rul 75-120) Firm finds Spouse a computer programmer job and Spouse previously worked as a computer programmer in Old Town and seeks a position in New Town where student attends law school

If you have an existing T/B, then fees you pay in connection in trying to find a job in that same T/B are deductible. Fact that it is a new job doesn't mean it is necessarily a new T/B. Doesn't mean you always have T/B status satisfied. If there's a substantial lack of continuity between taking time off and going back. EX: going to school to get degree. Less than a year is usually okay. Case by case basis.

(h)Same as (g), above, except that Employee is comptroller of the conglomerate. See Reg. § 1.132-4(a)(1)(iv).

If you provide substantial services to both, must satisfy same line of biz test

Law student's Spouse completed computer programming school just prior to student entering law school. Spouse contacts a talent search firm to help find a position as a part-time computer programmer (i.e. an independent contractor). Consider whether Spouse's search fees are deductible in the following circumstances. (based on Rev.Rul 75-120) Firm finds her a job but firm's fee was contingent upon its securing a position for Spouse and the payments will not become due until Spouse has begun working

Important narrow exception. If you don't owe the money until you start, you have an existing T/B, so fees now ARE deductible since relate to a current T/B. Relates to father sports agent relating to son who got hired.

Insured purchases a single premium $100,000 life insurance policy on her life for a cost of $40,000. Consider the income tax consequences to Insured and the purchaser of the policy in each of the following alternative situations: (a)Insured sells the policy to her Child for its $60,000 fair market value and, on Insured's death, the $100,000 of proceeds are paid to Child.

Insured - 60AR - 40AB = 20 GR/R/CG; Child - 100AR-60AB = 40GR, GI *Child's is NOT a capital gain because NO sale or exchange since contract extinguished by death.* If Child wanted C.G. treatment would have to sell prior to death, but couldn't get 100K since no one would pay that to only get 100k max

$4000 for replacing the roof over one of the apartments. The roof had termite damage

It depends. If separate apartments, restoration/capital expenditure. If all apartments are under one common roof, repair more likely

HYPO: Grandma created trust for granddaughter Jane. Trustee required to distribute 50K on Jane's 25th birthday. What are income tax consequences to the trust if the trustee distributes property worth 50K instead of cash? 70AB in property.

Kenan teaches if it is S/E, whether gain or loss Trustee 70AB/50 - non-recognition of loss under 267 Executor 70AB/50 - IS recognized due to 267(b)(13)

Landlord L owns two contiguous parcels of land. L leases both parcels to Tenant T for $1,000/month per parcel or a total of 24K/year; rent payable at the end of each year. The lease is for a 10 year period. Upon the following events, which occur more than one year after the lease is signed, what are the results? To L if L sells the right to the rents on both parcels, prior to any rental payments being due or paid, to a third party for $200K?

L has 200k O.I., L is selling only right to income without also selling income producing property. (Hort)

Denise is a lawyer who took a leave of absence from her firm to enroll in LLM course in taxation, intending to practice exclusively in the tax area. Are her educational expenses deductible?

LLM (master of law). If already practicing law, them LLM is the same T/B. Provided that you don't just go from JD to LLM. Remember Morton Frank timing requirement. You have to be actually practicing law, must be carrying on trade or business.

Homeowners purchased their vacation residence for 180k (20k of which was allocable to the land). When it was worth 160k (20k of which was allocable to the land), they moved out and put it up for sale, but not rent, for 170k. (a) May they take deductions for expenses and depreciation on the residence? If so, what types of expenses would qualify?

Land/dirt is NOT depreciable because it is not a wasting assets. Only the building is depreciable. Facts are more like Lowry (not being put up for rent). So question is whether TP intended to acquire post-conversion profit on the property by holding it for appreciation in order to satisfy 212. There are several problems with respect to qualifying for deductions on these facts. If the post-conversion appreciation sought must be appreciation over the TP's AB, there is a problem since the 170k sales price is less than the purchase price AB. [In other words, there's no profit here since selling for a loss] Another problem is that the property was immediately put up for sale which is indicative that the TP was not holding the property for post-conversion appreciation in value. [Timing problem] So although the door is open narrowly for Lowry; it is not that wide that everyone can claim post-conversion appreciation under 212. ANSWER: NO, cannot take deductions.

HYPO: Mary purchased biz equipment several years ago for $50k, she properly claimed ACRS deductions of 30k. 2) what if she sells for 55k?

Lesser of 50RB and 55AR is 50 50-20AB = 30 recharacterized as OI So, of the 35 GR (55 AR - 20AB), 30k is OI, 5k is CG

In Year One, Wilber paid $100,000 cash to purchase Blackacre (unimproved land) for use in his business. Wilber used Blackacre in his business. On October 12, Year Five, Wilber gave Blackacre to his adult daughter, Eve. The fair market value of Blackacre at the date of the gift was $212,000. Eve held Blackacre as an investment. On September 2, Year Six, Eve sold Blackacre to an unrelated person for $240,000. On that sale, Eve recognized:

Long-term capital gain of $140,000. Eve's basis in Blackacre is the same basis ($100,000) that Wilber had in the property. § 1015(a). So, the amount of Eve's gain on the sale was $140,000. Even though Blackacre was not a capital asset in Wilber's hands, Wilber's holding period is tacked on to Eve's; and so Eve is deemed to have held Blackacre for more than one year. Since Eve held Blackacre as an investment, it is a capital asset in her hands. Eve's gain then is a long-term capital gain.

On February 5, Year One, Martha paid $5,000 to purchase 100 shares of stock of the Bilt Rite corporation. Martha held the stock as an investment. In Year Four, Martha sold the 100 shares of Bilt Rite stock for $8,000. On that sale, Martha recognized:

Long-term capital gain of $3,000. While there are a few exceptions (see e.g., § 306), corporate stock typically qualifies as a capital asset. The facts given in the problem do not indicate that any of the exceptions to capital asset characterization apply. Since Martha held the stock for more than one year, her gain on the sale is a long-term capital gain.

On February 5, Year One, Martha paid $5,000 to purchase 100 shares of stock of the Bilt Rite Corporation. Martha held the stock as an investment. On May 11, Year Four, Martha made a gift of the 100 shares of Bilt Rite stock to her adult nephew, Sidney. At the date of the gift, the fair market value of the 100 shares of stock was $8,000. On August 12, Year Four, Sidney sold the 100 shares of Bilt Rite stock for $8,600. As a consequence of that sale, Sidney recognized:

Long-term capital gain of $3,600. Sidney's basis in the stock was the same basis ($5,000) that Martha had in those shares. § 1015(a). Because he takes the same basis that Martha had, Sidney's holding period for the stock includes the more than three years that Martha held the stock. § 1223(2). So, Sidney recognized a gain of $3,600 ($8,600 - $5,000 = $3,600). The stock constitutes a capital asset, and since Sidney is treated as having held the stock for more than one year, his gain is a long-term capital gain.

Hilbert owned an office building. In Year One, Laura and Hilbert executed a leasehold agreement under which Laura leased one floor of the building for a ten-year period. Laura occupied the leased property to conduct a business. In Year Three, Hilbert received a highly advantageous offer to purchase the building provided that he could get Laura to cancel her leasehold interest. Hilbert offered Laura $50,000 if she would cancel the remaining term of her lease, and Laura accepted. Hilbert paid Laura $50,000. As a consequence of receiving that $50,000 payment, Laura recognized:

Long-term capital gain of $50,000. The payment in cancellation of Laura's leasehold interest is treated as an exchange for the lease by § 1241. Consequently, the payment satisfies the sale or exchange requirement of capital gain treatment. Since a leasehold interest in realty is treated as personal property, Laura's leasehold interest is not disqualified from being a capital asset by § 1221(a)(2) -- i.e., it is neither real property nor depreciable property used in a trade or business. Laura's gain is a long-term capital gain. Since Laura had no basis in her leasehold interest, the amount of her gain is $50,000.

On June 3, Year One, Frank purchased a tractor for use in his farm at a cost of $50,000. The tractor is 5-year property. Frank elected to depreciate the tractor on the double declining balance method. Frank did not elect to take any deduction under § 179 or §168(k). In Years One and Two, Frank took depreciation deductions for the use of the tractor of $10,000 and $20,000 respectively. Those deductions were both allowed and allowable. Frank died on January 1, Year Three, and bequeathed the tractor to his daughter, Ann. At the date of Frank's death, the fair market value of the tractor was $35,000, and Frank had an adjusted basis in the tractor of $20,000. Frank's personal representative did not elect to use the alternate valuation date for estate tax purposes. Ann did not use the tractor, but offered it for sale. Two months after Frank's death, Ann sold the tractor for its then value of $35,800 to an unrelated person. As a consequence of Ann's sale of the tractor, she recognized:

Long-term capital gain of $800. The transfer of the tractor as a result of Frank's death did not cause any recapture of depreciation. § 1245(b)(2). Under § 1014(a), as a consequence of Frank's death and the fact that the alternate valuation date was not elected, the basis of the tractor in the hands of Frank's beneficiary (Ann) is equal to its fair market value at the time of Frank's death. So Ann obtained a basis of $35,000 in the tractor. None of the depreciation deductions that Frank was allowed is taken into account in determining Ann's recomputed basis since none of those deductions is reflected in her adjusted basis. Treas. Reg. § 1.1245-2(c)(1)(iv). Since Ann did not use the tractor in a business, she is not allowed any depreciation deductions; and the tractor is a capital asset in her hands. Ann sold the tractor for $800 more than her basis, and so she recognized a gain of $800. Because she inherited the tractor, Ann is treated as having held it for more than one year even though she actually held it for only two months. § 1223(9). So, Ann recognized an $800 long-term capital gain on the sale.

