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Kahn Probs and Answers

Kahn Probs and Answers

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PROBLEM SET # 1

1. Jessica is an associate with a large law firm in Chicago. Generally, Jessica¶s work period ends at 5:00 PM on weekdays. However, when an assignment needs to be completed within a specified time, and if the assignment cannot be completed within that time if the normal working hours are followed, the firm requires its employees to work as late into the night as is necessary. When that occurs, and it occurs frequently, the firm will reimburse an employee for the amount the employee expended to purchase supper in one of several nearby restaurants. Is the reimbursement that Jessica received for the cost of having supper income to Jessica? This is meal is (1) not furnished by the employer and (2) not on the premises. Thus, IRC § 119 DOES NOT apply. However, the de minimis exception, IRC § 132(a)(4), may apply. o How infrequent is it?  NOTE difference between statute and reg. y IRC § 132(3) look at all employees y Reg only go to all employees if can¶t find frequency for specific employee. Suppose now that Jessica comes to make out a tax return and explains that she has frequent meals @ work. I know that IRS never seems to enforce this provision as a practical matter. What do you do then? o KHAN says play by the rules, and likened this to speeding. Is a law a law if not enforced?

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2. The same facts as those stated in Question 1 except that the law firm purchases dinners from a nearby restaurant and has the meals delivered to the employees at their desks in the firm¶s office. Does Jessica have income from the receipt of a meal on the days she works late at the firm? Would it matter to the determination of the tax question whether the law firm ordered the same meal for everyone who was working late or whether the employees were permitted to select their meal from a menu provided by the restaurant? See § IRC 119. The meal is on premises and for convenience of employer. It is not income. o Convenience of empoloyer substantial noncompensatory purpose. Reg 1.1191(a)(2)(i).  Meals for both noncompensatory AND compensatory purpose STILL excludable! Reg 1.119-1(a)(2)(i).  See Reg. 1.119(a)(2)(ii)(a)-(d) for examples of convenience y Emergency call; short meal period; employee¶s inability to get meals reasonably within meal period; food service/restaurant.

3. The same facts as those stated in Question 1 except that Jessica is not required to work late, but she does so voluntarily. The firm reimburses its employees for supper costs incurred on days when they work late on projects that are subject to time constraints. Are the reimbursements income to Jessica? This is probably not income. KAHN thinks that the meal can be SELF IMPOSED by the employee as well as ORDERED by the employer. o The fact that the employee may accept or decline such meals is not taken into account. See IRC § 119(b)(2).

4. Peter is an officer of Joy Unlimited, Inc., a toy manufacturing company. In December, 2000, Joy Unlimited and Peter came to an agreement concerning his salary for that year and for future years. Joy agreed that Peter was to receive his salary free and clear of any federal income taxes. To accomplish that, Joy agreed to pay to the Internal Revenue Service any federal income tax that Peter incurred because of his salary. Peter¶s salary for the calendar year 2000 was $350,000. Peter had almost $70,000 of other income in addition to his salary. The federal income tax on the salary he received from Joy was determined to be $95,000. Peter filed his tax return for the year 2000 on April 14, 2001, and he enclosed a check drawn by his employer, Joy, in the amount of $95,000 plus Peter¶s own check for the additional amount of federal income tax that he owed. What was the tax consequence of this transaction to Peter? Since there is no exception to cover this income, Peter must include include it for tax year 2001. He would pay tax on this in 2002. This would end up causing pyramiding income (paying the tax on the taxable income year after year). The SCOTUS in a case like this (Old Colony) decided to decide later. KAHN thinks this is wrong. SCOTUS should have said ³we don¶t care whether it pyramids´ ± IT¶S INCOME! o Side notes  Tax rate insurance y Suppose you get reimbursed for tax. KAHN thinks this is not income. But, insurance contracts usually have a rider to pay extra for the extra tax to compensate for pyramiding. y If the tax from paying all at once and pyramiding are the same, you¶re better off pyramiding.

5. Sarah Thomas hired a domestic maid to clean her house, cook meals, wash, iron, etc. In addition to a regular salary, Sarah provides meals for the maid during the period that she is working at Sarah's home. Are these meals income to the maid? Would the maid realize taxable income if Sarah provided breakfast for her when she arrived in the morning, before she commenced work? The meals provided during working hours are excludable from gross income. § 119(a). o For convenience? Yes. o On business premises? Yes.  Business premises place where the employee works. The meals before work are probably income. o Meals immediately before or after work are generally not for convenience of employer. Reg. 1.119-1(a)(2)

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There is an exclusion for meals immediately before work for food service workers, Reg. 1.119-1(a)(2)(d), but Sarah probably does not qualify.

6. An historical society owns a house in Philadelphia that was once owned and occupied by a former president of the United States. During the day, the house is open to the public. The Society is concerned that if the house is left unoccupied at night, it will be burglarized or vandalized. To prevent that from occurring, the Society employs Ralph to live in the house at night. The Society permits Ralph to live in the house with his wife, but he is required to be there only outside of the visiting hours. Outside of visiting hours, Ralph and his wife can occupy any part of the house they wish, including the kitchen; but during visiting hours, they are limited to a part of the house that is not open to the public. Ralph receives no compensation for his services other than the use of the house. What are the tax consequences to Ralph? To Ralph¶s wife? Ralph and his spouse can live in the house without attributing it to his gross income because he is required to live there as a condition of his employment. IRC § 119(a)(2). o On business premises yes o For convenience of employer? yes. Facilitates work. o Required for employment? yes. Problem ± is there any doubt in your mind that this is compensatory? o Reg. 1.119-1 does not address this with lodging, but wrt meals, if there is both a noncompensatory AND a compensatory purpose, it is still excludable from income.

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7. George is hired to be the manager of the Ocean View Apartments in Daytona Beach, Florida. The employer requires George to live on the premises of the apartment complex. George informs the employer that he is married, and that he has two young children (ages 2 and 4) who live with him and his wife. In addition, George¶s mother-in-law also lives with him, and so does his cat. The employer then offers to rent George a three-bedroom apartment in the complex for a monthly rental of $300. Comparable apartments in the building rent for $2,200 a month. The employer requires George to rent the apartment as a condition of holding his job. George accepts, and he, his wife, two children, mother-inlaw, and cat all move into the apartment. George is paid a salary of $5,000 per month. In addition, the employer pays George a cash allowance of $150 a month to pay for meals for George and his family. What amount of gross income does George have because of these transactions? Kahn thinks only $4700 is income. o If you are charged an unvarying amount for meal or lodging, then it is not treated as part of your compensation. See Reg. 1.119-1(b).  THEN see if the value of the lodging is excluded altogether. Id Wife, dependent kids are excludable under IRC § 119(a). o For dependents, see IRC § 152. The mother in law may or not qualify as a dependent depending on the facts. See IRC § 152. o If the mother in law is NOT a dependent, George would have to pay tax on her living there. Regs. Under IRC § 61 discuss this. KAHN thinks it would be very harsh for the IRS to tax George.

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o There is an adjustment for inflation.75. What are the tax consequences to Steve if he picks option (a) or option (b)? If Steve chooses option (a). The same facts as those stated in Question 7 except that the employer does not provide George a cash allowance for meals. 9.- The cat is like moving furniture. see IRC § 132(f)(3). Steve is an employee at Corporation Inc. o Look at Reg. George and his family receive their meals without any charge. - . If Steve just takes the $150 and doesn¶t park. 10. Corporation Inc. This can be excluded. 8. Instead. 1. The average price of a meal is $5.1191(a)(2)(d). See IRC § 132(f)(4). there is a SPLIT on this. What tax consequence to John? John¶s meals are excluded because of the food service worker provision in Reg. o If they were using the $150 to buy groceries. what are the tax consequences if Steve personally pays for the parking spot and Corporation Inc. Since this is a reimbursement. IRC § 132(b)(6) If Steve is reimbursed. No tax. it is not income to him. What is the tax consequence to George and his family? IRC § 119 is a generous rule. this is clearly income. he must report it as imcome. o The wife and children would probably be included because of the meals and lodging provision read into the statute. reimburses Steve for the payment? If steve picks the parking space. 1.¶s San Francisco office. Although other occupants of the apartments pay a fee for the meals they receive in the Dining Room. John receives no cash compensation for his work but receives his meals free. the employer permits George and his family to take their meals at a dining room that is on the first floor of the apartment building and is operated by George¶s employer for the occupants of the apartments. offers Steve a choice of benefits: (a) a monthly parking spot in downtown San Francisco (normally the parking garage charges $150 a month for a monthly spot) or (b) $150 cash per month. He is employed at the school cafeteria. What about the $150? o Employer must furnish the meals in kind. John Hill is a student at the University of North Carolina. See IRC § 132. It depends on how narrowly or broadly the judge reads it. It is under the limit of $175/mo. He is required to eat his meals in the cafeteria immediately before mealtime.119 cash receipts for meals/lodging are income to the extent that they are compensation.

