Substance

(2016) (0.5 minutes) $100,000 lump-sum proceeds of life insurance policy on the life of TP's uncle. The policy was purchased and owned by TP, and the proceeds were payable to TP. State the amount that constitutes gross income to TP (without any further explanation).

0

(2016) (0.5 minutes) $4,000 of interest received on a State of Alaska bond the proceeds of which were used by the State of Alaska to finance the construction of new public schools. State the amount that constitutes gross income to TP (without any further explanation).

0

(2016) (0.5 minutes) Free coffee at work provided by TP's employer (value per year is $300). State the amount that constitutes gross income toTP (without any further explanation).

0

(2016) (0.5 minutes) Publicly traded securities received during the current taxable year as a bequest after the death of TP's best friend. The fair market value of the securities of the (1) date of death of the friend is $350,000 and (2) date of receipt of ownership by TP is $325,000. State the amount that constitutes gross income to TP (without any further explanation).

0

(2021) (½ minute) TP received $1,000 of interest on U.S. Treasury note purchased for $70,000. The amount that constitutes gross income to TP is .

$1,000

(2016) (0.5 minutes) $1,000,000 cash received as the winner of the Einstein Prize in Physics awarded by the Einstein Institute. Immediately upon receipt of the payment, TP made a gift of the $1,000,000 to TP's child. State the amount that constitutes gross income to TP (without any further explanation).

$1,000,000

(2016) (0.5 minutes) $60,000 as a partial payment of the proceeds of a life insurance policy in the face amount of $500,000 on TP' s father who died during the year. Pursuant to the terms of the policy, TP (as beneficiary of the policy) elected to receive a $60,000 payment in each year for TP's life. TP's life expectancy is 10 years when the payments commence in 2016. State the amount that constitutes gross income to TP (without any further explanation).

$10,000

(2021) (½ minute) TP's employer paid $2,000 to State A to satisfy TP's real property tax liability to State. The payment was in consideration of TP's services to the employer. The amount that constitutes gross income to TP is .

$2,000

(2016) (0.5 minutes) TP received a payment of $20,000 in exchange for undergoing procedures to donate her eggs to an infertile couple. Under TP's contracts, the sums received were designated as compensation for pain and suffering. State the amount that constitutes gross income to TP (without any further explanation).

$20,000

(2016) (0.5 minutes) State the amount of gross income with respect to the $250,000 punitive damages for the physical injury to the body (without any further explanation).

$250,000

(2016) (0.5 minutes) $3,000 of interest received on U. S. Treasury note. State the amount that constitutes gross income to TP (without any further explanation).

$3,000

(2016) (0.5 minutes) TP had worked as a firefighter for the city in which TP lived. During TP's work career, (1) TP accrued vacation time and sick leave and (2) for a period of time, TP was on temporary disability leave (during which TP continued to accrue vacation time and sick leave). Upon TP's retirement during the current year, TP's unused vacation time and sick leave (with a value of $3,000) was "cash out" (converted into the sum of money of $3,000 and paid to TP). State the amount that constitutes gross income to TP (without any further explanation).

$3,000

(2016) (0.5 minutes) After consulting with an accounting firm, TP engaged in a transaction that TP eventually determined to be an abusive tax shelter, and the IRS disallowed all tax benefits associated with the transaction. TP initiated a lawsuit against the accounting firm seeking monetary damages (all of the damages that TP alleged in the complaint were damages that TP sought to compensate TP for the loss suffered because the accountants were negligent and breached their fiduciary duties). TP received a $375,000 payment in settlement of the claims for the damaged alleged in the complaint. State the amount that constitutes gross income to TP (without any further explanation).

$375,000

(2016) (0.5 minutes) $5,000 cash found in 2016 in a desk purchased in 2014 at the garage sale. State the amount that constitutes gross income toTP (without any further explanation).

$5,000

(2021) (½ minute) TP recovered $5,000 in cash from the surface of a highway after TP saw the door of a Brinks cash delivery truck swing open and release cash from the truck. The amount that constitutes gross income to TP is .

$5,000

(2016) (0.5 minutes) $50,000 embezzled from TP's employer. State the amount that constitutes gross income to TP (without any further explanation).

$50,000

(2016) (0.5 minutes) State the amount of gross income with respect to the $50,000 compensatory damages for the emotional distress (without any further explanation).

$50,000

(2016) (0.5 minutes) $6,000 payment by TP's employer to bank to satisfy TP's debt to a bank. The payment was made in consideration of TP's outstanding service to TP's employer. State the amount that constitutes gross income to TP (without any further explanation).

$6,000

(2016) (0.5 minutes) $7,000 gain realized upon sale of State of Alaska bond the proceeds of which were used by the State of Alaska to finance the construction of new public schools. State the amount that constitutes gross income toTP (without any further explanation)

$7,000

(2021) (3 minutes) Explain generally (without discussing the technical operation of any particular Internal Revenue Code provision/s) (1) what the nonrecognition provisions of the Internal Revenue Code are designed to accomplish and (2) how they operate.

(1) A "nonrecognition provision" is any provision of the Code which provides that gain or loss shall not be recognized if the requirements of that provision are met. The three most significant nonrecognition provisions are: Like-kind exchange Involuntary conversions Transfers between spouses and certain former spouses (2) They operate by deferring the gain realized to a later date.

(2016) (0.5 minutes) TP was a credit card customer at a retailer whose computer system was hacked/ compromised by unauthorized persons, thereby possibly making personal and credit information about TP available to unauthorized persons. The retailer provided in kind, for the period of 18 months after restoration of the security of the retailer' s computer system, to TP (and all other similarly situated credit customers of the retailer) credit and identity protection services provided by a third party, the value of which for the current year was $300. State the amount that constitutes gross income to TP (without any further explanation).

0

(2016) (0.5 minutes) n January 1, 2016, TP was injured when the faulty airbags in TP's automobile deployed. TP suffered (1) physical injury to TP's body and (2) emotional distress associated with the physical injuries. TP is awarded a court judgment against the auto manufacturer, and the judgment is paid on December 1, 2016. The damages paid to TP pursuant to the judgment were as follows: (1) $70,000 compensatory damages for physical injury to the body of TP, and (2) $250,000 punitive damages for physical injury to the body of TP, and (3) $50,000 compensatory damages for the emotional distress incurred on account of the physical injury to the body. State the amount that constitutes gross income to TP regarding $70, 000 compensatory damages for the physical injuries to the body. (without any further explanation).

0

(2021) (½ minute) TP received $30,000 lump-sum proceeds of life insurance policy on the life of TP's brother. TP purchased the policy and owned it at all times. Under the policy, the proceeds were payable to TP. The amount that constitutes gross income to TP is .

0

(2021) (1 minute) TP received $4,000 of interest on a State of North Carolina bond the proceeds of which were used by the State of North Carolina to finance the construction of elementary schools and purchased for $175,000. The amount that constitutes gross income to TP is . TP sells the North Carolina bond for $180,000. The amount that constitutes gross income to TP is .

0 $5,000

(2021) (1 minute) TP received publicly traded securities during the current taxable year as a gift from TP's aunt. The aunt's adjusted basis in the securities as of the date of gift is $500,000 and the fair market value of the securities as of the date of the gift is $300,000. The amount that constitutes gross income to TP is . Later in the taxable year, TP sold the publicly traded securities for $400,000. The amount that constitutes gross income to TP is .

0 0

(2021) TP was a credit card customer at a retailer whose computer system was hacked/compromised by unauthorized persons, thereby possibly making personal and credit information about TP available to unauthorized persons. The retailer provided in kind, for the period of 18 months after restoration of the security of the retailer's computer system, to TP (and all other similarly situated credit customers of the retailer) credit and identity protection services provided by a third party, the value of which for the current year was $300. The amount that constitutes gross income to TP is .

0 - not for identity theft, 2016 IRS notice

(2018) (0.5 minutes) $3,000 of interest received on a State of Kentucky bond the proceeds of which were used by the State of Kentucky to finance the construction of highways and purchased for $65,000, how much is included in income. TP sells the Kentucky bond for $67,000 how much is included in income.

0, $2,000

(2018) (3 minutes) TPl and TP2 discussed in great detail a prospective business opportunity in which they would be participants. TP 1 decided to loan money to TP2, but only if TP2 gave TPl an interest in the business. TPl sent $30,000 to TP2, and together they formed a corporation under the laws of the nation of Belize (Corporation) in which TPI and TP2 were equal shareholders. Over a 16-year period, TPl made advances to Corporation totaling in excess of$1 l,0OO,000. Each time TPJ advanced money, TPJ did so without setting a time for repayment and without prescribing a rate of interest on the advance. At the time of the Tax Court trial, TPJ had received no repayment of any advance and had received no interest. When Corporation obtained loans from independent lenders over the years, it signed formal written loan documents and repaid the lenders. TP 1 did not obtain fonnal loan documents for any of these advances. TPl claimed bad debt deductions in 2010 and 2011 with respect to the advances to Corporation. Discuss whether TP 1 's advances should be characterized for income tax purposes as debt owned by Corporation to TP 1 or as contributions to the capital of Corporation by TP 1.

Based on the facts provided, TP1's advances to Corporation should be characterized as capital contributions rather than bona fide debt for the following reasons: Lack of formal debt instruments or set repayment terms indicates capital contribution rather than loan No interest was paid on the advances over 16 years TP1 was an equal 50% shareholder, so motivation was to finance the business rather than an arm's length loan Repayment was dependent on success of the business, indicating capital contribution The advances were madeproportionally to TP1's stock ownership Corporation obtained formal loans from independent lenders, evidencing an intent to treat advances from TP1 differently Courts examine if a reasonable expectation of repayment exists based on the facts and circumstances Overall, the characterization factors weigh heavily in favor of treating TP1's advances as equity investments rather than bona fide debt. The lack of formal debt terms and nonpayment over 16 years indicates the advances were capital contributions subject to business risk.

(2016) (2 minutes) TP's salary as an employee is $200,000 per year, and TP receives $10,000 of interest income from investment property (a portfolio of corporate debt instruments). TP is a limited partner in Partnership 123 (interests in which are not traded on an established securities market and not readily traded on a secondary market or the substantial equivalent thereof) that owns and leases tanker ships, and TP's distributive share of the Partnership loss for the current taxable year is $50,000. Discuss and quantify the amount of the distributive share of the Partnership 123 loss that TP will be allowed to deduct (assuming that TP has a sufficient amount of adjusted basis in the partnership interest).

Based on the information provided, TP's deduction for the distributive share of Partnership 123's loss will be limited to $10,000. The key facts are: TP's salary is $200,000 TP has $10,000 of interest income TP has a $50,000 distributive share of loss from Partnership 123 Partnership 123 is not publicly traded Losses from passive activities, which include investments in partnerships that do not involve material participation, are limited under the passive activity loss rules. Specifically, passive losses can only be deducted against passive income. Any excess passive losses are suspended and carried forward. In this case, TP's $10,000 of interest income qualifies as passive income. Therefore, TP can deduct $10,000 of the $50,000 Partnership 123 loss against this passive income. The remaining $40,000 of loss will be suspended and carried forward to future years when TP has additional passive income. In summary, TP can deduct $10,000 of the Partnership 123 loss in the current year due to the passive activity loss limitation rules.

