Tax Class Examples
Donor bought property for $1,000. FMV at time that he gives it to donee is $2,500. Donee later sells for $1,500. When is there income? What happens to basis?
Donee realizes no income at the time of the gift. § 102. The basis is 1,000, so when the donee sales, he has $500 of income. Don't get tricked by §1015(a) talking about a loss situation: that's talking about a built-in loss transferred AT THE TIME of the gift. Here, there was not a loss at the time of the gift. Doesn't apply.
A buys blue acre for $100 and buys yellow acre for $50. A combines Yellowacre and Blueacre, which are adjacent, into Green acre. He sells a slice of greenacre with parts of both yellowacre and blueacre. Sells the slice for $70. How much income does he have.
Gain and loss is not really possible to determine, based on the facts given You would need to know: what is the historical cost of that SLICE of blue acre and yellow acre—then you would add it together. Usually no info because there's no allocation at the time of purchase.
Ivan buys a life insurance policy. Premium (i.e. cost of policy) of the policy is $100 today. The policy is in effect for one year. If he dies during the year, his estate/heirs will be paid $100,000. If he does not die during the year, the policy expires, and no money is paid. Is the $100 cost of the policy deductible to Ivan? Is the potential payment of $100,000 includible to Ivan or his heirs?
Generally, premium is not deductible. (It would be deductible to an employer if employer purchased group health care for employerrs §79(a)) Payments fro the policy to Ivan's heirs in not taxable income if it was paid by reason of death of the insured § 101(a).
Diana has Facebook stock. Basis is $75,000. Value is $100,000. She would like to give $100000 to charity. She is considering two options: Sell FB stock for $100,000 and gift $100,000 of proceeds to charity. Give the stock to charity without selling it first. What should she do?
Gift without selling first; she then never has to include $25,000 of unrealized gains in income. · Charitable donations of appreciated property do not cause unrealized gain to be included in income.
R & H both received inheritances of $400,000. Prior to their inheritances, they each rented a house at the cost of $20,000. R uses his inheritance to buy a 30-year bond that pays interest of 5% per year. H buys the house he has been renting. Who is better off on an after-tax basis?
H is better off on an after-tax basis because the rental value of the house is not taxable when you buy it, whereas the rental value is taxable when you are renting. (Imputed income)
A pays $100,000 today for a contract promising her the right to receive $5,000 per year for 10 years and $140,000 in 10 years. Is there OID?
If the contract is an annuity (usually based on life expectancy, issued by life insurance co) - no- OID rules do not apply. If the bond is purchased secondarily, no OID because market discount rules apply. If its a bond issued at original discount, not by a life insurance co, there would be OID of 40,000 of OID.
Life insurance policy makes early payments to a terminally ill insured. What is the tax treatment?
If you are terminally ill, you can get an early payment before your death (with no penalty) and they are excluded from income. 101(g)
C corp. issues debt for 100 (i.e. borrows 100). Promises 5% interest per year, maturity of 10 years. One year later, the prevailing market interest rate is now 6% (making the debt less valuable). C buys back the debt for 93.2 (current market price). They finance the 9-year debt paying 6% interest. What are the tax consequences?
Immediate realization of income of 6.8. Increased annual tax deduction from 5 to 5.592 (because you're paying 6% interest. 5.592 is 6% of 93.2). Total increase of 5.328 (=9*0.592) in deductions over time. Assuming constant tax rates, there is a net present loss to C (6.8 is bigger than 5.32).
George is 40 years old and single and will live exactly to his life expectancy. He pays 145.2x for an annuity. There is no payment unless and until he reaches the age of 60. If he lives until age 60, then there are payments of 10x per year. His life expectancy at 40 is 42.5 years. His life expectancy at age 60 is 24.2 years. George dies at 65. · He has only received a total of 50x in payments under the annuity. What is the tax consequence of the annuity?
In addition to the income from payment during that year, there is also a deduction of 115.2x for unrecovered investment (see § 72(b)(3)). His original investment was 145.2 and he's only recovered 50x. He's excluded 60% of that, so he's excluded 30x and included 20x. Remaining basis is 145.2x-30x=115.2x. He will get a deduction for that remaining 115.2x. (§ 72(b)(3)).
George is 40 years old and single and will live exactly to his life expectancy. He pays 145.2x for an annuity. There is no payment unless and until he reaches the age of 60. If he lives until age 60, then there are payments of 10x per year. His life expectancy at 40 is 42.5 years. His life expectancy at age 60 is 24.2 years. George lives until age 90. How much income from annuity in his 88th year of life?
Income of 10x (see § 72(b)(2)) Once he lives until 60, he gets 10x a year and excludes 6x a year. Once he recovers all of his initial investment, he is done. Once you've recovered all your basis, you no longer exclude any ratio of payments from income.
Richard is retired and receives $10,000 in social security payments. What is included in income?
It depends on how much income Richard has. It is possible that 0 is taxable (if excess in §86(b)(1) is zero). It is also possible that 85% is taxable (if income is high enough). Other fractions between 0 and 85% are also possible
Your friend has a baby girl and you give her a $1,000 United States savings bond. The way the bond works is that you pay $500 for now, and in 18 years, when the young girl may be heading to college, she will be able to cash it in for $1000. Does the girl have to include OID in income over the course of the next 18 years even though she is not receiving any money yet?
OID rules don't apply for United States savings bonds. So no. Congress wants to encourage savings. § 1272(a)(2)(B)
F Buys stock for $1,000,000. Stock increases in value to $1,500,000. F gifts the stock to S. What is S's basis (ignoring the annual exclusion)?
S's basis: consider the effect of §1015(d)(1) & (6). $1,200,000 (equal to $1,000,000 basis carried over, increased by gift tax of $200,000 paid by F on $500,000 of unrealized appreciation, but not additional gift tax of $400,000 paid by F on $1,000,000 of his basis in stock). If the annual exclusion is taken into account, 15,000 is excluded. The gift tax due is 40%(14,845,000), "Amount of gift" is 594,000*(500,000/1,485,000)=200,000. So again, adjusted basis to S is $1,200,000
Larry can normally get a pre-tax return of 10% per year, so if he invests 90x, he will get 9x per year. Suppose he is offered the following opportunity: invest 90x; only get 8x per year for the term of the loan but get a final payment called "principal" of 100x instead of 90x. Should tax rules worry about deferrals in this case?
