fedtax outline

8/3/2019 FedTax Outline

1/28

FEDERAL TAXATION

I.Introduction to Federal Income Taxationa. Analysis of the Computation of Tax Liability of Mr.and Ms. Taxpayer

i. Basic Questions Addressed byan Income Tax System1. Tax = Taxable Income X Tax Rate

a. TI = Adjusted Gross Income Standard Deduction PersonalExemptions.

b. TI = AGI Itemized/Actual Deductions Personal Exemptions.ii. Evaluating their Tax Liability

1. Gross Income- 61 except as otherwise provided in thissubtitle, grossincomemeansallincome from whateversource derived, including (but not limited to) thefollowing [15] items.

2. Adjusted Gross Income- 62 grossincome lesscertain deductions.3. Deductions- two categories:above-the-line, below-the-line.

a. 62- listed items = above-the-line deductions;anything else = below.b. 63- taxable income...itemizers v. non-itemizers.

4. Calculating Adjusted Gross Income- you must consider deductionsabove-the-line;below-the-line deductions occurafterthe AGI.

II.Gross Income: Concepts and Limitationsa. Search for the Definition of Income

i. 61(a)allincome from whateversource derived.ii. Eisner v. Macomberthe gain derived from capital, from labor, or fromboth combined,

provided it be understood to include profit gained through asale orconversion ofcapitalassets...

iii. Glenshaw Glass Co.the mere fact that the payments were extracted from thewrongdoersas punishment for unlawfulconduct cannot detract from theircharacterastaxable income to the recipients...undeniable accessions to wealth, clearly realized, andover which the taxpayers have complete dominion.

b. Income Realized in Any Formi. 1.61-1(a)income maybe realized in any form, whether money, property, orservices.ii. 1.61-2(d)(1)ifservices paid forin prop, FMV of prop is the measure;if paid forin

services, the value of the servicesis the amount.1. FMV def20.2031-1(b)

iii. Frequent Flyer Miles, ifattributed by reason ofbusiness travel paid forby her employer,is not grossincome, even if used in personal travel. 2002-18, 2002-1 C.B. 621.

c. Realization, Imputed Income and Bargain Purchasesi. Realizationneed a realization event. 1.1001-1(a); 1001(b).

1. Embodylegally distinct entitlements?Cottage Savingsii. Imputed Incomenot taxed ifit derives from the personal efforts of the taxpayer.iii. Bargain Purchasesif the price you pay forsomething isless than the FMV, and it

occursat arms-length, generallyit is not income.Pellar.1. Employment setting 1.61-2(d)(2)(i) (if propertyis transferred ascomp forservices

< FMV, the difference between both pricesis GI).d. Treasure Trove- 1341e. Cesariniin regards to whether money found in a piano wasincludable in grossincome,

i. Treasure trove, to the extent ofits value in U.S.currency, constitutes grossincome forthe taxable yearin which it isreduced to undisputed possession.- 1.61-14 TreasuryRegulations 1965.

ii. Title belongs to the finderasagainst all the world except the true owner.iii. State law, not Federallaw.


2/28

f. OldColonyTrust Companythis payment (by the third person to pay the income tax) wasinconsideration of the services rendered by the employee, and wasa gain derived by the employeefrom hislabor. Thus, it isincome.

i. Rule: it was eithercompensation forservices rendered, ora gain or profit derived fromthe sale of the stockof the corporation (orboth)...in any view, it is taxable income.

g. Rev. Rul. 79-24fair market value of the property orservices rendered (if theyare not paid inmoney) must be included in income. If they were at astipulated price, this willbe the valueunless there is evidence to the contrary.

h. McCannin asituation where an employer paysan employees expenses on a trip that isareward forservices rendered by the employee, the value of the reward must be regarded asincome to the employee.

i. Convenience of the Employer doctrineii. Value = what Security paid.

i. Pellarthe purchase of property forless than its value does not, ofitself, give rise to therealization of taxable income. Such realization normallyarises, and is taxed, uponsale or otherdisposition.

i. Profit accrues only upon sale or disposition, and the taxable income is the differencebetween the amount thus realized and itscost (lessallowed deductions). 1001.

ii. The fact that the property maybe acquired at abargain price or one below its fairmarket value does not require a departure from this rule.

1. It maybe compensation where there isa relationship ofemployer & employee, adividend distribution, oragift.

j. Rocorewards (qui tam here could be one) are generallyincluded in grossincome. 1.61-2(a).

i. Punitive damagesare also includable in grossincome.ii. The payment wasa financialincentive fora private person to provide information and

prosecute claims relating to fraudulent activity.iii. Subsequently, triggering an audit by omitting income reported on a Form 1099 is not a

good faith attempt to comply with the taxlaws.III.The Effect of an Obligation to Repay

a. Loans: generally not grossincome. Not an accession to wealth oran increase in net worthbecause of the equaland offsetting liability to repay the loan.i. Morrisoncommissionerargued that paymentsand disbursementsconsidered taxable

constructive dividends. Turns out they were loans.ii. KarnsPrime & Fancy Foodfunds provided to the TP in return for executing asupply

agreement and a promissory note = taxable income, not aloan.1. 2007-53 follows Westpac, not Karns; will not treat payment ofa qualifying

advance trade discount as grossincome.b. Claim of Right: money received underaclaim of right, without restriction as to disposition, is

income; the contingent repayment obligation does not allow the receipt to be treated asaloan.i. Mieleattorney depositsadvance moneyin separate account, no income.

c. Illegal Incomei. Sullivangains from illegalbusiness taxedii. Jamesembezzlement fundsconstitute incomeiii. Gilbertno income due to intention to repay, reasonable certainty to repay, withdrawals

get corporate approval, prompt assignment ofassets to secure amount.1. Repayment ofillegal funds = deductible. Rev. Rul. 65-254.

iv. Rochelle/Rosenthalconsistent pattern of fraudulent dealing called loans = income.d. Deposits

i. Rent paid in advance generallyisincome in the yearit is received regardless of the periodcovered or the taxpayers method ofaccounting. 1.61-8(b).


3/28

e. North AmericanOilConsolidatedv. Burnetifa taxpayer receives earnings underaclaim ofright and without restriction as to its disposition, he has received income that he is required toreturn even though it maystillbe claimed that he is not entitled to retain the money, and eventhough he maystillbe adjudged liable to restore its equivalent.

i. Ifin 1922 the Government had prevailed, and the company had been obliged to refundthe profits received in 1917, it would havebeen entitled to a deduction from the profits of1922, not from those ofany earlieryear...

ii. Reception of part of the propertiesis not taxable; need to have control/charge over theentire property.

f. Jamesin regards to whether embezzled fundsare to be included in the grossincome of theembezzlerin the yearin which the fundsare misappropriated,

i. The obviousintent of that Congress to taxincome derived from both legaland illegalsources, to remove the incongruity of having the gains of the honest laborer taxed and thegains of the dishonest immune.

ii. A gain constitutes taxable income when its recipient hassuch control overit that, asapractical matter, he derives readily realizable economic value from it.

1. All unlawful gainsare taxable.iii. Rule: When a taxpayeracquires earnings, lawfully or unlawfully, without the

consensual recognition, express orimplied, ofan obligation to repayand without

restriction as to their disposition, he has received income which he is required to return,even though it maystillbe claimed that he is not entitled to retain the money, and eventhough he maystillbe adjudged liable to restore its equivalent. (citing North American

Oilv. Burnet).g. Gilbertwe conclude that where a taxpayer withdraws funds from acorporation which he fully

intends to repayand which he expects with reasonable certainty he willbe able to repay, wherehe believes that his withdrawals willbe approved by the corporation, and where he makesaprompt assignment ofassetssufficient to secure the amount owed, he does not realize income onthe withdrawals under the James test.

h. IndianapolisPower & Light Co.in determining whethera taxpayer enjoyscomplete dominionovera given sum, the crucial point is not whether his use of the fundsis unconstrained during the

interim period, but rather, whether the taxpayer hassome guarantee that he willbe allowed tokeep the money.

i. Deposits that are advance payments are considered taxable income.ii. Because of the nature of the partiesat the time of the deposit, and the fact that the

customerstill exercisessome control over the property (with achoice to place it towardsfuture bills or to have acash return and receipt), does not lead to taxable income.

i. Westpac Pacific Foodcash advancesin exchange for volume purchase commitments, subjectto pro rata repayment if the volume commitmentsare not met, are not income when received.

1. It is not an accession to wealth, but merelyan advance against an obligation,repayable if the obligation was not performed.

IV.Gains Derived from Dealings in Propertya. Gain = Amount Realized Adjusted Basis1. Gain is the excess of the amount realized over the unrecovered cost or otherbasis

for the propertysold or exchanged. 1.61-6(a).ii. Amount Realized

1. 1001(b)money received + FMV ofany other prop received.iii. Adjusted Basis- 1011 (thinkofas unrecovered cost)

1. Basis of property - 1012 = cost2. 1016requiresa TP to adjust basisin prop to reflect any recovery ofinvestment

oranyaddlinvestment made in the prop.


4/28

3. Doylein order to determine whether there isa gain orloss, withdraw from thegross proceedsan amount sufficient to restore the capital value that existed at thecommencement of the period underconsideration.

b. Tax Cost Basisi. 1.61-2(d)(2)(i).

c. Impact of Liabilitiesi. Impact on Basisii. Impact on Amount Realized

1. Recourse liabilitiesincurred bya taxpayerin the acquisition of prop are includedin the taxpayersbasisin that prop.

2. Recourse liabilities ofaseller, assumed bya purchaser, are included in the sellersamount realized.

a. Recourse liabilitybear the riskofloss.d. Basis of Property Acquired in Taxable Exchange

i. Value of prop relinquished in an exchange generally equals the value of prop received;one may generallyassume that the basis of prop received in a taxable exchange equalsthe value of the prop relinquished.

