Federal Income Taxation Outline

8/12/2019 Federal Income Taxation Outline

1/87

Tara Short, Class of 2009

Spring 2008

WOOTEN FEDERAL INCOE TA! I S"RIN# 08

C$% & ' INTRO TO FEDERAL INCOE TA! 00& ( 020

I% "RO)LE

#ross In*o+ -#I. / 120,000 S*tion

$ 25,000.00 cash 61$ 250,000.00 checks 61$ 10,000.00 landscaping Reg. 1.61-1(a) & 2(d)(1)$ 19,000.00 bank interest 61(a)()$ 1,000.00 di!idends "net capital gain# 61(a)()$ 15,000.00 selling stck pr%it "lng ter capital gain# 61(a)(')$ '20,000.00

A34st #ross In*o+ -A#I. / 210,000

A#I / #I ' A5o6 th lin 4*tions -ATLD.

$ (60,000.00) ages paid t rkers 162(a)

$ (20,000.00) bsiness e*penses 162(a)$ (10,000.00) bldg. depreciatin 16+$ (90,000.00)$ '20,000.00 $ 2'0,000.00

)lo7 th lin 4*tions -)TLD. / 19,800

$ 1,000.00 in!estent accnt e*pense 212

$ 1+,000.00 rtgage interest 16'$ ',+00.00 prpert ta*es 16/(a)(2)

$ +,000.00 state ince ta*es 16/(a)(')$ 9,000.00 charitable dnatin 10$ '9,+00.00

2 Floor on It+i D4*tions 6$ 2'0,000.00 * .02 2$ /,600.00

e rtgage, state ince ta*, prpert ta* & charitable dnatin 3 sb4ect t 2$ '9,+00.00 78

$ (1,000.00) in!estent accnt e*pense sb4ect t$ '+,+00.00

1 O6rall Li+itation on It+i D4*tions 6+$ 2'0,000.00 $(160,000.00) in%latin ad4sted applicable ant:$ 0,000.00 !er itei;ed dedctin liitatin* .0' ' liitatin$ 2,100.00

Total D4*tions / 1:,;00


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$ '+,+00.00 78 ins 2 %lr $ (2,100.00) ' liitatin 1:,;00%00

"rsonal E


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cash ethd < incldes ince nl hen it is actuallyr constructivelyrecEd. Dee /51(a)G Reg. 1.1//6-1(c)(1)(i).

61(a)(') gain deri!ed %r dealing in prpert (i.e. stck)

Ia*i rate n net capital gain: M a necessar cpnent % hich is lng-ter capital gain M is lessthan the a*i rate n rdinar ince. 1(h).

8i!idends inclded in ince nder 61(a)().Arrent la, di!idends are inclded in cptatin % net capital gain, & are ta*ed at the pre%erentialrate accrded net capital gain, rather than at rdinar ince rates as high as '5. 1(h)(11).

2% A34st gross in*o+

62 de%ines ad4sted as less certain dedctins.

62 sipl de%ines G it is not a deduction granting provision!In general, only those deductions listed in 62 are taken into account in computing AGIhs, there are 2 categries % dedctins.

1) cprised % dedctins a < a cnsider in deterining his r her G the are re%erred tas abovetheline: dedctins

2) cnsists % thse dedctins a < a take int accnt nl a%ter the has beendeterinedG there are re%erred t as belowtheline: dedctins.

nteri easre % ta*able ince

1% D4*tions

Khen ha!e an e*pense belie!e is dedctible, ICD %ind a speci%ic Ade athri;ing it.

n!esting in stcks & bnds & therise anaging neEs in!estents has been held nt t cnstitte atrade r bsiness ?in the eaning 162.iggins v" #omm$n, '12 C.D. 212 (19/1).

Nnacted 212 hich speci%icall pr!ides a dedctin %r e*penses paid r incrred dring the ta*able

ear %r the prdctin r cllectin % ince.:hs, the anageent %ee ill be dedctible as an in!estent acti!it e*pense nder 212.

H% Cal*4lating A34st #ross In*o+

?% Ta


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@ber % e*eptins pr!ided %r nder 152, Reg. 1.151-1(b).

:% Ta< Rat

pprpriate ta* rate nder 1. 1(a) M (i) list 6 di%%erent ta* rates

#redits. 21-5''1 the credit ?hlding ta*es paid thrgh the ear b the eplers n behal% % the eplees.Aredit !. dedctin

credit redces neEs ta* n a dllar %r dllar basis, hereas a dedctin redces ta*ableince, ths pr!iding a redctin in ta* that is dependent n the ta* bracket % the indi!idal.

III% CLASS NOTES

a* t raise re!ene

' ig plic cnsideratin e sed t talk abt ta*atin Hairness


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itei;ed r standardo 2 %lr & !erall liits '

o tei;ed - 6 & 6+

Authori%e t take a dedctin 162 %%, 212 @n dedctible things

o 261 %%

o 262 M cnsptin e*penses (i.e., %d, clthes, ldging)

o 26' M capital e*penditres (take deprecatin !er tie)

RATES ( &special treatent % capital gains (recei!e a ler ta* rate than rdinar ince)characteri;atin isse (certain kinds % ince gets ta*ed di%%erentl)

sal ince, reglarl paid lng ter capital gains1, '

TA! LIA)ILIT

CREDITSsbtract credits %r ta* liabilit

epler ithhlding % ta*ta* de r re%nddi%%erence b?t credit & dedctin

dedctins sbtracted %r ince credits sbtracted %r r ta* liabilit

C$%2 ' #ROSS INCOEJ CONCE"TS LIITATIONS 02& ( 0?1

I% "RO)LE

ar*lla

#ROSS INCOE / S*tion

$ 5,000 salar 61$ 5,000 ear end bns$ /50 !ale % ak desk ($500 %air arket !ale - $50 paid) M lks like a bargain deal bt

lk at relatinship b?t epler & eplee Reg. 1.61-2(d)(2)

)lo7 th lin 4*tions -)TLD. /

$ 15,000 %ederal ince ta*es ithheld$ 5,500 scial secrit ta*es$ /,500 state ince ta*es

Not Taent %ler iles$ 10,000 legal %ees %r he (represented hersel%) ipted ince$ 2,500 greenhse t thank %r legal ser!ices gi%t e*change (nt inclded)


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it*h

OR 1 bs stck %r $1,000 M stck ges p t $1,500 3 reali;atin e!entOR 2 stck ges t $2,000, %%ers t b 3 reali;atin e!ent

OR ' stck ges t $2,500, I brrs $2,000 ? stck as cllateral 3 reali;atin e!entOR / stck ges t $',000, Hire destrs stck certi%icates, 3 reali;atin e!ent

POQ replaces, I repas debtOR 5 stck ges t $',500 & I gi!es stck t a creditr B reali;atin e!ent

in pt %r debt % $',500 - $1k basis B $2.5k

nt Reali;ed B s reali;ed = arket 1001@A B $2,500nce %r discharge % a debt

II% O@ER@IEW

A% Th Sar*h for a Dfinition of In*o+

Angress, in de%ining ,: intended t e*ert the %ll easre % its ta*ing per.:

)% In*o+ Rali in An For+

Der!ice nnnceent 2002-1+, 2002-1 A.. 621 stated it ld nt assert that an < hasnderstated his %ederal ta* liabilit b reasn % the receipt r persnal se % %re>ent %ler iles attribtable t the ent %ler iles as a reslt % bsiness tra!el paid %r b her epler,is nt re>ired t reprt an as a reslt % receipt % the %re>ent %ler iles r her se % thse iles

%r persn tra!el.

C% Raliation, I+p4t In*o+ )argain "4r*hass

&% $ealization $euirement.

Reali;atin e!ents are nt liited t cash sales.

ain r lss as being reali;ed %r the cn!ersin % prpert int cash r %r the e*change %prpert %r ther prpert di%%ering ateriall either in kind r in e*tent. Reg 1.1001-1(a).

Cnder 1001F an e*change % prpert gi!es rise t a reali;atin e!ent s lng as the e*changedprperties are ateriall di%%erent: M that is, s lng as the ebd legall distinct entitleents.

Class Nots

Reali;atin rle M in general dnEt get ta* 4st n the %lctatin in the !ale % r prpert.Khat cnts as a reali;atin e!entL

EISNER 6% ACO)ER 028

F&: Irs. I ned stck in Dtandard Sil % A. Dhe & ther sharehlders recEd a 50 stck di!idend inthe %r % additinal crprate stck rather than a cash di!idend. Cnder Re!. ct % 1916, the stckdi!idend as ta*able.'&$at:Dp. At. held that n gain & n ince had been reali;ed b reasn % the stck di!idend &Angress had n per t ta* it nder the Anst. Reali;atin is a cnst. re>ireent.@, brad cnsenss that reali;atin is nt a cnstittinall-re>ired prere>isite t ta*atin.


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COTTA#E SA@IN#S ASSGN 6% COGN, H99 %S% at ?:: 028

Issue: Khether a sa!ings and lan assciatin reali;ed: lsses n the e*change % its interest in ne grp% he rtgage lans %r interests in a di%%erent grp % he rtgage lans.'&$at: egan b a%%iring the cncept % reali;atin is %nded n adinistrati!e cn!enience. he lsses

had in %act been reali;ed b?c, based n the reglatins nder 1001, an e*change % prpert gi!es rise t areali;atin e!ent s lng as the e*changed prperties are ateriall di%%erent: M that is, s lng as theebd legall distinct entitleents. ?c the participatin interest e*changed deri!ed %r lans that ereade t di%%erent bligrs & secred b di%%erent hesG the e*change interests did ebd legall distinctentitleents. Attage Da!ings reali;ed its lses at the pint % e*change.

2% Im#uted Income

pted ince is nt ta*ed, e!en thgh the RA cntains n speci%ic e*clsin t that e%%ect.

2 categriesFpted ince %r ser!ices & ipted ince %r prpert

e ner !. renters

Ncnic bene%it arising %r sel%-help, ie, %r per%ring ser!ices %r nesel%, neEs %ail r thers7aers dra%ting their n ills, ing r n lan, etc

Testins related t ipted ince arise in practice are thse assciated ? sel%-eplent replent acti!itiesF

&orris v" #omm$n(192+) M the !ale % %ar prdcts cnsed b the ner as nt ince.

1% (ar)ain urchases.

Kh are barter t* ta*ableL b?c then there ld be %eer cash t*

eneral barter principle M arket !ale %r the bartered gd r ser!ice

sse prchase an asset at a bargain price (HIU % the asset is greater than the price paid %r it) M ha!e an accessin t ealth, shld it be inclded in L @S

'ellar v" #omm$nM bargain prchases generall d nt cnstitte b?c adinistrati!el nrkable,speclati!e t %igre t a be inial.


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%r %rad & treble daages %r in4r t its bsiness b reasn % Es !ilatin %ederal antitrst las. 8ec.19/, parties cnclded a settleent in hich paid app*. $+00k. tal $'2/k represented pt %pniti!e daages %r %rad & antitrst !ilatins. did nt reprt this prtin % the settleent as ince%r the ta* ear in!l!ed. AEn deterined de%icienc claiing as ta*able the entire s less nl

dedctible legal %ees. a* At & At. % ppeals rled in %a!r % the


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hi is e>i!alent t receipt b the persn ta*ed. he ta*es ere paid pn a !alable cnsideratin, theser!ices rendered b the eplees, & as part % cpensatin. ired W the reard as clearl cpensatin %r ser!ices rendered & B & henser!ices are paid %r in a %r ther than $, the HIU is sed. Reg. 1.61-2(d)(1).