YES. This is an example of a discount bond. The amount of the OID on this bond is 10x (excess of 100x over 90x). If discount at original issue, 10x is included over the life of the bond (constant yield method)).
Suppose you are advising a CFO of a corporation. CFO tells you: lots of people buy our debt. We could pay less interest if those investors faced lower tax burden on the interest. Any ideas about how we could ease their burden?
Think about timing. You may not be able to change the total amount of interest (in present value terms) but you may be able to change the timing of the inclusion of income.
· Mayor wants more money for town coffers. Municipal debt only costs 3.5% (can borrow money at that rate) but U.S. treasuries yield 5%. Town is tax exempt under §115. Mayor issues town bonds to get money to buy Treasuries. Nets 1.5 million if he does 100 million of bonds. Will this scheme work?
This is an arbitrage. §103(b)(2) says exemption doesn't apply to any arbitrage bond—any bond issued for a higher yield investment. It's not that the town can't do this, it's that the bondholders will have to pay the tax.
A sells Greenacre to B for a promised payment of $100,000 in 10 years. No other payments are due at any time. The applicable AFR is 5%. What are the tax consequences?
This is like an OID bond for property. We must determine or deem a value for Greenacre. If the parties use the present value as the deemed price for Greenacre, then OID is equal to the excess of $100,000 over the present value calculated using the AFR. § 1274 If AFR=5%, the PV($100,000)=$100,000/(1_.05/2)20=$61,027. $61,027 is our "issue price" or the deemed value for Greenacre. So OID=$38,973. The seller would use the $61,027 number (issue price, present value) to determine if they have a gain or loss (from their basis). From the buyer's point of view, their BASIS is the $61,027. That is the amount they are deemed to have paid.
Sylvia, a bright, hard-working student, receives a grant of funds from a government organization to help her attend college. Tuition is included in the amount. Room and board are included as well. A monthly stipend for other expenses is also given. What amounts are included in Sylvia's income?
Under §117(a)&(b), tuition is excluded, but stipend and room and board are taxable.
Sylvia is in graduate school. Sylvia receives a tuition waiver (tuition would otherwise be $50,000). Sylvia also receives a $30,000 stipend. As part of her arrangement, Sylvia works as a research assistant. What is included in Sylvia's income?
Under §117(a), the tuition is excluded. Under §117(c), however, tuition may be included to the extent it reflects compensation. School would want to be careful that it doesn't look like the tuition scholarship is in exchange for her work. But, § 117(d) gives a separate basis for exclusion for the research assistance.
A's business is a public corporation. A owns a majority of the stock, but others own stock as well. B is the CEO and is paid $2.5 million in wages. Assume this is similar to what B could earn elsewhere (i.e. its reasonable under §162(a)). How much of B's salary can the corporation deduct when determining its income?
Under §162(m), only $1 million is deductible. Gets to deduct the 1st million, but the additional 1.5 is not. (He is the CEO and the corporation is public).
E dies with an estate worth $1,000,000. How much estate tax is due? Assume no inter vivos giving.
Unless your estate is more than $11,400,000, you are not subject to estate tax. § 2031 (unified credit): tax is now zero.
Taxpayer acquire the piano in 1957 for $15. She discovered $4,467 of cash inside the piano in 1964. When did she realize the income?
When did she exercise dominion over the cash- It was NOT when she purchased the piano. It became income when she found it (this is the realization event). Cesarini.
B borrow $100,000 to finance legal education. B graduates and works in public interest job. B graduates and works in public interest job. B's law school pays off B's loan over time. Does B have income for tax purposes?
Without 108(f), there would be income of $100,000. 108(f) offers an exemption from income when the student is working in a public interest job as a part of the loan requirements. Most loans do not have this as part of the requirement, but schools can make that part of loan terms for a student. There is no effect on basis because §108(b)(1) does not apply to situation under §108(f).
B borrows $100,000 in personal debts and has no assets. L, the lender, agrees to reduce B's debt to $20,000, and B agrees to make payments from his wages under the new arrangement. Does B have income?
Without §108, B would have $80,000 of income. If B is in the 25% tax bracket, B will owe $16,000 to the federal government, and considering they probably worked with their lender because of a financially difficult situation, this is problematic. §108 gives various exceptions so that this is NOT income: insolvency, bankruptcy, etc. so that B has no income.
A bought blue acre for $100, rents blue acre for $10 for one year before selling it for $125. How much income does A have?
$10 is included in income and does not reduce basis. So $10 of rental income and $25 of §1011 gain income (125-100=25) = $35 of income.
Assume M has already exceeded the exclusion amount in annual giving. M now has $14,015,000 in assets. M would like to give her daughter, D, as large as a gift as possible. How much can she give? (if she would also like to account for the tax that will be due?)
$10,015,000—because she is the donor, she has to pay the tax and she has to pay 40% on a tax inclusive basis. 40% of $14,015,000 is roughly 4 mil of taxes due. o 1.4G=14 million à G=$10 million
A bought black acre in 1988 for $100. Adjusted for inflation, $100 in 1988 is about $200 today. In 2019 sells for $250. How much income does A have?
$150 of gain. (amount realized - historical basis). Basis is not adjusted for inflation.
You purchase bond from IBM for 400 today. They will pay you 40 a year in qualified interest and 500 at the end of 10 years. Is the yield to maturity higher or lower than 8%? Note that a yield to maturity is the constant yield requirement to be used under the OID rules.
It has to be higher because the interest rate alone is 8%. If you were just getting 8% per year, you would only get the 40 a year, not the extra 100 at the year. Know that getting the additional interest makes the yield go higher.