1. Assumption not always true;ii. Philadelphia Park Amusement Co.cost basis of property received in a taxable exchange

is the fair market value of the property received, not the fair market value of the propertygiven.

1. The basis of propertyshallbe the cost ofsuch property. 1012.V.Gifts, Bequests, and Inheritance

a. What is Excluded under 102?i. 102- grossincome does not include the value of propertyacquired by gift, bequest,

devise, orinheritance.1. Statutory Limitations on the Exclusion 102(b)

ii. 102(c)- employer/employee exception (shall not exclude from grossincome anyamount transferred by or foran employer to, or for thebenefit of, an employee).

b. The nature ofabequest orinheritancei. 102(a)case bycase approach to characterization is necessary.1. Lyeth v. Hoeyfor what isabequest, etc., Congress used comprehensive terms

embracing allacquisitionsin the devolution ofa decedents estate.c. 102(b)Statutory Limits

i. First, the incomefrom property that is excluded asa gift, etc., isitself not excluded.102(b)(1)

1. (i.e. dividends from stockgifted to someone)ii. Second, no exclusion for gifts, whether made during life orat death, ofincome from

property. 102(b)(2)d. Basis of Property Received by Gift

i. Gifts of Appreciated Property1. 1015substitutedbasis used for gifts. (transferred basis)2. Taft v. Bowersappreciation inherent in gifts may ultimatelybe taxed.3. Basically, canshift gain to another person via gifting.

ii. Gifts of Property Basisin Excess of Fair Market Valuea. Basically, 1015(a) doesnt allow for the shifting oflosses via gifting.

2. If the FMV > AB, then the donorsbasisis the basis of the gift received. (ABwinsif FMV is higher)

3. If the FMV < AB, then...a. 1015- if the basisis greater than the fair market value at the time, then

for the purposes of calculatingloss, the fair market value is used as thebasis. (FMV winsif ABis higher)


5/28

4. Generally- whateveris the lesser of the two figures willbe the basis under 1015.e. Basis of Property Received byBequest or Inheritance

i. 1014- fair market value of the propertyat the time of the decedents death is the basisfor property received bybequest orinheritance

1. Pro-taxpayer;allows the step-upand will prevent alotof taxable income. If theestate tax goes, so does the step-up proviso, and therefore there could be problemsin the future.

2. Also, if prop decreased in value during the lifetime of the decedent so thedecedentsbasis exceeded the value of the prop, 1014(a) negates the lossinherentin the property.

a. Thisalso occurs with other property decedent has, like joint tenancyandcommunity property. 1014(b).

f. Part-Gift, Part-Salei. Reg. 1.1001-1(e) states that the seller-donor has gain to the extent that the amount

realized exceeds the adjusted basis of the property.ii. 1.1015-4 provides that the doneesbasis willbe the greater of the amount the donee paid

for the property or the adjusted basis of the donor.1. Consistent with 1015(A), note the limitation. For purposes ofcomputing loss, the

FMV of the propertyat the time of transferis used as the basis to the donee.

g. Dubersteina gift in the statutorysense...proceeds from adetached and disinterestedgenerosity.

i. Out ofaffection, respect, admiration, charity orlike impulses.ii. The most criticalconsideration is the transferors intention.

h. Wolderthe true test is whetherin actuality the gift isabona fide gift orsimplya method forpaying compensation.

i. Lookto the intention of the parties, the reasons for the transfer, and the partiesperformance in accordance with theirintentions what the basic reason for [the donors]conduct wasin fact the dominant reason that explains hisaction in making thetransfer.

ii. This wasa method forcompensation, in exchange for the legalservices, thus taxable.i. Olkreceiptsby taxpayers engaged in rendering servicescontributed by those with whom thetaxpayers have some personal or functionalcontact in the course of the performance of the

servicesare taxable income when in conformity with the practices of the areaand easily valued.(Tokes, like tips, meet these conditions.)

j. Goodwinthe special occasion gifts were made by the congregation asa whole, rather thanbyindividual Church members...[there wasa] highlystructured program...[with] regularly-scheduled payments.

i. ...the Church likelycould not retain the services ofa popularand successful ministeratthe relativelylow salaryit was paying...the congregation knew that the gifts enabled theChurch to paya $15,000 salary for $30,000 worth of work.

VI.Sale of a Principal Residencea. 121- taxpayers may exclude $250,000 (or $500,000 fora joint return) of the gain on the sale orexchange ofa qualifying principal residence.

i. Principal residence- property owned and used for periodsaggregating 2 years or moreduring the five year period. 121(a).

ii. Canbe used once every 2 years. 121(b)(3).1. Need three things: (1) one of the spouses must satisfy the ownership

requirement; (2) both spouses must satisfy the use requirement; (3) neitherspousehas used the exclusion within 2 years.

iii. Death ruleifan unmarried individualsells or exchanges propertysubsequent to thedeath of his or herspouse, the individuals use and ownership periods for 121(a) willinclude the period the deceased spouse used/owner the property. 121(d)(2)


6/28

iv. Spousal transfer ruleIfan individual receives 1041 prop (transferbetween spouses),that individuals ownership period for 121(a) purposes willinclude the ownership periodof the transferor. 121(d)(3)(a); 1.1221-4(b)(1).

v. Divorce ruleifan individualcontinues having an ownership interest in the propertybutceasesliving there because the spouse or formerspouse is granted use of the residencevia divorce/settlement, then the period that the spouse/formerspouse is given isincludedin the use of the property. 121(d)(3)(b); 1.121-4(b)(2).

b. Non-qualified use exception121(b)(5);subsection (a) shall not apply to so much of the gainallocated to periods of nonqualified use.

i. Pro-ratesand reduces the amount of gain to exclude.ii. Policy reason- 121 not designed for people to take advantage ofa rental propertyby

moving into it and getting the full exclusion under (a) (note: not retroactive before Jan.1

st2009).

iii. Equation1. Years nonqualified use/years owned X gain = amount not eligible to be excluded

under (a).2. Ex: 5 yearsaggregate from 09-14; first year rental property, 3 years following

were principal residence, yearafter that renting. The yearafter does not count inthe non-qualified numerator, due to 121(b)(5)(C)(ii)I) (which does not include

any portion of the 5-year period of (a) after the last date that the propertyis usedas the principal residence; therefore, no post-principal residence non-qualifyingyears).

a. Amount realized = 600,000; Adjusted Basis = 485,000. Gain = 115,000,but 15,000 is excluded due to depreciation (going overlater).

i. Therefore, 1/5 of 100,000 is 20,000 which cannot be excluded.iv. Impracticability ruleifasale or exchange happens due to achange in place of

employment, health, or unforeseen circumstances, and thusa taxpayer fails ownershipand use requirements or the once every 2 year rule, then 121(c) stillallows forsome oralof the gain to be excluded.

c. Principal Residencei. Residence that TP uses for majority of time = principal. 1.121-1(a)(2)1. Nonexclusive list of factors: (1) TP place of employment; (2) principal place of

abode of family members; (3) addresslisted on TP federaland state tax returns,driverslicense, auto registration, voter regitration; (4) TP mailing addy forbillsand correspondence; (5) location of TP banks; (6) location of religiousorganizationsand recreationalclubs that the TP isaffiliated with.

d. Guinanthe issue becomes one of whether the residence isa principal residence under 121:grossincome shall not include gain from the sale ... of propertyif, during the 5-year periodending on the date ofsale ... , such property hasbeen owned and used by the taxpayeras thetaxpayers principal residence for periodsaggregating 2 years or more.

i. The property that the taxpayer usesa majority of the time during the yearordinarily willbe considered the taxpayers principal residence. 1.121-1(b)(2).

1. Factors to considerinclude, but are not exhaustive:location of recreational/otheractivities, childrensaddresses, mailing address, banking area, vehicleregistration, state tax returns, voting registration, driverslicense.

2. Basicallyabalancing test spearheaded by majority of time.VII.Discharge of Indebtedness

a. Overviewi. Bowers v. Kerbaugh-Empire Co.the mere diminution oflossis not gain, profit, or

income.ii. Merkelthe reasoning in Kirby Lumberhasbeen called the freeing-of-assets theory.

Under this theory, a taxpayer realizes gain when a debt is discharged because after the


7/28

discharge the taxpayer has fewerliabilities to offset herassets. The taxpayers existingassets, which otherwise would have gone toward repaying the debt, are freed.

1. Insolvencycalculation date:it is more probable than not that he willbe calledupon to pay that obligation in the amount claimed.

2. Over 50% chance that you would have to pay out, then you would include itin the liabilities. If it is 50% or less, then it is not included.

b. Specific Rules Governing Exclusioni. Discharge of Indebtedness when Taxpayeris Insolvent

1. Lakelandline ofcasesno income arises from discharge ofindebtednessif thedebtorisinsolvent both before and after the transaction;and if the transactionleaves the debtor with assets whose value exceeds remaining liabilities, income isrealized only to that extent.