(2016) (3 minutes) TP owned real property, and on December 15, Year 1, granted (to an organization described in § 501(c)(3) that meets the requirements of § 509(a)(2)), by deed a conservation easement with respect to the real property. The December 15 deed stated that the consideration for the conservation easement was the mutual covenants in the deed. The conservation deed stated nothing about whether (1) the § 501(c)(3) organization had provided to TP goods or services in return for the conservation easement or (2) the conservation deed constituted the entire agreement between TP and the § 501(c)(3) organization. TP filed TP' s federal income tax return for Year 1 on April 15, Year 2. In a letter to TP, dated October 1, Year 2, a representative of the §501(c)(3) organization stated that "no goods or services were furnished in representative of your easement donation." Discuss whether TP qualifies for a deduction under §170 with respect to the transfer of the conservation easement.

Based on the information provided, it does not appear that TP would qualify for a deduction under §170 for the transfer of the conservation easement in Year 1 for the following reasons: The deed transferring the easement did not state whether the §501(c)(3) organization provided any goods or services to TP in exchange for the easement. The deed also did not state whether it constituted the entire agreement between the parties. The letter from the §501(c)(3) organization stating no goods or services were provided was dated October 1, Year 2, which was after TP filed their Year 1 return claiming the deduction. In order to claim a charitable deduction, the taxpayer must obtain a contemporaneous written acknowledgment (CWA) from the charity that includes a statement of whether any goods or services were provided in exchange for the donation. Since the deed was silent and the CWA letter came after the return was filed, it does not appear TP satisfied this requirement in Year 1. Unless TP can produce evidence of a CWA dated on or before they filed the Year 1 return, it is unlikely they would qualify for the §170 deduction for the transfer of the conservation easement in Year 1. The deduction may be available in a future year if proper CWA is obtained.

(2016) (2 minutes) On January 1, 2023, TP purchased, for $1,750,000 cash, and placed in service new machinery exclusively for use in TP's business activity. The equipment is purchased from the manufacturer, who is unrelated to TP. This is the only purchase of "Section 179 property" made by TP during 2023. This equipment has a §168(i)(1) class life of the six(6) years. TP expects to use the equipment for nine (9) years, and the TP estimates that the equipment will have a salvage value of $10,000 at the end of the period of use. Assume that the property qualifies under §168(b)(1) and ignore § 168(b)(1)(B). State the maximum amount of the §179 deduction allowable in 2023, ignoring § 179(b)(3).

Based on the information provided: TP purchased new equipment for $1,750,000 cash in 2023 The equipment has a MACRS class life of 6 years TP expects to use the equipment for 9 years The equipment has an estimated salvage value of $10,000 No other §179 property was purchased in 2023 The maximum §179 deduction allowable in 2023, ignoring the taxable income limitation in §179(b)(3), would be $1,160,000. The maximum §179 deduction was $1,160,000 for property placed in service in tax years beginning in 2023. Since the equipment was the only §179 property purchased and placed in service in 2023, TP's maximum §179 deduction for the year would be $1,160,000, subject to the taxable income limitation that is ignored per the facts provided. Therefore, the maximum §179 deduction allowable to TP in 2023 is $1,160,000.

(2018) (3 minutes) On January 1, 2018, TP purchased, for $1,500,000 cash, and placed in service new machinery exclusively for use in TP's trade or business activity. The equipment is purchased from the manufacturer, who is unrelated to TP. This is the only purchase of "Section 179 property'' (as defined by§ 179(d)(l)) made by TP during TP's taxable year beginning on January 1, 2018. State the maximum amount of the§ 179 deduction allowable to TP for the taxable year beginning on January 1, 2018, assuming that TP's taxable income for 2018 that is 2018 Substantive Questions Page 3 of 7 derived from the active conduct by TP of any trade or business during 2018 is $900,000.

Based on the information provided: TP purchased new machinery for $1,500,000 cash in 2018 for exclusive use in TP's trade or business This machinery qualifies as Section 179 property under §179(d)(1) TP did not place in service any other Section 179 property in 2018 TP has taxable income derived from an active trade or business of $900,000 in 2018 The maximum Section 179 deduction TP can claim for 2018 is: The maximum deduction allowed under Section 179 for 2018 is $1,000,000 This deduction cannot exceed the taxable income derived from TP's active trade or business, which is $900,000 Therefore, the maximum Section 179 deduction TP can claim for 2018 is $900,000, even though the equipment cost was $1,500,000. The deduction is limited to TP's business taxable income of $900,000 for the 2018 tax year.

(2021) (3 minutes) TP is a self-employed plumber who provides services to customers within the metropolitan area of TP's residence. The garage of TP's residence is the location from which TP manages the plumbing business and in which TP stores supplies and equipment. Other than the garage, TP maintains no office or other fixed place of business. TP incurs transportation expenses related to operation of TP's vehicle between TP's residence and TP's places of business activities. Under what circumstances, if any, may TP qualify for deduction with respect to some or all of such transportation expenses?

Being that the TP maintains and manages the business from his house and has a dedicated space used for this purpose, the office is considered the house. Travel between his home to another work place is not considered commuting, therefore it is deductible. In addition TP can deduct travel between jobs as well as travel from the last customer back to his residence which is the place where he manages his business. Consideration of the condition of substantiation must be met - time and date, amount/mileage, location and business purpose.

(2021) (7 minutes) A "limited liability company" exists under state law. Describe how the entity and its owners are subject to income taxation under the Internal Revenue Code.

Default tax status is a partnership if there are two or more members, or a disregarded entity if single member. LLCs file Form 1065 partnership return or no separate tax return if disregarded entity. Income/losses pass through to members and are taxed at individual rates on their personal returns. LLC itself pays no income tax. Members increase basis for passed-through income and decrease basis for passed-through losses and distributions received. Distributions generally tax-free up to a member's basis. Excess distributions treated as capital gains for members. Net losses limited to member's basis; excess suspended. Self-employment taxes apply to members for active income. LLC can elect to be taxed as a C corporation or S corporation by filing Form 8832.

(2021) (1 minute) TP e-filed TP's 2018 federal income tax return on October 15, 2019. The IRS computer software program reviewed and rejected the submitted return for failure to include an Identity Protection Personal Identification Number (IP PIN). TP re-filed the 2018 tax return with an IP PIN on April 30, 2020, and the IRS software reviewed and accepted the return. On April 5, 2023, the IRS sent TP a notice of deficiency for the 2018 tax year. The IRS notice of deficiency satisfied §6051. True or False?

False

(2018) (4 minutes) A was married to B. B was a sole proprietor farmer who purchased certain farm inputs (seed, fertilizer, herbicides, and fuel) in 2010 intending to use them to cultivate crops the following year. B was a cash-method taxpayer who properly deducted the farm input expenditures on B's Schedule F of the 2010 calendar-year taxable year joint return of A and B. B died in March 2011 not having used any of the purchased farm inputs. The farm inputs were listed in the inventory of B's assets prepared by B's estate, with the inputs' stated fair market value being equal to their purchase price. The farm input items were transferred to A, who began operating a farming business as a sole proprietor upon B's death. A used all the farm inputs in 2011 to grow crops that were sold in 2011 and 2012. A joint return properly was filed as to 2011, and deductions for tax year 2011 were claimed on A's Schedule F for an amount equal to the value of the farm inputs inherited from Spouse. The IRS conceded in the case that A's and B's Schedule F farming businesses were separate. Discuss the possible application of the "tax benefit rule" to require the recapture upon B's death in 2011 of the deduct

Held: The tax benefit rule does not require the recapture upon B's death in 2011 of deductions he claimed for 2010 for his expenditures on the farm inputs. Held, further, the I.R.C. sec. 6662 accuracy-related penalty for a substantial understatement of income tax does not apply, since Ps' deductions of the inputs under I.R.C. sec. 162 were appropriate, and the sole denied deduction conceded by Ps was not large enough to merit imposition of the penalty. Timothy L. Moll, for petitioners. Shaina E. Boatright and Douglas S. Polsky, for respondent. In this case because the inputs became part of B's estate and subject to estate taxes, the recapture was considered as taking place then and A is allowed to take the deduction in 2011.

(2018) (6 minutes) TP is a partner in a partnership. HTP were to sell TP's partnership interest, describe the characterization rules that will or may apply to determine the character of the gain or loss resulting from TP's sale of the partnership interest

Here are the key characterization rules that apply when a partner sells their partnership interest: The gain or loss on the sale of a partnership interest is generally treated as capital gain or loss under section 741. This applies to selling a full or partial partnership interest. However, section 751 contains exceptions under which a portion of the gain may be treated as ordinary income rather than capital gain. Specifically, the amount that would have been allocated to the selling partner as ordinary income related to unrealized receivables and inventory items had the partnership sold all its assets is recharacterized as ordinary gain rather than capital gain. Any gain attributable to substantially appreciated inventory and unrealized receivables is hot asset gain taxed as ordinary income under section 751(a). Depreciation recapture under sections 1245/1250 on assets owned by the partnership may also recharacterize a portion of the gain as ordinary. The selling partner would need to segregate hot asset ordinary gain under section 751 from capital gain to apply the appropriate rates. So while the default is capital gain/loss treatment under section 741, exceptions under section 751 can result in some ordinary income recognition on the sale of a partnership interest.

(2018) (2 minutes) Discuss the meaning of the phrase "other casualty" in§ 16S(c)(3) as construed by the Court.

Here are the key points on the meaning of "other casualty" under IRC §165(c)(3) based on how it has been construed by the courts: The term "other casualty" refers to a loss caused by a sudden, unexpected, or unusual event beyond the taxpayer's control. It covers losses from events similar in nature to fires, storms, shipwrecks - essentially involuntary conversions. There does not need to be a literal physical damage, but there must be an identifiable triggering event causing an economic loss. The courts have ruled that things like currency devaluation, progressive deterioration, or gradual market fluctuations do not qualify as other casualties. There is no sudden event. Casualty losses are determined on an event-by-event basis, so multiple losses can occur in one year if each has a discrete identifiable cause. The taxpayer bears the burden of proving each casualty loss was due to an identifiable precipitating event that was sudden, unexpected, and unusual rather than gradual decline. In summary, "other casualty" refers to losses tied to sudden events beyond the taxpayer's control, with economic damage traceable to that event. It does not cover progressive deterioration or market changes lacking a discrete trigger.

(2018) (0.5 minutes) Publicly traded securities received during the current taxable year as a bequest after the death of TP's parent The fair market value of the securities as of the (1) date of death of the parent is $400,000 and (2) date of receipt of ownership by TP is $375,000. Later in the taxable year, TP sold the publicly traded securities for $425,000.

Here are the key tax considerations: For the inheritance: The public securities received by TP as an inheritance have a basis equal to the fair market value on the date of death of TP's parent, which is $400,000 (per IRC Section 1014(a)). This basis rule applies even though the FMV was lower on the actual date of distribution ($375,000). No taxable income results from receiving appreciated property from an inheritance. For the sale: TP's basis is $400,000. TP sold the securities for $425,000. TP will realize a capital gain of $425,000 (sale proceeds) minus $400,000 (basis) = $25,000. This $25,000 capital gain will be taxable to TP at either the short-term or long-term capital gains rate depending on the holding period. In summary, inheritance receives a stepped-up basis but no recognition of gain. The inherited basis is used to determine gain or loss when the inherited property is later sold.