Since Year One, Mike held Redacre, which was unimproved land that Mike used in his self-employed business. In Year Four, Mike purchased a machine to use in his business, and Mike took depreciation deductions for the use of the machine under § 168. In Year Seven, Mike sold both Redacre and the machine for their value to unrelated persons. Mike recognized a gain of $85,000 on the sale of Redacre, and he recognized a loss of ($32,000) on the sale of the machine. Mike had no other gains or losses in Year Seven or in the preceding five years. As a consequence of the sale of Redacre and the machine, Mike recognized:

Long-term capital gain of $85,000 and a long-term capital loss of ($32,000). Redacre is realty that was held by Mike for more than one year and was used in his business, and so is a § 1231 asset. The machine is property of a character subject to the allowance for depreciation that Mike used in his business and had been held by him for more than one year, and so also is a § 1231 asset. Since Mike's § 1231 gain on Redacre ($85,000) is greater than Mike's § 1231 loss on the machine ($32,000), the gain and the loss are treated as long-term capital gain and long-term capital loss respectively. § 1231(a)(1).

Mary is unmarried and files a tax return as a single taxpayer. In Year Four, Mary had a net long-term capital loss of ($6,000) and a net short-term capital loss of ($3,000). Mary had no other capital gains or losses in Year Four. In that same year, Mary had taxable income of $92,000. Mary can carryforward to Year Five:

Long-term capital loss of $6,000 and no short-term capital loss. The carryforward of a capital loss has the same character in the subsequent year that it had in the year in which it was incurred. § 1212(b)(1). To the extent that a net short-term capital loss exceeds the taxpayer's net long-term capital gain, the excess will reduce the taxpayer's other income up to an amount of $3,000. § 1212(b)(2)(A). If a taxpayer has both a net long-term capital loss and a net short-term capital loss, the net short-term capital loss is used first to offset the $3,000 of the taxpayer's other income. The net long-term capital loss is used to offset the taxpayer's other income only to the extent that the net short-term capital loss is inadequate to offset the entire $3,000. Since Mary had $3,000 of net short-term capital loss, none of her net long-term capital loss was used up in Year Four. Consequently, Mary carried over a $6,000 long-term capital loss and no short term capital loss.

(e)What result under the facts of (d), above, if when the principal amount of the two mortgages is still $180,000 and the land is still worth $300,000, Mortgagor sells the property subject to both mortgages to Purchaser for $120,000 of cash? What is Purchaser's cost basis in the land?

M bought land from Seller for 100 by borrowing 80NR and 20 cash, then takes out another $100 mortgage on property Equity in property 120K Purchaser takes subject to both mortgages. Pays $120, because 300FMV - 180 (mortgages) = 120K 300AR - 100AB = *200GR* What is purchaser's AB? = *$300K*

To what extent would the following taxes be deductible by Married Couple under s.164? A state income tax of $7k, a state sales tax of $1k, and a local property tax of $2k?

May deduct the state income tax, but if so, CANNOT deduct state sales tax. Can also deduct property tax. So, total 9k deduction.

(l)Employer has a bar and provides the Employees with happy hour cocktails at the end of each week's work.

Maybe de minimis, depending on value; administrative side could matter. Employees? Self serve? Bartender?

Employee is the majority shareholder (248 of 250 outstanding shares) and president of Corporation. Shortly after Corporation was incorporated, its Directors adopted a resolution establishing a contingent compensation contract for Employee. The plan provided for Corporation to pay Employee a nominal salary plus an annual bonus based on a percentage of Corporation's net income. In the early years of the plan, payments to Employee averaged $50,000 annually. In recent years, Corporation's profits have increased substantially and, as a consequence, Employee has received payments averaging more than $200,000 per year. What are corporations possible alternative tax treatments for the payments?

Must satisfy contingent compensation test: free bargain made before services rendered to secure services of EE and reasonable at the time created? Corporation would like to deduct. But what stands in the way? The idea that it might be "excess compensation." Is this a dividend or other distribution in disguise? 162(a)(1) says compensation is deductible, but must be reasonable. [either way it is includable in EE's GI.] If 248/250, can't be the product of a free bargain as required under 1.162-7(a)(2)

(b)Same as (a), above, except that the desk clerk bounces a paying guest so Employee can stay rent-free. See Reg. §§ 1.132-2(a)(2) and (5).

NACS? - No, can't forego revenue

Eating at desk, or restaurant across the street?

NO

Eating at local restaurant?

NO

Leaving from Home to work?

NO

HYPO: Taxpayer has friend who is raving about a new golf training aid. Instead of paying $100 cost, taxpayer builds one for himself for $15, saving $85. GI?

NO. Imputed income is NOT includable as GI for tax purposes Direct tax, which must be apportioned. So difficult and unwieldy essentially unconstitutional

Law student's Spouse completed computer programming school just prior to student entering law school. Spouse contacts a talent search firm to help find a position as a part-time computer programmer (i.e. an independent contractor). Consider whether Spouse's search fees are deductible in the following circumstances. (based on Rev.Rul 75-120) The firm is unsuccessful in finding Spouse a position

NO. not yet carrying on T/B. Morton-Frank requirement. Not continuing any T/B. Timing issue.

Payor Spouse, who pays tax at a flat 30% rate, is required to pay Payee Spouse $100k per year as alimony or separate maintenance under a pre-2019 divorce instrument (deduction by payor; inclusion by payee). Assume Payee Spouse pays tax at a flat 15%. Payor Spouse wants to amend the divorce instrument to have the post-2018 law apply. You represent Payee spouse. If Payor Spouse requests a reduction in the payments under the agreement to $70k, what is your reaction?

NOPE No, because you are worse off. Payee is currently getting 85k after taxes (100k - 15%). Worse off. Payor is in the same place either way. 100k after 30% is 70k.

Does 102 apply? (e)Father leaves Daughter $20,000 pursuant to a written agreement under which Daughter agreed to care for Father in his declining years.

NOT excludable since clear written agreement for services. Now falls under 102(c)

Does 102 apply? (f)Father leaves Daughter $20,000 pursuant to a written agreement under which Daughter agreed to care for Father in his declining years. Father died intestate and Daughter successfully enforced her $20,000 claim under the agreement against the estate.

NOT excludable since clear written agreement for services. Now falls under 102(c)

Does 102 apply? Father leaves Daughter $20,000 pursuant to a written agreement under which Daughter agreed to care for Father in his declining years. Daughter settles dispute of her $20,000 claim for a $10,000 payment.

NOT excludable since clear written agreement for services. Now falls under 102(c)

Does 102 apply? (h)Father appointed Daughter executrix of his estate and Father's will provided Daughter was to receive $20,000 for services as executrix.

NOT excludable since clear written agreement for services. Now falls under 102(c), but should issue waiver is sole beneficiary since will get anyway

Would the results to the taxpayers in the Cesarini case be different if, instead of discovering $4,467 in old currency in the piano, they discovered that the piano, a Steinway, was the first Steinway piano ever built and it is worth $500,000?

No GI, appreciation not GI

Same as (a) except T is married and T and Spouse file a joint return and have 140k of MAGI.

No deduction since phase out is complete for joint returns by 130k

Payor Spouse, who pays tax at a flat 30% rate, is required to pay Payee Spouse $100k per year as alimony or separate maintenance under a pre-2019 divorce instrument (deduction by payor; inclusion by payee). What result in (a) if both spouses pay flat 30% rate

No difference to either spouse. Each receives 70k

Sophia purchased 50 shares of stock of the Bilt Rite corporation for $8,000 on September 12, Year One. On March 8, Year Four, the value of the 50 shares had declined to $5.000. On that date Sophia made a gift of the 50 shares to her nephew, Paul. Sophia's basis in the 50 shares at the time of making the gift to Paul was $8,000. There was no gift tax on the gift to Paul. The value of the stock increased after Sophia made the gift to Paul. On February 2, Year Five, Paul sold the 50 shares of stock to an unrelated person for its then value of $7,000. As a consequence of that sale, Paul recognized:

No gain or loss Paul sold for more than his $5,000 loss basis and for less than his $8,000 gain basis so he had neither a gain nor a loss on the transaction.

In Year Five, Bridget owned Whiteacre (unimproved land) which she had owned for three years. The fair market value of Whiteacre at that time was $50,000, and Bridget had a basis of $80,000 in Whiteacre. In Year Five, Bridget sold Whiteacre to her cousin, Pearl, for $20,000. Bridget intentionally sold Whiteacre for less than its value in order to make a gift to her cousin. There was no gift tax on the transaction. As a consequence of that bargain sale, Bridget recognized:

No gain or loss While Whiteacre was a depreciated assert in Bridget's hands (her basis was $80,000 and the value of the land was only $50,000), and while Bridget sold for less than her basis, *no loss is realized on a bargain sale gift* transaction (i.e., part-sale, part-gift). Treas. Reg. § 1.1001-1(e). So, Bridget did not recognize a loss. Since she did not sell for more than her basis, she did not recognize a gain.