2. 108(e)(1)except as provided, generally there is no insolvency exception fromthe general rule that grossincome includesincome from the discharge ofindebtedness.

a. However, no generation ofincome ifit occursin abankruptcy/title 11case, or, if the discharge occurs when the taxpayerisinsolvent. 108.

i. Insolvency exclusion limited to the amount by which the taxpayerisinsolvent. 108(a)(3).

ii. Insolvent means = excess ofliabilities over the FMV ofassets.108(d)(3).3. Merkelexampledebtors owes $100 to C, assets of $130, and anotherliability of

$100. C discharges the debt in exchange for payment of $20. Debtoris thusinsolvent by $70 ($200 - $130).

a. Amount of exclusion under 108(a)(1)(B) islimited to $70, per 108(a)(3).b. Debtor, under 61(a)(12) realizes $80 ofincome ($100 - $20), and excludes

$70 of that amount under 108(a)(1)(B) for net income recognition of $10.4. Merkel ruleifa taxpayerclaims to be insolvent for 108(a)(1)(B) purposes, must

prove bya preponderance of the evidence that he/she willbe called upon to payan obligation claimed to be aliabilityand that the totalamount ofliabilitiesso

proved exceeds the FMV of his/herassets.5. 1017(b)(2)basis reduction limitation ifinsolvent/bankrupt; may reduce tax

benefitslike depreciation.ii. Disputed or Contested Debts

1. Generally, if the amount of the debt is disputed, settlement of the amount does notconstitute a discharge of debt.

2. Preslarcontested liability rests on the premise that ifa TP disputesan originalamount of debt in good faith, asubsequent settlement of that dispute is treated asthe amount of debt cognizable for tax purposes.

a. Excess of original debt over the amount determined to have been due maybe disregarded in calculating GI.

b. Original debt must be unliquidated.3. Zarinliquidated debt, if unenforceable, would implicate contested liabilitydoctrine.

a. When debt = unenforceable, then amount isin dispute.b. Anysettlement is thuscognizable for tax purposes.c. Ifyou pay the settlement, then there is no discharge ofindebtedness

income. (Zarin paid $500Kin lieu ofa potential 3.5mill gambling debt,which was unenforceable perstate law).

iii. Purchase-Money Debt Reduction for Solvent Debtors1. 108(e)(5)ifsomeone purchases propertyagreeing to pay the purchase price over

a period of time, and refuses do to irregularities or defects, and then the two


8/28


9/28

i. Economiclossesalso excludable; whether damages received arepaid on account ofa personalinjuryis the beginning and end of theinquiry.

ii. Origin and character of the claim, not the consequences that result.iii. Supreme Court Limitations on the Pre-1996 version of 104(a)(2)

1. Burkewhether the injurycomplained ofisa tort-type personalinjury.2. Schleierwhether the damages receiver were on account of (actually

compensated for) personalinjury.

a. Must bearaclose nexus to the personalinjury.b. No nexus = no exclusion.c. Lost wages on account of = excludable; Priv. Letter Rul. 200041022.

iv. 1996 Amendments to 1041. House Committee Report: emotional distressis not to be treated asa physical

injury orsickness, unless there isa related medicalcare expense.a. The term emotional distressincludes physicalsymptoms which may result

from emotional distress.b. First, ifclaim hasits origin in a personal physicalinjury, recover for

emotional distress maybe excludable.i. Thus, the emotional distress must come after, not before, the

physicalinjury.c. Second, if the claim hasits originalin physicalinjury, it is not necessary

that the recipient of the damagesis the individual who suffered thephysicalinjury.

2. PLR 200041022-direct unwanted or uninvited physicalcontacts resulting inobservable bodily harmssuch asbruises, cuts, swelling, andbleeding are personalinjuries under 104(a)(2).

a. Thus, (1) origin must be physical, and (2) emotional distress with physicalsymptomsis not excludable.

v. Punitive Damages1. Exclusion does not apply to any punitive damagesin connection with acase not

involving physicalinjury orsickness. 104(a)(2).2. No exclusion wasavailable for punitive damagesarising out of non-physical

injuries. 104(a)(2).vi. Allocation of Awards

1. Service likely to scrutinize settlementscarefully.2. RobinsonTC can ignore astate court judgment allocation percentages ofawards

proceeds to tort-like personalinjuries.a. Basically, TC decides what is personaland what is not for tax purposes.

3. Bagleysettle agreement is not dispositive to award allocation, Service canassess that, too.

4. McKaywhile they have the power to assess, sometimes they do agree with theallocation.

vii. Periodic Payments1. Excludable under 104(a)(2).2. Encouragesinjured TP to structure theirsettlementsso as to exclude the interest

component of periodic payments.viii. 67 and Alternative Minimum Tax Issues

1. To the extent that an award isspecifically excluded from income, deduction forcostsin producing that income are denied. 265(a)(1).

2. TP can deduct attorney feesand associated costsin producing those awards.212(1).

a. Misc.itemized deduction, 2% floor under 67.


10/28

3. Benci-WoodwardTP must compare regular tax with aso-called tentativeminimum tax. If TMT > RT, higher tax must be paid.

4. Kensethassignment ofincome principles prevent the injured TP from assigningpart of the income from heraward orsettlement to attorney.

5. Banksgenerally, ifalitigants recoveryconstitutes grossincome, the litigantmust include in GI the portion of recovery paid to the attorneyasacontingent fee.

6. 62(a)(20)any deduction forattorneys feesand othercosts paid bya TP inconnection with an action involving aclaim ofunlawful discrimination willbe

ATL deduction, therefore not subject to 67 and the 2% floor.a. 62(e) defines unlawful discrimination; most non-physical personalinjury

actions will result in ATL deductions.c. Accident and Health Insurance

i. 104(a)(3)payments received through accident/health insurance policiesare excludedfrom GI, provided that the policy wasnotfinanced by the TP employer orby employercontributions not includable in TP income.

ii. Therefore, employer-financed plans not exempt. 104(a)(3).1. Instead, governed by 105, where 105(a) generallyincludes them as GI.2. Exceptions:

a. Medical expense reimbursements. 105(b)i. Limited to TP, spouse, and dependents, as wellas to the actualexpenses.ii. Contrast with 104(a)(3), payments that exceed medical expenses

remain tax free.iii. Rev. Rul. 69-154if one policyis employer-financed and otheris

self-financed, then the excess reimbursement isallocated inproportion to the relative payments made by each party.

b. Payments for permanent bodilyinjury/disfigurement. 105(c)i. These two exceptionsare provided that the paymentsare computed

with reference to the nature of the injuryand notthe period ofabsence from work. 105(c).

ii. Ifsuch amountsare paid by employer, theyare excluded by104(a)(1). 1.105-3.iii. 105(c) could apply to, and exclude, anyamounts paid in excess of

the applicable workerscomp act, since such amounts would not beexcludable under 104(a)(3).

c. Recall 106(a), which permits employercontributions to accident andhealth plans to be made on a tax-free basis to the employee, but 105(a)makes them taxable, except to the extent that the exceptions of (b) and (c)apply.

d. Previously Deducted Medical Expensesi. Not excluded per 104(a) and 105(b).ii. Sometimesa payment for personalinjuries orsickness, based in part on the TP medicalexpenses, maybe made in the form ofan undifferentiated lump sum.

1. Rev. Rul. 75-230lump sum award in personalinjurysuit settled out ofcourtmust be allocated between medical expensesand othercomponents.

a. Where no allocation is made, the settlement willbe presumed to beattributable first to medical expenses previously deducted, and thusincludable in income to the extent of the prior deduction allowed.

2. Rev. Rul. 75-232future medical expense awards maybe excluded, but to theextent of the allocations to future medical expenses, the taxpayer may not deductthose future medical expenses under 213 when theyare incurred.

e. Workers Compensation


11/28

i. 104(a)(1) excluded from income are amounts received under workers compensationactsascompensation for personalinjuries orsickness.

1. Also extends to payments underastatute in the nature ofa workmenscompensation act, but notto retirement payments to the extent based on age,length ofservice, or employee contributions, even where retirement iscaused byoccupationalinjury orillness. 1.104-1(b).

a. Conversely, nonoccupationalinjury orillnesscompensation is not within104(a)(1), even if the label of workerscomp is placed on it.

f. Certain Disability Pensionsi. Military disability pensionsand certain other govt disability pensionsare excluded under

104(a)(4).1. Limited by 104(b), to persons receiving compensation forcombat-related injuries

and to those who would on application received disabilitycompensation from theVA.

2. Exclusion for disabilityincome attributable to injuriessuffered in a terrorist attackupon an employee of the U.S. engaged in performance of official duties outsidethe country. 104(a)(5).

g. Schleiertwo part test:i. First, the taxpayer must demonstrate that the underlying cause ofaction giving rise to the

recoveryis based upon tort or tort type rights.ii. Second, the taxpayer must show that the damages were received on account of personal

injuries orsickness.h. BANKSwhen alitigants recoveryconstitutesincome, the litigantsincome includes the portion

of the recovery paid to the attorneyasacontingent fee.i. Attorney = agent, acting in the best interests on the principal (the client). Therefore, a

principal relies on the agent to realize an economic gain, and the gain realized by theagents effortsisincome to the principal. The portion paid to the agent maybedeductible, but absent some other provision oflaw it is not excludable from theprincipals grossincome.

1. Above-the-line deduction. 62(a)(20).IX.Fringe Benefitsa. 61(a)(1) grossincome includes fringe benefits.

b. Mealsand Lodgingi. 119- convenience of the employer doctrine.

c. 132i. No-Additional-Cost Service (e.g. making excesscapacity on trainsavailable free to

employees/families of). 132(a)(1) & 132(B).1. Excludable but fora few restrictions:

a. First, service must be one offered forsale to customersin the ordinarycourse ofbusiness. 132(b)(1).

b. Second, service offered in the line ofbusiness of the employerin whichthe employee is performing services. 132(b)(1).

c. Third, employerincurs no substantialadditionalcost. 132(b)(2).d. Fourth, no discrimination in favor of highlycompensated employees

(including officersand owners). 132(j)(1).ii. Qualified Employee Discount 132(a)(2) & 132(c). (excludescertain discounts that are

given exclusively to employees).1. Anti-discrimination provision. 132(j)(1).2. Employee is defined in 132(h).3. Up to 20% ofservicescan be excluded asa fringe; excessis taxable.4. Propertyislimited to gross profit percentage. Aggregate profit percentage of

employer.