Ralph and Helen have been friends since childhood.000 for the land and the home.000. In 2001. Malcolm realized income of $20. the FMV of such services taken in payment must be included in income as compensation. Malcolm offered to pay Helen for her services. The divorce became final in Year Two.5 1. He is in need of cash and.000. There is no reason why Al would compensate Joe. Joe takes this with a basis of $34k. In Year One. In 1992. and the gain/loss on the part of the entire property sold is the difference between the selling price and the cost or other basis of each part. and she contacted Malcolm to represent her. Helen would have liked to charge Malcolm. Helen told Malcolm that there was no charge for her services. Malcolm refused payment. Helen is a lawyer who specializes in divorce.000. Three months later. The sale of each part is a separate transaction.PROBLEM SET #1.  In year one. Reg. you must apportion the land equitably 3. The home itself was worth $150. after a series of sessions with hard driving realtor Joe Babcock. 2. the cost or other basis of the entire property shall be equitably apportioned among the several parts.000. Reg. and the gain/loss shall be determined at the time of sale of each part. saying that they had been friends for so long that he did not wish to charge her.61(2)(d). Malcolm and his wife had a terrible argument and decided to divorce. whatever price they choose represents the price of the property. 1. Her normal fee for the services involved in Malcolm¶s divorce would be $20. Selling 3 acres of land for $100k with a basis of $50k is $50k in income to Boswell. he sells out to Joe for $34. He paid $250.61(6)(a).666 per acre. The home was sold. and Helen offered to pay Malcolm for his services. the land must be worth $100k. o Think: if some land is worth more than other parts of land. What were the tax consequences of these transactions to Malcolm and to Helen? o Rule: If services are paid for in exchange for other services. Boswell sold off 3 acres to Carter for $100.000. Boswell purchased a home in the suburbs on 6 acres of choice land.000. What gain does Joe recognize on his bargain purchase? Joe does not realize any gain o Is this disguised compensation? NO! they are dealing at arm¶s length. Al Slone owns a house worth $42.000. Helen realized income of $14. o If the home was worth $150k. 1. and she did so. Malcolm is a real estate agent. Any gain to Boswell on his sale to Carter? Rule: When a part of a larger property is sold. Malcolm asked Helen to represent him in the divorce. If people are operating at arm¶s length. .000. and in year two. Malcolm¶s normal fee for selling a comparable house would have been $14. or $16. but she felt constrained not to charge him because of his refusal to charge her the previous year. Helen decided to sell her home.

Helen felt constrained to perform. The question is ³is this an exchange and not mutual gifts?´ y Malcom seemed to give a true gift. 4. Kahn knows of no cases that have taxed this. Clear to Kahn that these are not compensatory exchanges. o KAHN thinks the kid working at home would not be income. and he also earned $4. o EXAMPLE: are married couples exchanging chores recognizing income?  No. People are sharing duties in a common goal.  If in the form of a wage. Wyatt. y Measuring it would be ghastly y One aspect is that marriage is like a joint enterprise. but Kahn thinks it will be Reg¶d. Wyatt earned $20 from his parents for each week of the year. it can be argued that it is a commercial activity which is taxable. y Nobody has ever written a suggestion that this is an exception.  Illustrations y We have X and Y living in an urban environment and want to raise vegetables. they take turns doing each other¶s work. They pay Wyatt a weekly salary of $20 for these services. y Babysitting situation not a formal club. o Income tax law is designed to regulate COMMERICAL TRANSACITONS ± some kind of professional activity. . take out the garbage. What amount of gross income did Wyatt have in Year One? o $4. and clean his bedroom. They employ Wyatt to mow the lawn. o Technicically. just one neighbor exchanges sitting with another neighbor. Rather than each of them doing their own. probably not. But KAHN thinks this is not taxable because it is not in a commercial market. Each of them independently buys an area of land in a suburb where there is vacant land and they plant a garden. They have to leave their home to go out there and garden. In Year One.000 for part-time work he did at a local grocery store. Robert and Susan have a 16 year-old son. But. this is an exchange of services. does that substantively make it a wage? y Just within the family. More like a gift. o BUT if you are in a barter club and it is formalized.000 for grocery store.

but the terms of the sale permit Seller to occupy the building.000). y What about the seller? He is constructively paying rent of $550k for use of 4 years. y It would be harsh to say the whole thing is gain. Also lost in the fire were all of his records containing the dates of purchase and cost of all of his corporate stocks.000. o The building must have been worth more than a million.000 per year.000.  Taking an average might be very generous. and Buyer won¶t get to use it for 4 years. The fair rental value of the building is $150.  (Sale ± basis) for the building o KAHN SAYS:  ONE WAY TO LOOK @ IT y We need to know the amount realized from the sale. Rent for the building for 4 years is worth 545. In 2002. and these dates and costs cannot be determined.000) for the building. During the period 1961 through 1975 Allen purchased corporate stock. Buyer paid Seller One Million Dollars ($1.000.545.000. Allen sells all of the stocks. y Wouldn¶t want to leave him with advantage. but he has to amortize . KAHN thinks lowest. rent free. Is that what happened here? y Extra amortization? WHAT WENT ON HERE? CHECK. Why bother exchanging checks. unless excluded by law « includes intangible items (in this case.616(a) ± gain realized on the sale « is included in gross income. Does Allen realize any gain on this sale? o Yes.  Buyer has income there y Concept of present value of money ± pay tax now and get it back over 30 years is not equivalent.000 per year. Allen's office was destroyed in a fire in 1999. Buyer says I¶ll pay you 1. o Regs say prepayment of rent is income. He can deduct this rent. but Seller wants to pay up front (present value ± was discounted from $600.000 to $545. for four years. It puts the burden of proof of basis on taxpayer. let¶s just sell for $1mm. y Then there was a prepayment of rent. What are the tax consequences of this transaction to Buyer and to Seller? o To Buyer  Nothing? o To Seller  Seller is taxed on FMV of rental value at 150. The tax law requires you to keep records.545. y Let¶s assume the building is worth 1. See Reg. but at least give him credit for some basis. Buyer purchased an office building from Seller.5. 1. rent) «.  6. o How about taking the lowest price? KAHN doesn¶t know what they do for sure.



it over a four year period. He¶s converted the cash into an asset, and has to amortize it over 4 years. o This might be a better deal for the seller, a long term capital gain which has lower rates. ANOTHER WAY TO LOOK AT IT y You¶re a seller, retain the first four years. You¶ve sold a future (remainder) interest in the property. o In that case, he¶d have to allocate this basis. Keep it on the four year he retained, the rest of the basis would go on what he sold, and then measure the baiss with that. y Dramatic tax consequence realized. o Lower basis, not as big a gain as using $1.5 million. o Constructive rent = no ordinary deductions y How decide which scenario to use? o Look at the economic aspects of what actually takes place. You might not fool people.

PROBLEM SET #2
1. X negligently operated his automobile which resulted in Y¶s suffering physical injuries. Y sued X for damages. In a decision by the trial judge (sitting without a jury), Y obtained a judgment for $1,650,000, which was the total of the specific amounts listed below. X paid Y the amount of the judgment. What amount of the payment to Y is included in Y¶s gross income? $325,000 $600,000 $400,000 $200,000 $125,000 $1,650,000 for wages that Y did not earn prior to the judgment because of her injuries for future wages that the court determined Y will not earn because of her injuries for pain and suffering for emotional harm that Y suffered reimbursement of Y¶s medical expenses Total amount of award

o The scope of inclusion of 104(a)(2) is very broad. The following would be excluded from GI:  Lost wages ($325k) and lost future earnings ($600k)  Pain and suffering ($400k) o These are debatable:  Reimbursement for medical expenses were these deducted in the prior tax year?  Emotional harm did it stem from the physical harm? o KAHN SAYS:  What about the wages? How justify not taxing this? y Not usually gonna be verdict broken out like this. Usually get a lump sum. Harsh to not tax lump sum, but not here. 2. R owned an antique vase which had a value of $15,000. R¶s basis in the vase was $4,000. T negligently caused the destruction of the vase when it was being transported to a museum to be displayed on a temporary loan. T¶s insurer paid R $15,000 cash to compensate for the loss of the vase. What amount of that payment is income to R? o The income is $11k. Value ($15k) ± basis ($4k) = $11k.  KAHN SAYS y Hard to find a particular provision that says to exclude basis, even though it makes sense to do so. It¶s not a constructive purchase. y As long as R owned property similar to vase, he can avoid taxes. IRC § 1033. We will get into this later. y What if R insured the vase for $15k? Is he taxed on this? o No. There is nothing that says this though! It¶s just assumed.  A lot of professors say he should be taxed