Carl is employed by Mega, Inc. as an accountant. Mega owns and operates a restaurant and a retail furniture store. Carl performs accounting services for all of Mega's business activities. Carl purchased a dining room set from Mega's furniture store for $900. The retail price for that dining room set that is charged to Mega's customers is $1,000. Mega's gross profit percentage on its sales to customers is 25%. Because of making that purchase of the dining room set at a discount, Carl recognized:

No gross income. Since Carl's accounting services provide a substantial benefit to both Mega's retail furniture business and its restaurant business, Carl is eligible to receive qualified employee discounts from both businesses. Treas. Reg. § 1.132-4(a)(1)(iv)(A). Carl's discount is less than Mega's gross profit percentage of its regular price. So, Carl recognized no gross income from the transaction. See § 2.2200, 2.2240

Megan is employed by an appliance store in their sales department. Megan purchased a refrigerator from the store that is sold to customers at the retail price of $1,000. Because of her employee status, the store sold the refrigerator to Megan for $700. The store had a gross profit percentage on the sale of its inventory, including its refrigerators, of 40%. Consequently, the store made a profit on the sale to Megan. As a consequence of making that purchase at a discount, Megan recognized:

No gross income. The refrigerator was held by the employer for sale to customers in the same line of business in which Megan performs her services. Since the discount Megan received is less than her employer's gross profit percentage of the regular selling price, the transaction constitutes a "qualified employee discount." The entire amount of the discount is excluded from Megan's gross income by § 132(a)(2). See § 2.2200-2.2242

Mary found a house for sale that she wanted to purchase. To purchase the house she needed to make a down payment of $8,000, and Mary could only raise $6,000. She asked her mother, Alice, to loan her $2,000 to make up the difference, and her mother agreed. The loan was evidenced by a promissory note that Mary gave to her mother. Nothing was payable on the note for four years, and then the entire $2,000 became due. The mother did not charge Mary interest on the loan, and so none was paid. Two years after making the loan, and on Mary's birthday, Alice forgave the $2,000 debt and cancelled the note. Immediately before the cancellation of the note, Mary was solvent, and the fair market value of the note was $1,700 because no interest was payable on it. As a result of that cancellation of the debt, Mary recognized:

No income Assuming a bona fide debt, the mother's cancellation was a gift that is excluded from income by § 102(a). The relationship of the donor to the donee and the fact that the debt was forgiven on the donee's birthday give strong factual support to finding that the cancellation was a gift. The fact that no interest was payable on the loan does not cause any income tax consequence since the amount of the loan is less than $10,000. § 7872(c)(2)(A). If the note were deemed not to be bona fide, its cancellation still would not cause the debtor to recognize income. There would have been a gift to the daughter at the time that the $2,000 was transferred by the mother to her daughter.

Arthur is an Associate of the Sachs law firm. The Sachs law firm owns its building (from which it conducts its law practice) and an adjacent parking lot. Arthur is offered a space in the parking lot to park his car when at work. Arthur is given a choice. He can elect to take the use of the parking space or he can receive $2,000 per year in cash. Arthur elects to take the use of the parking space. The fair market value of the use of the parking space in Year One is $1,800. As a consequence of this arrangement, in Year One, Arthur recognized:

No income. Arthur's use of the parking space is excluded from his gross income by § 132(a)(5) as a qualified transportation fringe. § 132(f)(1)(C), and (5)(C). The statute expressly states that the option that Arthur has to receive cash in lieu of the parking space does not prevent the exclusion of the use of the parking space from the employee's income. § 132(f)(4). Note that as a result of an amendment made by the 2017 Tax Cuts and Jobs Act, the Sachs law firm will not be allowed any deduction for expenses incurred in providing the parking space to Arthur. §274((a)(4).

(b)Two years later when the land has appreciated in value to $300,000 and Mortgagor has paid only interest on the $80,000 mortgage, Mortgagor takes out a second nonrecourse mortgage of $100,000 with adequate rates of interest from Bank again using the land as security. Does Mortgagor have income when she borrows the $100,000? See Woodsam Associates, Inc. v. Commissioner, 198 F.2d 357 (2d Cir.1952).

No, borrowing is not taxable event, has to pay back

Taxpayer resides in the Champions area of Houston and travels via I-45 each day to her downtown law office. She also acquired a dessert and coffee shop several years ago. Taxpayer often eats lunch at her desk in order to get all of her work done. May she deduct the cost of her meals as an away from home expense? Would the result change if instead she ate at the restaurant across the street?

No, not away from home. Work location is tax home. No also to restaurant across the street

Taxpayer resides in the Champions area of Houston and travels via I-45 each day to her downtown law office. She also acquired a dessert and coffee shop several years ago. May she deduct the expenses allocable to her drive to work?

No, not considered "away from home" for tax purposes. "Home" for tax purposes is where we work, NOT where our residence is. Distance does not matter. Commuting from home to work is a nondeductible personal expenditure. Parking also nondeductible.

Insured died in the current year owning a policy of insurance that would pay Beneficiary $100,000 but under which several alternatives were available to Beneficiary. (a)What result if Beneficiary simply accepts the $100,000 in cash?

Nontaxable per 101(a)(1) exclusion GI

Cathy is an accountant (CPA) and enrolled part time in law school (with prospects of eventually attaining a degree) to better perform her accounting duties in areas where law and accounting overlap. Are her educational expenses deductible?

Not deductible, different T/B

To what extent would the following taxes be deductible by Married Couple under s.164? A federal income tax of $20k

Not deductible. Doesn't fall under 164 and 175

P in a separate suit recovered $100k from a fan who mercilessly taunted P about her unnaturally high squeaky voice, causing P extreme distress.

Not excludable, since not attributable to any physical injury

P recovered $200k in a suit of sexual harassment against former coach.

Not excludable, unless some sort of physical touching, might qualify under 104(a)(2)

Taxpayer resides in the Champions area of Houston and travels via I-45 each day to her downtown law office. She also acquired a dessert and coffee shop several years ago. Suppose the following day she went to Dallas in the morning to close an acquisition for a client and returned home to Houston that night. May she deduct the cost of meals in Dallas?

Not meals, didn't meet overnight rule (Correll case). But she CAN deduct transportation costs.

(g)Hotel chain is owned by a conglomerate which also owns a shipping line. The facts are the same as in (a), above, except that Employee works for the shipping line.

Not the same line of biz, can't exclude

Brad transfers the property in (b) to Angelina (divorce happened in 2019) in 2029.

Not timely. Rebuttable presumption that the transfer is not related to divorce. Brad is hoping for nonrecognition treatment, but unless he can't rebut presumption, under Davis case, he has 150k GR & Recognized. Angelina has 200k cost basis. Treated just as though he sold it to her.

Landlord L owns two contiguous parcels of land. L leases both parcels to Tenant T for $1,000/month per parcel or a total of 24K/year; rent payable at the end of each year. The lease is for a 10 year period. Upon the following events, which occur more than one year after the lease is signed, what are the results? To T if S subleases one parcel of land from T at $1200/month for the remainder of T's 10 year period.

OI (rent)

Agent entered into a contract with a national insurance Company to manage its State office for a ten year period. After 2 years Company decides to discontinue its State operation and agrees to pay Agent $50,000 to terminate her contract. What result to agent?

OI., not sale of a C.A., Hort controls Also, contract extinguished, so Hudson also says O.I.

Brad and Jen's divorce decree becomes final on January 1 of year one. Discuss the tax consequences of the following transactions to both Brad and Jen: (a) Pursuant to their divorce decree, Brad transfers to Jen in March of year one a parcel of unimproved land he purchased 10 years ago. The land has a basis of $100k and a FMV of $500k. Jen sells the land in April of year one for $600k.

Occurs within one year of divorce, so presumed to be incident to divorce Brad: It is IS a disposition of property. He transferred it in exchange for the relinquishment of marital rights. He's exchanging appreciated property for marital rights. 500 FMV - 100 AB = GR 400, but NOT recognized 1041 [under the Davis case, it would have been recognized, but IRC takes anti-Davis position] Anti-Davis rule of GR but NOT recognized was great for payor spouse Jen gets carryover basis. 500k GR & Recognized(600 AR - 100 AB); If we assume it is a capital asset (not knocked out by anything on 1221) the holding period from her other spouse is "tacked on" since she took a carryover basis under 1041

(n)Employee is an officer of corporation which pays Employee's parking fees at a lot one block from the corporate headquarters. Non-officers pay their own parking fees. Assume there is no post-2001 inflation.

Officer doesn't mean highly compensated; if assume, 132(a)(5)

(f)Same as (a), above, except that Employee is an officer in the hotel chain and rent-free use is provided only to officers of the chain and all other employees pay 60% of the normal rent. See Reg. § 1.132-8(a)(2)(i).

Officer status alone does NOT necessarily mean highly compensated within meaning of 414Q If high compensated, then gets NO exclusion, but low level DOES

Consider whether or to what extent the fringe benefits listed below may be excluded from gross income and, where possible, support your conclusions with statutory authority: (a)Employee of a national hotel chain stays in one of the chain's hotels in another town rent-free while on vacation. The hotel has several empty rooms.

Okay as NACS - 132(a)(i)

Single Taxpayer, T, who graduated from law school, pays $3000 of interest in the current year on qualified educational loans. T has $56k of MAGI. How much interest can T deduct?