"ELLAR 6% COGN -T%C% &9??. 0H?

F&: ested b pet.& errrs n part % the YEr). HIU at tie % cpletin as ateriall in e*cess % the price %i*ed in theagreeent, bt ateriall less than the cst % the cnstrctin.

Issue: Khether r nt the e*cess % the HIU r the prpert (e*clding land) !er cst cnstitted incet the


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relatinship % epler & eplee, r a di!idend distribtin, r a gi%t. n the instant case, n epler-eplee relatinship t in%er di%%erential as cpensatin, n di!idend, nt reali;ed.

ROCO 6% COGN -T%C% 2001. 0H8

F&: 8e%icienc in petitEs 199 ince ta*. i ta actin nder Halse Alaisct claiing @OC had sbitted %alse in%. t the CD hich reslted in a sbstantial !erpt % Hederal%nds. CD pd pet. $1,56+,0+ in 199 as his share % the settleent prceeds.Issue: (1) Khether the $ paent that pet. recEd %r the CD in 199 is incldable in L OND (2) Khetherthe pet. is liable %r the accrac-related penalt nder 6662(a) %r 199L OND'&$at:he >i ta pt t pet. as the e>i!alent % a reard %r petEs e%%rts t btain rept t the CD% !ercharges b @OCIA. Reards are generall incldable in . 1.61-2(a). incldes all ince%r hate!er srce deri!ed nless e*clded b la. RA pr!ides n e*clsin %r %r prceeds recEdb a realtr in a >i ta prceeding. @either >i ta pts nr pniti!e daages are intended tcpensate the recipient %r actal daages.


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H% Ye!in )ee-a. 8ec. 1 M Y signs Y t rite bk

&. RecEd $10k in ad!ance ralties2. Y garantees 1,000 cpies at $25 r has t repa the di%%erence it sells shrt

-5. Jl. 1 M anscript st be deli!ered-*. s ad!ance ralties inclde in L OND M cntingent 3 bligatin )eeKNDences, i.e. 'rdpart repas the lan n behal% % thebrrer (bt cld represent a gi%t t the brrer and nt gi!e rise t liabilit).

DppseF a crp. akes sbstantial cash disbrseents t a sharehlder, perits the sharehlder t sethe crpEs credit card %r persnal prchases, & pas %ederal & state ta* liabilit ed b the D.

&orrison v" #omm$n held the pts & disbrseent ere lansF the crt %nd that the crp. hadengh %nds t ake the lan, the D had engh ince t repa the lans, & there as e!idencethe D had in %act ade lan repts, inclding interest.

KARNS "RIE FANC FOOD 6 % COGN

F&: < sght %inancial assistance %r Dper Rite %r certain capital ipr!eents. Dper Ritere>ired the < t (a) enter int a ritten sppl agreeent re>iring < t prchase annall a certain atDper RiteEs prdcts & (b) t e*ecte a prissr nte paable t Dper Rite in the at % the ad!ance,althgh Dper Rite intended that the csterEs bligatin t repa the %nds that it ad!ance ld arisenl i% the cster ateriall breached the sppl agreeent. 7an is %rgi!en i% < des nt breach theagreeent. < inclded $250k as ther srce % ince %r the %lling ears & did nt inclde the1.5I in the ear recEd.'&$at: he deterinatin % hether a t* % %nds cnstittes a lan is a >estin % %act M in rder %r the%nds t cnstitte a lan, at the tie the %nds are t* there st be an ncnditinal bligatin (i.e. anbligatin that is nt sb4ect t a cnditin precedent) n the part % the trans%eree t repa, & anncnditinal intentin n the part % the trans%err t secre rept % sch %nds. he < did nt ha!e an

ncnditinal bligatin t ake each % the annal pts set %rth in the prissr nte W At. cncldedthat $1.5I recEd b the ired t retrn "that is, t reprt n his ta* retrn#, e!en thgh he a still


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be claied that he is nt entitled t retain the $, & e!en thgh he a still be ad4dged liable trestre its e>i!alent.

$ recEd nder a clai % right, ? restrictin as t dispsitin, is inceG the cntingent reptbligatin des nt all the receipt t be treated as a lan.

$ recEd & sel% ipses !lntar restrictin t be a!ailable %r rept pn settleent % the dispte ntince, att. recEd ad!ance b clients and canEt se %nds, att. is nt in receipt % ince hen recEd.

Hnds !er hich the < acts nl as a cndit are nt recEd nder a clai % right.

C% Illgal In*o+

7ng clear gains %r an illegal bsiness a be ta*ed. *) v" )ullivan(192).

+ames v" *)M Dp. At. held ebe;;led %nds incldable in (RC7N S8O).

Gilbert v. #omm$n(191) M < ade nathri;ed ?draals % crprate %nds & pleaded gilt tstate & %ederal charges. 2ndAir. eld < did nt reali;e ince nder the+amestest n %nd ?dran%r a crp. here the < %ll intended t repa the, e*pected ? a reasnable certaint t be able t

repa the, belie!ed the ?draals ld be appr!ed b the crp., & ade a prpt assignent %assets s%%icient t secre the at. ed. At. %nd it t be in the natre % a lan.

s+amessggests, & the Der!ice cncedes, rept % illegal ince entitles the < t a dedctin.Re!. Rl. 65-25/.

At. re4ected argent that the cnsensal recgnitin % indebtedness % an ebe;;ler ?in the sae ta*ear trans%red the t* int a lan.

reimer v" #omm$nM < cn!icted % btaining lans nder %alse pretenses anting t %rad.8espite this, the ct %nd the t*s ere lans since the < had alas regarded & treated the bligatinsas bna %ide debt the intended t repa.

n cntrast, here a cnsistent pattern % %radlent dealing denstrates an absence % intent trepa, erel labeling the %nds btained as lans ill nt a!id .

D% Dposits

Reglatins pr!ide that rent paid in ad!ance generall cnstittes in the ear it is recEd regardless %the perid c!ered r the ired t retrn "that is, t reprt n his ta* retrn#, e!en thgh it a still beclaied that he is nt entitled t retain the $, & e!en thgh he a ha!e t pa it back.'&$at: (1) ince earned in 1916 & ipnded b the recei!er in the ear as nt ta*able t hi, b?c heas the recei!er % nl a part % the prperties perated b the cpan. (2) @et pr%its ere nt ta*able tthe cpan as ince % 1916 b?c ne!er recEd it in 1916, n cnstrcti!e receipt % the pr%its, n right tdeand the recei!er pa the c. the $. 191 c. becae entitled t recei!e the $. (') @et pr%its earned bthe prpert in 1916 ere nt ince % 1922 M ear hich litigatin as %inall %inished. ecae ince


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% the c. in 191 hen it %irst becae entitled the & hen the actall recEd the. (i% lst in 1922 & hadt repa ld be entitled t a dedctin in 1922, bt ha!e inclde as ince in 191).-O!*: Khen get $ & thereEs n nderstanding that ha!e t pa the $ back, thatEs ince t .

BAES 6% %S% -&9:&. 0:?F&: Cnin %%icial h, ? anther persn, ebe;;led %nds %r 1951-195/ %r epler nin &insrance c. Hailed t reprt as ince.Issue: Khether ebe;;led %nds are t be inclded in the : % the ebe;;ler in the ear in hich the%nds are isapprpriated nder 61(a) % the RA % 195/.$ule: Khen a < ac>ires earnings, la%ll r nla%ll, ? the cnsensal recgnitin, e*press riplied, % an bligatin t repa & ? restrictin as t their dispsitin, he has recEd ince hich he isre>ired t retrn, e!en thgh it a still be claied that he is nt entitled t retain the $, & e!en thghhe a still be ad4dged liable t restre its e>i!alent.'&$at: 7a%l & nla%l gains are cprehended ?in the ter .: 7a%l as aditted in 1916hen a* statte aended M intent % Angress t deri!e ince ta* %r bth legal & illegal srces.

ali% as ince t the


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Th ff*t of an O5ligation to Rpa

Transa*tion Ds*ription Ta


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a% $100k-. I sld it %r cash $'50k & prchaser assed the $/50k rtgage B $+00k

&. $+00k (at. reali;ed B $/50k assptin % rtgage = $'50k cash) - $550 (basis a%terredeling) B $250k gain

2. ences %r Y & < n e*changeL

&. Y B $/50k (HIU) - $150k (asis) B $'00k ain in e*change % land

a% asis Y B $/50k HIU % prpert recEd2. < B $/50k - $50k B $/00k ain in e*change % land

a% asis < B $/50k HIU % prpert recEd-5. HIU % YEs land B $500k, HIU


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8i!idends are !ieed as earnings n r pr%it %r neEs in!estent, ch the a rent (61(a)(5))represents earnings n neEs prpert r interest (61(a)(/)) represents earning n neEs ne.

A% Ta< Cost )asis ( Reg. 1.61-2(d)(2)(i)

)% I+pa*t of Lia5ilitis

&% I+pa*t on )asis

he at % a isitin % prpert are inclded n the


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&% Oes, Aarl recei!es cash gi%ts %r epler, assciates & client. 2/(b)2% Aarl, $10k cpensatin & incldable in , $15k abe gi%t 102(a)1% @ liabilit, trans%erred basis 1015(a)

-a. Rb takes A basis % $60k, hen sells ld ha!e liabilit & pa ta*es

H% 7ks like cpensatin %r epler t eplee, s Rb st likel ill ha!e t inclde $150k in 102(c)(1)

?% i%t, R asses Es basis % $60k, $/5k (HIU) - $'0k B $15k lss 1015(a)-a. % sld %r $55k, n lss, n gain-5. % at the tie % gi%t, HIU is bel dnrs basis W he takes HIU as basis t cpte a lss-*. H at the tie % gi%t, HIU is bel dnrs basis W then he sells %r re than HIU basis, then he

canEt take a gain.-. % he sells it %r re than dnrEs riginal basis, then ses riginal basis as his n & has gain.

:% has gain % $15k & Rb has a basis % $5k (Rb n ta* cnse>ence);% basis is $60k - $5k B $15k gain

-a. R has a basis % $5k (hich e!er is greater the basis % the dnr, $60k r at pd, $5k)

8% R takes HIU basis % lt at tie % her death B $150k 101/9% $60k basis hen gi%ted t grand%ather, he takes that basis

-a. $60k basis hen he died & Es basis 101/(e)-5. $150k basis %r R.

II%O@ER@IEW

A% What is Eired %r a decedent thrgh be>est, de!ise r inheritance.

hreshld >estin nder 102 is hether that hich is recEd can be characteri;ed as gi%t, be>est,

de!ise r inheritance. he ti!e % the dnr is critical in characteri;ing receipts as gi%ts nder 102. #omm$n v" /uberstein.

102(a) denies e*clsin %r ats t* b an epler t, r %r the bene%it %, an eplee.

7iits gi%ts ade b bsiness 2/(b) disalls a dedctin %r gi%ts t indi!idals in e*cess % $25.

102(c)(1) negates gi%t stats %r t* %r eplers t eplees.