 3. D was sued by P for physical damages caused by D¶s negligent operation of an automobile. The case was tried to a jury, and D requested the judge to give the following two instructions to the jury. How should the judge rule? (1) The judge should inform the jury that P will not have to pay any federal income tax on any of the damages they award to P.    Too broad ± should explain that it is not included in income for physical injury. This also might make the jury award less. Why even say it at all? KAHN THINKS y Everyone should get the same instruction o

(2) In determining the amount of income P lost because of his injuries, the jury should take into account the amount of income taxes that P would have paid on that income, and only the net amount remaining after payment of taxes should be awarded to P.  No, courts don¶t do this. y It¶s not really compensating for lost wages ± it¶s just a proxy for the loss. y Why should we take the tax exclusion which was intended to the benefit of the injured party and give it to the tortfeasor? o Counter: maybe state law does not care about this. This is federal law. y In real life, there has been a division of results o Last time KAHN looked «  28 disallowed evidence of wages and taxes  6 allowed it y There is a SCOTUS case on this. o Involved FELA and tort injuries to railroad employees. o SCOTUS said tell jury not taxable  Required that allow evidence in determining wages o Federal courts since then have said this is limited to the FELA  Some say it depends on TP¶s bracket

4. M sued Q for employment discrimination. M obtained a judgment for $300,000 compensatory damages and $600,000 punitive damages. The compensatory damages were for lost income and for emotional harm and mental stress. What amount of that award is included in M¶s gross income when paid? o All of it.  Discrimination is not a physical injury, IRC § 104(a) does not cover it.

5. uses the words allowable and allowed as terms of art. or does it not matter? .000 $300. How much of that $400. Larry sued David for damages in tort. punitive damages are clearly income. y 100K in medical expenses and 0 income. Larry was physically injured by David¶s negligent operation of an automobile.000 $400.000 $1. y If he had 80k in income and 70k in deductions apart from the deductions « o He only would have been able to deduct 10k for medical.  The code.000 settlement is included in Larry¶s gross income? o If no allocation is made in a settlement agreement. o He could file a return to show the deduction.000 compensatory damages and $500. o If she got medical care.000 $100. The settlement did not state how much was paid for the several items for which Larry had requested damages. Z sued K for personal defamation because of statements that K had made about Z¶s moral character.  40% of $400k = $160k o Emotional harm and pain and suffering is debatable  30% of $400k = $120k o KAHN SAYS ± kind of off topic «  Medical e expenses might be taxed. What amount of that award is included in Z¶s gross income when paid? o All of it.000 Loss of income due to the injuries (20%) Emotional harm and pain and suffering (30%) Medical expenses incurred (10%) Punitive damages (40%) Total damages requested  Larry and David settled the law suit by David¶s paying Larry $400. We need to be very careful with these. and Larry¶s complaint listed the following request for damages: $200. Z obtained a judgment for $25.000 punitive damages. the payment will often be often be allocated in the ratio requested in plaintiff¶s complaint.The 1996 amendments to § 104(a) make nearly all punitive damages taxable. and the wrongful death exception does not apply here. y Allowable permissible y Allowed a deduction was taken  Suppose he took a deduction for medical expenses and had no income. he wouldn¶t save anything. as long as not in excess to medical PAID.000. not in excess of deductions ALLOWED under § 213 for medical expenses.000. in § 104(a) says. 6. y So do we only deduct that part for which he took the benefit.

Wilma obtained a settlement from George for the damages she suffered.  Weird but true.g. so they only got compensatory. .o KAHN SAYS ± about this problem «  Use the ratio in the complaint y 40% of 400k = $160k y This is similar to what happened in Glenshaw  Might say ± they asked for $600 compensatory and only got $400. George paid the judgment.  In this case. Wilma was seriously physically injured by George¶s negligence. sued George for the damages Harold incurred as a consequence of the injuries that Wilma had suffered. loss of consortium y letter ruling says this is ALL excludable from GI y rememeber. Harold obtained a judgment against George for $250. Harold. even more suspect.000 for loss of consortium. Same basis as consortium.  1 or 2 cases involving anti-trust awards 7. y Court will make a determination o This is most expensive and cumbersome. How much of the payment to Harold is included in Harold¶s gross income. Maybe not great policy. $250k would be excluded from Harold¶s income. but it policy might be headed this way. Wilma¶s husband. They never even got all the compensatory  Another possibility ± PROVE to me what your compensatory damages are. PLR 200121031.  Emotional harm? y This is allowable too. but given the conference committee report. generally not done. If not coming from Washington. and another $100.000 for the emotional harm that Harold suffered because of Wilma¶s injuries. be cautious to the weight you give PLRs. should it be included in Harold¶s gross income or in Wilma¶s? o Damages received by an individual for loss of consortium due to the physical injury of a spouse are excludable from gross income even if they are not the ones injured.  PLR 2001121031 y Two different kinds of suits o Survivorship  Sue on behalf of plaintiff FOR death o Wrongful death  People who suffered loss BECAUSE of death y e.  ANSWER: This will be excluded. o Emotional damages are also excluded in the gross income because they are a derivative of the wife¶s injury. o KAHN SAYS «  His own reaction is that it should NOT cover this. If any part of the payment is income.

The award included $15. she will invest that amount with an insurance company to purchase an annuity for a ten-year period. X has offered your client a choice of: (1) receiving a lump sum of $500.000 if she should choose that option. y But hey. Which of the alternatives that X has offered your client would you advise your client to take? o Take the installments.  Total is around 22k less than if she took the yearly payments. none of which has been deducted by your client.  The $500k is not taxed.000 in medical expenses. o All interest is taxble o KAHN says «  Look at IRC § 104.8.000 is a good figure for settlement. income of 21k @ 35% rate. but o KAHN SAYS «  Take the annual payments. . and so risk of nonpayment is not a factor in making her choice.250 each year for 10 years.000 for the next ten years. Your client¶s other income places her in the 35% marginal tax bracket (the top tax bracket for an individual). Your client has told you that if she accepts the $500. against the 71k. This figure includes $65. F obtained a judgment for compensatory damages against Z for physical injuries F suffered as a consequence of Z¶s negligence. This comes out to be a little to be 7400 yearly in taxes. and so any income she recognizes from payments she receives from X or from the investment of such payments will be taxed at a 35% rate. 9. y If we didn¶t get the injury. and so your client would receive approximately $71.  Of course. y Gross income does not include the amount of any damages recived on account of personal physical injury. Your client is satisfied that $500. An award of that type is sometimes called ³prejudgment interest. we wouldn¶t have gotten the interest.´ Is the pre-judgment interest excluded from F¶s gross income? Would interest payable on the judgment for the period between the entry of the judgment and the time when Z makes payment be excluded from F¶s gross income? o Pre-judgment is not excluded. need to deduct 50k.000 lump sum settlement. The parties have agreed that X is liable and that the amount of your client¶s actual damages total $500.000. this all depends on the 66k being interest free. Your client has complete confidence that X can and will make the annual payments of $66. She¶d get less than 66k a year if she went this way.000 cash.000 for interest on the amount of the judgment computed as interest from the time that the complaint was filed until the judgment was entered. Your client has a tort claim against X Corporation for a physical injury she suffered from the negligence of an employee of X. or (2) receiving annual payments of $66. it¶s income. The annuity provided by the insurance company will earn income at a 7% rate.  Buying the annuity.

000 punitive damages. Ellsworth paid the award to Martha. y See Schlier case. or periodic payments « 10.500.000 for the emotional distress that the incident caused. Martha filed numerous complaints with her employer about the behavior of her supervisor. Ellsworth paid Martha the amount that the settlement required. Is any part of the amount that Martha received from Ellsworth taxable to her? o Probably taxable . The pinch caused a minor bruise that remained for a few days.  PLR is worth talking about y Touching before pain is excludable y The PAIN incident is what troubled Kahn. Martha¶s supervisor frequently made lewd comments in her presence and made proposals to her of a sexual nature. the supervisor pinched Martha¶s buttocks. The settlement agreement expressly states that no amount is to be paid to Martha as punitive damages.(SCOTUS) o doesn¶t matter that the same act caused the personal injury and loss of income having nothing to do with injury. 11.  How do you apportion this? Particularly because the problem is a continuum. The same facts as those stated in Question 10 except that Martha and Ellsworth settled her suit. and $2. One day. taxable. Martha was employed by the Ellsworth Corporation. o Service left this open. but the company took no action. Is all or any part of Martha¶s award taxable to her? If the pinch had not caused a visible bruise. Martha sued Ellsworth for permitting the sexual harassment to have continued to take place. They imply that it is. The settlement agreement provided that Ellsworth was to pay Martha $2. Assume again that Martha had suffered a visible bruise from the pinch.  $1000 bruise itself y Bruise does not matter  $600k need to know which % of distress actually caused by pinch and not other factors o $2 mm in punitive include in GI.000. $600. The court awarded Martha: $1. o Relying on § 104(a)(2) damages.000 for the bruise she suffered. They mentioned extreme pain 2x in the ruling. this might happen.000 as compensatory damages for her physical injury and emotional harm.y In real life. whether as lump sums. y Service will not rule on this. what part of the award would be taxable to Martha? o Only damages relating to the pinch are excluded from GI. o KAHN SAYS «  Damages not stemming from the pinch should be taxable.  KAHN ASKS is pain enough? Interesting question.