Only $1500 of the $3000 interest is deductible. [56k - 50k] divided by 15k = .4 * 2500 = 1000 reduction (phase out). 2500 (max) - 1000 (phase out/reduction) = $1500 deduction under 221(b)(2)(B)

EX: Suppose B purchased policy from mom for its 100k FMV. What difference when he receives $5M?

Only can exclude $100k, $4.9M in G.I.

Since Year One, Mike held Redacre, which was unimproved land that Mike used in his self-employed business. In Year Four, Mike purchased a machine to use in his business, and Mike took depreciation deductions for the use of the machine under § 168. In Year Seven, Mike sold both Redacre and the machine for their value to unrelated persons. Mike recognized a gain of $25,000 on the sale of Redacre, and he recognized a loss of ($32,000) on the sale of the machine. Mike had no other gains or losses in Year Seven or in the preceding five years. As a consequence of the sale of Redacre and the machine, Mike recognized:

Ordinary income of $25,000 and an ordinary loss of ($32,000). Redacre is realty that was held by Mike for more than one year and was used in his business, and so is a § 1231 asset. The machine is property of a character subject to the allowance for depreciation that Mike used in his business and had been held by him for more than one year, and so also is a § 1231 asset. Since Mike's § 1231 loss on the machine ($32,000) is greater than Mike's § 1231 gain on Redacre ($25,000), the gain and the loss are treated as ordinary income and an ordinary loss respectively. § 1231(a)(2).

Rhoda purchased a large tract of land in Year One. Rhoda's purpose in purchasing the land was to use it as a ranch for raising cattle. After purchasing the land, and before turning it into a ranch, Rhoda abandoned that project because of a change in the market price of beef. Rhoda decided to hold the land as an investment in the belief that its value would increase. In Year Seven, Rhoda decided to subdivide the land into 50 lots to be offered for sale for the construction of private residences. Rhoda had roads built and had sewers and electricity installed. Rhoda hired an agency to market the lots and to sell them. In Year Eight, on behalf of Rhoda, the agency sold 23 lots, and Rhoda recognized substantial gains on those sales. Rhoda's gains from the sale of those lots is characterized as:

Ordinary income. At the time of the sale, Rhoda was holding the lots primarily for sale to customers in the ordinary course of a trade or business. The lots do not qualify as either a § 1231 asset because of § 1231(b)(1)(B) or a capital asset because of § 1221(a)(1). While Rhoda held the land as an investment for six years, she changed her purpose when she put the lots up for sale. *The determination of the seller's purpose is made at the time of the sales*. The purpose that Rhoda had in the preceding six years is evidence of her purpose at the time of the sales, but it is not conclusive. The number of sales she made, the improvements she made to the property, and the employment of an agency to market the lots provide a very strong case for ordinary income treatment. Section 1237 will not apply because of the substantial improvements that Rhoda made and the fact that she held the land for less than ten years before making the sales. See § 1237(b)(3).

In Year One, Frances obtained a copyright on a book that she had written. In Year Three, Frances made a gift of her copyright to her adult niece, Stephanie. Stephanie held the copyright as an investment. In Year Five, Stephanie sold the copyright to an unrelated person; and Stephanie recognized a gain of $180,000 on that sale. Stephanie's gain is characterized as:

Ordinary income. If Frances had sold the copyright for a gain, her gain would have been treated as ordinary income under § 1221(a)(3)(A). Stephanie acquired the copyright from Frances as a gift, and so Stephanie's basis in the copyright is the same basis that Frances had. § 1015(a). Consequently, the copyright is excluded from being a capital asset in Stephanie's hands by § 1221(a)(3)(C). The copyright is not § 1231 property because of § 1231(b)(1)(C); so Stephanie's gain on the sale of the copyright is not a § 1231 gain. Consequently, Stephanie's gain on the sale of the copyright is ordinary income.

Jock agreed to play football for Pro Corporation. Pro, fearful that Jock might not survive, acquired a $1 million insurance policy on Jock's life. If Jock dies during the term of the policy and the proceeds of the policy are paid to Pro, what different consequences will Pro incur under the following alternatives? (a)With Jock's consent Pro took out and paid $20,000 for a two year term policy on Jock's life.

Original issuance so whole amount excludable

HYPO 2: part sale part gift P--------------> C; $45 gift tax paid by transferee (C) (Deidrich case) 40 AB/100 FMV Result to P and C?

P: 45AR - 40AB = *5 GR & recognized* Gift tax paid by transferee is an economic benefit since it is P's responsibility to pay tax Treated as a sale to the extent to the amount of gift tax C: 45AB (greater of rule: amount paid is higher than donee's AB) + 1015(d)(6) adjustment = *90 AB* *Amount of gift?* 100 FMV - 45(amount paid) = $55 FMV gift *Gift tax adjustment formula*: 45 (gift tax paid) X [(55 FMV of gift - *0 AB*) / 55 amount of gift] *IMPORTANT: Since donor has already "used up" his AB calculating his GR in the "sale" above, the remaining amount of AB to plug into this equation is ZERO* 40AB/45K - sale 0AB/55K - gift 40AB/100K (must add back up to original AB/FMV of donor) *Thus the child's AB is:* 45 (amount paid) + 45 (1015(d)(6) gift tax adjustment) = *90AB*

HYPO: Parent conveys property to child. Property has $50K AB and $150 FMV. If child pays $80K?

Parent: $30K GR & Recog under 1.1001-1(e) Child: $80K AB under 1.1015-4(a); (greater of rule) $70K gift received, excludable under S.102, thus no reportable GI If child pays $40K? Parent: 10K loss realized, NOT recognized Child: 50K AB (greater of rule)

(o)Employer provides Employee with $185 worth of vouchers each month for commuting on a public mass transit system. Assume there is no post-2001 inflation.

Partial exclusion, partial inclusion $185 x 12 months = $2,220 $175 x 12 months = $2,100 excluded; $120 GI

Divorced Homeowner, age 55, who received no support payments from her former husband, fully supported her 20 year old Daughter who had no income, lived with Homeowner and was a dependent of Homeowner under 152(d). In the current year, Homeowner installed a central AC system at a cost of $10k which Dr. Watson said was an elementary requirement in caring for Daughter's respiratory problems. After installation, Homeowner's home and increased in value by $4k. Other medical expenses paid during the year by Homeowner and Daughter consisted of prescription meds ($500), doctors' bills ($1k). Late in the year, she also paid $3k in premiums for health insurance but received no reimbursements under the policy that year. If Homeowner's AGI is $100k for the year, what will be the amount of her medical expense deduction?

Per Gerard, can only deduct $6k of AC (the amount above the increase in value to the home) $500 (meds) + $1000 (doctor bills) + 3000 (insurance) + 6000 (AC) = 10,500. 10,500 in expenses - 100,000 (10% of AGI) = $500. Result prior to 2019 (when 7.5% threshold in place) 10,500 in expenses - 75,000 = 3000 itemized deduction.

HYPO: Inheriting from parents: Property A (25/100) vs. Property B (200/100) Which has a stepped-up basis?

Property A. $75K not taxed to anyone! Property B has a stepped-down basis. Would be better to sell prior to death.

(c)Same as (a), above, except that Employee pays the bill and receives a cash rebate from the chain. See Reg. § 1.132-2(a)(3).

QED? - YES! 20% on services. So, if room cost $300, you get for $240 If one exclusion doesn't work, another might

Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate. When the land is worth 300k he takes out a 2nd mortgage of 100k to buy stocks. What results to Mortgagor if the land declines in value from $300,000 to $180,000 and Mortgagor transfers the land by means of a quitclaim deed to Bank? See Parker v. Delaney, 186 F.2d 455 (1st Cir.1950).

Quitclaim - whatever interest goes to bank 100/180 (depreciation from 300) $180 AR - 100 AB = $80 GR & recognized

HYPO: Mary purchased biz equipment several years ago for $50k, she properly claimed ACRS deductions of 30k. 1) discuss income tax consequences if she sells for 45k

RB: 50k AR: 45k. AB: 20k (50-30 in deductions) Lesser of 45 and 50 is 45AR 45-20 = 25 recharacterized as OI So, of the 25 GR (45 AR - 20 AB), ALL of it is converted into ordinary income

How do we determine FMV in tax law?

Regulation 20.2031-1(b) From estate tax section that has been accepted for other purpose "The FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither under compulsion and both having reasonable knowledge of the relevant facts"

$1000 for patching the entire asphalt parking lot area

Repair, unless basically replacing

Landlord incurs the following expenses during the current year on a ten-unit apartment complex. Is each expenditure a currently deductible repair or a capital expenditure? (a) $500 for painting three rooms of one of the apartments

Repair, unless part of a larger remodelling/restoration

HYPO 1: part sale part gift P(parent) ----------> C (child) 10/40 25 debt What result to P and C?

Result to P? P = 25AR - 10AB = 15GR and recognized By assuming debt, we are deeming C to have paid 25K, which counts as P's AR Result to C? C's AB = 25 (greater of amount paid or carryover) Amount of gift? Difference between FMV and amount paid = $15 (excludable under 102)

Injured, who has a 20-year LE, recovers $1M in a personal injury suit arising out of a boating accident. What are the tax consequences to Injured if the $1M is deposited in a money market account paying 5% interest?

