IT II

XVII. 199A Deductions A. Qualified business income distribution 1. 199A a. Text 1) (a) Allowance Of Deduction — In the case of a taxpayer other than a corporation, there shall be allowed as a deduction for any taxable year an amount equal to the lesser of— a) (1) the combined qualified business income amount of the taxpayer, or b) (2) an amount equal to 20 percent of the excess (if any) of— A) (A)— the taxable income of the taxpayer for the taxable year, over B) (B)— the net capital gain (as defined in section 1(h)) of the taxpayer for such taxable year. 2) (b)(1) In General — The term "combined qualified business income amount" means, with respect to any taxable year, an amount equal to— a) (A)— the sum of the amounts determined under paragraph (2) for each qualified trade or business carried on by the taxpayer, plus b) (B)— 20 percent of the aggregate amount of the qualified REIT dividends and qualified publicly traded partnership income of the taxpayer for the taxable year. 3) (f)(1)(A) In General — In the case of a partnership or S corporation— a) (i) this section shall be applied at the partner or shareholder level, b) (ii) each partner or shareholder shall take into account such person's allocable share of each qualified item of income, gain, deduction, and loss, and c) (iii) each partner or shareholder shall be treated for purposes of subsection (b) as having W-2 wages and unadjusted basis immediately after acquisition of qualified property for the taxable year in an amount equal to such person's allocable share of the W-2 wages and the unadjusted basis immediately after acquisition of qualified property of the partnership or S corporation for the taxable year.

1) (c)(2) Carryover Of Losses — If the net amount of qualified income, gain, deduction, and loss with respect to qualified trades or businesses of the taxpayer for any taxable year is less than zero, such amount shall be treated as a loss from a qualified trade or business in the succeeding taxable year. 2) (b)(2) Determination Of Deductible Amount For Each Trade Or Business — The amount determined under this paragraph with respect to any qualified trade or business is the lesser of a) (A)20 percent of the taxpayer's qualified business income with respect to the qualified trade or business, or b) (B) the greater of— A) (i) 50 percent of the W-2 wages with respect to the qualified trade or business, or B) (ii) the sum of 25 percent of the W-2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property. 3) (c)(1) In General — The term "qualified business income" means, for any taxable year, the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Such term shall not include any qualified REIT dividends or qualified publicly traded partnership income. 4) (c)(3)(A) In General — The term "qualified items of income, gain, deduction, and loss" means items of income, gain, deduction, and loss to the extent such items are— a) (i) effectively connected with the conduct of a trade or business within the United States . . . . determined by substituting "qualified trade or business (within the meaning of section 199A)" for "nonresident alien individual or a foreign corporation" or for "a foreign corporation" each place it appears), and b) (ii) included or allowed in determining taxable income for the taxable year. 5) (b)(4)(A) In General — The term "W-2 wages" means, with respect to any person for any taxable year of such person, the amounts described in paragraphs (3) and (8) of section 6051(a) paid by such person with respect to employment of employees by such person during the calendar year ending during such taxable year. 6) (b)(6)(A) In General — The term "qualified property" means, with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167— a) (i) which is held by, and available for use in, the qualified trade or business at the close of the taxable year, b) (ii) which is used at any point during the taxable year in the production of qualified business income, and c) (iii)the depreciable period for which has not ended before the close of the taxable year.

1. 6662 a. Text 1) (a) Imposition Of Penalty — If this section applies to any portion of an underpayment of tax required to be shown on a return, there shall be added to the tax an amount equal to 20 percent of the portion of the underpayment to which this section applies. 2) (b) Portion Of Underpayment To Which Section Applies — This section shall apply to the portion of any underpayment which is attributable to 1 or more of the following: a) (1)— Negligence or disregard of rules or regulations. b) (2)— Any substantial understatement of income tax. c) (3)— Any substantial valuation misstatement under chapter 1. d) (4)— Any substantial overstatement of pension liabilities. e) (5)— Any substantial estate or gift tax valuation understatement. f) (6)— Any disallowance of claimed tax benefits by reason of a transaction lacking economic substance (within the meaning of section 7701(o)) or failing to meet the requirements of any similar rule of law. g) (7)— Any undisclosed foreign financial asset understatement. h) (8)— Any inconsistent estate basis. i) (9)— Any overstatement of the deduction provided in section 170(p). j) (10)— Any disallowance of a deduction by reason of section 170(h)(7). b. Notes 1) Let's say you did file, and did pay, but it turns out there is an underpayment after the audit. Now comes the "accuracy related" penalties. Consists of a 20% amount on the paid tax for a list of accuracy related issues 2) B: the list of issues. 3) If the accuracy mistakes makes the amount of gi way, way off, the penalty percentage kicks up to 40% 2. 6663 a. Text 1) (a) Imposition Of Penalty — If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud. b. Notes 1) 75% civil fraud penalty. This is insanely high.

1. 6664 a. Text 1) (c)(1) In General — No penalty shall be imposed under section 6662 or 6663 with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion. b. Notes 1) C1: if gov seeks to impose accuracy related and fraud penalties, if T can show that they had reasonable cause for taking the positions in their tax return that they took, those penalties can be abated. Have to show there was reasonable cause, T acted in good faith. 2) Reasonable cause is a facts and circumstances determination. But 1.6664-4 gives two common exs: a) Text A) Circumstances that may indicate reasonable cause and good faith include: I) An honest misunderstanding of fact or law that is reasonable in light of the experience, knowledge, and education of the taxpayer; and II) Reliance on an information return, professional advice or other facts, if, under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith. B) Ex: A engages B, a professional tax advisor, to give A advice concerning the deductibility of certain state and local taxes. A provides B with full details concerning the taxes at issue. B advises A that the taxes are fully deductible. A, in preparing his own tax return, claims a deduction for the taxes. Absent other facts, and assuming the facts and circumstances surrounding B's advice and A's reliance on such advice satisfy the requirements of paragraph (c) of this section, A is considered to have demonstrated good faith by seeking the advice of a professional tax advisor, and to have shown reasonable cause for any underpayment attributable to the deduction claimed for the taxes. b) Notes A) T relied on prof advice; honest misunderstanding of fact or law. A will have to show that the prof's advice was reasonable and that he relied on it. Problem will be getting the prof to admit that they gave the advice that was wrong

1. 15A.453-1 a. Text 1) (d)(2)(i) In General. — A taxpayer who elects not to report an installment sale on the installment method must recognize gain on the sale in accordance with the taxpayer's method of accounting. a) Receipt of an installment obligation shall be treated as a receipt of property, in an amount equal to the fair market value of the installment obligation, whether or not such obligation is the equivalent of cash. b) An installment obligation is considered to be property and is subject to valuation, as provided in paragraph (d)(2)(ii) and (iii) of this section, without regard to whether the obligation is embodied in a note, an executory contract, or any other instrument, or is an oral promise enforceable under local law.

1) (d)(2)(ii) Fixed Amount Obligations. a) A taxpayer using the cash receipts and disbursements methods of accounting shall treat as an amount realized in the year of sale the fair market value of the installment obligation. In no event will the fair market value of the installment obligation be considered to be less than the fair market value of the property sold (minus any other consideration received by the taxpayer on the sale). b) A taxpayer using the accrual method of accounting shall treat as an amount realized in the year of sale the total amount payable under the installment obligation. For this purpose, neither interest (whether stated or unstated) nor original issue discount is considered to be part of the amount payable. 2) (d)(2)(iii) Contingent Payment Obligations. — Any installment obligation which is not a fixed amount obligation (as defined in paragraph (d)(2)(ii) of this section) is a contingent payment obligation. If an installment obligation contains both a fixed amount component and a contingent payment component, the fixed amount component shall be treated under the rules of paragraph (d)(2)(ii) of this section and the contingent amount component shall be treated under the rules of this (iii). The fair market value of a contingent payment obligation shall be determined by disregarding any restrictions on transfer imposed by agreement or under local law. 3) The fair market value of a contingent payment obligation may be ascertained from, and in no event shall be considered to be less than, the fair market value of the property sold (less the amount of any other consideration received in the sale). a) Only in those rare and extraordinary cases involving sales for a contingent payment obligation in which the fair market value of the obligation (determinable under the preceding sentences) cannot reasonably be ascertained will the taxpayer be entitled to assert that the transaction is "open." 4) A taxpayer using the cash receipts and disbursements method of accounting must report as an amount realized in the year of sale the fair market value of the contingent payment obligation. A taxpayer using the accrual method of accounting must report an amount realized in the year of sale determined in accordance with that method of accounting, but in no event less than the fair market value of the contingent payment obligation.

1. Section 1253 - what congress has decided to do about certain kinds of property in certain transactions a. Text 1) (c) Treatment Of Contingent Payments By Transferor — Amounts received or accrued on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name which are contingent on the productivity, use, or disposition of the franchise, trademark, or trade name transferred shall be treated as amounts received or accrued from the sale or other disposition of property which is not a capital asset. b. Notes 1) This applies to amounts received in transfers or sales of a franchise, trademark, or trade name. 2) Whether or not they're a capital asset depending upon whether or not it's contingent on the productivity, use or disposition of the franchise or trademark that's transferred. 3) Says that: McD's your not getting capital gains treatment every time you license to a franchisee - that's ordinary income, bc the compensation of McD's is contingent based upon sales/productivity. 4) They COULD be capital assets, but congress has just decided no 2. Section 1239 a. Text 1) (a) Treatment Of Gain As Ordinary Income — In the case of a sale or exchange of property, directly or indirectly, between related persons, any gain recognized to the transferor shall be treated as ordinary income if such property is, in the hands of the transferee, of a character which is subject to the allowance for depreciation provided in section 167. b. Notes 1) If there's a sale between related parties, the gain on a sale will be treated as ordinary income, even if it is otherwise a capital asset. 2) A sale between related parties is inherently suspicious. 3) This is an anti-abuse provision; otherwise, Ts would be incentivized to sell at a price that's way above what the depreciable property might otherwise be worth. 4) Applies to a lot of RE transactions.

1. "Sale or exchange" Character of gain from dealing in property a. There cannot be a capital asset without a sale or exchange. b. Glenshaw glass: income = undeniable accession to wealth, clearly realized, over which T has complete dominion. 1) Here we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion . . . . c. Section 1001 1) Text a) (c) Recognition Of Gain Or Loss — Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized 2) Notes a) Goes to what is income: there must be a sale or exchange for there to be a recognition of gain. d. Regulation 1.1001-1 1) Text a) (a) General Rule. — Except as otherwise provided in Subtitle A of the Code, the gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or as loss sustained. 2) Notes a) Sale or exchange = you've converted property into cash, or you've exchanged property for other property that is not like kind b) This is what IRS looks at when determining if there's been a sale or exchange.

1. 83(d)(1) a. Text b. Notes 1) Any non-lapse restriction/restriction that will never lapse will be taken account will be taken into account for the fmv. 2) Bop shifts to the gov to show it's not fmv in the circumstances that are referenced here. 2. 1.83-3 a. Text 1) (e) Property. — For purposes of section 83 and the regulations thereunder, the term "property" includes real and personal property other than either money or an unfunded and unsecured promise to pay money or property in the future. The term also includes a beneficial interest in assets (including money) which are transferred or set aside from the claims of creditors of the transferor, for example, in a trust or escrow account. 2) (f) Property Transferred In Connection With The Performance Of Services. — Property transferred to an employee or an independent contractor (or beneficiary thereof) in recognition of the performance of, or the refraining from performance of, services is considered transferred in connection with the performance of services within the meaning of section 83. • The transfer of property is subject to section 83 whether such transfer is in respect of past, present, or future services. 3) (g) Amount Paid. — For purposes of section 83 and the regulations thereunder, the term "amount paid" refers to the value of any money or property paid for the transfer of property to which section 83 applies, and does not refer to any amount paid for the right to use such property or to receive the income therefrom. a) Such value does not include any stated or unstated interest payments. For rules regarding the calculation of the amount of unstated interest payments, see § 1.483- 1(c). b) When section 83 applies to the transfer of property pursuant to the exercise of an option, the term "amount paid" refers to any amount paid for the grant of the option plus any amount paid as the exercise price of the option. 4) (h) Nonlapse Restriction. — For purposes of section 83 and the regulations thereunder, a restriction which by its terms will never lapse (also referred to as a "nonlapse restriction") is a permanent limitation on the transferability of property-- • Which will require the transferee of the property to sell, or offer to sell, such property at a price determined under a formula, and • Which will continue to apply to and be enforced against the transferee or any subsequent holder (other than the transferor). A limitation subjecting the property to a permanent right of first refusal in a particular person at a price determined under a formula is a permanent nonlapse restriction. 5) (i) Lapse Restriction. — For purposes of section 83 and the regulations thereunder, the term "lapse restriction" means a restriction other than a nonlapse restriction as defined in paragraph (h) of this section, and includes (but is not limited to) a restriction that carries a substantial risk of forfeiture. b. Notes 1) If it's not a non-lapse restriction, it'll be a lapse restriction. Ex: vesting restrictions that pass over time. pass once the time period occurs. 2) G: 83 doesn't operate in a vacuum. OID rules, etc all applies at the same time for purposes of determining how much of the amount paid is interest or principle.

1. 1.83-1 a. Text 1) (a)(1) General Rule. — Section 83 provides rules for the taxation of property transferred to an employee or independent contractor (or beneficiary thereof) in connection with the performance of services by such employee or independent contractor. 2) (b)(1)— If substantially nonvested property (that has been transferred in connection with the performance of services) is subsequently sold or otherwise disposed of to a third party in an arm's length transaction while still substantially nonvested, the person who performed such services shall realize compensation in an amount equal to the excess of a) The amount realized on such sale or other disposition, over b) The amount (if any) paid for such property. Such amount of compensation is includible in his gross income in accordance with his method of accounting. . . . In addition, section 83(a) and paragraph (a) of this section shall thereafter cease to apply with respect to such property. 3) (c) Dispositions Of Nonvested Property Not At Arm's Length. — If substantially nonvested property (that has been transferred in connection with the performance of services) is disposed of in a transaction which is not at arm's length and the property remains substantially nonvested, the person who performed such services realizes compensation equal in amount to the sum of any money and the fair market value of any substantially vested property received in such disposition. Such amount of compensation is includible in his gross income in accordance with his method of accounting. a) In addition, section 83 and these regulations shall continue to apply with respect to such property, except that any amount previously includible in gross income under this paragraph (c) shall thereafter be treated as an amount paid for such property. b. Notes 1) C: is different when property is disposed of to a related party, not an arms length transaction. 2) Can't purge 83 by making gift to your daughter. Can purge it by making sale to unrelated party at arms length

1. Point for 83: a profits interest can be granted; gov says it won't treat that as a taxable event, so it doesn't implicate section 83. 2. 1.409A-1: 409A deals with deferred compensation arrangements. Question: is property that's transferred in exchange for services and subject to all sorts of limitations a form of deferred compensation that's subject to 409A. this rule provides that no, it's not. there is no deferral compensation merely bc the value of property isn't includable in income by reason of being substantially nonvested via section 83. a. Text: (b)(6)(i) In General. — If a service provider receives property from, or pursuant to, a plan maintained by a service recipient, there is no deferral of compensation merely because the value of the property is not includible in income by reason of the property being substantially nonvested (as defined in Section 1.83-3(b)), or is includible in income solely due to a valid election under section 83(b). 3. IRS Notice 2005-1: what does 409A have to say about capital interest, profits interest. 409A will NOT apply to a profits interest that is properly constructed. Just subject to the partnership rules. a. Text: Q-7 How Does section 409A Apply to Arrangements Between a Partnership and a Partner of the Partnership? A-7 Specifically, until additional guidance is issued, for purposes of section 409A, taxpayers may treat an issuance of a profits interest in connection with the performance of services that is properly treated under applicable guidance as not resulting in inclusion of income by the service provider at the time of issuance, as also not resulting in the deferral of compensation. Similarly, until additional guidance is issued, for purposes of section 409A, taxpayers may treat an issuance of a capital interest in connection with the performance of services in the same manner as an issuance of stock.

1. 1.83-3(a)(1): transfer of property occurs when somebody acquires a beneficial ownership interest in the property. a. Text 1) (a)(1) In General. — For purposes of section 83 and the regulations thereunder, a transfer of property occurs when a person acquires a beneficial ownership interest in such property (disregarding any lapse restriction, as defined in § 1.83-3(i)). 2) (a)(2) Option. — a) The grant of an option to purchase certain property does not constitute a transfer of such property. However, see § 1.83-7 for the extent to which the grant of the option itself is subject to section 83. b) In addition, if the amount paid for the transfer of property is an indebtedness secured by the transferred property, on which there is no personal liability to pay all or a substantial part of such indebtedness, such transaction may be in substance the same as the grant of an option. 3) (a)(3) Requirement That Property Be Returned. — Similarly, no transfer may have occurred where property is transferred under conditions that require its return upon the happening of an event that is certain to occur, such as the termination of employment. In such a case, whether there is, in fact, a transfer depends upon all the facts and circumstances. Factors which indicate that no transfer has occurred are described in paragraph (a)(4), (5), and (6) of this section. b. notes 1) A2: options are carved out to a large degree from section 83. Grant of an option doesn't constitute a transfer of the underlying property. Not a section 83 transfer, which means that that may be subject to 409A and constitute a deferred compensation arrangement. 2) F: the services that we are concerned with are ALL services - both past, present, and future. Doesn't matter the property be issued for future services vs past or present. Covenants not to compete could fall into this category. 3) Fmv of profits interest is zero.

1. 1.83-2 a. Text 1) (a) In General. — The fact that the transferee has paid full value for the property transferred, realizing no bargain element in the transaction, does not preclude the use of the election as provided for in this section. a) In computing the gain or loss from the subsequent sale or exchange of such property, its basis shall be the amount paid for the property increased by the amount included in gross income under section 83(b). If property for which a section 83(b) election is in effect is forfeited while substantially nonvested, such forfeiture shall be treated as a sale or exchange upon which there is realized a loss equal to the excess (if any) of—The amount paid (if any) for such property, over, • The amount realized (if any) upon such forfeiture. b) If such property is a capital asset in the hands of the taxpayer, such loss shall be a capital loss. A sale or other disposition of the property that is in substance a forfeiture, or is made in contemplation of a forfeiture, shall be treated as a forfeiture under the two immediately preceding sentences. 2) If this election is made, the substantial vesting rules of section 83(a) and the regulations thereunder do not apply with respect to such property, and except as otherwise provided in section 83(d)(2) and the regulations thereunder (relating to the cancellation of a nonlapse restriction), any subsequent appreciation in the value of the property is not taxable as compensation to the person who performed the services. 3) Thus, property with respect to which this election is made shall be includible in gross income as of the time of transfer, even though such property is substantially nonvested (as defined in § 1.83-3(b)) at the time of transfer, and no compensation will be includible in gross income when such property becomes substantially vested (as defined in § 1.83-3(b)). 4) In computing the gain or loss from the subsequent sale or exchange of such property, its basis shall be the amount paid for the property increased by the amount included in gross income under section 83(b). If property for which a section 83(b) election is in effect is forfeited while substantially nonvested, such forfeiture shall be treated as a sale or exchange upon which there is realized a loss equal to the excess (if any) of— a) The amount paid (if any) for such property, over, • The amount realized (if any) upon such forfeiture. b. Notes 1) This is a malpractice concern. Sometimes property are transferred to a service provider, and the provider actually pays fmv for the property. There's no bargain element. But there are vesting/other restrictions. So even though there's no bargain, still subject to 83, will be income when vesting restrictions lapse. If therre's no bargain, be SURE to file the 83b election. 2) Note: forfeiture is a sale or exchange. Will be capital gain/loss, but only to the extent you actually paid for the property. 3) Downside of b: if the property depreciates in value, there's no way to recoup the loss.

1. 1.83-4 - Collateral effects. a. (b)(1) Except as provided in paragraph (b)(2) of this section, if property to which section 83 and the regulations thereunder apply is acquired by any person (including a person who acquires such property in a subsequent transfer which is not at arm's length), while such property is still substantially nonvested, such person's basis for the property shall reflect any amount paid for such property and any amount includible in the gross income of the person who performed the services (including any amount so includible as a result of a disposition by the person who acquired such property.) Such basis shall also reflect any adjustments to basis provided under sections 1015, 1016, and 1022. 2. 83f a. Text 1) (f) Holding Period — In determining the period for which the taxpayer has held property to which subsection (a) applies, there shall be included only the period beginning at the first time his rights in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier b. Notes 1) Can have a blended holding period if property doesn't vest all at once, but over time. 3. 83h a. Text 1) (h) Deduction By Employer — In the case of a transfer of property to which this section applies or a cancellation of a restriction described in subsection (d), there shall be allowed as a deduction under section 162, to the person for whom were performed the services in connection with which such property was transferred, an amount equal to the amount included under subsection (a), (b), or (d)(2) in the gross income of the person who performed such services. Such deduction shall be allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed such services. b. Notes 1) Employer is entitled to a compensation deduction, but forced match as to amount and time period as to when the deduction can be taken. 2) May have to recognize gain or loss if uses stock other than its own

1. 83 a. Text 1) (f) Holding Period — In determining the period for which the taxpayer has held property to which subsection (a) applies, there shall be included only the period beginning at the first time his rights in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier. 2) (h) Deduction By Employer — In the case of a transfer of property to which this section applies or a cancellation of a restriction described in subsection (d), there shall be allowed as a deduction under section 162, to the person for whom were performed the services in connection with which such property was transferred, an amount equal to the amount included under subsection (a), (b), or (d)(2) in the gross income of the person who performed such services. Such deduction shall be allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed such services. b. Notes 1) H: what does the employer get out of this other than employee loyalty? Employer allowed a deduction for the amount of the property. But notice this is a forced matching rule for the amounts. Also deductible only in the year the gross income was includable by the service provider. Must also therefore match timing

1. 1.83-6 a. Text 1) (b) Recognition Of Gain Or Loss. — Except as provided in section 1032, at the time of a transfer of property in connection with the performance of services the transferor recognizes gain to the extent that the transferor receives an amount that exceeds the transferor's basis in the property. In addition, at the time a deduction is allowed under section 83(h) and paragraph (a) of this section, gain or loss is recognized to the extent of the difference between (1) the sum of the amount paid plus the amount allowed as a deduction under section 83(h), and (2) the sum of the taxpayer's basis in the property plus any amount recognized pursuant to the previous sentence. 2) (c) Forfeitures. — If, under section 83(h) and paragraph (a) of this section, a deduction, an increase in basis, or a reduction of gross income was allowable (disregarding the reasonableness of the amount of compensation) in respect of a transfer of property and such property is subsequently forfeited, the amount of such deduction, increase in basis or reduction of gross income shall be includible in the gross income of the person to whom it was allowable for the taxable year of forfeiture. The basis of such property in the hands of the person to whom it is forfeited shall include any such amount includible in the gross income of such person, as well as any amount such person pays upon forfeiture. b. Notes 1) Employer that took deduction in earlier year has to recover that, icnldue that deduction in income when there's been a forfeiture.

1. 1.83-6 a. Text 1) (b) Recognition Of Gain Or Loss. — Except as provided in section 1032, at the time of a transfer of property in connection with the performance of services the transferor recognizes gain to the extent that the transferor receives an amount that exceeds the transferor's basis in the property. In addition, at the time a deduction is allowed under section 83(h) and paragraph (a) of this section, gain or loss is recognized to the extent of the difference between (1) the sum of the amount paid plus the amount allowed as a deduction under section 83(h), and (2) the sum of the taxpayer's basis in the property plus any amount recognized pursuant to the previous sentence. 2) (c) Forfeitures. — If, under section 83(h) and paragraph (a) of this section, a deduction, an increase in basis, or a reduction of gross income was allowable (disregarding the reasonableness of the amount of compensation) in respect of a transfer of property and such property is subsequently forfeited, the amount of such deduction, increase in basis or reduction of gross income shall be includible in the gross income of the person to whom it was allowable for the taxable year of forfeiture. The basis of such property in the hands of the person to whom it is forfeited shall include any such amount includible in the gross income of such person, as well as any amount such person pays upon forfeiture. b. Notes 1) Deduction for equity compensation that is later forfeited; co will have to recover the amount of the deduction as income. This is general tax law principles.

1. 1.83-7 a. Text 1) (a) In General. — If there is granted to an employee or independent contractor (or beneficiary thereof) in connection with the performance of services, an option to which section 421 (relating generally to certain qualified and other options) does not apply, section 83(a) shall apply to such grant if the option has a readily ascertainable fair market value (determined in accordance with paragraph (b) of this section) at the time the option is granted. The person who performed such services realizes compensation upon such grant at the time and in the amount determined under section 83(a). 2) (b)(1) Actively Traded On An Established Market. — Options have a value at the time they are granted, but that value is ordinarily not readily ascertainable unless the option is actively traded on an established market. If an option is actively traded on an established market, the fair market value of such option is readily ascertainable for purposes of this section by applying the rules of valuation set forth in § 20.2031-2. 3) (b)(2) Not Actively Traded On An Established Market. — When an option is not actively traded on an established market, it does not have a readily ascertainable fair market value unless its fair market value can otherwise be measured with reasonable accuracy. 4) (a) In General. — If section 83(a) does not apply to the grant of such an option because the option does not have a readily ascertainable fair market value at the time of grant, sections 83(a) and 83(b) shall apply at the time the option is exercised or otherwise disposed of, even though the fair market value of such option may have become readily ascertainable before such time. a) If the option is exercised, sections 83(a) and 83(b) apply to the transfer of property pursuant to such exercise, and the employee or independent contractor realizes compensation upon such transfer at the time and in the amount determined under section 83(a) or 83(b). b) If the option is sold or otherwise disposed of in an arm's length transaction, sections 83(a) and 83(b) apply to the transfer of money or other property received in the same manner as sections 83(a) and 83(b) would have applied to the transfer of property pursuant to an exercise of the option. The preceding sentence does not apply to a sale or other disposition of the option to a person related to the service provider that occurs on or after July 2, 2003. b. Notes 1) Options themselves will be 83 property only if there is a reasonably ascertainable value that is reasonably ascertainable. Reasonable ascertainable if it's traded on an est market. 2) If not ascertainable, there's income at the time the option is exercised or otherwise disposed of.

1. 1.121-4 a. Text 1) (d) Involuntary conversions - (1) In general. For purposes of section 121 [principal residence], the destruction, theft, seizure, requisition, or condemnation of property is treated as a sale of the property. a) (2) Application of section 1033. In applying section 1033 (relating to involuntary conversions), the amount realized from the sale or exchange of property used as the taxpayer's principal residence is treated as being the amount determined without regard to section 121, reduced by the amount of gain excluded from the taxpayer's gross income under section 121. b) (3) Property acquired after involuntary conversion. If the basis of the property acquired as a result of an involuntary conversion is determined (in whole or in part) under section 1033(b) (relating to the basis of property acquired through an involuntary conversion), then for purposes of satisfying the requirements of section 121, the taxpayer will be treated as owning and using the acquired property as the taxpayer's principal residence during any period of time that the taxpayer owned and used the converted property as the taxpayer's principal residence. b. Notes 1) D: 121 in effect will be applied first, and then 1033 will be applied second. 2) D3: remember 121 has both an ownership and use requirement. All those reqs will be met for the destroyed property even though they might not have been true - deemed ownership, deemed use.

1. 123 a. Text 1) (a) General Rule — In the case of an individual whose principal residence is damaged or destroyed by fire, storm, or other casualty, or who is denied access to his principal residence by governmental authorities because of the occurrence or threat of occurrence of such a casualty, gross income does not include amounts received by such individual under an insurance contract which are paid to compensate or reimburse such individual for living expenses incurred for himself and members of his household resulting from the loss of use or occupancy of such residence. 2) (b) Limitation — Subsection (a) shall apply to amounts received by the taxpayer for living expenses incurred during any period only to the extent the amounts received do not exceed the amount by which— a) the actual living expenses incurred during such period for himself and members of his household resulting from the loss of use or occupancy of their residence, exceed b) the normal living expenses which would have been incurred for himself and members of his household during such period. b. Notes 1) B: reimbursements for living expenses will be reimbursed only to the extent that they exceed your normal living expenses. Remember: no deduction for personal living expenses. So the income exclusion applies only to the amount in excess of normal living expenses.

A. Related parties 1. 1033 a. Text 1) (i)(1) In General — If the property which is involuntarily converted is held by a taxpayer to which this subsection applies, subsection (a) shall not apply if the replacement property or stock is acquired from a related person. The preceding sentence shall not apply to the extent that the related person acquired the replacement property or stock from an unrelated person during the period applicable under subsection (a)(2)(B). 2) (i)(2) Taxpayers To Which Subsection Applies — This subsection shall apply to— a) (A) a C corporation, b) (B) a partnership in which 1 or more C corporations own, directly or indirectly (determined in accordance with section 707(b)(3)), more than 50 percent of the capital interest, or profits interest, in such partnership at the time of the involuntary conversion, and c) (C) any other taxpayer if, with respect to property which is involuntarily converted during the taxable year, the aggregate of the amount of realized gain on such property on which there is realized gain exceeds $100,000. 3) (i)(3) Related Person — For purposes of this subsection, a person is related to another person if the person bears a relationship to the other person described in section 267(b) or 707(b)(1). b. Notes a. I: you can't just go out and buy replacement property from relatives/related persons. 1033 won't apply if you do this. b. Special rules for casualty losses c. What is your insurance money is less than the basis you have in your lost property? Loss rules are subject to 165. 1033 only applies to gains.

1. 165 a. Text 1) (h)(2)(A) In General — If the personal casualty losses for any taxable year exceed the personal casualty gains for such taxable year, such losses shall be allowed for the taxable year only to the extent of the sum of— a) the amount of the personal casualty gains for the taxable year, plus b) so much of such excess as exceeds 10 percent of the adjusted gross income of the individual. 2) (h)(3) Definitions Of Personal Casualty Gain And Personal Casualty Loss — For purposes of this subsection— a) Personal Casualty Gain — The term "personal casualty gain" means the recognized gain from any involuntary conversion of property which is described in subsection (c)(3) arising from fire, storm, shipwreck, or other casualty, or from theft. b) Personal Casualty Loss — The term "personal casualty loss" means any loss described in subsection (c)(3). For purposes of paragraph (2), the amount of any personal casualty loss shall be determined after the application of paragraph (1). 3) (h)(5)(A) In General — In the case of an individual, except as provided in subparagraph (B), any personal casualty loss which (but for this paragraph) would be deductible in a taxable year beginning after December 31, 2017, and before January 1, 2026, shall be allowed as a deduction under subsection (a) only to the extent it is attributable to a Federally declared disaster (as defined in subsection (i)(5)). b. Notes 1) H2A: losses only allowed to the extent of: amount of gains plus so much of such excess as exceeds 10% of the agi of the individual. 2) H3: def of personal casualty gain and personal casualty loss. 3) H5A: losses under 165 only allowed to the extent they're due to a fed declared disaster.

I. Concerns regarding the actual filing of taxes A. IRS, update on reducing the fed tax gap and improving voluntary compliance 1. Gov wants to ensure we have motivation to file our taxes timely. 2. Chart, table 17: in terms of actual examinations, you can see what the audit rates actually are. they're v small. The more money you make, also, the more likely you'll get audited. 3. According to the IRS, the primary obligations on tax payers are: a. (1) to file timely returns; b. (2) to make accurate reports on those returns; and c. (3) to pay the required tax voluntarily and timely. d. Noncompliance results when taxpayers do not meet these obligations. B. Self-assessment. How taxes are collected begins with self assessment 1. Section 6012 a. Text 1) (a) General Rule — Returns with respect to income taxes under subtitle A shall be made by the following: a) (1)(A) Every individual having for the taxable year gross income which equals or exceeds the exemption amount [plus the basic standard deduction], except that a return shall not be required of an individual— b) (iv) who is entitled to make a joint return and whose gross income, when combined with the gross income of his spouse, is, for the taxable year, less than the sum of twice the exemption amount plus the basic standard deduction applicable to a joint return, but only if such individual and his spouse, at the close of the taxable year, had the same household as their home [and file jointly]. b. Notes 1) This is the rule that applies to individuals. Individuals are req to file and individual tax return that income or exceeds the deduction amount, plus the standard deduction (since 2018, there are no personal exemption amounts, all we have is the basic standard deduction).

1. 6072 a. Text 1) (a)GeneralRule In the case of returns under section 6012, 6013, or 6017 (relating to income tax under subtitle A), returns made on the basis of the calendar year shall be filed on or before the 15th day of April following the close of the calendar year and returns made on the basis of a fiscal year shall be filed on or before the 15th day of the fourth month following the close of the fiscal year, except as otherwise provided in the following subsections of this section. b. Notes 1) Time limit if we file on a yearly basis (which we all do as individuals). 2. 6201 a. Text 1) (a)(1) Taxes Shown On Return — The Secretary shall assess all taxes determined by the taxpayer or by the Secretary as to which returns or lists (or payments under section 6225(c)(2)(B)(i)) are made under this title b. Notes 1) Intros the concept of assessment. We don't assess ourselves, we report to the gov. and the IRS assess the taxes determined by T. 2) IRS takes our tax return. The amount of tax we claim that we owe is assessed by the gov. once it's assessed, it is available for the gov to collect. Once they assess, the collection apparatus can start grinding. Beginning assessment: the amount of tax that we tell the gov we owe. 3) Interest is imposed on the assessed tax from the date of the return to the day it's actually paid. This is called the underpayment rate. 4) Timely payment is the only way to keep interest from running

1. 6503 a. (a)(1) General Rule — The running of the period of limitations provided in section 6501 or 6502.1 on the making of assessments or the collection by levy or a proceeding in court, in respect of any deficiency as defined in section 6211 (relating to income, estate, gift and certain excise taxes), shall (after the mailing of a notice under section 6212(a)) be suspended for the period during which the Secretary is prohibited from making the assessment or from collecting by levy or a proceeding in court (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final), and for 60 days thereafter. 2. 6501 a. Text 1) (c)(4)(A) In General — Where, before the expiration of the time prescribed for the assessment of any tax imposed by this title, except the estate tax provided in chapter 11, both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon. b. Notes 1) C4A: the time for assessing can agree together to a diff period. Aka, T and USA can agree. Just needs to be in writing. Typically T will agree to extend the period of assessment.