and to plaintiff it makes a lot of difference. y This is at the commissioner¶s discretion o KAHN SAID  Court might not accept this y Appears to be excessive compensatory y By and large the court will accept a settlement at arms length o Problem here is that defendant did not have anything at stake.  . commissioner might elect to redetermine allocation.No punitive might be shady.

should still be reported.000 payment to M in Year Ten be treated for income tax purposes? If the statute of limitations on D¶s debt expired before Year Ten. filed a joint income tax return in which they correctly reported adjusted gross income of $22. Marie. In Year Ten. See IRC § 172.  They might want to borrow again in the future y So long as the payment is traceable to the payment of the debt.  Two issues gratuitous recovery? y Detached and disinterested generosity? o Is this sufficient to supplant TBR?  Commissioner ruling said NO.000 to M.000 that M received from D inYear Ten is included in M¶s income. 2.000. Rick and his spouse. it will be taxed at a marginal rate of 35%. and lender has to recognize it as income.000. this is a repayment of the debt. how should the repayment be treated for tax purposes? o If the $20k is paid back in year 10. People do repay loans on which SoL has run. y KAHN thinks not gratuitous recovery o This person feels obliged to repay debt. D sold the rights to an invention he had created that year for several million dollars. Being then able to repay the debt to M. Courts were faced with this problem ± they had no authority to tell TP to amend return if SoL had run.000 that was reduced by that deduction would have been taxed was a 25% rate. If the $20. D must include it in GI in year 10. even if it will be taxed at a higher rate. In answering the questions in Problems # 2 and # 3. M determined that the debt was not collectible.PROBLEM SET # 3 A ³net operating loss´ is a term of art and refers to something other than a net loss. Congress codified this in § 111. o The SoL is not determinative of when a debt is uncollectable. D owed a business debt of $20.  Gets taxed $7k. D repaid the debt of $20. In Year One. assume that no net operating loss carryover is available. How should the $20. Rick and Marie were not entitled to .000 on his tax return for Year One. The marginal rate at which the $20. In the year 2002. but D voluntarily repaid the debt anyway. o KAHN SAYS  The SoL may have run on amending the return ± he would have rather done this and pay at 25% than pay at 35% y The answer would be the same regardless of the SoL  This was a court-made rule. and M claimed and was allowed a bad debt deduction of $20. 1.

Now. The refund was duly paid in 2004. How much of that $10. Rick and Marie claimed and were allowed three exemptions for which they properly took a deduction of $9. their real estate tax would be $10. How much of that $5. the appeals board agreed that the 2002 real estate tax that was paid by Rick and Marie was excessive and ordered that a refund of $5. and Penny was allowed a charitable deduction . They didn¶t get anything back from the government. The basic standard deduction for the year 2002 for married taxpayers was $7. Rick and Marie elected to itemize their deductions rather than to use the standard deduction. the land had a value of $120.$15k (itemized real estate tax deduction) = .  Of the deduction.000 instead of $15. Penny made a gift of unimproved land to the Beth El temple. At the time of the gift. They had paid that tax under protest and appealed. 4.000.any tax credits for that year. 3.000 be paid to them.  -$2150 + $5000 (refund)= $2850 included in GI o KAHN SAYS  You have a choice: y All itemized deductions y Standardized deductions  Pick the one that adds up to more money to pay less in taxes.150 (exemptions) ± $7950 (standard deduction for married couples) = 4900.$2150.000 refund is included in Rick and Marie¶s joint income for 2004? o $22k ± $9150 (exemptions) . In addition.950. Rick and Marie filed a joint income tax return for the year 2004. They took the itemized because of $15k in tax.000 for a real estate tax payment they made that year. and in effect.000. and now they would have taken the standard deduction. $5100 is excluded. Rick and Marie claimed and were allowed an itemized deduction of $15. Rick and Marie had objected to the local taxing authority that the $15.150. and that amount was refunded to them. y $4900 in income.  22k (gross income) ± $9. they could have taken the standard deduction. On their joint return for that year.000 refund is included in the joint income of Rick and Marie? o KAHN SAYS  In this case.  Another way to deal with this y They got back $5000.000 real estate tax levied against them in 2002 was excessive. The same facts as those stated in Question 2 except that the amount ordered by the appeals board to be refunded to Rick and Marie in the year 2004 was $10. they didn¶t get a benefit of $2150. Since their itemized deductions were greater than the basic standard deduction.000 y What would taxable income be if $10.000? o It would have been $2850. In 2004. In Year One. we¶re down to $5k in tax.

not just the basis. We need something to recognize that the transaction turned out differently. The land had a value of $100.  Part 1 y Let¶s assume it¶s $100.000. To do otherwise would circumvent the TBR.  There is a regulation § 1.  Part 2 y How long did she hold the property? o Probably as long as she actually held it. Seven months later. y This is like a gift to charity.83-6. Penny had a basis of $30.000. o What¶s her basis? no court has discussed this.000. the temple abandoned its plan to build a new school building.000 when it was returned to Penny. The deduction was based on FMV.  Conditions y None listed here. not basis.000 in the land. Penny sold the land to an unrelated party for $105. y But partly what Hillsboro said was ± we¶ve got an annual accounting system. We can¶t see if she¶s going to get the land back ± we¶ll give her a deduction. What were the tax consequences of the return of the land to Penny and of Penny¶s sale of the land to the unrelated party? o Return of land  It is unsettled whether she would have to include the $120k or only the $100k in her year 3 income.of that amount from which she obtained a tax benefit. o Sale of land to unrelated party  Penny gets income of 75k y $105k (value) ± $30k (basis) = $75k o KAHN SAYS  In some kinds of charitable contributions of property. and she had held the land for more than 15 years. you can deduct the FMV. In Year Three. the TBR applies. We can probably tack the prior period on the 7 months.  KAHN thinks that the basis should be $30. . The temple than returned the land to Penny.  Hillsboro said that if the event is fundamentally inconsistent.  What do you do with the fact that she has 20k left in deduction that in come? y KAHN thinks she should NOT take it 20 out of the basis. Penny gave the land to the temple to permit the temple to construct a building thereon to be used for the religious education of children.

at a time when the fair market value of the stock was $2. D. no gain or loss y Congress did not want one TP to be able to transfer to another another that was already built in in the hands of the first. o Didn¶t want to transfer deductions.000.000 o Gain of $5k ($10k value .PROBLEM SET # 4 1. Assume B purchased stock for $5. $1.000 o $1000 loss ($1k value .4232.000 and gave the stock to her son. S.000 o Gain of $1k c. a. IRC § 1015.  No gain because basis was $5k. How much gain or loss (if any) is recognized by D on a sale to an unrelated person for the following amounts? For purposes of determining a donee¶s gain on donee¶s subsequent disposion of donated property. at a time when the fair market value of the stock is $4. How much gain or loss (if any) is recognized by S on a sale to an unrelated person for the following amounts? a.  KAHN SAYS y When in between bases. For purposes of determining donee¶s loss on subsequent disposition of donated property. the donee¶s original basis is equal to basis donor had at time of transfer.000 o Loss of $1k (using $2k basis instead of FMV) o KAHN SAYS «  a) gain of 8k  b) 2. $1. $10.000.$2k FMV at time of transfer) - . o But we can transfer gains. See Kahn § 2. donee¶s original basis is lessor of o Donor¶s basis @ time of transfer o FMV of donated property on date of transfer.000 and gives the stock to his daughter. $3.000 o Neither gain nor loss. Assume A purchases stock for $2.000 o Gain of $8k b. $3. This has potential for abuse also. c. $10.$5k basis) b.  Giving gift to donee in lower tax bracket to avoid paying more in taxes.