A pays 90x for a whole life insurance policy on A's own life. A sells and assigns the policy to B for 100x. When A dies, B gets the payout. What is A's tax treatment? A later dies, and the policy pays B 1,000x upon A's death. What is B's tax treatment?
A has 10x of gain; see § 1001 Unless an exception in the second sentence of § 101(a)(2) applies, 900x income to B.
A has a basis in land of 100x. He receives a settlement amount of 105x. What is his income/basis at the time of the settlement?
A's deemed remaining basis is 0 (100x-105x). Income at the time of the settlement is 5. (Taxypayer only realizes income at the time of the settlement to the extent the payment exceeds 100x) Inaja.
Alice pays $100,000 today for an annuity. The annuity promises to pay her $10,000 per year for the next 15 years. Thus, the total amount she was supposed to receive back is $150,000. · Alice died on year 10 of the 15-year annuity term, and the annuity therefore made no further payments. What are the tax consequences?
Alice would be entitled to a deduction of her as-yet unrecovered investment She has only recovered 2/3 her entire investment ($100,000) and payments have ceased. If 10 out of 15 years through. She will get a $33,000 deduction because she has only been able to exclude $67,000 from income of her original investment in the first 10 years.
Umberto receives $10,000 of unemployment compensation. What is included in income?
All $10,000 is included in income under § 85.
A's business is a private corporation. B is still the CEO and is paid $2.5 million in wages. This is still similar to what B could earn elsewhere (reasonable for §162(a) purposes). How much of B's salary can the corporation deduct when determining its income?
All $2.5 million is deductible because this is a private corporation (162(m) does not apply)
Phil the physicist is awarded a Nobel prize for his work. The value of the prize is well over $1 million. Phil does not transfer the money to charity. How much income does Phil have?
All 1 million. The value IS included in income for a Nobel prize, pursuant to §74(a).
W is hit by a car, and the accident is witnessed by W's husband H. H gets $100,000 for loss of consortium and emotional trauma and $10,000 in psychiatric bills. How much income does H have?
Although H's injuries are NOT physical injuries (they are emotional, which is not excludable under 104), H is probably able to exclude damages from income because 104(a)(2) doesn't say on account of WHOSE personal physical injuries or physical sickness the damages are on account of, so damages can be on account of his wife's physical injuries and qualify for exclusion.
H and W are married people with two children. W earns a certain income that is higher than what H can earn. H can either (1) work outside the home, earn additional income, pay taxes on earnings, and use after-tax dollars to pay a caretaker for his children or (2) work for himself at home as a caretaker for his children, and pay no tax for his services. What should H do?
Amount W earns may affect H's decision- push him toward inside or outside the home decision. Progressive brackets- the MORE that the higher earner, W, earns, the more they will pay in taxes (pay a tax on aggregate amount). The extra margin dollars that H will make as the lower earner will be taxed at the higher bracket because it is filed jointly with W. The imputed value of service done himself is not taxed at all.
Donor bought property for $1,000. FMV at time that he gives it to donee is $2,500. Donee later sells for $3,500. When is there income? What happens to basis?
Donee realizes no income at the time of the gift. § 102. At the time of the donee's SALE, the donee has $2500 of income. His basis is the Donor's purchase price, not the price of the property when he was given it.
B borrowed $100,000. B has an asset with the basis of $210,000. B is insolvent within the meaning of § 108(d)(3) (assets less than liabilities). B negotiates to reduce debt to $75,000, with a new payment plan. How much income does B have? Does her basis is assets change at all?
$25,000 without §108 (100,000 debt-75,000 discharge) but 0 with §108 because B is insolvent. Asset will go down to $185,000. The discharge of indebtedness income will offset his asset. §108(b)(2)(E), 1017(a). Income is technically deferred because it will adjust the basis of assets. But not that the tax may never be paid because of provisions such as §1014 (death) Also note that if there were no basis to be reduced, income would really be "erased"
A owns an unincorporated business with $3 million in gross receipts. A has a single employee B who is paid $2.5 million in wages. Assume this is similar to what B could earn elsewhere (not off-market. It's what B's services are worth). What is A's "income" under the 16th Amendment?
$3 million is the gross amount (§62) MINUS $2.5 million because he had to pay his employee (§162(a)). It seems that A's income "should" only be $500,000. § 162 reminds you it must be reasonable and ordinary & necessary.
A has $100,000 in a savings account. Account earns 5% interest per year. Now suppose that A makes gifts over time instead of all at once. A keeps savings account for 10 years. A withdraws and gifts $5,000 to B each year for 10 years. A withdraws and gifts $100,000 to C after 10 years (and closes out savings account). What are the tax consequences now?
$5,000 of income to A in each year (50,000 total) Everything is taxed to A. There is no income to B or C.
Suppose that the premium A had to pay for his self-provided health insurance is $500. Thus, A pays $500 up front (cost of the insurance). The policy pays $100,000 if he is injured and $0 otherwise. If A pays the premium with after-tax dollars, and he is in the 20% bracket, how much must he earn pre-tax to pay for the policy?
$625 (because $625-20%($625)=$500). [creates incentive for employer to pay for health insurance with pre-tax dollars]
Parent gives adult child a gift of appreciated property. The property has a basis of 30x and a value of 100x. Gift tax rate is 40% (annual exclusion and unified credit are used up). The parent makes a condition of the gift that the child pays the gift tax. Parties take the position that payment by the child is a gift to parent. The child's gift tax rate is 0% (annual exclusion still available). What are the tax consequences? 1. if they are genuine reciprocal gifts 2. if its a part gift/ part sale
(1) Reciprocal genuine gifts (donative intent require for both) Child pays 40x to IRS. No gain on transfer of the property. Child's basis is 30x+40%(70x) = 58x under § 1015(a)&(d). (Not just a carry-over basis. He has to add amount of tax paid on unrealized appreciation) (2) Part gift/ part sale: as if the child is buying the property for 28.57x so 71.43x is a gift. · G + 0.4G = 100x, where G is the value of the net gift given Thus G = 100x/(1+0.4)= 71.43x and gift tax paid = 40%(71.43x)=28.57x · Parent gain is 0x (§1.1001-1(e)) Child's basis is 30x (§ 1.1014-4) increased by gift tax on unrealized appreciation. Gift tax on unrealized appreciation computes as follows: Gift part has a value of 71.43x and basis 1.43 (the other 28.57x was allocated to sale part) Thus, the appreciation in gift part was 70x, and gift tax paid on this is 40% of 70x, which is 28 Thus, the total basis for child is 58x.
