Federal Income Tax Problems/Solutions

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8.1. Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with: 8.1.(c) A painting with a value of $8,000 and a basis of $5,000?

$2,000 gross income from discharge of indebtedness $3,000 gain on the painting (because it was transferred in satisfaction of settlement valued at $8,000; $8K - $5K = $3K gain)

8.1. Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with: 8.1.(b) A painting with a basis and fair market value of $8,000?

$2,000 gross income from discharge of indebtedness. $0 gain or loss on painting.

$200,000

13B.1. Grantor who is a lawyer creates a trust for the benefit of her adult Son with income to Son for life, remainder to Son's children. Who is taxed on the income paid to Son in the following circumstances: 13B. 1(e) Same as (c), above, except that Grantor retains the right to revoke the trust at any time.

All income to the Trust is taxable to Grantor. § 676: "The grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under any other provision of this part, where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a non-adverse party, or both." Here, grantor can re-vest his ownership of the whole trust.

6B3 1. Andre purchased some land ten years ago for $40,000 cash. The property appreciated to $70,000 at which time Andre sold it to his wife Steffi for $70,000 cash, its fair market value.What are the income tax consequences to Andre? (e) What results (gains, losses, and bases) to Andre and Steffi if Steffi transfers other property with a basis of $50,000 and value of $70,000 (rather than cash) to Andre in return for his property?

Andre: $0 gain recognized; $30,000 gain realized; $50,000 basis Steffi: $0 gain recognized; $20,000 gain realized; $40,000 basis

2C 2. Doctor needs to have his income tax return prepared. Lawyer would like a general physical check up. Doctor would normally charge $200 for the physical and lawyer would normally charge $200 for the income tax return preparation. (a) What tax consequences to each if they simply swap services without any money changing hands?

Each will have $200 in GI. See Rev. Ruling 79-24: When payment is made in a form other that cash, the amount of income is the FMV of services or property taken in payment.

12C 1. Father owns a registered corporate coupon bond which he purchased several years ago for $8,000. It has a $10.000 face amount and is to be paid off in 2018. The current fair market value of the bond is $9,000. The bond pays 6% interest, semi-annually April 1st and October 1st (i.e. $300 each payment). What tax consequences to Father and Daughter in the following alternative solutions? 12C. 1(c) On April 2, Father gives Daughter a one-half interest in the bond and the right to all the interest coupons.

Each will recognize ½ of the income as it comes due. (Blair: when a portion of the TREE is assigned the proportional FRUIT is income taxable to ASSIGNEE)

12B 1. Executive has a salaried position with Hi Rolling Corporation under which she earns $80,000 each calendar year. 12B.1.(a) Who is taxed if Executive, at the beginning of the year, directs that $20,000 of her salary be paid to her aged parents?

Executive is taxed for the $20,000 of income. He who earns a salary is taxed on that salary, generally.

12C 1. Father owns a registered corporate coupon bond which he purchased several years ago for $8,000. It has a $10.000 face amount and is to be paid off in 2018. The current fair market value of the bond is $9,000. The bond pays 6% interest, semi-annually April 1st and October 1st (i.e. $300 each payment). What tax consequences to Father and Daughter in the following alternative solutions? 12C. 1(e) On December 31, Father gives Daughter the bond with the right to all the interest coupons.

Father & Daughter will each have $150 income on Oct. 1st in the year of the gift. All subsequent interest income will be taxable to Daughter. The interest that will be received in Oct. must be prorated to reflect the Father's accrual of 3 months interest income as the gift was not made until Dec 31.

6B4 1. In the current year, Giver holds two blocks of identical stock, both worth $1,000,000. Giver purchased the first block years ago for $50,000 and the second block more recently for $950,000. Giver plans to make an inter vivos gift of one block and retain the second until death. Which block of stock should Giver transfer inter vivos and why?

Giver should transfer the $950,000 block inter vivos & the $50,000 block at death. By doing so, Giver avoids $950,000 in taxable transfer, rather than a mere $50,000 taxable transfer because of the stepped up basis given to property acquired from a decedent.

13B.1. Grantor who is a lawyer creates a trust for the benefit of her adult Son with income to Son for life, remainder to Son's children. Who is taxed on the income paid to Son in the following circumstances: 13B. 1(a) Grantor transfers to the trust accounts receivable for services which have never been included in her gross income. The clients pay the fees represented by the receivables in the succeeding year.

Grantor is taxed on all of the money received from her clients in satisfaction of the accounts receivable. No trust specific provisions apply here; the accounts receivable are really just deferred income, so this is an Earl income splitting problem. Grantor earned the income, so it is taxable in its entirety to her.

Chapter 2 C 2C 1. Vegy grows vegetables in her garden. Does Vegy have gross income when: (a) Vegy harvests her crop?

8.4. Decedent owed Friend $5,000 and Nephew owed Decedent $10,000. 8.4.(c) Now, what result to Nephew if Decedent's will provided that his estate not collect Nephew's debt to the estate?

No gross income. Here the will operates to discharge the debt as a bequest, so it is excluded from GI.

8.4. Decedent owed Friend $5,000 and Nephew owed Decedent $10,000. 8.4.(b) What result to the estate in (a), above, (with Decedent still in cold storage) if instead Friend simply permitted the statue to run stating that she felt sorry for Decedent's widow, the residuary beneficiary of his estate?

No gross income; here the FRIED expresses donative intent with respect to the dischare, so it is a gift excludable under § 102.

6C 1. Mortgage purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate. 6C 1. (e) What result under the facts of (d), above, if when the principal amount of the two mortgages is still $180,000, and the land is still worth $300,000, Mortgagor sells the property subject to both mortgages to Purchaser for $120,000 of cash? What is Purchaser's cost basis in the land?