A made a gift of the 1000 shares of X stock to B. What is the amount of loss that C recognized on that sale? Year 10 (A gifts stock to B) [$100k] $35k Year 20 (B gifts stock to C) [$35k] $50k Year 24 (C sells to unknown person) [$35k] $30k Year 1 (A buys stock) Basis FMV $100k $100k o In year 24. BUT WHAT IS RECOGNIZED? WHAT IS THE ANSWER? 5.  At time A B. C sold stock to U. basis shall be FMV. In Year One.  So. we have to know WHICH gift.000. Mary. B made a gift of the 1000 shares of X stock to C. o Let¶s reverse the figures to show why. C¶s basis was $35k. the fair market value of the 1000 shares of stock was $35. IRC §1015(a) y See chart above. Fred owned 500 shares of stock of the Widget corporation. At the date of that gift to C. At the date of that gift. C sold the 1000 shares of X stock to an unrelated person for $30. In Year Twenty.000.  Basis in a gift shall be the same as it would be in the hands of the donor. the moral of the story is to use the last transfer available.. it was worth $50k  When B C. 4. but he was unwilling to make a gift of the entire value of the stocks. $5k loss. o Therefore. In Year Ten. In Year Twenty-Four. .000.000. which was the fair market value of the stock at that time. The difference between the value of the stocks and the amount paid by Mary constitutes a gift from Fred. it was worth $35k  Is this a $20k loss or a $5k loss? y Spirit of the law suggests that we¶d go with $5k loss.3. y More natural reading is the gift from B C.e. Fred solved that problem by selling the stocks to Mary at a bargain price (i. Determine the tax consequences to Fred and to Mary in each of the following alternative circumstances. o KAHN SAYS  In § 1015(a). Fred wished to dispose of those shares to his niece. A paid $100. What amount of loss that C recognized on that sale is deductible? o See IRC §267(a)(1): no deduction allowed for any loss when exchanging property within family. The same facts as those stated in Question 3 except that the person to whom C sold the stocks in Year Twenty-Four was the sister of C. a price that was lower than the value of the stocks).000 to purchase 1000 shares of X stock. y So. and he sold it for $30k. Fred has a basis in those 500 shares of $80. the fair market value of the 1000 shares of stock was $50. EXCEPT if basis is greater than FMV.

o Mary  Her basis is $100k. Mary sold the 500 shares to an unrelated party for $60. Reg. Mary sold the 500 shares to an unrelated party for $160. Fred sold the 500 shares to Mary for $40.$40k purchase price Mary paid) less $11k annual exclusion for gift tax purposes. c.000. The fair market value of the shares at that time was $180.000. Four years later. o Fred  Did not realize a loss on the sale because on a bargain sale.000.000. See Reg.60 o KAHN SAYS  Remember. you can never realize a loss.  The fact that M paid less than F¶s basis should not change the fact that she uses his basis! b.000.  Under the regs.a. which was its value at that time. nieces are not related persons.000. Fred sold the 500 shares to Mary for $40.1001(e)(1). Fred sold the 500 shares to Mary for $100. o Mary  Received a gift of $60k ($100k value . o Fred  Has a gain of $20k because it is above his basis in a bargain transaction.  $20k loss y 80 . . Mary sold the 500 shares to an unrelated party for $100. which was its value at that time. 1.000. she has a gain of $60k. you don¶t apportion basis between sale and gift  Look at reg 1. Four years later. y 100k value ± 80k Fred¶s basis. Four years later. y Therefore.1015-4(a)(1). o Fred  No gain or loss because he did not get more than his basis in a bargain transaction. 1.1001(e) y No loss is realized on such a transfer. which was its value at that time. o Mary  Received a gift of $80k ($120k value ± $40k purchase price) less $11k annual exclusion for gift tax purposes  Mary had a gain of $20k. under IRC § 267. IRC § 1015.000. The fair market value of the shares at that time was $120. The fair market value of the shares at that time was $100.000.

Mary sold the 500 shares to an unrelated party for $50. Your client has three different stocks. There is no record or evidence of what A¶s basis was in the stocks. The fair market value of the shares at that time was $60. value of 20. B or C) should your client give to his son? o Stock C. o Fred  Fred never realizes a loss on a bargain sale because we never apportion basis. but it is shown that he purchased them sometime between 1940 and 1951. you would not hold this stock to death. o KAHN SAYS  Stock A y A is a depreciated stock. o Mary  Mary has a loss of $10k.000 FMV $20.  If son sells the stock for $20k.  Normally.000 to his son. Basis of 30. A died in 1980. How is B¶s gain or loss determined? o Find and take the lowest figure on record ± take all presumptions against the taxpayer.000. and he will not have to include any gain in his GI because the basis and the FMV are the same.000. Fred sold the 500 shares to Mary for $10. The only way he would get gain is if it were gaining up to $30k. which was its value at that time. B sold the stocks for $10. any one of which he is willing to use as the corpus of the gift. 7.000. but for loss.000 $15. The son can turn around and sell it. Your client. the basis will step down to the FMV. A gave B stocks in 1976. an elderly widower.000 $20. he won¶t get any gain or loss. In 1981.000 $20. Recognize the loss now. o Plusses  If he holds the stock until death. 6.000.000 Which of the three stocks (A.d.000 $20. The stocks have the following basis and fair market value: A Stock B Stock C Stock Basis $30. her basis is $60k. o Minuses  Stock B . Four years later. desires to make a present of $20. y Her basis is the donor¶s basis ($80).

In Year Six. he has a basis of $20k. What was the tax consequence to Susan of her sale of Whiteacre to Paul. Paul sold Whiteacre to an unrelated party for $300. and what was the tax consequence to Paul of his sale of Whiteacre in Year Six? o Straight up sale  Susan y No gain. y 8.000. Helen had a basis of $100.000. o Normally. In Year One. the basis steps up.000. basis is $20k. Susan¶s basis in Whiteacre was $125. Stock C y If he gives it to him now.000. you don¶t want to get rid of B because if widower dies. y Can¶t have anything lost by it ± if died then. Susan sold Whiteacre (unimproved land) to her husband. Paul paid Susan an amount equal to the fair market value of the property. The fair market value of Whiteacre was $190. Ralph. In other words. Harod would use Helen¶s basis of $100k. Paul. Helen made a gift of Blackacre (unimproved land) to her husband. What was the tax consequence to Ralph of that sale? o KAHN SAYS «  Use rule IRC § 1041(b). and Paul paid that amount to Susan. In Year One.000. This is an appreciated property o Positive  Widower might be in a higher tax bracket y Having son take the gain might be a lower rate of tax.000 in Blackacre. In Year Four.$80k value = loss of $20k 9. y $100k basis . but its fair market value at the time of the gift was only $75. o negative  This stock wouldn¶t be as good to give him because he¶ll have to pay tax on the gain of $5k. IRC § 1041(a).  Paul y Gain of $175k ($300k FMV ± $125k basis) o Husband takes wife basis. . Ralph sold Blackacre to an unrelated party for its then value of $80. y Only bad thing is lost opportunities on stocks a and b. When there is a gift between spouses. transferee has transferor¶s basis.

Begging might be a business.  From the transferor¶s perspective. IRC § 102(a). Henry paid the judgment. Franklin is successful at this venture and collects over $40. Under IRC § 61(a). But are there circumstances where a transferree¶s intent should be examined? KAHN thinks yes Duberstein left open the possibility that there are circumstances when this is appropriate.000. Henry promised that he would give Dennis $40. 3. Isn¶t this altruistic? y He¶s getting consideration for his money. o KAHN SAYS «  Moral obligation is too broad a term. On five days a week. they have went into strange constructions. Dennis remained in college and did graduate.000 per year.gross income is income from any source derived. 2. Dennis. To induce Dennis to remain in college. where ³gifts´ of casino tokes were deemed income to a casino card dealer because of their regularity to the dealer and dealer¶s anticipation of receipt. But in order to carry out the intention of the donor. Is any of the payment included in Dennis¶s gross income? . y He can either give $1000 or create an obligation to give $1000.PROBLEM SET # 5 1. Same effect. From the transferee¶s perspective.000 which had been promised to him. Henry¶s nephew. A donor¶s intent is not exclusive test for whether a transfer is a gift. See also Olk v. told his family that he planned to drop out of college. Dennis sued Henry and obtained a judgment for the $40. Henry reneged on his promise and refused to pay. but the consideration is for the person getting the benefit. Franklin stands on a corner and begs for money. Are the amounts Franklin receives treated as gross income to him? o Yes. The same facts as those stated in Question 2 except that when Dennis graduated. Not really a great measuring stick. IRC § 61(a)(2). then no. Is any of that payment included in Dennis¶s gross income? o If it was really a gift. this is probably a gift.000 if Dennis would graduate from college.  This is likely the case ± made out of love/affection o KAHN SAYS «  The uncle promised the $40k because he wanted to improve the well-being of the nephew. o KAHN SAYS there is no difference here.  The point is that this a professional donee. This is a gift. it probably is not y SCOTUS said in Duberstein that the intent of transferor determines. United States. Henry fulfilled his promise and gave Dennis $40. Courts have never expressly done this.