A buys blue acre for 100. Sells for 125. How much income does A have?
(1) what is adjusted basis? $100- it's just the original basis because nothing has happened to adjust it. (2) Amount realized? $125 (3) Amount of gain? amount realized ($125) - adjusted basis ($100) = $25 Taxable income: $25
A has $100,000 in a savings account. Account earns 5% interest per year. A makes two gifts: $5,000 per year to B for next 10 years. Remain to C (in 10 years). What should the tax consequences be? In answering, consider the following: values of gifts to B and C are $38,609 and $71,391, respectively.
(The result in Irwin v. Gavit) On these facts, it appears that B has $5,000 of income per year for 10 years, and C has no income for any of those 10 years.
If you receive $100, what are different ways it can be taxed?
1. As ordinary income (like compensation for services) 2. As a sale from investment property (you would need to know basis to only tax gain) 3. If investment property is held more than a year, taxed gain at capital gains rates 4. If it was principal received back from a loan, theres no tax because no gain or loss 5. If it was a loan and $100 is less than the amount loaned, you may actually have a loss or negative income
George is 40 years old and single and will live exactly to his life expectancy. He pays 145.2x for an annuity. There is no payment unless and until he reaches the age of 60. If he lives until age 60, then there are payments of 10x per year. His life expectancy at 40 is 42.5 years. His life expectancy at age 60 is 24.2 years. George lives exactly to his life expectancy. Additional facts: when George is 45, the value of his annuity is 180x (value has fluctuated). George pledges the annuity as security to borrow 160x from an unrelated party (borrows against it, pledges annuity as security). What is the tax consequence of borrowing?
34.8x is included in gross income as amount not "received as an annuity" (§72(e)(2)(B)&(4)(A)) [this is the excess of 180x over 145.2x]. Investment in the annuity is increased by 34.8x (§72(e)(4)(A), last sentence). Exclusion ratio at age 60 will now be 180x/242x=0.774
·Tax payer bought land for 100x. His right to use water on the property was harmed and he received 20x in a settlement (conceptual right to water was impaired but it's the same as if he sold a piece of the land- you are still realizing income). He later sold land 120x. How much income does A have and when?
40 of income (20 from settlement, 20 of gain) which is realized all at the sale. When he receives money from the settlement, his basis will be reduced by 20. He only has income at the time of the lawsuit to the extent that the payment exceeds 100x. Inaja.
F dies during 40 years later, leaving an estate worth $17,000,000 (ignoring money growth over time). The estate is to be divided equally among his children. F made no annual gifts. How much estate and gift tax is due?
40% of the excess of 17 mil over 11.4 million= $2,240,000. By parting with his money during life (and giving gifts to children for 40 years, not taxed because of annual gift exclusion), he could have saved his family $2.2 million.
E dies with an estate worth $13,000,000. How much estate tax is due? Assume no inter vivos giving.
40% tax is levied on excess of estate value over exclusion amount (unified credit of 11.4 mil) so for 13 million, the 1.6 million OVER the exclusion amount will be taxed
A has a basis in land of 100x. He receives a settlement amount of 60x. What is his income/basis at the time of the settlement?
40x would be the deemed remaining basis (100x-30x). Income at the time of the settlement is 0. (Will realize 60 of income upon sale later) Inaja.
You purchase bond from IBM for 490 today. They will pay you 40 a year in qualified interest and 500 at the end of 10 years. How much OID is there?
500 (SRPM) over 490 (issue price) gives us an excess of 10 for what would be OID. BUT De minimus rule: If OID (10) is less than ¼ of 1% of SRPM multiplied by # of years to maturity, OID rules don't apply. SRPM: 500. 1% of 500 is 5. ¼ of that is 1.25. 1.25 X 10 (years)= 12.5. The OID of 10 is LESS than 12.5, so OID rules don't apply per the de minimus rules.
A has a basis in land of 100x. He receives a settlement amount of 30x. What is his income/basis at the time of the settlement?
70x would be the deemed remaining basis (100x-30x). Income at the time of the settlement is 0. (Will realize 30 of income upon sale later) Inaja.
option 1: Andy buys Greenacre for 100 in year 1. Greenacre goes up in value to 250 in year 2. (not taxed on increase in value because there must be realization) Andy anticipates that Greenacre will further increase in value to 350 in year 3. Andy will have 250 of income in year 3. Ex option 2: If Andy sells in year 2 and purchases Blueacre, with similar value and value expectations he will have 150 if income in year 2 and 100 of income in year 3 Which option should Andy prefer?
Andy should prefer option 2. Having 250 income in year 3 pushes him to a really high tax bracket for his sale. If it's a 10% tax rate... would you rather pay $25 in year 3 or $15 in year 2 and $10 in year 3? Same thing is ultimately taxed but you would prefer to pay increments over time—gives you time to gain capital to pay for taxes and may be taxed on lower brackets. (example of lock-in effect caused by realization requirement)
A has $100,000 in a savings account. Account earns 5% interest per year. Suppose that gifts are structured instead as follows: $38,609 for A to B now. B uses full amount to buy an annuity that pays $5,000 for 10 years. $61,391 from A to C now. C uses full amount to buy a zero-coupon bond that pays $100,000 in 10 years. What are the tax consequences NOW?