Rev. Rul. 65-29 holds that, when the TP actually received the present value of an award for personal injury in a lump sum and invested it, any interest earned on the amount invested was taxable. 1M excludable because a personal injury suit, but 5% NOT excludable. Interest is includable under 163

Footnote 29 on p196: The term "reimburse" limits the IRC 105(b) exclusion. The interrelationship of 105(b) and 104(a)(3) can be complicated. EX: Assume an individual has two accident and health insurance policies, the premiums of one being paid by the individual and the other by employer, and both compensate individual for the same illness. Under 104(a)(3), all proceeds from the individual's own policy are excluded from income, but 105(b) limits the exclusion for the employer-provided policy to amounts which "reimburse" the individual for medical care. Assume that an employee had $900 of medical expenses related to an illness and that employee received $800 from an employer funded policy and $400 from employee's own policy. Thus, the question arises as to what amount of the $800 received from the employer funded policy may be excluded.

Rev.Rul 69-154 indicates that the amount of medical expense to be considered paid by each policy is proportionate to the benefits received from each policy. Under this approach, if the employee received $800 from the employer's policy and $400 from the employee's own policy (a total of $1200), 800/1200 or ⅔ of the medical expense is deemed paid by the employer's policy. Therefore, 2/3rds of the $900 of medical expenses, or $600 will be considered as paid for out of the proceeds of the employer policy. It follows that of the $800 received from the employer funded policy only $600 is excluded by 105(b), because the exclusion under 105(b) is limited to the amount of reimbursement for actual expenses. $200 of the $800 is included in gross income. The full $400 received from the employee's policy is excluded under 104(a)(3) which has no such limitation.

Barbara is a dentist and enrolled in a course of postgraduate study in orthodontics, intending to restrict her dental practice that specialty in the future. Are her educational expenses deductible?

Rev.Rul 74-78: Dentistry vs. Orthodontics. Deduction allowed because these are just different duties within the same T/B

Employer pays accountant $400 to prepare his federal income tax return, $150 of which is allocable to preparing the schedule related to the income from is sole proprietorship business.

Rev.Rul 92-29. $150 of the deduction under 162 is directly related to his sole proprietorship and ATL deductible under 62(a)(1). Remaining $250 falls under 212(3), but is a MID and disallowed under 67(g)

What are the tax consequences to Injured if the case was settled, and in the settlement, Injured received payments from D of $100k for life?

Revenue Ruling 79-313: all excludable Fully excludable. Timing of payment irrelevant (trick: trying to make you think of annuity)

HYPO: A purchased property for $20K. When it was worth 30K, he gifted it to B. What is B's basis? What is B's GR is he sells for $35k?

S.102(a) - gift not GI S.1015 - $20K basis If B sells for $35K - (1001(a) - sale) $35K AR $20K AB (carryover basis rule 1015) $15 GR

Assume that Businessperson is insolvent because Businessperson's liabilities of $100k exceed the $90k value of the ambulances (whose AB is $75k). Creditor discharges $40k of the $100k without any payment.

STEP 1: amount of CODI? 40k stated in question STEP 2: bankrupt or insolvent? YES! Insolvency amount = 10k (100-90) excluded from GI 40k CODI - 10k exclusionary relief from insolvency = 30k of OI STEP 3: reduction of tax attributes by amount of relief Only attribute mentioned is AB of 75k in ambulances. Reduce by insolvency amount (10k) that is excluded from GI = 65k AB in ambulances Liabilities after discharge are 60k, so 65 does not drop below the 60k floor of 1017 ***Remember you do not have to reduce the AB below the amount of outstanding liabilities (those liabilities that remain after discharge, here 60k after the 40k discharge)*** Since the AB of 65 exceeds the 60k of liabilities, he has a net worth of 5k so he is NOT insolvent after discharge. 1017 only applies if still insolvent after discharge *** He will NOT tell you that person is insolvent. So be sure to look for situation where liabilities exceed FMV of assets***

What result if pursuant to the divorce decree, Brad transfers the land in (a), to Jen in March of year four?

Same, still timely since within 6 years

Same as (c) except that the transfer is required by a written instrument incident to the divorce decree.

Same. Still counts. Goes to the basic idea of what is a divorce/separation instrument. 71(b)(2)(a) includes decree or written instrument incident to decree

The interest of 100k is on loans whose proceeds are used to purchase tax exempt bonds?

Section 265(a)(2) forecloses a deduction for interest on debt incurred to purchase or carry tax-exempt obligations. Therefore Investor will get no deduction in this or any succeeding year.

Same as (a), except the Creditor is also the ambulance dealer who sold the ambulances to the Businessperson

Seller is also the creditor, so 108(e)(5) applies - Purchase money debt reduction Apply the elements: 1. Seller financing? YES 2. Not bankrupt/insolvent? YES 3. Original parties? YES 4. Debt reduced by affirmative act of seller? YES (as opposed to the Statute of Limitations expiring) RESULT: AB in ambulances reduced to 60 AB (leads to more gain on future sale later, but for now is a good thing since not included in GI) Treat as a purchase price reduction ****REMEMBER: can only adjust down to zero. Any discharge beyond that is counted as gross income**** Seller financing situation: treated as a purchase price reduction. Your AB would be reduced. Thus, 40GR goes to AB to reduce to 60ab

Taxpayer resides in the Champions area of Houston and travels via I-45 each day to her downtown law office. She also acquired a dessert and coffee shop several years ago. Suppose she instead leaves her office one night and drives to her dessert and coffee shop located in Rice Village?

She also owns coffee shop. She can deduct costs of going between businesses. You can have more than one TB. Commuting ends once you arrive at tax home. Once you leave tax home to go to temporary location or another TB is deductible.

What if actual expenses exceed her reimbursement?

She has a 67(g) MID loss to the extent she is not reimbursed.

Single Taxpayer, T, who graduated from law school, pays $3000 of interest in the current year on qualified educational loans. If T has a $40k of MAGI in the current year, what amount of interest can T deduct?

Since T's MAGI does not exceed 50k, no phase out occurs. Can deduct max of $2500. Thus, $2500 of $3000 interest is deductible. The interest is an "above the line" deduction under 62(a)(17)

Brad is short of cash and to satisfy his obligation to pay $200k in cash, he transfers property worth $200k with AB of $50k to Angelina in 2019.

Since the payment was not in cash it is not alimony under 71 and 1041 would apply with Brad recognizing no gain and Angelina receiving the property with a $50k AB in property; carryover basis 1041. Transfers that are within 1041 shift any pre-transfer gain to the former spouse who may be taxed at a lower rate than the transferor (presumably). So while Congress made alimony payments pursuant to a post 2018 divorce decree nontaxable, there still is income shifting potential on any transfer under 1041 Brad: 200 FMV (marital rights) - 50 AB = $150k GR not Recognized

Same as (c) except that T and Spouse delay paying the $3000 interest (along with a $300 penalty) from the current year to succeeding year when their MAGI is $80k (because Spouse ceases working) and when no other interest payments are made.

Since there are no time limits on 221 deduction, and since MAGI is less than 100k, they qualify for full $2500 deduction. $300 penalty is not deductible.

EX: Recourse mortgage Sonny owns Parcel A of commercial real property, which is subject to a recourse mortgage to Friendly Bank of $40K. Sonny has a basis in the property of $60K and FMV $110. Sonny sells to Becca for $70K cash and Becca agrees to assume the mortgage.

Sonny's tax consequences? 70K cash + 40K debt = 110K AR 60K basis 50K GR + recognized Becca's? 110 AB

(d)T told T's broker to purchase 100 shares of stock on December 29 of year one at a time when its price was $50 per share. The stock was delivered to T on January 3 of year two when it was selling for $52 per share. T told T's broker to sell the stock on December 30 of year two when it sold for $60 per share, and it was delivered to Buyer on January 4 of year three when it was selling for $63 per share.

Start day after. 6000 (12/30/1) - 5000 (12/30/2) = 1000 LTCG. *Trade date controls* for both *quantification AND holding period* NOT settlement date *pay tax on year 2*

To what extent would the following taxes be deductible by Married Couple under s.164? A state income tax of $12k?

State income taxes are deductible under 164(a)(3), subject to a 10k ceiling, so only 10k of 12k. Itemized deduction

Assume that Businessperson declares bankruptcy and the $100k liability is discharged at the time that Businessperson's adjusted basis in the ambulances (as a result of depreciation) is $75k

Step 1: How much CODI income? 100k Step 2: Bankruptcy or Insolvency? YES! Bankruptcy, thus can exclude all 100k Step 3: Tax attribute reduction - use 100k exclusion to reduce tax attributes Tax attributes in problem? Only AB of 75k in ambulances listed. So AB in ambulances is reduced to ZERO. $25k remaining? Not applied, just ignored. 1017 limit not applicable Suppose we had 50k NOL, 30k LTCL carryovers in addition to ambulances. Result? NOL reduced by 50k to 0. (using 50k from the 100k exclusion toward NOL) LTCL reduced by 30k to 0 (using 30k from the remaining 50k after NOL reduction) AB reduced to 55k (using remaining 20k exclusion after LTCL reduction) ***remember, under 108(b)(5), can ELECT to reduce AB first***

Landlord L owns two contiguous parcels of land. L leases both parcels to Tenant T for $1,000/month per parcel or a total of 24K/year; rent payable at the end of each year. The lease is for a 10 year period. Upon the following events, which occur more than one year after the lease is signed, what are the results? To T, if after subleasing one of the parcels of land to S for $1200/mo for five years, S pays T $10,000 for all T's rights in the lease on that parcel and L releases T from the lease and accepts S as the new tenant?