Purchasor's basis = $180K (mortgage) + $120K (cash) = $300K Mortagagor will have a $200,000 gain on the sale. (120K CASH + 180K discharge of debt - $100K basis = $200,000 gain)

13B.1. Grantor who is a lawyer creates a trust for the benefit of her adult Son with income to Son for life, remainder to Son's children. Who is taxed on the income paid to Son in the following circumstances: 13B. 1(c) Same as (b), above, except that she transfers the building along with the right to the rentals at a time when no rent has accrued.

Trust will be taxed on all future rental income, as it owns the income producing asset. However, the income will be distributed to the Son, so he will ultimately be taxed on the income and the trust will take a deduction based on the distribution such that the effect is for the income to "pass-through" the trust to the son, thus avoiding double transaction.

13C. 1(e) Same as (d), above, except that Father retains the right to make all business decisions with respect to the shopping center and to use income from the center to expand the center. 13C. 1(e) Same as (d), above, except that Father retains the right to make all business decisions with respect to the shopping center and to use income from the center to expand the center.

Under 704(e)(1): Most likely the safe harbor will NOT apply, inductively pursuant to Reg 1.704-1(e)(2)(iv): substantial participation by the donee in the control and management of the business (including participation in the major policy decisions affecting the business) is strong evidence of donee partner's exercise of dominion and control over his interest. Robinson slide 188: "Donee's do not "own" capital interests within the meaning of IRC 704(e)(1) and Treas. Reg. 1.704 - 1(e)(2)(iv). While the donor can retain substantial managerial rights, this goes so far as to remove from donee's dominion & control.

2B 2. Winner attends the opening of a new department store. All persons attending are given free raffle tickets for a watch worth $200. Disregarding any possible application of I.R.C. § 74, must Winner include anything within gross income when she wins the watch in the raffle?

Yes, $200 gross income b/c when the watch crossed the barrier of ownership TP clearly realized a $200 accession to wealth.

2B 4. Insurance Adjuster refers clients to an auto repair firm that give Adjuster a kickback of 10% of billings on all referrals. (b) Even if the arrangement violates local law?

Yes, illegal income is still gross income.

2B 1. Would the results to the taxpayers in the Cesarini case be different if, instead of discovering $4,467 in old currency the piano, they discovered that the piano, a Steinway, was the first Steinway piano ever built and it is worth $500,000?

Yes; Cesarini articulates the tax consequences of finding a treasure trove: it is taxable in the year in which it is reduced to undisputed possession. Here, the higher than expected value of the item purchase itself does not constitute a treasure trove. Provided that this is an arms length transaction, TP would take a basis in the item equal to the purchase price and then upon sale of the item TP would recognize a capital gain.

1) Commuter owns a home in Suburb of City and drives to work in City each day. He eats lunch in various restaurants in City. a)May Commuter deduct his costs of transportation and/or meals? See Reg §1.162-2(e)

a) No these are not deductible b/c they are regular commuting expenses...not in travel status

b) Debtor mails the check in (a) on December 30 of year one. It is delivered to Lender on December 31 of year one but after the banks are closed.

i) Both have a deduction/income in yr1. (cf. Kaher, check case).

b) Depreciator uses the accelerated ACRS method provided by §168(a)

i) Yr5 Dep amount = 34,560 ii) A/B = 17,280

$30,000 ($70,000 sale price - $40,000 basis = $30,000 gain).

3B2 3. Retiree receives a $5,000 trip on his retirement. To pay for the cost of the trip, Employer contributed $2,000, and fellow employees of Retiree contributed $3,000. Does Retiree have gross income.

$2000 GI; $3000 gift The $2000 is a transfer from employee and does not qualify as a de minimus fringe benefit. The $3000 is most likely a gift as it was not made by the employer, rather fellow employees, but the recipient employee bears the burden of proving the disinterested motive of the gift if it is called into question.

8.1. Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with: 8.1.(a) A settlement of $7,000 of cash?

$3,000 gross income from discharge of indebtedness.

6B2 1. Donor gave Donee property under circumstances that required no payment of gift tax. What gain or loss to Donee on the subsequent sale of the property if: 6B2 1.(a) The property had cost Donor $30,000, had a $20,000 fair market value at the time of the gift, and Donee sold it for: 6B21. (b)(3) $24,000?

$0 gain or loss (gain →$24,000-$30,000 basis= 0 gain; loss → $20,000 FMV - $24,000 = 0 loss)

$0 gain recognized; $30,000 gain realized § 1041: transfers between spouses & former spouses (if incident to divorce) are tax Neutral & no gain or loss is recognized as a taxable event at the time of such transfer

8.1. Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with: 8.1.(d) Services, in the form of remodeling Rich's office, which are worth $10,000?

$10,000 gross income for services rendered in exchange for discharge of debt. Treat this situation as if RICH paid POOR $10,000 for his services, then POOR used the $10,000 to pay off his debt (CASH IN THE MIDDLE)

$100,000

6C 1. Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate. 6C 1. (a) What is Mortgagor's cost basis in the land?

$100,000 basis ($20,000 cash + $80,000 NRL) The loan counts toward the basis because there is a corresponding obligation to repay.

12C 1. Father owns a registered corporate coupon bond which he purchased several years ago for $8,000. It has a $10.000 face amount and is to be paid off in 2018. The current fair market value of the bond is $9,000. The bond pays 6% interest, semi-annually April 1st and October 1st (i.e. $300 each payment). What tax consequences to Father and Daughter in the following alternative solutions? 12C. 1(g) On April 2, Father sells the bond and directs that the $9,000 sale price be paid to Daughter.

$1000 income to Father ($9,000 - $8,000 basis) Father is taxed on the income because he directs the proceeds, hence controlling the beneficial enjoyment of the income, albeit to his Daughter.

6C 1. Mortgage purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate. 6C 1. (g) What results under the facts of (f), above, if Mortgagor gives the land to her Spouse rather than to her Son? What is Spouse's basis in the land? What is Spouse's basis in the land after Spouse pays off the $180,000 of mortgages?