1. 6502 a. Text 1) (a) Length Of Period — Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun— a) (1) within 10 years after the assessment of the tax, or b) (a)(2)— if— A) (A) there is an installment agreement between the taxpayer and the Secretary, prior to the date which is 90 days after the expiration of any period for collection agreed upon in writing by the Secretary and the taxpayer at the time the installment agreement was entered into; or B) (B) there is a release of levy under section 6343 after such 10-year period, prior to the expiration of any period for collection agreed upon in writing by the Secretary and the taxpayer before such release. c) If a timely proceeding in court for the collection of a tax is commenced, the period during which such tax may be collected by levy shall be extended and shall not expire until the liability for the tax (or a judgment against the taxpayer arising from such liability) is satisfied or becomes unenforceable. b. Notes 1) Now dealing with collection after assessment. SOL for collection after assessment is ten years. Exceptions for agreements between T and USA (a2). 2. 6601 a. Text 1) (a) General Rule — If any amount of tax imposed by this title (whether required to be shown on a return, or to be paid by stamp or by some other method) is not paid on or before the last date prescribed for payment, interest on such amount at the underpayment rate established under section 6621 shall be paid for the period from such last date to the date paid. 2) (g) Limitation On Assessment And Collection — Interest prescribed under this section on any tax may be assessed and collected at any time during the period within which the tax to which such interest relates may be collected. 3. Notes a. G: special rule. The treatment of interest and penalties as additions to tax rather than as separate claims for amounts that are otherwise due. They are assessed and collected like tax/in the same manner as the underlying tax. But it doesn't need separate notice. It just otherwise needs to be subject to the same SOL, too. b. C1, c2, c3: if a return is never filed, or fraudulent return is filed, gov can assess tax return at any time (CIVIL)

1. 6213 a. Text 1) (a) Time for filing petition and restriction on assessment - within 90 days, or 150 days if the notice is addressed to a person outside the US, after the notice of deficiency authorized ins ection 6212 is mailed (not counting Saturday, Sunday, or a legal holiday in the District of Columbia as the last day), the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency. 2) (c) Failure To File Petition — If the taxpayer does not file a petition with the Tax Court within the time prescribed in subsection (a), the deficiency, notice of which has been mailed to the taxpayer, shall be assessed, and shall be paid upon notice and demand from the Secretary. 3) (b)(4) Assessment Of Amount Paid — Any amount paid as a tax or in respect of a tax may be assessed upon the receipt of such payment notwithstanding the provisions of subsection (a). In any case where such amount is paid after the mailing of a notice of deficiency under section 6212, such payment shall not deprive the Tax Court of jurisdiction over such deficiency determined under section 6211 without regard to such assessment. b. Notes 1) During the pendency of the notice of deficiency/that 90 day period, gov isn't going to try and collect on the asserted deficiency until notice has been mailed, period has expired, or until decision of tax court is final. 2) All sorts of info must be included in notice of deficiency, including the date that is 90 days from the date of mailing the deficiency. Gove has to calculate the last day by which T can file in tax court, and put that in the notice. 3) C: now we have a notice of deficiency which signals the end of the admin process. 90 days run, what happens if T doesn't file a petition with tax ct: that failure to file allows the gov to assess the deficiency that was described in the notice of deficiency. 4) B4: T may not agree with the notice of deficiency. May want to petition tax ct for redetermination. But interest will cont to run from the due date of return until the taxes are actually paid.

1. 7121 a. Text 1) (a) Authorization — The Secretary is authorized to enter into an agreement in writing with any person relating to the liability of such person (or of the person or estate for whom he acts) in respect of any internal revenue tax for any taxable period. 2) (b) Finality — If such agreement is approved by the Secretary (within such time as may be stated in such agreement, or later agreed to) such agreement shall be final and conclusive, and, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact-- a) (1)— the case shall not be reopened as to the matters agreed upon or the agreement modified by any officer, employee, or agent of the United States, and b) (2)— in any suit, action, or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance therewith, shall not be annulled, modified, set aside, or disregarded. b. Notes 1) T may want to stop the interest by paying the tax. Does that mean they can't then go to tax ct: No. if payment is mailed after receiving the notice of deficiency, can still go to ct. this is one of the things that makes tax ct unique. 2) A: at admin level, doesn't always get to an extreme position. Could be that during the audit, T agrees that mistakes were made, agrees to adjustments gov wants to make, an increased tax liability. If that's the outcome of audit, parties can enter into a closing agreement and resolve the audit on that basis - no notice of deficiency is then required. 3) B: if T enters into a closing agreement with the gov, that agreement is conclusive - gov can't reopen the case later, decide to re-audit. 4) 7122 a) (a) Authorization — The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense. b) (b) Record — Whenever a compromise is made by the Secretary in any case, there shall be placed on file in the office of the Secretary the opinion of the General Counsel for the Department of the Treasury or his delegate, with his reasons therefor . . . . Notwithstanding the foregoing provisions of this subsection, no such opinion shall be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed (including any interest, additional amount, addition to the tax, or assessable penalty) is less than $50,000. However, such compromise shall be subject to continuing quality review by the Secretary. 5) IRS also has the authority to compromise cases. Aka deficiencies are determined and not contested, and for whatever reason T cannot pay, gov can come in and settle it for less than 100 cents on the dollar. Can compromise a civil OR a criminal case. 6) B: in the case of compromises where the amount at stake is more than 50k, the general council has to review the compromise, issue an opinion about why the compromise is within the requirements for such things.

1. SOL for criminal acts - 6531 a. Text 1) (c)(1) False Return — In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time. 2) (c)(2) Willful Attempt To Evade Tax — In case of a willful attempt in any manner to defeat or evade tax imposed by this title (other than tax imposed by subtitle A or B), the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. 3) (c)(3) No Return — In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. 4) No person shall be prosecuted, tried, or punished for any of the various offenses arising under the internal revenue laws unless the indictment is found or the information instituted within 3 years next after the commission of the offense, except that the period of limitation shall be 6 years— a) (1) for offenses involving the defrauding or attempting to defraud the United States or any agency thereof, whether by conspiracy or not, and in any manner; b) (2) for the offense of willfully attempting in any manner to evade or defeat any tax or the payment thereof; 5) the period of limitation shall be 6 years— a) (3) for the offense of willfully aiding or assisting in, or procuring, counseling, or advising, the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a false or fraudulent return, affidavit, claim, or document (whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document); b) (4) for the offense of willfully failing to pay any tax, or make any return (other than a return required under authority of part III of subchapter A of chapter 61) at the time or times required by law or regulations; c) (5) for offenses described in sections 7206(1) and 7207 (relating to false statements and fraudulent documents); d) (6) for the offense described in section 7212(a) (relating to intimidation of officers and employees of the United States); e) (7) for offenses described in section 7214(a) committed by officers and employees of the United States; and f) (8) for offenses arising under section 371 of Title 18 of the United States Code, where the object of the conspiracy is to attempt in any manner to evade or defeat any tax or the payment thereof. b. Notes 1) Advisors can also be prosecuted for tax crimes if we advise Ts to commit crimes, or if we prepare tax returns that we know to be false or fraudulent.

1. 7203 a. Text 1) Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution. b. Notes 1) Willful failure to pay taxes or file a tax return is a misdemeanor. There are felony level acts as well. A. Interest - one consequence of making mistakes, for both civil and criminal purposes 1. 6601 a. Text 1) (a) General Rule — If any amount of tax imposed by this title (whether required to be shown on a return . . .) is not paid on or before the last date prescribed for payment, interest on such amount at the underpayment rate established under section 6621 shall be paid for the period from such last date to the date paid. 2) (e)(1) Interest Treated As Tax — Interest prescribed under this section on any tax shall be paid upon notice and demand, and shall be assessed, collected, and paid in the same manner as taxes. Any reference in this title (except subchapter B of chapter 63, relating to deficiency procedures) to any tax imposed by this title shall be deemed also to refer to interest imposed by this section on such tax. b. Notes 1) The amount of tax due but not paid will accrue interest and the underpayment rate. Defined in 6621 2) E1: interest is treated in the same manner as the tax. so under the full payment rule, have to pay interest as well as base rate before can proceed in a pre-payment forum like a fed district ct. 2. 6621 a. Text 1) (a)(2) Underpayment Rate — The underpayment rate established under this section shall be the sum of— a) (A) the Federal short-term rate determined under subsection (b), plus b) (B) 3 percentage points. 2) (b)(3) Federal Short-Term Rate — The Federal short-term rate for any month shall be the Federal short-term rate determined during such month by the Secretary in accordance with section 1274(d). Any such rate shall be rounded to the nearest full percent (or, if a multiple of 1/2 of 1 percent, such rate shall be increased to the next highest full percent). b. Notes 1) The federal short term rate, plus 3 percentage points. 2) B3: it'll be rounded up or down to the nearest full percentage point, then you add the three percent.

1. 7422 a. Text 1) (a) No Suit Prior To Filing Claim For Refund — No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof. b. Notes 1) Another basis for litigating against the IRS: in a refund action. If you wanna get a refund, your only option is to pay the tax and then sue the gov for a refund. Can't be made until you have exhausted your administrative remedies. 2. 7491 a. Text 1) (a)(1) General Rule. If, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue. b. Notes 1) Bop is on the T. but on a factual issue, once T has introd credible evidence of a fact, then the bop shifts to the gov to determine that the factual issue is the way the gov sees it. gov has bop to the extent it wants to impose punitive ds.

1. 7430 a. Text 1) (a) In General — In any administrative or court proceeding which is brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty under this title, the prevailing party may be awarded a judgment or a settlement for-- a) (1) reasonable administrative costs incurred in connection with such administrative proceeding within the Internal Revenue Service, and b) (2) reasonable litigation costs incurred in connection with such court proceeding. 2) (b)(1) Requirement That Administrative Remedies Be Exhausted — A judgment for reasonable litigation costs shall not be awarded under subsection (a) in any court proceeding unless the court determines that the prevailing party has exhausted the administrative remedies available to such party within the Internal Revenue Service. Any failure to agree to an extension of the time for the assessment of any tax shall not be taken into account for purposes of determining whether the prevailing party meets the requirements of the preceding sentence. b. Notes 1) It's possible in tax litigation to recover attorneys fees. 2) B1: all administrative remedies must have been exhausted in order to recoup attorneys fees. 3) Attorneys fees are capped at 125/hour. That's a laughable rate. 2. 7482 a. Text 1) (a)(1) In General — The United States Courts of Appeals (other than the United States Court of Appeals for the Federal Circuit) shall have exclusive jurisdiction to review the decisions of the Tax Court, except as provided in section 1254 of Title 28 of the United States Code, in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury; and the judgment of any such court shall be final, except that it shall be subject to review by the Supreme Court of the United States upon certiorari, in the manner provided in section 1254 of Title 28 of the United States Code. b. Notes 1) If your petition isn't successful, T may appeal to the ct of appeals for their own district. If you reside in MS, can appeal to 5th cir. Exception: any appeal from the ct of fed claims is to the ct of appeals for the fed circuit. 2) If appeal is to 5th cir, and they've already ruled on the issue in a way that isn't favorable to you, you're kinda stuck. Ct of fed claims will apply the law that the home circuit has adopted, so can't get out of it that way, either.

A. 83 Election 1. 1.83-1 a. Text 1) (b)(1)— If substantially nonvested property (that has been transferred in connection with the performance of services) is subsequently sold or otherwise disposed of to a third party in an arm's length transaction while still substantially nonvested, the person who performed such services shall realize compensation in an amount equal to the excess of A) The amount realized on such sale or other disposition, over B) The amount (if any) paid for such property. Such amount of compensation is includible in his gross income in accordance with his method of accounting. . . . In addition, section 83(a) and paragraph (a) of this section shall thereafter cease to apply with respect to such property. 2) (c) Dispositions Of Nonvested Property Not At Arm's Length. — a) If substantially nonvested property (that has been transferred in connection with the performance of services) is disposed of in a transaction which is not at arm's length and the property remains substantially nonvested, the person who performed such services realizes compensation equal in amount to the sum of any money and the fair market value of any substantially vested property received in such disposition. Such amount of compensation is includible in his gross income in accordance with his method of accounting. b) In addition, section 83 and these regulations shall continue to apply with respect to such property, except that any amount previously includible in gross income under this paragraph (c) shall thereafter be treated as an amount paid for such property. b. Notes a. If you receive stock, and it's not vested, and someone is willing to buy it subject to those vesting restrictions, then your income will be accelerated even though it's not vested if you dispose of the stocks. b. B1: when it does vest, that'll be nothing to third party buyer in this arms length transaction. C: disposed not in an arms length transaction. Here, we see 83 will continue to apply.

1. 83 a. Text 1) (b)(1) In General — Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of— a) the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over b) the amount (if any) paid for such property. If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture. 2) (b)(2) Election — An election under paragraph (1) with respect to any transfer of property shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretary. b. Notes B2: if you're going to do this, you have to get on it. any election under b1 has to be made no later than 30 days from date of transfer.

1. 83a a. Text 1) (a) General Rule — If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of— a) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) . . ., over b) the amount (if any) paid for such property, c) shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm's length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture. 2) (d)(1) Valuation — In the case of property subject to a restriction which by its terms will never lapse, and which allows the transferee to sell such property only at a price determined under a formula, the price so determined shall be deemed to be the fair market value of the property unless established to the contrary by the Secretary, and the burden of proof shall be on the Secretary with respect to such value b. Notes 1) Fmv is determined at the time that there's no substantial risk or forfeiture, or the property is transferrable (whichever occurs first). Income included in the first taxable year in which the property is transferrable or not subject to substantial risk of forfeiture. That can happen all at the end, or can happen periodically if there are periodic vesting events

1. 83b a. Text 1) (b)(1) In General — Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of— a) the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over b) the amount (if any) paid for such property. If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture. 2) (b)(2) Election — An election under paragraph (1) with respect to any transfer of property shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretar 3) (c)(1) Substantial Risk Of Forfeiture — The rights of a person in property are subject to a substantial risk of forfeiture if such person's rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual. 4) (c)(2) Transferability Of Property — The rights of a person in property are transferable only if the rights in such property of any transferee are not subject to a substantial risk of forfeiture. b. Notes 1) Brings compensation forward to the date of transfer; immediately treated as an investor going forward. 2) Benefit: b2: all related provisions in 83 cease to apply; going full on into investment mode. Bc this is such a huge benefit, have to do this election within 30 days of the transfer. 3) Responsibility of the service provider to make this election. NOT the employer/person giving the property.

a. Notes 1) Basically, all assets are capital assets. But does not include: 8 categories of assets that aren't included within the meaning of capital asset, the first of which is inventory. Inventory is not capital assets, bc this is property that's held out for sale to the public, isn't intended to be held long term. 2) Also not capital asset: property used in a trade or business that's subject to depreciation deduction. Aka, depreciation deductions if you're getting deductinos to offset ordinary income, you should've have also gotten this capital gain rate. That's too good of a deal. 3) 3 - a patent, invention, model or design, secret formula or process that's held by a taxpayer whose personal effects created such property. Exclusion will apply to anybody, even someone who didn't create the property, if the basis of the property in their hands is determined by reference to the person who created the property. Aka, you create a patent, you give it to your kid, they're no longer the creator, but that's still not a capital asset. 4) 4: notes receivable: also not capital assets. Just ordinary income. 5) 5, 6, 7: specialized exceptions. Don't worry about them. 6) 8: supplies regularly used or consumed in a trade or business also are not a capital asset. B3: an exception to what is not a capital asset. This is an elective provision. At the taxpayer's election, musical compositions may, may not be capital assets. Note that this doesn't apply to book authors, graphic artists.

1. Mauldin case: had to deal with RE a. There is no fixed formula or rule of thumb for determining whether property sold by the taxpayer was held by him primarily for sale to customers in the ordinary course of his trade or business. Each case must, in the last analysis, rest upon its own facts. While the purpose for which the property was acquired is of some weight, the ultimate question is the purpose for which it was held. b. Property owned by same taxpayer over many years. c. This was a facts and circumstances determination. Have to look at the facts to determine what was the purposes why he held these assets. Specifically, what was the purpose AT THE TIME OF THE SALE (Not necessarily at the time he got the property). d. Ct does acknowledge that purpose may have changed over time, that it could change. 2. Malat v. Riddell a. The statute [§1221(1)] denies capital gain treatment to profits reaped from the sale of "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." (Emphasis added.) A literal reading of the statute is consistent with this legislative purpose. We hold that, as used in § 1221(1), "primarily" means "of first importance" or "principally." b. Says that property can have a dual purpose. Here, T was arguing he had RE, was going to develop an apartment building, have a residential rental apartment complex. That was my purpose. IRS argued no, you had a dual purpose - you were going to develop the property for rental OR sale, depending on which was more profitable. c. Ct said that "primarily" for sale to customers just means "principally" for that purpose in order for it to be considered an inventory that isn't a capital gain. d. Ct ultimately didn't decide if the property was or wasn't a capital asset.

a. Notes 1) The installment sale regulations provide that if T elects not to report sale in installment method, must recognize gain on the sale in accordance with T's method of accounting (cash or accrual). 2) Go on to distinguish between fixed amount obligations, where you can est amount realized. In the case of fixed amount obligation, highly unlikely there'd be an open transaction. 3) If there are contingent payments: installment sale regulations provide specific rules for if it's fixed, contingent, or it's both fixed and contingent. 4) Punchline: If a person elects out of installment method reporting, the installment sale regulations don't appy. Instead, go to 1.1001-1(g). go there to determine the amount realized attributable to the debt.

1. Burnet v. Logan a. Began the open transaction doctrine. b. The consideration for the sale was $2,200,000.00 in cash and the promise of future money payments wholly contingent upon facts and circumstances not possible to foretell with anything like fair certainty. c. The promise was in no proper sense equivalent to cash. It had no ascertainable fair market value. d. The transaction was not a closed one. Respondent might never recoup her capital investment from payments only conditionally promised. Prior to 1921 all receipts from the sale of her shares amounted to less than their value on March 1, 1913. e. She properly demanded the return of her capital investment before assessment of any taxable profit based on conjecture. f. Nor does the situation demand that an effort be made to place according to the best available data some approximate value upon the contract for future payments. g. As annual payments on account of extracted ore come in they can be readily apportioned first as return of capital and later as profit. h. The liability for income tax ultimately can be fairly determined without resort to mere estimates, assumptions and speculation. i. When the profit, if any, is actually realized, the taxpayer will be required to respond. j. Open transaction doctrine summarized 1) If the consideration to be received in a sale or exchange cannot be valued, it is not possible to determine the amount of gain realized at the time of the transaction. 2) In this situation, the taxpayer is not required to include in income any gain at the time of the transaction. Rather, the transaction remains open until payment is received, at which time the appropriate amount of gain is determined and taken into income. 3) The character of the gain is determined by the nature of the underlying transaction. 4) Open transactions typically arise in connection with sales of property in exchange for contingent payments based on the profits generated from the property.

1. 1.1273-1 a. Text 1) (b) Stated Redemption Price At Maturity. — A debt instrument's stated redemption price at maturity is the sum of all payments provided by the debt instrument other than qualified stated interest payments. 2) (c)(1)(i) In General. — Qualified stated interest is stated interest that is unconditionally payable in cash or in property (other than debt instruments of the issuer), or that will be constructively received under section 451, at least annually at a single fixed rate (within the meaning of paragraph (c)(1)(iii) of this section). 3) (c)(1)(iii) In General. — Interest is payable at a single fixed rate only if the rate appropriately takes into account the length of the interval between payments. Thus, if the interval between payments varies during the term of the debt instrument, the value of the fixed rate on which a payment is based generally must be adjusted to reflect a compounding assumption that is consistent with the length of the interval preceding the payment. See Example 1 in paragraph (f) of this section. 4) Example 1 a) (i) Facts. On January 1995, A purchases at original' issue, for $100,000, a debt instrument that matures on January 1, 1999, and has a stated principal amount of $100,000, payable at maturity. The debt instrument provides for interest payments of $8,000 on January 1, 1996, and January 1, 1997, and' quarterly interest payments of $1,942.65, beginning on April 1, 1997. b) (ii) Amount of qualified stated interest. The annual payments of $8,000 and the quarterly payments of $1,942.65 are payable at a single fixed rate because 8 percent, compounded annually, is equivalent to 7.77 percent, compounded quarterly. Consequently, all stated interest payments under the debt instrument are qualified stated interest payments. 5) (c)(4) Stated Interest In Excess Of Qualified Stated Interest. — To the extent that stated interest payable under a debt instrument exceeds qualified stated interest, the excess is included in the debt instrument's stated redemption price at maturity b. Notes 1) If there is stated interest in excess of qualified stated interest, then the excess is included in the redemption price at maturity, will result in original issue discount. The total interest will be og issue discount or qualified stated interest, one or the other. No mix.

1. Exceptions to the OID rules: 1272a2 2. Issue price - the second variable in determining the amount of og issue discount. a. Restatement of the og issue price of the debt. b. 1273b 1) Text a) (b)(1) Publicly Offered Debt Instruments Not Issued For Property — In the case of any issue of debt instruments— A) publicly offered, and B) not issued for property, C) the issue price is the initial offering price to the public (excluding bond houses and brokers) at which price a substantial amount of such debt instruments was sold. b) (b)(2) Other Debt Instruments Not Issued For Property — In the case of any issue of debt instruments not issued for property and not publicly offered, the issue price of each such instrument is the price paid by the first buyer of such debt instrument. c) (b)(3) Debt Instruments Issued For Property Where There Is Public Trading — In the case of a debt instrument which is issued for property and which— A) (A)— is part of an issue a portion of which is traded on an established securities market, or B) (B)(i)— is issued for stock or securities which are traded on an established securities market, or C) (B)(ii)— to the extent provided in regulations, is issued for property (other than stock or securities) of a kind regularly traded on an established market, the issue price of such debt instrument shall be the fair market value of such property. d) (b)(4) Other Cases — Except in any case— A) (A)— to which paragraph (1), (2), or (3) of this subsection applies, or B) (B)— to which section 1274 applies, the issue price of a debt instrument which is issued for property shall be the stated redemption price at maturity e) (b)(5) Property — In applying this subsection, the term "property" includes services and the right to use property, but such term does not include money. 2) Notes a) b2: refers to debt issued for cash. b) 1273b3: debt instrument is issued for property, either debt or property itself is publicly traded. Issue price = fmv of the property. c) B4: clean up category. If 1, 2, or 3 applies, then you're not in 4. If 1274 applies, not in 4. 4 provides that issue price, if no other rule applies, is the stated redemption price at maturity. What is property: 1273 b5. It's not money.

A. General notes 1. Section 61 a. (a) General Definition — Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: 1) (3) — Gains derived from dealings in property 2. Aspects of gains from dealings in property a. Amount of gain b. Character of gain 1) Ordinary income 2) Capital gain c. Nonrecognition of gain 1) Temporary deferral 2) Permanent exclusion 3. Section 1001 - determination of amount of and recognition of gain or loss a. (c) Recognition Of Gain Or Loss — Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized. b. (a) Computation Of Gain Or Loss — The gain from the sale or other disposition of property shall be the excess of 1) the amount realized therefrom over 2) the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of 3) the adjusted basis provided in such section for determining loss over 4) the amount realized. c. b) The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. In determining the amount realized— 1) there shall not be taken into account any amount received as reimbursement for real property taxes which are treated under section 164(d) as imposed on the purchaser, and there shall be taken into account amounts representing real property taxes which are treated under section 164(d) as imposed on the taxpayer if such taxes are to be paid by the purchaser.

1. Gain factors a. Amount realized includes both gain and adjusted basis. 2. Loss factors a. Adjusted basis includes both loss and amount realized. 3. Int'l Freighting Corp. v. Commissioner a. True, [1001(b)] provides that "the amount realized" is the sum of "any money received plus the fair market value of the property (other than money) received." Literally, where there is a disposition of stock for services, no "property" or "money" is received by the person who thus disposes of the stock. But, in similar circumstances, it has been held that "money's worth" is received and that such a receipt comes within [1001(b)]. 4. Crane v. Commissioner a. Starting from this point, we could not accept petitioner's contention that the $2,500.00 net cash was all she realized on the sale except on the absurdity that she sold a quarter-of-a-million dollar property for roughly one per cent of its value, and took a 99 per cent loss. . . . We adhere, however, to what we have already said on the meaning of "property," and we find that the absurdity is avoided by our conclusion that the amount of the mortgage is properly included in the "amount realized" on the sale. [T]he taxpayer was the "beneficiary" of the payment in "as real and substantial [a sense] as if the money had been paid it and then paid over by it to its creditors. *Note: the buyer assumed the debt on the property, the fmv of which equaled or exceeded the amount of the debt 5. Commissioner v. Tufts a. Crane ultimately does not rest on its limited theory of economic benefit; instead, we read Crane to have approved the Commissioner's decision to treat a nonrecourse mortgage in this context as a true loan. This approval underlies Crane's holdings that the amount of the nonrecourse liability is to be included in calculating both the basis and the amount realized on disposition. That the amount of the loan exceeds the fair market value of the property thus becomes irrelevant. *Note: the fmv of the property was less than the amount of the debt when the property was sold 6. Crane and Tufts codified a. §7701(g) Clarification Of Fair Market Value In The Case Of Nonrecourse Indebtedness — For purposes of subtitle A, in determining the amount of gain or loss (or deemed gain or loss) with respect to any property, the fair market value of such property shall be treated as being not less than the amount of any nonrecourse indebtedness to which such property is subject. 7. Principles of Crane and Tufts a. Nonrecourse debt treated as a true loan despite lack of legal obligation, i.e., proceeds not income because of deemed obligation to repay b. Nonrecourse debt reflected in cost basis of property securing debt c. Unpaid balance of nonrecourse debt included in amount realized on disposition of property irrespective of value of property at that time 8. Reg. 1.1001-2 Discharge of Liabilities a. (a)(2) Discharge Of Indebtedness. — The amount realized on a sale or other disposition of property that secures a recourse liability does not include amounts that are (or would be if realized and recognized) income from the discharge of indebtedness under section 61(a)(12). b. F transfers to a creditor an asset with a fair market value of $6,000 and the creditor discharges $7,500 of indebtedness for which F is personally liable. The amount realized on the disposition of the asset is its fair market value ($6,000). In addition, F has income from the discharge of indebtedness of $1,500 ($7,500 - $6,000).

1. 1.1031k-1 - for deferred like kind exchanges a. Text 1) (b)(1) In General. — In the case of a deferred exchange, any replacement property received by the taxpayer will be treated as property which is not of a like kind to the relinquished property if - a) (i)— The replacement property is not "identified" before the end of the "identification period," or b) (ii)— The identified replacement property is not received before the end of the "exchange period." 2) (c)(4)(i)— The taxpayer may identify more than one replacement property. Regardless of the number of relinquished properties transferred by the taxpayer as part of the same deferred exchange, the maximum number of replacement properties that the taxpayer may identify is a) (A)— Three properties without regard to the fair market values of the properties (the "3-property rule"), or b) (B)— Any number of properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinquished properties as of the date the relinquished properties were transferred by the taxpayer (the "200-percent rule"). 3) (f)(2) Although the taxpayer is not in constructive receipt of money or property if the taxpayer's control of its receipt is subject to substantial limitations or restrictions, the taxpayer is in constructive receipt of the money or property at the time the limitations or restrictions lapse, expire, or are waived. In addition, actual or constructive receipt of money or property by an agent of the taxpayer . . . is actual or constructive receipt by the taxpayer. b. Notes 1) C4i: one approach is to identify three possible replacement properties without regard to value as your replacement identification. Alternatively, you can id any number of properties so long as the value of all the properties in the aggregae doesn't exceed 200 percent of the aggregate fmv of all the relinquished properties. 2) F2: money will typically be in an escrow account. Key to making 1031 work is that the transferor doesn't actually receive that cash actually OR constructively. Cash has to be beyond the reach of the taxpayer in order for this to work.

1. IPX: shows how a deferred like kind exchange works a. IPX: Waits for the exchanger to id the replacement properties. Once ided, exchanger will have to go out and negotiate the terms of the exchange. Once all of that has been settled out, purchase agreements will be assigned to IPX, who will complete the purchase of the replacement properties. b. IPX will NOT give the out the funds until the period is over. c. These deferred exchanges sometimes happen in reverse. Aka, finds replacement property before there is a buyer for the og property. Seller will go ahead and give the deed to the EAT, who holds this until a buyer is found. Step 2: once a buyer is found for the relinquished property, that transaction goes forward to completion. The same 180 day exchange period applies. If you want to do this reverse exchange, still have to work with this period. d. This is one big circular exchange as to Exchange Agreements and Assignments. 1) The exchanger relinquishes property via direct deed to buyer. Buyer gives cash to IPX. IPX gives cash to seller. Seller gave exchanger replacement property's direct deed. e. Reverse starker exchange: step 1 1) Seller finds replacement property. Gives deed to EAT. EAT will give funds back to seller. EAT gives promissory note and security instrument to third party lender or exchanger. Third party lender or exchanger gives loan proceeds to EAT. f. Reverse starker exchange: Step 2 1) Exchanger gives relinquished property to buyer. Buyer gives cash to IPX. Between exchanges and IPS is assignments of QEAA and purchase agreement, and an exchange agreement. IPX gives cash to EAT. EAT repays loan from third party lender or exchanger. EAT gives replacement property to exchanger.

A. Debt in exchange for property where there's no public trade - 1274 1. Text a. (a) In General — In the case of any debt instrument to which this section applies, for purposes of this subpart, the issue price shall be— 1) (1)— where there is adequate stated interest, the stated principal amount, or 2) (2)— in any other case, the imputed principal amount. b. (b)(1) In General — Except as provided in paragraph (3), the imputed principal amount of any debt instrument shall be equal to the sum of the present values of all payments due under such debt instrument. c. (b)(2) Determination Of Present Value — For purposes of paragraph (1), the present value of a payment shall be determined in the manner provided by regulations prescribed by the Secretary— 1) as of the date of the sale or exchange, and 2) by using a discount rate equal to the applicable Federal rate, compounded semiannually. 3) Sales For $1,000,000 Or Less Of Farms By Individuals Or Small Businesses 4) Sales Of Principal Residences 5) Sales Involving Total Payments Of $250,000 Or Less 6) Debt Instruments Which Are Publicly Traded Or Issued For Publicly Traded Property 7) Certain Sales Of Patents 8) Sales Or Exchanges To Which Section 483(e) Applies 9) Transfers of property between spouses or incident to divorce d. (c)(1) In General — Except as otherwise provided in this subsection, this section shall apply to any debt instrument given in consideration for the sale or exchange of property if— 1) (A)the stated redemption price at maturity for such debt instrument exceeds— a) where there is adequate stated interest, the stated principal amount, or b) in any other case, the imputed principal amount of such debt instrument determined under subsection (b), and 2) (B)some or all of the payments due under such debt instrument are due more than 6 months after the date of such sale or exchange. e. (c)(2) Adequate Stated Interest — For purposes of this section, there is adequate stated interest with respect to any debt instrument if the stated principal amount for such debt instrument is less than or equal to the imputed principal amount of such debt instrument determined under subsection (b).

1. Notes a. 1274 does a couple of things. It's going to look for the discount as 1272 does, and it's going to redetermine the principle amount on the loan, but will do it in a different way, will do it via time value of money concepts. b. C1: we will have a stated or imputed principal amount. c. If there's not stated interest, then the purchase price can be determined under the 1274 rules. d. A: issue price is stated or implied principle amount. Go back to 1272 after we know this to determine how discount will be accrued. e. C2: there is adequate stated interest if principle amount is less than or equal to the imputed principle amount. Ex: debt says I'll pay you 5m, 5% interest, due in five years. There, say principle amount stated is 5m. but what we have to do is compare the stated principle amount to the imputed principle amount to see if the interest is adequately stated. f. Exceptions: sales of principle residences, certain sales of patents.... Rest are on slide. g. Section 1274A 1) Text a) (a) Lower Discount Rate — In the case of any qualified debt instrument, the discount rate used for purposes of sections 483 and 1274 shall not exceed 9 percent, compounded semiannually. b) (b) Qualified Debt Instrument Defined — For purposes of this section, the term "qualified debt instrument" means any debt instrument given in consideration for the sale or exchange of property . . . if the stated principal amount of such instrument does not exceed $2,800,000 [$6,734,800 for 2023]. c) (c)(1) In General — In the case of any cash method debt instrument— A) section 1274 shall not apply, and B) interest on such debt instrument shall be taken into account by both the borrower and the lender under the cash receipts and disbursements method of accounting. d) (c)(2) Cash Method Debt Instrument — For purposes of paragraph (1), the term "cash method debt instrument" means any qualified debt instrument if— A) the stated principal amount does not exceed $2,000,000 [$4,810,600 for 2023], B) the lender does not use an accrual method of accounting and is not a dealer with respect to the property sold or exchanged, C) section 1274 would have applied to such instrument but for an election under this subsection, and D) an election under this subsection is jointly made with respect to such debt instrument by the borrower and lender. 2) Notes a) 1274A(a) and (b): we have a cap - can't exceed 9%. b) 1274A(c): cash method debt instrument: 1274 doesn't apply, don't have to go through OID scenario if the instrument is taken into account by both borrower and debtor under cash method accounting. 1274Ac2: originally 2m limit on cash method debt instrument. This is elective.