T has a capital gain (under Metro) T has 10k LTCG. This is the same as Metro. Key: transferring interest in underlying property

T, who is single, a child of X and a full-time law student has gross investment income of $4k in the current year and no section 62 or itemized deductions. T qualifies as a dependent of X for the year. See 63(c)(4), 7(B) What is T's taxable income, if any, for the current year?

T's taxable income for the year is $3,500. Because an exemption deduction is allowable (not necessarily allowed) to another taxpayer, T's standard deduction is limited by §63(c)(5) to the greater of (1) T's earned income (0 under these facts) plus $250, or (2) $500, here $500. Thus T's taxable income is $4,000 less $500 or $3,500.

Taxpayers purchase a home after 12/15/17 which they use as their principal residence. Unless otherwise stated, they obtain a loan secured by the residence and use the proceeds to acquire the residence. What portion of the interest paid on such loan may Taxpayers deduct in the following situations? (a) The purchase price and FMV of the home is $350k. Taxpayers obtain a mortgage for $250k of the purchase price

TP may deduct 100% of the interest paid or accrued on the loan. Under 163(h)(2)(D) a taxpayer may deduct QRI in full. That term is defined in 163(h)(3)(B)(i) to include any interest paid on acquisition indebtedness, which in turn is defined as any debt that is secured by a qualified residence and used to acquire such residence. 163(h)(3)(B). As taxpayers have incurred the mortgage to purchase a qualified residence (their principal residence), and the proceeds are in fact used for such purpose, taxpayers may deduct interest paid on the mortgage in full since the amount of the acquisition indebtedness does not exceed $750k

The facts are the same as in (a) and (b), except that the proceeds of the loans are used 50% to purchase tax exempt bonds and 50% to buy corporate bonds and the bonds are her only investments?

The 50k of investment interest paid to purchase the tax-exempt bonds is non-deductible under 265(a)(2). The 50k of investment interest used to purchase corporate bonds is fully deductible as there is 70k of NII.

Example: Nonrecourse mortgage Assume the same facts as the previous example, except a nonrecourse mortgage. Result?

The SAME tax consequences would result because the nature of the mortgage as recourse or nonrecourse is IRRELEVANT when the property's FMV exceeds the amount of the debt.

HYPO: Sam, a teacher, bought stock in 2010 for $5K, sold in 2019 for $7500.

The fact that he is a teacher is significant, since if a broker of stock, different characterization 7500 AR - 5000 AB = 2500 GR, recognized. LTCG

HYPO: After illness, Donna dies in September 2019. She owned the following property (100k/300k), she received as a gift from her mother Michelle. Assuming Michelle is Donna's sole heir, what difference would it make if donna received the gift in August vs. November of 2018?

The following happens within 1 year; (see S. 1014(e)) Mother (100/300) → gift → daughter → will → mother If a bunch of transfers happen in a year, 1014(e). You retain same adjusted basis since within a year. Trying to avoid manipulation *August* Daughter's AB after gift = $100 (carryover basis) Mothers AB after will = $100 (carryover basis because of 1014(e)) *November* - 300k AB since outside of a year so 1014(e) doesn't apply

Under the facts of (b), may Injured and Spouse deduct the medical expenses? See 213(a).

The timing here differs from 2a. When the expense and recovery occur in the same year, the exclusions pursuant to 104 and 105 apply but there is no 213 medical expense deduction since 213(a) allows a deduction only to the extent that expenses for medical care are not compensated by insurance or otherwise. This prevents double benefit

Homeowners purchased their vacation residence for 180k (20k of which was allocable to the land). When it was worth 160k (20k of which was allocable to the land) they rented the property and properly took 10k of depreciation on it. What result when they subsequently sell the property for 165k

There is neither gain nor loss. The AB for determining gain is 170AB. The AB for determining loss is 150AB.

The facts are the same as (b), except that Taxpayers use the proceeds of the $100k mortgage to buy a Ferrari.

This is not acquisition indebtedness, but home equity indebtedness and is no longer deductible regardless of the year in which the home equity interest was incurred.

Husband and Wife file separate returns. Husband has substantial itemized deductions, but Wife has very few. Why does Congress prohibit the use of the standard deduction by Wife if Husband itemizes his deductions?

This problem implicates §63(c)(6) - where married filing separately where either spouse itemizes, the standard deduction amount is zero. Effectively, if one spouse itemizes, they both must itemize. Section §63(c)(6)(A) prohibits use of the standard deduction on a separate return by one spouse if the other spouse itemizes deductions. The reason for this rule is that without it one spouse could pay and deduct all the itemized expenses while the other spouse could elect the standard deduction and they would receive a double benefit. This would be a distortion. As the standard deduction is intended to replace itemized deductions, such intra-family tailoring could defeat its purpose.

Example To illustrate, suppose in year one, a baker purchases a delivery truck for $80,000 and then uses the truck in the baker's delivery business. At this point, the baker's basis in the truck is $80,000, which is what the truck cost. We'll assume that the truck is depreciable Section 1245 property, gain on which would ordinarily be characterized as long-term capital gain under Section 1231, except insofar as Section 1245 requires otherwise. In years one through five, the baker is allowed a total of $50,000 in depreciation deductions on the truck. Thus, in year six, the baker's adjusted basis in the truck is $30,000. That year, the baker sells the truck to an auto dealer for $60,000, producing a gain of $30,000. Now, we'll need to determine whether the $30,000 gain should be characterized as long-term capital gain, ordinary income, or a bit of both.

To do that, we'll first need to calculate the baker's recomputed basis in the truck. At the time of the sale, the baker's adjusted basis in the truck was $30,000. To that amount, we'll need to add the $50,000 in total depreciation deductions allowed on the truck. This calculation gives us a recomputed basis of $80,000, which is what the adjusted basis would have been without any depreciation deductions. Our next step is to subtract the baker's actual adjusted basis from either the recomputed basis or the amount realized, whichever is less. The difference will be the amount of gain we'll have to characterize as ordinary income under Section 1245. Here, the recomputed basis is $80,000, but the amount realized is only $60,000. Thus, we'll subtract the $30,000 actual adjusted basis from the $60,000 amount realized, which gives us $30,000. Accordingly, the baker's entire $30,000 gain on the truck will be characterized as ordinary income under Section 1245. Section 1245 trumps Section 1231, which would otherwise have characterized the gain as long-term capital gain.

Facts the same as (d) but the mortgage on the Florida residence is $700k.

Total mortgage indebtedness is 850k, exceeding 750k cap by 100k. Thus 100k of indebtedness is nondeductible/disallowed. Taxpayers can choose which mortgage has the disallowance. Will likely choose based on which has the lower interest rate.

Single TP, who is an employee of a law firm, in the current year has $100k of AGI, and the following allowable itemized deductions: $6000 in interest, $6500 in state income taxes, $1500 in unreimbursed employee travel expenses, $200 in tax preparation fees, and $300 bar association dues. What different if TP's 65th birthday is January 1 of the succeeding year? Reg 1.151-1(c)(2)

Treated as reaching 65 on 12/31. TP qualifies for another standard deduction of $750 (elderly at 65) under 63(f)(1)(A) and (f)(3). When added to standard deduction of 12k, the additional $750 elderly standard deduction pushes the total standard deduction to 12,750, and so now he should take the standard deduction instead of the itemized deduction (of 12,500)

What are the tax consequences to Mortgagor if the liabilities had been nonrecourse liabilities?

Tufts: In Non recourse debt, when you transfer property to satisfy loan, your amount realized includes in outstanding principal balance. 180 AR - 100 AB = 80k (61(a)(3)) [no income from discharge] Read in regs: 1-1001-2(a), (c), EX 7,8 Only a 61(a)(3) dealings in property transfer - 180 relief of liabilities - 100 AB in property = 80 GR - 108 is not triggered because not 61(a)(12) - Tuft, FMV immaterial here - 1.1002-2(c)(7) AND (8)

Taxpayer resides in the Champions area of Houston and travels via I-45 each day to her downtown law office. She also acquired a dessert and coffee shop several years ago. Suppose the taxpayer decides to expand her law practice by opening another office in Austin where several big clients reside. She believes it will take 3 months and spends 6 months in Austin overseeing the new office and rents an apartment. May she deduct the rent under 162(a)(2)?

Two prongs: 1) realistically expected to last, and 2) in fact does last less than a year, then it is temporary. Realistic expectations one year or less, deductible

Which way does TP want basis to adjust?