$100K basis per spousal transfer rules

6B2 1. Donor gave Donee property under circumstances that required no payment of gift tax. What gain or loss to Donee on the subsequent sale of the property if: 6B2 1.(a) The property had cost Donor $20,000, had a $30,000 fair market value at the time of the gift, and Donee sold it for: 6B2 1. (a)(1) $35,000?

$15,000 gain

2B 5. Owner agrees to rent Tenant her lake house for the summer for $4,000. (a) How much income does Owner realize if she agrees to charge only $1,000 if Tenant makes $3,000 worth of improvements to the house?

$4,000 gross income $1,000 cash $3,000 in improvements that were agreed to be a substitute for rent. § 109 does not apply here, because the improvements were required as rent. See IRC § 109 "Gross Income DOES NOT INCLUDE INCOME (OTHER THAT RENT) derived by a lessor or real property on the termination of a lease, representing the value of such property attributable to BUILDINGS ERECTED OR OTHER IMPROVEMENTS MADE BY THE LESSEE.

$40,000 (same basis as transferor) § 1041: basis in a spousal transferee is treated as if acquired by gift. However, unlike gifts, the spouse always takes the transferor's basis, even when computing loss.

6B2 1. Donor gave Donee property under circumstances that required no payment of gift tax. What gain or loss to Donee on the subsequent sale of the property if: 6B2 1.(a) The property had cost Donor $20,000, had a $30,000 fair market value at the time of the gift, and Donee sold it for: 6B2 1. (a)(3) $25,000?

$5,000 gain ($25,000 - $20,000 basis)

$5,000 gain ($35,000 - $30,000 basis)

8.4. Decedent owed Friend $5,000 and Nephew owed Decedent $10,000. 8.4.(a) At Decedent's death Friend neglected to file a claim against Decedent's estate in the time allowed by state law and Friend's claim was barred by the statue of limitations. (Let's defer our concern for Nephew.) What result to Decedent's estate?

$5,000 gross income from discharge of indebtedness, abeit due to the lender's mistakes. (This is not a gift because there is no donative intent; it is merely a mistake).

6B2 1. Donor gave Donee property under circumstances that required no payment of gift tax. What gain or loss to Donee on the subsequent sale of the property if: 6B2 1.(a) The property had cost Donor $20,000, had a $30,000 fair market value at the time of the gift, and Donee sold it for: 6B2 1. (a)(2) $15,000?

$5,000 loss ($20,000 basis - $15,000 = $5,000) ↑ basis is lower than FMV. See § 1015: for purposes of determining loss on a gift, done will apply the lesser of donor's basis or FMV.

$5,000 loss (20,000 FMV @ time of donation - $15,000)

6B2 2. (b) Suppose the transaction were viewed as a sale of on-half of the land for full consideration and an outright gift of the other one half. How would this affect Father's gain and Daughter's basis? Is it a more realistic view than that of the Regulations? Cf. § 170(e)(2) and 1011(b), relating to bargain sales to charities.

$50,000 gain to Father; $150,000 basis to Daughter 50% Gift portion: $50,000 basis ($100,000/2 = $50,000) transfers from Father to Daughter. Father has no gain. 50% Sale portion: $100,000 realized - $50,000 basis = $50,000 gain to Father $100,000 paid by daughter becomes her basis in this 50% of the property.

6B1 1. Owner purchases some land for $10,000 and later sells it for $16,000. (c) What result to Owner in (b), above, if rather than ever actually acquiring the land Owner sold the option to Investor for $1,500?

$500 gain; Owner has a basis of $1,000 in the option and he realizes a $500 gain ($1,500 -$1,000) when he transfers ownership to Investor.

6B1 1. Owner purchases some land for $10,000 and later sells it for $16,000. (d) What difference in result in (a), above, if Owner purchased the land by making a $2,000 cash payment from Owner's funds and an $8,000 payment by borrowing $8,000 from the bank in a recourse mortgage (on which Owner is personally liable)? Would it make any difference if the mortgage was a nonrecourse liability (on which only the land was security for the obligation)?

$6,000 gain; borrowing money does not affect the basis because there is a corresponding obligation to repay. The fact that the loan is recourse or non-recourse does not affect basis.

6B1 1. Owner purchases some land for $10,000 and later sells it for $16,000. (a) Determine the amount of Owner's gain on the sale.

$6,000 gain; owner has a $10,000 sale price less the $10,000 basis equals a $6,000 gain.

6B1 1. Owner purchases some land for $10,000 and later sells it for $16,000. (b) What difference in result in (a), above, if Owner purchased the land by paying $1,000 for an option to purchase the land for an additional $9,000 and subsequently exercised the option?

$6,000 gain; owner still has a basis of $10,000 because the $1,000 option was later included in the total value of money tendered for the property ($1,000 option + $1,000 balance upon exercising the option).

6B1 1. Owner purchases some land for $10,000 and later sells it for $16,000. (g) What difference in result in (a), above, if when the land had a value of $10,000, Owner, a real estate salesperson, received it from Employer as a bonus for putting together a major real estate development, and Owner's income tax was increased $3,000 by reason of the receipt of the land?

$6,000 gain; the basis in property received as income is the FMV at the time of transfer & is NOT reduced by tax paid on the property. Conceptually, treat this as if Owner received $10,000 in cash from Employer, then went out & bought a $10,000 parcel of land.

6B1 1. Owner purchases some land for $10,000 and later sells it for $16,000. (e) What result in (a), above, if Owner purchased the land for $10,000, spent $2,000 in clearing the land prior to its sale, and sold it for $18,000?

$6,000 gain; when Owner purchases the property he has a $10,000 bases. The $2,000 clearing procedure is an expense incurred to increase the value of the land by making it useable, thus there is a $2,000 increase in bases ($18,000 - $12,000 = $6,000). See § 1016

8.1. Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with: 8.1.(f) Same as (a), above, except that Poor's Employer makes the $7,000 payment to Rich, renouncing any claim to repayment by Poor.