12/28


13/28

compensated. Consider nature & quality of the services, as wellaseffects of the services on the return. (Elliots)

ii. Factors: position held, hours worked/duties, importance ofemployee to company, past duties/salary with current, etc. (Elliots)

iii. Posnerindirect market testhigher rate of return, the highermanager gets paid. If extremely high, extremely high pay. Iflow,then low. (Exacto Spring).

iv. 162m- disallowing deduction ofcertain employee compensation >1,000,000.

e. Clothing:i. Deductible under 162 if (1) type specifically required ascondition

of employment; (2) not adaptable to general usage as ordinaryclothing; (3) not so worn. (Pevsner)

f. Lobbying: 162e disallowsany deduction foramounts paid orincurred inconnection with influencing legislation orany direct communication withacovered execbranch officialin an attempt to influence.

ii. Carrying On a Trade orBusiness1. Trade oraBusiness: taxpayer must be involved in the activity with continuityand

regularityand the taxpayers primary purpose for engaging in it must be for

income or profit.a. 1.183-2alists 9 factors for whetheran activityis engaged for profit.b. Trader v. Investor (trader engaged in trade/business, investoris not).

(Moller;Purvis)2. Carrying On: prepatory trips not allowed; pursuit is not searching for, rather in

connection with orin course of.a. Starting up givesbenefitslong after the business gets going.

3. Section 195 and the Amortization of Certain Pre-Operational or Start-Up Costs:a. Can pro-rate at an even levelstart-ups overa period not < 60 months.

2004, up to $5,000 in taxable year. Reduced byamount exceed $50,000.Remainder of expensesamortized over 180mos, beginning month

trade/bizbegins.4. Carrying On to Employees?

a. If expenses were incurred byan employee in finding workin the sametrade orbusiness, carrying on issatisfied. BTL, subject to 2% floorin 67.

i. Carrying on asan executive (Primuth)ii. Possible to retain carrying on status while being unemployed

(Furner) (one year period Rev. Rul. 68-591)b. 212- same as 162, except forcollection/production ofincomec. Welch v. Helveringthe payoffs to the creditors ofabankrupt corporation (in order to

strengthen his own standing and credit) are not allowable business deductions. It is not ordinaryand necessary (appropriate and helpful).

XI.Capital Expendituresa. 263 deniesa deduction forcapital expenditures (if theyincrease the value), allow a deduction ifits merelya repair. 1.263(a)-1(b). Examples 1.263(a)-2(a).

i. Providesabenefit that persists/generatesincome overa period ofyears.ii. Creates/addsbasis.iii. Canbe amortized/depreciated.

b. Capital expenditure isa question of degree, not ofkind (between deductionsand CE).Consulting/legal fees had to be capitalized. (INDOPCO)

i. Separate and distinct asset testifaseparate and distinct asset iscreated, then it shouldbe capitalized under 263. (Lincoln Savings)

ii. Taxpayers realization ofbenefitsbeyond ayear which it incurred is veryimportant.


14/28

iii. Ifit is made in one taxyearand its usefullife extendssubstantiallybeyond the close ofthat year, then itsa CE. (US Freightways)

1. One yearitems where it will never extend beyond ayear, that meet all 162 criteria(ordinary, necessary, trade/biz) are deductible.Id.

c. Selected Categoriesi. Cost of Acquisition; Costsincurred in Perfecting/Defending Title:

1. If the origin of the claim wasin the acquisition ofstocks, the costs were CEs (asthe appraisals were). (Woodward/Hilton Hotels)

2. Costsincurred in defending or perfecting title are CE, thus not deducted currently1.263(a)-2(c), 1.212-1(k).

3. Legal feesincurred in resisting efforts to cancel registration of trademarkareCEs, same in an infringement action. (Georator;Medco Products) Defense alsoCE, under regs.

4. If dispute does not relate to title but to income from it, then it is deductible.(SouthlandRoyalty) (allowing deduction forcosts to recoveraddl royaltypayments, but none for determination ofleasehold interest).

5. Disposing ofasset, ifit issimply retired/discarded, is deductible. Rev. Rul. 2000-7.

6. Cost of nonpracticing malpractice insurance policy for retired lawyeris deductiblein the year the businessceases to operate. (Stegar)

7. Rental propertyand the creation thereofare CEs (Encyclopedia Britannica).a. 263A in response to Idaho Power, capitalization ofindirect and direct

costs.ii. Repair/Improvement

1. 1.162-4, 1.263(a)-1(b) say that expenditures for repairs/maintenance that do notmateriallyadd value to appreciably prolong life are deductible. Replacementsandimprovementsare CEs.

2. One-year rule of thumb, CE if the acquisition hasa period of usefullife greaterthan ayear. Guidepost, not dispositive. Ifits within a plan of rehabilitation,modernization, orimprovement, then it is CE. Ifit standsalone, without plan,

then deductible. (Wehrli)3. See Rev. Rul. 2001-4.

iii. Intangible Assets1. Capitalization ofamounts paid to acquire orcreate an intangible, to facilitate the

acquisition orcreation ofan intangible, or to create or enhance aseparate anddistinct asset. 1.263(a)-4(b)(1).

2. Acquired intangible ex: ownership interestsin corps, partnerships, etc.; debtinstruments; options to provide/acquire prop;leases; patents/copyrights;franchises/trademarks. 1.263(a)-4(c)(1). MUST BE CE.

3. Created intangible: financialinterests, prepaid expenses; ownership interestslisted above;certain membership fees;amounts paid to create/terminate certain

Ks for prop/services;amounts paid to defend title to intangible property. 1.263(a)-4(d)(2).

4. Prepaid expenses = CE. (Boylston Market Association)5. Facilitation ofa transaction = CE. 1.263(a)-4(e)(1)(i). For those not CE, see

1.263(a)-4(e)(4).6. 12 month rule, C not required foramounts paid fora right/benefit that does not

extend beyond the earlier of: 12 mo from first realization of right/benefit, or endof taxyear following the year of payment. 1.263(a)-4(f)(1). Ex: 1.263(a)-4(f)(8).

7. Facilitation of the acquisition ofa trade/biz, or to change bizscapitalstructure =CE. 1.263(a)-5(a). Simplifying conventions. 1.263(a)-5(d). Amounts paid toinvestigate a transaction = facilitate = CE. 1.263(a)-5(e).


15/28

iv. Expansion Costs1. Expenditures for the protection ofincome from loss/diminution are deductible,

not CE. (Briarcliff Candy)2. No propertyinterest in credit card proceduresbybanks. Costsincurred in

establishing the CC is deductible. (Colorado SpringsNatlBank).3. Renewing certifications to maintain compliance with qualitystandards =

deductible because mere ability to sellin new marketsand to new customers doesnot result in significant future benefits. (Rev. Rul. 2000-4)

4. Downsizing;severance payments to employeesare currently deductiblev. Advertising Expenses

1. Generally, currently deductible. Rev. Rul. 92-80. 1.162-1(a), 1.162-20(a)(2).2. Ordinarybusinessadvertising, even iflong-term goalsare the primary objective,

are ordinarybusiness expenses under 162 if the taxpayercan show asufficientconnection between the expenditure and the taxpayersbusiness. (RJRNabisco)

d. Purchase or Leasei. Rental paymentscan be deducted with respect to the property used in a trade/businessbut

onlyif the taxpayer does not take title and has no equityin property. 162(a)(3).e. Idaho Powerwhen wagesare paid in connection with the construction oracquisition ofa

capitalasset, they must be capitalized and are then entitled to be amortized over the life of the

capitalasset so acquired.f. MidlandEmpire Packing Comust assess the purpose for which the expenditure was made. If

it is to restore/mend, keeping the propertyin an ordinarily efficient operating condition, then it isa repairand canbe deducted asa trade/biz expense. Ifit isan improvement, alteration, etc., andprolongs the life of the property, increasesits value, or makesit adaptable to a different use, theit isacapital expenditure and not deductible.

g. Mt. MorrisDrive-Indrain constructed = permanent improvement, thus not deductible asacapital expenditure.

h. Rev. Rul. 2001-4three scenarios of repair; (1) a heavy maintenance visit without replacements,alterations, improvements, etc, that prolonged its usefullife, but rather mere repairs to minorthings, thus deductible; (2) replacement ofskin panels on plan and installation ofsmoke detector

system and othersystems that materiallyimproved the airplane, thusbeing a CE and notdeductible; (3) involved replacements of majorcomponents that substantially prolonged theusefullife ofairframe; therefore, not deductible and isa CE.