B is not taxed on $38,609 of gift from A. B is taxed under the rules of § 72, with basis of $38,609 to recover § $38,609 is his investment and taxes will be based on the exclusion ration so he is only taxed on interest rather than his capital investment C is not taxed on $61,391 from A. C is taxed under OID rules, with issue price and basis of $61,391 § $61,391 is his basis in the investment. He will pay phantom income year in and year out. Once B & C have turned around and respectively purchased an annuity and zero-coupon bond, the income will be the same as before. The receipt of the chunks of money from A are not income to their B or C.
B paid $500,000 for a home. B has a mortgage of $400,000. The home value fell to $300,000. B is not insolvent or in bankruptcy, but B negotiates with L to reduce the mortgage principal to $325,000. What are the effects?
Before 2018: 0 income because of §108(a)(1)(E)(h)- exception for housing to combat the 2008 housing crisis. Exception is now repealed. Now: $75,000 of income from discharge of indebtedness.
Donor bought property for $2,000. FMV at time that he gives it to donee is $1,000. Donee later sells for $1500. When is there income? What happens to basis?
Donee realizes no income at the time of the gift. § 102. There IS a loss relative to the original basis (500 loss), but the exception says we use the FMV at the time of the gift for basis-1000. When you use $1000 to determine loss, you ask: what is the excess of basis over amount realized? 1000-1500. You ACTUALLY have a gain, but the excess is zero. You don't get to realize a gain. Any sale price between 1000-2000 will result in no gain and no loss. Its only when you go below 1000 that you'll have a loss. And only when you go above 2000, the original basis, will you have a gain.
Donor bought property for $2,000. FMV at time that he gives it to donee is $1,000. Donee later sells for $500. When is there income? What happens to basis?
Donee realizes no income at the time of the gift. § 102. There is a loss of $1500 if we use the carry-over basis of $2,000. Except, the exception (§1015(a)) applies here: the actual loss will be determined by the fair market value at the time of gift ($1000), so the loss is actually only $500.
Donor bought property for $2,000. FMV at time that he gives it to donee is $1,000. Donee later sells for $2,500. When is there income? What happens to basis?
Donee realizes no income at the time of the gift. § 102. §1015(a) applies here concerning the loss. If there's a loss at the time of sale compared to the original basis, the basis is the FMV. Under §1015(a), basis is a bifurcated, indeterminate quantity. It depends on if there is a loss or gain at the time of sale. So here, there is still a gain of $500 from the donor's basis at the time of the donee's sale.
George is 40 years old and single and will live exactly to his life expectancy. He pays 145.2x for an annuity. There is no payment unless and until he reaches the age of 60. If he lives until age 60, then there are payments of 10x per year. His life expectancy at 40 is 42.5 years. His life expectancy at age 60 is 24.2 years. George lives exactly to his life expectancy. Additional facts: George makes an election under the annuity that pays him 50x when he is age 50 and reduces scheduled payments from 60 onward to 7x instead of 10x. What is the tax consequences of borrowing?
Exclusion ratio will be calculated for age 50 for remaining payments (instead of 60). 72q says there's 10% penalty for premature distributions from annuities (if you were in the 40% bracket, you go up to the 50% bracket for THAT amount). 72q doesn't apply if you follow the rules under 72q2- if payment is after 59 ½, upon death, the taxpayer's become disabled. You can get payments out prior to age 59 ½ as long as they are taken out equally over a consecutive amount of time (ex: from age 20 onward)- otherwise there is a penalty.
F is unmarried and has 5 adult children, each of whom is married. Starting when F is age 50, he gives each married $30,000 per year. F dies during 40 years later, leaving an estate worth $11,000,000. The estate is to be divided equally among his children. How much has F given in the aggregate and how much estate and gift tax is due?
F has given $17,000,000 (ignoring growth in money over time). Aggregate estate and gift tax is 0. Gift tax is 0 because of the annual exclusion allowed (15K per person per year). Estate tax is 0 because of the 11.4 mil unified credit.
Principal received unsolicited samples of textbooks worth $400. The publishers hoped he might order more for his school. What are the tax consequences to the Principal?
He can exclude the $400 and do nothing further (Not clear why, but the IRS seems not to pursue enforcement- this is a customary thing that they are fine with). Or you can include the $400 and take a charitable deduction (But of course, these would offset (mostly)) But you can't both exclude from income and expect a deduction- that is "double dipping." Haverly.
Howard is an employee who receives a pre-tax wage of $100,000. He elects to put $3,500 in an HSA. Thereafter, he pays a medical expense of $2,000 with HSA fund. Ed is an employee who is similarly situated except: no HSA election, and so the $2,000 medical expense is paid with his after-tax dollars. If both are subject to a flat 20% tax rate, who is better off?
Howard has avoided tax of $700 on $3,500 of income, but Ed has not. With the remaining $1,500 in Howard's HSA, he can keep it for medical expenses in future years, invest it in the meantime, and withdraw it as taxable income in retirement (would be taxed then) to the extent that a balance remains.
Now suppose Ivan insures his life for one year in the future. If he dies between 365 and 730 days from now, his estate/heirs receive $100,000. If he waited one year, and bought a simple one-year policy, it would cost $100. How much does it cost to buy the FUTURE policy today?
If he waited one year and bought a simple policy, it would cost $100. If he pays the insurance company today, the insurance company will charge him less. Charged $95.23 TODAY, instead of $100 in a year. o Assume that the appropriate discount rate is 5%. Answer: he would pay a present value of $100, or $95.23 (=100/(1+0.05)) What is the income treatment of any payment on this policy? None of the $100,000 is included in income, if paid. (§101(a)(1)). The $4.77 of implicit interest earned is apparently NOT included in income. This savings component of life insurance is effectively excluded (if you buy policies in advance).
Alice pays $100,000 today for an annuity. The annuity promises to pay her $10,000 per year for the next 15 years. Thus, the total amount she will receive back is $150,000. What are the tax consequences?