$7,000 gross income from employer $3,000 gross income for discharge of indebtedness The $7,000 is GI because it came from employer. It could constitute a gift if the employee can prove that it is not compensation in recognition of employment.

6B1 1. Owner purchases some land for $10,000 and later sells it for $16,000. (f) What difference in result in (e), above if Owner had previously rented the land to Lessee for five years for $1,000 per year cash rental and permitted Lessee to expend $2,000 clearing the property? Assume that, although Owner properly reported the cash rental payments as gross income the $2,000 expenditures were properly excluded under § 109. See § 1019.

$8,000 gain; improvements made by the lessee - and properly excluded under § 109 do NOT increase lessor's bases in the property. ($18,000 sale price - $10,000 basis = $8,000).

8.1. Poor borrowed $10,000 from Rich several years ago. What tax consequences to Poor if Poor pays off the so far undiminished debt with: 8.1.(e) Services that are worth $8,000?

$8,000 gross income from services rendered $2,000 gross income from discharge of indebtedness.

6C 1. Mortgage purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate. 6C 1. (h) What results to Mortgagor under the facts of (d) above, if the land declines in value from $300,000 to $180,000 and Mortgagor transfers the land by means of a quitclaim deed to Bank? See Parker v. Delaney, 186 F.2d 455 (1st Cir. 1950).

$80,000 gain ($180K discharge of debt - $100K basis)

$80,000 gain ($180K discharge of debt - $100K basis) Even though the FMV is $10,000 less than the amount owed on the property, he still being discharged of $180K in debt. *Different result if recourse mortgage? Probably only a $170,000 discharge of debt b/c mortgage is still personally liable for the $10K unrecovered balance.

iii) What result if Mother and Son both render services worth $20,000 and the agreement is the same as in part (b). See Reg. 1.704-1(e)(3)(i)(b).

(1) 20K + 20K are backed out (M & S service income) and there is 60K left. (2) 60K/4 = 15K distribution per partner. (3) Mom taxed 20K (service) +15K (distribution). Son taxed 20K (service) +15K (distribution). Daughter 1 is taxed 15K (distribution)...15K is a gift under §102. Daughter 2 is taxed 15K (distribution)...15K is a gift under §102. (4) Total tax M (35K)/ S (35K)/ D1 (15K)/ D2 (15K) = 100K

ii) What result if Mother renders no services but the agreement provides that the income is to be divided 10% to Mother and 30% each to Son and each of her Daughters

(1) Horst problem and §704 (e) says that you must divide into proportionate share and here the mom is trying to do 10k/30k/30k/30k , (2) Mom's share is 25K. Capital is 100K. Apply 704(e)(2) ... except that such share is proportionately greater than the share of the donor to the donor's capital... there are four people so each proportionate share is 25%—distribution is 25k/25k/25k/25k.

13 C.2) Mother owns a group of apartments which she transfers to a partnership with Son and two Daughters who provide no consideration for their ¼ interests in the partnership. The income from the partnership is $100,000. i)What result if Mother renders services worth $20,000 to the partnership, but the partnership agreement merely calls for splitting the income ¼ each and each partner actually receives $25,000.

(1) What mom is doing is what Earl doesn't allow, having a splitting agreement for her income generated from services. So we need to back out mom's services. 100,000 - 20,000 mom's services = 80,000 partnership capital. (2) Now apportion capital 20k/20k/20k/20k for tax purposes. This is the tax result even though under state law the distribution is 25k/25k/25k/25k. (3)For tax purposes, mom gets taxed 20k (services) and 20k (partnership distribution). The three kids are taxed on 20K and the other 5K is a gift under §102.

6B3 1. Andre purchased some land ten years ago for $40,000 cash. The property appreciated to $70,000 at which time Andre sold it to his wife Steffi for $70,000 cash, its fair market value.What are the income tax consequences to Andre? (d) What results in (a)-(c), above, if the property had declined in value to $30,000 and Andre sold it to Steffi for $30,000?

(a) $0 loss recognized; $10,000 loss realized (b) $40,000 basis (c) $10,000 loss ($40,000 basis - $30,000 sale price = $10,000 loss

12B 1. Executive has a salaried position with Hi Rolling Corporation under which she earns $80,000 each calendar year. 12B.1(b) Who is taxed if Executive at beginning of the year directs that $20,000 of her salary be paid to any charity the Board of Directors of Hi Rolling selects? (Executive is not a member of the Board.)

*NPA; the income will probably be taxed to the Executive. The $20,000 is part of Executive salary, which inherently means that it is directly compensation for her work.

12B 1. Executive has a salaried position with Hi Rolling Corporation under which she earns $80,000 each calendar year. 12B.1(c) Same as (b), above, except that Executive makes the same request with respect to a $10,000 year-end bonus which Corporation has announced toward the end of the year, based on services rendered during the year?

*NPA; unless the bonus is a customary part of Executives expected compensation, it will probably be excluded from Executives gross income as this fact pattern is very similar to that of the taxpayer is Giannini.

13C. 1(f) Do you see a relationship between § 704(e)(1) and the messages in both Chapter 12 and the Clifford case in Chapter 13?

...

All income to Trust is taxable to Grantor. Exception in § 673 (b): In the case of any beneficiary who- (1) is a lineal descendant of the grantor, and (2) holds all of the present interests in any portion of a trust, the grantor shall not be treated under subsection (a) as the owner of such portion solely by reason of a reversionary interest in such portion which takes effect upon the death of such beneficiary before such beneficiary attains age 21. Here, the beneficiary is a lineal descendent & holds all present interest. However, application of the § 673(b) exception FAILS to apply because the Grantor's reversionary interest DOES NOT terminate once Son turns 21 years old.

13B.1. Grantor who is a lawyer creates a trust for the benefit of her adult Son with income to Son for life, remainder to Son's children. Who is taxed on the income paid to Son in the following circumstances: 13B. 1(g) Same as (c), above, except that at Son's death the property reverts to Grantor if Grantor is then living. The value of the reversionary interest exceeds 5% of the value of the trust corpus.