XII.Depreciationa. Costsassociated with the wear, tear, and obsolence of the building/propertyin any given tax

year.i. Need to measure the value of the building at the beginning of the taxyearand the value at

the end; the decrease in the value is deductible income.b. 167- a reasonable allowance for the exhaustion, wearand tear (including reasonable allowance

for obsolescence) (1) of property used in the trade orbusiness (2) of property held for theproduction ofincome.

i. 167e prevents fraud in carving out term interestsin land and depreciating it.ii. Stocknot subject to wearand tear, thus not depreciable. 1.167(a)-3.c. Need 4 key things

i. Basis- 1.167(g)-1.ii. Recovery Period- 168(e)(3), othersaround there.

iii. Depreciation Method- 168(b)(1).iv. Applicable Convention- 168(d)(1)

1. Be sure to use the tables provided afterconvention is found.a. Simplyapply the totalbasis (unadjusted for depreciation) at everyyear on

the table. The first and last yearsare halfyears (unless mid-month(straight line) or mid-quarter).


16/28

d. Recovery period/Usefullifei. Asset byasset determination;longer the life, smaller the deduction.

1. 167m = asset depreciation range (selection of usefullives 20% longer orshorterthan midpoint life).

ii. ACRS- assignsall tangible property to one of five periodsbased on classlife. 168(i)(1).1. Must be placed after12/31/81, but before 12/31/86 (MACRS).2. Most real prop: 15 years, most tangible prop: 3 years or 5 years.

iii. MACRS- after12/31/86. Expandscategories, periods, recovery.1. Nonresidential real- 39; Residential rental- 27.5. Other than that, 3, 5, 7, 10, 15,

20. 168(e)(1). (classlife = midpoint life of ADR)a. 168(e)(3)(B)(i)- 5 year property.

iv. Automobiles that were in pristine condition but shown fora fee at showsare subject toobsolescence, thus depreciable. (Selig v. Commissioner).

e. Depreciation Methodi. Straight Line = Cost / Recovery Period. 1.167(b)-1. (Salvage cost = 0, 168(b)(4)).

ii. Accelerated- permitslarger depreciation in the earlyyears of the period; front loads.1.167(b)-2.

1. Double Declining (200%)- 168(b)(1).a. Switch over to straight line in the year SL yieldsalarger deduction.

Automatically done in the tables.b. SL required for residential rental propertyand nonresidential real

property. 168(3).f. Conventions

i. Placed in service = placed in acondition orstate of readinessand availability for thespecificallyassigned function 1.46-3(d)(1)(ii).

1. Half-Year: generalclassification for most property; property placed on July1st/mid yearat the beginning andend of the recovery period. 168(d)(1), (4)(A).

2. Mid-Month- residential rental propertyand nonresidential real property.168(d)(2), (4)(B).

3. Mid-Quarter- use if prop placed in service during last quarter (3 mos) of the year,and if those props have a greateraggregate bases of 40% ofall props placed intoservice in that year. 168(d)(3).

ii. Note: 168 is general, 167 used forintangible property (unless 197 used).g. Amortization of Intangibles- 197

i. 15 year period.h. Basisand Depreciation

i. Must adjust the basis of prop for depreciation. 1016(a)(2). Cannot do it less than theamount allowable. Even ifyou fail to claim depreciation, you must still reduce the basis!

i. 179- Expensing Tangible Personal Propertyi. Allows taxpayers to deduct currently, immediately the cost ofacquisition ofcertain

depreciable businessassets.

1. Elective, not mandatory. (why not? TV of $!)2. Onlyapplies to certain property. 179(c).3. (1) isalimitation;limits the amount that can be expensed immediately with

respect to the property placed in service during acertain year. (7) updates to250,000.

4. (2) proviso forlimitation in (1), reducing the payout with respect to the cost of theproperty > 500,000. (7) updates to 800,000.

ii. Must adjust the basisimmediately.XIII.Losses and Bad Debts

a. Losses- 165(a);any uncompensated losssustained during the year.


17/28

i. 165(c)- restricted to trade orbusinesslosses, lossesin profit-seeking transactions, andcasualty or theft losses.

ii. Business or Profit Requirement1. 165(c)(1) and (c)(2) require business/profit.

a. Basically, 162 prop that isaloss = deductible;above the line. 165(c)(1).b. Losses of 212 prop are usuallybelow the line, unless from sale/exchange

of prop. 165(c)(2).i. The fact that she entered into profit does not change, even ifloss

inevitable. Still deductible. 1.165-9(a).2. Main issue is usuallythe line between business/profit activities and personal

activities.a. Can convert personal prop to income-producing. 1.165-9(b)(1).

i. Newcombeoffered former home forsale but not rent; where theprofit sought by the TP represents onlyappreciation which tookplace during the period the TP occupied the prop, it will not bedeemed to havebeen held for production ofincome.

1. Period of time isa worthy factor to consider.ii. Austenprimary/dominant motive to be considered.iii. Gevirtzoriginal profit motive abandoned, and personal use

dominant over future business use.3. Not allowed a deduction that exceedsbasis. 165(b).

a. Lesser of rule FOR LOSS. 1.165-9(a)(2).i. Basislimited, forloss, to lesser of value at the time ofconversion

adjusted for depreciation, for period subsequent to the conversionof the prop forincome-producing.

ii. Ifconverting from prop to biz use, 1.167(g)-1 determines that theFMV of date ofconversion, if < AB of prop, isbasis fordepreciation.

b. Estate of Millertaxstatusbecomes neutral (to heir) at DEATH.iii. When isalosssustained?

1. Closed and complete transactions, fixed byidentifiable events. 1.165-1(b).2. WORTHLESS SECURITIES165(g)(2).a. Boehmdisputes over worthlessnessbound to the result and when it

occurred.i. 6511(d)SOL is 7 years.

3. Obsolescence or permanent abandonment = loss. 1.165-2, 1.167(a)-8(a)(4).iv. Amount of Deduction

1. Again, 165(b) limits to BASIS.v. Disallowed losses

1. Other provisions of the code, like 267(a)(1) (related party transactions) and 1091(wash sales) may disallow losses. 165/166 are the ONLYloss granting

provisions. Othercode sections ride off of them (like CGs, etc.)b. Bad Debts166

i. Line betweenbusinessand non-businessbad debts.ii. Bona Fide Debt166 only applies to a BFD

1. Need creditor-debtor relationship, based on a valid, enforceable obligation to paya fixed or determinable $. 1.166-1(c)

iii. Worthlessnessno deduction allowed if not worthless?1. 1.166-(2)(a),(b)no legalaction needed to prove; factually determined.

iv. BusinessBad Debts166(a)(1)1. Deductible in year theybecome wholly worthless.2. Forpartial worthlessness166(a)(2).


18/28

v. NonbusinessBad Debtsmust be wholly worthless, not partially worthless.1. Defined asa debt other than a debt created/acquired in connection with TPs

business, ora debt the loss from the worthlessness of which isincurred in TPsbusiness. 166(d)(2).

2. Buchananimportance of total worthlessnesssupported.3. Deductible onlyas STCL. 166(d)(1).

a. Remember the 3Klimitation forcapitalloss deductions!4. What about unrepaid advances to aclosed corp?

a. Whipplecontrolling shareholders organization, promotional, andmanagerialservices to acorp did not cause loans to the corp to beclassified asbusiness debts.

i. Cannot just be a return on an investment.5. An employee canbe considered to be the trade/biz of employment. 62(a)(1)

a. Trentifloan needed to insure continued employment, then thats valid.vi. Amount deductible = debts AB. 166(b).

1. No BD deduction allowed unlesssuch amounts have been included in income.1.166-1(e).

vii. Loan Guarantees1. Treated asbad debts. Connection needed to classify them as nonbiz orbis. 1.166-

9.viii. 165 & 166 interplay

1. Mutually exclusive; where both applicable, 166 rules. Spring City.ix. Cowlesmere offers to sell or rent are insufficient to provide the necessary 212

foundation of profit-seeking, required by 165(c)(2).x. 2004-58abandonment losses for 165 (need (1) intention to abandon the asset and (2)

affirmative act); 165 deduction onlyallowed if there isaclosed and complete transactionfixed byidentifiable events establishing that the propertyis worthlessin the taxable yearthe deduction isclaimed. 1.165-1(b), (d)(1).

xi. Generesfocus on relation the lossbears to TPsbusiness. If, at the time ofworthlessness, the relation is proximate, then the debt qualifiesasabad business debt.

1. Need a dominant motive, not asignificant motive.XIV.Travel Expensesi. 162(a)ii. 162(a)(2)- traveling expensesaway from home, including amounts expended for

meals/lodging other than extravagant amounts, in pursuit ofa trade/biz.b. Commutingdue to choice of where to live being personal, generally nondeductible under 262.

1.262-1(b)(5).i. Three elements underFlowers:

1. Reasonable & necessary2. Incurred away from home3. Incurred in pursuit ofbusiness

ii. Rev. Rul. 55-109where an employee having two separate employersis required to workon the same dayat a different location within the same city for each, the expenses fromJob 1 to Job 2 are ordinary/necessary.

iii. Polleion dutystatus for police constitutesa deduction forcosts of driving personalcarsbetween homesand HQ.

1. When conditions of employment restrict an employees discretion with regards totypical personalchoices = business expense.

c. Other Transportation Expensesi. Ifyou fly to anothercity to take a deposition = ordinaryand necessarybusiness expense.

1. Same with driving acaracross town to visit aclient.2. Away from home requirement not necessary; 162(a) curesallyalls ills.


19/28

ii. What if there isa mixed vacationbusinessand personal?1. Ifyour primary purpose isbusiness, you willbe entitled to deduct what costsare

business related.2. Ifit is primarily personal, transportation expensesare not deductable, although

any expensesincurred while at destination and allocable to businessaredeductible. 1.162-2(b)(1).

iii. Forcruises/luxury water transport- 274m.iv. No deduction for travel expenses for education- 274(m)(2).

d. Expenses for Mealsand Lodging while in Travel Statusi. 274(n) limits deductions of meals to 50% of theircost.ii. Over night rule/sleep or rest rule (Correll).