UP! - reduces the amount subject to tax since there's less difference between the amount realized (the future sale price of the property) and the adjusted basis, and thus less gain realized to be taxed Losses, depreciation are downward adjustments Higher basis is a good thing because a higher offset against sales price (less taxable gain) ACRS - Accelerated Cost Recovery System - deductions

In the succeeding year Spouse was ill but, fortunately, they carried medical insurance and additionally Spouse had Spouse's medical expenses under a policy provided by Employer. Spouse's medical expenses totaled $4k and they received $3k benefits under policy and $2k benefits under Employer's policy. What benefits are included in GI? (****had multiple questions like this on test***)

Under 105(b) - if under an employer provided health care policy you get directly or indirectly reimbursed for 213 medical expenses (TP, spouse, or dependents), can exclude from GI to the extent being reimbursed. Under 104(a)(3) - you pay for your own policy, FULL exclusion. The problem implicates 104(a)(3) and 105(b). Based on Rev.Rul 69-154 (footnote 29, page 196 of text) the amount of medical expense to be considered part of the proceeds of each policy is proportionate to the amount of benefits received from each policy Total medical expenses = 4k; Total benefits received $5k Employee 3k - 104(a)(3) - deductible Employer paid 2k - 105(b) - ⅖ of benefits paid by employer Because you got more than you actually paid in medical bills, have to determine what proportion was paid by employer 105(b) analysis: applying the proportionality rule from Rev.Rul 69-154 ⅖ x 4k medical expense = 1600; Amount excluded per 105(b) Summary: 4.6k excluded (3k under 104(a)(3) + 1.6k under 105(b)(1); 400 GI Note: Does EE have GI from employer's premium payments? NO! 106 excludes

Alice is a doctor. In the current year, after some time as an orthopedic surgeon, Alice, who was often called upon to give medical testimony in malpractice suits, decided to go to law school so as to better under stand this aspect of her medical practice. Are her educational expenses deductible?

Under 162, need to be carrying on the same T/B. Doesn't matter, different T/B, deduction denied.

Facts are the same as (a) but additionally, towards the end of the current year when the outstanding principal balance of the mortgage is $150k, Taxpayers' financial prospects improve dramatically and they purchase a luxury vacation residence in Florida for its FMV of $800k. They finance $550k of the purchase price with a note secured by a mortgage on the Florida house, use the house 45 days a year, and elect to treat the residence as a qualified residence.

Under 163(h)(2)(D) Taxpayers are allowed a deduction for qualified residence interest. Under 163(h)(4)(A) the term qualified residence is defined as a taxpayer's principal residence (under 121), and, if an election is made, one other residence for use by the taxpayer under 280(A)(d)(1). In order to "use" a residence within the meaning of 280(A)(d)(1), if a taxpayer rents out a residence, the taxpayer must use it for personal purposes the greater of 14 days or 10% of the number of days the taxpayer rents out the residence. The vacation home will be treated as a qualified residence if Taxpayers so elect. Together the 150k mortgage and the $550k mortgage are $700k, which is under the $750k cap, so the interest is fully deductible

Same as (a) except that F, T's father makes the $3000 payment

Under regulations, if 3P who is not obligated to make interest payment, pays the interest, the payment is a 102(a) gift. T still can take deduction. Since T's MAGI is $40k, he is not subject to phase out and can take full $2500 deduction.

Carl earned a bachelor's degree in education and he teaches world history in a junior high school. In the current year he contemplates a summer European tour doing things that will benefit his teaching efforts. He wishes to know if he may deduct his expenses?

Unlike Denise, Carl is not traveling to obtain education. 274(m)(2) denies a deduction for travel as a form of education. Note the section does not preclude deductibility of travel to obtain education (see Denise above) or other travel that is necessary to engage in activities that give rise to deductible education

Homeowners purchased their vacation residence for 180k (20k of which was allocable to the land). When it was worth 160k (20k of which was allocable to the land) they rented the property and properly took 10k of depreciation on it. What result when they subsequently sell the property for 175k

Use adjusted basis of 170k. 180AB - 10 ACRS depreciation. 175 AR - 170 AB = 5 GR & recognized. 1.165-9(b)(2) is not applicable because there is no loss. Thus, we are back to using cost minus depreciation as the AB

COMMON LAW JX HYPO: H & W acquire property for 40K, appreciates to 80K. H dies.

Whole property 40ab/80fmv Each share: 20ab/40fmv H dies and W is surviving JT. W sells the property for $90. What result? 60 AB = 20ab (from her original share) + 40ab (FMV of her deceased H's share) 90AR - 60AB = 30GR

COMMUNITY PROPERTY JX HYPO: H & W acquire property for 40K, appreciates to 80K. H dies.

Whole property 40ab/80fmv Each share: 20ab/40fmv Each has one half interest 1014(b)(6) - after death in community property jx, surviving spouse's AB is FMV her half. So, her adjusted basis in HER half is now 40, which was the FMV of her half. 1014(b)(1) - surviving spouse takes FMV as AB for deceased H's half. What is her adjusted basis for the whole property after H's death? 80. The FMV of the whole. If H dies, leaves W his share in will. W sells whole for 90. 90AR - 80AB = 10GR

Winner attends the opening of a new department store. All persons attending are given free raffle tickets for a watch worth $200. Disregarding any possible application of I.R.C. § 74, must Winner include anything within gross income when she wins the watch in the raffle?

Win a watch in a prize contest. Does this count as GI? Yes, an accession to wealth

(k)Employee attends a business convention in another town. Employer picks up Employee's costs.

Working condition

Going from home to temporary work location?

YES

Going from one work location to another?

YES

Guy gets watch in a raffle worth $200. Is this GI?

YES, GI means an accession to wealth, clearly realized, over which he has dominion

Travelling to temporary place of work?

YES, get transportation costs (but not meals unless you stay overnight)

Investor purchased three acres of land, each acre worth $100,000 for $300,000. Investor sold one of the acres in year one for $140,000 and a second in year two for $160,000. The total amount realized by Investor was $300,000 which is not in excess of her total purchase price. Does Investor have any gain or loss on the sales? See Reg. § 1.61-6(a).

YES. Divided into individual sales 140-100 = 40GR and recognized 160 - 100 = 60 GR and recognized

Example: The XYZ Corporation borrowed $1,000 from Melody in Year One and gave her its certificate of indebtedness which called for annual payments of interest at a rate of 10%, and repayment of the principal amount of $1,000 in Year Ten. In Year Five, Nick, who is not a dealer in securities, purchased the certificate from Melody for $900. In Year Ten, the Corporation paid Nick $1,000 in full payment of his claim. Capital treatment?

Yes Although the transaction might be viewed as a mere extinguishment of Nick's claim under the debt instrument, it is treated as an exchange of the instrument. Nick has a $100 long-term capital gain.

In the current year, T purchases a single life annuity with no refund feature for $48,000. Under the contract T is to receive $3,000 per year for life. T has a 24-year life expectancy. (c)If T dies after nine years of payments will T or T's estate be allowed an income tax deduction? How much?

Yes, 30k

(e)Same as (a), above, except that Employee stays in the hotel of a rival chain under a written reciprocal agreement under which employees pay 50% of the normal rent.

Yes, allowed as long as in the same line of biz

(d)Same as (a), above, except that Employee's spouse and dependent children traveling without Employee use the room on their vacation.

Yes, can still exclude, counts for wife/kids

Taxpayer resides in the Champions area of Houston and travels via I-45 each day to her downtown law office. She also acquired a dessert and coffee shop several years ago. Went to Dallas in the morning to close an acquisition for a client except that the deal does not close and she spends the night in Dallas and returns home in the next day after the deal closes. Meals and lodging deductible?

Yes, satisfied Correll's overnight rule. Lodging (100%) and meals (50%) deductible

Son, who is single, owns a home. Father pays Son's 14k annual property tax. Is the tax deductible by Son?

Yes. Although the son didn't direct pay the tax, we have an indirect payment from father to son, which is a gift. The son can be deemed to have made the payment. This result is supported by Old Colony and Cramer. Son's deduction is limited to 10k amount. So can only deduct 10k of 14k.

Hilda died at the age of 85 and devised all of her property to Franklin. Franklin was not related to Hilda. Hilda had met Franklin at a picnic, and he had cultivated her friendship and convinced her to name him as her sole beneficiary in her will. Hilda left nothing to her only child, Paula. Paula brought a suit against the estate and Franklin claiming that Franklin had unduly influenced her mother and requesting that the bequest be voided so that Paula would inherit all of her mother's property as her only heir. The suit was settled under an agreement in which Paula received $800,000 from the estate. As a result of the settlement, Paula recognized:

ZERO The Supreme Court held in Lyeth v. Hoey, 305 U.S. 188 (1938) that a bona fide settlement of a claim is treated the same for tax purposes as it would be treated if it were a final judgment of a court for the plaintiff. So, for tax purposes, the settlement is treated as if Paula had obtained a judgment for $800,000. The settlement is therefore treated as an inheritance to which § 102(a) excludes from Paula's gross income.

Martha has considerable knowledge about fine art. While perusing a flea market, Martha sees a painting for sale for $150. Martha recognized that the painting was painted by a prominent artist and is worth $10,000. Martha purchased the painting for $150. As a consequence of making that purchase, Martha recognized a gain of:

Zero This was an arm's length transaction, and so there was no disguised compensation involved. The fact that Martha knew that she was getting a huge bargain does not affect the tax consequences of her purchase. If Martha turned around and sold the painting the next day for $10,000, then she would recognize a gain of $9,850 on that sale.