All income to Trust is taxable to Grantor. §673: "The grantor shall be treated as the owner of any portion of a trust in which he has a reversionary interest in either the corpus or the income therefrom, if, as of the inception of that portion of the trust, the value of such interest exceeds 5 percent of the value of such portion." Here, Grantor has a reversionary interest exceeding 5%.

13B.1. Grantor who is a lawyer creates a trust for the benefit of her adult Son with income to Son for life, remainder to Son's children. Who is taxed on the income paid to Son in the following circumstances: 13B. 1(f) Same as (c), above, except that Grantor holds liberal powers to change the income beneficiary of trust from Son to anyone other than Grantor.

All income to the Trust is taxable to Grantor. § 674: The grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party. Here Grantor has "liberal" control the beneficial enjoyment of the income, thus Grantor is taxed.

13B.1. Grantor who is a lawyer creates a trust for the benefit of her adult Son with income to Son for life, remainder to Son's children. Who is taxed on the income paid to Son in the following circumstances: 13B. 1(i) Same as (h) above, except that the trust instrument provides that the corpus shall revert to Grantor only if Son dies prior to reaching 21 years of age.

All income will be table to the Trust, then to Son upon distribution of the income. Here, the provisions of the trust satisfy all conditions of the exception in § 673(b): (1) Son is a lineal descendent, (2) Son owns all present interest in the trust, & (3) Grantor's reversionary interest terminates upon Son reaching 21 years of age.

13B.1. Grantor who is a lawyer creates a trust for the benefit of her adult Son with income to Son for life, remainder to Son's children. Who is taxed on the income paid to Son in the following circumstances: 13B. 1(j) Same as (c), above, except that Grantor may direct the sale of the trust corpus to any person including herself for any price she wishes.

All income will be taxable to Grantor. § 675: "A grantor shall be treated as the owner of any portion of a trust in respect of which - (1) a power exercisable by the grantor of a nonadverse party, or both, without the approval or consent of any adverse party enables the grantor or any person to purchase, exchange, or otherwise deal with or dispose of the corpus or the income therefrom for less than an adequate consideration in money or money's worth."

12B 1. Executive has a salaried position with Hi Rolling Corporation under which she earns $80,000 each calendar year. 12B.1(d) Who is taxed if Executive, in her corporate role, gives a series of lectures on corporate finance at a local business school and, pursuant to her contract with Hi Rolling, turns her $1,000 honorarium over to Corporation?

Corporation will be taxed. Even though payment is being received by Executive for services she performed, she is remitting payment to Corporation pursuant to her employment contract. Rev Ruling 74-581: Clinic attys remitting payments to employer do not have income from those payments because of a unique factual situation in which the employee is remitting income from each client pursuant to employment agreement.

1) On January 2 of the current year for $300,000 Depreciator purchases new equipment for use in her business. The purchase is made from an unrelated person. The equipment has a 6-year class life and is 5 year-property under §168(c). Depreciator plans to use the equipment for seven years, and expects it to have a salvage value of $30,000 at the end of that time. Depreciator is a single, calendar year taxpayer, and she uses the equipment only in her business. In the following problems compute the depreciation deductions with respect to the equipment in each year of its use assuming that if §168(k) is applicable in the current year Depreciator elects out of its use, and compute Depreciator's adjusted basis for the property in each year.

DESCRIPTION ONLY

12C 1. Father owns a registered corporate coupon bond which he purchased several years ago for $8,000. It has a $10.000 face amount and is to be paid off in 2018. The current fair market value of the bond is $9,000. The bond pays 6% interest, semi-annually April 1st and October 1st (i.e. $300 each payment). What tax consequences to Father and Daughter in the following alternative solutions? 12C. 1(d) Father owns an income interest in a trust which owns the bonds and on April 2, Father gives his income interest (the right to the succeeding interest coupons) to Daughter.

Daughter will be taxed on the interest income. This is like Blair because the Father owns only an income interest in the trust (bonds) & it seems that he does not have control of the TREE, just the FRUIT.

12C 1. Father owns a registered corporate coupon bond which he purchased several years ago for $8,000. It has a $10.000 face amount and is to be paid off in 2018. The current fair market value of the bond is $9,000. The bond pays 6% interest, semi-annually April 1st and October 1st (i.e. $300 each payment). What tax consequences to Father and Daughter in the following alternative solutions? 12C. 1(b) On April 2, Father gives Daughter the bond with the right to all the interest coupons.

Daugther will be taxed on the interest from the bond as ordinary income as each coupon becomes due. The income is no longer taxable to the Father because he has transferred ownership of the income producing asset itself to his Daugher.

12C 1. Father owns a registered corporate coupon bond which he purchased several years ago for $8,000. It has a $10.000 face amount and is to be paid off in 2018. The current fair market value of the bond is $9,000. The bond pays 6% interest, semi-annually April 1st and October 1st (i.e. $300 each payment). What tax consequences to Father and Daughter in the following alternative solutions? 12C. 1(f) On April 2, Father sells Daughter the right to the two succeeding interest coupons for $500, their fair market value as of the time of sale.

Father has $500 income on Apr. 2 (Date of Sale). Daughter has $100 income when the next 2 coupons become due. ($600 interest payment - $500 basis)

12C 1. Father owns a registered corporate coupon bond which he purchased several years ago for $8,000. It has a $10.000 face amount and is to be paid off in 2018. The current fair market value of the bond is $9,000. The bond pays 6% interest, semi-annually April 1st and October 1st (i.e. $300 each payment). What tax consequences to Father and Daughter in the following alternative solutions? 12C. 1(a) On April 2 of the current year, Father assigns Daughter all the interest coupons.

Father has taxable income from all the interest coupons (Horst: "The power to dispose of income is the equivalent of ownership of it". Father will recognize the taxable income as each coupon becomes due, NOT in one lump sum at the time of assignment (Rev. Ruling 69-102).