If she puts in $100,000 and takes out $150,000- conceptually, she has gained $50,000. However, annuities are taxed using the exclusion ratio over the full amount of time rather than taxing the $50,000 all at once. To find exclusion ration, we need the investment amount OVER the expected return: 100,000/150,000=0.67 Thus, .67 fraction of every payment is excluded from income and the remaining fraction is included in income is excluded from income and the remaining fraction is included in income.
A state plans to issue a bond that does not qualify for an exemption under § 103 (muni bond). Prospective buyers will require that bonds pay 10% interest annually. The law is unexpectedly reinterpreted, and the bonds will now be tax-exempt. What should happen to the interest required by the buyers?
It should go down, because the buyers care about after-tax amounts. The state will pay less interest. To know how much less, we will want to know how much the bond holder would have received before the tax exemption. If they got 10% interest (1- 30% tax rate) = 7% interest. After they are taxed on receiving 10% interest, it's really like they received 7%. So, the state, tax-exempt bond only has to pay 7% to be equal to non-tax-exempt bonds.
A minister has a salary of $50,000 + minister can use a house that it would cost $25,000 to rent. How much income does he have?
Just 50,000. · Without §107 (rental value of parsonages- allows ministers of the gospel to exempt from income rental value of home furnished to minister or rental allowance paid to him as part of comp), we would have $75,000 of income here. If the church is providing housing in-kind, §119 may not be enough to exclude the housing from income because, say the house is located 20 miles away, that is NOT for the convenience of the employer or on the business premise. WITH §107, that $25,000 is deductible and the minister only has $50,000 of income.
W is hit by a car, and the accident is witnessed by W's husband H. W gets $100,000 for physical injuries, $50,000 for medical bills and $1mil in punitive damages. How much income does W have?
Just the amount from punitive damages. Physical damages and medical bills are both excludable from income under 104(a)(2). Punitive damages are not excludable, so they would be taxed as income.
A bought medical insurance in advance, and that the insurance will pay $100,000 to compensate A for medical expenses. Is the recovery under the insurance policy includable in income?
No because of §104(a)(3)—"gross income does not include amounts received through accident or health insurance... for personal injuries or sickness"
$3,000 cash gift from mother to adult son. What are the tax consequences?
No deduction for mother (unless 274 applies?). (No gift tax if she has not used up annual exclusion) No income to son. § 102.
George is 40 years old and single and will live exactly to his life expectancy. He pays 145.2x for an annuity. There is no payment unless and until he reaches the age of 60. If he lives until age 60, then there are payments of 10x per year. His life expectancy at 40 is 42.5 years. (See table V of Treas. Reg. § 1.72-9). His life expectancy at age 60 is 24.2 years (Table V). How much income does he have during each year of his life?
No income until age 60 (No income from ages 40-60. Notwithstanding the fact that it is growing, he isn't taxed on any of that because §72). Annuity starting date is the date of the first payment. Annuity starting date is when he turns 60. So the 60 year old life expectancy is what we use (24.2 on table). If he reaches 60, expected return of 10x(24.2)=242x (Section 72(B), find the exclusion ratio to see the fraction that you will NOT be taxed on (payments/expected return)). Exclusion ratio is 145.2x/242x=0.6, and so 4x of income per year once payments start (Annuity payment X exclusion ratio= what is excluded from income).
The taxpayer works as an RA for a dorm, and in return, the educational institution furnishes her lodging. Does she have any income?
No. 119(a) may be enough if a dorm is considered "on the business premises." But if it's off-campus housing owned by the university, 119(d) would still allow an exclusion from income.
A is tortuously physically injured by B. A sues and recovers $100,000. How much of the $100,000 is included in income?
Nothing (104(a)(2)- it's damages for a physical injury).
A has employer-provided health insurance. She buys over-the-counter medicine, completely covered by her policy. How much income does A have?
Some over-the-counter medicine that ISN'T medical care under §105(b), but IS covered by employer-paid health insurance—then you would include that in income (not excludible because its not qualified medical care).
A dies with $14,015,000 in estate and all is left to daughter. Again, unified credit was previously consumed by inter vivos giving. Annual exclusion only applies to inter-vivos gifts so that doesn't apply. How much can she give to her daughter?
Tax owed: $5,606,000 Daughter gets: $8,409,000 E - 0.4E = Net à Net = 0.6 x Estate This is different from the inter vivos result because: the estate tax is tax-inclusive / gift tax is tax-exclusive. In this respect, it is better to give during life because you are not subject to gift tax on the amount of tax paid to cover the gift.
· Sam enters a local spelling bee and wins. He is awarded $1,000 by the spelling bee committee. A few days later, he gets a surprise call from a foundation that has decided to give him an additional $2,000 because they read about his spelling acumen in the local paper. Sam generously donates the new $2,000 to the local public school. How much income does Sam have from his events?
The $1,000 is included in income under §74(a) (§ 61 probably would've been enough. This is an accession to wealth). $2,000 is excluded from income under §74(b) exception—the exclusion can't apply to the spelling be because the recipient cannot be selected with action on his part to enter the contest. It applies to the $2000 because he fulfills all 3 conditions under 74(b), including that he transfers the money to an appropriate charity. Had he given the whole $3,000 to the school: he can exclude $2,000 under §74(b) and he can deduct the $1,000. § 74(b)(1) does not apply to the $1000 money from the contest that Sam entered
Taxpayer trades the use of her apartment given for a work of art. How much income does she realize?
The FMV of the work of art. As a barter situation, the IRS says there is income for the value of rent to the apartment owner and sale treatment for the fair market value of the artwork.
A buys a corporate bond for $800. It promises to pay $50 per year for the next 10 years. In 10 years, it also promises to pay a principal of $1000. The bond was not newly issued when A bought it. It had been issued several years before for $1,000 but had fallen in value. What is A's tax treatment?
The OID rules don't apply! (This is not a discount at "original issue"). But the market discount rules DO apply (§§ 1276, 1278(a)(2)). The $200 of market discount will be included in income as interest when A disposes of bond. Such a disposition includes waiting for the final payment at maturity. Taxpayer can elect constant yield method instead (§ 1276(b)(2)). (can defer taxes on 200 discount)
you buy stock for 100x. It goes up in value to 130x, then you die. Six months later, your estate sells for 135x. What result under § 1014, ignoring any special elections.