(2016) (2 minutes) Discuss briefly the substantiation requirements that TP, who operates a business activity as a sole proprietor, must satisfy in order to obtain deductions for business transportation expenses for a partial-day trip that involve only airfare expense for transportation of TP from City One to City Two and then back to City One. Discuss substantiation requirements for deducting transportation expenses.

Here are the key substantiation requirements for TP to deduct transportation expenses for the partial-day business trip: TP must maintain adequate records to substantiate the amount, time, place, and business purpose of the transportation expenses. This includes retaining documents such as receipts, tickets, itineraries, etc. For air transportation expenses, TP must have documentary evidence like a receipt or ticket showing the amount paid, date and place of travel, and the destination. As this was a partial-day trip, TP does not need to substantiate lodging or incidentals, just the airfare. TP should also note the business reason for the trip and keep any agendas or meeting information related to the business purpose of the travel. TP's records should be contemporaneous rather than reconstructed after the fact. Records should be kept for at least 3 years after the filing of the tax return with the related deduction. In summary, TP must have documentary proof of the airfare costs along with records detailing the business purpose in order to substantiate any deduction claimed for these business transportation expenses.

(2018) (0.5 minutes) $2,000 of interest received on U.S. Treasury note purchased for $70,000.

Here are the key tax considerations for the $2,000 of interest received by TP on a US Treasury note: The $2,000 interest income would be includible in TP's gross income under IRC §61(a)(4). Interest income from any source is taxable. The fact that the interest is from a US Treasury note does not exempt it from income. Interest on state or federal obligations is taxable. The amount of income is the $2,000 actually received during the tax year. It does not matter what TP paid for the Treasury note. If the note was purchased at a discount, the discount would be taxable as interest income over the life of the note. TP's basis in the Treasury note would remain $70,000. Basis is not affected by interest payments. When TP sells the note, the sales proceeds minus $70,000 basis would be capital gain/loss. In summary, the $2,000 Treasury interest is fully taxable as ordinary interest income despite the source being a government obligation. The interest does not impact TP's basis.

(2018) (0.5 minutes) $2,000 payment by TP's employer to X to satisfy TP's gambling debts payable to X. The payment was made in consideration of the importance of TP's services to TP's employer.

Here are the key tax considerations for the $2,000 payment: For TP: The $2,000 would likely be considered taxable compensation income to TP under IRC §61 even though paid to X. It was made in consideration for TP's services, so TP received an economic benefit. TP would have to include the $2,000 payment in gross income, even though TP did not actually receive the cash. Old Colony Trust Co. v. Commissioner. For X: The $2,000 would not be taxable income to X, as X received the payment to satisfy an existing debt owed by TP. X did not have any gain. The payment from TP's employer discharged TP's gambling debt tax-free for X. IRC §108(e)(5). Employer: The $2,000 would likely be deductible by the employer as an ordinary and necessary business expense under IRC §162. It was paid to retain a valuable employee. In summary, TP must include the third-party payment in income, while X excludes it and the employer can deduct it. The payment is treated as compensation to TP.

(2018) (0.5 minutes) $3,000 cash found by TP in a coffee can in TP's garden.

Here are the key tax considerations for the $3,000 cash found by TP: The $3,000 would be includible in TP's gross income under IRC §61 as found property. Treas. Reg. §1.61-14(a) specifically includes found property as a form of miscellaneous income. There are no exceptions under §61 for found property or treasure trove, unlike some foreign jurisdictions. The taxability of the found cash would be the same regardless of whether TP can identify the original owner or not. If TP makes reasonable efforts to locate the owner and return the cash but is unsuccessful, TP may be able to claim a casualty loss deduction under §165 for the repayment amount as a loss from restoration of value. Rev. Rul. 61-215. If the owner is identified, TP may be able to exclude returning the cash under the claim of right doctrine if within the same year. In summary, found property is taxable gross income under §61, regardless of whether the owner is identifiable. The taxability is the same in the year found, but repayment in same year may warrant exclusion.

(2018) (0.5 minutes) $30,000 embezzled from a not-for-profit organization as to which TP served as the treasurer

Here are the key tax considerations for the $30,000 embezzled from a not-for-profit organization by TP: For TP: The $30,000 would be includible in TP's gross income under IRC §61 even though obtained illegally. Income from criminal activities is taxable. James v. United States. TP would not be able to deduct any expenses incurred in connection with the embezzlement, as deductions are disallowed for expenses incurred in illegal activities under IRC §162(c). If caught, TP may be able to deduct restitution payments or forfeitures in the year paid under IRC §165. For Not-for-Profit: The $30,000 embezzlement loss would be deductible by the not-for-profit as an ordinary and necessary business expense under IRC §162. However, any restitution received from TP in a later year would need to be included in income by the not-for-profit. In summary, the embezzled funds are taxable income to TP without an offsetting deduction, while the not-for-profit organization can claim a deduction for the loss but must report any repayment by TP as income.

(2018) (0.5 minutes) $50,000 lump-sum proceeds of life insurance policy on the life of TP's aunt The policy was purchased and owned by TP's brother, and the proceeds were payable to TP.

Here are the key tax considerations for the $50,000 life insurance proceeds received by TP: For TP: The $50,000 would generally be excluded from TP's gross income under IRC §101(a) as life insurance proceeds paid by reason of death of the insured. This exclusion applies even though the policy owner was TP's brother rather than TP. TP was named as the beneficiary. There are no tax implications for TP regardless of who paid the premiums on the life insurance contract. For Brother: There are no tax implications for TP's brother who owned the policy, since life insurance proceeds are not taxable to the policy owner. The premiums paid by the brother would not be subject to gift tax, as the premium payments would qualify for the annual gift tax exclusion. In summary, TP can exclude the $50,000 life insurance proceeds from income under §101(a). The brother receives no taxable income and his premium payments are gift tax free.

(2016) (6 minutes) On December 31, Year 1, TP owned unencumbered unimproved real property with an adjusted basis of $200,000 and a fair market value of $500,000. On December 31, Year 1, TP sold the property to Buyer according to the following terms: Buyer paid TP $100,000 cash at closing. Buyer executed a promissory note payable to TP in the total principal amount of $400,000. A principal payment of $100,000 was due on the anniversary date of the sale in each of the four years following the year of sale. The promissory note required the payment of interest at 3% compounded annually, and the note had a fair market value of $400,000. TP received the required $100,000 payment of principal on the note in Year 2, and on January 1, Year 3, TP transferred the note (entitled to three additional principal payment of $100,000 each) to TP's child as a gift. The fair market value of the note on January 1, Year 3, was $300,000. Issue: Quantify and discuss the Year 1 tax consequences to TP according to § 453. Quantify and discuss the Year 2 tax consequences to TP according to § 453. Quantify and discuss the Year 3 tax consequences to TP according to § 453B.

Here are the tax consequences to TP under Section 453 installment sale rules: Year 1: TP's realized gain is $500,000 FMV - $200,000 basis = $300,000 TP received $100,000 cash down payment + a note worth $400,000 FMV = $500,000 total payments in Year 1 Under §453, this is treated as an installment sale since at least 1 payment is received after the year of sale §453 states only payments received in Year 1 are recognized. So TP recognizes $100,000 gain in Year 1 Year 2: TP receives $100,000 principal payment on the note This is treated as gain as payments reduce TP's basis to $0 after Year 1 So TP recognizes another $100,000 of gain in Year 2 Year 3: TP gifts the remaining note with $300,000 FMV to child Under §453B, a disposition of an installment obligation results in immediate gain recognition TP has $300,000 realized amount - $0 remaining basis = $300,000 realized gain Therefore, TP recognizes the last $300,000 of deferred gain in Year 3 on the gift In summary, §453 allows TP to defer tax by spreading the $300,000 total gain over 3 years as payments are received. The gift of remaining note triggers leftover gain.

(2016) (2 minutes) Compare and contrast the 1) cash method of accounting, and 2) the accrual method of accounting.

Here is a comparison of the key differences between the cash method and accrual method of accounting: Cash Method: Income is recognized when payment is actually or constructively received. Expenses are deductible when they are paid. Only records cash inflows and outflows. Easy to track. Good for small businesses and personal finances. Provides less accurate measure of current income. Accrual Method: Income is recognized when earned, regardless of when payment is received. Expenses deductible when incurred, regardless of payment. Matches revenues and expenses to the period in which transactions occurred. Provides more accurate measure of current income. More complex recordkeeping required. Used by large businesses. Revenue and expenses may be recognized before cash is received or paid out. Key differences: Timing of income and expense recognition Complexity of recordkeeping Accuracy in determining current year income Upfront recognition of future cash inflows/outflows The accrual method better reflects economic performance but is more complex. Cash method is simpler but doesn't match revenues and expenses as well.

(2018) (4 minutes) Describe generally the federal income tax treatment of the payment of alimony and child support from TP1 to TP2 assuming that the payments are made pursuant to a divorce or separation instrument executed prior to January 1, 2019.

Here is a general overview of the federal income tax treatment of alimony and child support payments made under a pre-2019 divorce or separation instrument: Alimony: Under prior law, alimony payments were deductible by the payor (TP1) and includible in income by the recipient (TP2). This was subject to requirements such as the payments being in cash and structured as alimony. Child Support: In contrast, child support payments were neither deductible by the payor (TP1) nor taxable income to the recipient parent (TP2). Payor (TP1) - Could deduct alimony payments as an adjustment to income under IRC §215. Child support payments are nondeductible. Recipient (TP2) - Must include alimony payments in gross income under IRC §61. Child support is excluded from income. For divorces after 2018, alimony is no longer deductible by TP1 and not income to TP2 under the TCJA. Reporting - The payor reports deductible alimony paid on Form 1040. The recipient reports alimony received on Form 1040. Different boxes are used to identify separate child support.

(2018) (4 minutes) Summarize the essential conditions required for a§ 170 deduction with respect to a contribution of a conservation easement to a § 170 qualifying charitable organization.

Here is a summary of the key conditions required for a charitable deduction under IRC §170 for donation of a conservation easement: Qualified Organization - The easement must be contributed to a governmental or publicly supported charity that meets the requirements under §170(b)(1)(A). Most are donated to land trusts. Qualified Property - The easement must be granted in perpetuity on real property that has significant conservation value, such as for historic preservation or protection of wildlife habitat or open space. Reserved Rights - The donor cannot retain rights that are inconsistent with the conservation purpose, such as building on the property. Prohibition on surface mining - The easement deed must prohibit surface mining. Substantiation - A qualified appraisal is required along with photos showing current condition. Omission of required information can negate the deduction. Reduction in Value - The easement must reduce the fair market value of the underlying property. Deductions are limited to that reduction in value. In summary, key requirements relate to the recipient organization, property characteristics, restrictions on use, substantiation, and reduction in property value. The deed and documentation must satisfy IRC §170 stringent rules.

(2016) (4 minutes) Describe the generally applicable Internal Revenue Code rules regarding a net operating loss.