In Year One, Margery, who had a two-year old daughter, joined a babysitting club. Under the club rules, each member earns points when they babysit for another member, and each member uses up points when another member sits for their child. The effect is that the members exchange services by sitting for each other's children. In Year One, Margery earned 200 points, which had a fair market value of $100. Margery used 50 of those points (having a fair market value of $25) to obtain babysitting services from other members. The fair market value of the babysitting services she obtained in Year One was $30. Margery had gross income in Year One of:

Zero. The barter transactions in which people have been taxed involve the exchange of professional services or of property. The parties involved were providing services that they ordinarily provide to clients or customers in their trade or profession. When the exchange of services takes place in a noncommercial context especially when performed by people in a nonprofessional capacity, there should be no tax consequence. In effect, persons are pooling their labor to accomplish a jointly sought end in a noncommercial setting. See, Douglas Kahn, Exclusion from Income of Compensation for Services and Pooling of Labor Occurring in a Noncommercial Setting, 11 Fla. Tax Rev. 683 (2011). The Service and the courts have not addressed this issue, but there is no indication that there has been any effort to tax persons engaged in this type of venture.

Gainer acquired an apartment in a condominium complex by inter vivos gift from Relative. Both used it only as a residence. It had been purchased by Relative for $200,000 cash and was given to Gainer when it was worth $300,000. Relative paid a $60,000 gift tax on the transfer. Gainer later sells the apartment to Shelterer. (a)What gain or loss to Gainer on his sale to Shelterer for $320,000? (b)What is Shelterer's basis in the apartment?

a) What is G's AB? 200 (carryover basis) + 20 (gift tax adjustment) = 220 AB 320 AR - 220 AB = *100 GR* b) 320 AB

Owner agrees to rent Tenant her lake house for the summer for $4,000. (a)How much income does Owner realize if she agrees to charge only $1,000 if Tenant makes $3,000 worth of improvements to the house? (b)Is there a difference in result to Owner in (a), above, if Tenant effects exactly the same improvements but does all the labor himself and incurs a total cost of only $500? (c)Are there any tax consequences to Tenant in part (b), above?

a) $4000 in consideration is split between $1000 cash and $3000 in improvements; 61(a)(5) and 1.61-1(a); Rent is GI: 61(a)(5) b) still the same; owner gets same increase, not focused on tenant's costs, but owner's benefit c) tax consequences to TENANT from B? Cost $1000 in cash rental; $500 materials; received a $4,000 benefit $2500 = compensation for services IS gross income and subject to tax - 61(a)(1)

Vegy grows vegetables in her garden. Does Vegy have gross income when: (a)Vegy harvests her crop? (b)Vegy and her family consume $100 worth of vegetables? (c)Vegy sells vegetables for $100? (d)Vegy exchanges $100 worth of vegetables with Charlie for $100 worth of tuna which Charlie caught?

a) No, Imputed income b) no, it's imputed income c) Yes. converted into cash, taxable event d) Yes. bartering counts. It doesn't matter that cash wasn't involved. Transaction took place. Each report GI of $100

In an arm's-length exchange, Sharp exchanges some land with a cost basis of $6,000 and a value of $9,000 with Dull for some non-publicly traded stock which Dull owns and in which Dull has a basis of $8,000 and is worth $10,000 at the time of the exchange. (a)Consider Sharp and Dull's gains on the exchange and their respective cost bases in the assets they receive. (b)What results in (a), above, if the value of Dull's stock cannot be determined with any reasonable certainty?

a) SHARP 10K (ar) - 6K(ab) = 4K GR DULL 9K (ar) - 8K(ab) = 1K GR Sharp has $3000 in appreciation realized plus $1000 in benefit since stock was worth $1000 more than land; Dull has $2000 in appreciation realized, but a loss in $1000 exchange values b) Sharp exchanges land 6K/9K for Dull's stock 8K/??? FMV Assume that market values are equal in an exchange if cannot determine value of one side. it is assumed to be valued $9000, since that is the value of the land for which it was exchanged. In an arms-length exchange, if value received in a barter cannot be determined, it is assumed to be at least worth the FMV of the property given up. Thus: Sharp exchanges land 6K/9K for Dull's stock 8K/9K SHARP 9K (ar) - 6K(ab) = 3K GR DULL 9K (ar) - 8K(ab) = 1K GR

Doctor needs to have his income tax return prepared. Lawyer would like a general physical check up. Doctor would normally charge $200 for the physical and Lawyer would normally charge $200 for the income tax return preparation. (a)What tax consequences to each if they simply swap services without any money changing hands? (b)Does Lawyer realize any income when she fills out her own tax return?

a) Taxable to both parties; value of service received as pay, GI of $200 each b) No, imputed (did the tax return himself)

Donor gave Donee property under circumstances that required no payment of gift tax. What gain or loss to Donee on the subsequent sale of the property if: (a)The property had cost Donor $20,000, had a $30,000 fair market value at the time of the gift, and Donee sold it for: (1)$35,000? (2)$15,000? (3)$25,000?

a) appreciated property - so loss basis rule does NOT apply 1) 15k GR & R 2) 5k LR 3) 5k GR & R

Insurance Adjuster refers clients to an auto repair firm that gives Adjuster a kickback of 10% of billings on all referrals. (a)Does Adjuster have gross income? (b)Even if the arrangement violates local law?

a) yes b) yes - illegal income is still income; reg: 1.61-14 - "illegal gains constitute GI"

(b)What difference in result in (a), above, if Owner purchased the land by paying $1,000 for an option to purchase the land for an additional $9,000 and subsequently exercised the option?

b) $6000 since transaction costs included

(b)The property had cost Donor $30,000, had a $20,000 fair market value at the time of the gift, and Donee sold it for: (1)$35,000? (2)$15,000? (3)$24,000?

b) depreciated property 1) 5k GR 2) 5k LR (loss basis rule) 3) neither gain nor loss because it is depreciated property and was sold at a value between the AB and the FMV of the donor

(c)What result to Owner in (b), above, if rather than ever actually acquiring the land Owner sold the option to Investor for $1,500?

c) $500 GR

(d)What difference in result in (a), above, if Owner purchased the land by making a $2,000 cash payment from Owner's funds and an $8,000 payment by borrowing $8,000 from the bank in a recourse mortgage (on which Owner is personally liable)? Would it make any difference if the mortgage was a nonrecourse liability (on which only the land was security for the obligation)?

d) no difference - can't increase AB as you pay off loan, can't "double dip"; loan money counts the same as your own cash Nonrecourse loan; seller-finance loan - treat the same

(e)What result in (a), above, if Owner purchased the land for $10,000, spent $2,000 in clearing the land prior to its sale, and sold it for $18,000?

e) amount realized $18 minus adjusted basis ($10 cost + $2 capital expenditure) = $6 *capital expenditures after acquiring property and before sale is part of AB* $6000, since $2000 included in transaction costs $10K + $2K (capital expenditure) = AB $12K $18K (AR 1001b) minus $12K (AB 1012) = $6K GR, 1001a Report as GI - recognized under 1001c

Employee has a loss on the sale of some stock that he held for investment

employee's stock loss is allowed as a deduction under 165(c)(2) and it would be deductible from GI under 62(a)(3) in arriving at AGI. ATL!

HYPOS. TP incurred start up expenditures and commenced business. What result if TP had the following expenditures? $4k:

fully deductible immediately, since under $5k. No amortization required

Father had some land that he had purchased for $100,000 but which had increased in value to $200,000. He transferred it to Daughter for $100,000 in cash in a transaction properly identified as in part a gift and in part a sale.* Assume no gift tax was paid on the transfer. Suppose the transaction were viewed as a sale of one-half of the land for full consideration and an outright gift of the other one half. How would this affect Father's gain and Daughter's basis? Is it a more realistic view than that of the Regulations? Cf. §§ 170(e)(2) and 1011(b), relating to bargain sales to charities.

gain to father = $50K, basis for Daughter = $200K *[this can't be right?]* seems like Daughter's basis is 150k

Same as (c) except transfer is made in March of year seven.

not timely since outside of safe harbor of 6 years, unless can rebut presumption. If not, Davis rule applies and transferor's GR is taxed.

(d)To what extent are T and T's spouse taxable on the $3,000 received in the current year if at a cost of $76,500 they purchase a joint and survivorship annuity to pay $3,000 per year as long as either lives and they have a joint life expectancy of 34 years?

taxable on $750, $2250 excludable

Brad and Angelina divorce in 2019 and Brad makes the following alimony payments to Angelina pursuant to their divorce instrument. Result? Brad transfers $200k of cash to Angelina in 2019.

the payment is a nontaxable event with Angelina receiving no income and Brad no deduction.

In Year One, Sheila purchased an apartment building containing 55 units. Sheila leased the units in the apartment building. In Year Five, Sheila sold the apartment building to an unrelated person. At the time of the sale, Sheila had a basis of $400,000 in the building and a basis of $150,000 in the land on which the building is situated. On the sale of the property, Sheila received $480,000 for the building and $225,000 for the land on which the building rests. Sheila had never previously sold any realty. There was no recapture of depreciation on that sale. As a consequence of the sale, Sheila recognized:

§ 1231 gain of $75,000 on the land and a § 1231 gain of $80,000 on the building. If Sheila's rental of the apartment units did not constitute a trade or business, then the building and the land would both be capital assets in her hands. It does not matter that the building could be depreciated; if the property were not used in a trade or business, it would not be excluded from capital asset characterization by § 1221(a)(2). However, the rental of so many apartment units will constitute a trade or business, and so neither the land nor the building is a capital asset. Instead, both the land and the building are § 1231 properties, and the gain on the sale of those properties is § 1231 gain.