13B.1. Grantor who is a lawyer creates a trust for the benefit of her adult Son with income to Son for life, remainder to Son's children. Who is taxed on the income paid to Son in the following circumstances: 13B. 1(b) Grantor owns a building subject to a long term lease. She transfers the right to future rentals under the lease to the trust.

Grantor is taxed on all such rental income. No trust specific provisions apply here; this is an issue of income assignment. Here, Grantor has transferred the right to income, but has not transferred the income producing asset. Like in Horst, the owner of the asset - here, Grantor - is the taxable party.

Morgagor has a $80K gain. ($180K discharge of debt - $100K basis) Sons basis is $180K. This operates like a part sale/part gift: the donee's basis is the greater of donors basis or amount paid. Here, Son is now responsible for a $180K debt, so it is as if he paid $180K for the property.

3B2 2. The congregation for whom Reverend serves as a minister gives her a check for $5,000 check on her retirement. Does Reverend have gross income?

Most likely no GI. This depends on the relationship between the proposed donor & donee. There does not seem to be an employer-employee relationship between the congregation and the priest as there would be such a relationship between the church as an entity & the priest. If the church, as priest employer, gave him the $5,000 than it would be GI.

3B2 1. Employer gives all of her employees, except her son, a case of wine at Christmas, worth $120. She gives Son, who also is an employee, a case of wine, worth $700. Does son have gross income?

Most likely yes, but it can be argued both ways. The most likely result is $120 of gross income to son and a $580 gift from MOM. IRC § 102(c) : an employee "shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee." Tres. Reg. § 1.102 - 1(f)(2): if the employee can show that the transfer was not made in recognition then it will be considered a gift. Here, all employees receive "gifts" written within the employer -employee context, & son receives a similar "gift", albeit of a significantly higher value. It seems that the value should be prorated so that son recognizes GI consistent with the value of "gifts" given to other employees ($120). The value of the "gift" above the standard "gift" given to the other employees ought to constitute a tax-free gift because it was given in Employer's capacity as Mom, not as Employer, Hence the excess value was motivated by "detached & disinterested generosity" "out of affection, respect, or like impulses" making it excludable.

6C 1. Mortgage purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate. 6C 1. (b) Two years later when the land has appreciated in value to $300,000 and Mortgagor has paid only interest on the $80,000 mortgage, Mortgagor takes out a second nonrecourse mortgage of $100,000 with adequate rates of interest from Bank again using the land as security. Does Mortgagor have income when she borrows the $100,000? See Woodsam Associates, Inc. v. Commissioner, 198 F.2d 357 (2d Cir. 1952).

No, Mortgagor neither has income, nor an increase in basis solely from securing debt with his land because there is a corresponding obligation to repay and the money is not going back into the land, respectively.

2C 1. Vegy grows vegetables in her garden. Does Vegy have gross income when: (b) Vegy and her family consume $100 worth of vegetables?

No, imputed income is not taxable.

2C 2. Doctor needs to have his income tax return prepared. Lawyer would like a general physical check up. Doctor would normally charge $200 for the income tax return preparation. (b) Does Lawyer realize any income when she fills out her own tax return?

No, imputed income is not taxable.

2B 5. Owner agrees to rent Tenant her lake house for the summer for $4,000. (b) Is there a difference in result to Owner in (a), above, if Tenant effects exactly the same improvements but does all the labor himself and incurs a total cost of only $500?

No, the fair market value (FMV) of the improvements made is still $3,000 and it is still a substitute for cash rent payments.

2B 5. Owner agrees to rent Tenant her lake house for the summer for $4,000. (c) Are there any tax consequences to Tenant in part (b), above?

Tenant has $3,000 in gross income because he has been compensated $3,000 for making the improvement. He may have only $2,500 income if can deduct the $500 in expenses. *Treat as if tenant paid landlord $4,000 in rent, then landlord paid tenant $3,000 to make improvements. PUT CASH IN THE MIDDLE.

2B 3. Employee has worked for Employer's incorporated business for several years at a salary of $80,000 per year. Another company is attempting to hire Employee but Employer persuades Employee to agree to stay for at least two more years by giving Employee 2% of the company's stock, which is worth $100,000, and by buying Employee's spouse a new car worth $30,000. How much income does Employee realize from these transactions?

The $100,000 worth of stock results in $100,000 gross income to Employee because when the stock crosses the barrier of ownership he clearly realizes a $100,000 accession to wealth. The $30,000 car also results in $30,000 gross income to Employee. Even though the car is given to Wife, it is given by Employer in compensation for Employee giving up HIS right to leave his job for another 2 years, so it is gross income to Employee. Moreover, Employee is really in control of the disposition of the car b/c he could have negotiated an alternative deal. He also has $80,000 from his salary.

13B.1. Grantor who is a lawyer creates a trust for the benefit of her adult Son with income to Son for life, remainder to Son's children. Who is taxed on the income paid to Son in the following circumstances: 13B. 1(d) Same as (c), above, except that six months' rent has accrued on the lease at the time of Grantor's transfer.

The accrued rent is taxable to Grantor. All future rent will ultimately be taxed to son, once it passes through the trust & trust takes its deduction.

12C 1. Father owns a registered corporate coupon bond which he purchased several years ago for $8,000. It has a $10.000 face amount and is to be paid off in 2018. The current fair market value of the bond is $9,000. The bond pays 6% interest, semi-annually April 1st and October 1st (i.e. $300 each payment). What tax consequences to Father and Daughter in the following alternative solutions? 12C. 1(h) Prior to April 2, Father negotiates the above sale and on April 2 he transfers the bond to Daughter who transfers the bond to Buyer who pays Daughter the $9,000.

The answer depends on how far the negotiations have gotten by Apr. 2. If there is already a contract obligation to sell before Apr2, then the Susie Salvator precedent applies: the Daughter is merely a conduit. If not, the Stranahan applies: Father gave up all rights to the property to Daughter, so income from the property is taxable to her alone.