1. Rides on duplication of expensesin maintaining an apt or home at his principalplace of workand incurring additional expensesin securing lodging. (duplicationsupported byGlazer)

iii. What is home?1. Rev Rul 75-432home is the principal place ofbusiness for 162(a)(2) purposes.

(factual determination)2. Robertsonhome means vicinity of PPOBand not where personal residence is

located.

3. Yet, Rosenspanhome means home?4. Temporary jobs will give way to travelstatus ifitsaway from home(Peurifoy).

a. One year presumptionone year orless, temporary. More than year =indefinite = no deduction.

b. Can be overcome if demonstrated that the job was going to last 2 yearsand return home.Blankenship.

c. 162(a) now states-not be temp away from home ifsuch period > 1 year.d. Rev. Rul93-86

i. Realistically expected (and doeslast) 1 yr or 1 yr (no expectation ofless),

then indefinite.iii. Initially 1 yr orless, but then realistically expected > 1 yr, then

temporary.e. Ordinarily, seasonal employment = temp.f. Andrews- can only have one home for 162(a)(2) purposes.

i. Major post of dutyiv. Spousal Travel Expenses

1. Historicallyifbona fide business reason forspouses presence, then can deduct.1.162-2(c). (had to be ordinaryand necessary)

2. 274(m)(3) three requirementsa. Spouse/dependent/otheraccompanying taxpayerisabona fide employee

of taxpayerb. Travel of S/D/O is forabona fide business purposec. S/D/O could otherwise deduct.

i. Noteemployer paid expensescould be deductible under274(e)(2).

ii. Fringe benefit? 1.132-5(t)(1).v. Reimbursed Employee Expenses

1. ATL if 62(c) requirement is met. 62(a)(2)(A), (c). Unreimbursed, or those whichfail the provisions, are BTL.

2. Amounts paid to an employee underan accountable plan are excluded from GI.1.62-2(c)(4).


20/28

a. Three Part Test under 1.62-2(c)(2)(i):i. Reimbursement arrangement must provide reimbursements,

advances, orallowances only for deductible biz expenses (businessconnection) 1.62-2(d)(1)

ii. Properlysubstantiated. 1.62-2(e)(1) (amount, time, place andbusiness purpose) 1.62-2(e)(2).

iii. Must require employee to return anyamount in excess of thesubstantiated expenses within a reasonable time. 1.62-2(f)(1). If

they dont, excess = nonaccountable payment, includable in GI.1.62-2(c)(2), (3). (checkspecial rules 1.62-2(f)(2)).

3. Amounts paid to an employee undera nonaccountable plan are GI, deductibleexpense BTL (miscellaneous, itemized). 1.62-2(c)(5).

vi. Business-Related Meals1. Maystillbe deducted as ordinary/necessarybiz even if not away from home

under 162(a). 1.262-1(b)(5).2. Substantiation required. 274(a)3. Taxpayer must be present at meal. 274(k)4. Limits meal expense deduction to 50%. 274(n)

vii. Limitations on Foreign Travel1. 274(h)(1)determine whetherit is reasonable for the convention, seminar, ormeeting to be held outside the NA area.

a. Cannot be deducted of ports ofcall outside US. $2000 ayearlimitationon cruise ships that meet 274(h)(2).

b. N. Am. Defined 274(h)(3)(A), (5).viii. Relationship to Section 212

1. Clear from 274(c), (d) that such meals/lodging can be deducted under 212 subjectto same rules under 172.

a. Harrisallowed deduction for travel to maintain certain lots held forinvestment.

2. However, 274(h)(7) deniesa deduction under 212 forconvention, seminar, orsimilar meeting.

ix. Substantiation- 274(d).x. Rev. Rul. 99-7

1. Three Examplesa. Deductibledaily transportation expenses forbetween residence and

temporary worklocation outside metro area where taxpayerlives/normallyworks. If within metro, unless next 2 exsapply, no dice.

b. Deductibleif one or more regular worklocationsaway from residence,may deduct daily expensesin going between the residence and temp worklocation in same trade/biz, regardless of distance.

c. Deductibleif residence is PPoBiz within 280A(c)(1)(A), daily expensesincurred in going between residence and another worklocation in sametrade/biz, regardless of whether other workis reg or temp or the distance.

xi. HendersonuseFlowers elements; (1) reasonable/necessary expenses; (2) be incurredaway from home; (3) incurred while in the pursuit ofa trade/biz.

1. To determine home:a. Businessconnection to the locale claimed homeb. Duplicative nature of the taxpayersliving expenses while traveling and at

the claimed home.c. Personalattachments to the claimed home.

XV.Entertainment and Business Mealsa. Business or Pleasure?


21/28

i. Mossentertainment activities provide a necessarysociallubricant.ii. 262 deniesa deduction for personal expensesand mostentertainment expenses.iii. Question becomes: when does 162 overcome 262?

1. Sanitary FarmsDairyfarm sent president/controlling shareholder on abig gamehunt;intended and actually provided extremely good advertising at a relativelylow cost, thus deductible.

2. Cohantaxpayerspend substantial $$ on tax-deductible entertainment, kept norecords;Hand stated that the court must make aclose approximation.

iv. 274(a) imposes requirementsin addition to those found in 162.1. 274(d) substantiation requirements (intended to overturn Cohan).

v. Due to a personal element and lavishness, 274(n)(1) limited the deduction forbusinessmealsand entertainment to 50%.

vi. Alternative approach274(b).b. Entertainment Activities

i. 274(a)(1)disallowsany deduction foran activity ofa type generallyconsidered toconstitute entertainment, amusement, or recreation unless (in addition to 162 or 212)taxpayersatisfies one of two tests:

1. Directly Related To (the active conduct of trade orbusiness).a. Requires more than merely promote goodwill. 1.274-2(c)(3).b. Must anticipate some income orspecificbusinessbenefit from theexpense, actively engage in abusiness discussion, and be motivated

principallyby the businessaspect of the business-entertainment combo.i. Not necessary to spend more time onbusiness than entertainment.ii. See also clear business setting test 1.274-2(c)(4).

c. No deduction if taxpayer not present and there are substantial distractions.1.274-2(c)(7).

2. AssociatedWith (the active conduct of the trade orbusinessand directlypreceded or followed byasubstantialandbona fide business discussion).

a. Need aclearbusiness purpose, but thissatisfied by having intent tomaintain biz goodwill or obtain new business. 1.274-2(d)(2).

b. Need to have asubstantialbusiness discussion that precedes or follows,and must be made with the purpose of obtaining income (or otherbusinessbenefit), and it must be theprincipal aspect.

c. Not necessary to spend more time on biz than pleasure, nor even the sameday.

d. Spouses1.274-2(d)(4).ii. Always remember the 50% limitation under 274(n)(1).iii. For extravagant/lavish meals, check274(K)(1)no deduction. Also the taxpayer or

employee of needs to be present.1. Need to determine the extent of which islavish, and only deduct what isnot

lavish.

iv. Entertainment ticketsface value limitation under 274(l)(1).v. Therefore, for the limitations, applyall first and then the 50% limitation under 274(n).1. The 50% limitation doesnotapply to employees who receive reimbursement

from their employers, provided that the employee accounts to the employer per274(d). 274(n)(2)(A), (e)(3). Employeris then subject to 50% limitation.

c. Entertainment Facilitiesi. 274(a)(1)(B)generally nondeductible.

1. Ex: hunting lodges, swimming pools, airplanes, & vacation homes. 1.274-2(e)(2).2. Exception:if used primarily forbusiness purposes (more than 50% business)

1.274-2(e)(4)(iii)then only the potion directly related to the active conduct isallowed. 274(a)(2)(C).


22/28

a. Regardless, no deduction forclub dues! 274(a)(3).3. Harrigan Lumberno deduction forannuallease payments ofa hunting lodge.

a. Exclusive use and unfettered access = facility within 274(a)(1)(B).4. On Shore Quality Controlno deduction for use ofa ranch for hunting purposes

due to friendsand businessacquaintancesbeing able to use as well.d. Substantiation Requirements

i. 274(d)need adequate records orsufficient evidence corroborating astatement of thefollowing:

1. Amount of expense.2. Time and place incurred.3. Business purpose for the expense.4. Business relationship to the taxpayer of the persons entertained.

ii. Adequate records = account book, diary, orsimilar records with entries made at or neartime of the expense, together with documentary evidence (bills/receipts) supportingentries. 1.274-5T(c)(2).

1. < $75, documentary evidence not needed. 1.274-5(c)(2).2. If no adequate records, must establish substantiation by own statement together

with corroborative evidence. 1.274-5T(c)(3).iii. Exceptions to substantiation:

1. An employee incurring reimbursed expenses does not have to report thereimbursement or the expensesif he makesan adequate accounting to theemployer. 1.274-5T(f)(2).

2. Certain per diem and mileage allowancesalso exempted. 1.274-5(g). Excessstillincome.

e. Exceptionsi. 274(e)(2)(A) disallowance rule does not apply to the extent the taxpayers payment ofan

expense is treated ascompensation to the recipient.ii. Substantiation required for 274(d) expenses, except to the extent waived b the 274(d)

regulations themselves.f. Business Meals

i. 162(a)(2) allowsa deduction for ones own meals while away from home onbusiness;119 exclude meals furnished for the convenience of the employer; 132 excludesoccasionalsupper money from income.

ii. Suttercost of meals, entertainment, and similaritems for onesselfand dependentsarea personal expense, nondeductible.