Here is a summary of the key rules regarding net operating losses (NOLs) under the Internal Revenue Code: A net operating loss occurs when a taxpayer's business deductions exceed its gross income in a given tax year, resulting in negative taxable income. This creates an NOL that can be carried forward or back to offset taxable income in other years. For NOLs arising in tax years starting after 2017, the carryback period is eliminated (with some exceptions) and the carryforward period is indefinite. Prior to that, the general carryback period was 2 years and the carryforward period was 20 years. The amount of taxable income that can be offset by NOL carryforwards is limited to 80% of taxable income for tax years beginning after 2020. Prior to that, there was no limit. NOLs must be used in the order they are incurred, meaning the oldest NOLs must be applied first before newer NOLs. Generally, NOLs can only be carried forward or back by the original taxpayer who incurred the losses. Exceptions exist for NOLs acquired in an ownership change or from another taxpayer. Detailed rules exist regarding calculating and tracking NOLs, including ordering rules, loss limitations, and tracking of NOL absorption. Special rules can apply for certain industries or entities, such as real estate investment trusts (REITs).

(2021) (3 minutes) Describe the nature of the analysis likely to be undertaken by the Tax Court to determine if a taxpayer is subject to the §6663 fraud penalty.

Here is an overview of the analysis the Tax Court would undertake to determine if the section 6663 fraud penalty applies: IRS has burden of proving fraud by clear and convincing evidence. Tax Court looks for badges of fraud such as large understatements, inadequate records, concealment of assets, failure to cooperate. Court examines taxpayer's education, sophistication, history of filing proper returns. Reckless disregard of rules and regulations can indicate fraud. Actual intent to evade taxes must be shown. Fraud is never presumed - circumstances must clearly indicate intentional wrongdoing. Tax Court weighs all facts and circumstances in totality to determine existence of fraud. In summary, the Tax Court conducts a thorough examination of all the evidence to determine whether the IRS has definitively proven the taxpayer acted with intentional disregard of tax laws and deliberate intent to evade taxes. The badges of fraud serve as circumstantial evidence.

(2018) (5 minutes) Briefly describe the circumstances under which a transfer or transfers to a corporation in exchange for stock of such corporation will be entitled to nonrecognition treatment. Also describe relevant adjusted basis rules.

Here is an overview of the nonrecognition rules and basis adjustments for transfers of property to a corporation in exchange for stock: Section 351 provides for nonrecognition treatment when one or more persons transfer property to a corporation solely in exchange for stock of the corporation, and immediately after the exchange such person(s) are in control of the corporation. "Control" means at least 80% of the total combined voting power and at least 80% of all other classes of stock. Gain or loss is not recognized on the exchange of property for corporate stock under Section 351. The basis of the property transferred carries over and becomes the basis of the stock received, increased by any gain recognized and decreased by boot received. The corporation takes a transferred basis in the property received equal to the basis in the hands of the transferor, increased by any gain recognized by the transferor. Liabilities assumed by the corporation are generally not treated as money received for purposes of gain recognition. So in summary, Section 351 provides for nonrecognition on transfers of appreciated property to a controlled corporation, with special basis allocation rules.

(2016) (3 minutes) Describe how married persons, of the same sex, are treated for federal tax purposes.

Here is how same-sex married couples are treated for federal tax purposes: After the Supreme Court decision in Obergefell v. Hodges, same-sex marriages are recognized for federal tax purposes. The IRS issued guidance stating that same-sex couples legally married in a state or foreign jurisdiction are treated as married for federal tax purposes regardless of where they reside. This applies to all federal tax provisions where marriage is a factor, including filing status, personal exemptions, standard deductions, employee benefits, IRA contributions, and other tax rules. Same-sex married couples generally must file as married filing jointly or married filing separately for federal income taxes. They cannot file as single individuals. However, for certain returns filed before Obergefell, same-sex married couples were allowed to amend returns to file as married filing jointly, married filing separately, or single as they choose. In general, all joint filing rules, limitations, and restrictions apply equally to same-sex married couples. There are no special federal tax rules solely for same-sex married couples. In summary, same-sex married couples are treated the same as opposite-sex married couples for federal tax purposes across the Tax Code under current IRS guidance and interpretation of Supreme Court precedent.

(2018) (2 minutes) TP timely filed a fraudulent tax return with the intent to evade tax. On a date after the due date for that return, TP filed a non-fraudulent amended return for that same year. Discuss the applicable statute of limitation with respect to the taxable year for which the returns were filed.

If a taxpayer files a fraudulent return with intent to evade tax, the statute of limitations for that year remains open indefinitely under section 6501(c)(1). The subsequent filing of a non-fraudulent amended return does not start the running of the statute of limitations. Specifically: Section 6501(c)(1) provides that in the case of a false or fraudulent return filed with intent to evade tax, the tax may be assessed at any time. This unlimited assessment period applies even if the taxpayer subsequently files an amended non-fraudulent return. The unlimited statute remains open because the original return was filed fraudulently. The amended return does not undo that fraudulent intent or restart the limitations period. Therefore, because TP originally filed the return fraudulently with intent to evade tax, the statute of limitations remains open indefinitely under section 6501(c)(1). The subsequent non-fraudulent amended return does not start the running of any limitations period.

(2016) (1 minute) TP and Spouse decide to divorce and initiate a divorce proceeding. During the pendency of the divorce proceeding, TP receives from Spouse monthly support amounts (1) in cash and (2) via electronic transfers from Spouse's bank account to TP' s bank account. Discuss whether such support amounts qualify as §71 alimony if all other §71 requirements are satisfied.

If all other requirements of §71 are satisfied, the monthly support amounts TP receives from Spouse would qualify as alimony, regardless of whether paid in cash or via electronic transfers. Some key points: Section 71 defines alimony or separate maintenance payments as any cash payment meeting certain requirements. Cash payments include checks or money orders, as well as electronic transfers of funds. The regulations under §71 specifically state that electronic fund transfers or bank deposits qualify as cash payment methods for alimony. Therefore, the fact that some payments are made in cash and some via electronic transfer does not affect the characterization of the payments as alimony, assuming all other §71 requirements are satisfied. These requirements include: payment made under a divorce or separation agreement, spouses cannot file joint return, payment stops at death of recipient spouse, not designated as child support, etc. In summary, as long as the monthly support payments from Spouse to TP meet all the requirements in §71, the form of payment - cash or electronic transfer - does not matter. The payments would be treated as taxable alimony income to TP. The payment method does not preclude alimony treatment. Share Retry

Section 453

Installment method

(2021) (2 minutes) Briefly describe the interest payable with respect to: a) an unpaid federal income tax liability, b) An addition to tax imposed by § 6651(a)(1).

a) Interest on unpaid federal income tax liabilities is charged at the federal short-term rate plus 3 percentage points, compounded daily. b) Interest on additions to tax under §6651(a)(1) for failure to file is charged at the federal short-term rate plus 3 percentage points, compounded daily.

(2018) (3 minutes). Describe the interest that is imposed on unpaid assessable penalties, additional amounts, or additions to tax.

Interest is imposed on unpaid assessable penalties, additional amounts, and additions to tax as follows: Under section 6601(e)(2)(A), interest applies to assessable penalties, additional amounts, and additions to tax that are not paid within 21 calendar days from the date of notice and demand. The interest rate is the federal short-term rate determined under section 6621(b) plus 3 percentage points. This increased interest rate applies only to assessable penalties, additional amounts, and additions to tax. It does not apply to interest on underpayments of tax. Interest runs from the date of notice and demand to the date of payment. There is no grace period - interest begins to accrue immediately after the 21 day period from notice and demand. Statutory exceptions exist for certain small amounts under section 6651. In summary, a higher interest rate applies under 6601(e)(2)(A) to unpaid assessed penalties/additions to tax, running from the due date 21 days after notice and demand is issued. This encourages prompt payment.

(2018) (1 minute) Under§ 6343(a)(l)(D), the Commissioner may release a levy if "the Secretary has determined that such levy is creating an economic hardship due to the financial condition of the taxpayer." Reg.§ 301.6343-l(b)(4}(i) limits this economic hardship relief to individual taxpayers and excludes corporate taxpayers. Is the Regulation a valid regulation under applicable Court authority? State YES or NO.

No

(2016) (1 minute) Under applicable Tax Court authority regarding a conservation easement transfer, must each outstanding mortgage on the underlying property be subordinated, at the time of the transfer, to the rights of the holder of the easement? State YES or NO.

No Okay, here are more details on whether outstanding mortgages must be subordinated for a conservation easement donation: The Tax Court has held that a mortgage does not need to be subordinate to the conservation easement at the time of the donation for the donor to qualify for a charitable deduction. Specifically, in Minnick v Commissioner, the Tax Court ruled that the taxpayer was entitled to a deduction even though the bank had not agreed to subordinate the mortgage to the easement until almost 2 years after the donation. The court said the regulation requiring subordination only requires the mortgagee to subordinate its rights in the property "at the time of the gift," which can be after the date of the gift. So the subordination does not need to happen by the date the gift is made, just at some point thereafter. This provides more flexibility for taxpayers. However, it is still advisable for taxpayers to obtain subordination agreements prior to claiming a deduction, in order to avoid challenges from the IRS. But it is not an absolute requirement per the Tax Court interpretation. In summary, outstanding mortgages do not necessarily need to be subordinated by the date of the donation per Tax Court precedent, even though that is the optimal approach for taxpayers. The subordination can happen at a later time and the deduction would still be valid.

(2016) (4 minutes) In 2012, TP purchased unimproved real property. To acquire the property, TP (1) paid $50,000 cash at the closing, (2) assumed a pre existing first mortgage debt secured by the property in the amount of $600,000 (for which TP became personally liable), and (3) executed a second mortgage debt in the principal amount of $100,000. In 2016, TP received an offer from Buyer to purchase the real property, and TP accepted the offer. Buyer (I) paid $500,000 cash, (2) took subject to the· first mortgage debt in the principal amount of $200,000 (TP had paid down the principal amount of the debt from $600,000 to $200,000), and (3) assumed the second mortgage debt in the principal amount of $100,000. Quantify the amount of TP's adjusted basis in the property at the time of the acquisition in 2012. Quantify TP's amount realized and any gain or loss realized upon the sale of the property to Buyer in 2016.

Okay, let's go through this step-by-step: TP's adjusted basis in the property at acquisition in 2012: Cash paid: $50,000 Liability assumed (1st mortgage): $600,000 Liability incurred (2nd mortgage): $100,000 TP's adjusted basis = $50,000 + $600,000 + $100,000 = $750,000 TP's amount realized and gain/loss on sale in 2016: Cash received: $500,000 Liability assumed by buyer (1st mortgage): $200,000 Liability assumed by buyer (2nd mortgage): $100,000 TP's amount realized = $500,000 + $200,000 + $100,000 = $800,000 TP's adjusted basis = $750,000 (from above) TP's realized gain = Amount realized - Adjusted basis= $800,000 - $750,000 = $50,000 Therefore, TP realized a gain of $50,000 on the sale of the property in 2016.

(2021) (8 minutes) Describe in general terms the federal income taxation of the periodic income of, and distributions from, a Subchapter S corporation (that is organized in 2020 and immediately elects Subchapter S status)

S corporation itself pays no income tax. Its income/losses flow through to shareholders. Shareholders must report their allocable share of S corp income on their personal tax returns, whether or not distributions made. Distributions to shareholders are generally tax-free to extent of basis in stock. Excess distributions are treated as capital gain income. Shareholders increase basis by passed-through income and reduce basis by passed-through losses and distributions. S corp must make pro rata distributions to shareholders based on ownership. Net losses limited to shareholder's basis - excess losses are suspended. LIFO recapture tax and excess net passive income taxes may apply at entity level. Built-in gains tax applies if sold certain assets within 5 years of S election. Periodic income is allocated to SH on a pro-rata basis Distributions are not taxable if AEP dividends are in excess of distributions.