I. Section 267 A. McWilliams 1. 267a is actually a disallowance of deductions. Prohibition is focused on certain parties whose economic interests are v similar. Also: meant to control the timing for tax losses. 2. Former §24 [current §267] provides an absolute prohibition of certain losses, not a presumption. 3. A common characteristic of groups designated in former §24 [current §267] was that their members had nearly identical economic interests. 4. Purpose of former §24 [current §267] was to stop taxpayers from choosing, through intra-family transfers and other designated devices, the time for realizing tax losses on investments, the ownership of which for all practical purposes, had not changed. B. 267 1. Text a. (a)(1) Deduction For Losses Disallowed — No deduction shall be allowed in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection (b). The preceding sentence shall not apply to any loss of the distributing corporation (or the distributee) in the case of a distribution in complete liquidation. b. (a)(2)— If— 1) (A)— by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not (unless paid) includible in the gross income of such person, and 2) (B)— at the close of the taxable year of the taxpayer for which (but for this paragraph) the amount would be deductible under this chapter, both the taxpayer and the person to whom the payment is to be made are persons specified in any of the paragraphs of subsection (b), then any deduction allowable under this chapter in respect of such amount shall be allowable as of the day as of which such amount is includible in the gross income of the person to whom the payment is made (or, if later, as of the day on which it would be so allowable but for this paragraph). c. (a)(3)(A) In General — The Secretary shall by regulations apply the matching principle of paragraph (2) in cases in which the person to whom the payment is to be made is not a United States person. d. (d)(1) In General — If— 1) (A)— in the case of a sale or exchange of property to the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection (a)(1), and 2) (B)— the taxpayer sells or otherwise disposes of such property (or of other property the basis of which in the taxpayer's hands is determined directly or indirectly by reference to such property) at a gain, 3) then such gain shall be recognized only to the extent that it exceeds so much of such loss as is properly allocable to the property sold or otherwise disposed of by the taxpayer 4) (g) Coordination With Section 1041 — Subsection (a)(1) shall not apply to any transfer described in section 1041(a) (relating to transfers of property between spouses or incident to divorce).

1. Notes a. A: focused on losses from sale or exchange of property between people in b. b. A2: Ts who are related but have diff methods of accounting. If the recipient has a method that's different from payor and recipient doesn't have to (cash method) include in gi until actually received, and the T who incurred expense is an accrual method and would be able to deduct in that year - this is the mismatch we care about. If so, have to take the deduction when it's includable in the gi of the person to whom it is due. This is a forced matching principle. Ensures deduction is taken at the same time the property is includable in gi. c. A3A: applies to payments by US persons, non US persons without regard to accounting method. d. G: if 267 and 1041 (transfer of property between spouses) overlap, 1041 controls. e. D1: allows person who bought the property to take advantage of the loss in certain circumstances. In the later sale of the property by the buyer at a gain, gain is recognized only to the extent that it exceeds as much of he loss as is properly allocable to the property.

A. 1045 - rollover of gain on sale of qualified small business stock 1. Text a. (a) Nonrecognition Of Gain — In the case of any sale of qualified small business stock held by a taxpayer other than a corporation for more than 6 months and with respect to which such taxpayer elects the application of this section, gain from such sale shall be recognized only to the extent that the amount realized on such sale exceeds— 1) the cost of any qualified small business stock purchased by the taxpayer during the 60-day period beginning on the date of such sale, reduced by 2) any portion of such cost previously taken into account under this section b. (a) Nonrecognition Of Gain — This section shall not apply to any gain which is treated as ordinary income for purposes of this title. c. (b)(2) Purchase — A taxpayer shall be treated as having purchased any property if, but for paragraph (3), the unadjusted basis of such property in the hands of the taxpayer would be its cost (within the meaning of section 1012). d. (b)(3) Basis Adjustments — If gain from any sale is not recognized by reason of subsection (a), such gain shall be applied to reduce (in the order acquired) the basis for determining gain or loss of any qualified small business stock which is purchased by the taxpayer during the 60-day period described in subsection (a). e. (b)(4) Holding Period — For purposes of determining whether the nonrecognition of gain under subsection (a) applies to stock which is sold— 1) the taxpayer's holding period for such stock and the stock referred to in subsection (a)(1) shall be determined without regard to section 1223, and 2) only the first 6 months of the taxpayer's holding period for the stock referred to in subsection (a)(1) shall be taken into account for purposes of applying section 1202(c)(2) [active business requirements].

1. Notes a. Allows the gain on a sale of QSMS to be rolled over into another investment in QSBS and therefore the tax on gain until sale or exchange of other QSBS if you've held the stock for at least six months. Helpful if a start up blows up before five years have passed, stockholder wants to sell, but doesn't want to be taxed on their gain. b. A: replacement window is very tight - is just 6 months. if you're going to reinvest the proceeds from the sale of QSBS into other QSBS, then you better get busy. This is elective. c. Idea is that one day when you do meet the five year holding period, your rolled over gain would then be eligible for exclusion d. A: rollover doesn't apply to the extent that any gain is treated as ordinary income. Situation: when a corp is itself redeeming shares of a shareholder. In a redemption transaction it's possible the gain on the redemption sale will be treated as a dividend. And to the extent it is, the 1045 rollover won't be available. e. B2: T needs to actually purchase the replacement stock. purchase = basis of the property begins with cost. You must have a cost basis in order for the stock to qualify for rollover benefit. f. B3: have to be concerned about basis in nonrecognition provisions. This is the basis rule for the rollover. g. B4: the holding period rule for rollover. To tack holding periods, basis has to be carried over. The holding period will be determined without regard for 1223 - will have reset holding period. AND you only need to meet the active business requirements for the first six months of the holding period.

a. (e)(3) Qualified Trade Or Business — For purposes of this subsection, the term "qualified trade or business" means any trade or business other than— 1) (A)— any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees, 2) (B)— any banking, insurance, financing, leasing, investing, or similar business, 3) (C)— any farming business (including the business of raising or harvesting trees), 4) (D)— any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 613 or 613A, and 5) (E)— any business of operating a hotel, motel, restaurant, or similar business. b. (e)(4) Eligible Corporation — For purposes of this subsection, the term "eligible corporation" means any domestic corporation; except that such term shall not include— 1) a DISC or former DISC, 2) a regulated investment company, real estate investment trust, or REMIC, and 3) a cooperative. c. (e)(5)(B) Portfolio Stock Or Securities — A corporation shall be treated as failing to meet the requirements of paragraph (1) [active business requirements] for any period during which more than 10 percent of the value of its assets (in excess of liabilities) consists of stock or securities in other corporations which are not subsidiaries of such corporation (other than assets described in paragraph (6)). d. (e)(7) Maximum Real Estate Holdings — A corporation shall not be treated as meeting the requirements of paragraph (1) [active business requirements] for any period during which more than 10 percent of the total value of its assets consists of real property which is not used in the active conduct of a qualified trade or business. For purposes of the preceding sentence, the ownership of, dealing in, or renting of real property shall not be treated as the active conduct of a qualified trade or business. e. (h)(1) In General — In the case of a transfer described in paragraph (2), the transferee shall be treated as— 1) having acquired such stock in the same manner as the transferor, and 2) having held such stock during any continuous period immediately preceding the transfer during which it was held (or treated as held under this subsection) by the transferor. f. (h)(2) Description Of Transfers — A transfer is described in this subsection if such transfer is— 1) by gift, 2) at death, or 3) from a partnership to a partner of stock with respect to which requirements similar to the requirements of subsection (g) are met at the time of the transfer (without regard to the 5-year holding period requirement).

1. Notes a. Incentive to use C corp formation in the right circumstances, in startup situations. b. Five reqs. Corp stock if meets these reqs is treated as qualified small business stock. c. A1: why does anybody wanna have qualified small business stock? GI shall not include 50% of any gain from the sale or exchange of QSBS held for more than 5 years. Applies to taxpayers other than corps, aka individuals, trusts, estates, some partnerships. Secondly, notice holding period req: must be held for more than 5 years. d. A4: since 2010, this has increased to a 100% exclusion for QSBS. Can operate a small business in a C corp and down the road after five years go public, can exclude 100% on the gain on the sale of that stock, subject to limits in 1202. This is the reason why 1202 is so topical. e. B1: here's the limitation that applies in the case of 1202 stock. the amount of gain that can be excluded is limited to 10m or, if larger, 10x the aggregate adjusted bases of QSBS, whichever is greater. f. B2: the gain that is eligible for 100% exclusion is "eligible gain" - must arise from the sale or exchange of QSBS that is held for more than 5 years. g. C1: what is QSBS: any stock in a C corp that is og issued after August 1993, if 1) at the time of issuance, the corp is a qualified small business, and the stock is acquired by the T at its original issue in exchange for money or other property, or for compensation of services. h. Req one: stock of a C corp i. Req 2: stock og issued after Aug 1993 j. Req 3: at time of issuance, corp was a qualified small business. k. Req 4: stock is acquired at original issue for cash or property or services. Means: (og issue = stock acquired from the corp itself to the shareholder) l. C2A: in addition to the og issuance by a C corp, we can see that a corp won't be treated as a qualified small business unless it meets the active business reqs of section e and is a C corp. active business reqs have to be met during the corp's life as a C corp. during the time that the corp is a C corp, must meet active bus reqs. If doesn't meet this reqs, isn't QSMS. m. D1: what it means to be a qualified small business. 1) must be domestic, not foreign corp. 2) must be a C corp (not an S corp). 3) asset tests n. Asset tests in d1. Question on how assets are valued, esp when it involves a lot of intellectual property. Not easily valued. o. D2A - how to determine value for assets. Talking about adjusted basis for the assets. NOT fmv. p. E1: active business requirement, what does it entail. Entails three things. At least 80% of value of assets is used in conduct of qualified trade or business; and it is an eligible corp. q. E3: what are the qualified trades or business that a QSB can engage in? Cannot be law, accounting, architecture, medicine, engineering, most prof businesses/orgs. Huge list of businesses that aren't eligible. D ex is oil and gas, things like that. r. E4: what is an eligible corp. must be a domestic corp. cannot be a DISC (export related trading co); mutual funds, RE investment trusts, REMIC (another type of entity that deals with RE mortgage pools), cooperatives. s. E5B: exception - any corp that has 10% or more of its assets dedicated to securities of corps that are not its subsidiaries. Those are investment activities, not business activities. t. E7: another exception - if 10% or more of the total value of its assets consists of real property, won't satisfy active bus requirements. u. H1: when transferor of stock will be deemed to have received stock at og issue. In this instance, there will be a tacking of the holding period. v. H2: when a transferor can be deemed to have received stock at og issue - at death, by gift, transfers from a partnership to a non-corporate partner.

A. 1033 1. Text a. (a) General Rule — If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted— 1) Into property similar or related in service or use to the property so converted, no gain shall be recognized. 2) Into money or into property not similar or related in service or use to the converted property, the gain (if any) shall be recognized except to the extent hereinafter provided in this paragraph: b. (a)(2)(A) Nonrecognition Of Gain — If the taxpayer during the period specified in subparagraph (B), for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted, or purchases stock in the acquisition of control of a corporation owning such other property, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion (regardless of whether such amount is received in one or more taxable years) exceeds the cost of such other property or such stock. Such election shall be made at such time and in such manner as the Secretary may by regulations prescribe. c. (a)(2)(B) Period Within Which Property Must Be Replaced — The period referred to in subparagraph (A) shall be the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition or condemnation of the converted property, whichever is the earlier, and ending— 1) 2 years after the close of the first taxable year in which any part of the gain upon the conversion is realized, or 2) subject to such terms and conditions as may be specified by the Secretary, at the close of such later date as the Secretary may designate on application by the taxpayer. Such application shall be made at such time and in such manner as the Secretary may by regulations prescribe. d. (a)(2)(E)(ii) Disposition Of The Converted Property — The term "disposition of the converted property" means the destruction, theft, seizure, requisition, or condemnation of the converted property, or the sale or exchange of such property under threat or imminence of requisition or condemnation. e. (g)(1) Special Rule — For purposes of subsection (a), if real property (not including stock in trade or other property held primarily for sale) held for productive use in trade or business or for investment is (as the result of its seizure, requisition, or condemnation, or threat or imminence thereof) compulsorily or involuntarily converted, property of a like kind to be held either for productive use in trade or business or for investment shall be treated as property similar or related in service or use to the property so converted. f. (h)(2) Trade Or Business And Investment Property — If a taxpayer's property held for productive use in a trade or business or for investment is located in a disaster area and is compulsorily or involuntarily converted as a result of a federally declared disaster, tangible property of a type held for productive use in a trade or business shall be treated for purposes of subsection (a) as property similar or related in service or use to the property so converted.

1. Notes a. Lays out scheme of non-recognition that is diff than the other ones we've seen b. No gain or loss recognized - lays out carry over basis and tax holding period that preserves the gain into the replacement property to be taxed at a later time. c. 1033, we have reqs for deferral on involuntary conversion: involuntary conversion (eg insurance proceeds, condemnation award); qualified replacement property (ie similar or relate din service or use); timely replacement d. Condemnation award: paid via a 5th amendment taking of property. e. When this involuntary conversion has happened, the non-recognitionof g the gain or loss arises when there has been qualified replacement property. Here, doesn't have to be like kind, but should be similar or related in service or use. f. A: if property as a result of destruction, theft, seizure, or requistion is involuntary converted into property similar or related ins ervice or use, no gain shall be recognized. But this is a case where the T actually receives other property at the time of the involuntary conversion - can happen in a condemnation proceeding when there's a condemnation and T in settlement of that process is willing to accept some other property in exchange for condemned property, exchanges through a simultaneous exchange. In this instance, no gain will be recognized. Diff from 1031: no gain is recognized - doesn't say a word about loss. only says no GAIN is recognized. g. Where ther eis a simultaneous replacement, no gain is recognized. h. But: doesn't always happen this way. tornado knocks down house, insurance co then gives you cash. i. A second bullet: this is the tornado ex. In this instance, gain shall be recognized, WITH a big "except." Except is explained through the rest of a. j. A2A: there will be a replacement period in which these things must happen. If during this period T purchases other property similar or related in service or use to the property converted, or purchase stock in the acquisition of control of a corp, this provision now becomes elective (diff from 1031). T can elect whether or not to be taxed on the gain, but only to the etent that the amount realized exceeds the cost of such other property or stock. k. A2b: period begins on the date of the disposition of the converted property. Ends two years afte the close of the first taxable year in which any part of the gain upon the conversion is realized. For people in Rolling Fork, they have until 2025 taxes to defer the gain. Date can be even later if IRS grants additional time. l. A2Eii: tells us what "disposition of converted property" means. m. G1: this is a rule that applies in the case of real property. If real property is destroyed and was used in a trade or business or held for investment, the sort of property that could be exchanged in a like kind exchange was replaced with like kind property, that will be deemed to satisfy the "similar or related business" requirement. n. H2: property deed to satisfy the "similar or related in service or use" standard. Applies when T's property was held for use in a trade or business in a fed declared disaster

a. (b)(5) Method Of Computing Straight Line Adjustments — For purposes of paragraph (1), the depreciation adjustments which would have resulted for any taxable year under the straight line method shall be determined— 1) in the case of property to which section 168 applies, by determining the adjustments which would have resulted for such year if the taxpayer had elected the straight line method for such year using the recovery period applicable to such property, and 2) in the case of any property to which section 168 does not apply, if a useful life (or salvage value) was used in determining the amount allowable as a deduction for any taxable year, by using such life (or value). b. (c) Section 1250 Property — For purposes of this section, the term "section 1250 property" means any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been property of a character subject to the allowance for depreciation provided in section 167. c. (d)(1) Gifts — Subsection (a) shall not apply to a disposition by gift. d. (d)(2) Transfers At Death — Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death. e. (d)(3) Certain Tax-Free Transactions — If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). f. (g) Adjustments To Basis — The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a). (h) Application Of Section — This section shall apply notwithstanding any other provision of this subtitle.

1. Notes a. This section is also aimed at the recapture of depreciation deductions as OI on the sale or exchange of property. But this section relates to real property, NOT to personal property. b. Now, there's a lot of 1250 proeprty. But there's very little recapture. He idea of the recapture is essentially the "additional appreciation" over the amount of depreciation that would've been taken on a straightline basis. It's getting at the accelerated depreciation. Remember last semester: there were some methods that allowed you to frontload deductions for depreciation. c. C: improvements on the land, to the extent they're real property, are depreciable and subject to an allowance for depreciation, so that's 1250 proeprty d. A1B: the applicable percentage of the depreciation. In the case of 1250 proeprty, 100%. That means if there were additional depreciation deductions, then all of it would be subject to recapture. e. G: this is an override provision. Will override other provisions, including 1231.

1. 1.1001-1 a. Text 1) (g)(3) Coordination With Section 453. — If a debt instrument is issued in exchange for property, and the income from the exchange is not reported under the installment method of section 453, this paragraph (g) applies rather than Section 15a.453-1(d)(2) to determine the taxpayer's amount realized attributable to the debt instrument. b. Notes 1) A: the amount realized is equal to the money received, plus the fmv of any property. Only in rare cases will property be considered to have no fmv. For this purpose, the note itself becomes property and must be valued. Rest of our discussion is how you value that. 2) G2ii: the amount realized attributable to a debt instrument/the buyer's note in the installment sale where they have opted out of installment method, the amount attributable to the debt instrument is the issue price. 3) This is a new idea, then: the idea that a debt instrument can have a issue price. We think of it in terms of balance, principle, etc. the issue price though of a debt instrument is concerned not only with promise to repay, but whether there's appropriate interest payable on that amount for however long the payment is outstanding. Aka, if the payment obligation is to pay over five years, then interest must be payable in order for hat payment in fifth year to have a value that's eual to today's present value. This gets us into the time value of money. Dollar today is worth more than a dollar 10 years from now.

1. Problems on page 858 a. What is the fmv of the payment and the stock? if you treat this as an open transaction, you see that T is allowed to recover basis before reporting any gain. Contrast that to installment sale, where each payment is part gain, part recovery of basis. But here, recovery of basis is frontloaded. No taxable income until basis has been recovered in full. b. 1a: it's not until the 26th year that all of the basis is recovered, T begins reporting gain which is LTCG bc sale of stock was a capital asset held long term - transaction never closed, is open. 2. Open transactions - only in rare and extraordinary cases a. 1.1001-1 1) (a) The amount realized from a sale or other disposition of property is the sum of any money received plus the fair market value of any property (other than money) received. The fair market value of property is a question of fact, but only in rare and extraordinary cases will property be considered to have no fair market value 2) (g)(2)(ii) [T]he amount realized attributable to the debt instrument is the issue price of the debt instrument as determined under Section 1.1274-2(g), increased by the fair market value of the contingent payments payable on the debt instrument. a) This paragraph (g)(2)(ii), however, does not apply to a debt instrument if the fair market value of the contingent payments is not reasonably ascertainable. Only in rare and extraordinary cases will the fair market value of the contingent payments be treated as not reasonably ascertainable. 3) (g)(2)(ii) Special Rule To Determine Amount Realized. — a) This paragraph (g)(2)(ii), however, does not apply to a debt instrument if the fair market value of the contingent payments is not reasonably ascertainable. Only in rare and extraordinary cases will the fair market value of the contingent payments be treated as not reasonably ascertainable.

A. Other disaster relief 1. 139 a. Text 1) (a) General Rule — Gross income shall not include any amount received by an individual as a qualified disaster relief payment. 2) (b) Qualified Disaster Relief Payment Defined — For purposes of this section, the term "qualified disaster relief payment" means any amount paid to or for the benefit of an individual— a) (1) to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster, b) (2) to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster c) (3) by a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster, or d) (4) if such amount is paid by a Federal, State, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare, but only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise. b. Notes 1) A: Gi doesn't include any amount received as a qualified disaster relief payment. 2) B: def of qualified disaster relief payment. Has to be made to an individual, not a corp that had damage. 3) 3: includes - when airlines give tickets to people who need to relocate.

1. Problems page 923 a. 1033a2 here. Recovery reduced by cash given by insurance. This is the elective replacement regime. Will take 28k cost basis in the securities. Tacked holding period rules don't apply; holding period begins when they acquire the securities. b. B: T DOES replace the old property with smaller, newer equipment. Let's assume this was a timely replacement. We still have 4k gain realized on the loss. but we'll then apply the formula for the determination of the gain. We reinvest 20k in equipment - told it's the same as the old equipment, just smaller. That'll be "similar." It's of the same character/nature. Reduce by the amount of gain that was not realized. 2k of gain was cognized that was not realized. That will reduce the amount of our basis. Adjusted basis in replacement property is 24k. c. B3: tax consequences to T if sold newly acquired equipment for 20k before any depreciation became allowable. In a quick sale, the amount realized is 26k. we know adjusted basis is 24k. T will just realize that additional 2k that was realized when the property was replaced. And that gain will be ordinary bc of depreciation recapture. d. 2: reduce the gain realized, leaves a 100k gain to be recognized UNLESS we advise client about section 1033. Second side of ledger - what 1033 would say about this. Adjusted basis of replacement property is 100k. NOTE: This T may say they don't want to invet in a replacement home - she doesn't have to, this is elective. But she does have to pay the tax on the gain if she doesn't replace (line 7).

1. 6330 a. Text 1) (a)(1) In General — No levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made. Such notice shall be required only once for the taxable period to which the unpaid tax specified in paragraph (3)(A) relates. b. Notes 1) T has the right to be heard, but it'll be whenever the gov gets around to it. 2. 6503 a. Text 1) (a)(1) General Rule — The running of the period of limitations provided in section 6501 or 6502.1 on the making of assessments or the collection by levy or a proceeding in court, in respect of any deficiency as defined in section 6211 (relating to income, estate, gift and certain excise taxes), shall (after the mailing of a notice under section 6212(a)) be suspended for the period during which the Secretary is prohibited from making the assessment or from collecting by levy or a proceeding in court (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final), and for 60 days thereafter. b. Notes 1) Only thing that'll slow down the process: suit for refund is under way, taxes haven't finished being assessed.

1. Problems page 987 1. Problem 1 a. 1: options - tax ct, district ct, ct of fed claims. If principle consideration in forum selection is jury, have to go to district c tbc it's the only ct that'll give you a jury (bc the other two are art 1 cts). b. If have no money to pay the asserted deficiency: Has to go to us tax ct. that's the only pre-payment forum available to the T. means that petition to the tax ct must be filed within 90 days of notice of deficiency. c. What if T wishes to stop the running of interest but also litigate the issues. T has several options here. After the 90 day letter, T can actually pay the asserted deficiency and that won't deprive the tax ct of j. one way to do it: pay the tax, file the petition, have the tax ct redetermine the amount of the deficiency. Another possibility: pay the tax, stop running of interest, sue in fed district ct for a refund of the tax paid, or the ct of fed claims. "Sue for a refund:" sue for the tax paid, penalties, everything. Will only proceed if the ENTIRE assessment has been paid. District ct is also a possibility. Another possibility is to lodge a deposition, it'll be treated as tax paid as of the date of deposit later on if taxes are actually assessed and DO prevails in tax ct. so those are three options to stop the running of interest - note that they all involve paying interest. d. D: litigation involves a v difficult tax law issue. This is a question of expertise. If you're looking for expertise, the us tax ct is the ct where the chances of it being assigned to a judge with technical expertise is the highest. If that's your principle consideration, then for that issue the tax ct is the best j. e. E: litigation involves a legal issue on which there is a split of authority amongst the circuits. T's home circuit has decided issue in gov's favor. if you file in tax ct, district ct rule will apply. Will have to go to ct of fed claims, where the appeal lies in the fed circuit. This applies when you really think you have an appealable issue. 2. Problem 5: commissioner sent a 90 days letter that indicates response due by June 28th, exactly 90 days later. Mrch 31st was the day of filing the 90 days letter. a. A: is T's petition timely if it's mailed on June 28th? Even though it arrives at ct on July 1st? This highlights the mailbox rule. Mailed by the due date, but not received by the clerk until after the due date for filing. The petition is still timely bc was mailed on the due date or petition. Mailing is filing for this purpose. T can clearly argue timely filing. b. B: what result if notice mailed on March 31st, and the proper date is June 28th? Service erroneously says you have 91 days. T mails petition one day late. This is still timely. T is entitled to rely on the date that is in the 90 day letter for filing the petition in tax ct. as long as T did that, it'll be deemed a timely filing. c. C: what result in B if the improper date gives them only 88 days instead of 90? Aka, mistake in the other direction? Even though mailed after date specified in letter, T can should and would file timely filing. Gov cannot shorten the 90 day period by erroneously specifying a date earlier than the actual 90 days. d. D: is T's petition timely if mailed June 28th but was improperly addressed, ct didn't receive it until after 90 days. the mailbox rule does NOT apply if you don't address the petition properly. Not a timely filing. e. E: T's petition not filing, there's no tax ct j, has T completely lost her day in ct? No. bc T still has recourse to the fed district ct and ct of fed claims. This will require that T pay the tax assessed in full and bring the case as a claim for refund. But only AFTER exhausting all admin remedies. day in ct is therefore delayed til tax is paid, IRS rejects T's claim for refund.

1. Section 1223 a. Text 1) (1) In determining the period for which the taxpayer has held property received in an exchange, there shall be included the period for which he held the property exchanged if, under this chapter, a) the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged, and, b) the property exchanged at the time of such exchange was a capital asset as defined in section 1221 or property described in section 1231. 2) (2) In determining the period for which the taxpayer [transferee] has held property however acquired there shall be included the period for which such property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person. 3) (9) In the case of a person acquiring property from a decedent or to whom property passed from a decedent (within the meaning of section 1014(b)), if— a) the basis of such property in the hands of such person is determined under section 1014, and b) such property is sold or otherwise disposed of by such person within 1 year after the decedent's death, then such person shall be considered to have held such property for more than 1 year b. Notes 1) Holding period tacking will follow the basis rules. If the basis is not the same as the basis of the property giving, the holding period will begin the day after acquisition. This applies to the transferor. 2) What about the transferee: they have a similar rule. If they acquire property and their basis is the same as the transferor's basis, the holding period will tack.

1. Section 1231 - a MAJOR recharacterization provision a. Text 1) (a)(1) Gains Exceed Losses — If— a) the section 1231 gains for any taxable year, exceed b) the section 1231 losses for such taxable year, such gains and losses shall be treated as long-term capital gains or long-term capital losses, as the case may be. 2) (a)(2) Gains Do Not Exceed Losses — If— a) the section 1231 gains for any taxable year, do not exceed b) the section 1231 losses for such taxable year, such gains and losses shall not be treated as gains and losses from sales or exchanges of capital assets. 3) (a)(3)(A) Section 1231 Gain — The term "section 1231 gain" means— a) any recognized gain on the sale or exchange of property used in the trade or business, and b) any recognized gain from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) into other property or money of— A) property used in the trade or business, or B) any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit 4) (a)(3)(B) Section 1231 Loss — The term "section 1231 loss" means any recognized loss from a sale or exchange or conversion described in subparagraph (A). 5) (a)(4)(A) —In determining under this subsection whether gains exceed losses— a) the section 1231 gains shall be included only if and to the extent taken into account in computing gross income, and b) the section 1231 losses shall be included only if and to the extent taken into account in computing taxable income, except that section 1211 shall not apply.

11. Section 166 bad debts a. Text 1) (d)(1) General Rule — In the case of a taxpayer other than a corporation— a) subsection (a) shall not apply to any nonbusiness debt; and b) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 1 year. 2) (d)(2) Nonbusiness Debt Defined — For purposes of paragraph (1), the term "nonbusiness debt" means a debt other than— a) a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or b) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business. b. Notes 1) D1 - these are loans that are nonbusiness loans. Aka, when you make a loan to your cousin and he doesn't pay you back. 2) D1 - this is for taxpayers OTHER than corps. It provides that you can't take a deduction for those types of debts. 3) When these types of debts become worthless, it'll be considered a loss from the sale or exchange of a capital asset held for not more than a year (short term capital loss) 4) D2 - the statutory definition of what is a nonbusiness debt.

1. Section 1234 - options a. Text 1) (a)(1) General Rule — Gain or loss attributable to the sale or exchange of, or loss attributable to failure to exercise, an option to buy or sell property shall be considered gain or loss from the sale or exchange of property which has the same character as the property to which the option relates has in the hands of the taxpayer (or would have in the hands of the taxpayer if acquired by him). 2) (a)(2) Special Rule For Loss Attributable To Failure To Exercise Option — For purposes of paragraph (1), if loss is attributable to failure to exercise an option, the option shall be deemed to have been sold or exchanged on the day it expired. b. Notes 1) Options take on the character of the underlying asset. An option to buy real property, and if that RP would be a capital asset, then that option would be a capital asset. And vv - if you have an option to buy property that wouldn't be a capital asset, then the option is not a capital asset 2) A2 - what happens if an option expires. Would normally give rise to an ordinary loss, but this provision provides that it is deemed to have been sold or exchanged on the date of expiration. This means that this can give rise to a capital loss. 2. Section 1236 - dealers in securities a. Text 1) (a) Capital Gains — Gain by a dealer in securities from the sale or exchange of any security shall in no event be considered as gain from the sale or exchange of a capital asset unless— a) the security was, before the close of the day on which it was acquired (or such earlier time as the Secretary may prescribe by regulations), clearly identified in the dealer's records as a security held for investment; and b) the security was not, at any time after the close of such day (or such earlier time), held by such dealer primarily for sale to customers in the ordinary course of his trade or business. 2) (b) Ordinary Losses — Loss by a dealer in securities from the sale or exchange of any security shall, except as otherwise provided in section 582(c), (relating to bond, etc., losses of banks), in no event be considered as ordinary loss if at any time the security was clearly identified in the dealer's records as a security held for investment. b. Notes 1) Dealers are a particular type of taxpayer. These are people that buy and sell property and are PRINCIPLES. 2) A - dealers are locked into ordinary loss/gain situations. Cannot have a capital gain UNLESS a couple of things are true: 1) the dealer has to id the security as an investment security on the date it was acquired. 2) the security wasn't held by the dealer primarily for sale in the ordinary course of a trade or business. 3) B - ordinary losses. Companion rule. If the dealer ids the security as held for investment in their records, cannot be treated as an ordinary loss

1. Problems page 722 a. 1a: first, must assume that T is not a dealing in stock. so we can say the stock is a capital asset - not inventory, not depreciable property. Only question is did T hold it for more than a year; is this long or short term capital gain. Long term bc he held it for more than a year. period began Jan 16. He sold it Jan 16, so this is long term b. 1b: Feb 28 bought. Sold them on Feb 29 of year two. Remember that for holding period purposes, we're actually focusing on months. and so if the convention is that property bought on the last day of the month, holding period will begin on first day of next month, then this isn't a long term gain. Period begins on March 1st. this is a short term capital gain; he held it for ONLY one year, not more than a year c. 1c: bought shares on Feb 10, bought another 100 shares on March 10. He sold the 100 shares on Feb 15 of year 2 for 60. This raises a question of which shares were actually sold, the Feb shares or March shares? This'll dictate whether or not this is a long or short term capital gain. Regulations tell us that absent any specific id of what's being sold, there's a "first in, first out" rule. The first shares purchased will be the first sold (FIFO). d. 1d: T told his broker to purchase 100 shares on December 29. Stock delivered on Jan 3 of year 2. Delivered in year 3. This deals with trade dates and settlement dates. Trade date is Dec 29. Settlement date is Jan 3rd. when it was sold on Dec 30, was that more than a year? the TRADE DATE is the relevant date, not the settlement date. That means we focus on the 29th and 30th of December. Bc more than a year has passed, that's a long term capital gain. e. 1e: what's the consequence on the price was 45? Then our AR will be 4500, not 6k. basis is 5k. we've experienced a capital loss, a long term one. Since this is less than 3k, could deduct the whole 500, even if it had no other capital gain to offset. 2. If a transaction doesn't involve a capital asset, or if it doesn't constitute a sale or exchange it'll give rise to ordinary income or ordinary loss. for varying policy reasons, the Internal Revenue Code will supply one or more of the essential elements if missing.

1. Section 1235 - sale or exchange of patents a. Text 1) (a) General — A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 1 year, regardless of whether or not payments in consideration of such transfer are— a) payable periodically over a period generally coterminous with the transferee's use of the patent, or b) contingent on the productivity, use, or disposition of the property transferred. 2) (b) "Holder" Defined — For purposes of this section, the term "holder" means— a) any individual whose efforts created such property, or b) any other individual who has acquired his interest in such property in exchange for consideration in money or money's worth paid to such creator prior to actual reduction to practice of the invention covered by the patent, if such individual is neither— A) the employer of such creator, nor B) related to such creator (within the meaning of subsection (c)). b. Notes 1) Sale of all substantial rights in patents is considered the sale or exchange of a capital asset held for more than one year. therefore, will give rise to a capital gain/loss. 2) This is regardless of whether the purchase price is contingent on productivity or stretched out over a long period of time. this is a v favorable provision for the taxpayer.

1. Section 1241 a. Text 1) Amounts received by a lessee for the cancellation of a lease, or by a distributor of goods for the cancellation of a distributor's agreement (if the distributor has a substantial capital investment in the distributorship), shall be considered as amounts received in exchange for such lease or agreement b. Notes 1) V important during pandemic. Lotta leases were in default. When lessor is trying to cancel a lease, get the tenant out, they can buy out the tenant's lease. This provision allows the tenant to report the buy out payment as a sale or exchange (presumably as a capital asset)

1. Section 1253 a. Text 1) (a) General Rule — A transfer of a franchise, trademark, or trade name shall not be treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or continuing interest with respect to the subject matter of the franchise, trademark, or trade name. 2) (c) Treatment Of Contingent Payments By Transferor — Amounts received or accrued on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name which are contingent on the productivity, use, or disposition of the franchise, trademark, or trade name transferred shall be treated as amounts received or accrued from the sale or other disposition of property which is not a capital asset. b. Notes 1) A transfer of a franchise, trademark, or trade name shall not be treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or continuing interest with respect to the subject matter of the franchise, trademark, or trade name. 2) This is an ex of a negative capital gain treatment. 3) C: focuses on the nature of the consideration that's given in a transaction. If the amount received is contingent on productivity, that's treated as ordinary income, and not as a capital asset.