2% Th Nat4r of a )4st or Inhritan*

hreshld >estinF is the cash r prpert recEd a be>est, de!ise r inheritance, r is it cpensatinr se ther %r % ta*able iteL

0eyth v" oey(19'+) deterined that prpert recEd b an heir %r the estate % his ancestr is

ac>ired b inheritance, and ths e*cldable, hen it is distribted nder an agreeent settling a cntestb the heir % the !alidit % the decedentEs ill.

1% Stat4tor Li+itations on th Eest, de!ise, & inheritance is nt e*clded. 102b1102(b)(2) denies an e*clsin t gi%ts, hether ade dring li%e r at death, % ince %rprpert.


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)% )asis of "roprt R*i6 5 #ift, )4st or Inhritan*

&% #ifts of Appr*iat "roprt

1015(a) M recei!ers basis is re%erred t as a sbstitted basis: r a trans%erred basis.:

rans%erred basis rle shi%ts the ta* brden assciated ? the appreciated !ale % the gi%t %r the gi!ert the recei!er, i.e. gi%t % stck bght at $200 then hen gi!en !ale is $/00.

-a.t v" 1owers(1929) M %ather ga!e stck t daghter that had increase in !ale dring the tie the%ather ned the. he daghter then sld the stck. Dhe as ta*able n appreciatin that ccrreddring the perid her %ather ned the stck.

n e%%ect, -a.tcn%irs that anther liitatin e*ists ? respect t the general e*clsin rle %r gi%ts, ie,the appreciatin inherent in gi%ts a ltiatel be ta*ed t the dnee.

2% #ifts of "roprt ' )asis in E


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Spring 2008


prceeds %r a detached and disinterested genersit t % a%%ect, respect, adiratin, charit r likeiplses. Khat cntrls is the intentin ? hich pt, he!er !lntar, has been ade. he ta*ingstatte des nt ake nndedctibilit b the trans%err a cnditin n the gi%t: e*clsinG nr des it draan distinctin b?t trans%ers b crp. & indi!idals, as t the a!ailabilit % the gi%t: e*clsin t the

trans%eree. 8ecisins st be based n the applicatin % %act-%inding tribnalEs e*perience ? theainsprings % han cndct t the ttalit % the %acts % each case. Hnd it as nt a gi%t btrecpense & indceent %r ser!ices decided b the trier % %act & is pheld.

WOLDER 6% COGN, H91 F%2 :08 -&9;H. &0;

F&: a* At. held the HIU % the stck & cash recEd nder the clientEs ill cnstitted ta*able ince.Issue: Khether an att cntracting t & per%ring li%etie legal ser!ices %r a client recei!es incehen the client, prsant t the Y, be>eaths a sbstantial s t the att. in lie % the pt % %ees dringthe clientEs li%etie is ta*able ince.$ule: est hether in actalit the gi%t is a bna %ide gi%t r sipl a ethd %r paing cpensatin.'&$at: he >estin is resl!ed b e*aining the intent % the parties, the reasns %r the t*, & the parties

per%rance in accrdance ? their intentins. * as ince & sb4ect t ta*atin.

OLK 6% NITED STATES, ?1: F%2 8;: -&9;:. &09

F&: rial ct held tkes: ere gi%ts. kes are placed in a cn %nd & di!ided ang the dealers.Issue: Khether $, called tkes: in the rele!ant trade, recEd b the encesL-a. 7cal bank - $2k ta*able-5. 8Es epler - $2k ta*able (lks like cpensatin) 10+, 61(a)(12)-*. 8Es brther - $2k 3 ta*able, lks like gi%t. 102

2% Ye!in


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-a.@ discharge % indebtedness ince, redctin in the debt, r settleent B redctin in debt.-5. $9k discharge % indebtedness ince-*. @ ince % discharge % indebtedness b?c gi%t.

&. Ye!inEs parent prdced a nte t a lender

a% Y brrs $20k5% Y pas back $11k*% Ye!inEs parents gi%ts hi $9k, then pas back $9k re% ch ince shld Y reali;eL

i% @ne b?c the gi%t ent straight t the discharge % debtii% e reali;es n ince here

% N*aple 2F Y brrers $20ki% Ye!in pas $1kii% 7ender sells lan t parents %r $10kiii%


22/87


Spring 2008


Higre t h land t* rks es $5k* land ? a basis % $20k & HIU B $60k is in essence paing $60k n his debt

KhatEs his ant reali;edL $60k has a gain % $/0k (HIU $60k - $20k base)$15k ince as a reslt % cancellatin % debt&. Dos h ha6 othr in*o+M

a% 8i%%erence b?t the ant reali;ed & the basesi% nt reali;ed B $60kii% ases n land B $20kiii% nce reali;ed ? gain % B $/0k (HIU $60k - $20k)

-5. What 5asis 7ill B ta in th lan sh r*G fro+ )M

&. Cnder'hiladelphia 3 HIU is the bases B $60kH% LloJ lia5ilitis


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nsl!enc e*ceptin F @ ince arises %r discharge % indebtedness i% the debtr is insl!ent bthbe%re & a%ter the t*G & i% the t* lea!es the debtr ? assets hse !ale e*ceeds reaining liabilities,ince is reali;ed nl t that e*tent.

10+ e*cept as pr!ided, there is n insl!enc e*ceptin %r the general rle that incldes ince

%r the discharge % indebtedness. Dpeci%icall pr!ides n i% the discharge ccrs in a bankrptccase r i% the discharge ccrs hen the < is insl!ent.

10+(a)(') liits the insl!enc e*clsin t the at b hich the < is insl!ent.10+(d)(') de%ines insl!ent t ean the e*cess % liabilities !er the HIU % assets.8eterinatin % this e*cess is deterined n the basis % ent settleent % that dispte is treated as the at % debt %r ta* prpses.

5arin v.#omm$nM < incrred a $',/'5,000 gabling debt hich he dispted n the basis that the debtas nen%rceable nder state la. < & casin settled dispte %r $500,000. Khen a debt isnen%rceable, the at % the debt is in dispte. he settleent % the debt is treated as the at % thedebt %r ta* prpses. ?c Qarin pd the $500k, there as n discharge % indebtedness ince.

'reslar critici;ed &4arnshaw v" #omm$n (2002) agreed hlding that a < h settled a credit carddispte ? the issing bank had discharge % indebtedness ince ephasi;ing that a signi%icant part %the debt ed b the < as ncntested & li>idated. 8ischarge % liabilit %r an % sch debt Wcnstitted discharge % indebtedness ince.

1% "4r*has(on D5t R4*tion for Sol6nt D5tors

10+(e)(5) M retracti!e redctin in prchase price 3 discharge % indebtedness ince.

H% A*4isition of In5tnss 5 "rson Rlat to D5tor

10+(e)(/) speci%icall pr!ides that, i% a persn related t a debtr ac>ires the indebtedness, theac>isitin shall be treated as an ac>isitin b the debtr.

?% Dis*harg of D4*ti5l D5t

10+(e)(2) pr!ides that %rgi!eness % a debt des nt generate ince i% the pt % the debt ldha!e been dedctible.

RatinaleF i% discharge % indebtedness ince ere t be ipted t the tenant, the tenant ld beentitled a dedctin %r the past de rent hich ld cpletel %%set the discharge %indebtedness ince.

)% Dis*harg of In5tnss as #ift, Co+pnsation, Et*%


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#omm$n v" +acobson(19/9) M ct cnsidered hether a discharge % indebtedness cld be cnsidered ane*cldable gi%t nder 102(a) & its predecessrs cnclding the gi%t e*clsin as nt applicable herea debtr prchased his n bligatins at a discnt.

Sther circstances the cancellatin % indebtedness can be e*cldable as a gi%t.

i.e. parents lends $ t a child then %rgi!es the debt, the %rgi!eness % the debt ld likel becnsidered a gi%t e*cldable nder 102(a).

Sther circstances the %rgi!eness a represent a %r % cpensatin & shld nt be cnsidereddischarge % indebtedness ?in the eaning % 61(a)(12).

NITED STATES 6% KIR) L)ER CO%, 28H %S% & -&91&. &;H

F&: Jl 192', V issed its n bnds %r hich it recEd their par !ale. 7ater, in sae ear, prchasedin the pen arket se % the sae bnds at less than par.Issue: Khether the di%%erence in prices (sld then bght) is a ta*able gain r ince % the V %r 192'.'&$at:% the crp. prchases & retires an % sch bnds at a price less than the issing price r %ace !ale,the e*cess % the issing price r %ace !ale !er the prchase price is gain r ince %r the ta*able ear.

RE@ENE RLIN# 8H(&;:, &98H(2 C%)% 1H &;H

F&: Y %r gds. D shipped st % gds bt nt all.


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recei!ing $ %r a sale. he land as prperl cnsidered gains deri!ed %r dealings in prpert t thee*tent the HIU in the land e*ceeded the


26/87


Spring 2008


&. 119 M epler pr!ided %d, gi!en cash nt eal2. 1'2 M nt n-additinal-cst ser!ice, nt >ali%ied eplee discnt, rking cnditin %ringe

bene%its, de minimis%ringe bene%its, nt >ali%ied transprtatin %ringe-*. K skips dinner & keeps the $15 %r his ther e*penses M nt inclded, b?c dnEt ant t ha!e t keep

check r de minimis%ringed bene%its.-. Aa%eteria n preises hich pr!ides %ree sper t each assciate rking the e!enings-. Aa%eteria n preises, %ree eals thrght the da t all assciates.

&. Reg. 1.119-1(a)(2)(i) M eals %rnished b an epler ? charge t the eplee ill beregarded as %rnished %r the cn!enience % the epler i% sch eals are %rnished %r asbstantial nn-cpensatr bsiness reasn % the epler.

2. 119(b)(/) M all eals %rnished n the bsiness preises % an epler t sch eplerEseplees shall be treated as %rnished %r the cn!enience % the epler, i% ? regard t thisparagraph, re than hal% % the eplees t h sch eals are %rnished n sch preisesare %rnished sch eals %r the cn!enience % the epler.

1. 1'2(e)(2) M treatent % certain eating %acilities M the peratin b an epler % an eating

%acilit %r eplees shall be treated as a de inis %ringe i% M sch %acilit is lcated n rnear the bsiness preises % the epler, and re!ene deri!ed %r sch %acilit nralle>als r e*ceeds the direct perating csts % sch %acilit.

H% $otAir, In*%

-a. No(aitional(*ost, fr foo +al P+rl in*intalQ *osts ' nothing in*l4 as in*o+

&. 1'2(b)(1) M he ser!ice st be ne %%ered %r sale t csters in the rdinar crse %bsiness & the ser!ice be %%ered in the line % bsiness % the epler in hich the epleeis per%ring ser!ices. his line % bsiness re>ireent is best e*plained b the %llinge*cerpt %r the legislati!e h*.a% Reg. 1.1'2-/(a)(1)(i!) pr!ides that the per%rance % sbstantial ser!ices directl

bene%iting re than ne line % bsiness is treated as the per%rance % sbstantial ser!ices

in all sch lines % bsiness.2. 1'2(b)(2) pr!ides that the epler incr n sbstantial additinal cst (inclding %rgne

re!ene).a% Reg. 1.1'2-2(c) states that peritting airline eplees t take persnal %lights at n

charge & t recei!e reser!ed seats reslts in %rgne re!ene & t?% eplees recei!ing the%ree %lights are nt eligible %r the n-additinal-cst e*clsin.