Rul. o If Paula was required to provide services. 71-425. 1. 73-87. but there is no statute that says this is excluded.  Even though IRC § 102(c) suggests that it is income. 5. This is a transfer payment. Randolph married. Remember.  You need to know more about the payments to decide excludability y For need? Etc. o KAHN SAYS «  This is not a gift. Treated just like a trust. thus the donors were not disinterested. Reg. Randolph has worked for five years as an employee of his father in his father¶s real estate business. Collecting on the judgment is collecting/enforcing the gift. This year. 6. there is a fair amount of tax law that is court made or out of administrative practice. What are the tax consequences to Hillary? o They are probably not gifts and Hillary must include them in the GI of her campaign fund. A testimonial dinner is held to raise money for her campaign. although it sort of seems like one. The diners at the dinner probably expect Hillary to act a certain way if elected. Rev.1021(f)(2) suggests that it isn¶t. Are those payments included in Paula¶s gross income? Would it affect your answer if Paula received the payments under a welfare program in which the recipients of payments are required to provide services? o Welfare fund distributions are generally not gross income. or contribute it to a charitable organization. They go to jail. Rul. but this is what he said. . and his father gave him a wedding gift of $150. Common law excludes it. 4. this would not change the fact that the welfare payments are excluded from her GI.  What do you do with the leftover money? y Hold it for the next campaign. o KAHN SAYS «  Not GI unless Hillary used the funds for her personal consumption  If the money is not mixed with the personal funds not income for candidate. Prop. The dinner raises $450. Paula received welfare payments from the State of Utopia to support her and her three minor children.000 which amount is turned over to Hillary to assist in financing her campaign. See Rev. Hillary is a candidate for election to a federal office.000.  Problems sometimes arise because politicians mix campaign funds for personal purposes.o KAHN THINKS this is a gift see above. Is any of that amount included in Randolph¶s gross income? o Probably not included in Randolph¶s GI. This is weird.

It has a personal relationship. the relationship as a domestic servant puts this one on the line. Is any of that bequest included in Patricia¶s gross income? Would it affect your answer if Patricia had retired two years before Frances died? o The bequest is in her gross income. A final regulation is not a statute. but is given a lot of weight unless inconsistent. y Look at the title of 102(c) ± employee gifts. whatever « y In this case. Patricia was still in her employ. Proposed regs get considerably less weight. .  Remember. Does this limit it?  Part 2 y KAHN doesn¶t think that 102(c) should be limited to current employees. she made a bequest of $50. On the death of Frances Hawthorne. What about birthday/Christmas gifts? Extraordinary? No. This clearly is distiniguished from bequests and devices. and all I care about is what Kahn thinks.o KAHN SAYS . o KAHN SAYS «  Part 1 y There are a number of ways to approach an employer gift to employee.  IRC § 102(c) directly clashes with this on its face.´ o KAHN THINKS this is wrong. . work harder.  But what about the relationship they had? o If Patricia retired two years before Frances died. Patricia worked as a domestic servant for the Hawthorne family for over 30 years. 7. and the burden ³is extraordinary. o Compensation for past service o Encouragement to stay. proposed regulations are given some weight. But KHAN THINKS this doesn¶t matter. At the time of Frances¶s death.000 to Patricia in appreciation of the loyal service that Patricia had provided. it¶s OK y TP has burden of showing that the gift has nothing to do with the employment. The proposed reg suggests family. y Can¶t have a gift if the employer was an entity. it might change it because it cannot be tied to performance or incentive. IRC § 102(c)(1). Suppose a parent gave a kid an allowance. But distinguish it by thinking of § 102(c) as prohibiting gifts from employers to employees in their capacity as an employee ± if he gets a gift in his capacity as a family member. but they are not binding. . and the kid also works in the family business. That word seems inappropriate. but does not require it. y One of the issues is whether IRC 102(c) should apply AT ALL in testamentary transfers. Is this extraordinary? No.

. In 2004. The billionaire talk show host told the audience that everybody will get a new Pontiac G-6 midsize 2005 sports sedan. but they are tax-free since they are gifts. briefly respond to Oprah¶s statement. o Prize and award is generally taxable by statute.8. one of the world's richest entertainers. why gift given? This is really a form off advertising. As an IRS representative. Oprah Winfrey gave her audience free Pontiac automobiles. shouting: "Everybody gets a car! Everybody gets a car!" Assume Oprah told the winners that not only do they get the cars. As reported by Fortune Magazine: Oprah Winfrey. surprised her fans Monday by giving each of her 276 audience members a new car to celebrate the premiere of her show's 19th season. KAHN SAYS « o If not from detached and disinterested generosity. Winfrey screamed and jumped up and down on the stage.IRC§ 74.

Fred borrowed $5. Rhoda denied those claims. an art dealer. The bank determined that it was not worth the cost and difficulty it would incur in seeking to collect the full $5. even though Fred was solvent. Is any of the loan included in Fred¶s gross income? o It does not seem to be a gift.000 was still owing.000 in satisfaction of the loan. Fred is not an employee or otherwise related to the bank. IRC § 102(a). What was the tax consequence to Fred? o Fred has $2k in income. The price for the painting was $40. The same facts as those stated in Question 1(a) except that the bank did not offer to accept a lesser amount and no part of the loan was ever repaid. Did Fred recognize any income.000 from the Friendly National Bank. Martha purchased an oil painting from Rhoda. Martha subsequently complained that Rhoda had made false and misleading statements about the painting. After some negotiation and threats of litigation. bearing adequate interest. Fred is no longer liable for the debt. The 2k Fred saves should be considered a gift. IRC § 108(e)(1). so it has been discharged and the $5k is income for Fred in year 5. a. o KAHN SAYS «  Does this conflict with IRC § 61(a)? No. an expired SoL is a discharge of debt. c. if so. it seems more like a gift. see IRC § 108(d)(1)(A). the bank agreed to accept a payment of $3.PROBLEM SET # 7 1. The same facts as those stated in Question 1(a) except that the lender was Fred¶s father instead of a bank. and. Martha paid Rhoda $10. and is excluded from his income.000.000 owed to it. The terms of the new note were identical to those of the original note except that the face amount of the new note was a lesser figure. What was the tax consequence to Fred in that case? o In this case.000 in exchange for the original note on which $30.000 cash plus Martha¶s promissory note in the amount of $30. so there is no exception to the general rule that GI includes income from discharge of indebtedness. Two years after the loan was made. Fred was solvent. 2. o KAHN SAYS «  There is an understanding that he will pay back the loan ± not income.000. The terms of the loan provided for adequate interest payments. What was the tax consequence to Martha? . IRC § 61(a)(12). The statute of limitations for a suit to collect the loan expired in June of Year Five. b. Rhoda agreed to accept a new promissory note from Martha in the amount of $15. in what year? o In the absence of any indication that Fred intended to pay after the SoL expired. so it is not income.

There would be no income. Rupert went to the officers of the church and asked them to reduce his pledge to $10. What do you do then?  Suppose Martha was insolvent by an amount of $5k.000 because he had suffered significant business losses in the interim. even though the deal was changed in a subsequent year. As a result of the forgiveness. y If we go back to the insolvent exception.000 of his obligation. so even though he was discharged of $15k worth of debt. See IRC § 108(e)(2).  Suppose Martha is disputing this. her exception is limited to $5k. y If there was a gain on the sale.o Martha¶s debt to Rhoda arose out of the purchase of the painting. and they cancel the debt.000 from Rupert and cancelled the remaining $25. § 108(e)(5) is a specific application of the transactional approach. Martha is solvent. o KAHN SAYS «  This is an example of the transactional approach. Thus. and not included in GI. A year or two later she settles with Rhoda. o KAHN SAYS «  One way to look at this ± transactional approach.000 of Rupert¶s pledge because they were under the mistaken belief that they had no right to enforce Rupert¶s promise since no consideration was given for his promise? o Even had he paid. a promise to make a contribution to a charitable organization is enforceable by the charity regardless of whether the obligor received consideration for the promise. 3. although he was solvent. the officers of the church accepted $10. can (e)(5) apply to the $10k that is not covered by (e)(1)? The language says the section does not occur when the purchaser is insolvent. Under local state law. and then decides to sell the painting for $30k. she is $10k solvent. Nevertheless.  Suppose Martha was insolvent when this took place. Since Martha is solvent. Subsequently. What was the tax consequence to Rupert? Would it affect your answer to that question if the church officers had agreed to cancel $25. so we use IRC § 108(e)(5).000 to the church. see IRC § 108(e)(5)(B). When is ³when?´ Congress didn¶t think about it. We can¶t apply IRC § 108(e)(5)(a). KAHN thinks the $10 should be excluded because it fits the policy of what the statute was trying to achieve. and remained insolvent after debt was cancelled. The Zion Baptist church of Willsboro initiated a fund raising campaign to obtain the funds to build a new church. it wouldn¶t change my answer. Martha¶s debt is reduced in part. If Martha is solvent. Martha claimed a loss of $10k upon sale. one could argue the TBR could apply. Rupert Walters made a written pledge of $35. there would be no income to him. . Rupert would have later been able to deduct the donation. the debt can be considered to be reduced. They just changed the deal. o No.