(2018) (3 minutes) TP fails to adequately substantiate business-related expenses that, if properly substantiated, would be deductible (because§ 274 is inapplicable). Discuss whether TP successfully can assert in the Court that at least some approximated portion of the inadequately substantiated business-related expenses should be deductible.

TP likely cannot successfully assert that an approximated portion of the inadequately substantiated business expenses should be deductible. The courts have consistently held that: Section 274 overrides the Cohan rule that previously allowed courts to estimate certain undetailed expenses. Taxpayers must strictly substantiate expenses subject to 274(d). Absent strict substantiation, no deduction is allowed for travel, meals, entertainment, or listed property. Estimates are unacceptable. Taxpayers cannot rely on Cohan for expenses covered by 274(d) even if the court believes they were legitimately incurred. The taxpayer has the burden of providing adequate records such as receipts, logs, itineraries to substantiate amount, time, place, and business purpose. For other business expenses not covered under 274(d), courts retain some ability to estimate expenses under Cohan if reasonable. But the taxpayer must present a sufficient evidentiary basis. For 274(d) expenses, only amounts actually substantiated with records will be allowed. Courts have no discretion to estimate. Therefore, for any travel, meals, entertainment expenses, or listed property lacking full substantiation, TP likely cannot convince the court to apply Cohan approximations and should not be entitled to any deduction.

(2018) (3 minutes) TP owns real property used in TP's business within the meaning of§ 122l(a)(2). The real property constitutes "property used in a trade or business,,, as defined by§ 1231 (b )( 1 ). On January 1, 2018, TP entered into a contract for sale of the property to X, and upon execution of the contract by TP and X, TP received from X $10,000,000 as a deposit against the purchase price of $25,000,000. The transaction was to close and ownership to transfer from TP to X on July 1, 2018, but X defaulted, and the closing and transfer of ownership did not occur. Under the terms of the contract , TP was permitted to retain the $10,000,000 deposit. Discuss whether § 1234 applies to TP with respect to this transaction.

Section 1234 does not apply to TP's retention of the $10,000,000 deposit in this situation. Section 1234 provides that gain or loss attributable to the cancellation, lapse, expiration, or other termination of a right or obligation with respect to personal property which is (or on acquisition would be) a capital asset in the hands of the taxpayer shall be treated as gain or loss from the sale of a capital asset. However, here the $10,000,000 was received by TP as a deposit to buy real property used in TP's trade or business, which is section 1231 property. It was not received in connection with a termination of rights or obligations with respect to a capital asset. Rather, TP simply retained the deposit upon the buyer's breach and default. TP did not sell or exchange a capital asset. Therefore, section 1234 does not apply to characterize TP's retention of the deposit as capital gain or loss. The deposit retains its original nature as ordinary income to TP.

(2018) (3 minutes) TP owns a professional sports team based in City. The game schedule for the sports team requires the players and other staff personnel to travel to locations away from City. When the teams travels away from City for games, TP incurs lodging and meal expenses at hotels for team personnel. TP contracts with the hotels for the provision, in a hotel banquet or conference room, of pre-game meals and snacks exclusively to players and team personnel. TP provided such food to all the traveling employees in nondiscriminatory manner as required by § 132(e)(2). Discuss whether, as to a expenses incurred prior to December 31, 2017, § 274(n) limits TP's deductions as to the meal expenses inCUITed while the team travels away from City.

Section 274(n) does not limit TP's deduction for the meal expenses incurred while the team travels away from City, for expenses prior to December 31, 2017, for the following reasons: Section 274(n) limits deductions for meal expenses to 50% of the cost. However, there is an exception under 274(n)(2)(B) for meals provided by an employer operated eating facility that constitutes a de minimis fringe under §132(e). The pre-game meals and snacks provided by TP in the hotel banquet/conference rooms qualify as a de minimis fringe benefit because they are provided in a nondiscriminatory manner during team travel. Therefore, the meal expenses are excepted from the 50% limitation by §274(n)(2)(B). As a result, TP can deduct 100% of the meal costs incurred for team personnel during team travel away from City, as the meals fall under the de minimis fringe exception to 274(n). In summary, as the meals are provided under the requirements of §132(e), §274(n) does not apply to limit TP's deduction for these travel meal expenses to 50% for costs prior to December 31, 2017. The full cost is deductible.

(2021) (3 minutes) In 2010, TP and Spouse purchased for $400,000 (paid in cash) a residence as TP's and Spouse's principal residence. TP and Spouse own and occupy the property as their principal residence until they sell the property on October 1, 2020, for $950,000. Neither TP nor Spouse has ever owned another residence. Explain the amount of the gain recognized with respect to the sale of the residence in 2020 if TP and Spouse file a joint return for 2020.

Since TP and Spouse owned and used the residence as their principal residence for the entire period of ownership, the gain on the sale of the residence is eligible for the section 121 exclusion. Section 121 allows an exclusion of up to $500,000 of gain on the sale of a principal residence by married individuals filing jointly if certain requirements are met. Here, the amount realized is $950,000. The adjusted basis is $400,000. Therefore, the gain realized is $950,000 - $400,000 = $550,000. TP and Spouse can exclude $500,000 of the $550,000 gain under section 121. The amount of gain recognized is $550,000 - $500,000 = $50,000. Therefore, TP and Spouse will recognize $50,000 of gain on the sale of their principal residence in 2020. The remaining $500,000 of gain is excluded under section 121.

(2021) (8 minutes) TP and B exchange unimproved real properties that are encumbered by mortgage debts. In the exchange transaction, TP's mortgage debts are assumed by B, and B's mortgage debts are assumed by TP. The gross fair market value of B's property is $200,000, its adjusted basis is $120,000, and it is encumbered by a $50,000 mortgage debt leaving a net equity of $150,000. The gross fair market value of TP's property is $220,000, its adjusted basis is $200,000, and it is encumbered by a $70,000 mortgage debt leaving a net equity of $150,000. Discuss and quantify the §1031 consequences to TP (not B).

Since this is a qualified section 1031 exchange usually no gain or loss is recognized at the time of the transfer. For the TP since the mortgage debt on the property transferred is $70K and the mortgage debt on the property received is $50K there is a $20K realized gain. This is considered boot and becomes taxable to TP. The adjusted basis in the property received is basis in the property transferred which is $200K. FMV of TP property: $220,000 TP's basis: ($200,000) Gain realized: $20,000 Mortgage relieved: $70,000 Net boot deemed received: $70,000 Gain recognized: Lesser of realized gain or boot Therefore, TP's recognized gain is $20,000 Conclusion: TP will recognize $20,000 of gain in the §1031 exchange due to the mortgage relief they received being treated as taxable boot under §1031.

(2018) (3 minutes) Discuss the applicable period of limitations as to TP whose tax return was fraudulently prepared by a tax return preparer.

The statute of limitations applicable to TP's tax return that was fraudulently prepared by a tax return preparer depends on TP's own intent and involvement in the fraud: Under section 6501(c)(1), if TP's return was filed with the "intent to evade tax" by TP, the tax may be assessed at any time. The fraud of the preparer is attributed to the taxpayer. However, if the preparer committed the fraud without the taxpayer's knowledge or intent, section 6501(c)(1) does not apply to keep the statute open indefinitely. Instead, the general three year limitations period under section 6501(a) would apply, starting from the date the return was filed. The IRS has 3 years to assess tax unless it can prove the taxpayer intended to evade tax by filing the fraudulent return. So if TP was unaware of the fraud, the normal three year statute would apply. But if TP had intent to evade tax by filing the fraudulent return prepared by the tax return preparer, section 6501(c)(1) would keep the statute open indefinitely. The key factor is whether TP had intent to evade tax.

(2018) (4 minutes) TP sued TP's former employer for workplace physical injury, discrimination, and retaliation. TP alleged (1) a physical injury inflicted by the former employer and (2) that TP had "suffered severe emotional distress and anxiety, with physical manifestations, including high blood pressure/' TP also sought punitive damages. The decision of the court awarded: 1.$50,000 to the physical injury. 2.$100,000 to punitive damages. Discuss whether TP may exclude from gross income any part of the amounts received

TP may be able to exclude some or all of the awarded damages from gross income: Physical Injury Award ($50,000): This amount is excludable from income under IRC §104(a)(2), which allows exclusion of damages received for personal physical injuries or physical sickness. TP alleged a workplace physical injury inflicted by the employer, so the award based on that claim is tax-free. Emotional Distress Award ($100,000): This amount may also be excludable if the emotional distress resulted from the physical injury. Damages for emotional distress stemming from a physical injury are considered received "on account of" the physical injury under §104(a)(2) per the 1996 amendments. Punitive Damages ($100,000): Punitive damages are taxable and cannot be excluded under §104(a)(2). TP will have to include this amount in gross income. In summary, TP can likely exclude both the physical injury award and any emotional distress award that stemmed from that physical injury. However, any punitive damages received must be included in gross income even if related to the physical injury claim.

(2021) (2 minutes) TP receives as a gift from TP's uncle an artwork with a fair market value of $20,000 and an adjusted basis to the uncle of $5,000. Uncle paid a gift tax of $2,000 with respect to the transfer to TP. The amount of TP's adjusted basis in the artwork is .

TP's adjusted basis in the gifted artwork is $5,000. Under Section 1015(a), the recipient's basis in property acquired by gift is the same as the adjusted basis of the property in the hands of the donor. The payment of gift tax by the donor does not affect the donee's basis. Therefore, TP's adjusted basis in the artwork is $5,000, which was the uncle's adjusted basis, regardless of the $20,000 FMV or $2,000 gift tax paid.

(2018) (3 minutes) TPl and TP2 form the 1-2 Partnership, in which TPl and TP2 are equal partners for all purposes. TP 1 is to serve as the manager of the partnership business activities and is to receive a salary of $200,000 per year regardless of the partnership income. During the year, the partnership has profit from operations (exclusive of TPl 's salary expense) of $350,000 ($150,000 net of TPl's salary expense). Discuss the amount of income from the partnership that TP 1 and TP2 must report.

TP1 and TP2 must report partnership income as follows: The partnership had operational profit of $350,000 before deducting TP1's guaranteed salary. TP1's $200,000 salary is deducted by the partnership as a guaranteed payment under IRC §707(c). This leaves net partnership income of $150,000 ($350,000 - $200,000). As equal partners, TP1 and TP2 each report 50% of this net income, which is $75,000. In addition, TP1 reports the $200,000 guaranteed payment as ordinary income. So TP1 reports total income of $200,000 salary + $75,000 share of partnership income = $275,000 TP2 reports $75,000 as their 50% share of net partnership income. In summary, guaranteed payments are deducted by the partnership in determining net income allocable to the partners based on ownership. The partner receiving the payment reports it separately as ordinary income.

(2018) (3 minutes) Describe and explain the federal income tax accrual method of accounting "all events test" with respect to a taxable year beginning before January 1, 2018.