The basis becomes 130 at death, and so gain of 5x for estate on property. The basis "steps-up" to its fair market value at the time you died, NOT the original basis. § 1014
You work as an attorney for a university. The university lets you take a class at a discounted price (normal cost is $5000, the cost to you is $2000). You are a receiving a benefit of $3,000. Is that $3,000 income to you?
The difference ($3,000) is NOT taxable income because of §117(d) (gross income shall not include any qualified tuition reduction). (Without §117, the $3,000 difference would be income). If the discount is only available to highly compensated employees, NOW that employee who got the discount has $3,000 of income (§117(d)(3))
A flight attendant and her non-airline-employee spouse are allowed to fly standby for free. Is the benefit income to the flight attendant, or to her spouse?
The flight attendant and spouse are NOT taxed for the tickets because it is a no-additional-cost service fringe benefit § 132(a)(1). The value of the flight is not relevant because any income is excluded (additionally, it would be difficult to value). It is important that this is a standby ticket—not incurring additional cost for the employer; the two seats would otherwise go vacant. The employee cannot take a paying customer's seat or that is forgone revenue for the employer.
The mother sells Greenacre to her daughter. The mother's basis was 30. The value of Greenacre at the time of the sale was 90. The sale price was 65. (Giving a gift to the daughter of 25 because the land was worth 90) How much gain to the mother? What is the daughter's basis?
The mom has 35 of income (excess of 65 over 30; Reg. § 1.1001-1(e)). The daughter's basis is 65 (greater of carryover basis and cost §1.1014-4(b)). Usually, gifts would always use the carryover basis (30), but part-gift/part-sale regulations tell you what to do. Here, 65 (sale price) is greater than 30 (carry-over basis) so 65 is the daughter's basis.
Mother's basis is 60. Value of the property is 90. She sells to her daughter for 35. So the gift to the daughter is 55 (difference between value of the property and sale price). How much gain to the mother? What is the daughter's basis?
The mothers gain is 0 (basis of 60 and sells for 35. If there was NOT a gift involved, she would have a loss. Mother doesn't get to realize the loss because reg §1.1001-1(e)). Sale of proceeds-mothers basis= mothers gain. BUT, can't go negative. Maximum of 0. Daughter's basis is 60 (greater amount between mother's basis (60) and sale price (35))
Mother's basis is 35. Value of the property is 60. She sells to her daughter for 35. So the gift to the daughter is 25 (difference between value of the property and sale price). How much gain to the mother? What is the daughter's basis?
The mothers gain is 0. Sale of proceeds (35) -mothers basis (35) = mothers gain (0). Daughters basis is 35. (greater amount between mother's basis (35) and sale price (35))
Mother's basis is 90. Value of the property is 60. She sells to her daughter for 35. So the gift to the daughter is 25 (difference between value of the property and sale price). How much gain to the mother? What is the daughter's basis?
The mothers gain is 0. Sale of proceeds (35) -mothers basis (90) = mothers gain (min, 0). Gifted in a loss position so the basis is indeterminate until the future when we know if there is a loss or a gain. Part-gift, part-sale of deprecated property: indeterminate amount. Daughter's basis will depend on whether there is a future gain or loss.
Diana has Facebook stock. Basis is $75,000. Value is $100,000. · Diana only wants to give $30,000 gift. She wants to keep the remaining $70,000 of value for herself. She is again considering two options: -Sell the FB stock for $100,000 and gift $30,000 of proceeds to charity. -Sell the stock to charity for $70,000, effectively giving a $30,000 gift.
The part-gift/part-sale. By doing this she hopes to avoid being taxed on at least SOME unrealized gain. If rules for gain on part-gift / part-sale were the same as in Reg. § 1.1001-1(e) (no realized gain here), she would avoid any tax on unrealized gains because she is selling for less than basis. However, there is a different rule for bargain gifts to charity under § 1011(b). Tax treatment under § 1011(b): 1001(b): were going to use a NEW basis for the part-gift/part-sale to charity. New basis= old basis * (payment or sale price/FMV) §75,000*(70,000/100,000)= now basis of 52,500. That means the gain is $17,500 (excess of $70,000 over $52000). NOT $25,000.
Consider two policies Alice is considering: Pay as you go alternative: insurance company offers life insurance coverage for 10 years. Asks for premium payment of $100 per year at the start of each of the 10 years. Pay up front alternative: Insurance company offers the same policy but requires only a single initial payment of $850. Assume Alice will pay for the policy from her savings and assume further that: Her pre-tax return on savings is 5% per year. The 5% annual amount is subject to a 40% tax (if kept in a savings account). Which alternative is better for Alice?:
The pay up front alternative costs her less in after-tax present value terms, because the present value of the pay as you go premiums is $878.61 (cost this to set aside in savings account), which is more than $850. She may find it advantageous to pay insurance company up front. If her savings were not subject to tax, the present value of the pay as you go alternative would instead be $810.78, and so she would prefer to pay as you go. Early investment in insurance contract provides a channel for untaxed savings return, but this is only valuable to the extent that she does not already have another way to achieve the same thing.
Ben borrows $25,000 from Larry. Ben is the borrower. Larry is the lender. Ben promises to pay Larry back the $25,000 in 10 years. In the meantime, Ben will also pay 5% ($1,250) per year in interest. How should this be taxed?
The payments of principal ($25,000) are not deductible (to Larry) & not includible (to Ben) - principal isn't income because of the counter-balancing obligation to return the money. No tax on $25,000 from Larry to Ben. The payments of interest ($1,250) are included in Larry's income. The payments of interest ($1,250) may be deductible for Ben- depends on reason for the loan and various special rules. (If it's in his business, such as he gets a loan for his pizza shop, it is deductible. If it's a mortgage loan, it is probably deductible. If it's a personal loan, probably no.)