000 Euros were worth $6. dollars. it was income. Commissioner. Diffrence is the cost of goods sold during the year. this would reduce the cost of goods sold and increase income from the year by $3k. something exactly like this happened. Ohio. or as a purchase money debt tied to the purchase of the dresses?  English Shoe Case y TP purchases English shoes on credit. value of pound had fallen. but the purchaser was taxed on the gain. determine closing inventory. currency. KAHN THINKS THIS IS TOTALLY WRONG APPLICATON OF TRANSACITONAL RULE o Does Not matter if loss or profit on sale. 4. o If debt is tied to transaction.  How reduce basis? y Start out @ beginning of year and determinie opening inventory. At the time she purchased the dresses. Rachel owns and operates a boutique retail dress shop in Columbus. The transactional rule applies in this case because the credit element of Rachel¶s purchase was an integral part of the purchase. y Inducing people to ³give you money´ ± compare to fraudulently inducing a loan with no intent to repay. maybe there would be income! This is just speculative. 4. Since TP failed to prove that she had a loss on sales. y Just subtract from the opening inventory the $3k.000 Euros. she bought a line of dresses from a French manufacturer for 4. . By March of Year Two.S. the Euro had fallen in value as compared to U.000 to the French manufacturer in satisfaction of her debt. o KAHN SAYS «  One issue is do you look at debt independently. dollars. y Court said this would be income unless loss on whole transaction.000 Euros she had purchased for $3. o Note: In English Shoe v.000 in U.  If the church was confused and made a mistake« still no income.000 Euros for only $3.000 in U. In Year One. She bought the dresses on credit. and so she made no cash payment and owed the manufacturer the Euros. and then TP paid in cheaper pounds. y He didn¶t induce them If there was fraud. Then add cost of purchases during the year.S. @ end of year. what it should have done was to reduce the basis. and so Rachel was able to purchase 4. What was the tax consequence to Rachel of this transaction? o The $3k savings should be viewed as a reduction in price of the dresses (inventory). Rachel then paid the 4.S.

the subsequent discharge of that debt may cause TP to recognize income under the TBR. a. Paul opened a gourmet restaurant in Grand Rapids.  When using salary as gift to corporation. o KAHN SAYS  If it HAD been a gift. o KAHN SAYS « . o Putoma said this was not income. and Paul promised to meet the payroll thereafter. Paul asked the chef to forgive the $25. o When an accrual method taxpayer is allowed a deduction for an accrued but unpaid expense. See Kahn § 2. ___ when interest was owing. congress gave it to the corporation in that limited circumstance. it is not a gift. and the $25. and the chef reports his income on the cash receipts and disbursement method of accounting.  Rev. y Ruling said TBR applies and they had income anything. Rul. On his tax returns for Years One and Two. In a commercial setting. In Year Three. Paul had erroneously failed to claim a deduction for the unpaid salary. In his tax returns for Years One and Two. employee should have income. and the debtor had accrued and deducted unpaid interest. the chef was convinced that the restaurant would prosper in the immediate future. Paul had accrued and deducted the $25. Consequently. In its first two years of operation. and Paul obtained a tax benefit from those deductions. o Another way to look at this ± Paul has to pay tax on $25k because of the tax benefit rule. it could be a gift. Despite these disappointments. By the end of Year Two. Paul was unable to pay the chef the entire amount of salary that was owing to him under the contract. The chef agreed. Paul hired a prominent chef for the restaurant and contracted to pay the chef a salary of $20. then forgave it as a gift.000 for wages that had not been paid.1280. In Year One.000 of unpaid salary. There is no exception under IRC § 111 because Paul has derived a tax benefit. would he have had to report it?  There is no good reason not to tax this. This got repudiated. o KAHN SAYS probably wrong. y Earlier Supreme Court case which said if creditor forgave a debt because it thought it was the best thing it could do. y But in 1980. The term of the contract was 5 years.5.000 of unpaid salary.000 debt was cancelled in July of Year Three. What are the tax consequences to Paul of the cancellation of the $25. b. Paul owed the chef $25.000 per month. KAHN SAYS  Cancellation would not be treated as a gift. Paul reports his income from the restaurant on the accrual method of accounting. the restaurant did not produce the amount of income that Paul had anticipated.000 debt in each of the following alternative circumstances? o First. Michigan.

and she had no loss carryovers to that year. the bank forgave $30. and the unimproved land. o Same answer as above. At the beginning of Year Four. the unpaid balance of Sylvia¶s debt to the bank was $60. Thus. The whole notion of casuing income on CoD is that the debt gave rise to a benefit. Sylvia was insolvent by 25k. After that payment.000 cash and an acre of unimproved land with a fair market value of $12. What was the tax consequence to Sylvia of the cancellation of $30.000.´  But if they agreed at the outset for this salary. there would have been no income anyway! c.000 cash. Sylvia borrowed money from the Friendly National Bank. y This didn¶t prevent any income and provided no benefit. In his tax returns for Years One and Two. before the debt was forgiven. y In this problem. IRC § 111. what basis does Sylvia have in the land that she owns? Assets 23 (cash) 12 (land¶s FMV) 35 3 cash (paid 20 to bank) 12 (land¶s FMV) 15 Liabilities 60 (unpaid debt) 60 10 (bank forgave 50) 10 Notes -25 (insolvent) 5 (solvent) o Tax consequence to Sylvia  Insolvency is determined by [FMV of assets ± liabilities]. but Paul had obtained no tax benefit from those deductions.000. The only assets that Sylvia had were $23.000.000 of her debt? As of January 1 Year Five. 6.000. In March of Year Four. You can go back to the transactional approach. Sylvia had $3. Sylvia had no net operating losses or capital losses in Year Four. the bank cancelled $50. but Sylvia was personally obligated to repay it. Sylvia had no other debts. Sylvia¶s basis in the land was $28. Paul had taken deductions for the unpaid salary. IRC § 108(d)(3). The debt was not secured. In Year One. o An argument against this is to say ³he got the value of the chef¶s services at a bargain. .000 of Sylvia¶s debt in exchange for Sylvia¶s payment of $20. y The cancellation of the debt can be looked at as a change of the salary of the chef.  Tax benefit rule deals ONLY with taking of deduction. and the outstanding balance of her debt to the bank was $10. o TBR applies in this case too.000 of the debt.000 cash to the bank.

Therefore. new basis of $7k . we want to encourage fresh starts. IRC §1017 says that the reduction in basis shall not exceed the aggregate bases of the property held by TP immediately after discharge over the aggregate of the liabilities of TP immediately after discharge.  o Basis in Sylvia¶s land  When an amount is excluded from GI under IRC § 108(a)(1)(A)-(C). Since Sylvia is insolvent by $25k. y Why not have income because insolvent? o We tax insolvent people on wages « o Reason given is not convincing. getting them further in debt via taxation would be a deterrent. y Sylvia was forgiven $30k. y Aggregate bases of property (her single property!) = $28k y Liabilities = 10 ± 3(assets) = 7 in total liabilities y $28k .  Go back to Kirby Lumber no increase in net worth. The statute redirects us to IRC § 1017(i). that amount shall be applied to reduce the tax attributes of TP in the order as provided in IRC § 108(b)(2). but was only insolvent by $25k. IRC § 108(a)(1)(B). KAHN SAYS y § 108 is a codification of common law o If you cancel debt of insolvent debtor. y $28k basis ± $21k reduction = $7k new basis.  KAHN SAYS « y Remember ³next taxable year´ clause! y Basis of her property was 28k o The $3k cash she had left was included in the basis. IRC § 108(a)(3). she should include $5k in taxable income. but the amount excluded shall not exceed the amount by which Sylvia is insolvent. If the whole idea is to get the person recovered so a business relationship can be continued. This is the maximum amount by which we can reduce the basis. o Basis = 31k y Liability = 10k y We can reduce as much as $21k y Therefore.$7k = $21k. o Then. and they did what § 108 does. the amount of the forgiven debt shall not be income. o KAHN THINKS that there is a disincentive to the creditor to forgive the debt if she was taxed on it. The first thing available to reduce is basis of property. IRC § 1017(b)(2). This is not out of sympathy. and still insolvent no income. a case came along when someone became solvent.