5% 1'2(b)(2) als pr!ides that hether an epler incrs an sbstantial additinal cst bedeterined ? regard t an ant hich an eplee ight be re>ired t pa.

*% Reg. 1.1'2-2(a)(5)(ii) M t the e%%ect that the cst % ser!ices erel incidental: t thepriar ser!ice rendered are generall nt sbstantial.

% Reglatins, a%ter listing se!eral e*cess capacit ser!ices: that >ali% as n-additinal-cst

ser!ices, speci%icall state that nn-e*cess capacit ser!ices, hich d nt s >ali%, annetheless be %ll r partiall e*clded %r ince nder the >ali%ied epleediscnt: rles discssed bel. Reg. 1.1'2-2(a)(2).

1. 1'2(4)(1) prhibits discriinatin in %a!r % highl cpensated eplees, a ter hich, asde%ined in /1/(>), can inclde %%icers & ners.a% )eeReg. 1.1'2-+(a)(2) pr!ides nl the ebers % the highl cpensated grp, rather

than all eplees recei!ing bene%its, ill be sb4ect t ta*.5% 1'2(h) de%ines eplee t inclde neEs spse & dependent children as ell as certain

retired & disabled eplees & the sr!i!ing spse % a decease eplee.i% 1'2(h)(') pr!ides a special rle treating the se % air transprtatin b the parent %

an eplee as se b the eplee


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Spring 2008


ii% 1'2(4)(5) hich pr!ides %a!rable treatent %r a%%iliates % airlines.-5. &12-*. -4alifi +plo is*o4nt. ( E


28/87


Spring 2008


&. Reg. 1.1'2-5(a)(1)(!) - Aash pts t an eplee d nt >ali% as rking cnditin %ringesnless the eplee is re>ired t se the pts %r e*penses incrred in a speci%ic r pre-arranged >ali%ing acti!it, !eri% sch se, & retrn an e*cess t the epler.

2. Reg. 1.1'2-5(b) M deterines the rking cnditin %ringe prtin % !ehicle sage, here an

eplee ses an epler-pr!ided !ehicle %r bsiness & persnal prpses.1. Reg. 1.1'2-5(n) M cnser prdct testing, that is the se b eplees % epler-

an%actred cnser gds, sch as cars, %r testing & e!alatin tside the eplerEs%%iceZdelineate the re>ireents %r sch eplee se t >ali% as a rking cnditin%ringe bene%it.

?% POQ pr!ides %ree parking. he %ir pas $150?nth %r each parking space. each %ir eberh ses pblic transit ser!ice, the %irs pas $5? (the cst % a nthl transit pass).-a. 1'2(a)(5) e*cldes %r ince >ali%ied transprtatin %ringe: bene%its.-5. 1'2(%)(1) - >ali%ied transprtatin %ringe bene%its isF

&. transprtatin in a cter higha !ehicle in cnnectin ? tra!el b?t the epleeEsresidence & place % eplentG

2. a transit passG1. >ali%ied parking

-*. 1'2(%)(') M cash reibrseents %r these ites are als e*cldable-. 1'2(%)(2), (6) M the e*clsin is sb4ect t speci%ied dllar liitatins hich are ad4sted %r

in%latin.

II%O@ER@IEW

61(a)(1) pr!ides that, ang ther things, incldes %ringe bene%its.:

Reglatin 1.61-1(a) pr!ides the %r % receipt desnEt atter & ince a be reali;ed in the%r % ser!ices, eals, accdatins, stck r ther prpert, as ell as in cash.:

#omm$n v" )mith, the cncept % is intended t inclde in ta*able ince an ecnic r %inancial

bene%it cn%erred n the eplee as cpensatin, hate!er the %r r de in hich it is e%%ected.

HR@N N@NHDhe la regarding the ta* treatent % %ringe bene%its is t be %nd in a patchrk % legislati!e,4dicial & adinistrati!e rles.

A% als Loging

* % pieceeal ta* treatent % %ringe bene%its1919 rling that eals & ldging %r seaen abard ships ere e*clded1920 rling that e*epted spper $ paid b an epler t an eplee, h !lntaril per%rse*tra labr %r his epler a%ter reglar bsiness hrs.

An!enience % epler dctrine F e*clsins ere preised n the ntin that the bene%its gi!eneplees ere %r the cn!enience % the epler.

dpted b the reasr & crts as pr!iding the standard %r deterining hether epler-pr!ided eals & ldging ere e*cldable.

Re>ired ired t accept >arters & eals at the hspital t be a!ailable.

1enagliaM the %act that the


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1950, the Der!ice tk the psitin that, i% the epler characteri;ed a bene%it as cpensatin, thebene%it ld be treated as ince regardless % the %act that the bene%it as pr!ided %r thecn!enience % the epler.

De crts re4ected this psitin hile thers ebraced it.

Reslted in siilarl sitated


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Spring 2008


st % nn-stattr epler-pr!ided %ringe bene%its e*isted (ignred b the Der!ice r treated asnnta*able.

1921, Der!ice rle that persnal transprtatin passes issed b a railrad cpan t its eplees& their %ailies are cnsidered gi%ts & the !ale des nt cnstitte ta*able ince t the

eplees.: 19+/, Angress enacted the %irst cprehensi!e treatent % %ringe bene%it. 1'2.

1'2 recgni;es categries % e*cldable bene%itsF

@-additinal-cst ser!iceG Tali%ied eplee discntG Krking cnditin %ringeG /e minimis%ringeG Tali%ied transprtatin %ringeG

Tali%ied !ing e*pense reibrseentG and

Tali%ied retireent planning ser!ices.&% No(Aitional(Cost Sr6i*

Angress recgni;ed that cpanies engaged in the airline, railrad, r htel bsiness %ten ha!e e*cesscapacit (e"g", e*tra seats n a schedled airline %light) hich ill reain nsed %r lack % paingcsters).

?c n cst incrred b the epler in alling an eplee t ccp an ept seat, Angress pted

t e*clde %r ince the entire !ale % sch ser!ices, sb4ect t a nber % restrictins.

/ Re>ireents1. 1'2(b)(1) - he ser!ice st be ne %%ered %r sale t csters in the rdinar crse %bsiness.

I"e", an eplee % a crpratin has persnal bsiness in NA & the cpan alls the

eplee t ccp an therise ept seat n the crprate 4et hich is being %ln t NA %rbsiness reasns, this bene%it %ails the %r sale t csters: standard

2. 1'2(b)(1) M the ser!ice be %%ered in the line % bsiness % the epler in hich the epleeis per%ring ser!ices. his line % bsiness re>ireent is best e*plained b the %lling e*cerpt%r the legislati!e h*.

n epler hich pr!ides airline ser!ices & htel ser!ices t the general pblic is cnsideredt cnsist % 2 separate lines % bsiness. n eplee % the airline bsiness a nt e*cldethe !ale % %ree htel rs pr!ided b the htel bsiness % the epler & !ice !ersa. %the cld d this, it ld disad!antage sall bsiness abilit t cpete.

Khat abt an accntant that pr!ides ser!ices t bth lines % bsinessL Reg. 1.1'2-/(a)(1)(i!) pr!ides that the per%rance % sbstantial ser!ices directl bene%iting

re than ne line % bsiness is treated as the per%rance % sbstantial ser!ices in all schlines % bsiness.

'. 1'2(b)(2) pr!ides that the epler incr n sbstantial additinal cst (inclding %rgnere!ene).

Reg. 1.1'2-2(a)(5) pr!ides %r prpses % deterining hether an re!ene is %rgne, it isassed that the eplee ld nt ha!e prchased the ser!ice nless it ere a!ailable t theeplee at the actal price charged t the eplee.

Reg. 1.1'2-2(c) states that peritting airline eplees t take persnal %lights at n charge &t recei!e reser!ed seats reslts in %rgne re!ene & t?% eplees recei!ing the %ree %lights arent eligible %r the n-additinal-cst e*clsin.


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1'2(b)(2) als pr!ides that hether an epler incrs an sbstantial additinal cst bedeterined ? regard t an ant hich an eplee ight be re>ired t pa.

hs, eplee paent 3 ser!e t trans%r an epler-pr!ided ser!ice int a n-additinal-cst: ser!ice, althgh sch pt a b!isl be >ite rele!ant in easring

the ince, i% an, the eplee recei!es %r the eplerEs pr!isin % the ser!ice. Hinall, the state re%ers t sbstantial: additinal csts.

I"e", are the hsekeeping csts assciated ? aintenance % ht rs sbstantial:additinal csts t the ner % a htel chain h perits eplees t se rs hichtherise ld reain !acantLo Reg. 1.1'2-2(a)(5)(ii) M t the e%%ect that the cst % ser!ices erel incidental: t the

priar ser!ice rendered are generall nt sbstantial.

Reglatins, a%ter listing se!eral e*cess capacit ser!ices: that >ali% as n-additinal-cstser!ices, speci%icall state that nn-e*cess capacit ser!ices, hich d nt s >ali%, annetheless be %ll r partiall e*clded %r ince nder the >ali%ied eplee discnt:rles discssed bel. Reg. 1.1'2-2(a)(2).

/. 1'2(4)(1) prhibits discriinatin in %a!r % highl cpensated eplees, a ter hich, asde%ined in /1/(>), can inclde %%icers & ners.

)eeReg. 1.1'2-+(a)(2) pr!ides nl the ebers % the highl cpensated grp, ratherthan all eplees recei!ing bene%its, ill be sb4ect t ta*.

1'2(i) pr!ides special rle athri;ing reciprcal agreeents b?t eplers in the sae line %bsiness, ths enabling the eplers t pr!ide ta*-%ree bene%its t ne antherEs eplees.Dch reciprcal agreeents st be in riting & the eplers a nt incr an sbstantialadditinal csts (inclding %rgne re!enes) in pr!iding sch ser!ices.

1'2(h) de%ines eplee t inclde neEs spse & dependent children as ell as certainretired & disabled eplees & the sr!i!ing spse % a decease eplee.

1'2(h)(') pr!ides a special rle treating the se % air transprtatin b the parent % aneplee as se b the eplee 1'2(4)(5) hich pr!ides %a!rable treatent %r a%%iliates % airlines.

#harley v" #omm$n, the < arged 1'2(a)(1) e*clded %r ince ants he recei!ed %r %re>ent%ler iles hich he cn!erted t cash. he crt nted that the ent%ler iles %r sale t csters in the rdinar crse % its bsiness. he crt cnclded that eitherthe tra!el credit arrangeent represented additinal cpensatin t the < %r his cpan r the ent %ler iles in hich he had a ;er basis. Cnder either analsis, the antcredit t his persnal tra!el %nd cnstittes .

Der!ice annnced that the R ill nt assert that an < has nderstated his %ederal ta* liabilit breasn % the receipt % persnal se % %re>ent %ler iles. his relie% des nt appl t bene%its that

are cn!erted t cash, r t cpensatin paid in the %r % sch bene%its, r t bene%its sed %r ta*a!idance prpses.