1. Section 1237 a. Text 1) (a) General — Any lot or parcel which is part of a tract of real property in the hands of a taxpayer other than a C corporation shall not be deemed to be held primarily for sale to customers in the ordinary course of trade or business at the time of sale solely because of the taxpayer having subdivided such tract for purposes of sale or because of any activity incident to such subdivision or sale, if— 2) such tract, or any lot or parcel thereof, had not previously been held by such taxpayer primarily for sale to customers in the ordinary course of trade or business (unless such tract at such previous time would have been covered by this section) and, in the same taxable year in which the sale occurs, such taxpayer does not so hold any other real property; and 3) no substantial improvement that substantially enhances the value of the lot or parcel sold is made by the taxpayer on such tract while held by the taxpayer or is made pursuant to a contract of sale entered into between the taxpayer and the buyer. . . ; and 4) such lot or parcel, except in the case of real property acquired by inheritance or devise, is held by the taxpayer for a period of 5 years. 5) (b)(1) Gains — If more than 5 lots or parcels contained in the same tract of real property are sold or exchanged, gain from any sale or exchange (which occurs in or after the taxable year in which the sixth lot or parcel is sold or exchanged) of any lot or parcel which comes within the provisions of paragraphs (1), (2) and (3) of subsection (a) of this section shall be deemed to be gain from the sale of property held primarily for sale to customers in the ordinary course of the trade or business to the extent of 5 percent of the selling price. b. Notes 1) If a lot or parcel of real property is held by a taxpayer other than a c corp, is won't be deemed to be held primarily for sale to customers in the ordinary course of trade or business at the time of sale solely bc of the taxpayer having subdivided such tract for purposes of sale or bc of any activity incident to such subdivision or sale, IF: 1) it's held by taxpayer for five years; 2) on substantial improvement enhances its value; and 3) such tract hadn't previously been held primarily for sale to customers in the ordinary course of trade or business. 2) B1 - blended treatment of capital gain/ordinary income for a single piece of property. Aka if you sell enough lots, even if you meet all these conditions, we'll treat you like someone holding property for sale to customers, but only a little bit.

1. Section 165 a. Text 1) (g)(1) General Rule — If any security which is a capital asset becomes worthless during the taxable year, the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset. b. Notes 1) G1 - when do you get to deduct your loss for securities: when it becomes worthless. That's when a sale or exchange is deemed to have taken place. 2) Section 1234A a) Text A) Gain or loss attributable to the cancellation, lapse, expiration, or other termination of— I) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or II) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer, III) shall be treated as gain or loss from the sale of a capital asset. The preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement). b) Notes A) Gain or loss attributable to cancellation, lapse, expiration, or other termination of rights shall be treated as gain or loss form the sale of a capital asset if it was a capital asset in the hands of T. B) Lookit regulation CCA regulation/pronouncement to understand this. 1) CCA 201642035, SITUATION 1. Acquiror enters into a contract with Target, pursuant to which the parties agree to take steps leading to Acquiror's acquisition of Target's stock, which is publicly traded on an established exchange, pursuant to a plan of merger. Target then receives a superior offer, terminates the contract, and pays Acquiror a $1,000,000 termination fee as required under the contract terms. When the contract is terminated, Acquiror has incurred $200,000 of costs of investigating and pursuing the transaction, which Acquiror properly capitalized as costs of facilitating the proposed transaction. Acquiror has gain of $800,000 (i.e., Acquiror's amount realized from the receipt of the termination fee ($1,000,000) minus Acquiror's capitalized facilitative costs ($200,000)). Because the gain is attributable to the termination of Acquiror's right with respect to Target's stock, which would have been a capital asset in Acquiror's hands, the gain is treated as capital gain under §1234A.

l. Regulation 1.1001-3 1) (a) General Rule. — For purposes of §1.1001-1(a), a significant modification of a debt instrument, within the meaning of this section, results in an exchange of the original debt instrument for a modified instrument that differs materially either in kind or in extent. A modification that is not a significant modification is not an exchange for purposes of §1.1001-1(a). 2) A significant modification of a debt instrument. If there's a significant modification, there will be a deemed exchange of hat instrument for a new one, and that will set off tax consequences for the lender (primarily). Banks actually lobbied for this - they were exchanging portfolios of bad loans, and they didn't want to have to wait until the borrowers went bankrupt; they wanted to swap portfolios and trigger those losses at a time of their choosing. 3) It doesn't take a lot for there to be a significant modification - and for banks, this is great, but this could have crazy bad implications for borrowers.

7. Other character of gains from dealings in property: holding period a. Is our gain or loss on the sale or exchange of a capital asset short or long term? 1) short term: held for less than a year. long term: a year or more b. Rev. Rule 66-7 1) In view of the foregoing, it is concluded that the holding period of a capital asset begins to run on the day following the date of acquisition of the asset involved. Accordingly, a capital asset acquired on the last day of any calendar month, regardless of whether the month has 31 days or less, must not be disposed of until on or after the first day of the [twelfth] succeeding month of the calendar in order to have been "held for more than [one year]" within the meaning of sections 1222(3) and (4) of the Code. 2) Holding period of a capital asset begins on the day following the acquisition of the capital asset. 3) Aka: if you bought stock today, your holding period starts tomorrow. 4) Holding period is measured in months, not days. This can get tricky in the case of leap years. c. Rev. Rule 66-97 1) Text a) There are two relevant dates in connection with such security transactions [effected on a registered securities exchange]: (1) the "trade date"--the date on which the contract to buy or sell the security is made and (2) the "settlement date"--the date on which the security is delivered and payment is tendered. • [B]onds as well as stocks are considered acquired or sold on the respective "trade dates." • [T]he holding period for debentures acquired by purchase, whether on a registered securities exchange or in the "over-the-counter" market, is to be determined by excluding the "trade date" on which the debentures are acquired and including the "trade date" on which the debentures are sold. 2) Notes a) Dealing with days of acquisition for publicly traded stock and securities b) Exclude trade date/date of acquisition for calculating holding period for stocks. But you INCLUDE the date of sale in your holding period.

a. Problem page 860 1) Seller owns land purchased as an investment 4 years ago for 2k (cost basis). Seller sells to B. B pays 2k in cash in current year, gives four 10% interest bearing notes to be paid off in each of following four years. Installment sale. Each note has a 2k surface value. 2) There is adequate stated interest here. 3) Amount realized is issue price via 1.1273-2(d)(1). Only applies to the extent 1274 doesn't. 4) 1274: let's say it applies in this instance. Issue price will be the stated principle amount. Amount realized on this sale will be 10k. 5) 1b: is opting out of installment reporting. Doesn't matter whether T is accrual or tax method. This method of accounting supersedes both in the same way. wouldn't change anything. b. What happens if we make a sale and we have either fixed and contingent payment features, or maybe it's all contingent? 1) 1.1001-1(g)2)(i): g1 doesn't apply to the extent that there are contingent payment debt instruments involved. a) Text A) (g)(2)(i) In General. — Paragraph (g)(1) of this section does not apply to a debt instrument subject to either Section 1.483-4 or Section 1.1275-4(c) (certain contingent payment debt instruments issued for non-publicly traded property). B) (g)(2)(ii) Special Rule To Determine Amount Realized. — If a debt instrument subject to Section 1.1275-4(c) is issued in exchange for property, and the income from the exchange is not reported under the installment method of section 453, the amount realized attributable to the debt instrument is the issue price of the debt instrument as determined under Section 1.1274-2(g), increased by the fair market value of the contingent payments payable on the debt instrument. I) If a debt instrument subject to Section 1.483-4 is issued in exchange for property, and the income from the exchange is not reported under the installment method of section 453, the amount realized attributable to the debt instrument is its stated principal amount, reduced by any unstated interest (as determined under section 483), and increased by the fair market value of the contingent payments payable on the debt instrument. b) Notes G2ii provides a series of rules for determining the amount realized in a contingent payment sale when T has opted out of installment method reporting.

A) 1) 1.1275-4 a) Text A) (c)(4)(ii)(A) General Rule. — A contingent payment is treated as a payment of principal in an amount equal to the present value of the payment, determined by discounting the payment at the test rate from the date the payment is made to the issue date. The amount of the payment in excess of the amount treated as principal under the preceding sentence is treated as a payment of interest. B) (c)(4)(ii)(B) Test Rate. — The test rate used for purposes of paragraph (c)(4)(ii)(A) of this section is the rate that would be the test rate for the overall debt instrument under Section 1.1274-4 if the term of the overall debt instrument began on the issue date of the overall debt instrument and ended on the date the contingent payment is made. However, in the case of a contingent payment that consists of a payment of stated principal accompanied by a payment of stated interest at a rate that exceeds the test rate determined under the preceding sentence, the test rate is the stated interest rate. b) Notes A) What are contingent payments, how are they treated in these diff contexts B) C4ii4: these are the OID rules. C) These rules say when you get the contingent payment in x year, we'll make a present value calculation back to the day you issued it. Any amount that is in excess of the amount treated as principle is then treated as interest payments. D) C4iiB and A: the test rate. This is a rate that is published by the gov.

B. 1.691(a)-1 1. Text a. (b) General Definition. — In general, the term "income in respect of a decedent" refers to those amounts to which a decedent was entitled as gross income but which were not properly includible in computing his taxable income for the taxable year ending with the date of his death or for a previous taxable year under the method of accounting employed by the decedent. See the regulations under section 451. Thus, the term includes: 2. Notes a. Refers to amounts to which D was entitled to as GI, but weren't included in D's GI under their method of accounting. b. If D was entitled to some payment not received before etheir death, there's no income for D bc of cash method. C. 1014 1. Text a. (c) Property Representing Income In Respect Of A Decedent — This section shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691. 2. Notes a. C: there's no step up in basis for IRD.

A. 1.691(A)-3 character of income 1. (a)— The right to receive an amount of income in respect of a decedent shall be treated in the hands of the estate, or by the person entitled to receive such amount by bequest, devise, or inheritance from the decedent or by reason of his death, as if it had been acquired in the transaction by which the decedent (or a prior decedent) acquired such right, and shall be considered as having the same character it would have had if the decedent (or a prior decedent) had lived and received such amount. B. Problems page 881 1. 1a: accrual method of accounting. Not IRD bc attorney was accrual method. That account receivable would be included already by the decedent in their final return. 2. Ib: cash method: that is IRD. No income had been reported yet bc bill wasn't paid before attorneys' debt, and income arises when it's actually received. Spouse has to report the collection of the receivable as income, will pay the tax as IRD in the year the collection is made. 3. 1c: attorney's contingent fee that used accrual method. The fee wasn't fixed. Accrual method realizes income when all facts have occurred that fix the right to the income. And the right to the fee hadn't been fixed yet. So: spouse will report income as IRD, pay tax, notwithstanding the fact that attorney was accrual method. 4. 1d: appreciated property subject to both recapture and 1231 gain. Remember: gain or loss is recognized on sale or exchange of property, regardless of how much it's appreciated; must be a sale before there can be a gain or a loss. so this is NOT IRD bc there's been no income event. This is not IRD. The basis rules still apply. 5. 1e: installment sale obligation received when property was sold by a cash or accrual method T. installment method is mandatory, doesn't matter what your general method of accounting is. Whoever inherits that obligation will have to report the income that would be IRD, have to report the gain as and when the payments are received.

I. Like-Kind Exchanges A. Why do we need a non-recognition provision in the first place? 1. 1.1001-1 a. Text 1) (a) General Rule. — Except as otherwise provided in Subtitle A of the Code, the gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or as loss sustained. 2. 1001 a. Text 1) (c) Recognition Of Gain Or Loss — Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized. b. Notes 1) C: the entire amount of gain or loss of property on the sale or exchange of property shall be recognized. General rule. 2) Principal characteristics of nonrecognition provisions 3. Principle characteristics of nonrecognition provisions a. Tax on gain (loss) deferred until disposition of property received in exchange in an otherwise taxable sale or exchange b. Gain (loss) preserved for future taxation by requiring the property received in the exchange to have the same basis as the property given in the exchange or in the hands of the transferor ("substituted basis"; see §7701(a)(42)) c. Holding period for property received in exchange includes the holding period of property given in the exchange or in the hands of the transferor ("tacked" holding period; see §1223(1) 4. Requirements for like-kind exchange a. qualifying use: property held for use in trade or business or for investment b. there must be an exchange, not sale and reinvestment c. replacement property must be "like-kind" 5. 1041: transfers of property between spouses is one ex 6. Nonrecognition provision essentially just result in the deferral of tax. You will still have to pay tax later on a subsequent disposition of the property. 7. Gain that isn't being taxed currently is preserved in the transfer of basis from the old property to the new. 8. Holding period: rules will come into play that will tack the holding period. 9. One of the principle non recognition provision in the code is like kind exchange. a. Three reqs: qualifying use; must be an exchange; replacement property must be like kind. b. Personal use does NOT qualify as a use for purposes of 1031. c. Like kind provisions are now limited to real property exchanges. That's it.

A. 1031a1/a2. Remember qualifying use reqs: must meet these reqs both for old and new property. 1. Text a. (a)(1) In General — No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment. b. (a)(2) Exception For Real Property Held For Sale — This subsection shall not apply to any exchange of real property held primarily for sale.Notes 2. Notes a. A2: applies to developers, land sale cos making big subdivisions. If your business is the sale of real property, you won't be eligible for a 1031 transaction. b. We're concerned about real property used in a trade or business, like your factory or office building. B. 1.1031 1. Text a. (a)(1) In General. — The term real property under section 1031 and §§1.1031(a)-1 through 1.1031(k)-1 means land and improvements to land, unsevered natural products of land, and water and air space superjacent to land. Under paragraph (a)(5) of this section, an intangible interest in real property of a type described in this paragraph (a)(1) is real property for purposes of section 1031 and this section. Property that is real property under State or local law as provided in paragraph (a)(6) of this section is real property for purposes of section 1031 and this section. b. (a)(3) Unsevered Natural Products Of Land. — Unsevered natural products of land, including growing crops, plants, and timber; mines; wells; and other natural deposits, generally are treated as real property for purposes of this section. Natural products and deposits, such as crops, timber, water, ores, and minerals, cease to be real property when they are severed, extracted, or removed from the land. 2. Notes a. A1: what is real property. Reference to state or local law - this law defines property rights for almost all purposes. b. Generally, includes both developed and undeveloped property, residential, agricultural property. c. A3: in the case of unsevered natural products of land - ie crops, plants, timber, minerals - all that is real property to the extent state and local law provides it is UNTIL it has been severed or extracted from the land. At that point, it is personal property.

I. Foreclosure of seller-financed property A. Has to do with 1038. Remember: seller who sells on installment basis will report on installment basis. But sometimes seller sells real property, takes back a note from the buyer, everybody has good intentions to pay. Then the buyer defaults, can't continue to make payments, seller has to foreclose. What'll happen in that circumstance? 453B: gain inherent in the installment note will be triggered, gain will be recognized when the installment note is satisfied for other than face value or is sold. Here, the installment note isn't sold, it's simply being foreclosed. Assume property secured installment obligation. 453B would say all gain in the note is triggered, that's the amount T should pay. But 1038 comes in and says no, if this is a reacquisition of property bc of default by the buyer, no gain or loss will result from that, except as provided in b and d.

A. 1038 1. Text a. (a) General Rule — If— a sale of real property gives rise to indebtedness to the seller which is secured by the real property sold, and the seller of such property reacquires such property in partial or full satisfaction of such indebtedness, then, except as provided in subsections (b) and (d), no gain or loss shall result to the seller from such reacquisition, and no debt shall become worthless or partially worthless as a result of such reacquisition. b. (b)(1) In General — In the case of a reacquisition of real property to which subsection (a) applies, gain shall result from such reacquisition to the extent that-- 1) the amount of money and the fair market value of other property (other than obligations of the purchaser) received, prior to such reacquisition, with respect to the sale of such property, exceeds 2) the amount of the gain on the sale of such property returned as income for periods prior to such reacquisition. c. (b)(3) Gain Recognized — Except as provided in this section, the gain determined under this subsection resulting from a reacquisition to which subsection (a) applies shall be recognized, notwithstanding any other provision of this subtitle. d. (c) Basis Of Reacquired Real Property — If subsection (a) applies to the reacquisition of any real property, the basis of such property upon such reacquisition shall be the adjusted basis of the indebtedness to the seller secured by such property (determined as of the date of reacquisition), increased by the sum of— 1) the amount of the gain determined under subsection (b) resulting from such reacquisition, and 2) the amount described in subsection (b)(2)(B) [amounts paid by seller]. If any indebtedness to the seller secured by such property is not discharged upon the reacquisition of such property, the basis of such indebtedness shall be zero. e. (d) Indebtedness Treated As Worthless Prior To Reacquisition — If, prior to a reacquisition of real property to which subsection (a) applies, the seller has treated indebtedness secured by such property as having become worthless or partially worthless— 1) such seller shall be considered as receiving, upon the reacquisition of such property, an amount equal to the amount of such indebtedness treated by him as having become worthless, and 2) the adjusted basis of such indebtedness shall be increased (as of the date of reacquisition) by an amount equal to the amount so considered as received by such seller. f. (e) Principal Residences — If— 1) subsection (a) applies to a reacquisition of real property with respect to the sale of which gain was not recognized under section 121 (relating to gain on sale of principal residence); and 2) within 1 year after the date of the reacquisition of such property by the seller, such property is resold by him, then, under regulations prescribed by the Secretary, subsections (b), (c), and (d) of this section shall not apply to the reacquisition of such property and, for purposes of applying section 121, the resale of such property shall be treated as a part of the transaction constituting the original sale of such property.

A. 1231 - involuntary conversions and property that is used in a trade or business 1. Text a. (a)(3)(A) Section 1231 Gain — The term "section 1231 gain" means— 1) (ii)— any recognized gain from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) into other property or money of— a) (I) property used in the trade or business, or b) (II) any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit. 2. Notes a. A3A: section 1231 gain means any recognized gain from the compulsory conversion into toher property or money of property used in trade or business OR any capital asset that is held for more than one year and is held in connection with a trade or business. b. 1033 c. B1: basis rules. Decrease by money actually received and not reinvested in replacement property. That'll decrease the basis of the property received. d. B2: basis rule that applies in the elective gain that applies in 1033a2. Now will switch to cost basis, bc T has purchased replacement property. Begin with cost, then decrease it by the amount of the gain not recognized. e. There are two diff basis rules here. Know which one applies when.

A. 1223 1. Text a. (1)— In determining the period for which the taxpayer has held property received in an exchange, there shall be included the period for which he held the property exchanged if, under this chapter, the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged, and, in the case of such exchanges the property exchanged at the time of such exchange was a capital asset as defined in section 1221 or property described in section 1231. For purposes of this paragraph— 1) (A)— an involuntary conversion described in section 1033 shall be considered an exchange of the property converted for the property acquired, and 2. Notes a. 1: holding period provision for involuntary conversions. It will be subject to this section 1223(1) which provides for tacked holding period in the case of a nonrecognition transaction.

1. Notes a. How much gain will the seller/forecloser actually have to recognize on the foreclosure? Formulation focuses on the payments. We'll add up all the payments that have been received prior to the reacquisition, to the extent those payments exceed the amount of gain that's been reported on tax return prior to the reacquisition, that'll be gain. Essentially looks to tax what has not already been taxed prior to the reacquisition. b. B3: an override provision. If gain will be recognized under 1038, will be recognized regardless of any other section in the code. Overrides other provisions. c. D: has to do with whether the seller has written off the debt as worthless prior to the time of foreclosure. This is a tax benefit rule. If seller has determined prior to foreclosure this is a worthless debt, deducts it under 166, then on a later foreclosure, seller will have to recapture the amount of that prior deduction, treat it as an amount received, recapture the benefit of the prior deduction. That increased amount received will be added to the basis of the property required. d. C: provides a basis rule. How we'll determine basis of property once it's been reacquired. Basis = basis of the installment note, plus any amount of gain that's recognized in the foreclosure, any other amounts the T has spent reacquiring the property (always will be some expenses in foreclosure). e. E: special rules for principal residence. If sold and foreclosed within one year, you just simply treat the second sale after the foreclosure as part of the og sale.

A. 453B 1. Text a. (a) General Rule — If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and— 1) (1) the amount realized, in the case of satisfaction at other than face value or a sale or exchange, or 2) (2) the fair market value of the obligation at the time of distribution, transmission, or disposition, in the case of the distribution, transmission, or disposition otherwise than by sale or exchange. Any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received. b. (b) Basis Of Obligation — The basis of an installment obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full. 2. Notes Basis of the note is equal to the face amount of the note, minus the amount of gain.

1. 6501 a. Text 1) (a) General Rule — Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) . . . and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. For purposes of this chapter, the term "return" means the return required to be filed by the taxpayer . . . . 2) (c)(4)(A) In General — Where, before the expiration of the time prescribed for the assessment of any tax imposed by this title, except the estate tax provided in chapter 11, both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon. 3) (c)(1) False Return — In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time. 4) (c)(2) Willful Attempt To Evade Tax — In case of a willful attempt in any manner to defeat or evade tax imposed by this title (other than tax imposed by subtitle A or B), the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. 5) (c)(3) No Return — In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. b. Notes 1) Assessment process must be completed within 3 years the return was filed. That includes any audits by the gov to increase that assessment. This general rule has exceptions though. 2) C4A: one exception to three year assessment rule. It's possible for the T and gov to agree to a diff assessment period. That agreement must be in writing. Can be before or after the three year period. 3) If T goes through an audit and the result is that parties agree on what adjustments will be made to income, gov will always ask T to agree in writing to the immediate assessment of the audit adjustments. 4) C1, 2, 3: fraudulent terms. If fraudulent, taxes can be assessed at any time. includes people who try to evade tax. 5) If T simply fails to file a tax return, the sun will never set on that tax return. Gov can come up any time and assess tax on that year. 6) Assessment begins with tax return, runs through the process until the SOL has expired on that particular tax years.

A. Administrative procedures 1. Gove doesn't have to accept what we say on our return. 2. 6211 a. Text 1) (a) In General — For purposes of this title in the case of income, estate, and gift taxes imposed by subtitles A and B and excise taxes . . . the term "deficiency" means the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44 exceeds the excess of— a) (1) the sum of A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus B) the amounts previously assessed (or collected without assessment) as a deficiency, over— b) (2) the amount of rebates, as defined in subsection (b)(2), made. b. Notes 1) Goal of audit is to determine if there is a deficiency in the amount of tax that is due. Deficiency = the diff tween the amount you actually paid and how much the gov says you actually owed. 3. 6212 a. Text 1) (a) In General - If the Secretary determines that there's a deficiency in respect of any tax imposed by subtitles A or B or chapter 41, 42, 43, or 44, he's authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail. Such notice shall include a notice to the taxpayer of the taxpayer's right to contact a local office of the taxpayer advocate and the location and phone number of the appropriate office. 2) (b) Joint Income Tax Return - In the case of a joint income tax return filed by husband and wife, such notice of deficiency may be a single joint notice, except that if the Secretary has been notified by either spouse that separate residences have been est, then, in lieu of the single joint notice, a duplicate original of the joint notice shall be sent by certified mail or registered mail to each spouse at his last known address. 3) [(a) cont.] Except as otherwise provided in section 6851, 6852, or 6861 no assessment of a deficiency in respect of any tax imposed by subtitle A, or B, chapter 41, 42, 43, or 44 and no levy or proceeding in court for its collection shall be made, begun, or prosecuted until a) such notice has been mailed to the taxpayer, b) nor until the expiration of such 90-day or 150-day period, as the case may be, c) nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final. d) [(a) cont.] Any petition filed with the Tax Court on or before the last date specified for filing such petition by the Secretary in the notice of deficiency shall be treated as timely filed. b. Notes 1) The 90 day letter = notice of deficiency. 2) For joint tax returns, code only requires that a single notice be sent. If a married couple files separately, then two will have to be sent. 3) The 90 days letter begins a period of time for filing petition in tax court for redetermination of the deficiency. 4) This is your option for relief.

1. Notes a. A: gov doesn't want to have to chase down a bunch of de minimis claims under 3k. taxpayer will either claim a deduction for the amount repaid in respsect of prior income, or T is going to not amend the earlier return but calculate the tax that was due on the earlier return without the part of the income that had to be returned. So you have an option. Can either claim the deduction or compute tax without the deduction. b. B1: repayment of prior income cannot be voluntary. If taxpayer says they'll take the credit amount, just recompute tax for earlier year, then this provision says that if the amount of tax that was overpaid in earlier exceeds the amount of tax due in the current year, then it can be refunded. T can get a refund without amending earlier return or anything else. c. B2: a doesn't apply in the case of any adjustments related to inventory sales. Adjustments made in alter year only.

A. Claim of right - Reg. 1.1341-1 1. Text a. (a)(2) For the purpose of this section "income included under a claim of right" means an item included in gross income because it appeared from all the facts available in the year of inclusion that the taxpayer had an unrestricted right to such item, and "restoration to another" means a restoration resulting because it was established after the close of such prior taxable year (or years) that the taxpayer did not have an unrestricted right to such item (or portion thereof). b. (g) Bad Debts. — The provisions of sections 1341 and this section do not apply to deductions attributable to bad debts. 2. Notes a. A2: income included under a claim of right = gi to which it appeared T had an unrestricted right in the tax year. b. G: doesn't apply to bad debts. If you make a loan, the borrower doesn't repay, you take your bad debt loss deduction in the year the debt is objectively uncollectable. 1341 doesn't apply - can't reverse all that happened. What are the kinds of bad debts that would commonly fall under this heading: installment sales.

1. 1.83-2 a. Text 1) (a) In General. — The fact that the transferee has paid full value for the property transferred, realizing no bargain element in the transaction, does not preclude the use of the election as provided for in this section. 2) If this election is made, the substantial vesting rules of section 83(a) and the regulations thereunder do not apply with respect to such property, and except as otherwise provided in section 83(d)(2) and the regulations thereunder (relating to the cancellation of a nonlapse restriction), any subsequent appreciation in the value of the property is not taxable as compensation to the person who performed the services. 3) Thus, property with respect to which this election is made shall be includible in gross income as of the time of transfer, even though such property is substantially nonvested (as defined in § 1.83-3(b)) at the time of transfer, and no compensation will be includible in gross income when such property becomes substantially vested (as defined in § 1.83-3(b)). 4) In computing the gain or loss from the subsequent sale or exchange of such property, its basis shall be the amount paid for the property increased by the amount included in gross income under section 83(b). If property for which a section 83(b) election is in effect is forfeited while substantially nonvested, such forfeiture shall be treated as a sale or exchange upon which there is realized a loss equal to the excess (if any) of— a) The amount paid (if any) for such property, over, b) The amount realized (if any) upon such forfeiture. 5) If such property is a capital asset in the hands of the taxpayer, such loss shall be a capital loss. A sale or other disposition of the property that is in substance a forfeiture, or is made in contemplation of a forfeiture, shall be treated as a forfeiture under the two immediately preceding sentences. b. Notes 1) Consider: if the election is made, any subsequent appreciation is not taxable as compensation. that's the upside, the reason you do it. compensation is over on the date of transfer of property. Now you're an investor. 2) There will also be no compensation as and when it vests, either. Reason to make the election, if it can be managed. 2. Effect of 83b election - exs

A. Collateral effects 1. 1.83-4 a. Text 1) (b)(1) Except as provided in paragraph (b)(2) of this section, if property to which section 83 and the regulations thereunder apply is acquired by any person (including a person who acquires such property in a subsequent transfer which is not at arm's length), while such property is still substantially nonvested, such person's basis for the property shall reflect any amount paid for such property and any amount includible in the gross income of the person who performed the services (including any amount so includible as a result of a disposition by the person who acquired such property.) Such basis shall also reflect any adjustments to basis provided under sections 1015, 1016, and 1022. b. Notes 1) Basis rule. Basis of property that is in this case property that's transferred not at arms length while is nonvested....but it's up to the person to perform 2) F: holding period, when does it begin? With respect to the part of the property that vests, begins WHEN it vests.

A. 1031 1. Text a. (h) Special Rules For Foreign Real Property — Real property located in the United States and real property located outside the United States are not property of a like kind. 2. Notes a. H: problem: people exchange US real property for foreign real property. That is not like kind for purpose of 1031. B. Boot 1. 1031 a. Text 1) (b) Gain From Exchanges Not Solely In Kind — If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. 2) (c) Loss From Exchanges Not Solely In Kind — If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized. b. Notes 1) B: situation where there may be other property like money involved - aka property other than just real property. If there is boot, no loss is allowed, only gain. Will collect tax on the gain. Cannot claim a loss.

A. Deferred like-kind exchanges 1. Can be difficult to find like kind property at the same time. might be a good opportunity to excahgne your property now, but haven't identified an exchange property. 2. When exchanges aren't simultaneous - deferred like kind exchanges. 3. 1031a3: a. Text 1) (a)(3) Requirement That Property Be Identified And That Exchange Be Completed Not More Than 180 Days After Transfer Of Exchanged Property — For purposes of this subsection, any property received by the taxpayer shall be treated as property which is not like-kind property if— a) (A)— such property is not identified as property to be received in the exchange on or before the day which is 45 days after the date on which the taxpayer transfers the property relinquished in the exchange, or b) (B)— such property is received after the earlier of— A) (i)— the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or B) (ii)— the due date (determined with regard to extension) for the transferor's [tax] return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs. b. Notes 1) Must id exchange property within 45 days. have to close the acquisition of replacement properties within 180 days OR, if sooner, the due date for the transferor's tax return.

a. Notes 1) The idea is that when the corp income tax rate was lower in 2018, the tax policy people were concerned that there would be a big rush to move businesses, create new business in corp form rather than other forms of business entities. This would have been a total counter trend - policy people were concerned. 2) A: a deduction available to taxpayers OTHER than corps. 3) A: deduction is equal to the LESSER of number one or two. One: the combined business income amount - that itself, note, is a defined term. Two: 20% of the excess of taxable income over net capital gain. 4) B: qualified business income amount means: A) the sum of the amounts for each qualified trade or business, plus B) 20% of the aggregate amount of the qualified REIT dividends. 5) F1A: what applies to partner and shareholders. They're pulling out their share for income, gain, deduction, loss. this deduction for qualified business income doesn't just apply to sole proprietors. Also applies to partners of partnerships that conduct business, shareholders of S corps that conduct business that otherwise satisfies all other reqs of qualified business income. 6) C2: if there are losses in a given year from a qualified business activity, that loss won't generate any deduction bc to get the deduction there must be qualified business income, so that loss will be carried over. Will have the effect of reducing the deduction in the succeeding year. 7) B2: the amount of the deduction in our formula. Note: if A applies, T will only pay tax on 80% of their qualified business income. Idea is that 20% of QBI could be a deduction. Notice that this is a non-cash expenditure. 8) B: the greater of... this is trying to get small businesses to employ people. the more W2 people your business pays, the more of this deduction T will be allowed to take. 9) C1: QBI is income from a qualified trade or business, considering all of the business income and loss. 10) C3A: QBI doesn't come from trade or business not carried on in the US. 11) B6A: qualified property subject to the depreciation. Must be held in the qualified trade or business, used in production of QBI.

A. Employment and excluded trades or businesses 1. 199A a. Text 1) (c)(4) Treatment Of Reasonable Compensation And Guaranteed Payments — Qualified business income shall not include— a) (A) reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business, b) (B) any guaranteed payment described in section 707(c) paid to a partner for services rendered with respect to the trade or business, and c) (C) to the extent provided in regulations, any payment described in section 707(a) to a partner for services rendered with respect to the trade or business. 2) (d) Qualified Trade Or Business — For purposes of this section— (1) In General — The term "qualified trade or business" means any trade or business other than— a) (A)— a specified service trade or business, or b) (B)— the trade or business of performing services as an employee. 3) (d)(2) Specified Service Trade Or Business — The term "specified service trade or business" means any trade or business— a) (A) which is described in section 1202(e)(3)(A) (applied without regard to the words "engineering, architecture,") or which would be so described if the term "employees or owners" were substituted for "employees" therein, or b) (B) which involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)). 4) (b)(3)(A) Exception From Limit — In the case of any taxpayer whose taxable income for the taxable year does not exceed the threshold amount, paragraph (2) shall be applied without regard to subparagraph (B).

1. Forum selection considerations a. If T doesn't have money to pay, only option is the US tax ct. b. For any technical tax ct, the US tax court is probably the best. Most of the judges there came outta tax practice, have experience with technical tax issues. c. Fed tax procedures - collections d. Collections is a dept of IRS that everybody hates the most. e. Besides favorable precedent, other factors a to take into consideration in selecting a judicial forum include the following: 1) ability and desire to pay the deficiency 2) speed of case 3) disposition 4) availability of a jury trial 5) publicity 6) availability of small case procedures in tax court 7) convenience of forum 8) breadth of the court's jurisdiction 9) settlement possibilities during 10) trial 11) accruing of interest 12) cost and duration of litigation 13) costs of litigation 14) appellate review possibilities

A. Federal Tax Procedure - Collections 1. 6301 a. The Secretary shall collect the taxes imposed by the internal revenue laws. 2. 6321 a. Text 1) If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. b. Notes 1) Fed gov has special rights that other CRs don't have. for ex: if any person liable to pay has property, US gov has a lien on all property and rights to property, both real and personal property. This is called the automatic lien. Gov doesn't have to ask anybody for anything. 2) How do you discover these liens if they're automatic? Gov ests its lien priority by giving written notice. Won't get ahead of pre-existing liens, like the mortgage on your home. 1. 6320 a. Text 1) (a)(1) In General — The Secretary shall notify in writing the person described in section 6321 of the filing of a notice of lien under section 6323. b. Notes 1) When notice of lien is given, T has a right to a hearing. In the case of RE, gov will record its lien in public records. Has priority over any later liens. 2. 6331 a. Text 1) (a) Authority Of Secretary — If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. b. Notes 1) Gov also has the power of levy. On ten days notice, gov can actually levy property. That can be a bank account. Property then turned over to gov. gov doesn't have to have any marshall supervise the levy or go to any ct go get permission. Most typical levy for the average taxpayer: garnishment of wages. Other CRs can go around doing this without supervision, but feds can.

A. Timing aspects 1. 83 a. Text 1) (a) General Rule — If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of— a) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over b) the amount (if any) paid for such property, c) shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm's length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture 2) (c)(1) Substantial Risk Of Forfeiture — The rights of a person in property are subject to a substantial risk of forfeiture if such person's rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual. 3) (c)(2) Transferability Of Property — The rights of a person in property are transferable only if the rights in such property of any transferee are not subject to a substantial risk of forfeiture. b. Notes 1) A: fmv of property is determined at the first time that the rights in the property are transferrable or are not subject to substantial risk of forfeiture. 2) When is that value includable in income, though? In the first taxable year in which the person having the interest's interest is transferrable or not subject to a substantial risk of forfeiture. 3) As the vesting occurs, you have to redetermine the fmv of the property. If value is increasing over time, there'll be more income in later years than in earlier years, even if the amount that is vested is the same. 4) C2: what does it mean for property to be transferrable? Transferrable only if the rights in the property are not subject to a substantial risk of forfeiture. If you have to continue to meet the vesting criteria, then they're subject to substantial risk of forfeiture.

