Accounting 426 - 2006

John R. Dorocak

Cal State University

San Bernardino

© Winter,l 2006, John R. Dorocak

This publication is distributed with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional advice and assume no liability in connection with its use. Tax laws are constantly changing and are subject to differing interpretation. In addition, the facts and circumstances in your particular situation may not be the same as those presented herein. Therefore, we urge you to do additional research and ensure that you are fully informed.

Chapter 1 - Introduction to Various Taxes Objectives of Course Federal Income Tax Calculation - Tax

formula (Individuals) Federal Income Tax Calculation - Tax

Returns (Individuals & other taxpayers)

5 Issues of Federal Income Tax

Is it income Is it deductible Is it ordinary income or capital gain When is it income To whom is it income

History of Federal Income Tax

1895: Pollock v. Farmer’s Loan & Trust Co

1913: 16th Amendment Revenue Acts Codes - 1939, 1954, 1986

Criteria to Judge Taxes

Adam Smith - equality, convenience, certainty, economy

1986 - fairness and simplicity (flatter rates & less deductions)

Internal consistency, policy objectives - see ”Factors” (policies) below

Revenue raising (revenue neutrality) (sources of federal revenues)

Various Taxes (other than federal income tax) * Property Taxes: ad valorem; realty v.

(fixtures) personalty; personal use v. business use

Excise taxes - state and federal *Sales/Use Taxes - State Value Added Tax (VAT) - potentially

federal (or state)

Death Taxes: estate (or inheritance), gift *Federal estate tax - purpose, marital

deduction, unified credit states - estate tax or inheritance tax *Gift taxes Federal gift tax - 12,000 (06) (adjusted) per

donee exclusion, marital deduction, unified credit, gift splitting

States - few have gift tax

Various Taxes (continued)

*State Income Taxes Local Income Taxes *Employment Taxes - FICA, FUTA

IRS Role - Audits, Pronouncements Sources of law - code; regs, rev ruls,

other IRS pronouncements

General Tax Formula - Various Taxes:

Base x Rate = Tax rates:

Proportional, progressive, regressive, flat

Factors Shaping Federal Tax Law (policies) Revenue needs economic considerations (policies) - e.g.,

stimulate economy social considerations (policies) - e.g.,

employee’s benefits equity - i.e., fairness Political - e.g., special interest IRS courts

Property Transactions

Gain Calculation: Amount Realized - Adjusted Basis = Gain (Chap 3)

Property Transactions

(Chaps 1,3,14,17) Amount realized - Adjusted Basis =

Gain or loss (Reg. 1001 (c) old 1002) Realization v. Recognition PROPERTY Usually a capital asset

tangible or intangible (e.g., stock, personal car, personal residence)

Property Transactions (continued)

Since property = cap asset, therefore gain = CG

LT v. ST CG (MT in 97 only)

1221

Lists what is not capital asset (chap 3, chap 14)

inventory a/r 1231 assets creative works gov docs

1231 Asset (Chap 14)

Depreciable personalty used in T or B (e.g., machine)

Realty used in T or B 1231 can be best of both worlds capital gain (subject to 5 year look -

back) ordinary loss

Depreciation Recapture(Chap 14)

Overrides 1231 and capital losses rules (corps add 291 recapture - R/E) as if (1245-1250) x 20%)

Subject to non recognition - 1031, 1033, 121, 341 - see Reg. (old) 1.1002 (Chap 13)

1245 Recapture

1245 Recapture (recapture all deprec to extent of gain = OI)

Personalty Commercial (non resid) R/E 81-86

1250 Recapture - R/E

Basically excess of accel’d over S/L (note 81-86 commerc R/E above 1245)

(Chap 13, Chap 16)

LT Capital Gains Rates

20% & 10%

97 only - if assets held at least 18 mo, beginning 7/29/97 (Also if held >12 mos & sold after 5/6/97 but before 7/29)

98 forward - If assets held >12 mo, beginning 1/1/98

STCG - Regular rates

LTCG Rates (continued)

18% 8%

If assets held 5 yrs, beginning after 12/31/2000

t/p >15%, acquire after 12/31/00 unless elect recognize gain on 1/1/01

LTCG Rates (continued) 28/25/15/10%; 25/15/10%

28% & 25% 15% & 10% - collectibles 25% & 15% & 10% - 1250 Property -

Portion possibly at 25%

Home Sales

Principal residence Sec 121

500,000 (250,000 single) exclusion - sales after 5/6/97

LT Capital Gains Rates(& Dividends ’03 – ‘08

5% (5/6/03 – 12/31/07) 0% (1/1/08 – 12/31/08) 15% (5/6/03 – 12/31/08)

JGTRRA ‘03

LT Capital Gains Rates (+ Dividends ’09-‘10

5%

15%

TIPRA 06