2% 4alifi E+plo Dis*o4nt

N*clsin %r >ali%ied eplee discnts re%lects recgnitin % lng-standing practice % bsinessest pr!ide discnts t their eplees n the sae gds & ser!ices the sell t the general pblic.

rgs in %a!rF

Dtilates a cpanEs sales t a natral grp % csters (increase !erall sales & pr%its)


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Dtilatin % sales t the general pblic (eplee edcated abt the erchandise theepler sells W eplees ake re e%%ecti!e sales, ral is higher, re lal ad!cates,e%%ecti!e eans % ad!ertising the eplers gds).

1'2(c) liits the ant % discnt hich ill be e*cldable & pr!ides separate liitatins %r

prpert & %r ser!ices.he e*clsin %r eplee discnts n ser!ices is liited t 20 % the price at hich the ser!icesare being %%ered b the epler t csters. cntrast, the e*clsin %r eplee discntsn prpert is liited t the eplerEs grss pr%it percentage, hich is the e*cess % the aggregatesales price %r the prpert sld b the epler !er the aggregate cst % sch prpert t theepler, di!ided b the aggregate sales price.

1'2(c)(/) de%ines >ali%ied prpert r ser!ices.:he de%initin cntains the sae %r sale t csters: and line % bsiness: re>s. % 1'2(b).he real prpert & persnal prpert held %r in!estent d nt >ali% %r the 1'2(c) e*clsin.

I"e", the e*clsin ld nt appl t eplee prchases % stcks r bnds, gld cins rresidential & cercial real estate. n ipsing this liitatin, Angress as cncerned thatsch prpert cld tpicall be sld b eplees at clse t the sae price at hich theepler sells the prpert t its nn-eplee csters.:

1'2(c) the scpe % the ter % eplee is the sae as that in 1'2(b), and the anti-discriinatin rles applicable t the n-additinal-cst ser!ice e*clsin are als applicable t the>ali%ied eplee discnt e*clsin.@teF the reciprcal agreeent rles % 1'2(i) are nt applicable t >ali%ied eplee discnts.

1% Woring Conition Fring )nfits

Nplers pr!ide eplee ? all % the tls, %%ice space, & spplies an eplee needs.

Dch prpert & ser!ices are s clsel cnnected t 4b per%rance that ere the eplee, rather

than the epler, t pa %r the, the eplee ld be entitled t dedct their cst as bsinesse*pense W hen the are pr!ided b the epler, the 3 cnsidered cpensatin t the eplee.

1'2(a)(') e*cldes these s-called rking cnditin %ringe bene%its.:Reg. 1.1'2-5(a)(1)(!) - Aash pts t an eplee d nt >ali% as rking cnditin %ringesnless the eplee is re>ired t se the pts %r e*penses incrred in a speci%ic r pre-arranged>ali%ing acti!it, !eri% sch se, & retrn an e*cess t the epler.Reg. 1.1'2-5(b) M pr!ided %r deterining the rking cnditin %ringe prtin % !ehicle sage,here an eplee ses an epler-pr!ided !ehicle %r bth bsiness & persnal prpses.Reg. 1.1'2-5(n) M cnser prdct testing, that is the se b eplees % epler-an%actred cnser gds, sch as cars, %r testing & e!alatin tside the eplerEs %%iceZ delineate the re>ireents %r sch eplee se t >ali% as a rking cnditin %ringe bene%it

Re!. Rl. 92-69, 1992-2 A.. 51, the Der!ice cnclded epler-pr!ided tplaceent ser!ices eree*cldable b eplees as rking cnditin %ringe bene%its.

% an epler deri!es a sbstantial bsiness bene%it %r the pr!isin % sch tplaceentser!ices that is distinct %r the bene%it it ld deri!e %r the ere pt % additinalcpensatin, ie, prting a psiti!e crprate iage, aintaining eplee rale, & a!idingrng%l terinatin sits, the ser!ice a generall be treated as a rking cnditin %ringe.

-ownsend Industries v" *nited )tates, '/2 H.'d +90 (+thAir. 200'), the crt held the per-eplee cst% the


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ll the trips ere !lntaril, nearl all eplees %elt an bligatin t attend.: estinregarding the bsiness discssins that tk place ang thse attending.At %nd nsend had a realistic e*pectatin t gain cncrete %tre bene%its %r the trip basedn its knledge % its n sall cpan, its knledge % the tilit % interpersnal interactins

that prbabl ld nt ccr bt %r the trip, & its knledge % its n past e*perience.:

H% De Minimis Fring )nfits

Re%lecting a cngressinal desire %r adinistrati!e cn!enience, 1'2(a)(/) e*cldes de minimis%ringebene%its, de%ined in 1'2(e).

@te the ephasis place n %re>enc: as a %actr %r deterining hether a bene%it is de minimis.@te als that, nlike the n-additinal-cst ser!ice, >ali%ied eplee discnt, & rkingcnditin %ringe bene%it rle, the de minimise*ceptin des nt necessitate an epler-epleerelatinship b?t the pr!ider & recipient.

W bene%its recei!ed b a directr % a crpratin a cnstitte e*cldable de minimis%ringes. Reg. 1.1'2-6(d)(2) - special rles %r e*clding eals & ccasinal eal $ as de minimis%ringes.

Reg. 1.1'2-6(e) lists a !ariet % cn bene%its that d r d nt >ali% as de minimis.

Reg. 1.1'2-6(c) de minimis%ringe bene%it stats is e*plicitl denied t an cash r cash e>i!alentbene%its, ther than thse alled b the special rles.

?% 4alifi Transportation Fring

1'2(a)(5) e*cldes %r ince >ali%ied transprtatin %ringe: bene%its. 1'2(%)(1) - >ali%ied transprtatin %ringe bene%its isF

(1) transprtatin in a cter higha !ehicle in cnnectin ? tra!el b?t the epleeEsresidence & place % eplentG

(2) a transit passG (') >ali%ied parking. 1'2(%)(') M cash reibrseents %r these ites are als e*cldable. 1'2(%)(2), (6) M the e*clsin is sb4ect t speci%ied dllar liitatins ad4sted %r in%latin.

:% On("r+iss #+s Othr Athlti* Fa*ilitis

1'2(4)(/) M Angressinal cncern %r eplee health hich %r n-preises athletic %acilitiespr!ided b the epler.

1'2(4)(/)()(iii) - N*clsin applicable nl i% the se % sch %acilities is liited t eplees,their spses & their dependent children.

C% @al4ation

Hringe bene%its nt e*clded %r ince nder 1'2 r anther % the Ade, are, sb4ect t ta*

prsant t 61(a)(1). Reg. 1.61-21(b)(1) - he easre % ince is the %air arket !ale % the %ringe bene%it, less an

e*cldable prtin % the %ringe bene%it & an ant paid b the recipient.

Dpecial, & e*tensi!e, !alatin rles are pr!ided, h?e, ? respect t epler-pr!ided !ehicles,cha%%er ser!ices, cercial & nn-cercial air tra!el, & eating %acilities.

Reg. 1.61-21(a)(/) - he reglatins e*plicitl ta* the !ale % %ringe bene%it t the eplee, e!enthgh the bene%it a actall be recei!ed b sene else.

)ENA#LIA 6% COGN, 1: )%T%A% 818 -&91;. 221


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F&: estin, been epled as the anager in %ll charge % the se!eral htels in nll ned &perated b aaiian tels.


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ebers % his %ail r his %riends had %ree se % !Et transprtatin %r persnal e*crsins r here ithas nt been established that the ere n !Et bsiness. HIU % the prpert r ser!ices taken in ptst be inclded in ince & cst % 1stclass cercial %lights ill be sed.

III%CLASS NOTES2 ig naltical ssesF

nclsin

Hactr paent ccretins M is the < better %%L eneral rle that %ringe bene%its are inclde, nless there is a speci%ic e*clsin (119)Uale

Resltin M Ade illFnclde HIUG SR

1.61-2(d)tall e*clde

C$% 10 ' ANNAL ACCONTIN# ;&; ' ;1?

I%"RO)LES

&% Nllen - 1'/1-a. OR1F a*able ince $100Y (inclding $5k bns) ta*ed at '0 - '0,000 ta* cnse>ence

&. n nt inclded, $96k * 0.' B 2+,+00 - $'0k - $1,200 ta* added b?c inclded-5. OR2F A iprperl calclated NEs bns, shld ha!e been $1k, N retrned e*cess $/k, ta*able

ince $60k, ta*ed at 20 B12,000 - dedctin sa!es $+00 in ta*es.&. $6/,000 * .2 B 12,+00 M dedctin sa!es $+00

-*. the ta* cst % the riginal inclsin is rth re than the dedctin-. 1'/1(a)(5) pr!ides instead (hen it is re !alable than a dedctin) is a ta* decrease, in e%%ecta ta* credit, against the crrent ears liabilit in an at e>al t the added ta* ccasined b theprir earEs inclsin ince.

-. N has a ta* credit % $1.2k in OR22% Nllen - 1'/1 ld nt appl b?c $2k nt greater than $'k.

-a. Retrns hal% in ear 2 and the ther hal% in ear '.&. OR2 M ld nl be able t ha!e [ ta* dedctin - $/002. OR' M ld nl be able t ha!e [ ta* dedctin - $/00

-5. 1'/1(a)(') the ant % sch dedctin e*ceeds $'k.-*. ccral ethd instead % cash ethdL

&. Dtill get dedctin nder 7eis hlding, ld take %ll dedctin1% OR 1F bns $50k ? OR 'F RD deterines NEs OR1 cpensatin e*ceeded reasnable: cpensatinb $50k, & denies A a OR1 dedctin %r the $50k bns M crp. cannt dedct b?c e*ceededreasnable cpensatin.-a. A & N enter int an agreeent that N retrn an cpensatin denied b RD, & N repas in OR'

&. N still had a right t it n change in cnse>ence-5. Khat i% the agreeent as entered int dring OR2L-*.


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-5. Ist she reprt an ince in ear /L Oes. 111 applies M ta* bene%it rle.&. ppl ta* bene%it hen e all sene t ha!e a dedctin ne ear & a %ndaentall

incnsistent e!ent happens (prpert re!erts back t her).2. chL

a% 111 M $9k, h ch a bene%it did she get in OR1L5% B $'0k, dedctins $1/k B ta*able ince = e*ceptins B $16k*% Khat ere her ta*able ince ld ha!e been had she nt gi!en the prpert aa

i% B$'0k, standard dedctin (itei;ed as $/k s sheEll take standard)B $5k, a*ableince = e*eptins B $25k

% $25k - $16k B $9k, erriEs charitable cntribtin redced her ta*able ince b $9k, s thatis all she st inclde in OR/.

-*. sse then in '0 ta* bracket.-. Dppse the !ale in OR/ as $5k r $15k.

?% erge M last OR dedcted $1k in clti!atin e*penses attribtable t plants he ga!e aa t a lcalgarden clb hen he ent t % bsiness last ear. ls dedctible $250 %r staps & $100 %r

statiner that reained n hand hen he ent t % bsiness. k the staps he & discarded thestatiner. Khat ta* reslts this earL-a. $1k (clti!ating e*penses), $250k & $100 (%r statiner) B $1.1k in bsiness e*penses.-5. k dedctins based n sing the %r his bsiness-*. Cnderillsboro- the < has t nde the dedctin in a later ear i% there is anthing

%ndaentall incnsistent ? the dedctin in the earlier ear. Dtill alled t take the dedctinL&. he staps M OR1 tk dedctin, shld nde the dedctin b?c sing %r persnal se in OR22. he statiner M OR1 tk dedctin, 3 ha!e t nde the dedctin b?c nt sing %r persnal

se & the cst % ding bsiness.1. he plants M OR1 tk dedctin, ga!e the plants aa, bght the ? the intentin % selling,

bt ga!e the aa instead hen he ent t % bsiness 3 need t nde the dedctin.