The "all events test" is the standard used under the accrual method of tax accounting to determine when an item of income or deduction has been incurred for federal income tax purposes, prior to the TCJA changes effective 2018. The all events test provides: An item of income is includible in gross income in the taxable year when (1) all the events have occurred that fix the right to receive the income and (2) the amount can be determined with reasonable accuracy. A liability is deductible in the taxable year when (1) all the events have occurred that establish the fact of the liability, and (2) the amount can be determined with reasonable accuracy. The all events test focuses on when the right to income or liability is fixed based on obligating events, not when payment is made/received. Economic performance rules may further restrict accrual of deductions until economic obligations are satisfied. Reliance Damages v. Commissioner established the all events test for accrual accounting. Therefore, the all events test requires an item to be included in taxable income or claimed as a deduction when the right or liability is fixed and amount determinable, regardless of when paid. It distinguishes accrual from cash method.

(2018) (2 minutes) Petitioner, an attorney, had represented, pursuant to a power of attorney, a taxpayer in an administrative proceeding with the IRS. Petitioner sent a letter to the IRS applying for administrative costs under§ 7430 on behalf of the client taxpayer. Petitioner seeks Court review of the IRS decision to deny Petitioner's application for an award of administrative costs under § 7430. Petitioner asserts in the petition the § 7430 claim as it related to Petitioner's rights under§ 7430 and not on behalf of the taxpayer. The Commissioner has submitted a motion to dismiss for lack of jurisdiction on the basis that Petitioner is not the proper party to file a claim under § 7430(f)(2). How should the Court rule on the motion?

The Court should grant the Commissioner's motion to dismiss for lack of jurisdiction because the petitioner lacks standing to pursue a claim for administrative costs under Section 7430. Section 7430(f)(2) states that a decision granting or denying an award for administrative costs "may be reviewed by the Tax Court." However, it does not confer standing on someone other than the taxpayer. Here, the petitioner is the attorney who represented the taxpayer, not the taxpayer himself. Only the taxpayer has standing to pursue an administrative claim for costs under Section 7430. The petitioner represented the taxpayer only pursuant to a power of attorney. That does not provide the petitioner independent standing to assert a Section 7430 claim on his own behalf. Therefore, since only the taxpayer has standing to petition the Tax Court to review a denial of administrative costs under Section 7430, the Court should grant the motion to dismiss for lack of jurisdiction. The petitioner lacks standing to independently pursue the Section 7430 claim as the taxpayer's representative.

(2018) (3 minutes) TP contributed an interest in property (not cash and not publicly traded securities) to an entity qualifying within§ 170(c)(2). TP claimed a§ 170 deduction in excess of $5,000 with respect to the transfer. The deduction claimed was very significantly greater than 2018 Substantive Questions Page 2 of 7 TP's acquisition cost of the interest in the property (which was acquired in TP's preceding taxable year). TP included with TP's federal income tax return for the year of the claimed deduction a Form 8283, Noncash Charitable Contributions. TP's Form 8283 provided the date and manner of acquisition of the contributed property, but the Form left blank the space for the "Donor's cost or other adjusted basis." Discuss whether the Court should hold that TP's Form 8283 satisfied the substantiation requirement of Reg.§ 1.l 70A-13(c)(2).

The Court should hold that TP's Form 8283 does not satisfy the substantiation requirements of Reg. §1.170A-13(c)(2) for the noncash charitable contribution. The regulation requires taxpayers to provide their cost or adjusted basis information on Form 8283 for noncash contributions over $5,000. Leaving this basis space blank does not substantially comply. The basis information is considered essential for the IRS to evaluate the claimed deduction. The Tax Court has held omission of basis by the taxpayer violates the strict substantiation rules, preventing any deduction (RERI Holdings I, LLC v. Commissioner, 149 T.C. 1 (2017)). While TP provided the date/manner of acquisition, the basis information is specifically required by Reg. §1.170A-13(c)(4)(ii)(E). Partial information does not excuse omission of the basis. Absent reasonable cause, failure to fully comply with the substantiation regulations precludes a charitable deduction. TP has not shown reasonable cause in this case. Therefore, the Court should sustain the IRS's disallowance of TP's claimed charitable deduction for failure to meet the substantiation requirements by omitting cost/adjusted basis from Form 8283. The deduction should be denied in full.

(2018) (3 minutes) TPl and TP2 were married at all relevant times. TPl erroneously claimed single/unmarried filing status on TPl 's 2012 individual income tax return. TP2_did not file a 2012 individual income tax return. In a notice of deficiency to TP 1, the IRS changed TP l 's 2012 filing status to married filing separately. After petitioning the Court, TPl and TP2 filed a joint 2012 income tax return. The IRS contends that TPl 's original 2012 single return was a separate return such that the limitations of§ 6013(b)(2) apply to make§ 6013(b)(l) inapplicable to TPl and TP2. Discuss how the Court should rule regarding the applicability of§ 6013(b)(2) to TP 1 and TP2.

The Court should rule that §6013(b)(2) does not apply to prohibit TPl and TP2 from filing a joint return. Under §6013(b)(1), a married couple who has filed separate returns for a taxable year may subsequently elect to file a joint return, even after the due date for the return. However, §6013(b)(2) provides that this privilege does not apply where the taxpayer has filed a separate return and the time for filing has expired for the spouse who did not join in the separate return. Here, TP2 did not file any separate return for 2012. The provision is intended to prevent taxpayers from benefitting if their spouse failed to timely file. But since TP2 filed no 2012 return, §6013(b)(2) should not prohibit TPl and TP2 from now filing jointly. The Court should reject the IRS's position, as TP2 did not file a separate return. Allowing TPl and TP2 to jointly file better reflects their marital situation for 2012. §6013(b)(2) does not apply on these facts.

(2018) (2 minutes) Describe in general terms the holdings of the Tax Court decisions interpreting the "reasonable cause" exceptions found in§ 66Sl(a)(l) and§ 6664(c)(l) with respect to taxpayer reliance on the advice of a tax professional.

The Tax Court has established the following standards regarding reasonable cause exceptions for reliance on tax professional advice under sections 6651(a)(1) and 6664(c)(1): The taxpayer must show they provided necessary and accurate information to the advisor. The advice must be based on all pertinent facts and circumstances and the law as it relates to those facts and circumstances. The reliance must be reasonable, in good faith, and based on the advisor's expertise. The advice must not be based on any unreasonable factual or legal assumptions. The taxpayer cannot rely on an advisor who has an inherent conflict of interest or does not have expertise in the relevant aspects of Federal tax law. The taxpayer must actually rely in good faith on the advisor's judgment. In summary, the Tax Court requires the taxpayer to demonstrate reasonable, good faith reliance based on accurate facts provided to an expert advisor not having any conflict of interest. Blind reliance is not sufficient.

(2018) (2 minutes) TP operates a landfill and uses the cash method of accounting for federal income tax purposes. TP is legally required to pay reclamation and closing costs if and when it closes the landfill. TP made a proper § 468 election to currently deduct estimated reclamation, closure, and post-closure costs before the costs are paid, and TP currently deducted the amount prescribed by§ 468(a)(l). The IRS contends that§ 468 applies only to accrual method taxpayers. How should the Court rule on the issue of whether § 468 applies only to accrual method taxpayers?

The Tax Court should rule that section 468 applies to both cash and accrual method taxpayers. The relevant authorities indicate: The text of section 468 does not limit its application only to accrual method taxpayers. The regulations under section 468 state it applies to both cash and accrual methods. Treas. Reg. §1.468-1(a)(2). The legislative history of section 468 shows intent for it to apply to cash method taxpayers to address the mismatching of income and deductions. Case law has held section 468 deductions are allowable to cash method taxpayers. Roosevelt & Son Pshp. v. Comm'r, 102 T.C.M. (CCH) 116 (2011). Deductions under section 468 relate to estimated future costs and represent an exception to the general rule prohibiting cash method taxpayers from deducting future liabilities. Therefore, based on the statute, regulations, legislative history, and case law precedent, the Tax Court should hold that section 468 permits current deductions for estimated reclamation costs for both cash and accrual method taxpayers.

(2018) (3 minutes) TP made gifts in Year 1 for which no Form 709 was filed. TP also made a gift in Year 2 for which a Form 709 was filed, but the Form 709 did not descnoe the 2018 Substantive Questions Page 5 of 7 transferred property, nor did it provide a description of the method used to determine the value of the transferred property. Discuss the applicable period of limitations under§ 6S01 for each year.

The statute of limitations on assessment of gift tax under Section 6501 depends on whether a gift tax return was filed and whether it adequately disclosed the transfer. For the Year 1 gifts: No gift tax return was filed Under Section 6501(c)(3), the tax may be assessed at any time if no return is filed. Therefore, there is no limitations period that would bar assessment of gift tax on the Year 1 transfers. For the Year 2 gift: A gift tax return was filed but did not describe the property or valuation methodology. Under Section 6501(c)(9), if a gift is not adequately disclosed, the tax may be assessed within 3 years after the return is filed. So the IRS has at least 3 years from the filing of the Year 2 return to assess gift tax on that transfer. In summary, the Year 1 gifts can be assessed at any time due to failure to file a return, while the Year 2 gift has a minimum 3 year assessment period because it was not adequately disclosed despite filing a return.

(2021) (3 minutes) The IRS examiner determined that TP was liable for a 40% gross valuation misstatement penalty under §6662(h), and the examiner determined in the alternative that TP was liable for a 20% accuracy-related penalty under §6662(a). The examiner obtained written approval from the examiner's immediate supervisor, who signed an IRS Civil Penalty Approval Form, for the 40% gross valuation misstatement penalty. The §6212 notice of deficiency issued to TP was based on the IRS Appeals officer's closing memorandum, for which the Appeals officer obtained written approval from the officer's immediate supervisor. The §6212 notice of deficiency included the 20% §6662(a) accuracy-related penalty but omitted the 40% §6662(h) penalty. TP filed a Tax Court petition. In its TCR 30 answer pleading, the IRS asserted the 40% §6662(h) penalty. The answer pleading was signed by the IRS trial counsel and the trial counsel's immediate supervisor. TP asserts that imposition of the 40% penalty is impermissible because the IRS failed to comply with §6751(b)(1). Discuss how the Court should rule on the issue of IRS compliance with §6751(b)(1).

The Tax Court should rule that the IRS complied with Section 6751(b)(1) with respect to the assertion of the 40% penalty under Section 6662(h). Section 6751(b)(1) requires that the initial determination of certain penalties be personally approved in writing by the immediate supervisor of the individual making such determination. Here, the examiner initially determined the 40% penalty and properly obtained written supervisory approval as documented on the Civil Penalty Approval Form. The fact that the notice of deficiency omitted the 40% penalty is not relevant, since initial supervisory approval was properly obtained. The subsequent re-assertion of the 40% penalty in the answer pleading, even though approved by the trial counsel's supervisor, does not constitute an initial determination requiring separate approval. Therefore, the IRS complied with the Section 6751(b)(1) written supervisory approval requirement for the initial determination of the 40% gross valuation misstatement penalty. The Tax Court should uphold the penalty on this issue.

(2021) (3 minutes) Explain the concept of "portability" with respect to the federal estate tax "unified" or "applicable" credit of a married decedent.

The concept of portability refers to the ability of a surviving spouse to use the unused estate tax exemption of their deceased spouse. Key points: Applies to married couples when the first spouse dies after 2010. Allows surviving spouse to add unused exemption of deceased spouse to their own. Deceased spouse's executor must file estate tax return to elect portability. Surviving spouse can then use combined exemption amount. Exemption is portable but not indexed for inflation after first death. Provides flexibility in using full combined exemption. In summary, portability allows married couples to fully utilize the estate tax exemptions of both spouses for estate planning purposes. The surviving spouse can use the unused exemption of the first spouse to die in addition to their own exemption.