Employer pays for A's health insurance. Employer pays the $500 premium. The policy pays $100,000 if he is injured and $0 otherwise. What are the tax consequences? (for the premium for both parties and if the insurance pays out)
The premium is deductible to the employer as part of compensation expenses. The premium payment is excludable to A under §106. 104(a)(3) would not allow A to exclude insurance payout of $100,000 since this is employer-provided health care BUT § 105(b) is going to allow the taxpayer to exclude the $100,000 recovery from the insurance company.
Owner-beneficiary of a life insurance contract dies. Contract makes payment to estate. Is the amount included in the value of the estate?
The proceeds of life insurance can generally be kept out of the insured's estate (and avoid the estate tax) if they go directly to a beneficiary rather than the estate, and if the insured did not retain certain "incidents of ownership." Make heirs the beneficiary and tie your hands (make it so you don't have ability to get it back) or else the amount will go through your estate and be subject to that estate. § 2042
Law firm gives you an office. The office costs the law firm $30,000 to rent a year. How much income do you have?
The rental price of the office is NOT income because it is a working condition fringe § 132(a)(3). · This is because, if you were in solo practice and you made $100,000 but you paid $30,000 for an office, assuming it was a reasonable expense, you would get to deduct that office expense against your income. Congress said, if you have a working condition that WOULD be deductible if you were self-employed, you get to exclude it from income and the firm would get to deduct it.
Taxpayer exchanges legal services for someone to paint her house. How much income does she realize?
The value of the painting. IRS says there IS income for the fair market value of services provided to both. This is a barter situation. Rev Rule 79-24
a bond has a face amount of $500 and pays $40 per year for 10 years, which is a rate of 8%. It is sold at issuance for $400. Is there OID? If so, how much? What are the annual tax consequences?
There IS OID on this bond because it is sold at issuance for a "discount" of its face amount. Stated redemption price at maturity = $500. (ignore interest of 40, per § 1273(a)(2)). Issue price = $400. OID = 100 (500-400) per § 1273(a)(1). You are taxed on your qualified stated interest (40 a year) AND the OID portion. The OID portions add up to the OID amount of 100 over the 10 years.
You purchase a zero-coupon bond from IBM for 400 today. They will pay you 900 at the end of 10 years. What are your tax consequences?
There is 500 of OID on the bond (900-400=500). You will be taxed every year more and more because the implicit balance (of 400) is growing year by year. The debt instrument is generating phantom income.
Ophelia wins a gold medial in the Olympics and receives a cash prize from the U.S. Olympic Committee. How much income does she have?
Zero. The value is NOT included in income because of the exception for prizes by the U.S. Olympic Committee under §74(d). Gifts from other countries, like if Canada's Olympic Committee gave an American Olympian a prize, that would be taxable.
A buys blue acre for $100 and buys yellow acre for $50. A combines Yellowacre and Blueacre, which are adjacent, into Green acre. A sells Green Acre for $135. How much income does A have?
o Adjusted basis: $150 (blueacre + yellowacre) o Amount realized: $135 (gross amount from sale) o Gain: No gain ($135-$150) o Loss is $15
How is a total of 140x taxed differently as an inter vivos gift v. as a bequest of an estate? (ignoring unified credit an annual exclusions)
o Gift: 100 o Tax: 40 o Total: 140 (40% tax exclusive) o Bequest: 84 o Tax: 56 o Total: 140 (40% tax inclusive) You are taxed MORE on estate tax because you are taxed inclusively, using the estate. Gift tax is tax-exclusive. You would rather give during life than during death.
Town wants to attract Giganto-Mart store to its area. Giganto-Mart had planned to issue bonds to raise money to develop property and build a building. Town instead issues bond and uses the revenue to develop property and build a building. Town leases the developed property and building to Giganto-Mart for a series of structured rental payments designed to pay off the town's new debt. Town is acting as a conduit between Giganto-Mart and people leasing the land. What is tax consequences for people who purchase the bonds?
§103(b)(1) is an exception- private equity bond. §141(a)(1), (b)(1) &(e)(B), nd Reg. § 1.103-7(c). Private equity bonds are bonds used for private activity as opposed to public activity. Therefore, the interest on the bond is NOT tax exempt.
A receives $1mil settlement lump sum- A invests it in a bond paying 5% ($50,000) per year for 30 years. A then receives $1mil payment of principal at the end of 30 years. B receives $1mil right to settlement but elects to structure as follows: B receives payment of $50,000 per year for 30 years. B then receives $1mil payment at the end of 30 years. Who is better on an after-tax basis?
§104(a)(2) allows for exclusions of all amounts received in "structured settlements" as well as lump sums. B is better off through a structured settlement. Is not taxed on $50,000 payments as damages as opposed to A's lump sum, which is not taxed when received but any interest from reinvestment would be taxed.
A university rents an apartment complex to its employees for $45,000. The complex is $1,000,000 to buy. The market rental price to other people is $60,000. How much are employees allowed to exclude from income?
§119(d) allows an exemption from employee's income for "qualified campus lodging" furnished by an educational institution. · 119(d)(2)- you only get the exclusion to the extent that the lessor of 5 percent of the appraised rental value of the qualified campus lodging (here, 5% of 1,000,000 is 50,000) or the average of the rentals paid by individuals (here, 60,000) [lessor is 50,000] ...exceeds the rent paid by the employee for the qualified campus lodging. [50,000 exceeds 45,000 by 5,000] Employees. can exclude $5,000 from income.
Department store gives employee a discount on a refrigerator (property). If sold to employee for $800, but it is usually sold for $1000, so employee received $200 of benefit. The refrigerator's usual profit margin is 10%. How much income does the employee have?
§132(c) (Qualified Employee Discount) allows an exclusion from income for the discount to the extent that it doesn't exceed the "at cost" value of the refrigerator [as property]. A 10% profit margin means the employer buys the refrigerator at-cost for $900. Since the discount cuts below cost, the employee can only exclude $100 from income and must include the other $100.