1. Canbe overcome byclearand detailed evidence ... that the expenditure inquestion was different from orin excess of that which would have been made forthe taxpayers personal purposes.

iii. Basically, under Rev. Rul. 63-144, a taxpayercannot obtain a deduction for the portion ofhis mealcost which does not exceed an amount he would normallyspend on himself.

iv. Sibla/Cooperfiremen allowed to deduct contributions to a fund for daily mealsat thestation, whether or not they were able to actually eat said meals.

v. Wellsdeduction denied fora public defender forcosts of taking severalstaffers outonce a month and other periodiclunches.

vi. Fenstermakerno deduction allowed for expenditures on ground there was no showingthat the expenses exceeded what would havebeen incurred for personal purposes.

vii. Dunkelbergeremployee must show that the employer required or expected her to incurand bear the expenses without reimbursement.

g. Walliserdirectly related to/associated with; directly related requires greater degree ofproximate relationship. More than goodwill for directly related with standard.


23/28

h. Mossmealitselfshould be an organic part of the business meeting, so as to reduce transactioncosts due to growth ofcamaraderie and growing a rapport. It is different when all participantsinthe mealare coworkersalready. Meal with outsider = sociallubricant.

i. ChurchillDownsevents were mainly dinners, brunches, receptions, and are generallyconsidered entertainment (and food and beverage), should be subject to the 50% limitation under274(n).

XVI.Charitable Deductions (Ch. 26) (be familiar with GENERALLY)a. General- 170: must be made to or for the use ofa qualified recipient (170c);constitute a transfer

of money or property made with no expectation of return;actuallybe paid to the recipient withinthe taxable year (170(a)(1)); not exceed certain percentage limitations (170b);be substantiated.

b. Requirements for Charitable Deductionsi. Who is a Qualified Recipient?- 170(c) providesalist

1. 170c2- exclusivelycharitable2. TRIPP V.COMMISSIONER- specificindividualis not an entityyou can give charity

to. (cannot earmarkcertain funds foracertain person).a. PEACE V.COMMISSIONER- can suggest to whom it goes?

3. DAVIS V.COMMISSIONER- LDS funds given to sons mission worknot deductible.If gave to church, and church gave it to them, could havebeen. Not for the use ofcharitable organization...needs to be in alegally enforceable trust of that org.

4. Net earningscannot benefit a private shareholder orindividual. 170(c)(2)(c).5. Lobbying/politicallimited 170(c)(2)(d).ii. What is a Contribution or Gift? Similar to DUBERSTEIN.

1. Allandetached and disinterested generosity.a. Cannot expect to benefit from thischaritable donation.

2. Voluntary transfer of money with no expectation ofbenefit.a. Childrens private school? No.b. Factsand circumstances.

3. Hernandeznot allowed a deduction forchurch of Scientology feesbecause itsaquid pro quo exchange.

4. American BarEndowment1.170A-1(h)(1, (2). Charitable contribution islimited to the amount of the payment that exceeds the value when it is done inconsideration for goods orservices.

a. Rev. Rul. 67-246tickets to concert examples. If reimbursed orchestra,face value for tickets, no deduction. Ifcharitycharged more than facevalue of tickets (and indicated), could take a deduction of excess. Have togo to concert.

b. Unless religious org, have to provide info to charitable person that onlyexcesscan be counted.

5. If taxpayer donating to higherinstitution, in exchange for rights of tickets, only80% amount contributed.

6. Forcars, deduction limited to what the charity valuesit at.iii. Actual Payment Required- 170(a)(1) (within the taxable yearin which the deduction istaken).iv. Limitations- 170e

1. Contribution base limitation of 50% (of the AGI). 170(b).2. Capital gain propertylimitation 170(b)(1)(c).3. Corporationslimited to 10% ofcorps TI. 170(b)(2).

c. Contribution of Servicesi. Cannot provide servicesand claim a deduction for their value. 1.170A-1(g). Can ifyou

expend to render those services.d. Contribution of Appreciated Property

i. FMV used. 1.170A-1c1.


24/28

ii. 170e statesamount of deduction is the difference between the FMV and the amount ofgain that would not have been long-term capital gain had the property not been sold.

1. Limits deduction to adjusted basis for ordinaryincome property. Ordinaryincome and short-term capital gain treated the same.

2. If I donate a Picasso painting to a Church that sellsit the next day, deduction islimited to basis. 170(e)(1)(B)(i)(II).

e. Contributions of Partialinterestsin Property- generally not allowed. 170(f)(3(A).i. Certain transfersin trust can.ii. If onlyinterest isa partialinterest (like a remainderinterest), then you can have a

deduction. 1.170A-7(a)(2)(i).1. Cannot purposely divide property to create an interest and avoid 170(f)(3)(A).

a. Exceptions:i. 170(f)(3)(b) remainderinterest in personal residence or farm.

1. Can retain life interest.ii. 170(f)(3)(b) contributions of undivided portions of the entire

interest in the property.iii. 170(f)(3)(b) qualified conservation easement.

f. Bargain Sale to Charity:ifyou sell to acharity forless than its worth (bargain sale)i. 1011(b) requiresapportioning basis of propertybetween charitable portion and sale side

to receive accurate gain.g. Substantiation

i. In past, small donations did not necessarily need substantiation.XVII.Capital Gains and Losses (Ch. 31)

a. Preferential Treatment for Long Term Capital Gaini. Investment type gains; taxat alower rate due to fact it could be inflation; mobility of

capital problems.ii. No preferential treatment = disincentivize savings?

1. Need regulatoryscheme? Can handle inflation in another way?iii. Limitation on Deduction of Capital Lossesiv. Justification for Preferential Capital Gain Treatment

b. Section 1(h)i. Maximum Rates on Long-Term Capital Gain under the Current Law1.NCG = NLTCG(LTCG LTCL) NSTCL(STCL STCG)

a. Onlyapply to the extent NLTCG exceed capitallosses.b. STCG = ordinary rates.

ii. Components of Net Capital Gain: 28% Rate Gain; Unrecaptured Section 1250 Gain;Adjusted Net Capital Gain

1. FIRST28%: Collectiblesand 1202 Gain (if ordinaryincome bracket is < 28%,taxat ordinary rates;if ordinarybrack> 28%, get bumped down)

a. Collectibles Gain:sale or exchange of rug, antique, stamp, coin, etc.,which is held for more than year. 1(h)(6)

b. 1202 Gain: 50% of the gain from the sale or exchange ofcertain type ofstockdescribed in 1202.

2. SECONDUnrecaptured 1250 Gain25%:certain type of depreciationrecapture (any gain attributed to depreciation), taxed at 25%.

3. ANYTHING LEFTOVERAdjusted Net Capital Gain: 15% and 5%/0% Ratesa. If taxpayerin 10 or 15% bracket, and have room leftoverin that bracket,

starting 2008, rate willbe 0 on any NCG. 1(h)(1)(b).i. Ex: 30K LTCG, 36K Ordinary I.

1. 4K of LTCG is taxed at 0 due to 40-36 = 4 (40 = bracketcap).

4. Adjusted Net Capital Gain: Qualified Dividend Income


25/28

a. Dividends (if qualified), taxed at 15%. At end of 2010 it expires.1(h)(11)(b). Thinkofassomething that gets CG treatment, but not CG.

i. Corporations, basically.ii. Thisisadded afterNCG calculation.

iii. Attribution of Capital Losses Included in the Computation of Net Capital Gain1. NSTCL = STCL STCG2. NLTCG = LTCG LTCL3. STCL will reduce STCG. STCGssuckbecause they dont get any preferential

treatment (OI).a. Ifanyleftover, then attack28% rate gain forcollectibles. Then attackthe

25%, then attackthe 15%.i. Go in descending orderaccording to category.

4. LTCL first applied to LTCG in the same category. Ifadjusted NCL, start with15%, then up to 28% if that is eaten up. Then 25%, then 15%.

a. Start with category where the lossis.c. Application of 1211(b) Limitation on the Deduction ofCapital Losses

i. If I aloss under 1211(b), can eat up all CG dollar-for-dollar, up until the CG is exhausted1. Code doesnt let deduct the excessas OI. Can deduct 3K of the excess right away

against OI. Anyleftoverafter that, carry overinto future years (indefinitely) until

we die or get used up.a. Can deduct, each year, 3Kayear, unlessyou can get match up with more

CG to eat up more.2. Ordinary Losses > Capital Losses, but Capital Gains > Ordinary Gains.

ii. 1211 not a deduction granting provision. In order to be deductible, have to use a lossprovision like 165.

iii. Thus, ifyou have a NCL at the end of the day, what are you carrying over?1. 1212(b) determines the character of the carryover2. Take STCG and net against STCL

a. Then LTCG and net against LTCL.b. Cross match and net against each other to determine what categoryit is.c. STCL = deemed to be deducted foragainst the 3K OI offset. Make upphantom gain?

d. What isa Capital Asset? Everything except what islisted!i. Section 1221(a)(1): Inventory, Stockin Trade, and PropertyHeld Primarily for Sale to

Customersin the Ordinary Course of the Taxpayers Trade orBusiness1. Capitalasset is everything except for what islisted in 1221(a)(1). If not on the

list, it isa CA. List:a. Inventory or property held by the taxpayer primarily (of first importance)

forsale to customersin ordinarycourse ofbusiness.i. Bynumlookto primary purpose of the property wasat the time

which it wasbeing offered forsale, not at the time it was first

bought.ii. Section 1221(a)(2): Property Used in the Taxpayers Trade orBusiness

1. Real or depreciable property used in the trade orbusiness.2. Can still get 1231 CG treatment.

iii. Section 1221(a)(3): Copyrights, Literary, Musical, Artistic Compositions, etc.1. Personal effortsby taxpayer who created it; orletter/memo of property produced

by taxpayer.2. Also denied if held by taxpayerin whose hands the basisis determined in whole

orin part in reference to the basis ofsuch propertyin the hands of the taxpayerwho gifted it.