A. Five year cliff vesting ex 1. This is not common, but idea is there is an award of stock today, and it'll vest on the fifth anniversary of this date 100%. Before that anniversary, there's no vesting. This is called cliff vesting. Effect on income on service provider over the years is illustrated. 83a says there's no income in the first year bc there is substantial risk of forfeiture. Still a substantial risk in year 2, 3, 4. In none of those periods does service provider have income bc of that substantial risk. On the fifth anniversary of the year of the award, when vesting occurs all at once, and stock is worth 50/share, now the service provider has income. And income is determined by the fmv of the stock at the time of vesting. 2. Five year ratable vesting: say there's vesting 20% per year. 20% of 30k is 6k. each year, as value increases, 20% of that value will vest. But note: service provider will end up paying less tax than in five year cliff vesting, actually.

a. D1: it is possible to elect out of installment method if one so chooses. But in any case, payment is the central concept here. b. Installment method focuses on the receipt of payment. Payments take usually forms, given in b31, as well as actual and constructive receipt of any forms of payment. c. F3: refinements of the concept of payment. First: payment doesn't include the installment note that's given by the buyer of the property. d. B3i, b2iv: for purposes of discerning the amount of payment, the amount of any qualifying indebtedness won' be considered payment as long as it exceeds the basis of the property. e. B2iv: qualifying indebtedness: doesn't include the buyer's installment obligation, but does include third party obligations, esp loan obligations that are secured by the property that's being sold. If a liability/debt isn't a qualifying ebt and it's discharged in connection with the installment sale, it will be treated as payment in the year of the sale. f. F3: what is a contingent payment. Payments to be received include payments that aren't contingent, and some payments that are. if the amount is what the contingency relates to. g. F6: there are coordination rules. To thee extent the transaction involves a like kind exchange, 1031 controls. In eh case of boot: installment method applies if payment is received after a year. h. B2i: gross profit ratio is determined to the extent that any payment is classified as gain in the year it's received as payment. Formula. Ratio of gross profit divided by the total k price. It'll apply once it's determined it should apply to each payment. i. B2v: gross profit definition is keyed off of selling price. Here, more or less aligns with "gain." j. B2ii: selling price definition. Disregard any liabilities that are secured by the property, disregard any interest. K price is also basically equal to the selling price, but here you'll reduce the selling price by the qualifying amount of indebtedness. Aka: fi there's a qualifying indebtedness on the property, it's treated as recovery of basis to the seller. k. G1 from 453) - another reference to contingent payments. The sale to related parties is another carveout from installment method. Installment method doesn't apply in this instance. l. G3: related persons definition. Basically just 267, but includes those relationships that're described in 707b1B, having to do with partnerships. Don't get bogged down with that - just know this definition is a little big larger.

A. Gross profit ratio 1. Section 15A.453-1 a. Text 1) (b)(2)(i) In General. — Under the installment method, the amount of any payment which is income to the taxpayer is that portion of the installment payment received in that year which the gross profit realized or to be realized bears to the total contract price (the "gross profit ratio"). 2) (b)(2)(v) Gross Profit Defined. — The term "gross profit" means the selling price less the adjusted basis as defined in section 1011 and the regulations thereunder. 3) (b)(2)(ii) Selling Price Defined. — The term "selling price" means the gross selling price without reduction to reflect any existing mortgage or other encumbrance on the property (whether assumed or taken subject to by the buyer) and, for installment sales in taxable years ending after October 19, 1980, without reduction to reflect any selling expenses. Neither interest, whether stated or unstated, nor original issue discount is considered to be a part of the selling price. 4) (b)(2)(iii) Contract Price Defined. — The term "contract price" means the total contract price equal to selling price reduced by that portion of any qualifying indebtedness (as defined in paragraph (b)(2)(iv) of this section), assumed or taken subject to by the buyer, which does not exceed the seller's basis in the property (adjusted, for installment sales in taxable years ending after October 19, 1980, to reflect commissions and other selling expenses as provided in paragraph (b)(2)(v) of this section). 2. Section 453 a. Text 1) (f)(6) Like-Kind Exchanges — In the case of any exchange described in section 1031(b)— a) the total contract price shall be reduced to take into account the amount of any property permitted to be received in such exchange without recognition of gain, b) the gross profit from such exchange shall be reduced to take into account any amount not recognized by reason of section 1031(b),

A. Problems page 992 1. Filed on May 1: three years from date of filing, which would be May 1 in year 5. Note: if the return is filed timely, then the mail filing rule applies. But if it was a delinquent return, it's deemed filed when the IRS actually receives it. in this case, he'll assume that it was filed delinquent, not pursuant to an extension. If was filed pursuant to extension, date of filing was April 15 (??) 2. No SOL for a return that was never filed (for civil purposes. For criminal purposes, there's a six year SOL, even on a failure to file). 3. Problem 2: T filed on April 1 of year 1. What diff result if the deficiency asserted rests on an omission that would increase gi on the return to 60k. what was reported on return was 40k. T omitted 20k, or 50% of the amount. Therefore six year statute would apply. Statute would run on April 15th of year 7. 4. The deficiency asserted rests on an omission done with deliberate attempt to evade tax. No SOL for assessment or collection in this case. no time limit. But remember: still 6 years for criminal statute. The gov only has 6 years from the commission of the offense to prosecute criminally T in this case.

A. Innocent spouse relief 1. There's two approaches to this type of relief. The first one is traditional approach. Arises in the context of a joint return. 6015 a. Text 1) (b)(1) In General — Under procedures prescribed by the Secretary, if— a) (A) a joint return has been made for a taxable year; b) (B) on such return there is an understatement of tax attributable to erroneous items of one individual filing the joint return; c) (C) the other individual filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement; d) (D) taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement; and e) (E) the other individual elects (in such form as the Secretary may prescribe) the benefits of this subsection not later than the date which is 2 years after the date the Secretary has begun collection activities with respect to the individual making the election, then the other individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such understatement. 2) (c)(1) In General — Except as provided in this subsection, if an individual who has made a joint return for any taxable year elects the application of this subsection, the individual's liability for any deficiency which is assessed with respect to the return shall not exceed the portion of such deficiency properly allocable to the individual under subsection (d). 3) (c)(3)(A)(i) In General — An individual shall only be eligible to elect the application of this subsection if— a) (I) — at the time such election is filed, such individual is no longer married to, or is legally separated from, the individual with whom such individual filed the joint return to which the election relates; or b) (II) — such individual was not a member of the same household as the individual with whom such joint return was filed at any time during the 12-month period ending on the date such election is filed. 4) (d)(1) In General — The portion of any deficiency on a joint return allocated to an individual shall be the amount which bears the same ratio to such deficiency as the net amount of items taken into account in computing the deficiency and allocable to the individual under paragraph (3) bears to the net amount of all items taken into account in computing the deficiency. 5) (c)(2) Burden Of Proof — Except as provided in subparagraph (A)(ii) or (C) of paragraph (3), each individual who elects the application of this subsection shall have the burden of proof with respect to establishing the portion of any deficiency allocable to such individual. 6) (c)(3)(B) Time For Election — An election under this subsection for any taxable year may be made at any time after a deficiency for such year is asserted but not later than 2 years after the date on which the Secretary has begun collection activities with respect to the individual making the election.

A. 1033 1. Text a. (b)(1) Conversions Described In Subsection (a)(1) — If the property was acquired as the result of a compulsory or involuntary conversion described in subsection (a)(1), the basis shall be the same as in the case of the property so converted— 1) decreased in the amount of any money received by the taxpayer which was not expended in accordance with the provisions of law (applicable to the year in which such conversion was made) determining the taxable status of the gain or loss upon such conversion, and 2) increased in the amount of gain or decreased in the amount of loss to the taxpayer recognized upon such conversion under the law applicable to the year in which such conversion was made. b. (b)(2) Conversions Described In Subsection (a)(2) — In the case of property purchased by the taxpayer in a transaction described in subsection (a)(2) which resulted in the nonrecognition of any part of the gain realized as the result of a compulsory or involuntary conversion, the basis shall be the cost of such property decreased in the amount of the gain not so recognized; and if the property purchased consists of more than 1 piece of property, the basis determined under this sentence shall be allocated to the purchased properties in proportion to their respective costs. c. (h)(3) Federally Declared Disaster; Disaster Area — The terms "federally declared disaster" and "disaster area" shall have the respective meaning given such terms by section 165(i)(5). 2. Notes a. H3: fed declared disasters. Defined in 165(i)(5). b. 165(i)(5): fed declared disasters means any disaster determined by the US president. 1) (i)(5) Federally declared disasters. For purposes of this subsection— a) The term "Federally declared disaster" means any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. b) The term "disaster area" means the area so determined to warrant such assistance.

A. Involuntary conversions - principal residence 1. 1033 a. Text 1) (h)(4) Principal Residence — For purposes of this subsection, the term "principal residence" has the same meaning as when used in section 121, except that such term shall include a residence not treated as a principal residence solely because the taxpayer does not own the residence. 2) (h)(1) Principal Residences — If the taxpayer's principal residence or any of its contents is located in a disaster area and is compulsorily or involuntarily converted as a result of a federally declared disaster— a) (A)(i) Exclusion For Unscheduled Personal Property — No gain shall be recognized by reason of the receipt of any insurance proceeds for personal property which was part of such contents and which was not scheduled property for purposes of such insurance. b) (A)(ii) Other Proceeds Treated As Common Fund — In the case of any insurance proceeds (not described in clause (i)) for such residence or contents— A) such proceeds shall be treated as received for the conversion of a single item of property, and B) any property which is similar or related in service or use to the residence so converted (or contents thereof) shall be treated for purposes of subsection (a)(2) as property similar or related in service or use to such single item of property. c) (h)(1)(B) Extension Of Replacement Period — Subsection (a)(2)(B) shall be applied with respect to any property so converted by substituting "4 years" for "2 years". b. Notes 1) H4: for 1033, principle residence has same meaning as it does in 121, except this term here shall also include a person who rents their house. Entitled to same treatment as someone who owns their home. 2) 121 says principal residence includes a home, trailer, condo, boat. 3) H1: what happens when your principal residence has been destroyed. No gain shall be recognized on the receipt of any insurance proceeds for personal property. 4) H1B: for replacement period: longer period for property under a2B.

1. 6603 a. Text 1) (a) Authority To Make Deposits Other Than As Payment Of Tax — A taxpayer may make a cash deposit with the Secretary which may be used by the Secretary to pay any tax imposed under subtitle A or B or chapter 41, 42, 43, or 44 which has not been assessed at the time of the deposit. Such a deposit shall be made in such manner as the Secretary shall prescribe. 2) (b) No Interest Imposed — To the extent that such deposit is used by the Secretary to pay tax, for purposes of section 6601 (relating to interest on underpayments), the tax shall be treated as paid when the deposit is made. 3) (d)(1) In General — For purposes of section 6611 (relating to interest on overpayments), except as provided in paragraph (4), a deposit which is returned to a taxpayer shall be treated as a payment of tax for any period to the extent (and only to the extent) attributable to a disputable tax for such period. Under regulations prescribed by the Secretary, rules similar to the rules of section 6611(b)(2) shall apply. b. Notes 1) Ts can deposit money with the gov, and it doesn't relate to any tax assessment, the money's just there, and if later there is a tax assessment, no interest will run bc the payments will be deemed made when the deposit was made. This provision is helpful for people engaged in illegal activities, or cannabis. Also helpful if you're dealing in an area where the legality is uncertain.

A. Judicial procedures 1. 6213 a. Text 1) (a) Time For Filing Petition And Restriction On Assessment — Within 90 days, or 150 days if the notice is addressed to a person outside the United States, after the notice of deficiency authorized in section 6212 is mailed (not counting Saturday, Sunday, or a legal holiday in the District of Columbia as the last day), the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency. b. Notes 1) A: can file for redetermination after receiving notice of deficiency. 2) You don't need to be a lawyer to argue cases in front of tax ct. just need to be admitted to argue in front of tax court. this includes CPAs. So the quality of representation in tax ct varies wildly. Tends to be on the informal side. 3) Tax has its own rules based on fed rules of civ pro. Alters them in several respects. 4) This is not an article 3 ct. this is a ct that is est under art 1 under the executive branch authority. So it's not surprising the gov wins most cases at the US tax ct. gov is presumed correct, T has bop. 2. 7502 a. Text 1) (a)(1) Date Of Delivery — If any return, claim, statement, or other document required to be filed . . . within a prescribed period . . . is, after such period or such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed . . . , the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be. 2) (f)(1) In General — Any reference in this section to the United States mail shall be treated as including a reference to any designated delivery service, and any reference in this section to a postmark by the United States Postal Service shall be treated as including a reference to any date recorded or marked as described in paragraph (2)(C) by any designated delivery service. b. Notes 1) A1: petitions must be filed in DC, bc that's where the ct is. But petitions can also be filed by mail - no need for personal service. The filing date is the mailing date. 2) F1: don't have to just use mail - can use a private courier co like DHL.

A. Section 1 1. Text a. (h)(11)(A) In General — For purposes of this subsection, the term "net capital gain" means net capital gain (determined without regard to this paragraph) increased by qualified dividend income. b. (h)(11)(B) Qualified Dividend Income — For purposes of this paragraph, the term "qualified dividend income" means dividends received during the taxable year from— 1) domestic corporations, and 2) qualified foreign corporations. 2. Notes a. H11A and B: treats qualified dividends as capital gains. b. An LLC can elect to be treated as a corp; if it does, this rule would apply to the LLC. The classification of the entity is important to this rule's application. c. In tax, a dividend is treated as a capital gain even though there's been no exchange in property d. There are five capital gain brackets. B. Problems page 695 1. 1(a): note that we're given these are capital assets. a. 1c: take out the capital gain, bc it's subject to diff tax rates. Tax on the salary is 60k. tax on the capital gain is 7,200. We worked that in 1a/1b. So we add that back, get total tax of 67,200. 2. 2: determine the net capital gain after netting losses, gains. 3. 3: T is in highest fed tax bracket. a. 3c: a short term capital loss is going to go to the capital gain tax first, collectibles, and if there's more loss than collective gain, it'll go to 1250, leave the taxpayer with the most favorable result after the gain is full absorbed. b. 3d: net out using the highest tax bracket. C. Capital losses 1. Capital losses are only deductible if they're first deductible under section 165. Now, deduct via the 1211, 1212 capital loss limitations. General rule: can only be deducted against capital gains, plus 3k for a non-corp taxpayer. 2. Problem page 701: a. Net long term loss is 4k. short term, gains exceed the losses - 1,600 of net short term capital gain. How much is allowed as a deduction? Answer: in our carryover year, how much of the 7k is LTCL: all of it.

A. More on Capital Gains and Losses 1. Section 1221 - what is a capital asset a. Text 1) (a) In General — For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include— a) (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; b) (2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business; c) (3) — a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by— A) a taxpayer whose personal efforts created such property, B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or C) a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B); d) (4) accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1); e) (8) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer 2) (b)(3) Sale Or Exchange Of Self-Created Musical Works — At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply to musical compositions or copyrights in musical works sold or exchanged by a taxpayer described in subsection (a)(3).

1. 1273a a. Text 1) (a)(1) In General — The term "original issue discount" means the excess (if any) of— • the stated redemption price at maturity, over • the issue price. 2) (a)(4) Adjusted Issue Price — For purposes of this subsection, the adjusted issue price of any debt instrument at the beginning of any accrual period is the sum of— a) the issue price of such debt instrument, plus b) the adjustments under this subsection to such issue price for all periods before the first day of such accrual period. b. Notes 1) A4: adjusted issue price. Begin with issue price, at end of year one you have to include in income the discount that accrued, and pay taxes, even though you didn't get any money. The way we prevent double tax: you add the amount you paid tax on to the issue price, and that becomes the adjusted issue price. 2) 1272a3: Daily portions is how gov says we'll allocate the accrual on og issue discount 2. 1272 a. (a)(3) Determination Of Daily Portions — For purposes of paragraph (1), the daily portion of the original issue discount on any debt instrument shall be determined by allocating to each day in any accrual period its ratable portion of the increase during such accrual period in the adjusted issue price of the debt instrument.

A. OID - operative provisions 1. 1.1272-1: a. Text 1) (a)(1) In General. — Under section 1272(a)(1), a holder of a debt instrument includes accrued OID in gross income (as interest), regardless of the holder's regular method of accounting. A holder includes qualified stated interest (as defined in Section 1.1273-1(c)) in income under the holder's regular method of accounting See Sections 1.446-2 and 1.451-1. b. (b)(1) Constant Yield Method. — Except as provided in paragraphs (b)(2) and (b)(3) of this section, the amount of OID includible in the income of a holder of a debt instrument for any taxable year is determined using the constant yield method as described under this paragraph (b)(1). 1) Step One: Determine The Debt Instrument's Yield To Maturity. 2) Step Two: Determine The Accrual Periods. 3) Step Three: Determine The OID Allocable To Each Accrual Period. 4) Step Four: Determine The Daily Portions Of OID. c. Notes 1) The OID is going to be reported by both borrower and lender on an accrual basis regardless of the holder's regular method of accounting. Reports qualified stated interest according to their normal method of accounting. 2) B1: how do you determine how much interest/income is accruing each year, how much to report? This is the procedure. 3) The slide shows how this will be reported via accrual method. Note compounding interest. 2. 163 a. Text 1) (e)(1) In General — The portion of the original issue discount with respect to any debt instrument which is allowable as a deduction to the issuer for any taxable year shall be equal to the aggregate daily portions of the original issue discount for days during such taxable year. 2) (e)(2)(B) Daily Portions — The daily portion of the original issue discount for any day shall be determined under section 1272(a) (without regard to paragraph (7) thereof and without regard to section 1273(a)(3)). b. Notes 1) E1: provides matching deduction for the borrower's perspective. Allowed to deduct the aggregate daily portions of the og issue discount. May be subject to other limits, but begin with the fact that amount that's deductible is the same amount that's includable in the lender's income.

I. OID Rules A. Last semester, we looked at interest, and we classified it in three diff ways: Business interest, investment interest, personal interest. What we didn't do is examine what is interest, how do we know whether a payment consists of interest of not 1. there parts of interest pre-purpose/use: Original issue discount, unstated (understated) interest, qualified stated interest. 2. For today, we're going to look at interest before we consider its purpose or use. Look at what it really is 3. Think about it in these terms: there is sometimes interest that is unstated or understated. Gov publishes the applicable fed rates - are minimum interest rates the gov considers adequate for diff terms/lengths of debt obligation. When we say unstated or understated, talking about it in comparison to the applicable fed rates. 4. OID rules require that we classify unstated or understated interest as qualified stated interest or original issue discount. 5. Lookit what the issue was from the pov of the gov in OID a. Began with this idea: before OID was adopted, smart people were turning option A on "OI Focus of the provisions slide" to option B. aka, interest is not paid concurrently; it might not have been stated at all. Just said lend us 1k today, we'll pay you 1611 at the end of five years. Question arose: 1) what was the character of the investment return (Ordinary or LTCG); 2) what about the timing of these payments. There was no income in years 1-5, even though a return was building up. b. Gov adopted OID to address the character of the income and the timing of the income. In alt B, what was happening was that the borrower corp were deducting business expenses in every year based upon the interest that was accruing - aka, were treating the discount (the diff between the amount borrowed and amount to be paid in five years) and deducting the amount of interest expense each year. c. US v. Midland-Ross Corp. 1) Analyzed the character of the investment return. Conclusion: the og issue discount was the same as interest. It was effectively interest. Therefore ordinary income, not capital gain. 2) But the timing issue wasn't solved yet. 3) Earned original issue discount serves the same function as stated interest, concededly ordinary income and not a capital asset; it is simply "compensation for the use or forbearance of money." Unlike the typical case of capital appreciation, the earning of discount to maturity is predictable and measurable.

A. OID Terminology 1. Borrower: issuer, maker, obligor 2. Lender: holder, investor, originator, creditor 3. Principal: issue price, adjusted issue price, stated principal amount, imputed principal amount 4. Interest: stated interest, qualified stated interest, unstated interest, discount/premium, original issue discount 5. Debt: bond, debenture, note, loan B. Debt issued for cash 1. OID rules are separated into two scenarios: 1) Debt instruments issued for profit 2) debt issued for cash. Right now, we're looking at the second scenario. 2. 1272 a. Text 1) (a)(1) General Rule — For purposes of this title, there shall be included in the gross income of the holder of any debt instrument having original issue discount, an amount equal to the sum of the daily portions of the original issue discount for each day during the taxable year on which such holder held such debt instrument. 2) (a)(2) Exceptions — Paragraph (1) shall not apply to— a) (A) Tax-Exempt Obligations — Any tax-exempt obligation. b) (B) United States Savings Bonds — Any United States savings bond. c) (C) Short-Term Obligations — Any debt instrument which has a fixed maturity date not more than 1 year from the date of issue. d) (D) Loans Between Natural Persons [if loan amount does not exceed $10,000 and not business related] b. Notes 1) A1: this rule will impose a method of accounting for holders, regardless fo what their method of accounting might otherwise be. Puts everybody on accrual method. Does NOT create a new method, like investment method does. Just puts everybody on accrual method. This is aimed at the timing issue we discussed earlier. 2) Will include in gross income the amount of interest that accrued each year. 3) What is original issue discount? This is more complicated. basic def: the excess of the stated redemption price at maturity over the issue price. If those numbers aren't equal, there is an og issue discount, everybody will be on accrual method in respect to that debt instrument. 4) B: how much is payable = stated redemption price at maturity. One exception: qualified stated interest. Qualified stated interest: gov recognizes that some people do provide for interest that is payable currently, and that interest should be accounted for, taxed as income, deducted according to each taxpayer's method of accounting. C1i: qualified stated interest = has to be payable at least annually and at a single fixed rate of interest. This is the kind of interest we are familiar with, it just has to be paid annually. If it's paid at different rates at diff intervals, doesn't count. It only paid all at once, doesn't count.

A. Property for services 1. This is taxable to both recipients and transferors. I. Section 83 A. Section 83 background 1. What it's about: taxing the receipt of property as compensation for services. Aka: if you get stock from your employer. This is still income, we know. Other questions answered: 1) when is it income 2) what is the character of the income 2. There are two moving parts: 83a and b. 83a provides all the general rules. From the date property is received until the date the service provider can actually transfer that property and treat it fully as their own, the value of that property will be treated as compensation. 3. Say stock is awarded. Is subject to a vesting schedule that might say your stock will vest 25% on the first anniversary of the award. Then it'll vest monthly for three years after that pro rata. That's probably the most common vesting schedule we see. So at end of four years, stock is fully vested. Idea is that the service will continue over that four year period. 4. There are two aspects to what's going on here. Stock in the hands of most individuals is a capital asset. But 83 is trying to get at compensation; so there's tension between compensation that OI and gain on a capital asset. Question: when does the compensation begin and end, and when does the investment holding period begin and end. Section 83a says that the compensation leg of the transaction leg will continue throughout the vesting period, until the vest period, when the compensation will be complete. From final vesting date forward, the investment leg of the stock holding begins. Service provider would then have a capital asset; any later sale of the stock would result in short or long term gain or loss depending on holding period 5. 83b allows a taxpayer to accelerate the compensation income all the way to the date of transfer of the property. The compensation aspect of the property transfer can be accelerated so it occurs on the date of the transfer of the property. The investment period then begins immediately, so that if there is a later sale or exchange of property, the service provider can realize a capital gain or loss. 6. Summary statement of 83 a. The basic rule under §83 is that, if property is transferred to an individual as compensation for the performance of services, the individual will be taxed on the excess of the property's fair market value over the amount the employee paid for such property, if any, as soon as the property: 1) is no longer subject to a "substantial risk of forfeiture," or 2) becomes freely transferable, whichever occurs first.

A. Operating permits 1. 83a a. Text 1) (a) General Rule — If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the [specified amount] shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. 2) (a)(1) General Rule. — Section 83 provides rules for the taxation of property transferred to an employee or independent contractor (or beneficiary thereof) in connection with the performance of services by such employee or independent contractor. b. Notes 1) Lays out basic premises. Somebody has to be performing services. 2) A1: does your classification as employee make a diff on compensation status? NO. if you're an independent contractor, you're still subject to 83. There are exceptions to this, though.

1. 6603 a. Text 1) (a) Authority To Make Deposits Other Than As Payment Of Tax — A taxpayer may make a cash deposit with the Secretary which may be used by the Secretary to pay any tax imposed under subtitle A or B or chapter 41, 42, 43, or 44 which has not been assessed at the time of the deposit. Such a deposit shall be made in such manner as the Secretary shall prescribe. 2) (b) No Interest Imposed — To the extent that such deposit is used by the Secretary to pay tax, for purposes of section 6601 (relating to interest on underpayments), the tax shall be treated as paid when the deposit is made. 3) (d)(1) In General — For purposes of section 6611 (relating to interest on overpayments), except as provided in paragraph (4), a deposit which is returned to a taxpayer shall be treated as a payment of tax for any period to the extent (and only to the extent) attributable to a disputable tax for such period. Under regulations prescribed by the Secretary, rules similar to the rules of section 6611(b)(2) shall apply. b. Notes 1) A: deposit procedure is used to stop the running of interest. Typically used by people engaged in illegal activities. If later there is an assessment, T can show deposit, there'll be no underpayment interest. Deposit procedure can also be made during the pendency of an audit.

A. Penalties 1. Penalties themselves also bear interest. 2. 6651 a. Text 1) (a)(1) [In the case of failure] to file any return required under authority of subchapter A of chapter 61 (other than part III thereof) [e.g., income tax return] . . . , on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate; 2) (f) Increase In Penalty For Fraudulent Failure To File — If any failure to file any return is fraudulent, paragraph (1) of subsection (a) shall be applied— a) (1) by substituting "15 percent" for "5 percent" each place it appears, and b) (2) by substituting "75 percent" for "25 percent". 3) (a)(2) [In the case of failure] to pay the amount shown as tax on any return specified in paragraph (1) on or before the date prescribed for payment of such tax (determined with regard to any extension of time for payment), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount shown as tax on such return 0.5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 0.5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate; or 4) (c)(1) Additions Under More Than One Paragraph — With respect to any return, the amount of the addition under paragraph (1) of subsection (a) shall be reduced by the amount of the addition under paragraph (2) of subsection (a) for any month (or fraction thereof) to which an addition to tax applies under both paragraphs (1) and (2). In any case described in the last sentence of subsection (a), the amount of the addition under paragraph (1) of subsection (a) shall not be reduced under the preceding sentence below the amount provided in such last sentence. b. Notes 1) Begin with the penalty for failure to file. 2) F: if failure to file is fraudulent, then the penalty is increased to 15% per month. 3) A2: penalty for failure to pay. Is half a percent for the first month, switches to 1% per month thereafter. 4) C1: coordinating rule. The amount of the penalty that's imposed on the failure to file is reduced by the amount of the penalty for the failure to pay.

1) Notes a) deals with situation where selling price can't be determined, but period can be. In that case, this regulation is giving you the rule for recovering the seller's basis in the property. Since you do know the period, this regulation requires the basis be recovered ratably over the payment period. We are told to disregard whether the installment obligation bears adequate stated interest. b) If there is some kind of an agreement that provides for two different periods of recovers (x if this happens), then you have to take that into account in allocating the taxpayer's basis over the payment period. c) If no payment is received in a year, or amount is less than the basis allocated for that year, what happens to that basis? No loss shall be allowed if the amount of payment is less than the basis unless it is the final payment year. d) If payment doesn't exceed the basis allocated for that year, the unrecovered part of the basis is just carried over until the very end. At the very end, a loss deduction for any unrecovered basis is appropriate.

A. Problem 2, page 851 1. Take agreement itself, make assumptions about the contingencies - assume all in favor of the seller, see if max selling price can be assumed. If it can, that then becomes the selling price for the purpose of installment method. 2. 2C a. No, installment method IS the method for reporting sales. It supersedes cash method or accrual method, unless the T opts out. b. All we do is plug in, treat it as if it WAS the selling price for purposes of determining gain. c. Tax payer's entire basis of 100k is recovered at the end of the 20 year period. 1. 15A.453-1 a. Text b. Notes 1) Provides that if it turns out you were wrong about the max seller price, there is a provision for re-computing the gross profit ratio in order to make some proper adjustments.

A. Pledge of installment obligation - 453 1. Text a. (d)(1) In General — For purposes of section 453, if any indebtedness (hereinafter in this subsection referred to as "secured indebtedness") is secured by an installment obligation to which this section applies, the net proceeds of the secured indebtedness shall be treated as a payment received on such installment obligation as of the later of— 1) the time the indebtedness becomes secured indebtedness, or 2) the time the proceeds of such indebtedness are received by the taxpayer. b. (d)(2) Limitation Based On Total Contract Price — The amount treated as received under paragraph (1) by reason of any secured indebtedness shall not exceed the excess (if any) of— 1) (A)— the total contract price, over 2) (B)— any portion of the total contract price received under the contract before the later of the times referred to in subparagraph (A) or (B) of paragraph (1) (including amounts previously treated as received under paragraph (1) but not including amounts not taken into account by reason of paragraph (3)). c. (d)(3) Later Payments Treated As Receipt Of Tax Paid Amounts — If any amount is treated as received under paragraph (1) with respect to any installment obligation, subsequent payments received on such obligation shall not be taken into account for purposes of section 453 to the extent that the aggregate of such subsequent payments does not exceed the aggregate amount treated as received under paragraph (1). d. (d)(4) Secured Indebtedness — For purposes of this subsection indebtedness is secured by an installment obligation to the extent that payment of principal or interest on such indebtedness is directly secured (under the terms of the indebtedness or any underlying arrangements) by any interest in such installment obligation. A payment shall be treated as directly secured by an interest in an installment obligation to the extent an arrangement allows the taxpayer to satisfy all or a portion of the indebtedness with the installment obligation. 2. Notes a. When a seller receives obligations in an installment sale, later sells those obligations, there is acceleration. Gain has to be reckoned. But what if the seller doesn't sell, just walks to the bank, says I have all these obligations, please lend me money now, and I'll pledge these installment notes to secure my loan. b. The liquidity issue goes away. That's how the gov views it - you have the money to pay the tax. The pledge itself is treated as a payment. c. 453A)d)(1) - if any indebtedness is secured by an installment obligation, the net proceeds are treated as payment. Happens at the later o f the time debt becomes secured, or the time the process are received by the taxpayer. d. D2: if you borrow more money than you're owed, your payment is capped at the k price. e. D3: you gain is accelerated, but your taxable payment resumes after you've recouped the amount of accelerated gain. f. D4: what is secured indebtedness? It's any indebtedness secured by an installment obligation, to the extent it's directly secured. In many commercial transactions, cos will give a blanket security agreement to a bank for line of credit.

A. Problem no. 3 1. Deals with the pledge scenario. T owns a rental building. T pledges 500k of notes as security. What tax consequences in current years and succeeding? 2. Begin by calculating the gain on sale. 3. Sixty percent of each payment is taxable gain. B. Problem 1, page 850 1. Seller owned investment land she purchased for 2k, sold for 2k cash in current year and four 8% notes paid off in succeeding years. C. What happens when someone opts out of installment method 1. The T then reports the gain in accordance with the T's method of accounting. In almost all cases, reports the transaction as a closed transaction/transaction that's completed, gain or loss can be calculated. a. But: in some cases, it's not possible to determine the amount realized in the transaction, and sometimes it's not possible to determine the adjusted basis of property sold. In those cases, there's something called open transaction that'd allow T to report the transaction in the fashion that happened in the Logan case. b. Gov's position though is that it is an exceedingly rare case that requires open transaction reporting c. Section 453 1) When a seller elects out of the installment method, the seller must normally treat the sale as a closed transaction and report the entire realized gain in the year of sale. However, in the rare circumstances where the value of a right to a contingent payment is unascertainable, a seller who elects out of the installment method may report the sale as an open transaction and thereby defer gain until the seller recovers the seller's basis in the transferred property.

1. 104 a. Text 1) (a) In General — Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include— a) (1) amounts received under workmen's compensation acts as compensation for personal injuries or sickness; b) (2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness; b. Notes 1) Exception to tax benefit rule. Remember section 104 last semester - gi doesn't include amounts received for personal physical injuries or sickness. EXCEPT in the case of amounts recovered under 213. If there's a personal injury recovery, recovery is excluded under 104 except if they were claimed as deductions in the prior year. 2) May have deducted in med expenses in a prior year, but when you recover those med expenses, it's gi. Doesn't matter if you got a tax benefit from it or not.

A. Problem page 663 1. 1a: deductions reduced by the amount of refund. Taxable income is still negative. So no matter how you look at it, this T had zero tax liability. Therefore since there was no reduction in the T's tax liability, the deduction for the state property taxes didn't generate any tax benefit. Bc no tax benefit, the 2k state property tax refund isn't gi. 2. 1b: reduce deduction by amount of refund, then recompute. In this instance, in this case, tax liability WAS reduced by the deduction. So here we do have a tax benefit. So we know we will have some gross income. But how much? The amount of the gi will be equal to the amount of the benefit. So there was 1k in income - that's the amount that will be included in gi. The other 3k of the refund will be excluded bc it gave no benefit. Only 1k of the refund actually created any benefit. 3. 1c: T does not elect to itemize, just takes the standard deduction, which here would be 25,900. No deduction for the state taxes was actually taken - the standard deduction was taken, and the standard deduction would've been allowable in all cases.

A. Ownership attribution 1. 267c: a. Text 1) (c) Constructive Ownership Of Stock — For purposes of determining, in applying subsection (b), the ownership of stock— a) (1)— Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries; b) (3)— An individual owning (otherwise than by the application of paragraph (2)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner; c) (2)— An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family; d) (4)— The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; e) (5)— Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock. b. Notes 1) Constructive ownership rules in applying 267b. 2) C5: constructive ownership operating rules. Stock constructively owned is treated as if you actually owned it so the attribution rules will apply.