:% A Arpratin - 12, carr net lss back 2 ears & %rard 20 ears.-a. OR1F ta*able ince % $10k.-5. OR2F ta*able ince % $10k.-*. OR'F ta*able ince % $5k M carr the $60 back M net lss % $55 ($0 ta*able ince)-. OR/F ta*able ince % $20k M carr the $55 back M net lss % $'5 ($0 ta*able ince)-. OR5F ince % $/0k & its allable e*penses % $100k (net lss % $60k).-f. OR6F ta*able ince % $5k M carr $'5 net lss %rard (net lss % $'0k) ($0 ta*able ince).-g. ORF ta*able ince % $'0k, $50k allable e*penses.

&. Aarr net lss % $'0k %rard (net lss % $50k) ($0 ta*able ince).-h. OR+F ta*able ince $10k M carr $50k %rard (net lss % $/0k) ($0 ta*able ince).-i. OR9F ta*able ince $10k M carr $/0k %rard (net lss % $'0k) ($0 ta*able ince).

-3. OR10F ta*able ince $10k M carr $'0k %rard (net lss % $20k) ($0 ta*able ince).-. OR11F ta*able ince $10k M carr $20k %rard (net lss % $10k) ($0 ta*able ince).-l. OR12F ta*able ince $10k M carr $10k %rard (net lss % $0k) ($0 ta*able ince).-+. OR1'F ta*able ince $10k M n net lss t carr %rard %r this pint n.-n.M OR20F ta*able ince is $10k?r.

II%O@ER@IEW

//1 general rle that


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ants recEd nder a clai % right, ? restrictin as t dispsitin, cnstitte ince.

shld the restratin nder a clai % right be taken int accnt*nited )tates v" 0ewisM < recEd an iprperl cpted bns in 19// hich he reprted asince that ear, & hich he repaid t his epler in 19/6. he g!Et psitin as that therepaent shld be taken as a dedctin in 19/6 rather than perit a recptatin % the 19//ta*.

he ta8 increasethat reslts %r inclding in ince an ant recEd nder a clai % rightill nt alas be the sae as the ta8 savingsreslting %r dedcting its rept in a later ear.

1'/1 M the < h eets the re>ireents % 1'/1(a)(1)-(') is directed t cpte ta* liabilitnder the apprach that prdces the re %a!rable ta* reslt.

1'/1(a)(5) pr!ides (hen it is re !alable than a dedctin) is a ta* decrease, in e%%ect a ta*credit, against the crrent earEs ta* liabilit in an ant e>al t the added ta* ccasined b theprir earEs inclsin in ince.

his sectin ser!es the %nctin % an aended retrn ? in %act athri;ing ne.Re>ireents % 1'/1 1'/1(a)(') M inr ants are barred %r treatent b $'k threshld re>ireent. 1'/1(a)(1) M it is necessar that the restred ite ha!e been inclded in ince %r a prir ear

b?c it appeared: the < had an nrestricted right t the ince.

here is n appearance: % sch a right ? respect t ebe;;led %nds, & repaent is thstside the .

appeared: re%ers t a seblance % an nrestricted right in the ear recEd as distingished%r an nchallengeable right (hich is re than an \apparentE right) & %r absltel nright at all (hich is lees than an \apparentE right).

1'/1(a) des nt appl t the repaent % %nds recEd as the reslt % the ent e!ent,: % %nds recEd nder abslte right.:

/ominion (esource v" *nited )tates 1'/1(a)(2) re>ires the < t establish that he did nt ha!e an nrestricted right t the antrecEd in the prir ear. hs !lntar repaents d nt ce ?in 1'/1.

'ike v" #omm$nM att. sld stck ptins. is right t retain the pr%its as dispted, & he paid thepr%its t the cpan, nt b?c he aditted liabilit r as cpelled t d s, bt b?c he %earedcntr!ers !er the atter ld endanger his pr%essinal career. a* At. held < %ailed t establishthat he as nt entitled t retain the pr%its, as re>ired b 1'/1(a)(2)G bt the crt %rther held thept as allable as a 162 dedctin.

1arrett v" #omm$nM the a* Art held that the


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inapplicable t the rept n the grnds the < had nt appeared t ha!e an nrestricted right: t theince, as re>ired b 1'/1(a)(1).

Wang v" #omm$nM intern %r brkerage hse sld insider in%ratin. DNA initiated ci!il & criinalprceedings against < h settled the ci!il actin b pt % $125k t a restittin %nd. Art re4ect

the


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characteri;atin % the rec!er as a nn-ta*able retrn % capital, !ieing the t* instead as gi!ing rise tta*able ince W ad4sting the crpEs ince b the ttal % the charitable cntribtin dedctinspre!isl claied and alled. he g!Et %iled a tin %r DJ & the crt granted the tin.Issue: Khether the gain attribtable t the rec!er as t be ta*ed at the rate applicable at the tie the

dedctin as %irst claied r hether the prper rate as that in e%%ect at the tie % rec!er.'&$at:'erry v" *)(195+) dissenting, it as recgni;ed that a retrn t the dnr % a prir charitablecntribtin ga!e rise t ince t the e*tent % the dedctin pre!isl alled. he principle is ellingrained in r ta* la that the retrn r rec!er % prpert that as nce the sb4ect % an ince ta*dedctin st be treated as ince in the ear % its rec!er. 7iitatin n the principleF ta*-bene%it rlehich perits the e*clsin % the rec!ered ite %r ince as lng as its initial se as a dedctin didnt pr!ide a ta* sa!ing. ?A the crp. btained a %ll ta* bene%it %r its earlier dedctins, thsededctins ere prperl classi%ied as ince pn recpent and st ha!e been ta*ed as sch.

$ILLS)ORO NATIONAL )ANK 6% COGN, H:0 %S% 1;0 -&981. ;1&

F&: 2 cases cnslidated here petitiners appealed the decisins % the CD At. % pp. %r the th Air.

RN the applicabilit % the ta* bene%it rle t the rept t sharehlders % ta*es %r hich the ere liablebt that ere riginall paid b the crps & t the distribtin % e*pensed assets in a crprate li>idatin.Issue: Khat is the applicabilit % the ta* bene%it rle t 2 crprate ta* sitatinsF (1) the repaent t thesharehlders % ta*es %r hich the ere liable bt that ere riginall paid b the crpratinG and (2) thedistribtin % e*pensed assets in a crprate li>idatin.'&$at: he At. held that the ta* bene%it rle re>ired the recgnitin % ince in the case cncerning theli>idatin bt nt in the case cncerning the ta* re%nd. (2) n the li>idatin case, the At. re!ersed thedecisin % the ler At. and held that the li>idating crp. st inclde in ince the ant % thenarranted dedctin b?c 26 C.D.A.D. ''6 did nt pre!ent the applicatin % the ta* bene%it rle. he At.reanded %r a deterinatin % the prper increase in ta*able ince. (1) n the case cncerning the ta*re%nd, the At. sipl re!ersed b?c a redeterinatin as sght in the a* At. he At. re!ersed the

decisin % the ler At. and held that the dedctible di!idend as peritted hen the ne, thghinitiall paid int the state treasr, ltiatel reached the sharehlder.

C$ &2 ' )SINESS "ROFIT SEEKIN# E!"ENSES 2H& ( 2;:

I%"RO)LES

&% Aase-a. 8edct salar & bns pd t L

&. 162(a)(1)2. Hactrs %r reasnable cpensatin (p. 25/)1. ns - 162(h)

-5. (a) change, i% AEs bsiness ere incrp. & A is sle sharehlder % the crp.2% Hinn

-a. $25k dedctibleL Ana itt M carring n trade bsiness-5. $20k dedctibleL Oes, cld be part % his iage.

1% Dall & Da - Nach incr air%are e*penses % $500, htel charges % $600, & rese riting saplepreparatin $100. Dall recei!es & accepts a 4b %%er.-a. Dall M clerking in a 4dicial clerkship, s she ld be carring n a bsiness trade (crrentl

carring n the trade r bsiness she is crrentl seeking a 4b).&.


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a% Dightseeing desnEt atter b?c as priaril lking %r a 4b.-5.@O 7a %ir pas DallEs transprtatin & htel cst.

&. Re!. Rling 5-120 M ? indicating hether the inter!ieee as engaged in a trade r bsiness,held the reibrseent recEd b an inter!ieee as nt .

-*. Da debatable.H% IarkEs t! clthes dedctibleL

-a.@, b4ecti!e test, i% the clthes can be rn %r general se than canEt dedct the cst % the clthes(pg. 256) M Re!. Rling 0-//.

?% ireents %r the dedctin % csts assciated ? bsinessF


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he cst st be an e*pense:he e*pense st be rdinar:t st be necessar:t st be paid r incrred dring the ta*able ear:

t st be paid r incrred in carring n: a trade r bsiness.:

&% Th E


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W his csts ere nt rdinar: ?in the eaning % 162.

Dancer v. omm3n(19+0) M the At. alled a dedctin %r the csts a < incrred in settling anegligence actin arising %r an car accident hich ccrred hile he as tra!eling n bsiness. hecrt ntedF the e*penditre in the instant case did nt %rther petitinerEs bsiness in an ecnic

senseG nr is it the tpe % e*penditre that an bsinesses are called pn t pa. @either %actrlessens the direct relatinship b?t the e*penditre & the bsiness. Aar tra!el b the petitiner as anintegral part % his bsiness. Asts incrred as a reslt % sch an incident are 4st as ch a part %!erall bsiness e*penses as the cst % %el.

5% Is th E


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Khere parties are related, shi%ting ince %r ne part t the ther a be ad!antages.Arp. separate ta*able entit, pr%its generated b the crp. are ta*ed t it & pr%its distribted asdi!idends b the crp. are ta*ed t the sharehlders.

8ble ta* can be eliinated i% the crp. can sccess%ll characteri;e its distribtins tsharehlders r their %ail ebers as dedctible salaries r cpensatinG hence, theteptatin t disgise di!idends as dedctible ages.

!lliots Inc. v. omm3n(9thAir. 19+') M the reasnableness % cpensatin paid t a share-hlder-eplee, particlarl a sle sharehlder, shld be e!alated %r the perspecti!e % a hptheticalindependent in!estrF hether an inacti!e, independent in!estr ld be illing t cpensate theeplee as he as cpensated.Arts ha!e ses cbinatin % %actrs as rele!ant t the deterinatin % reasnablenessF

(a) the psitin held b the epleeG (b) hrs rked & dties per%redG (c) the general iprtance % the eplee t the sccess % the cpanG (d) a cparisn % past dties & salar ? crrent respnsibilities & cpensatinG (e) a cparisn % the epleeEs

(%) the si;e % the c., the cple*ities % the c.Es bsiness & the general ecnic cnditinsG

(g) the e*istence % a ptentiall e*plitable relatinship b?t the ta*paing c. & its epleesG&(h) e*istence % a bns sste that distribtes all r nearl all % the pre-ta* earnings % the c.