3B1 1. Our system of self-assessment requires the taxpayer to make the initial determination of gift or income, and tax administration procedures give the Commissioner the power to challenge that decision. If a judicial controversy develops, why is the decision of the trial court so important, and what role may an appellate court play?

The decision of the trial court is important because determination of whether a transfer constitutes a gift is highly dependent on the fact finder's (jury's or, in a bench trial, judge's) assessment of the transfer with respect to the "donor's" intent. This case by case approach can yield wildly incongruous results depending on how an individual fact finding body assesses an individual donor's intent, which is largely based on self serving testimony that the fact finder assess for credibility/truth.

13C.1. Section 704(e)(1) recognizes as a partner in a family partnership one who "owns a capital interest in a partnership in which capital is a material income-producing factor." Consider whether the following situations meet the statutory requirement: 13C. 1(b) Father is a doctor who makes his Daughter (a recent medical school graduate) a partner in his practice.

Under 704(e)(1): Does NOT satisfy the capital requirement. There are only services here, this is not a partnership based on capital as a material income producing factor. Services do not constitute a "capital interest" and a partnership based on income derived from rendering services is not one "in which capital is a material income-producing factor. Under Culbertson: This is most likely a partnership because daughter is a med school graduate (she has the capacity to render services on behalf of the partnership), so it should be do-able to prove that there was a bona-fide intent at the time of formation.

13C.1. Section 704(e)(1) recognizes as a partner in a family partnership one who "owns a capital interest in a partnership in which capital is a material income-producing factor." Consider whether the following situations meet the statutory requirement: 13C. 1(c) Father owns a shopping center where the stores are subject to long-term leases and he transfers the leases to a partnership with Son and Daughter.

Under §701(e)(1): While the shopping centers are capital, the leases alone are NOT. However, application of §704(e)(1) is irrelevant because such an assignment of income violates the Horst fruit/tree standard: Father is attempting to transfer the income from property without also transferring the income producing property itself. Under Culbertson: still violates Horst

13C.1. Section 704(e)(1) recognizes as a partner in a family partnership one who "owns a capital interest in a partnership in which capital is a material income-producing factor." Consider whether the following situations meet the statutory requirement: 13C. 1(a) Father is a doctor who makes his Son (a law student) a partner in his practice, assuming applicable state law does not prohibit such associations.

Under §704(e)(1): Does NOT satsfy the capital requirement. The Son does NOT own any capital that is a material income producing factor. Under Culbertson: Probably NOT a partnership - this looks like a sham as law student would/could not practice medicine, thus Father is merely trying to split his income to a lower marginal tax rate tax payer.

13C.1. Section 704(e)(1) recognizes as a partner in a family partnership one who "owns a capital interest in a partnership in which capital is a material income-producing factor." Consider whether the following situations meet the statutory requirement: 13C. 1(d) Father transfers both the shopping center and the leases in (c), above, to the partnership with Son and Daughter.

Under §704(e)(1): The Horst problem in (c) has been resolved by transferring the shopping center itself. The safe harbor excetion applies [i.e. §704(e)(1)] because the shopping center is a capital asset & it is the material income producing factor (the lease income is derived directly from the shopping center). Moreover, under Reg. 1.707-1 Father's gifting of the partnership interest DOES NOT defeat the § 704(e)(1) safe harbor exception. Under Culbertson: doesn't matter - the safe harbor statute preempts Culbertson.

2B 4. Insurance Adjuster refers clients to an auto repair firm that give Adjuster a kickback of 10% of billings on all referrals. (a) Does Adjuster have gross income?

Yes

2C 1. Vegy grows vegetables in her garden. Does Vegy have gross income when: (c) Vegy sells vegetables for $100?

Yes, $100 gross income

2C 1. Vegy grows vegetables in her garden. Does Vegy have gross income when: (d) Vegy exchanges $100 worth of vegetables with Charlie for $100 worth of tuna which Charlie caught?

Yes, $100 gross income. Here, there is a transaction in which the vegetables and tuna cross the barrier of ownership, thus we treat the transaction as if there was cash in the middle and apply the FMV of the goods exchanged as income to each respective recipient party. See Rev. Ruling 79-24: when payment is made in a form other than cash income is assessed based on the FMV of the property or services taken in payment.

c) Debtor pays all five year's interest ($25,000) to Lender in cash on December 31 of year one.

i) Lender 25k income y1; debtor deduction 5k in y1 (§461(g)(1) ... he gets 5k deduction each year for 5 years. You cannot pay for your medical bills in advance

1) Landlord incurs the following expenses during the current year on a ten-unit apartment complex. Is each expenditure a currently deductible repair or a capital expenditure? b) $4,000 for replacing the roof over an apartment. The roof had suffered termite damage

i) NPA-- Capital Expenditure or you could argue the "repair" is currently deductible repair

1) Landlord incurs the following expenses during the current year on a ten-unit apartment complex. Is each expenditure a currently deductible repair or a capital expenditure? d) $3,000 for adding a carport to an apartment.

i) Capital Expenditure

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

i) Currently Deductible repair/expense

1) Landlord incurs the following expenses during the current year on a ten-unit apartment complex. Is each expenditure a currently deductible repair or a capital expenditure? c) $1,000 for patching the entire asphalt parking lot area.

i) Currently Deductible repair/expense

1) Landlord incurs the following expenses during the current year on a ten-unit apartment complex. Is each expenditure a currently deductible repair or a capital expenditure? e) $100 for advertising for a tenant to occupy an empty apartment.

i) Currently Deductible repair/expense... not making the apartment more valuable, this is more like a replacement the new investment

1) Lender lends out money at a legal interest rate to Debtor. Debtor is required to pay $5,000 interest each year on the loan which extends over a five year period. The interest is deductible by Debtor under §163. The agreement calls for payment of each year's interest on December 31 of the year. Both parties are calendar year, cash method taxpayers. Discuss the tax consequences to both parties under the following alternatives: a) Debtor mails a check for $5,000 interest to Lender on December 31, of year one. It is delivered to Lender on January 2 of year two.