A. Problems page 889 1. 1: dad has 10k permanent disallowed loss. bad plan for dad. 2. When daughter sells stock for 45k: she has a 5k gain. 267d - to the extent of that gain, can offset it with dad's loss. her gain is 5, which doesn't exceed loss of 10. So she didn't have to recognize any gain at all. 3. B: daughter resells to 55k. dad's consequences are the same. But now daughter sells for a gain of 15k. means she has gain of just 5k, bc dad's loss was 10k. 4. C: daughter resells for 35k. dad's consequences are same. Daughter realizes a loss. her loss is not augmented by dad's loss. only 5k loss allowed. 5. D: daughter gives stock to son. Son sells for 48k. now we have a gift transfer to son. She made a gift, no sale or exchange, daughter doesn't realize any gain or loss. bc it is a gift, son's basis is carryover. Takes daughter's basis and tacked holding period. He recognizes 8k in gain. 6. 2: would 1041a apply? McWilliams transactions weren't between the spouses - were done on open market. Since 1041 doesn't apply to indirect transfers, how to you interpret? Asks what is the purpose of 1041. Ok to say it applies to both direct, indirect transfer says RD. if so, 1041 would disallow any deduction in McWilliams case. BUT: the loss is preserved by the transfer of basis from the spouse. Under 1041, treat transfer between spouses as a gift, and in gift transfers, have transferred basis. 7. 3: when loser dies, there's a basis stepup - 200k as of the date of death. During estate admin, value declined to 80k. at that time, estate sold to loser's daughter for 80k. 267b(12)/(13). Reason for sale was to raise funds to pay admin expenses of the estate. This was not a bequest. 8. 4a: T owns land purchased 10 years ago for 10k. sells to corp for 5k. are T and corp related? T is deemed to own the shares that sone owns. TX is partially owned by her as a partner. She'll be deemed to own, proportionally, part of TX's shares. She owns half of TX, deemed to own half of their shares. 9. T actually and constructively owns 60% of the shares. Disallowed. No loss deduction for T. 10. 4b: T doesn't directly own any stock of the corp. but again 30 from son, 15% from partnership, so ends up with 60% deemed interest. Loss on sale is disallowed. 11. 4c: partnership rule doesn't apply here. X is deemed to own 15% of partnership stock. the son deemed to own shares of his partner, x. son owns 15% of stock that x owns. See 267c5. T will not be deemed to own the stock son owns. 12. 5: don't have anything to distinguish between voluntary, involuntary sale. The fact here it was involuntary doesn't change the result - is a deemed sale between related parties. B. Wash sales C. Securities in which there's been a loss are being sold within a period of 60 days to free up the losses without destroying he interest in that security. 1. These rule say: won't allow loss to be claimed when you're selling and replacing within this period. Loss is disallowed, but not permanently - the basis and holding period rules will just come into play, those shares will have carryover basis, and when sold in a non wash sale transaction, realized.

A. 1.267(d)-1 1. Text a. (c)(1)— Section 267(d) does not affect the basis of property for determining gain. Depreciation and other items which depend on such basis are also not affected. b. (c)(2)— The provisions of section 267(d) shall not apply if the loss sustained by the transferor is not allowable to the transferor as a deduction by reason of section 1091, or section 118 of the Internal Revenue Code of 1939, which relate to losses from wash sales of stock or securities. c. (c)(3)— In determining the holding period in the hands of the transferee of property received in an exchange with a transferor with respect to whom a loss on the exchange is not allowable by reason of section 267, section 1223(2) does not apply to include the period during which the property was held by the transferor. In determining such holding period, however, section 1223(1) may apply to include the period during which the transferee held the property which he exchanged where, for example, he exchanged a capital asset in a transaction which, as to him, was nontaxable under section 1031 and the property received in the exchange has the same basis as the property exchanged. d. (f)(2) Deferral (Rather Than Denial) Of Loss From Sale Or Exchange Between Members — In the case of any loss from the sale or exchange of property which is between members of the same controlled group and to which subsection (a)(1) applies (determined without regard to this paragraph but with regard to paragraph (3))— 1) (A)— subsections (a)(1) and (d) shall not apply to such loss, but 2) (B)— such loss shall be deferred until the property is transferred outside such controlled group and there would be recognition of loss under consolidated return principles or until such other time as may be prescribed in regulations. 2. Notes a. D does NOT affect basis. Buyer gets cost basis. b. C3: neither is there a tacked holding period. F2: corps that are all part of an affiliated group of corps/owned by a single parent. Here, treatment is different: loss is still disallowed, but not permanently. Loss is deferred until the property is transferred outside of the group. When that happens, then the loss is allowed.

A. Proscribed rels 1. 267 a. Text 1) (b) Relationships — The persons referred to in subsection (a) are: a) (1)— Members of a family, as defined in subsection (c)(4); b) (2)— An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; c) (3)— Two corporations which are members of the same controlled group (as defined in subsection (f)); d) (10)— A corporation and a partnership if the same persons own— A) (A)— more than 50 percent in value of the outstanding stock of the corporation, and B) (B)— more than 50 percent of the capital interest, or the profits interest, in the partnership; e) (11)— An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation; f) (12)— An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; or g) (13)— Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate. b. Notes 1) 267b: family, two corps described in f, individual that owns more than 50% of corp's stock and that corp. 2) 267b(10): when the same person owns more than 50% in value or stock or in partnership's capital interest.

a. Notes 1) B1: gov has to conclude that in some way it'd be inequitable to hold the other person liable for the understatement. The rub here: if someone is enjoying the fruits of whatever errors have been made, is that really inequitable? 2) C1: second approach. This is a little more objective. Involves redetermining the tax liability as though separate returns have been filed instead of joint returns. Gets rid of joint and several liability. This approach is to see what would happen if the spouses had filed separate returns from the beginning. Then you can see what the relative tax liability of each would be. This is an elective approach, there are several reqs 3) C3Ai: eligible for second approach only if spouses are divorced or they are legally separated. Or, on another basis, aren't living together and haven't been living together at any time during the 12-month period ending on the date election is filed. 4) D1: If you're accepted under second approach, expenses allocated to the two spouses, tax liability is determined as if they had filed separate returns. Innocent spouse will just owe the tax that they would've owed if they had filed a separate, and not joint, return in the first place. 5) C2: in either case, bop is on the innocent spouse C3B: innocent spouse relief claim must be made within two years after the IRS has begun collection activities.

A. Refunds 1. Common for people to overpay taxes, and then they want their money back. 2. 6511 a. Text 1) (a) Period Of Limitation On Filing Claim — Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. 2) (b)(2)(B) Limit Where Claim Not Filed Within 3-Year Period — If the claim was not filed within such 3-year period, the amount of the credit or refund shall not exceed the portion of the tax paid during the 2 years immediately preceding the filing of the claim. 3) (d)(1) Seven-Year Period Of Limitation With Respect To Bad Debts And Worthless Securities — If the claim for credit or refund relates to an overpayment of tax imposed by subtitle A on account of— a) (A) The deductibility by the taxpayer, under section 166 or section 832(c), of a debt as a debt which became worthless, or, under section 165(g), of a loss from worthlessness of a security, or b) (B) The effect that the deductibility of a debt or loss described in subparagraph (A) has on the application to the taxpayer of a carryover, in lieu of the 3-year period of limitation prescribed in subsection (a), the period shall be 7 years from the date prescribed by law for filing the return for the year with respect to which the claim is made. b. Notes 1) When must T request a refund? Within three years of the time that return was filed, or two years from the tax was paid, whichever of the periods expires the later. If no return was filed, within two years from the time tax was paid. 2) B2B: if the claim for refund isn't made within 3 years of the date the return is filed, but is made on the basis of the two-year alternative statute, then only the taxes that were paid in that two-year period of time can be refunded. No harm no foul if those are the only taxes that were paid. More problematic if taxes were paid through, like, employer withholding. 3) D1: special extension of statute to 7 years. Reflects the fact the fact that sometimes one can't tell when certain events actually happen. Ask when a debt becomes worthless, or when does a security becomes worthless such that a deduction for worthless securities can be claimed.

A. 453 - depreciation recapture 1. Text a. (i)(1) In General — In the case of any installment sale of property to which subsection (a) applies— 1) (A) notwithstanding subsection (a), any recapture income shall be recognized in the year of the disposition, and 2) (B) any gain in excess of the recapture income shall be taken into account under the installment method. b. (i)(2) Recapture Income — For purposes of paragraph (1), the term "recapture income" means, with respect to any installment sale, the aggregate amount which would be treated as ordinary income under section 1245 or 1250 (or so much of section 751 as relates to section 1245 or 1250) for the taxable year of the disposition if all payments to be received were received in the taxable year of disposition. 2. Notes a. G1: there is no installment reporting on an installment sale to a related person. Aka, there is no installment method reporting for sales to related parties. All payments shall be treated as received in the year of disposition. b. G1: there is no installment reporting on an installement sale to a related person. Aka, there is no installment method reporting for sales to related parties. All payments shall be treated as received in the year of disposition. c. 453B: Another limit: if seller sells to unrelated person and takes a note that provides for payment over some period of time, then that person has made an installment sale and will report income when payments are actually received. But sometimes that seller may change circumstances, want their money right away. But there is already a note with terms, so you can't just go to buyer and demand money - BUT there is a market for notes, even privately issued notes. Someone might buy it. Seller will have income in the year that they sell their note, unless that note was for personal injuries. 3. Reg. 1.453-12 a. (a) General Rule. — Unrecaptured section 1250 gain, as defined in section 1(h) (7), is reported on the installment method if that method otherwise applies under section 453 or 453A and the corresponding regulations. If gain from an installment sale includes unrecaptured section 1250 gain and adjusted net capital gain (as defined in section 1(h)(4)), the unrecaptured section 1250 gain is taken into account before the adjusted net capital gain.

A. Retirement or disposition of an installment obligation - 453B: 1. Text a. (a) General Rule — If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and— 1) (1) the amount realized, in the case of satisfaction at other than face value or a sale or exchange, or 2) (2) the fair market value of the obligation at the time of distribution, transmission, or disposition, in the case of the distribution, transmission, or disposition otherwise than by sale or exchange. 3) Any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received. b. (b) Basis Of Obligation — The basis of an installment obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full. c. 2. Notes a. Another limit: if seller sells to unrelated person and takes a note that provides for payment over some period of time, then that person has made an installment sale and will report income when payments are actually received. But sometimes that seller may change circumstances, want their money right away. But there is already a note with terms, so you can't just go to buyer and demand money - BUT there is a market for notes, even privately issued notes. Someone might buy it. Seller will have income in the year that they sell their note, unless that note was for personal injuries. b. What if the sale isn't depreciable property, but some other type of property? 1) 453e1 - if you make a sale of property to a related person, when the second person you sell to sells the property, that will affect you - it'll be treated as a payment by the person making the first disposition. BUT: there is a two-year time limit on this.

A. Problem 1, page 850 1. B: accrual method. Here, doesn't matter if you're cash method or accrual - installment method overrides both when it applies. Why is adjusted basis here 5k and not 2k, and why is gross profit ratio 50% and not 80%? You add the depreciation recapture amount to the basis. We'll add the 3k back to the basis of the asset. So our gain on the transaction is 5k, not 8k, and that affects our gross profit ratio. 2. Total amount reported in year one is 4k, bc had to add back the 3k recapture amount - 1245 recapture will override installment method, entire amount is treated as received in the year of disposition. B. Section 15A.453-1 1. Text 2. Notes a. What counts as a payment? Does NOT include: you sell property on an installment basis, the note that buyer gives you is NOT payment. b. Liability will be treaed as payment only to the extent the liability exceeds the basis of the property sold. Aka, Cran c. !B2v: what is gross profit: selling price minus the adjusted basis. C. What if the sale isn't depreciable property, but some other type of property? 1. 453e1 - if you make a sale of property to a related person, when the second person you sell to sells the property, that will affect you - it'll be treated as a payment by the person making the first disposition. BUT: there is a two-year time limit on this. D. Problem 1, page 850 1. B: accrual method. Here, doesn't matter if you're cash method or accrual - installment method overrides both when it applies. Why is adjusted basis here 5k and not 2k, and why is gross profit ratio 50% and not 80%? You add the depreciation recapture amount to the basis. We'll add the 3k back to the basis of the asset. So our gain on the transaction is 5k, not 8k, and that affects our gross profit ratio. Total amount reported in year one is 4k, bc had to add back the 3k recapture amount - 1245 recapture will override installment method, entire amount is treated as received in the year of disposition.

A. Retirement or disposition of installment obligation 1. One of the main policy reasons for installment method: sellers are taking back obligations and not actually have the cash to pay the tax realized. Allows taxpayers to pay the tax as and when payments are received - that way you aren't creating hardships for taxpayers who don't have enough cash to pay taxes. 2. If that liquidity situation doesn't apply anymore, the gov wants its money - payments will be deemed to be received. 3. 453B: you sell property, get an installment note, pay on installment method, later decide to sell installment obligation itself - that will trigger gain or loss, tax will be paid on the disposition of the installment obligation itself. Rules for determining the amount of gain on the disposition of the installment obligation. 4. 453B(b): complicated when installment sale in the first instance was a related party, that rp doesn't hold the property that was sold. B. More notes on 453 1. E1: this has to do with the sale of property to a related person who then sells to an unrelated person for cash. The og seller will be deemed to have received payment upon that second disposition. it basically accelerates. 2. E2A: two year rule on the second disposition. if second disposition happens after two years, there is no acceleration of gain on the first disposition. 3. E5: if you have deemd payment due to second disposition, the actual payments will be excluded up to the amount of the deemed payment. Then taxation will resume. 4. F1: related person.

A. Ex 1. Carryover basis is 20k. Fmv at time of gift is 30k. therefore, we're going to use the basis for determining gain, aka 20k. There is a 15k gain because of that. 2. 2: what if sales price was 15k? basis is 20k, fmv is greater at time of gift, but now value has declined. Under the general rule, we're going to use the carryover basis bc the fmv was greater than the basis AT THE TIME of the gift. 3. B: property cost donor 30k, had a 20k fmv at the time of the gift. Will invoke loss basis rule. Donee sold it for 35k. here, we're determining gain, not loss. So: will still use the carryover basis of 30k. 4. 2: sales price at 15k. there is a loss here. Now we have to invoke the loss basis rule. Our basis is 20k, the fmv at the time of the gift. Amount realized - 15k. basis for loss purposes - 20k. There is a 5k loss to the donee. 5. 3: 24k amount realized/sale price. 24k is less than the carry over basis, so we won't use the gain basis rule. But 14k is greater than 20k basis for loss. the gain basis rule doesn't apply, neither does the loss basis rule. In this instance, there is no gain and no loss. B. Section 1041 - basis of property acquired from a decedent 1. Text 2. Notes a. Property acquired from decedent - fmv of property at the date of the decedent's death is the acquiror's basis. Policy issue: way to avoid tax on gains from the sale of grossly appreciated property

A. Section 1001 - determination of amount of and recognition of gain or loss 1. Text 2. Notes a. Focus here is on amount realized. Can include liabilities in your amount realized. Think of liabilities as cash. B. problem page 130 1. Andrew purchased land 10 years ago for 40k. appreciated to 70k, at which time he sells it to his wife for 70k in cash. You would think that amount realized is 70, basis is 40, there's a gain of 30k to Andrew. But this is a transfer between spouses. Section 1041 comes in to say that he has no tax consequences. There's no gain or loss recognized on a transfer of property between spouses. What is her basis in the property: Andrew's basis, aka 40k carryover basis. 2. What gain if she immediately sells the property for 70k? She'll have a 30k gain. That sucks for her if she got that property in a divorce settlement. This arises in family law all the time. 3. What result if the property had declined in value to 30k, he sold it to her for 30k? he will not recognize a gain. What is her basis in the property: 40k. what gain or loss to her if she immediately resells: she can claim a 10k loss - aka, here she can actually get a benefit. 4. What result if she transfers other property to him in exchange for the property: no gain or loss here, bc it's a transfer between spouses. Carryover basis for all concerned. C. Problem page 133 1. In current year, giver holds two blocks of identical stock, both worth 1m. first block purchased for 50k, most recent purchase for 950k. wants to make a gift of one block and retain the second. Which block of stock should he transfer, and why? The more expensive one, bc there's a higher basis. Let's hold the other one until death.

I. Gains from Dealings in Property A. Three characteristics of these dealings: 1. Amount of gain 2. Character of gain a. Ordinary income b. Capital gain 3. Nonrecognition of gain a. Temporary deferral b. Permanent exclusion B. Section 61 - gross income defined 1. Text a. (a) General Definition — Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: b. (3) — Gains derived from dealings in property C. Section 1001(c) - determination of amount of and recognition of gain or loss 1. Text a. (c) Recognition Of Gain Or Loss — Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized. 2. Notes a. General rule is that unless there's an exception, when there is a sale or exchange of property, the entire amount of the gain or loss is recognized b. What "property" is is defined by state law. c. Keys: sale or exchange; property

A. Section 1001(a) - calculation of gain or loss 1. Text a. The gain from the sale or other disposition of property shall be the excess of: 1) The amount realized therefrom over 2) The adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of 3) The adjusted basis provided in such section for determining loss over 4) The amount realized 2. Notes a. Turns on the amount realized and basis. b. Amount realized is the TOTAL AMOUNT RECEIVED - distinguish this from the person's GAIN. Amount realized is comprised of both gain and adjusted basis. B. Section 1011 1. Text a. (a) General Rule — The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012 or other applicable sections of this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses)), adjusted as provided in section 1016. C. Section 1012 - basis of property 1. Text a. (a) In general - the basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses) 2. Notes

A. Section 1016 - adjustments to basis 1. Text a. (a) General Rule — Proper adjustment in respect of the property shall in all cases be made— 1) for expenditures, receipts, losses, or other items, properly chargeable to capital account, . . . 2) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent of the amount 3) allowed as deductions in computing taxable income under this subtitle or prior income tax laws, and 4) resulting (by reason of the deductions so allowed) in a reduction for any taxable year of the taxpayer's taxes under this subtitle (other than chapter 2, relating to tax on self-employment income), or prior income, war-profits, or excess-profits tax laws, 2. Notes a. An expenditure that's not currently deductible will affect basis b. No downward adjustment to basis if you had no deduction c. There are upward and downward adjustments. Upward if capital expense. Downward - depreciation deductions, IF you received a tax benefit for the deduction. B. Problems page 120, 121 1. Owner purchases land for 10k, sells it for 16k. Amount realized is 16k. Cost basis is 10k, gain is 6k. a. B: what if owner sold the option for 15k. The option is property. But when the option is granted, that's not a sale or exchange - that's an "open transaction." b. C: Owner sells the option. Now there's been a sale or exchange, that triggers gain or loss. Owner paid 1k for the option, gain is 500. c. D: what if owner purchased the land by making 2k payment and a 8k payment by a recourse mortgage from bank? Include the amount of the liability in the cost basis of the property (Crane). Here, basis is 10k. there is no difference from A here. The fact of the liability doesn't change anything. What about if the mortgage was nonrecourse? In Crane - she wasn't the borrower, so it was nonrecourse for her. No, no difference if it was nonrecourse - amount of gain is still 6k. d. E: what result in A if the owner purchased land for 10k, spent 2k on clearing land, sold it for 18k? section 1016. Is the 2k a currently deductible expense? There was nothing to repair here, or to restore. He was spending money to make it more usable. So this is an ex of the expense being added to the cost basis. Adjusted basis is now 12k. gain is still 6k. 18k is the amount realized, minus 12k cost basis. e. F: what difference in E if the owner had rented the land for 5 years, spent 2k clearing the land? The expense was made by the tenant, not the owner. The clearing costs were not intended to be rent. In E, amount realized was 18k, but here, our basis is still 10k. So in this variation, the amount of gain is 8k.

A. Section 1015 - basis of property acquired by gift 1. Text a. (a) Gifts After December 31, 1920 — If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift [basis for gain], except that if such basis (adjusted for the period before the date of the gift as provided in section 1016) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value [basis for loss]. b. (e) Gifts between spouses. In the case of any property acquired by gift in a transfer described in section 1041(a), the basis of such property in the hands of the transferee shall be determined under section 1041(b)(2) and not this section 2. Notes a. Split basis rule. Basis of property acquired by gift will have the same basis in the donee as in the hands of the donor for GAIN purposes. 1) But if the basis of the property at the time of the gift is greater than the property's fmv, then for purposes of determining a loss, basis will be the fmv. Aka, this is the basis for loss. b. Taft v. bowers 1) Father had 1k in stock. made a gift of the stock to his daughter when the stock was worth 2k. daughter sold the stock for 5k. she reported 3k gain on the sale. But there was really a 4k gain per the IRS, bc she assumed the basis of her father under 1015. c. Split basis rule doesn't apply to transfers between spouses, former spouses. B. Section 1041 - transfers between spouses 1. Text a. (a) General Rule — No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)— 1) a spouse, or 2) a former spouse, but only if the transfer is incident to the divorce. b. (b) Transfer Treated As Gift; Transferee Has Transferor's Basis — In the case of any transfer of property [to a spouse or former spouse incident to divorce]— 1) for purposes of this subtitle, the property shall be treated as acquired by the transferee by gift, and 2) the basis of the transferee in the property shall be the adjusted basis of the transferor. 2. Notes a. No gain or loss if done between spouses, or done between former spouses incident to a divorce. Will treat the property as acquired by gift, but the basis of the transferee shall be the adjusted basis of the transferor. No split basis rule here.

A. Section 1211 - Limitations on capital losses 1. Text a. (a) Corporations — In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges. b. (b) Other Taxpayers — In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of— 1) $3,000 ($1,500 in the case of a married individual filing a separate return), or 2) the excess of such losses over such gains. 2. Notes a. Here, there is a limit for corps, and there is a limit for non-corps b. Corp rule: losses are only allowed to the extent of gains from such sales or exchanges. If corp has a net capital loss, no deduction for that loss is allowed. c. Other taxpayers: losses from sales or exchanges of capial assets are allowed only to the extent of the gains from such sales or exchanges, PLUS the lower of 3k or the excess of such losses over gains. Can deduct the amount of your losses, plus 3k. There is a 3k cap. d. Limitation on capital loss deductions

A. Section 1212 1. Text a. (a)(1) In General — If a corporation has a net capital loss for any taxable year (hereinafter in this paragraph referred to as the "loss year"), the amount thereof shall be— b. a capital loss carryback to each of the 3 taxable years preceding the loss year, but only to the extent— — such loss is not attributable to a foreign expropriation capital loss, and — the carryback of such loss does not increase or produce a net operating loss (as defined in section 172(c)) for the taxable year to which it is being carried back; c. except as provided in subparagraph (C), a capital loss carryover to each of the 5 taxable years succeeding the loss year; and d. a capital loss carryover to each of the 10 taxable years succeeding the loss year, but only to the extent such loss is attributable to a foreign expropriation loss, and shall be treated as a short-term capital loss in each such taxable year. e. (b)(1) In General — If a taxpayer other than a corporation has a net capital loss for any taxable year— 1) the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss in the succeeding taxable year, and 2) the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss in the succeeding taxable year. f. (b)(2)(A) In General — For purposes of determining the excess referred to in subparagraph (A) or (B) of paragraph (1), there shall be treated as a short-term capital gain in the taxable year an amount equal to the lesser of— 1) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), or 2) the adjusted taxable income for such taxable year. 2. Notes a. If corp has a net capital loss for any given year, corp gets to carry that loss back for three years. Can say they had capital gains three years ago, but their loss is now here. Corp can actually amend its tax return for three years and claim capital loss up to the amount of the capital gain. b. If it doesn't have a pass capital gain, it can have a capital loss carryover. The carryover is for five years. If it goes unused, it expires. c. Ten year loss carryover period for foreign expropriation losses: this is rare/rarely happens. We won't worry about this part of it. d. In any carryover scenario, the carryover will be treated as short-term capital loss. e. If an individual has a capital loss in any particular year, we too can carry it over, but we DON'T get to carry it back. There's no expiration period on our carry forward - can do it indefinitely. f. B2A: individuals cannot reduce ordinary income for capital losses. But this says that we'll treat 3k as capital so to net capital with capital

A. Section 179 - reminder 1. Text a. (a) Treatment As Expenses — A taxpayer may elect to treat the cost of any section 179 property as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service b. (d)(1) Section 179 Property — For purposes of this section, the term "section 179 property" means property which is— 1) tangible property (to which section 168 applies), or 2) computer software (as defined in section 197(e)(3)(B)) which is described in section 197(e)(3)(A)(i) and to which section 167 applies, which is— 3) section 1245 property (as defined in section 1245(a)(3)), or 4) at the election of the taxpayer, qualified real property (as defined in subsection (e)), and 5) which is acquired by purchase for use in the active conduct of a trade or business. 2. Notes a. Can deduct the whole cost at once, instead of deducting every year.

A. Section 1245 1. Text a. (a)(1) Ordinary Income — Except as otherwise provided in this section, if section 1245 property is disposed of the amount by which the lower of— 1) the recomputed basis of the property, or 2) in the case of a sale, exchange, or involuntary conversion, the amount realized, or 3) in the case of any other disposition, the fair market value of such property, exceeds the adjusted basis of such property shall be treated as ordinary income. 4) Such gain shall be recognized notwithstanding any other provision of this subtitle. b. (a)(2)(A) In General — The term "recomputed basis" means, with respect to any property, its adjusted basis recomputed by adding thereto all adjustments reflected in such adjusted basis on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for depreciation or amortization. c. (a)(2)(B) Taxpayer May Establish Amount Allowed — For purposes of subparagraph (A), if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed for depreciation or amortization for any period was less than the amount allowable, the amount added for such period shall be the amount allowed. d. (a)(2)(C) Certain Deductions Treated As Amortization — Any deduction allowable under section 179, 179B, 179C, 179D, 179E, 181, 190, 193, 1 or 194 shall be treated as if it were a deduction allowable for amortization. e. (a)(3) Section 1245 Property — For purposes of this section, the term "section 1245 property" means any property which is or has been property of a character subject to the allowance for depreciation provided in section 167 and is either— 1) personal property, 2) other property (not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (2) for a period in which such property (or other property) [used in certain specified activities, industries, research, etc.], 3) so much of any real property (other than any property described in subparagraph (B)) which has an adjusted basis in which there are reflected adjustments for amortization under section 169, 179, 179B, 179C, 179D, 179E, 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, 193, or 194[,] , or 4) [other specified properties].

a. (b)(1) Gifts — Subsection (a) shall not apply to a disposition by gift. b. (b)(2) Transfers At Death — Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death. c. (b)(3) Certain Tax-Free Transactions — If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). d. (b)(8)(A) In General — If a taxpayer disposes of more than 1 amortizable section 197 intangible (as defined in section 197(c)) in a transaction or a series of related transactions, all such amortizable 197 intangibles shall be treated as section 1245 property for purposes of this section. e. (b)(8)(B) Exception — Subparagraph (A) shall not apply to any amortizable section 197 intangible (as so defined) with respect to which the adjusted basis exceeds the fair market value. f. (c) Adjustments To Basis — The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a). g. (d) Application Of Section — This section shall apply notwithstanding any other provision of this subtitle 1. Notes a. What is 1245 property: tangible personal property for which depreciation deductions are allowed (for the most part). b. Exceptions: b1, b2, b3: recapture won't apply to gifts. Won't apply to transfers at death (no depreciation, no recapture). And won't apply to certain tax-free transactions. c. Depreciation recapture will be excused when partnerships, etc are being broken down, set up, creation or formation of entities, partnerships. d. B8A and B: B is the exception - don't worry about A if it is a loss property. e. C: when somebody pays tax on a 1245 recapture amount, basis will follow from that. This is the authorization to provide rules for adjustments to basis. We call this a tax-paid basis. f. D: 1245 depreciation recapture overrides other provisions of income tax law.

A. Section 1250 1. Text a. (a)(1)(A) In General — If section 1250 property is disposed of after December 31, 1975, then the applicable percentage of the lower of— 1) that portion of the additional depreciation (as defined in subsection (b)(1) or (4)) attributable to periods after December 31, 1975, in respect of the property, or 2) the excess of the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over the adjusted basis of such property, 3) shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. b. (a)(1)(B) Applicable Percentage — For purposes of subparagraph (A), the term "applicable percentage" means— 1) (v) in the case of all other section 1250 property, 100 percent. c. (b)(1) In General — The term "additional depreciation" means, in the case of any property, the depreciation adjustments in respect of such property; except that, in the case of property held more than one year, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined for each taxable year under the straight line method of adjustment. d. (b)(3) Depreciation Adjustments — The term "depreciation adjustments" means, in respect of any property, all adjustments attributable to periods after December 31, 1963, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization [with certain exceptions].

I. Capital gains and losses A. Income has one of two types of character: ordinary income, or capital gain/loss. we care bc capital income is taxed at a different rate. 1. Capital income is taxed more favorably. Why? A lot of that gain/appreciation in income may actually be due to inflation and not real growth in the value of stock. B. Section 1222 - other terms relating to capital gains and losses 1. Text a. (1) The term "short-term capital gain" means gain from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent such gain is taken into account in computing gross income. b. (2) The term "short-term capital loss" means loss from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent that such loss is taken into account in computing taxable income. c. (3) The term "long-term capital gain" means gain from the sale or exchange of a capital asset held for more than 1 year, if and to the extent such gain is taken into account in computing gross income. d. (4) The term "long-term capital loss" means loss from the sale or exchange of a capital asset held for more than 1 year, if and to the extent that such loss is taken into account in computing taxable income. e. (5) Net Short-Term Capital Gain — The term "net short-term capital gain" means the excess of short-term capital gains for the taxable year over the short-term capital losses for such year. f. 6) Net Short-Term Capital Loss — The term "net short-term capital loss" means the excess of short-term capital losses for the taxable year over the short-term capital gains for such year. g. (7) Net Long-Term Capital Gain — The term "net long-term capital gain" means the excess of long-term capital gains for the taxable year over the long-term capital losses for such year. h. (8) Net Long-Term Capital Loss — The term "net long-term capital loss" means the excess of long-term capital losses for the taxable year over the long-term capital gains for such year i. (10) Net Capital Loss — The term "net capital loss" means the excess of the losses from sales or exchanges of capital assets over the sum allowed under section 1211. In the case of a corporation, for the purpose of determining losses under this paragraph, amounts which are short-term capital losses under section 1212(a)(1) shall be excluded. j. (11) Net Capital Gain — The term "net capital gain" means the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for such year. 2. Notes a. All corp income is subject to the same rate - there is no preferred rate for capital income. This means that capital losses are freed up to reduce ordinary income. That's not the case for individual taxpayers - we're subject to the netting mechanism of capital gains and losses

A. Section 165 1. Text a. (a) General Rule — There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. b. (b) Amount Of Deduction — For purposes of subsection (a), the basis for determining the amount of the deduction for any loss shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property. c. (c) Limitation On Losses Of Individuals — In the case of an individual, the deduction under subsection (a) shall be limited to— 1) losses incurred in a trade or business; 2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and 3) except as provided in subsection (h), losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. 2. Notes a. Three types of losses: operating losses, property losses (amount realized is less than the adjusted basis), casualty losses (house burns down, you wreck your car). b. What type of loss isn't allowed: loss on personal use property

A. Section that deems capital gain to be OI: Section 1239 1. Text a. (a) Treatment Of Gain As Ordinary Income — In the case of a sale or exchange of property, directly or indirectly, between related persons, any gain recognized to the transferor shall be treated as ordinary income if such property is, in the hands of the transferee, of a character which is subject to the allowance for depreciation provided in section 167. b. (b) Related Persons — For purposes of subsection (a), the term "related persons" means— 1) a person and all entities which are controlled entities with respect to such person, 2) a taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless such beneficiary's interest in the trust is a remote contingent interest (within the meaning of section 318(a)(3)(B)(i)), and 3) except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate. c. (c)(1) General Rule — For purposes of this section, the term "controlled entity" means, with respect to any person— 1) a corporation more than 50 percent of the value of the outstanding stock of which is owned (directly or indirectly) by or for such person, 2) a partnership more than 50 percent of the capital interest or profits interest in which is owned (directly or indirectly) by or for such person, and 3) any entity which is a related person to such person under paragraph (3), (10), (11), or (12) of section 267(b). 2. Notes a. Say you have a close family business. Say you sell to a related party, who takes a cost basis, and generates a lot of deductions. Ex in a churning transaction: sell an asset to a related party solely for the purpose of creating depreciation deductions within the family. b. This section says that if you do that, the gain must be treated as OI. Not going to let you generate basis in a deferred capital gain transaction so you can get current deductions. c. B: who are related parties. d. C1: what is a controlled entity. 267b is one of the key sections that deal with related party definitions. e. Section 267: entites that are under common control, when the same person owns both of them. To "own" for income tax purposes: lookit 1239. Ownership can be actual OR constructive. 1) (c)(2) Constructive Ownership — For purposes of this section, ownership shall be determined in accordance with rules similar to the rules under section 267(c) (other than paragraph (3) thereof). f. C2: this is a situation where there will be DEEMED constructive ownership. Refer, again, to 267.