@ single %actr is deterinati!eG rather, the eplent sitatin st be !ieed as a hle.ndirect arket test M i% the rate % retrn is e*treel high, it ill be di%%iclt t pr!e that theanager is being !erpaid.Menards Inc. v. omm3n(200/) M RD arged that the cpensatin paid b the < t its ANS asnt reasnable & t?% disalled part % the dedctin claied b the cpan nder 162. he al t 5 % the


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5% Th PCarring OnQ R4ir+nt

8e!elpent % ne bsiness in!l!es 2 stages be%re the trade r bsiness beces peratinalFn the in!estigatr stage, a persn a re!ie !aris kinds % bsiness be%re deciding t ac>irer t enter int a speci%ic bsiness.

Fran v. omm3n(195') M < h sght t prchase & perate a nespaper r radi statin.< ltiatel prchased a nespaper, bt ade ners trips t cities t in!estigate pssibleprchases incrring tra!el & legal e*penses. hese e*penses 3 dedctible nder 162 b?c ntrelated t the cndct % the bsiness that the ere engaged in bt ere preparatr t lcatinga bsiness !entre % their n. he e*pense % in!estigating & lking %r a ne bsiness &trips prapartr t entering a bsiness are nt dedctible as rdinar & necessar bsinesse*pense incrred in carring n a trade r bsiness.

7egislati!e h* % 195, address s called start p e*pensesF siness in!estigatr e*penses generall are nndedctible regardless % hether the are

incrred b an e*isting bsiness in relatin t anther bsiness r b a < h is nt in anbsiness (can dedct e*pense incrred %r in!estigatins int ac>iring a speci%ic bsiness)

Decnd stage ccrs a%ter the < has decided t ac>ire r establish a speci%ic bsiness &cences preparatins %r its peratin.

$ichmond elevision or#. v. 9.*.(1965) M < sght t dedct certain persnnel traininge*penses incrred prir t recei!ing the HAA license necessar t perate. At. held e!en thgh< has ade a %ir decisin t enter int bsiness & !er a cnsiderable pd r tie speng $ inpreparatin %r entering that bsiness, he still has nt engaged in carring n an trade rbsiness ?in the intendent % 162(a) ntil sch tie as the bsiness has begn t %nctin asa ging cncern & per%red thse acti!ities %r hich it as rgani;ed.

Dtart-p csts pr!ide bene%its lng bend the crrent ta* ear & t?%, shld nt be crrentl dedctible

Dch e*penses are analgs t the csts incrred in ac>iring an e*isting bsiness, r bldgs. &

e>ipent %r an e*isting bsiness. ls pre!ents < %r dedcting persnal e*penses.

*% &9? th A4thoriation of Crtain "r(Oprational or Start(p Costs

195 peritted < t elect t arti;e bsiness start-p e*penditres !er a pd % nt less than 60 s.

200/ aended 195 t all a < t dedct p t $5k % start-p e*penditres in the ta*able r in hichthe acti!e trade r bsiness begins.

he $5k at is redced bt nt bel 0 b the at t start-p e*penditres e*ceed $50k.

he reainder % start-p e*penditres are arti;ed !er a 1+0- pd beginning ? the nth inhich the acti!e trade r bsiness begins.@teF t clai a crrent dedctin %r r t arti;e start-p e*penditres nder 195, ne st

actall engage in the trade r bsiness. N*penditres eligible %r arti;atin st satis% 2 re>sF

he e*penditre st be pd r incrred in cnnectin ? creating, r in!estigating the creatin rac>isitin %, a trade r bsiness entered int b the


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he cts & ser!ice agree that a < a be in the trade r bsiness % being an eplee & an epleecan ha!e re than 1 trade r bsiness.

8edctible eplee bsiness e*penses (i.e. rese csts, pstage) are generall 78 & sb4ect tthe 2 %lr ipsed b 6.

he scpe % the epleeEs crrent trade r bsiness is b!isl critical in e!alating the dedctibilit% csts incrred in seeking ne eplent.

rimuth v. omm3nM < as the secretar-treasre %r a sall crp.


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nder e*ainatin had been epled b pet. %r '0= rs. Hr 19'2 & 19'', he claied salaries &e*penses incident t lking a%ter his prperties as dedctible nder 2'(a). AEn re%sed dedctins.a* ard held that these acti!ities 3 carring n a bsiness.'&$at: deterine hether the acti!ities % a < are carring n a bsiness: re>ires an e*ainatin %

the %acts in each case. ired a be, sch %acts are nt s%%icient as a atter % la t perit the cts t re!erse the decisin.

COGN 6% #ROETIN#ER -&98;. 2:8

F&: 19+ resp. de!ted 60-+0 hrs ?k agering n dg races. @ ther eplent & tried t ake ali!ing ding sch. rss innings % $0k n bets % $2k %r a net gabling lss % $2k. Reprted hislss n 19+ ta* retrn, he didnEt tili;e it in cpting his r clai it as a dedctin. a* At held heas in the trade r bsiness % gabling.'&$at: (1) the stattr rds % trade r bsiness: is brad & cprehensi!e & (2) that, h?e, e*pensesincident t caring %r neEs n in!estents, e!en thgh that endea!r is %ll-tie, are nt dedctible as

pd r incrred in carring n a trade r bsinessG (') that the ppsite cnclsin a %ll %r an acti!etrader. t be engaged in a trade r bsiness, the < st be in!l!ed in the acti!it ? cntinit &reglarit & that the ali%ing as a trade r bsiness.

ra!el e*penses are dedctible i% the priar prpse %r the trip is t seek ne eplent.

"E@SNER 6% COGN -&980. 2;1

F&: < anager % enEs clthing stre, OD7. as t ear the clthes as part % her 4b. < desnt ear the at he, & nl %r rk. Althes can be rn at ther ties than %r 4st rk.Issue: Khether the < can dedct as rdinar & necessar bsiness e*pense the cst % prchasing &aintaining OD7 clthes & accessries rn b the < in her eplentL$ule: he cst % clthing is dedctible as a bsiness e*pense nl i%F (1) the clthing is % a tpe

speci%icall re>ired as a cnditin % eplent, (2) it is nt adaptable t general sage as rdinarclthingG and (') it is nt s rn./onnely v" #omm$n(1959).'&$at: < eets re>ireent (1) and ('). ?e, 3 (2). At. ses an b4ecti!e test here n re%erence is adet the indi!idal


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C$ &1 ' CA"ITAL E!"ENDITRES 2;; ' 108

I%"RO)LES

&% Janet ade e*penditres this ear %r a restarant she ned. N*pense r capital e*penditreL

-a. $10,000 t repaint the e*terir % the restarant. Reg. 162-/, repairs r aintenance, hich d ntateriall add t !ale r appreciabl prlng se%l li%e, are dedctibleG replaceents ripr!eents, n the cntrar, are nt & st be capitali;ed. D4*ti5las aintenance.

-5. $12,000 t %i* daage t the ne r% cased b a tree %alling. D4*ti5lReg. 162-/, repair.-*. $'0,000 %r cpletel reiring & replbing the restarant & redeling the interir. sse

rk as dne iediatel a%ter JanetEs prchase % the restarant.&. - $10k ld *apitali2. - $12k ld 4*ti5las repair e*pense1. Re!. Rling 2001-/F ding a cplete re%rbishent, than e*penses that therise ld ha!e

be dedctible ld ha!e t be *apitali.-. $'k %r ad!ertising cnsltant Reg. 162-/(a)(1) M:abisco v" #omm$n(29') - 4*ti5l

&. $k %r nespaper, radi & tele!isin - 4*ti5l2. $/k %r a ne sign tside the restarant M *apitalib?c ipr!eent1. $1k t re!e & discard the ld sign that the ne replaced M 4*ti5lRe!. 2000- (2+5)

-. $5k %r a ne !er %r the restarant - *apitali&. installatin M part % the !en and getting it rlling M *apitali2. 1 r aintenance M 4*ti5lReg. 1.26'(a)-(/)(%)

-f. $'k annal prei %r %ire, the%t & liabilit ins. pd. at the end % the ear 1 & c!ered the 12nth perid %r Heb. 1 % ne*t ear 2 t Jan. '1 % the ear '.&. &0H: of stat4t ' os not


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II%O@ER@IEW

Khen b an asset, can rec!er the assetEs cst in a %e asFediate 8edctinF csts % assets that are sed p in ne ear can be dedcted iediatel(bsiness e*pense).

8ring 7i%e % ssetF can rec!er the cst % the asset as it is sed p.8epreciatinF tangible assets

rti;atinF intangible assets nnitiesCpn 8ispsitinF can nl rec!er the cst % the asset hen sell it (it isnEt capitali;ed becaseit desnEt ear t).

Dtck

7andA% D4*ti5l E


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Spring 2008


ngredients W sed p right aa M can dedctYNO TCNDS@F SK 7S@ D K EI CO@ S@ S 7DL

)% Dfining Capital E


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Spring 2008


c>isitin csts cnstitte capital e*penditres becase the asset prdces a lng ter bene%it (e.g.prchasing title t a bilding, achine, !ehicle, cpright, patent, etc.).

8e%ending itle

Asts incrred in de%ending title % prpert are capitali;ed (e.g. legal %ees incrred in resisting

e%%rts t cancel tradeark r in a tradeark in%ringeent actin). his incldes csts incrred inper%ecting a recentl-ac>ired title and csts incrred in the de%ense % a pre-e*isting title.Oet, hen the dispte relates t ince %r the title, it has been held dedctible (e.g. rec!eringralties).

8ispsing ssets8ispsitin csts are t be treated as capital e*penditres e*cept that csts are dedctible hen theasset is erel retired and discarded (e.g. re!ing telephne plls in rder t install ne nes --dedctible e*pense).

omm3n v. Idaho o,er o., CD Dpree Art (19/), p2+0Asts that rdinaril a be crrentl dedctible (ages, rent) a take n a di%%erent stats henthe are part % an ac>isitin cst % cnstrcted prpert. Hr e*aple, i% hire a carpenter tbild a tree hse that plan t rent t, his age is a capital e*penditre t .Apan?ta*paer can dedct %r their n e>ipent. t nl get dedctin %r sing thingsp. ere, are trning e>ipent int the %acilities. he n ha!e a ne plant %r sing thee>ipent p^ O st capitali;e i% create sething that lasts (nt 4st i% b sethingthat lasts).

@ral and rtine csts are @S capitali;ed.

n e*penditre st be capitali;ed t the e*tent that it (1) creates?enhances separate?distinct asset (2)

prdces signi%icant %tre bene%it (') is related t ac>isitin % capital asset.

RNUN@CN RC7@ 99-2', p291

N*penditres incrred in the crse % a general search %r, r in!estigatin %, an acti!e trade r

bsiness in rder t deterine hether t enter a ne bsiness and hich ne bsiness t enter(ther than csts incrred t ac>ire capital assets that are sed in the search r in!estigatin) >ali%as in!estigatr csts that are eligible %r arti;atin as start-p e*penditres nder 195.e!er, e*penditres incrred in the attept t ac>ire a speci%ic bsiness d nt >ali% as start-p e*penditres becase the are ac>isitin csts nder 26' and hence are capitali;ed.HactsF crpratin C hired an in!estent banker t e!alate the pssibilit % ac>iring a trade rbsiness nrelated t C_s e*isting bsiness.ldingF (1) cndcting research and e!alating pblicl a!ailable %inancial in% B in!estigatrcsts, becase the are sed in deciding hether t enter a bsiness. C (2) csts related tappraisals % UEs assets and re!ie % UEs bks B ac>isitin csts?capital e*penditres becasethe are incrred nce the decisin t ac>ire a speci%ic bsiness as ade.