26/28

3. 1221(b)(3) can elect to have this not get treated as OI ifyoure selling orexchanging taxpayercreated musical works.

4. 170(e) charitable limitation if donating musicalcomposition to charity.iv. Section 1221(a)(4): Accounts Receivable for Services Rendered or Inventory-Type

Assets Sold1. People sell ARall the time. If related to services rendered orinventory type, not

treated as CA.v. Section 1221(a)(5): Certain Publications of the U.S. Govt

vi. Section 1221(a)(8): Supplies Used or Consumed in the Taxpayers Trade/Businessvii. Judicially Established Limits on Capital Asset Characterization

1. CornProductstaxpayer purchased corn futures; would take possession of Ksifnecessary, orsell remaining Ks. Tried to claim them as CG. SCt said that thedefinition should be narrowlyconstrued, intent of not classifying businessincomeas CG. Taxpayerin business ofselling corn; futures used to ensure corn supplynot interrupted.

2. WindellCompanysubstantialinvestment purpose makesit a CA, even if there isabusiness motive.

3. Arkansas Bestcapitalstockheld bya taxpayer; CA even though it wasacquiredforbusiness purposes. Distinguished Corn Productsasabroad reading of

1221(a)(1).4. Ceneztaxpayerbought stockin corporation which runsan oil refinery. CA

even though taxpayersold petroleum products. Couldnt directly redeem stockfor oil, unlike Corn Products.

5. Thus, buying something that can be directlyconverted into inventory, not acapitalasset. Ifconnection is more remote, then CA.

6. AzarNuttaxpayeragreed to purchase a home ofan executive when theexecutive was terminated from employment. Sold home for the loss. Wantedordinarylossbecause home was used in trade orbusiness under 1221(a)(2).Court rejected, said it has to be used, not just abusiness purpose. Actually haveto use asset in a role in business operations. Wasa CA, meaning CL, which

blows.7. Hortconsideration received bylandlord in exchange to cancelalease, then OI.

Substitute for future rental payments, right to receive income that would be OI.8. Davislottery winner;sold future annuity payments foralump sum. Replacing

OI, not a CA.e. Sale or Exchange Requirement

i. Capital Gain = sale or exchange ofacapitalasset.ii. 1222 only gains orlosses resulting from sale/exchange willbe treated.iii. Freelandtaxboard sayssale or exchange is extremelybroad.iv. Keenanifyoure satisfying a request for depreciated property, then thatsasale or

exchange.

v. Yarboroughabandonment could be sale or exchangevi. Helveringinvoluntary foreclosure sale could be sale or exchange.1. Involuntaryconversions.

vii. 165(g)- worthlesscould be treated asaloss ofa CA.viii. Amounts received in retirement ofa debt instrument.ix. VERYBROAD INTERPRETATION.

1. Basicallyany disposition.f. TheArrowsmith Rule: Characterization of Certain Gains/Losses Dependent on Prior Tax

Treatment of Related Gains/Lossesi. Characterization can potentiallychange based on certain events that happened before in a

similar transaction.


27/28

ii. ArrowsmithTaxpayers who are shareholders ofaliquidated corp; forced to payajudgment post-liquidation, held to be a CL instead of ordinary, because it would havebeen a CL ifcorp wasstill operating.

iii. SkellyOiltaxpayer forced to refund overcharge amounts that were previouslyinincome. Had to give refunds, must be ordinaryloss. Taxpayer had taken acertain typeof deduction for portion of the amount, court relied onArrowsmith, thusloss depends onhow gain was treated in prioryear.

iv. Gains/lossescould be characterized ascapital gains orlossesif the transaction spansmore than one year even ifit was not currentlyascapital.

g. Holding Periodi. Property must be held for more than one yearbefore itssale or exchange to be long-term

capital gain orloss. (> 1; 1yr orless = ST).ii. 1223 holding period of donorincluded.

XVIII.Quasi-Capital Assets: 1231 (Ch. 32)a. Primary purpose of 1231 is to provide special, favorable tax treatment to the sale, exchange, or

involuntaryconversion of real or depreciable property used in the taxpayers trade orbusiness.(1221(2) says not acapitalasset).

i. For 1231, these scenarios maybe characterized asacapitalgain1. Loss = ordinaryloss.

b. First, identify the gainsand losses that are subject to 1231.i. Result from the sale/exchange of prop used in trade/biz. 1231(a)(3)(A)(i).1. Must be depreciable, in trade/biz. (basically what 1221(2) excludes)2. Held for more than 1 year. 1231(a)(3)(A)(ii)(II).

a. Also, > 1 year requirement.b. No short-term 1231 prop.

3. Prop in 1221(1), (3), (4), (5) = not applicable due to 1231(b)(1).ii. 1231 also arise from the involuntary/compulsoryconversation oftwo types of prop per

1231(a)(3)(A)(ii):1. Prop used in trade/biz2. CA held > 1 year, for trade/biz or profit

a. Note 165(h)(2)(B), other than trade/biz/profit and involuntaryconversion.iii. Sum- consider two elements: the triggering event and the nature of the propertyinvolved.

c. Second, PreliminaryHotchpot Analysis. (aka firepot) (1231(a)(4)(C))i. Governscertain involuntaryconversions.ii. Checkabove code to make sure that theyare not certain involuntary transactions which,

willbe ignored for 1231, if the total ofsuch losses > gains (and be OI).1. Thus, if 1231 gains > losses, lump with other 1231 gains/lossesin the Principal

Hotchpot under 1231(a)(1), (2).d. Third, PrincipalHotchpot Analysis (1231(a)(1), (2), (3)).

i. Applies to all1231 gains/losses, except for those disregardedvia the PreliminaryHotchpot under 1231(a)(4)(C).

ii. Compare the total 1231 gainsand losses.iii. Net positive number = all gains/losseslong-term CA gains/losses.iv. Net negative number (or gains = losses) = OI.

e. Fourth, Recapture of Net Ordinary Losses (1231(c)).i. Effectivelylimits LTCG; may require some 1231 gains to be OI.ii. Need to choose what gainsare characterized as 1231.

XIX.Recapture of Depreciation (Ch. 33)a. Overview

i. Excess depreciation is recaptured; taxpayer forced to give it backby recognizing it asincome, via 1016 and 1001.


28/28

b. Section 1245 Recapturei. Recapturesas OI the gain on disposition attributable to depreciation deductions, as

opposed to the gain resulting from the increase in the propertys value.1. 1245(a)(1) OI = difference between the taxpayers ABand the lesser of:

a. Recomputedbasis, orb. Amount realized (or FMV, if not asale, exchange, involuntary

conversion).2. Recomputed basis = AB + depreciation/amortization previously taken. (note

179 treated asamortization for thissection). 1245(a)(2)(A), (C).a. Generally the originalbasis. But, note, you can add deductions takenby

the original ownerifit was gifted.b. Check1.1245-6(a) to see ifcharacterized aslong-term gain when there is

left over gain.ii. Section 179the conversation ofan automobile frombusiness use to personal use isnot

a disposition of the automobile. Rev. Rul. 69-487.1. 179(d)(10)it hasits own recapture provision;if 179 prop wasconverted to

personal use (no used predominantlyin trade/bizat any time during recoveryperiod), then the taxpayer must give up the benefit that 179 gave.

a. Benefit = difference between the deduction taken under 179 and thededuction that wouldhave been allowedunder 168 for the period ofbusiness use involved. 1.179-1(e)(1).

b. Inapplicable when 1245 applies. 1.179-1(e)(3).c. Section 1250 Recapture

i. Applies to depreciable real property, exceptfor the limited cateogries of real propertyincluded within 1245. (1250(c)).

ii. When 1250 propertyis disposed ofand yieldsagain, the depreciation subject torecapture and characterization as OI is generally only the depreciation taken in excess ofSL depreciation. 1250(a)(1)(A), (b)(1).

iii. Generallythere can be no additional depreciation on real propertyacquired after 1986,and 1250 thus threaters to become mere surplusage.

d. Unrecaptured Section 1250 Gaini. Under 1(h)(1)(D), max rate of tax on unrecaptured 1250 gain is 25%. Thus, it hasfavorable treatment when compared to LTCG ofcollectibles (28%). Not as favorable asother CG, like stock, which 15%.

ii. Definition1(h)(6) definesas the LTCG from 1250 prop attributable to depreciationdeductionsallowed to the taxpayerand not otherwise recaptured as OI.

iii. Any time a taxpayersells depreciable real propertyat a gain, the TP must determine howmuch of the gain constitutes unrecaptured 1250 gain.

1. Checkon 121 exclusion rulesa. 121(d)(6)gain attributable to depreciation allowed with respect to the

residence isnotexcludable.

e. Section 1239 OIi. Specialcharacterization rule; not really recapture like 1245/1250. Predates those.ii. Mandates that any gain recognized on the sale/exchange of depreciable propertybetween

certain related partiesbe characterized as OI; none of the gain is eligible for CGtreatment under 1231.

iii. Principal related partieslisted under 1239(b), (c).f. Other Recapture Provisions

i. Note 1231(c);if gain escaped 1245/1250, which maybe LTCG 1231(a)(1), can stillbeOI.

fedtax outline

Documents