i) Debtor 5k deduction in y1; lender $5 income in y2

2)TP lives with her husband and children in City and works there. a) If her employer sends her to Metro on business for two days and one night each week and if TP is not reimbursed for her expenses, what may she deduct? See §274(n)(1).

i) Duductible: Trans & lodging b/c travel "away from home" under §162(a)(2) & 50% of meals in Metro (limit meals to avoid dup). See §274(n)(1).

b) Same as (a), except that she works three days and spends two nights each week in Metro and maintains an apartment there.

i) Duplicated expenses but not sure what is the tax home. Deductible: Trans & lodging b/c travel "away from home" & 50% of meals in Metro

c) Same as (b) except that Depreciator disposes of the equipment on December 1 of year five.

i) Here only difference is that under the half year convention 168(d) any property placed in service or disposed of during any taxable year is placed in service or disposed of on the midpoint of such year. So in Yr5, you only get ½ of your depreciation.

d) Client calls Lawyer at 4:00pm, Dec 31 of year one, saying she has Lawyer's fee statement, has made out check in full payment and, as she is about to leave for Europe, will leave check with desk clerk at Client's apartment. Lawyer is ill, has no one to send to pick up check, and finally picks it up on Jan 2 of year two. See Loose v. US.

i) Lawyer income year 1 ; client deduction year 2 (desk clerk is Client's agent... the fact that the lawyer is ill is irrelevant b/c clerk "receives" the property in y1 ... no such thing as CR for deductions.) constructive receipt... Hornung

2) Lawyer renders services to Client which are deductible to Client under IRC §162. What result to both Lawyer and Client if both are cash method, calendar year TPs in each of the following circumstances. a) Lawyer sends out a bill for $1,000 on December 24 of year one. Client pays the bill on January 5 of year two.

i) Lawyer/ client both 1k income/deduction in y2

b) Lawyer sends out bill for $1,000 on Nov 15 of year one. Client immediately pays the bill using her credit card and credit card company pays Lawyer the $1,000 on December 15 of year one. Client pays credit card company the $1,000 credit card bill on Jan 15 of year two.

i) Lawyer/client 1k income & deduction in year y1... get deduction when you pay the bill not when you pay your credit card bill.

c) Prior to rendering the services, Lawyer and Client agree that Lawyer will be paid $500 in year one and $500 in year two. Client pays Lawyer $500 of cash on Dec 24 of year one and $500 of cash on Jan 5 of year 2.

i) Laywer/client $500 income & deduction in years 1 & 2 (split, probably don't want to defer payments for a practical matter)

c) TP and Husband own a home in City and Husband works there. TP works in Metro, maintaining an apartment there, and travels to City each weekend to visit her husband and family. What may she deduct? See Robert A. Coerver, 36 T.C. 252 (1961) and Virginia Foote, 67 T.C. 1 (1976).

i) No deductions b/c she not on travel status b/c her travel is to "visit her family", which is personal travel disallowed under §262. Her tax home is Metro, where she works.

d) Same as (c) above but Debtor does so b/c Lender makes it a condition of extending Debtor another loan.

i) Same as (C.) .... TR "this is hard to know"... b/c you don't want to grant the lender the power to collude with debtor. We are assuming this is a sham. Even if its not, the lender doesn't care, he could make it a condition of a new loan. So we want to treat the two the same.

c) Commuter resides and works in City, but occasionally must fly to Other City on business for his employer. He eats lunch in Other City and returns home in the late afternoon or early evening. May he deduct all or a part of his costs?

i) Travel status begins overnight so no meal. But flying is. Cost of trans is deductible but not the cost of lunch.

b) Same as (a), above, but Commuter is an attorney and often must travel between his office and the City Court House to file papers, try cases, etc. May Commuter deduct all or any of his costs of transportation and meals?

i) Yes travel expenses for going from office to court are deductible. Cost of meals is not deductible b/c not travelling. See Rev. Ruling 55-109.

a) Depreciator elects under §168(b)(5) to use the straight line method for the equipment and all other property in its class placed in service during the year.

i) Yr5 Dep amount = 60,000 ii) A/B = 30,000

f) Debtor offers to pay Lender the $5,000 of interest due on December 31 of year one but Lender suggest that Debtor pay it on January 2nd of year two, which Debtor does.

i) constructive receipt by lender... so debtor has constructive payment in y1 and lender has constructive receipt in y1. ii) Debtor has 5K deduction in y2 (b/c no such thing as CR for deductions) ; lender 5k income in y1 under constructive receipt

e) Debtor pays year one's $5,000 of interest in cash on January 2nd of year two and, as agreed, pays year two's interest on December 31 of year two.

i) lender and debtor have 10k income/ded in y2

6B2 2. Father had some land that he had purchased for $100,000 but which had increased in value to $200,000. He transferred it to Daughter for $100,000 in cash in a transaction properly identified as in part a gift and in part a sale. * Assume no gift tax was paid on the transfer. 6B2 2. (a) What gain to Father and what basis to Daughter under Reg § 1.1001-1e and 1.1015-4(a)(1)?

§ 1.1001 - 1(e): when a transfer of property is part sale and part gift, transferors gain is the extent to which the amount realized exceeds the adjusted basis in the property. Here, the amount realized is $100,000 and the adjusted basis is $100,000. $100,000 AR - $100,000 adj. basis = $0 gain. $100,000 basis to daughter. § 1.1015-4: Where a transfer of property is in part sale and in part gift, the unadjusted basis of the property in the hands of the transferee is the sum of the greater of the amount paid by transferee for the property or the transferor's adj. basis at the time of the transfer. Here, adj. basis of transferor = amount paid by transferee = $100 K

Federal Income Tax Problems/Solutions

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