@teF ta*paer incrring csts t in!estigate the e*pansin % an e*isting bsiness generall candedct thse csts nder 162.

2% Rpair or I+pro6+nt

Reg. 1.162-/, 1.26'(a)-1(b)F Repairs that dnEt ateriall add t !ale r appreciabl prlng se%lli%e are dedctible.

Midland !m#ire acin) om#an0 v. omm3r(1950), p2+5

Khen an ne*pected daage t a bilding ccrs, a repair that restres the bilding t its statebe%re the daage is dedctible, as lng as it des nt add !ale r appreciabl prlng the li%e %the prpert.


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Khen the repairs erel ser!e t keep the prpert in an perating cnditin !er its prbable se%lli%e %r the prpse %r hich it as sed, it is crrentl dedctible.HactsF Sil % nearb re%iner starts leaking int baseent % Iidland. he re%iner as bilt a%terIidlandEs bsiness began. Iidland il pr%s the baseent and then dedcts the csts. AEr

arges it is a capital e*pense.ldingF e*penditres %r lining baseent alls and %lr ere repairs and ths dedctible asrdinar and necessar bsiness e*penses.

RN


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Spring 2008


Nplee rainingF ill generall be dedctible bsiness e*penses, bt it st be capitali;ed in nsalcircstances here training pr!ides bene%its signi%icantl bend thse traditinall assciated ithtraining in the rdinar crse % bsiness.

1% Intangi5l Assts Aapitali;atin % ats pd t ac>ire r create an intangible, t %acilitate: the ac>isitin r creatin %

an intangible, r t create r enhance a separate & distinct asset.

Snership interests in partnerships, crpratins r ther entities, debt instrents, ptins t pr!ider ac>ire prpert, leases, patents r cprights, etc

Ast % creating intangibles st be capitali;ed.

H% Eit in the prpert.

here a be an isse, h?e, as t hether ac>isitin csts are being disgised in ters % rental: csts.

C$ &H ' DE"RECIATION 109 ' 1?0

I%"RO)LES

&% 7*r tel-a. ract % land M nn-depreciable, land des nt %all in !ale. Reg. 1.16-(a)(1)-2

&. Hilling p a hle n the land M a be seen as an ipr!eent n the land & can depreciate the!ale % the cst % the hle

-5. Hences & cncrete sidealks n the grnds % the htel.&. 7and ipr!eent Re!. Rling +6-56 (A '/')

-*. 7andscaping, inclding shrbber & trees&. 7and ipr!eent Re!. Rling +6-56 (A '/')

-. Ualable anti>e %rnishing & carpets, dcr % the pblic spaces thrgh t the htel&. 16 M depreciable b?c ear & tear in pblic places & itEs a part % the bsiness


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Spring 2008


-. 7andscape paintings %r each % the gest rs.&. Re!. Rling 6+-2'2 M sb4ect t ear & tear it shld be depreciable

2% 7i;-a. $200Y

&. Oear 1 B $/0k B $1602. Oear 2 B $6/ B $961. Oear ' B $96 basisH. Oear - $0

-5. N>ipent in ear ' i% she sells it n 8eceber '1 % that earL&. et [ ear cn!entin M 19.2 % $200, $'+./k, $19.2k2. d4sted basis - $96k - $19.2k B 6.+k

-*. Iid->arter cn!entin-. Cnder 19 she gets t e*pense $150,000 % the $200k, & nder 16+ she gets t take depreciatin

% the reaining $5k.1% Nrik M e*clded %r 19

-a. 1 cpnent the rent - $2k? dedctible nder 162(a) as bsiness e*pense-5. $10k, bns %r leasing the prpert

H%


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Spring 2008



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Spring 2008


'.6 is the straight line rate % depreciatin

Reglatin 1.16(b)-1Cnder straight line ethd

cst % prpert (r ther basis) 7NDD estiated sal!age !ale is dedctible in e>al ants!er the perid % estiated se%l li%e % the prpert

16+(b)(/) alls sal!age !ale t be treated as ;er

ccelerated 8epreciatin8eclining balance ethd

perits larger depreciatin dedctins in earl ears %rnt laded: dedctins

greater %i*ed rate % depreciatin is appliedt t the cst less the depreciatin dedctins claied %r prir ears. Reg, .16(b)-2(a)

Ist cn ethdsdble declining balance r 200

150 declining balance 8ble 8eclining alance

N*F


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Spring 2008


n prpert placed int ser!ice (r dispsed % ) dring ta* ear is deeed placed in ser!ice (rdispsed %) n the id-pint % the ta* ear 16+(d)(1) and (/)()@SNF % prpert placed in ser!ice dring the last ' nths % the ear that ha!e an aggregate basisgreater than /0 % the aggregate base % all prperties placed in ser!ice that ear

id->arter cn!entin applies Re!ene


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Spring 2008


I bs a !ilin %r 100Y. Dhe depreciates all % it !er the ear catchall perid. er basis is n ;er.% she sells it %r 100Y, she reali;es a gain % $100Y becase her basis is ;er. here%re, she st pata*es n that ant.

I bs a bilding %r $200,000, ses it %r bsiness !er 10 ears, then sells it %r $150,000. sse

she cld depreciate $5,000 %r the bilding. here%re, her ad4sted basis ld be $125,000 (200Y M5Y). ccrding t 1001, her gain ld be $25Y (150Y-125Y), e!en thgh she sld the prpert%r less than she paid %r it. Kh des she reali;e gainL ?c she sed the prpert %r 10 ears t earnince ith her bsiness.

E% &;9 ' E


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Spring 2008


pplicatinDtraight line !. dble declining balance

C$ &? ' LOSSES )AD DE)TS 1?& ' 1;?

I%"RO)LES

&% 8an bght trck %r $/0k, tk $1/k depreciatin dedctin-a. 8edct lss he incrred n the saleL Oes 165(c)(1), take ad4sted basis ($/0k - $1/./k) B 25.6k,

sld %r $2/k B $1.6k dedctible lsses-5. Csed as a persnal !ehicle nt %r bsiness M Reg. 1.262-1(b)(/) (pg 10'/), nt dedctible

&. rader pint, dedctins are a atter % legislati!e grace and canEt dedct nless can %ind asectin that sas it is dedctible

-*. 8-. 8

2% rittnie

1% Aal!inH% Iar

-a. 8-5. 8

?% nt Iabel:%


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Spring 2008


siness lsses dedcted 7

7sses n pr%it seeking t* are 7 dedctins nless the reslt %r the sale % prpert

@et perating lss rles % 12 %a!r bsiness lsses !er in!estent r ther nnbsiness lsses in thecptatin % net perating lss carrbacks & carr%rards.

165(c)(2) M t* entered int %r pr%it: M nt engh that at the tie % a sale a < as hping t ake apr%it.

ali% %r a 165dedctin.

-e,come v. omm3n(190) - 16 & 212 dedctins (depreciatin & aintenance) ere deniedhere the estin.

the e*tent a < recei!es ins. r ther cp., the lss is %%set & the dedctin redced. 165(a)% there is a reasnable prspect % rec!er: the lss is nt treated as sstained ntil the atter %reibrseent is deterined ? reasnable certaint.: Reg. 1.165-1(d)(2) & 1.165-1(d)(').

H% Disallo7 Losss


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Spring 2008


26(a)(1) disalling lsses n related part: sales r e*changes

1091 dening lsses n ash sales: % stck r secrities.

)% )a D5ts

166 alls a dedctin %r debts becing rthless ?in the ta*able r3 dra a distinctin b?t crprate & indi!idal ire cnsideratin % all pertinent e!idence: ? regard t the deterinatin % rthlessness.

6511 pr!ides r DS7 %r re%nd clais nder 166.

1% )4sinss or Non(54sinss D5ts

166(b) M distingishes b?t bsiness & nn-bsiness debts

siness debtsare dedctible nder 166(a)(1) in the r the bece hll rthless.ired incnnectin ?


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Spring 2008


% eplee can denstrate that a lan t neEs epler is in e%%ect re>ired t ensre cntinedeplent, the lan is a bsiness debt arising t % the trade r bsiness % being an eplee.rent v. omm3n (1961).

he lan st bear a pr*iate relatinship t the


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Spring 2008


*ituation +M P prchases e*clsi!e right %r the reainder % the cpright ter t script. 200/ P ill ntset script %r prdctin, & rites %% the cst % ac>iring & de!elping script. P retains all rights t thescript inde%initel. V 4*ti5l*ituation 2M 200', P prchase liited e*plitatin rights t se screenpla b in the prdctin % tin

pictre. ers % prchase agreeent, all % PEs right e*pire i% screenpla b s nt set %r prdctin ?in%r ears %r the date % the agreeent. @t set %r prdctin, PEs rights e*pire. P rites %% in 2006.onl 4*ti5l in 200; 7hn rights iring & de!elping creati!e prpert as a lss nder 165(a)

i% the < des nt establish an intentin t abandn the prpert & an a%%irati!e act % abandnent, ridenti%iable e!ent(s) e!idencing a clsed & cpleted t* establishing rthlessness.

%S% 6% #ENERES -&9;&. 1:9

F&: 8ebt held b crp. ed t sharehlder-epler becae rthless in 1962.Issue: Khether, %r the sharehlder-eplee, that rthless bligatin as a bsiness r nn-bsiness baddebt ?in the eaning & reach % 166(a) & (d).$ule: Ist be dinant bsiness ti!atin.'&$at: rns n the pr*iate relatin. s it a dinant bsiness ti!atin r a signi%icant.

C$ &: ' TRA@EL E!"ENSES 1;; ' H0H

I%"RO)LES

&% 8ick-a.@, this is cting and 3 dedctible nder 262-5. Dbrbia r srrnding areas, csts t !isit clients M Oes, tep. rk lcatins inside r tside %

etr area.&. Hr he t client, t rk B can dedct e!erthing2. % he, t rk then client B canEt dedct he t rk, bt can dedct rk t client.

-*. 8ri!e %r he t client in either sbrbia r anther tn, a 8 dedct cstsL Oes&. 8i%%erent i% 8Es %%ice ere in his he rather than being lcated elsehereL @.

-. Oes.-. 8edct ealsL M @ b?c nt spending !ernight.

2% Nlaine1% le*isH% 8an?% Iarc

II%O@ER@IEW

A% Co++4ting


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he chice % here ne li!es is generall persnal.

Ating csts are !ieed as persnal in natre & nndedctible nder 262.

AEn !. Hlers (19/6) M Dp. At. denied a dedctin %r tra!el e*penses t a < h li!ed inJacksn, ID, bt h rked in Ibile, 7, he cld d st % his rk in Jacksn, bt anted tdedct the e*pense hen he had t rk in Ibile.

(ationale;t be dedctible, a tra!el e*pense st satis%

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