(2021) (4 minutes) Define and distinguish, for federal income tax purposes, the following doctrines: (1) "constructive receipt" and (2) "cash equivalence".

The constructive receipt doctrine requires cash basis taxpayers to recognize income when it becomes available even if not physically received yet. The cash equivalence doctrine taxes certain property as if it were cash received based on readily convertible cash value, even if unconverted.

(2021) (4 minutes) Discuss the circumstances, if any, under which a taxpayer may deduct any amount paid or incurred in connection with either (1) investigating the creation or acquisition of an active trade or business or (2) creating an active trade or business.

The costs of investigating or creating an active trade or business must be capitalized under §195, not deducted when paid or incurred. There is an exception for the first $5K for each expense type with the difference amortized over 15 years. In case the expenses are exceeding $50K, the $5K is reduced $ by $ by the excess.

(2021) (3 minutes) TP receives a disaster relief payment from the federal government with respect to a federally declared disaster (as defined by §165(i)(5)(A)). Discuss whether the disaster relief payment constitutes gross income to TP.

The disaster relief payment must be for unreimbursed personal expenses related to a federally declared disaster area to qualify for income exclusion under Section 139. The requirements focus on the payment's source, recipient, use of funds, non-reimbursement by insurance, no tax deduction previously taken and lack of subsequent obligation.

(2018) (3 minutes) At the time of death on January 31, 2008, Decedent owned an investment account with Xco, a securities business. Decedent's executor on or before November 28, 2008, withdrew $11,500,000 from the invesbnent account to pay the estate's taxes and administrative expenses. On December 11, 2008, the chairman of Xco was arrested, and the Securities and Exchange Commission issued a press release to alert the public that it had charged the chairman with securitie$ fraud relating to a multibillion-dollar "Ponzi,, scheme. On March 12, 2009, the chairman admitted to perpetrating a Ponzi scheme through Xco and pleaded guilty to various Federal crimes, including securities fraud, investment adviser fraud, money laundering, and perjury. As a result of the Ponzi scheme, the estate's interest in Xco became worthless. The estate of Decedent on April 1, 2009, timely filed a federal estate tax return on which the estate (1) reported a gross estate that included the January 31, 2008, value of Decedent's interest in the Xco investment account (undiminished by the effects of events occurring after that date) and (2) claimed a § 2054 theft loss deduction relating to the Ponzi scheme, the amoun

The estate does not qualify for a theft loss deduction under Section 2054 based on the facts provided: Section 2054 allows an estate tax deduction for losses arising from fires, storms, shipwrecks or 'other casualties' or from theft, when such losses are not compensated for by insurance or otherwise. However, the IRS has held that a decline in value of assets due to a Ponzi scheme does not qualify as a deductible theft loss under Section 2054. Here, the decline in value arose from the revelation of the Ponzi scheme, not from an actual theft of the estate's assets. The assets were not physically stolen but simply declined in value after the chairman's fraud was uncovered. Therefore, the later decrease in value does not qualify as a theft loss, as it was not due to a taking of the estate's property. The estate can only value the Xco account interest as of the date of death, unaffected by post-death events. In summary, the revelation of fraud affecting the estate's assets does not constitute a theft entitling the estate to a loss deduction under Section 2054. The deduction was properly denied.

(2016) (4 minutes) TP, who has recurring losses from activities that involve elements of personal sports, hobby, or recreation, may be subject to limitations applicable to activities not engaged in for profit. Describe the limitation applicable to activities not engaged in for profit.

The limitation applicable to activities not engaged in for profit is that deductions related to such activities are limited to the amount of income derived from the activity. In other words, taxpayers cannot use losses from activities not engaged in for profit to offset other sources of income. Any excess losses can be carried forward to future years to offset future income from that activity, but cannot create an overall loss.

(2018) (0.5 minutes) Free donuts every Friday at work provided by TP's employer (value per year is $250).

The tax treatment of the free donuts provided to TP by their employer is as follows: The value of the donuts is considered taxable compensation income to TP under IRC §61. Food and beverages provided to employees are specifically listed as taxable fringe benefits under IRC §132. The $250 annual value of the donuts would be included in TP's gross income and subject to income and payroll taxes. However, TP's employer can exclude the value from income under IRC §132(e) if it is considered a de minimis fringe benefit. De minimis fringe benefits are those with a low value, taking into account the frequency provided. $250 annually likely qualifies. If considered de minimis, TP would not have to include the value of the donuts in income. The employer can still deduct the cost. In summary, free food is generally taxable compensation, but snacks of low value provided infrequently may qualify as excludable de minimis fringe benefits. The $250 annual value of donuts likely qualifies for exclusion.

(2016) (2 minutes) The §163(h)(3) limitations on mortgage interest deductions apply on a per-taxpayer basis, not a per-residence basis. Some key points: §163(h)(3) allows an itemized deduction for qualified residence interest paid on a taxpayer's principal residence and one other residence of the taxpayer. The IRS has clarified that this deduction is applied on a per-taxpayer basis, not based on the number of residences. So for unmarried co-owners of a principal residence, each person is entitled to deduct the amount of qualified residence interest they individually paid, up to the §163(h)(3) limits. The limits apply individually to each co-owner, not to the total mortgage interest paid on the residence. So if two unmarried co-owners paid $10,000 each in mortgage interest, they could each deduct up to $10,000 on their own tax return, even though the total interest paid on the residence was $20,000. In summary, the §163(h)(3) deduction limits are applied on a per-taxpayer basis, even for co-owners of a residence. Each co-owner is entitled to a deduction based on the interest they paid. The total mortgage interest paid on the residence itself does not determine the deduction limits.

The §163(h)(3) limitations on mortgage interest deductions apply on a per-taxpayer basis, not a per-residence basis. Some key points: §163(h)(3) allows an itemized deduction for qualified residence interest paid on a taxpayer's principal residence and one other residence of the taxpayer. The IRS has clarified that this deduction is applied on a per-taxpayer basis, not based on the number of residences. So for unmarried co-owners of a principal residence, each person is entitled to deduct the amount of qualified residence interest they individually paid, up to the §163(h)(3) limits. The limits apply individually to each co-owner, not to the total mortgage interest paid on the residence. So if two unmarried co-owners paid $10,000 each in mortgage interest, they could each deduct up to $10,000 on their own tax return, even though the total interest paid on the residence was $20,000. In summary, the §163(h)(3) deduction limits are applied on a per-taxpayer basis, even for co-owners of a residence. Each co-owner is entitled to a deduction based on the interest they paid. The total mortgage interest paid on the residence itself does not determine the deduction limits.

(2021) (3 minutes) Describe in general terms the holdings of the Tax Court decisions interpreting the "reasonable cause" exceptions found in §6651(a)(1) and §6664(c)(1) with respect to taxpayer reliance on the advice of a tax professional.

There are 3 items that need to be considered under the reasonable cause exception with respect to TP reliance on the advice of a tax professional: - the tax professional possessed certain education qualifications that made it clear to the TP that was qualified to prepare such a tax return - the TP relied in good faith on the advice of the tax professional - the TP provided all necessary information to the tax professional to properly prepare and complete the tax return

(2018) (3 minutes) Describe which taxpayers are not permitted for federal income tax purposes to use the cash method of accounting.

There are several categories of taxpayers who are prohibited from using the cash method of accounting for federal income tax purposes: C corporations - A C corporation cannot use the cash method unless it meets an average gross receipts test (average gross receipts of $25 million or less over the prior 3 tax years). IRC §448(b)(3). Partnerships with a C corporation partner - A partnership with a C corporation partner cannot use the cash method. IRC §448(a)(2). Tax shelters - Tax shelters cannot use the cash method other than for certain qualifying farming or real property trades or businesses. IRC §448(a)(3). Certain specified trades or businesses - Taxpayers in certain industries, such as health, law, consulting, athletics, and accounting are prohibited from using the cash method if average annual gross receipts exceed $25 million. IRC §448(d)(2). Certain entities filing FBARs - Any taxpayer who fails to report foreign accounts as required under FBAR rules must use the accrual method with respect to income from the foreign accounts. IRC §446(b)(2). Therefore, the use of the cash method is restricted for C corporations, partnerships with C corps, tax shelters, large entities in specified service industries, and those with unreported foreign accounts. Other taxpayers may generally use the cash method.

(2021) (1 minute) With respect to certain transfers to charitable organizations, the IRS Form 8283, Noncash Charitable Contributions, requires the TP to provide, as to the contributed property, the date, manner of acquisition, and the TP's cost or other adjusted basis. If TP fails to provide the cost or other adjusted basis of the contributed property, then TP fails to satisfy the substantiation requirement of Reg. §1.170A-13(c)(2). True or False?

True

(2018) (3 minutes) H died in 2012, and H's estate reported a deceased spousal unused exclusion (DSUE) and, pursuant to § 2010( c )( S)(A), elected portability of the DSUE. In 20 I 3 the IRS sent H's estate a letter reporting that the return had been accepted as filed. W died in 2013. Pursuant to § 2010{c)(2)(B), W's estate claimed the DSUE reported by H's estate. As a part of an examination of the estate tax return filed by W's estate, the IRS also examined the estate tax return filed by H's estate. The IRS reduced the amount of the DSUE but did not determine or assess a deficiency against H's estate. The IRS determined an estate tax deficiency against W's estate. W's estate filed a petition with the Court alleging that the IRS should not be allowed to examine the estate tax return filed by H's estate to determine the proper DSUE amount allowable to W's estate. Discuss whether the estate of W may successfully challenge whether an examination of the estate tax return of H's estate is an improper second examination within the meaning of§ 7605(b ).

W's estate likely cannot successfully argue that the IRS is prohibited from examining H's estate tax return under Section 7605(b) in determining the proper DSUE amount available to W's estate. Section 7605(b) prohibits unnecessary exams or inspections of a taxpayer's books and records. However, the statute prohibits separate examinations of the same taxpayer's books - it does not prohibit examining one taxpayer's return as part of inspecting another taxpayer's affairs. Here, H's estate and W's estate are separate taxpayers. Examining H's return is reasonably necessary to verify the DSUE amount claimed by W's estate. The IRS is not precluded from examining the correctness of H's estate tax return and reported DSUE when auditing W's estate tax return. H's estate cannot invoke Section 7605(b) to prevent the IRS from verifying information claimed by another taxpayer (W's estate). Therefore, W's estate likely cannot successfully argue the IRS is prohibited under Section 7605(b) from examining H's estate tax return in determining the allowable DSUE claimable by W's estate. The estates are separate taxpayers.

(2018) (2 minutes) TP is not a resident of the U.S. for federal income tax purposes. Because TP engaged in a transaction that possibly had U.S. income tax consequences, TP retained X to prepare the relevant U.S. federal income tax return. X has a bachelor of arts degree from Columbia College, a master of business administration degree from Columbia University Graduate School of Business, and ajuris doctorate from St Johns University School of Law. Xis a certified public accountant licensed in the State of New York. X did not specialize in international tax law, and X had no advanced degree specializing in taxation. At the time TP hired X, X had been preparing U.S. income tax returns for 40 years. X spent 30% to 40% of X's time preparing income tax returns. Both TP and X believed that X was qualified to prepare the tax return of TP. Discuss whether TP can avoid liability for a penalty under § 6662 on the basis ofTP's reliance on the advice ofX.