A. Section 267 1. Text a. (b)(3)— Two corporations which are members of the same controlled group (as defined in subsection (f)); (b)(10)— A corporation and a partnership if the same persons own— 1) more than 50 percent in value of the outstanding stock of the corporation, and 2) more than 50 percent of the capital interest, or the profits interest, in the partnership; b. (b)(11)— An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation; c. (b)(12)— An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; d. (c) Constructive Ownership Of Stock — For purposes of determining, in applying subsection (b), the ownership of stock— 1) (c)(1)— Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries; 2) (c)(2)— An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family; 3) (c)(4)— The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and 4) (c)(5)— Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock. 2. Notes a. C5: this is an operating rule. If somebody constructively owns stock, then there will only be ONE family attribution. There will not be more than one. BUT there can be more than one entity attribution. There's just no family attribution. Your sister isn't deemed to own your spouse's stock b. Section 1245 is a recharacterization section c. Anybody who recognizes a gain on the sale or exchange of 1245 property may have to treat part of that gain as OI. d. A1: this recognition will occur regardless of any other rule in the code. e. A2A: on the sale of 1245 property, the adjusted basis of that property will be recomputed. f. A2B: this section is dealing with the diff tween "allowed" and "allowable." Depreciation is not an elective provision. g. A2C: there are some other sections which aren't technically depreciation deduction sections. For the purpose of 1245 recapture, these sections will be treated as amortization deductions, though technically they're neither amortization or depreciation deductions

1. 1.83-7 a. Text 1) (a) In General. — If there is granted to an employee or independent contractor (or beneficiary thereof) in connection with the performance of services, an option to which section 421 (relating generally to certain qualified and other options) does not apply, section 83(a) shall apply to such grant if the option has a readily ascertainable fair market value (determined in accordance with paragraph (b) of this section) at the time the option is granted. The person who performed such services realizes compensation upon such grant at the time and in the amount determined under section 83(a). 2) (a) In General. — If section 83(a) does not apply to the grant of such an option because the option does not have a readily ascertainable fair market value at the time of grant, sections 83(a) and 83(b) shall apply at the time the option is exercised or otherwise disposed of, even though the fair market value of such option may have become readily ascertainable before such time. a) If the option is exercised, sections 83(a) and 83(b) apply to the transfer of property pursuant to such exercise, and the employee or independent contractor realizes compensation upon such transfer at the time and in the amount determined under section 83(a) or 83(b). b) If the option is sold or otherwise disposed of in an arm's length transaction, sections 83(a) and 83(b) apply to the transfer of money or other property received in the same manner as sections 83(a) and 83(b) would have applied to the transfer of property pursuant to an exercise of the option. The preceding sentence does not apply to a sale or other disposition of the option to a person related to the service provider that occurs on or after July 2, 2003. 3) (b)(1) Actively Traded On An Established Market. — Options have a value at the time they are granted, but that value is ordinarily not readily ascertainable unless the option is actively traded on an established market. If an option is actively traded on an established market, the fair market value of such option is readily ascertainable for purposes of this section by applying the rules of valuation set forth in § 20.2031-2. 4) (b)(2) Not Actively Traded On An Established Market. — When an option is not actively traded on an established market, it does not have a readily ascertainable fair market value unless its fair market value can otherwise be measured with reasonable accuracy. b. Notes 1) An option has two aspects. Option refers to some other property. The option itself though is also property. 2) The rules for the award of options as opposed to stock vary. Not the same. For 83 purposes, a nonqualified option/an option that isn't an ISL, will be treated as property subject to 83 if and only if it has a readily ascertainable fmv at the time the option is granted. If it doesn't have that, then it's not subject to 83 at the time of the grant. 3) What is readily ascertainable? If option is actively traded on a market, then the value is readily ascertainable. And when it's not traded on an est market, then it's not readily ascertainable.

A. Summary statement of 83 1. 83 says that yes, transfer of property for services is income, and 2) when is that property income, and how much. 2. Only when the transfers are subject to all sorts of restrictions/vesting restrictions that the timing of the income is adjusted. The income arises when the property is no longer subject to a substantial risk of forfeiture - that answers the timing question. Timing can also be affected by the sale or other disposition of the property. 3. Two things at issue here: compensation and investment. Property exchanged for services is compensation. when do you stop being an employee receiving compensation and start being treated as an investor that holds the property as a capital asset. 4. You can accelerate, be done with compensation aspect of it by means of 83b election, bcome an investor day 1. Cost to do that - to the extent that there's value in the property, must report that value as income on receipt. And you might not have the money to pay tax on that. 5. The basic rule under §83 is that, if property is transferred to an individual as compensation for the performance of services, the individual will be taxed on the excess of the property's fair market value over the amount the employee paid for such property, if any, as soon as the property: a. is no longer subject to a "substantial risk of forfeiture," or b. becomes freely transferable, whichever occurs first B. Operating premises 1. 83 a. Text b. Notes 1) 83a: there must be services, property, must be transferred. All these must occur. 2) E: includes both real and personal property 2. Rev proc 93-27: a limit. Two types of interest: capital interest, profits interest. What this is getting at is that if on a hypothetical liquidation of the partnership partner receives nothing, then that partner is a profits interest partner. If partner receives a share of liquidating distributions on a hypothetical liquidation, then that partner is a capital partner. a. Text: SEC. 4. APPLICATION .01 Other than as provided below, if a person receives a profits interest for the provision of services to or for the benefit of a partnership in a partner capacity or in anticipation of being a partner, the Internal Revenue Service will not treat the receipt of such an interest as a taxable event for the partner or the partnership. 1) SEC. 2. DEFINITIONS. .01 A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and then the proceeds were distributed in a complete liquidation of the partnership. This determination generally is made at the time of receipt of the partnership interest. .02 A profits interest is a partnership interest other than a capital interest.

A. Rescission doctrine 1. The rescission doctrine is a minor exception to the claim of right doctrine. Under the doctrine of rescission, a taxpayer need not report as gross income an amount received under a claim of right, if the taxpayer repaid that amount within the year of receipt. A rescission payment made during the same year the amount was received extinguishes what otherwise would have been taxable income to the recipient for that year. The rescission restores the parties to the payment to the relative positions that they would have occupied if no contract was made. 2. Rescissions are useful tax tools. If there are ks and payments that are exchanged in a transaction that later proves to be mistaken or the parties just regret the transaction, they're in a position to rescend the transactions that were made, make everybody in the same position that they were in, if decided in same tax year the transaction was made. Was as if the transaction didn't happen. But HAS to be caught in the first year the transaction is implemented. 3. IRS, Service Cener Advice Memorandum, SCA 200235030 a. Text 1) Deductions for repayments of amounts included in income under a claim of right must be deductible under some other section of the Code. Because payments of personal loans are generally not deductible under any provision of the Code, a taxpayer who takes an amount into income because of a cancellation of indebtedness and who later paid that amount cannot deduct the payment. b. Notes 1) Doesn't create deductions; just authorizes deduction for an otherwise deductible item in the year that the amount is restored to the parties. 2) From gov's POV: in order for there to be a deduction via 1341, payment must first be allowed as a deduction under some other section. Like a trade or business expense.

A. Tax benefit doctrine 1. Reverse of the claim of right doctrine. Requires that you report the refund or recover, or however you got back the amounts your reported previously, in income. 2. 111 a. Text 1) (a) Deductions — Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter. 2) Example: In 2013, E paid $600 in state income taxes. In preparing his federal return, however, E determined that he had only $2,200 in itemized deductions, so he claimed the standard deduction. In 2014, E received a $150 refund of the state income taxes paid in 2013. The $150 refund is excluded from E's gross income because his federal income tax liability for 2013 was not reduced on account of the state income tax deduction. 3) (b)(1) In General — If— a) (A) a credit was allowable with respect to any amount for any prior taxable year, and b) (B) during the taxable year there is a downward price adjustment or similar adjustment, the tax imposed by this chapter for the taxable year shall be increased by the amount of the credit attributable to the adjustment 4) Example: In 2013, B paid $5,000 in dependent care expenses for which a $1,000 income tax credit was allowable. However, B's income tax liability, before credits, was $400, so only $400 of the credit was used; the balance was not carried forward. In 2014, B received a refund of $500 of the child care expenses paid in 2013. The $100 credit generated by that $500 did not reduce B's income tax liability for 2013, so the $100 credit attributable to the $500 refund is not added to B's income tax liability for 2014, nor is the $500 refund included in B's gross income for 2014. 5) Example: In 2013, B paid $5,000 in dependent care expenses for which a $1,000 income tax credit was allowable. However, B's income tax liability, before credits, was $400, so only $400 of the credit was used; the balance was not carried forward. In 2014, B received a refund of $500 of the child care expenses paid in 2013. The $100 credit generated by that $500 did not reduce B's income tax liability for 2013, so the $100 credit attributable to the $500 refund is not added to B's income tax liability for 2014, nor is the $500 refund included in B's gross income for 2014. 6) (c) Treatment Of Carryovers — For purposes of this section, an increase in a carryover which has not expired before the beginning of the taxable year in which the recovery or adjustment takes place shall be treated as reducing tax imposed by this chapter

A. 1014 - what does it mean to acquire property from a decedent 1. Text a. (a) In General — Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent's death by such person, be— 1) the fair market value of the property at the date of the decedent's death, b. (b) Property Acquired From The Decedent — For purposes of subsection (a), the following property shall be considered to have been acquired from or to have passed from the decedent: 1) (b)(1)— Property acquired by bequest, devise, or inheritance, or by the decedent's estate from the decedent; 2) (b)(6) — In the case of decedents dying after December 31, 1947, property which represents the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State, or possession of the United States or any foreign country, if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent's gross estate under chapter 11 of subtitle B (section 2001 and following, relating to estate tax) or section 811 of the Internal Revenue Code of 1939; c. (e) Appreciated property acquired by decedent by gift within 1 year of death (1) In general. In the case of a decedent dying after December 31, 1981, if 1) (A) appreciated property was acquired by the decedent by gift during the 1- year period ending on the date of the decedent's death, and 2) (B) such property is acquired from the decedent by (or passes from the decedent to) the donor of such property (or the spouse of such donor), the basis of such property in the hands of such donor (or spouse) shall be the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent. 2. Notes a. (b)(6) - favorable rule for community property states. When you die, your half of the property will be adjusted to fmv, and so will your spouse's half. (e) - if the step up rule is so great, why don't young people with appreciated assets give them to their parents, then re-inherit them? This rule prohibits this. If the appreciated property is acquired by the decedent by gift during one year before the death, AND it's acquired by the donor of such property, the basis of the property in the hands of the donor shall be the adjusted basis of the property in the hands of the decedent immediately before the decedent's death. Aka, no basis step up. This is an anti-abuse rule.

I. Amount Realized A. Amount realized is the sum of the money received, plus the fmv of any property received. B. Intl freight: 1. "Money received" really means "money's worth;" it doesn't have to mean literal money. Aka, if you receive stock, that's "money received". So the value was included in the amount realized. 2. In any exchange between unrelated parties, the values of the property and/or services exchanged are presumed to be equal. C. Crane: deals with amount realized. Crane only received 25k worth of cash, and no property, and she said her ar in the transaction was 25k. Gov, however, included the amount of liability in her ar. The amount of the mortgage was properly included in the ar. Was a non-recourse loan, but nevertheless we had to deal with how that liability figured on her ultimate disposition of the property. D. Tufts: again, nonrecourse loan. But now, the diff from Crane is that the property's fmv was less than the amount of the loan at the time of property's sale. Taxpayer said the property was only worth 1.4m, so their ar couldn't be more than that, even though the loan was 1.8m. Ct said that doesn't matter. Even though the borrowers weren't personally liable, they'd treat the nonrecourse loan as a "true" loan. E. Section 7701 1. Text 2. Notes a. Crane and Tufts applies across the board to nonrecourse finance F. Debts 1. If it goes into the basis, it will go into ar (nonrecourse debt) 2. What if a debt is recourse? Ar doesn't include amount that would otherwise be included in the discharge of indebtedness 3. Discharge of indebtedness and ar are EXCLUSIVE. Is something is included in ar, then it cannot be counted as DOI income. 4. Fmv IS the cap on the ar for a recourse liability (and you might have DOI income) - it ISN't for a nonrecourse liability.

A. Basis 1. 1031d: basis of old property will become the basis in the new property, with adjustments for boot. a. (d) Basis — If property was acquired on an exchange described in this section, section 1035(a), section 1036(a), or section 1037(a), then the basis shall be the same as that of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized on such exchange. If the property so acquired consisted in part of the type of property permitted . . . to be received without the recognition of gain or loss, and in part of other property, the basis provided in this subsection shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. For purposes of this section, section 1035(a), and section 1036(a), where as part of the consideration to the taxpayer another party to the exchange assumed (as determined under section 357(d)) a liability of the taxpayer, such assumption shall be considered as money received by the taxpayer on the exchange. B. Holding period - 1223 1. Text a. In determining the period for which the taxpayer has held property received in an exchange, there shall be included the period for which he held the property exchanged if, under this chapter, the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged, and, in the case of such exchanges the property exchanged at the time of such exchange was a capital asset as defined in section 1221 or property described in section 1231. 2. Notes a. 1: provides for a tacked holding period when the basis of the received property is the same as the relinquished property. C. Page 913 problems 1. 3a: no gain recognized bc this is a like kind exchange. 2. 4: a - he made up values, said property was worth 100k. say adjusted basis is 10k. 1031 doesn't apply here bc there's no exchange; it's just a straight sale with reinvestment. 3. 4b: the exchange of RE happened before the sale. Even though time lapsed between the time parties entered into a k for sale, that wasn't a deferred exchange, was still simultaneous bc the title for the relinquished property didn't go anywhere until the time of the exchange. Bc it was a simultaneous exchange, satisfied all reqs for 1031 4. 4c: not a simultaneous exchange. 1031 applies, no gain recognized. 5. 4d: deferred like kind exchange. Except after transfer, prior to replacement, seller may opt to take the cash other than the property. 6. 5a: B won't have any gain recognized bc didn't receive any property. Since B paid 100k additionally, there is no gain recognized bc there's no boot. But it will affect their basis in the replacement property. Basis is increased to 200k. 7. 5b: both properties now encumbered with liabilities. B has no gain recognized bc the liabilities assumed is treated as money paid; his basis is increased by those 30k. goes forward with a 130k basis.

I. Disaster Gains and Losses A. 1.1001-1 1. Text a. (a) General Rule. — Except as otherwise provided in Subtitle A of the Code, the gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or as loss sustained 2. Notes a. A: does NOT say "from the VOLUNTARY" conversion of property into cash. This has been interpreted to mean gain or loss is recognized whether the conversion is voluntary or involuntary. Involuntary = destruction, that sort of thing. B. 1001 1. Text a. (c) Recognition Of Gain Or Loss — Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized. 2. Notes a. When there is conversion, must be recognized C. Requirements for deferral on involuntary conversion 1. involuntarily conversion (e.g., insurance proceeds, condemnation award) 2. qualified replacement property (i.e., similar or related in service or use) 3. timely replacement

1. Problem 1, page 878 a. A: he has to pay 1.50/share. b. B: deferred to year 4, bc that's when there is no substantial risk of forefeiture. Only diff tween this and a: he had to find some way to get 150k to buy the stock. no advantage by doing it in this fashion. c. What if he had made an 83b election: no bargain element here. Amount paid is the fmv for the shares. No gross income, no corresponding tax to pay. He'd be smart to do this. d. C: what result if he gives the option to his child, who exercises the option in year 4. This is not an arms length dispensation. Section 83 continues to apply to the property in the hands of the child. Question: whose income is it, who has to report int 850k in income, who pays the tax? Going to have to think back to Lucas v. Earl. This is "fruit vs the tree," assignment of income question.

I. New topic - section 691 - IRD (income in respect of a decedent) A. 691 deals within income that decedent had the right to collect. 1. Text a. (a)(1) General Rule — The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of: b. (a)(1)(A)— the estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent; c. (a)(1)(B)— the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent's estate from the decedent; or d. (a)(1)(C)— the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right. e. (b) Allowance Of Deductions And Credit — The amount of any deduction specified in section 162, 163, 164, 212, or 611 (relating to deductions for expenses, interest, taxes, and depletion) or credit specified in section 27 (relating to foreign tax credit), in respect of a decedent which is not properly allowable to the decedent in respect of the taxable period in which falls the date of his death, or a prior period, shall be allowed: f. (b)(1) Expenses, Interest, And Taxes — In the case of a deduction specified in section 162, 163, 164, or 212 and a credit specified in section 27, in the taxable year when paid— 1) (A)— to the estate of the decedent; except that 2) (B)— if the estate of the decedent is not liable to discharge the obligation to which the deduction or credit relates, to the person who, by reason of the death of the decedent or by bequest, devise, or inheritance acquires, subject to such obligation, from the decedent an interest in property of the decedent. g. (b)(1)— All accrued income of a decedent who reported his income by use of the cash receipts and disbursements method; h. (b)(2)— Income accrued solely by reason of the decedent's death in case of a decedent who reports his income by use of an accrual method of accounting; and i. (b)(3)— Income to which the decedent had a contingent claim at the time of his death. j. (d) Items Excluded From Gross Income. — Section 691 applies only to the amount of items of gross income in respect of a decedent, and items which are excluded from gross income under Subtitle A of the Code are not within the provisions of section 691. 2. Notes a. B1 - income has been accrued, D just didn't receive it. somebody else will now receive that accrued income. That income is IRD under 691 now. b. B3: could refer to litigation claims - person can die before matter is concluded, wins big judgment, that's then IRD. So is 401k money, all kinds of pensions and retirement money. c. D: 691 doesn't MAKE GI - just classifies D's income as IRD. Item that wasn't GI to begin with, like municipal bond interest, isn't made GI by 691. d. A1: GI is included in GI when received for THESE PARTIES - could be D's estate, the person who receives the right to the amount (this talks about 401k, all sorts of retirement incomes), right to receive if amount received after a distribution by D's estate e. B: these people will also be entitled to any deductions that would've otherwise been allowable to the D. doesn't create deductions, notably. Just acknowledges deductions otherwise allowable, allows them to basically transfer.

1. Problem page 761 a. A: 1231 gains here exceed the losses. That means they're treated as long term capital gains, long term capital losses. b. C: the character of our gain and loss is now split. When the losses from an involuntary conversion/casualty, which is what happened here, then the ordinary loss character will be preserved, and that loss doesn't go into the main hodgepot for the capital gain/loss treatment. c. D: one year holding period is satisfied. Is the property subject of the kind subject to depreciation? Probably not. gains exceed losses. Therefore, all of it has to go into the main hodgepot. d. E: lookit a2. Shall be treated as ordinary loss. This is super beneficial for taxpayers. e. G: per 1231c, T will report a 4k LTCG, and 8k of ordinary income. That 8k essentiall reverses the favorable treatment of losses in prior years.

I. Recharacterizing gain or loss - Section 1231 and 1245 A. Section 64 1. Text a. For purposes of this subtitle, the term "ordinary income" includes any gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231(b). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this subtitle, as "ordinary income" shall be treated as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231(b). 2. Notes a. Defines ordinary income. OI is any gain from the sale or exchange of property which is not a capital asset. The catch: any gain from the sale or exchange of property which is treated or considered under other provisions which treats the gain as OI, the gain will be treated as a gain that is NOT from a capital asset. Aka, whether it's actually so or not, if capital gain is treated as OI for purposes of section 64 and the taxation of OI, we'll act like there wasn't the sale or exchange of a capital asset.

A. Problems page 944 1. Problem 1 a. We're told that there's an attorney who files a joint return with spouse. 1) A: he says that the 162 deductions are 30k. he put in the standard deduction bc we're told the couple has minimal deductions (?). 2) Here, they have less than the taxable threshold amount. Therefore a 199A deduction is permissible, although a law practice would not otherwise be a qualified trade or business. 3) Deduction is reducing the effective tax rate (ETR). b. B: income is below the threshold. The answer is that no deduction is allowed. Not bc it's bc legal services, but because the attorney is an employee. c. C: now we're talking abou someone who is an equal partner in a partnership. One half of gross income is 284k. and he's half partner. 1) 20% of 254k is 50,800. 20% of 260k is 52k. we'll use the lesser of these two numbers. d. D: the attorney's gross income from practice is 500k. what happens now is that the T's taxable income exceeds the threshold amount. No 199A deduction bc law practice is not a qualified trade or business. 2. Problem 2 page 944 a. Now, both spouses are involved in businesses. b. First must convert all numbers into a 20% allocable share bc partnership. Did this on the first lines. c. Real estate was subject to the wage cap. d. Full deduction for catering business, less than full deduction for RE business bc of wage cap.

I. Various Section on Recapturing Refunds A. General notes 1. What happens when information we report on a return is adjusted in a later year. whether that's deductions that were returned, etc. what do we do in those circumstances. One possible solution: go back and amend the earlier return, report the revised amount of income/deductions. 2. Prob: the things that might need adjustment might not be learned right away. Possible that the SOL for filing an earlier year return has passed. 3. After you file, IRS has three years to audit and asses your return. You only have a certain amount of time to amend that return B. Claim of right doctrine - 1341 1. Text a. (a) General Rule — If— 1) (1) an item was included in gross income for a prior taxable year (or years) because it appeared that the taxpayer had an unrestricted right to such item; 2) (2) a deduction is allowable for the taxable year because it was established after the close of such prior taxable year (or years) that the taxpayer did not have an unrestricted right to such item or to a portion of such item; and 3) (3) the amount of such deduction exceeds $3,000, then the tax imposed by this chapter for the taxable year shall be the lesser of the following: 4) (4) the tax for the taxable year computed with such deduction; or 5) (5) an amount equal to— a) (A) the tax for the taxable year computed without such deduction, minus b) (B) the decrease in tax under this chapter . . . for the prior taxable year (or years) which would result solely from the exclusion of such item (or portion thereof) from gross income for such prior taxable year (or years). b. (b)(1) If the decrease in tax ascertained under subsection (a)(5)(B) exceeds the tax imposed by this chapter for the taxable year (computed without the deduction) such excess shall be considered to be a payment of tax on the last day prescribed by law for the payment of tax for the taxable year, and shall be refunded or credited in the same manner as if it were an overpayment for such taxable year. c. (b)(2) Subsection (a) does not apply to any deduction allowable with respect to an item which was included in gross income by reason of the sale or other disposition of stock in trade of the taxpayer (or other property of a kind which would properly have been included in the inventory of the taxpayer if on hand at the close of the prior taxable year) or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.

1. Notes a. Proceeds from an installment sale shall be taken into account under installment method. If you have a loss, don't have to worry about installment method. But if you did recognize a gain, have to worry about installment method b. B1: def of installment sale - disposition of property where at least one payment is to be received after the close of ht etaxable year in which the disposition occurs c. B2: Installemnt sale doesn't include any dealer disposition, a disposition of personal property of a kind which is req to be included in the inventory of the taxpayer if on hand at the close of the taxable year. d. C: care about the proportion of the payment to the gross price. Figure out how much of each payment is actually income. e. D: you have to opt out of installment method, NOT opt in. f. Payment: Section 15A.453-1 1) Text a) (b)(3)(i) In General. — A) Payment may be received in cash or other property, including foreign currency, marketable securities, and evidences or indebtedness which are payable on demand or readily tradable. B) Payments include amounts actually or constructively received in the taxable year under an installment obligation. C) (b)(3)(i) For purposes of determining the amount of payment received in the taxable year, the amount of qualifying indebtedness (as defined in paragraph (b)(2)(iv) of this section) assumed or taken subject to by the person acquiring the property shall be included only to the extent that it exceeds the basis of the property (determined after adjustment to reflect selling expenses). D) (b)(2)(iv) Qualifying Indebtedness. — The term "qualifying indebtedness" means a mortgage or other indebtedness encumbering the property and indebtedness, not secured by the property but incurred or assumed by the purchaser incident to the purchaser's acquisition, holding, or operation in the ordinary course of business or investment, of the property. 2) Notes a) What counts as a payment? Does NOT include: you sell property on an installment basis, the note that buyer gives you is NOT payment. b) Liability will be treated as payment only to the extent the liability exceeds the basis of the property sold. Aka, Crane! B2v: what is gross profit: selling price minus the adjusted basis.

a) a. Like kind exchanges are limited b. F6: 453 gives 1031 control of the timing of the recognition of gain. c. Proceeds from an installment sale shall be taken into account under installment method. If you have a loss, don't have to worry about installment method. But if you did recognize a gain, have to worry about installment method d. B1: def of installment sale - disposition of property where at least one payment is to be received after the close of ht etaxable year in which the disposition occurs e. B2: Installemnt sale doesn't include any dealer disposition, a disposition of personal property of a kind which is req to be included in the inventory of the taxpayer if on hand at the close of the taxable year. f. C: care about the proportion of the payment to the gross price. Figure out how much of each payment is actually income. g. D: you have to opt out of installment method, NOT opt in. h. Like kind exchanges are limited i. F6: 453 gives 1031 control of the timing of the recognition of gain j. Installment method accounting doesn't do anything except direct the taxpayer on when and how much gain to report - in what year, etc. k. Installment method relates to an installment sale. If there's an installment sale, installment method applies l. B1: installment sale: at least one payment has to be received after the year of the sale/in which the disposition occurs. These are deferred payment transactions. Doesn't apply to dealers or sales of inventory property. But in other cases, installment method is mandatory. m. C: formula has developed to report gain on a ratable basis. Do that by means of gross profit ratio.

a) . a. Rev. Proc. 2022-38 1) Debt Instruments Arising Out of Sales or Exchanges. For calendar year 2023, a) a qualified debt instrument under § 1274A(b) has stated principal that does not exceed $6,734,800, and b) a cash method debt instrument under § 1274A(c)(2) has stated principal that does not exceed $4,810,600. A. Section 483 1. Text a. (a) Amount Constituting Interest — For purposes of this title, in the case of any payment— a) under any contract for the sale or exchange of any property, and b) to which this section applies, c) there shall be treated as interest that portion of the total unstated interest under such contract which, as determined in a manner consistent with the method of computing interest under section 1272(a), is properly allocable to such payment.

a. (b) Total Unstated Interest — For purposes of this section, the term "total unstated interest" means, with respect to a contract for the sale or exchange of property, an amount equal to the excess of— 1) the sum of the payments to which this section applies which are due under the contract, over 2) the sum of the present values of such payments and the present values of any interest payments due under the contract. 3) For purposes of the preceding sentence, the present value of a payment shall be determined under the rules of section 1274(b)(2) using a discount rate equal to the applicable Federal rate determined under section 1274(d). b. (c)(1) In General — Except as provided in subsection (d), this section shall apply to any payment on account of the sale or exchange of property which constitutes part or all of the sales price and which is due more than 6 months after the date of such sale or exchange under a contract— 1) under which some or all of the payments are due more than 1 year after the date of such sale or exchange, and 2) under which there is total unstated interest. c. (c)(2) Treatment Of Other Debt Instruments — For purposes of this section, a debt instrument of the purchaser which is given in consideration for the sale or exchange of property shall not be treated as a payment, and any payment due under such debt instrument shall be treated as due under the contract for the sale or exchange. d. (d)(1) Coordination With Original Issue Discount Rules — This section shall not apply to any debt instrument for which an issue price is determined under section 1273(b) (other than paragraph (4) thereof) or section 1274. 1. Notes a. If a debt instrument isn't covered by 1272, and it's not covered by 1274, then section 483 may apply. It is similar to the OID rules in the sense that it's characterizing payments as interest. Main diff: 483 isn't imposing any timing requirements. All it's doing is recharacterizing payments as they're made and as they're received. b. A: characterizes part of payment of interest, which causes your cost basis in the property, bc the interest is a current expenses - isn't going into your cost basis. For seller, that is ordinary income. c. B: total unstated interest. 1) C2: coordinating rule with installment method. Remember: via installment method, the buyer's installment note is not payment. Same rule applies here. Debt obligation of the buyer is itself not payment. Neither is it interest. 2) D1: coordinating rule with the OID rules. We aren't going to have a big mashup of these rule. 483 will bow out in favor of the OID rules when there is overlap.

I. Qualified small business stock A. Very powerful incentive to start business for capital formation. Very powerful provision that as advisors you'll be involved with for startups. B. 1202 1. Text a. In general, corporate stock is treated as qualified small business stock if it satisfies all of the following conditions: 1) The stock was originally issued after August 10, 1993; 2) The corporation issuing the stock meets the C corporation requirements; 3) The stock satisfies the original issuance requirement; 4) The corporation issuing the stock satisfies the QSB requirement; and 5) The corporation issuing the stock satisfies the active business requirement. b. (a)(1) In General — In the case of a taxpayer other than a corporation, gross income shall not include 50 percent of any gain from the sale or exchange of qualified small business stock held for more than 5 years. c. (a)(4) 100 Percent Exclusion For Stock Acquired During Certain Periods In 2010 And Thereafter — In the case of qualified small business stock acquired after [September 27, 2010]— 1) paragraph (1) shall be applied by substituting "100 percent" for "50 percent", 2) paragraph (2) shall not apply, and 3) paragraph (7) of section 57(a) shall not apply. d. (b)(1) In General — If the taxpayer has eligible gain for the taxable year from 1 or more dispositions of stock issued by any corporation, the aggregate amount of such gain from dispositions of stock issued by such corporation which may be taken into account under subsection (a) for the taxable year shall not exceed the greater of - 1) $10,000,000 reduced by the aggregate amount of eligible gain taken into account by the taxpayer under subsection (a) for prior taxable years and attributable to dispositions of stock issued by such corporation, or 2) 10 times the aggregate adjusted bases of qualified small business stock issued by such corporation and disposed of by the taxpayer during the taxable year. e. (b)(2) Eligible Gain — For purposes of this subsection, the term "eligible gain" means any gain from the sale or exchange of qualified small business stock held for more than 5 years

a. (c)(1) In General—Except as otherwise provided in this section, the term "qualified small business stock" means any stock in a C corporation which is originally issued after [August 10, 1993], if— 1) as of the date of issuance, such corporation is a qualified small business, and 2) except as provided in subsections (f) and (h), such stock is acquired by the taxpayer at its original issue— a) in exchange for money or other property (not including stock), or b) as compensation for services provided to such corporation. b. (c)(2)(A) In General — Stock in a corporation shall not be treated as qualified small business stock unless, during substantially all of the taxpayer's holding period for such stock, such corporation meets the active business requirements of subsection (e) and such corporation is a C corporation. c. (d)(1) In General — The term "qualified small business" means any domestic corporation which is a C corporation if— 1) the aggregate gross assets of such corporation (or any predecessor thereof) at all times on or after [August 10, 1993] and before the issuance did not exceed $50,000,000, 2) the aggregate gross assets of such corporation immediately after the issuance (determined by taking into account amounts received in the issuance) do not exceed $50,000,000, and 3) such corporation agrees to submit such reports to the Secretary and to shareholders as the Secretary may require . . . d. (d)(2)(A) In General — For purposes of paragraph (1), the term "aggregate gross assets" means the amount of cash and the aggregate adjusted bases of other property held by the corporation. e. (e)(1) In General — For purposes of subsection (c)(2), the requirements of this subsection [active business requirements] are met by a corporation for any period if during such period— 1) at least 80 percent (by value) of the assets of such corporation are used by such corporation in the active conduct of 1 or more qualified trades or businesses, and 2) such corporation is an eligible corporation.

A. 172 1. Text a. (a) Deduction Allowed — There shall be allowed as a deduction for the taxable year an amount equal to— a) (1) in the case of a taxable year beginning before January 1, 2021, the aggregate of the net operating loss carryovers to such year, plus the net operating loss carrybacks to such year, and b) (2) in the case of a taxable year beginning after December 31, 2020, the sum of— A) (A) the aggregate amount of net operating losses arising in taxable years beginning before January 1, 2018, carried to such taxable year, plus B) (B)— the lesser of— a) (i) the aggregate amount of net operating losses arising in taxable years beginning after December 31, 2017, carried to such taxable year, or b) (ii) 80 percent of the excess (if any) of— I) (I) — taxable income computed without regard to the deductions under this section and sections 199A and 250, over II) (II) — the amount determined under subparagraph (A) b. (c) Net Operating Loss Defined — For purposes of this section, the term "net operating loss" means the excess of the deductions allowed by this chapter over the gross income. Such excess shall be computed with the modifications specified in subsection (d). c. (d)(1) Net Operating Loss Deduction — No net operating loss deduction shall be allowed. d. (d)(8) Qualified Business Income Deduction — Any deduction under section 199A shall not be allowed. e. (d)(4) Nonbusiness Deductions Of Taxpayers Other Than Corporations — In the case of a taxpayer other than a corporation, the deductions allowable by this chapter which are not attributable to a taxpayer's trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business.

a. (d)(4)(C)— any deduction for casualty or theft losses allowable under paragraph (2) or (3) of section 165(c) shall be treated as attributable to the trade or business; b. (d)(3) Deduction For Personal Exemptions — No deduction shall be allowed under section 151 (relating to personal exemptions). No deduction in lieu of any such deduction shall be allowed. c. (b)(1)(A) General Rule — A net operating loss for any taxable year— 1) (i)— shall be a net operating loss carryback to the extent provided in subparagraphs (B), (C)(i) and (D), and 2) (ii)— except as provided in subparagraph (C)(ii), shall be a net operating loss carryover— a) (I) — in the case of a net operating loss arising in a taxable year beginning before January 1, 2018, to each of the 20 taxable years following the taxable year of the loss, and b) (II) — in the case of a net operating loss arising in a taxable year beginning after December 31, 2017, to each taxable year following the taxable year of the loss d. (b)(2) Amount Of Carrybacks And Carryovers — The entire amount of the net operating loss for any taxable year (hereinafter in this section referred to as the "loss year") shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried 1. Notes a. This is a very well-worn deduction. Has the effect of averaging out income over years. b. A: this is an authorizing a deduction for an amount equal to 1) before 2021, aggregate of net operating loss carryovers plus the carrybacks to such year. 2) after 2021, sum of net operating losses plus the lesser of... c. Short answer: for NOLs after 2020, can ONLY carry them forward, can NOT carry them back. d. NOL = trade or business expenses in excess of the business's income. e. D3: NOL doesn't include the standard deduction, any personal deduction. Distinguish between what's personal, what's business. f. B1A: carryback is no longer available/can't be done now, but up to 2021, were available. Now it's carry forward only. As we can see, diff treatment for NOLs that were generated before 2018 - those have a 20 year life, can be carried forward for 20 years. If not used within 20 years, it expires. For NOLs arising after 2017, those are evergreen, can be carried forward (subject to 80% limit) indefinitely. g. B2: apply the NOL to the earliest year that there is taxable income. If you have three years of NOLs, and in year 4 it becomes profitable, MUST apply the NOL in year 4. Can't just store them up for forever.