Yes, TP can likely avoid the accuracy-related penalty under section 6662 based on reliance on the advice of X, because: Under Treas. Reg. 1.6664-4(c), reliance on professional tax advice can constitute reasonable cause if the reliance was reasonable and the tax advisor was competent. Here, X has extensive general tax experience preparing returns for 40 years and spends 30-40% of time on return preparation. X has multiple advanced degrees including a law degree, showing expertise in tax matters. X is a licensed CPA, again indicating competency in taxation. Although X does not specialize in international tax, X has the requisite knowledge and experience in general federal income tax law to provide competent advice. It was reasonable for TP, a foreign taxpayer, to believe X was qualified based on X's credentials and long history of return preparation. Since TP reasonably relied on the advice of a tax professional with sufficient tax expertise to justify that reliance, the accuracy penalty should not apply.

(2018) (2 minutes) TP received an IRS notice of deficiency after filing a federal income tax return that reported zero taxable income and claimed a refund for withholding taxes paid on the substantial amounts of income TP received. TP filed a petition with the Tax Court asserting that none of the income TP received was taxable and that the notice of deficiency was invalid because the Commissioner had no firsthand knowledge of the income giving rise to the deficiency. At trial, TP continued to assert the arguments alleged in the petition. TP requested an opportunity to submit written briefs following the trial, which the Court allowed. The Court directed TP to two cases that rejected the tax-protester arguments advanced by TP and encouraged TP to abandon those arguments that had been repeatedly rejected by the Court and other courts. TP agreed to review both cases and assured the Court that the brief would be no more than 15 pages. The brief TP submitted to the Court was over 70 pages, and TP again asserted the tax-protester arguments that the Court has rejected many times. Discuss whether the Court should impose a § 6673 penalty on TP.

Yes, the Tax Court should impose a section 6673 penalty on TP based on the following: Section 6673 allows the Tax Court to impose a penalty if it appears the taxpayer instituted or maintained proceedings primarily for delay or the taxpayer's position is frivolous or groundless. Here, TP continued to assert frivolous tax protester arguments that have been repeatedly rejected by courts. TP was specifically warned by the Court to abandon these frivolous positions but did not do so. TP disregarded the Court's order limiting the brief to 15 pages and reasserted the frivolous positions. TP is wasting the Court's time and resources by advancing clearly groundless arguments. Imposing a section 6673 penalty will penalize TP for this wasteful litigation and deter future frivolous claims. Therefore, the facts indicate the Tax Court should impose a section 6673 penalty on TP for asserting frivolous arguments and disregarding the Court's warnings and orders.

(2016) (2 minutes) TP has elected the accrual method of accounting. During Year 1, TP entered into a contract with Client under which TP is to provide services to Client over a five-year period. Payments under the contract are due on December 31 of each of the five years. On December 15, Year 2, Client pays to TP the amount due on December 31, Year 2, plus the amount due on December 31, Year 3. As of December 31, Year 2, the payment for Year 3 has not been earned, but there exists no restriction on use by TP of the Year 3 amount paid. Should TP report the prepayment of the Year 3 amount in the gross income for Year 2?

Yes, under the accrual method of accounting, TP should report the prepayment for Year 3 services in their gross income for Year 2, even though the income is not earned until Year 3. The key reasons are: TP is on the accrual method, so income is recognized when earned, not necessarily when received. However, there is an exception under IRC §451 for advance payments. An advance payment can be included in income in the year of receipt if there is no restriction on its use and the services/goods relating to the payment will be provided within 3 years. Here, the Year 3 prepayment was received by TP in Year 2. There was no restriction on TP's use of the funds. And the Year 3 services will be provided within 3 years. Therefore, under the advance payment exception, the prepayment for Year 3 services should be included in TP's Year 2 income even though not earned until Year 3. This matches the income to the period of receipt rather than deferring it. The accrual method aims to accurately reflect income in the proper year. So in summary, the Year 3 prepayment should be reported in Year 2 income on TP's accrual basis return since the requirements of the §451 advance payment exception are met.

Individuals TP1, TP2, and TP3 form a general partnership (which would not be treated as an investment company under §351 if incorporated). Under the terms of the partnership agreement, the partners are to receive a 30%, 30%, and 40% interest, respectively, in partnership capital; profits and losses are to be shared in the same proportion. The partners made the contributions in 2020 in exchange for their partnership interests in the manner described in the attached table. Partner Contribution Adjusted Basis Fair Market Value TP1 Unimproved real property $50,000 $70,000* TP2 Cash $30,000 $30,000 TP3 Securities** $35,000 $40,000 * The real property has a total fair market value of $70,000, but the property is encumbered by a $40,000 mortgage indebtedness. TP1 purchased the real property in 2010 as an investment. The partnership receives the property subject to the $40,000 mortgage indebtedness. ** TP3 purchased the securities as an investment in 2015. a. (3 minutes) Discuss, quantify, and

a) No gain or loss is recognized by any partner upon formation of the partnership under §721. This is because each partner contributed property in exchange solely for a partnership interest. TP1: No gain on contribution of real property TP2: No gain on contribution of cash TP3: No gain on contribution of securities b) The partners' initial basis in their partnership interests are: TP1: $50,000 (Basis in contributed property) - $22K TP2: $30,000 (Basis in contributed cash) - $42K TP3: $35,000 (Basis in contributed securities) - $51K Under §722, the partner's initial basis in the partnership interest equals the basis of the property contributed to the partnership. All partners take a transferred basis without gain recognition under §721.

(2018) (4 minutes) In 2012, TP purchased unimproved real property. To acquire the property, TP (1) paid $100,000 cash at the closing, (2) assumed a preexisting first mortgage debt secured by the property in the principal amount of $75,000 (for which TP became personally liable), and (3) executed a second mortgage indebtedness (for which TP was personally liable) to the seller in the principal amount of $600,000. In 2018, TP received an offer from Buyer to buy the real property, and TP accepted the offer. Buyer (1) paid $500,000 cash, (2) took subject to the first mortgage debt in the principal amount of$50,000 (TP had paid down the principal amount of the debt from $75,000 to $50,000), and (3)assumed the second mortgage debt in the principal amount of $600,000. a. Quantify the amount of TP' s adjusted basis in the property at the time of acquisition in 2012. b. Quantify TP's amount realized and any gain or loss realized upon the sale of the property to Buyer in 2018.

a) TP's adjusted basis at acquisition in 2012: Cash paid: $100,000 First mortgage assumed: $75,000 Second mortgage incurred: $600,000 Total basis = $100,000 + $75,000 + $600,000 = $775,000 b) At sale in 2018: Cash received: $500,000 First mortgage Buyer takes subject to: $50,000 Second mortgage assumed by Buyer: $600,000 Amount realized = $500,000 + $50,000 + $600,000 = $1,150,000 TP's adjusted basis is still $775,000 Realized gain = Amount realized - Adjusted basis = $1,150,000 - $775,000 = $375,000 Therefore, TP's adjusted basis was $775,000 at acquisition. At sale, TP had an amount realized of $1,150,000, realizing a gain of $375,000.

(2021) (2 minutes) On January 1, 2020, TP was injured when the computer in TP's automobile failed. TP suffered (1) physical injury to TP's body and (2) emotional distress associated with the physical injuries. TP is awarded a court judgment against the auto manufacturer, and the judgment is paid on December 1, 2020. The damages paid to TP pursuant to the judgment were as follows: (1) $100,000 compensatory damages for physical injury to the body of TP, (2) $500,000 punitive damages for physical injury to the body of TP, and (3) $75,000 compensatory damages for the emotional distress incurred on account of the physical injuries sustained. a) The amount that constitutes gross income to TP with respect to the $100,000 compensatory damages for the physical injury to the body is . b) The amount of gross income with respect to the $500,000 punitive damages for the physical injury to the body is . c) The amount of gross income with respect to the $75,000 compensatory damages for the emotional distress is .

a). 0 b). $500,000 c). $75,000

(6 minutes) In 2016, TP purchased unimproved real property. To acquire the property, TP (1) paid $200,000 cash at the closing, (2) assumed a preexisting first mortgage debt secured by the property in the principal amount of $100,000 (for which TP became personally liable), and (3) executed a second mortgage indebtedness (for which TP was personally liable) to the seller in the principal amount of $700,000. In 2020, TP received an offer from Buyer to buy the real property, and TP accepted the offer. Buyer (1) paid $800,000 cash, (2) took subject to the first mortgage debt in the principal amount of $75,000 (TP had paid down the principal amount of the debt from $100,000 to $75,000), and (3) assumed the second mortgage debt in the principal amount of $700,000. a) Quantify the amount of TP's adjusted basis in the property at the time of acquisition in 2016. b) Quantify TP's amount realized and any gain or loss realized upon the sale of the property to Buyer in 2020.

a). Adjusted basis is $1,000K = $200K + $100K+ $700K b). Amount realized is $1,575K = $800k + $75K + $700K The gain realized is $575K

(2021) On December 31, year 1, TP owned unencumbered unimproved real property with an adjusted basis of $200,000 and a fair market value of $800,000. On December 31, year 1, TP sold the property to Buyer according to the following terms: Buyer paid TP $300,000 cash at the closing. Buyer executed a promissory note payable to TP in the total principal amount of $500,000. The promissory note required a principal payment of $100,000 on the anniversary date of the sale in each of the five years following the year of sale. The promissory note required the payment of interest at 2% compounded annually, and the note had a fair market value of $500,000. TP received the required $100,000 payment of principal on the note (and the associated interest) on December 31, year 2. On January 1, year 3, TP transferred the note (entitled to four additional principal payments of $100,000 each) to TP's child as a gift. The fair market value of the note on January 1, year 3, was $400,000. a) (3 minutes) Quantify and discuss the year 1 tax consequences to TP according to §453. b) (3 minutes) Quantify and discuss the year 2 tax consequences to TP according to §453. c) (1 minute) Quantify and discuss the ye

a). Year 1 - $300K cash + $500K FMV note - $200K basis = $600K gain realized; GP% is 75%; $225K recognized b). Year 2 - $100K payment x 75% recognized gain percentage = $75K recognized c). Year 3 - $400K FMV gift x 75% = $300K recognized

(2021) In 2000, Corporation was created with a capitalization of 1,000 shares of voting common stock, 1000 shares of nonvoting common, and 1000 shares of voting preferred. Each share of stock has equal value, and each share of voting stock has an equal voting right. The preferred stock was issued at the time of creation of Corporation, and the preferred stock is not §306 stock. The stock has been owned since the 2000 creation of Corporation as described in the attached table. In 2020, Corporation redeems all of the shares owned by B. Assume that, at all times after the redemption, B serves as an officer of Corporation. A is unrelated to B and C. C is B's mother. Shareholder Voting Common Nonvoting Common Voting Preferred A 200 600 700 B 300 100 300 C 500 300 0 Total 1000 1000 1000 a. (3 minutes) Explain whether the redemption of all of B's shares qualifies for exchange treatment under §302(b)(3). b

a. The redemption does not qualify under 302(b)(3) because after the redemption B still owns voting stock indirectly through his mother as well as by being an officer of the company, failing the complete termination requirement. b. The redemption does not qualify under 302(b)(2) because after the redemption B still owns more than 50% of the total combined voting power directly and through attribution from family member C, failing the substantially disproportionate requirement.