1. Closed transactions a. Most transactions are closed. Closed and reported on installment method, unless T elects out. b. Lookit what situation will be when T has closed transaction and has opted out of installemnt method: 1.1001-1 1) Text a) (g)(1) In General. — If a debt instrument is issued in exchange for property, the amount realized attributable to the debt instrument is the issue price of the debt instrument as determined under Section 1.1273-2 or Section 1.1274-2, whichever is applicable. A) If, however, the issue price of the debt instrument is determined under section 1273(b)(4), the amount realized attributable to the debt instrument is its stated principal amount reduced by any unstated interest (as determined under section 483) 2) Notes a) G1: debt instrument issued in exchange for property. How can we value that when T elects out of installment method. The issue price is the amount realized. b) Two different regs deal with issue price: 1.1273-2 and 1.1274-2. Also can lookit 1273(b)(4). c) What gov is getting at: a debt instrument that's issued for property is comprised of two things: a principle amount and an interest amount. If the interest is unstated, some part of the principle amount will be recharacterized as interest. c. 1.1273-2 1) Text a) (d)(1) Issue Price. — If an issue of debt instruments is [issued for non-publicly traded property], and if section 1274 applies to the debt instrument, the issue price of the instrument is determined under section 1274. Otherwise, the issue price of the debt instrument is its stated redemption price at maturity under section 1273(b)(4). See section 1274(c) and Section 1.1274-1 to determine if section 1274 applies to a debt instrument. b) (b) Stated Redemption Price At Maturity. — A debt instrument's stated redemption price at maturity is the sum of all payments provided by the debt instrument other than qualified stated interest payments. 2) Notes a) Issue price: applies to the issuance of debt instruments for non publicly traded property. This is referring to something that might occur between private parties. b) If 1274 applies, ti controls, but if it doesn't control, the issue price is its stated redemption price at maturity

a. 1273 1) Text 2) Notes a) A2: stated redemptive price at maturity = the amount fixed by the last modification f the purchase agreement. Includes interest and other amounts payable (could be fees, toher kinds of bonus interest). All of that will be included in the stated redemption price at maturity. b) What really is gov concerned with: people not paying tax on interest as and when it accrues. Easiest ex: T buys my car, gives a note for the value, will pay me interest at 7.75, but won't pay any principle or interest until ten years from the day of purchase. So in effect what's happening is that you have a note and you're not reporting any interest until ten years. Gov says that's not right, you should be paying tax on the interest each year when it accrues, even if you haven't received it. c) There's a diff method of accounting for interest on a yield to maturity basis so gov can tax interest accruals as they're happening, even though no interest is actually being paid. b. 1.1274-2 1) Text a) (b)(1) Debt Instruments That Provide For Adequate Stated Interest; Stated Principal Amount. — The issue price of a debt instrument that provides for adequate stated interest is the stated principal amount of the debt instrument. For purposes of section 1274, the stated principal amount of a debt instrument is the aggregate amount of all payments due under the debt instrument, excluding any amount of stated interest. b) (b)(2) Debt Instruments That Do Not Provide For Adequate Stated Interest; Imputed Principal Amount. — The issue price of a debt instrument that does not provide for adequate stated interest is the imputed principal amount of the debt instrument 2) Notes a) This is the other regulation regarding issue price. b) Issue price of debt instrument that provides for adequate stated interest is the stated principal amount. c) My note says 10k, provides for 8% interest, the stated principle amount is the issue price. d) B2: Debt instruments where there is NOT adequate stated interest. New concept: imputed principle amount. The gov will impute interest on that transaction where there's not adequate stated interest.

A. Contingent purchase price 1. Text a. (c)(3)(i) In General. — When a stated maximum selling price cannot be determined as of the close of the taxable year in which the sale or other disposition occurs, but the maximum period over which payments may be received under the contingent sale price agreement is fixed, the taxpayer's basis (inclusive of selling expenses) shall be allocated to the taxable years in which payment may be received under the agreement in equal annual increments. 2. Notes a. In corp transactions, contingent purchase price is v common - are called earn outs. b. There are two variations on the cpp. One is the amount of the price. Do we know it? We may or may not. the other is the period over which it'll be paid. If you know both, it's not contingent. But if one or both aren't known, then you have a contingent scenario.

a. 15A.453-A: 1) Text a) (c)(3)(i) In making the allocation it is not relevant whether the buyer is required to pay adequate stated interest. However, if the terms of the agreement incorporate an arithmetic component that is not identical for all taxable years, basis shall be allocated among the taxable years to accord with that component unless, taking into account all of the payment terms of the agreement, it is inappropriate to presume that payments under the contract are likely to accord with the variable component. b) (c)(3)(i) If in any taxable year no payment is received or the amount of payment received (exclusive of interest) is less than the basis allocated to that taxable year, no loss shall be allowed unless the taxable year is the final payment year under the agreement or unless it is otherwise determined in accordance with the rules generally applicable to worthless debts that the future payment obligation under the agreement has become worthless. When no loss is allowed, the unrecovered portion of basis allocated to the taxable year shall be carried forward to the next succeeding taxable year. If application of the foregoing rules to a particular case would substantially and inappropriately defer or accelerate recovery of the taxpayer's basis, a special rule will apply. See paragraph (c)(7) of this section. c) (c)(2)(i)(A)— contingent payment sale will be treated as having a stated maximum selling price if, under the terms of the agreement, the maximum amount of sale proceeds that may be received by the taxpayer can be determined as of the end of the taxable year in which the sale or other disposition occurs. A) The stated maximum selling price shall be determined by assuming that all of the contingencies contemplated by the agreement are met or otherwise resolved in a manner that will maximize the selling price and accelerate payments to the earliest date or dates permitted under the agreement. d) (c)(2)(i)(A)— Except as provided in paragraph (c)(2)(ii) and (7) of this section (relating to certain payment recomputations), the taxpayer's basis shall be allocated to payments received and to be received under a stated maximum selling price agreement by treating the stated maximum selling price as the selling price for purposes of paragraph (b) of this section. e) The stated maximum selling price, as initially determined, shall thereafter be treated as the selling price unless and until that maximum amount is reduced, whether pursuant to the terms of the original agreement, by subsequent amendment, by application of the payment recharacterization rule (described in paragraph (c)(2)(ii) of this section), or by a subsequent supervening event such as bankruptcy of the obligor. f) When the maximum amount is subsequently reduced, the gross profit ratio will be recomputed with respect to payments received in or after the taxable year in which an event requiring reduction occurs. If, however, application of the foregoing rules in a particular case would substantially and inappropriately accelerate or defer recovery of the taxpayer's basis, a special rule will apply. See paragraph (c)(7) of this section.

A. Problems page 154 1. 1A: mortgagor purchases parcel of land for 100k. borrows 80k from bank, pays that amount, and an addition 20k to seller, giving bank a nonrecourse mortgage on the land. We have a true, nonrecourse loan here. Land is security for the land. What is the mortgagor's cost basis in the land: 100. Include amount of loan bc it's acquisition indebtedness a. B: two years later when land is worth 200k, mortgagor has only paid interest on loan. Takes out a second nonrecourse loan, using land as security. First loan is 80, second loan is 100. Both secured by land. Does mortgagor have income when she borrows the second loan? This is not acquisition indebtedness, just borrowing out equity on loan. No, no income, bc the borrower is deemed to have an obligation to repay bc the fmv of the land exceeds the amount of the first and second loan. They'll treat the second loan as though she had an obligation to repay bc it's in her economic benefit to do so. b. C: what is mortgagor's basis in the loan if 100k in mortgage proceeds is used to improve the land? Section 1016 - that expenditures that are chargeable to capital accounts are added to the basis of property. We don't know if that expense is currently deductable, but we can assume that it's all chargeable to capital. Section 1016, just add that to basis of property. Og cost basis was 100, now add another 100 in improvement, adjusted basis is 200. c. D: what is basis in land if 100 in loan proceeds are used to purchase stocks? Basis of the property is unaffected. 100 is the cost basis of the stocks. d. E: what result if in D, the principle amount of loans is 180, land is worth 200, land is sold subject to both mortgages for 120 in cash. This is the case of Crane. Ar is 120k in cash, plus the 180k in loans that the buyer is taking on. Amount realized is 300k. remember that the basis is unaffected bc used to be stocks. So basis is still 100. So there's 200k of gain. What is purhaser's cost basis: 300 - paid 120k, took on 180k in liabilities. e. F: what result in D if instead mortgagor gives the land, worth 300, still subject to mortgages, to her son? From son's perspective, when he receives a gift, that's excluded from his income. What's the effect on mortgagor, though? This is treated as a part sale, part gift transaction. The sale piece begins with ar of 180k (amount of liabilities). Basis was 100, so her gain is 80. What about the other 120k in value? That's a gift. Mom has 80k gain, may or may not have gift tax. What is the son's basis in the land? On the gift part, he takes basis of donor (100k here). But when it's treated as a sale, the son's basis becomes the cost - here, the amount of the liabilities he took the property subject to (180k). the additional 120k is excluded bc mom intended to make a gift.

a. G: what result if the mortgagor gives the land to her spouse rather than her son? It's still a gift, but now we're switching up the donee. Section 1041 provides independent rules for transfers of property between spouses - no gain or loss is recognized in this instance. So the gift to the spouse is not part sale part gift, it's just a full gift. No gain or loss. what is spouse's basis in the land? Section 1041(b) provides the basis rule for spousal transfers - donee spouse will have the basis in the property as the donor spouse (100k, even though the liabilities are 180k). their basis is still 100k, even after they pay off the loan. Must take basis of the donor spouse. b. H: what result to the mortgage in D if the land declined in value from 300 to 180, mortgagor transferred via quitclaim deed to the bank. No warranty as a part of that deed. Ar is 180k, the amount of the liabilities. Mortgagor's basis: 100k, bc when it borrowed the second loan, it invested in stocks, not in the land. c. I: what result to mortgage in H if land declines in value from 300 to 170k at the time of the quitclaim deed? Fmv comes below the amount of the liabilities. We know from section 7701(g) that the ar in this scenario the ar will be 180k, the amount of the liabilities, not withstanding the fact that the fmv is now lower. Still has a gain of 80k, fmv is not relevant in this scenario 1. 2: investor purchased three acroes of land, each worth 100k, for a total of 300k. sold one acre for 140k in year 1. In year 2, sold acre 2 for 160k. question: does investor have gain or loss on each acre, when the basis of ALL the land is 300k? And ar by the investor is 300? It wouldn't seem like they have gain, since haven't received more than he's paid. But nevertheless, in regulations, we're told that the basis must be allocated to each of the acres based on the fmv. So when he sold for 140k, we can say his basis in that acres was 100, so he has gain of 40k, even though he hasn't recovered his full cost. Same occurrence for year 2 - he has gain again. 2. 3: gainer has an apartment by inter vivos gift. Cost basis was 200k. given to gainor when it was worth 300k. gainer takes a 200k basis bc it's a gift. We know gift tax was paid. He sells it for 320k. ar is 320k. basis was 200k on date of gift, so gain is 120k. or IS IT?? To answer this question, have to look for basis adjustments in instances of gift tax. Refer to section 1015(d). Find that the amount of the basis adjustment is equal to the amount of appreciation in the property, over the total value. Aka, we know the cost was 200k, i''s now worth 300k. appreciation is 100k. so 100k/300k total value = 1/3. 1/3 times 60k of gift tax paid is 20k. that's the amount that can be added to the basis in respect to the property. So the gainer's basis is actually 220k at the time of the sale, so his gain is actually 100k. what is buyer's basis? Lookit their cost. a. C: same questions. Now assume that property was acquired for 80k in cas, subject to 120k mortgage, on which nobody was every personally liable or any principle was every paid. There was 30k tax on the gift. Is the basis any different? No. amount of acquisition indebtedness is included in basis. We know this is nonrecourse. Relative paid 30k in tax on the gift. Buyer took subject to mortgage, paid 200k in cash. Cost basis is still 320k for buyer. From seller's perspective: ar is 320k. what is gainer's basis? Basis is determined by going through gift tax appreciation calculation. Here, the basis is ... LOOK AT THIS ON MON b. Takeaway: liabilities are crucially important to transactions in property.

A. Statutes of limitation 1. Section 6501 a. Text 1) (a) General Rule — Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) . . . and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. For purposes of this chapter, the term "return" means the return required to be filed by the taxpayer 2) (b)(1) Early Return — For purposes of this section, a return of tax imposed by this title, except tax imposed by chapter 3, 4, 21, or 24, filed before the last day prescribed by law or by regulations promulgated pursuant to law for the filing thereof, shall be considered as filed on such last day. 3) (e)(1)(A) General Rule — If the taxpayer omits from gross income an amount properly includible therein and— a) (i)— such amount is in excess of 25 percent of the amount of gross income stated in the return, or b) (ii)— such amount (I) is attributable to one or more assets with respect to which information is required to be reported under section 6038D [foreign financial asset] . . . and (II) is in excess of $5,000, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time within 6 years after the return was filed. 4) (e)(1)(B) Determination Of Gross Income — For purposes of subparagraph (A)— a) (ii)— An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income; and

a. Notes 1) A: if gov things you've understated your tax liability for a given year, an exam may be in order. Assessment itself must be made within three years of the filing of the return. 2) B1: SOL is measured from the date that the return is filed. It's filed on the date it's mailed (even though the gov might not receive it til days later). What if you file before the due date? Do we measure from that date? No - measure the SOL from the last day of the filing period. In the case of individuals, would be three years from April 15th, even if we file six months prior to April 15th. 3) E1A: alt SOL. This is a six-year statute that follows from a substantial understatement of income. 25% of the amount of gross income that's actually stated in the return. If you state 100k in tax return, but your income is really 150k, you've omitted from gross income 50% of the amount stated in the return, so you'd be subject to this six-year statute. Note that three year statute requires assessment before the gov can go to court and begin collection. Diff in six year: proceeding for collection can be made at any time in the six years, with or without a ct proceeding. 4) NOTE: do not confuse the SOL for assessment with the SOL for collection. 5) E1B: the gains from the dealings in property are gross income, NOT the amount realized, but the GAIN. Person can omit some amount of gain by overstating their basis in the property. That has the same effect, for six year SOL purposes, as omitting income the ordinary way. will trigger the six year SOL. 6) What is a return for this (SOL) purpose? Beard v. Commissioner, 82 T.C. 766 (1984) a) Text A) The Tax Court follows a four-part test to determine whether a return has been filed: I) there must be sufficient data to calculate tax liability; II) the document must purport to be a return; III) there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and IV) the taxpayer must execute the return under penalties of perjury. b) Notes A) For SOL purposes, a return must pass this four-part test.

1) (e)(2)(A) In General — The term "threshold amount" means $157,500 (200 percent of such amount in the case of a joint return). 2) (d)(3)(A) In General — If, for any taxable year, the taxable income of any taxpayer is less than the sum of the threshold amount plus $50,000 ($100,000 in the case of a joint return), then— a) (i) any specified service trade or business of the taxpayer shall not fail to be treated as a qualified trade or business due to paragraph (1)(A), but b) (ii) only the applicable percentage of qualified items of income, gain, deduction, or loss, and the W-2 wages and the unadjusted basis immediately after acquisition of qualified property, of the taxpayer allocable to such specified service trade or business shall be taken into account in computing the qualified business income, W-2 wages, and the unadjusted basis immediately after acquisition of qualified property of the taxpayer for the taxable year for purposes of applying this section. 3) (d)(3)(B) Applicable Percentage — For purposes of subparagraph (A), the term "applicable percentage" means, with respect to any taxable year, 100 percent reduced (not below zero) by the percentage equal to the ratio of— a) (i) the taxable income of the taxpayer for the taxable year in excess of the threshold amount, bears to b) (ii) $50,000 ($100,000 in the case of a joint return). 4) (i) Termination — This section shall not apply to taxable years beginning after December 31, 2025. a. Section 1202 1) (e)(3) Qualified Trade Or Business — For purposes of this subsection, the term "qualified trade or business" means any trade or business other than— a) (A)— any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners, b. Rev. Proc. 2022-38, section 3.27 1) Year: 2023 2) Joint return: 364,200 3) Married filing separate: 182,100 4) Single/head of household: 182,100

a. Notes 1) C4: your compensation is not QBI. Doesn't matter you're employed by/shareholder of qualified business. 2) D: QB is a specified QB. 3) D2: QB refers to the types of trades and businesses referred to in 1202e3A. 4) Limited exemption for small businesses 5) Small businesses not subject to all the limitations we've been talking about. 6) B3A: small businesses under this exemption must have income that doesn't exceed the threshold amount 7) E2A: threshold amount = 157,500 (double that for married filing jointly). 8) D3A: phaseout regime for when a person hits that threshold amount. Benefit amount is phased out; can't claim the deduction anymore. Don't have to know all the ins and outs of this rule. Just know that those below the threshold amount are entitled to 199A without regard to all of the other limits. Those whose income is above it have to comply with all of the other things we've been talking about. 9) I: termination limit. The 199A deduction is going to sunset in 2025. After that, it's an open question on whether congress will extend 199A deductions or not or modify it.

1) (a)(4)(B) — Losses (including losses not compensated for by insurance or otherwise) on the destruction, in whole or in part, theft or seizure, or requisition or condemnation of— a) property used in the trade or business, or b) capital assets which are held for more than 1 year and are held in connection with a trade or business or a transaction entered into for profit, shall be treated as losses from a compulsory or involuntary conversion. 2) (a)(4)(C) — In the case of any involuntary conversion (subject to the provisions of this subsection but for this sentence) arising from fire, storm, shipwreck, or other casualty, or from theft, of any— a) property used in the trade or business, or b) any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit, this subsection [(a)] shall not apply to such conversion (whether resulting in gain or loss) if during the taxable year the recognized losses from such conversions exceed the recognized gains from such conversions. 3) (b)(1) General Rule — The term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year, which is not— a) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year, b) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, c) a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by a taxpayer described in paragraph (3) of section 1221(a), or d) a publication of the United States Government. . . . 4) (c)(1) In General — The net section 1231 gain for any taxable year shall be treated as ordinary income to the extent such gain does not exceed the non-recaptured net section 1231 losses. 5) (c)(2) Non-Recaptured Net Section 1231 Losses — For purposes of this subsection, the term "non-recaptured net section 1231 losses" means the excess of— a) the aggregate amount of the net section 1231 losses for the 5 most recent preceding taxable years, over b) the portion of such losses taken into account under paragraph (1) for such preceding taxable years.

a. Notes 1) Focused on trade or business 2) Why is this section necessary in the first place? Section 1221a - property used in trade or business is subject to depreciation. And property used in trade or business is NOT a capital asset. If we didn't have 1231, there'd never be a capital asset in respect to business use property. a) Text A) (a) In General — For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include— B) (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; C) (2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business; 3) Section 1231 says that if section 1231 gains exceed 1231 losses, then they'll be treated as long term capital gains or long term capital losses. 4) If you have gains, capital assets. You have losses: ordinary losses. This is super awesome. 5) A3A: a section 1231 gain - gain on the sale or exchange of property used in trade or business, AND any gain from the conversion, as a result of destruction, theft, or seizure, of property used in a trade or business or any capital asset held for more than one year and held in connection with trade or business. 6) A3B - section 1231 loss: any loss from a sale or exchange or conversion that described in a3A. 7) Then you just compare your gains and losses. If there an overall gain, then long term capital loss. if an overall loss, it's an ordinary loss. 8) A4A: to determine if gains exceed losses, lookit this section. 9) A4C: losses from involuntary conversions only. This applies only to involuntary conversions arising from fire, storm, shipwreck, or other casualty, or theft. That's it. NOT condemnations, expropriations. This is only for purposes of sub-hodgepodge. If you have these, the main hodgepodge will not apply if the losses from the conversion exceed the gains. Aka, they'll be treated as ordinary losses. This is a good outcome for the taxpayer. 10) B1: what is property used in a trade or business for this section? Property used in a trade or business that is subject to depreciation, held for more than one year. it's also real property used in a trade or business held for more than one year which is NOT inventory; held primarily for sale to customers; patent, invention, model or design; publication of the US gov. 11) C1: taxpayers that try to gain the 1231 system. This section tries to prevent that type of gaming the system, writing everything off as ordinary losses. This rule says we're going to look at five year period. 12) C2: here's the five year lookback period.

1. 83 a. Text 1) (a) General Rule — If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of— a) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) . . ., over b) the amount (if any) paid for such property, 2) (d)(1) Valuation — In the case of property subject to a restriction which by its terms will never lapse, and which allows the transferee to sell such property only at a price determined under a formula, the price so determined shall be deemed to be the fair market value of the property unless established to the contrary by the Secretary, and the burden of proof shall be on the Secretary with respect to such value. 3) (h) Nonlapse Restriction. — For purposes of section 83 and the regulations thereunder, a restriction which by its terms will never lapse (also referred to as a "nonlapse restriction") is a permanent limitation on the transferability of property— a) Which will require the transferee of the property to sell, or offer to sell, such property at a price determined under a formula, and • Which will continue to apply to and be enforced against the transferee or any subsequent holder (other than the transferor). A limitation subjecting the property to a permanent right of first refusal in a particular person at a price determined under a formula is a permanent nonlapse restriction. 4) (i) Lapse Restriction. — For purposes of section 83 and the regulations thereunder, the term "lapse restriction" means a restriction other than a nonlapse restriction as defined in paragraph (h) of this section, and includes (but is not limited to) a restriction that carries a substantial risk of forfeiture.

a. Notes 1) Formula: excess of property's fmv over the amount paid for the property. 2) D1: in the case of property subject to a restriction, that never laps, price shall be deemed to be fmv. Plenty of formulas for valuation that appraisers use. Sometimes there are formulas that are built into sale agreements by shareholders, including agreements on stock awards. Kinds of formulas you'll see are some pre-agreement, typically. 3) H: talks about restrictions that will never lapse. Essentially sanctions the right of first refusal with a formula valuation provision. Gov is saying we will respect the formula you provided for this particular type of restriction unless it's egregiously wrong. Nature of a restriction that will never lapse: imposes service provider to agree to an amount that may or may not be fmv at the time of a later sale. 4) I: lapse restriction = a restriction other than a nonlapse restriction. G: definition of amount pai. Refers to the value of any money or property paid for the property's transfer. Aka: money or property paid by service provider in consideration of the property transferred to the service provider. To the extent there is any imputed interest, that unstated interest is not considered an amount paid. Where options are concerned: amounts paid takes on a 2d meaning. Includes any amounts paid on the exercise of the option.

1) Example: In 2012, O Corp. paid advertising expenses of $40,000. O's taxable loss for 2012 was $70,000. O properly carried this loss forward as a net operating loss to 2013, using it to reduce what would otherwise be taxable income of $125,000 in 2013. In 2014, O received a rebate of $10,000 with respect to its advertising expenses paid in 2012. Had the $10,000 not been spent and deducted in 2012, the loss carryforward to 2013 would have been $10,000 less. Thus, the $10,000 is treated as having reduced income tax liability for 2012. Accordingly, under the tax benefit doctrine, the $10,000 is included in O's gross income for 2014. 2) The tax benefit doctrine does not apply if the taxpayer's recovery occurs in the same year as the transaction justifying the deduction. Instead, the recovery and the deduction are netted; excess recovery is included in gross income and excess deduction is deducted. a) Example: In June 2014, D Corp. paid $5,000 for liability insurance coverage. In August 2014, the insurance company refunded $500 to D because of adjustments required by the state insurance commission. D's deduction for insurance expenses for 2014, ignoring other insurance premiums, is $4,500. 3) If no deduction was allowable nor claimed with respect to the recovered amount, the tax benefit doctrine does not apply. a) Example: In 2013, T paid $20,000 in federal income taxes through payroll withholding and estimated tax payments. Federal taxes are not deductible, and T did not attempt to deduct them. On T's 2013 federal income tax return, filed in 2014, T computed an overpayment of tax of $3,500. The resulting $3,500 refund T subsequently receives is not includible in income since no deduction was allowable or claimed with respect to the recovered amount.

a. Notes 1) You do have to report as income recovery of those prior deductions, but only if those deductions actually created a tax benefit in the prior year. if there was no tax benefit, then you don't have to report any income in the year recovered. Tax benefit = tax liability in prior year was actually reduced by these deductions. 2) B1: what if you claimed a tax credit based on some expenditure, and later that expenditure is somehow recovered. That has to be recovered but only to the extent of the tax benefit. (deduction reduces gi; a credit is dollar for dollar reduction of tax liability). 3) Ex: T only owed 400 to begin with. And so if you add back the 500 expenditure, which carries with it a 100 credit, you can see that the credit did not deliver any tax benefit. Only 400 of the 1k credit was used. 1k credit was reported, but only 400 was actually used to reduce tax liability. 4) 111 applies to both deduction taken in an earlier year and for expenditures that gave rise to credits when recovered in a later year. aka, both expenses and credits. 5) C: says that you're getting a benefit if the only thing hat happens is your deduction is increased. It'll be treated as if your taxes were reduced, bc you carry that loss forward.

A. Key terms: property, transfer, services 1. 1.83-3 a. Text 1) (a)(1) In General. — For purposes of section 83 and the regulations thereunder, a transfer of property occurs when a person acquires a beneficial ownership interest in such property (disregarding any lapse restriction, as defined in § 1.83-3(i)). 2) (a)(2) Option. — a) The grant of an option to purchase certain property does not constitute a transfer of such property. However, see § 1.83-7 for the extent to which the grant of the option itself is subject to section 83. b) In addition, if the amount paid for the transfer of property is an indebtedness secured by the transferred property, on which there is no personal liability to pay all or a substantial part of such indebtedness, such transaction may be in substance the same as the grant of an option. 3) (a)(3) Requirement That Property Be Returned. — Similarly, no transfer may have occurred where property is transferred under conditions that require its return upon the happening of an event that is certain to occur, such as the termination of employment. In such a case, whether there is, in fact, a transfer depends upon all the facts and circumstances. Factors which indicate that no transfer has occurred are described in paragraph (a)(4), (5), and (6) of this section. 4) (e) Property. — For purposes of section 83 and the regulations thereunder, the term "property" includes real and personal property other than either money or an unfunded and unsecured promise to pay money or property in the future. The term also includes a beneficial interest in assets (including money) which are transferred or set aside from the claims of creditors of the transferor, for example, in a trust or escrow account. 5) (f) Property Transferred In Connection With The Performance Of Services. — Property transferred to an employee or an independent contractor (or beneficiary thereof) in recognition of the performance of, or the refraining from performance of, services is considered transferred in connection with the performance of services within the meaning of section 83. a) The transfer of property is subject to section 83 whether such transfer is in respect of past, present, or future services 6) (g) Amount Paid. — a) For purposes of section 83 and the regulations thereunder, the term "amount paid" refers to the value of any money or property paid for the transfer of property to which section 83 applies, and does not refer to any amount paid for the right to use such property or to receive the income therefrom. b) Such value does not include any stated or unstated interest payments. For rules regarding the calculation of the amount of unstated interest payments, see § 1.483- 1(c). c) When section 83 applies to the transfer of property pursuant to the exercise of an option, the term "amount paid" refers to any amount paid for the grant of the option plus any amount paid as the exercise price of the option.

a. Notes 1) Property includes both real and personal property, but not an unfunded promise to pay money in the future. 2) Includes beneficial interest in assets that are transferred from claims of creditors of the transferor, like in a trust. 3) E: don't have to include the word 'money' in the definition of property. 4) A1: what does 'transfer' mean, when does it occur? Occurs when a person acquires a beneficial ownership interest in property. This includes legal ownership. The fact your name isn't on the title doesn't matter - it's beneficial ownership that matters. 5) A2: what about (stock) options. Is that a transfer? No, not a transfer of the underlying property. An option to buy x stock is not a transfer of the stock itself. However, the transfer of the option itself may be a transfer for 83 purposes. 6) A3: overrides transfer treatment. Ex: employer receives stock only so long as employee was employed; as soon as employment ended, the stock would be repurchased by the co. This ex is not considered a transfer, bc the employee doesn't have the benefits of ownership. 7) F: what services are we really talking about here? Can be for the performance of services or from refraining from performing services (like a covenant not to compete). Applies to past, present, and future services. 8) How much income a service provider receives when property is transferred

a. Rev. Rule. 71-265 1) Text a) Generally, for Federal income tax purposes, a sale, exchange, or other disposition of real estate is held to occur at the time a transfer of ownership by deed is executed and delivered, or at the time possession and the burdens and benefits of ownership are, from a practical standpoint, transferred to the buyer, whichever occurs first. 2) Notes a) RE takes a diff view of holding period. Holding period is keyed on the date that escrow or that the day the property is deeded. State determines which one will be used.

a. Section 1223 1) Text a) (1) In determining the period for which the taxpayer has held property received in an exchange, there shall be included the period for which he held the property exchanged if, under this chapter, A) the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged, and, B) the property exchanged at the time of such exchange was a capital asset as defined in section 1221 or property described in section 1231 b) (2) In determining the period for which the taxpayer [transferee] has held property however acquired there shall be included the period for which such property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person. c) (9) In the case of a person acquiring property from a decedent or to whom property passed from a decedent (within the meaning of section 1014(b)), if— A) the basis of such property in the hands of such person is determined under section 1014, and B) such property is sold or otherwise disposed of by such person within 1 year after the decedent's death, then such person shall be considered to have held such property for more than 1 year. 2) Notes a) In some cases, property can be exchanged or sold and the gain will not be realized. Ex, a 1031 exchange. b) If property received in an exchange has the same basis as the property that was exchanged, then you can include in your holding period the amount of time that you held the property you gave up. c) This is called tacking. d) 2: from transferee's pov: the transferee's holding period will include any period that another party held that property if they have the same basis as that other party. e) 9: applies to property acquired from a decedent. You're deemed to have held property for more than one year if you sell or dispose of it within one year after the decedent's death. Basis under 1014: step up or down based on fmv - split basis (I think?)

a. Section 165, losses 1) Text a) (g)(1) General Rule — If any security which is a capital asset becomes worthless during the taxable year, the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset. 2) Notes G1: overrides sale or exchange requirements in the case of securities that become worthless. If you have stock in a co that will become worthless in five years, when do you get to claim your loss? If an when it becomes worthless, you can take a capital loss in the year it becomes worthless, even though you might not have sold it or exchanged it.

a. Section 1234 1) Text a) (a)(1) General Rule — Gain or loss attributable to the sale or exchange of, or loss attributable to failure to exercise, an option to buy or sell property shall be considered gain or loss from the sale or exchange of property which has the same character as the property to which the option relates has in the hands of the taxpayer (or would have in the hands of the taxpayer if acquired by him). b) (a)(2) Special Rule For Loss Attributable To Failure To Exercise Option — For purposes of paragraph (1), if loss is attributable to failure to exercise an option, the option shall be deemed to have been sold or exchanged on the day it expired. 2) Notes a) Applies to options, which people use to tie up property even though hey aren't ready to buy it yet. b) What happens when an option expires without it being exercised? No sale or exchange. A2 - if loss is attributable to failure to exercise the option, it will be deemed to have been sold or exchanged.

a. Kenan v. Commissioner 1) Niece inherited 5m from her aunt, but not before she reached age 40. Trust could satisfy that in cash, or in securities (stocks). Trustees got to decide what form of property would be distributed to the niece to satisfy the bequest. The trustees decided was they'd satisfy it partly in cash, partly in securities. 2) Gov said there was a sale/exchange in the securities, trust said no. since trustees received nothing, in what since could there have been a sale/exchange? Gov said you could've sold them for cash and then distribute that cash to the niece. But you didn't do that, you just distributed the securities to the niece, but you shouldn't be able to avoid the gain on that transaction when you could have, perhaps should have, sold them for cash. 3) Ct said: don't have to receive something in return for there to be an exchange - doesn't require a bilateral agreement. 4) Takeaway: can have a sale or exchange even when you're just satisfying a claim, don't receive anything in return. 5) The word "exchange" does not necessarily have the connotation of a bilateral agreement which may be said to attach to the word "sale." Thus, should a person set up a trust and reserve to himself the power to substitute for the securities placed in trust other securities of equal value, there would seem no doubt that the exercise of this reserved power would be an "exchange" within the common meaning of the word, even though the settlor consulted no will other than his own. . . . b. Hudson v. Commissioner 1) Ts went out and bought a judgment from a third party - somebody in an unrelated case sued a DO, got a judgment, sold the judgment to the two Ts. Now they're wanting to collect, which they do. 2) IRS says they don't have a capital gain. Ts say there was indeed a sale or exchange. 3) IRS says all that happens was that the DO satisfied the judgment, and Do didn't receive anything, ie there was no sale or exchange. 4) Ct found that there was no sale or exchange, therefore was ordinary income. 5) We cannot see how there was a transfer of property, or how the judgment debtor acquired property as the result of the transaction wherein the judgment was settled. The most that can be said is that the judgment debtor paid a debt or extinguished a claim so as to preclude execution on the judgment outstanding against him. When petitioners received the $21,150 in full settlement of the judgment, they did not recover the money as the result of any sale or exchange but only as a collection or settlement of the judgment.

a. Section 1235 1) Text a) (a) Gain or loss attributable to the cancellation, lapse, expiration, or other termination General — A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 1 year, regardless of whether or not payments in consideration of such transfer are— b) payable periodically over a period generally coterminous with the transferee's use of the patent, or c) contingent on the productivity, use, or disposition of the property transferred. 2) Notes a) Discusses sales and exchanges b) A: this rule applies specifically to patents. Says that a transfer of all substantial rights to a patent should be considered a sale or exchange of a capital asset, even though 1221 says patent isn't a capital asset. This section overrides that if there is a sale of all substantial rights. c) All substantial rights: = for all markets, for all time b. Section 1253 1) Text a) (a) General Rule — A transfer of a franchise, trademark, or trade name shall not be treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or continuing interest with respect to the subject matter of the franchise, trademark, or trade name. 2) Notes a) Transfer of a franchise, trademark, trade isn't treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or cont interest with respect to the subject matter of the franchise, trademark, or trade name. b) Partner to 1235 c. Section 1271 1) Text a) (a)(1) Retirement — Amounts received by the holder on retirement of any debt instrument shall be considered as amounts received in exchange therefor. 2) Notes A1: gov just has proclaimed that an exchange occurs in this instance - when you satisfy a debt instrument, there's a deemed exchange, even though some cts have said otherwise. This is important for publicly traded securities.