The overpayment to George created a debt that he owed to the employer. George had taxable income of $80. George¶s marginal rate of federal income tax for that year was 30%. George and his employer agreed that George should have received a commission of only $10. In Year Four.000 of that income was taxable at a federal income tax rate of 15%. In Year One.000.5%.$2750 deduction = 3750 total tax payable OR  [Tax for taxable year without deduction] ± [decrease in tax for the prior taxable year which would result solely from the exclusion of such item from gross income for the prior taxable year]. and the statute of limitations for repayment of that debt had not expired when George repaid the amount to the employer.000 had expired before the employer discovered the error.  ($10k * 20%) + ($5k * 15%) = $2750 deduction. and the remaining $10. What was the tax consequence to George of the repayment of $15. After some negotiations. IRC § 1341(a)(4) y Deduction o George will deduct tax payable on $15k (the overpayment from year 1. George¶s employer discovered that George had received commissions for sales that should have been credited to another employee. and George returned the excess $15. without taking the repayment of the commission into account. George¶s total federal income tax for Year One was $18.000 was taxable at a 20% federal income tax rate. George had taxable income of $40. IRC § 1341(a)(1)-(3). Consequently.000 that George received that year from his employer for sales that George initiated. In Year Four.PROBLEM SET # 8 1. y Tax Payable for year 4 o ($30k * 15%) + ($10k * 20%) = $4500 + $2000 = $6500 in tax payable y Total o $6500 tax payable year 4 . but George had nevertheless repaid that amount? o George make a deduction in year 4 because he did not have an unrestricted right to the $15k of income in year 1. IRC § 1341(a)(5). the average rate of George¶s tax for Year One was 22.000 of the Year One commission? Would it effect your answer if the statute of limitations on George¶s obligation to repay the $15.000 to his employer.000 in Year One. and $25. $30.000.000 of George¶s taxable income was taxed at that 30% marginal rate.000. . Part of George¶s $80.) Remember to calculate the tax payable in different tax brackets! Start off with the highest bracket and work your way down. The tax imposed for year four will be the lesser of «  [The tax for the taxable year computed with the deduction].000 taxable income was a commission of $25.

Look at tax you owe reported in year 1. This is harsh. and his tax return showed a net loss of ($20.000 of George¶s commission in Year Four? o KAHN SAYS «  1341 does not apply to employer. Check this out!!!!  Remember the difference between a deduction and a credit. If you took 15k out.000). and since the employer used the cash receipts and disbursements accounting method. What was the tax consequence to the employer from receiving the return of the $15. Take out the «  30% marginal rate. and so George could not carry the loss forward or back to other taxable years. if George had not received the $15.000 of commissions that . The amount excluded from year 1 will be credited in year 4. it would all be at that rate. he has a lower tax than a4.  If this was a large capital gain. and she was in a marginal federal income tax bracket of 50% in Year Four.y y y y Tax for year 4 o [$30k * 15%] + [$10k * 20%] = $4500 + $2k = $6500. Thus. This is an example of the tax benefit rule. o KAHN SAYS «  Note: (a)(4) and (5) are not electable  The first one is 2750. The same facts as those stated in Question 1 except that in Year One. he willrduce tax liability by 2750.000 of commission owing to her until Year Five. The employer did not pay the other employee the $15. George¶s deductions were so large that he had a net loss of ($20. George¶s loss did not constitute a net operating loss or a capital loss. but he has to pay the tax on it. she got no deduction for that payment until Year Five. If he uses a5. it will have to be characterized as income  [BUT WHAT ABOUT THE AVERAGE TAX RATE? WHY IS THIS IN THERE?] 2. George¶s employer was in a marginal federal income tax bracket of 30% in Year One. GEORGE MUST ELECT 1341(a)(5). thus 1341 might be applicable even though the SoL is expired. y 4500 y If he takes the deduction in year 4. Consequently. Year 1 Tax on overpayment to be deducted o 15k * 30% (marginal tax rate) = $4500 Total tax payable for year 4 o $6500 (year 4 tax) ± ($4500 decrease in tax from year 1)) = $2k tax payable. It all depends on how broadly 1341 is read.  How determine tax in year 1 y Look at marginal rate. 3. o George might be restricted in the fact that he wants to keep his job.000) for that year. The same facts as those stated in Question 1.

there is a provision that if you use (a)(5). and Mary did so. The same facts as those stated in Question 1 except that the amount of commission that was erroneously paid to George in year one was only $2. but she was in a marginal federal income tax bracket of 30% in Year Four. one of Mary¶s customers was overbilled by $6. George repaid to the employer the $2. y Itemized deduction o Employee business expense o § 67 ± miscellaneous itemized deduction?  Check (b)(9) ± excludes 1341 deductions. requested Mary to return the $6. it indicates there is a deduction existing under 1341 itself o In 1341(b)(3). in this problem. HE THINKS that the 2000 ought not to be miscellaneous 5. So is it allowed to be a miscellaneous deduction? KAHN ISN¶T SURE. But here. Mary Walters is the sole proprietor of a wholesale business that is engaged in selling appliances. this is undecided. Mary was in a marginal federal income tax bracket of 50% in Year Two.000 because of a clerical error of an employee of Mary¶s.000. but there would have been no effect on his tax liability. and the government acquiesced. In Year Two.000 to his employer in Year Four? o KAHN SAYS «  At the moment.000 of commissions he had erroneously received in Year One. indicates that there must be a deduction existing outside 1341 which indicates you can take it. y In the state « o In (a)(2). What was the federal income tax consequence to George of making that $2.000 repayment? o KAHN SAYS «  1341 does not apply. 1341 DOESN¶T apply.000) on his tax return for that year.´  One decision allowed the deduction. In Year Four.  There is little decided about the ³converse tax benefit rule.were erroneously paid to him. The little authority there is on this issue allowed it. Don¶t be too confident about the strength of this because it is not evidence the court considered the issue carefully. or else there would be no reason for this provision. and the customer paid that bill. In Year Four. Minimum amount is $3k. What was the tax consequence to Mary of returning the overpayment? . What was the tax consequence to George of repaying the $15. he would have reported a loss of ($35.  You can still get the deduction y A ruling by the service allows this.000 overpayment. the customer discovered the error. 4.

y KAHN THINKS there is no reason why math error is any different than any other kind of error. y This section is not applicable to sales. A mistake was made ± it has a harsh result because of differences of tax rates. o o KAHN SAYS «  Didn¶t it appear that she had an unrestricted right? What in the statute prevents Mary from using §1341? NOTHING! y But the service¶s position has never been tested in court. Franklin received a salary of $250. What was the tax consequence to Franklin of making that repayment in the following alternative circumstances? .4323. 6.o IRC § 1341 does not apply to the return of an overpayment received as a consequence of clerical error. The corporation did not appeal that decision. and similar items.162-8). y Lewis was entitled to % of profits. returns. ' 1.  It will be a deductible item. 68-153. (See Treas. The denial of the deduction would increase the corporation¶s tax liability for Year One.000. Had to do with construction of contract.000 of the salary paid to Franklin was excessive.000.  Is there a distinction between mistake of fact and mistake of law? y Lewis o SCOTUS characterized this as mistake of fact  But it was a mistake of law.000 to the corporation as a return of the excessive compensation. In Year One. and Franklin promptly paid $70. Kahn § 13. Reg. See Rev. and consequently the excess $70. Congress was trying to provide relief. allowances.  What about § 1341(b)(2) y On the other hand. The corporation litigated that issue with the IRS. How was this to be calculated? o It¶s apparent that congress is willing to do this for a mistake of fact. you can say the cause of overpayment was BILLING. Rul. the Tax Court held that the Service was correct and that $70. the IRS determined that the maximum reasonable salary for Fred was only $180. o The focus is on the item that was sold ± it doesn¶t say that absolutely. Inc. Upon auditing the corporation¶s Year One tax return.  Rationale taxpayer had an unrestricted right to the item based on facts known at the end of the year y But this rationale would blow § 1341 out of the water! o Consequence to Mary returning the overpayment?  There¶s no reason why this shouldn¶t be a loss/business expense.000 paid to him in Year One was a nondeductible dividend. but in Year Five. Franklin Jones was the president and sole shareholder of Win All.

he contractually gave it back. but dividends are not.o KAHN SAYS «  A corporation would like to pay salary rather than dividends because salary is deductible. . which was prior to the audit of the corporation¶s tax return. See Kahn § 13. In Year One. it¶s income in that year. The contract covered salary paid to Franklin by the corporation prior to and subsequent to its execution. They might pay salaries and rents that are too high in order to avoid paying taxes on dividends. Therefore. c. The contract between Franklin and the Win All corporation that is described in paragraph (a) above was executed in Year Three. it was not under §1341. and a subsequent event made him pay it back. o This ruling is in doubt. The later determination that his salary was excessive did not change that fact. o There are two views on whether IRC § 1341 would apply. See Van Cleave v. o KAHN SAYS «  Does a slight possibility that it has to be returned mean he doesn¶t have an unrestricted right? y Claim of right doctrine o If you claim amount is yours. even if you¶re wrong.  Subsequent events? y Very little in favor of this y This might make sense if the event was a condition of getting the payment b. a. o KAHN SAYS «  This is not a §1341 problem.4322  Commissioner y IRC § 1341 would not apply because Franklin had an unrestricted right to the money in the year he received it. There was no contractual agreement between Frederick and the corporation for Frederick to return the excessive element of any salary paid to him. He had a right to the salary when he got it.  Sixth Circuit y IRC § 1341 would apply because Franklin appeared to have an unrestricted right to money when he received it. United States. That¶s what this problem is about. Franklin and the Win All corporation executed a contract that required Franklin to return any part of his salary that was determined by the IRS or by a court to be excessive compensation.

CHECK THE ANSWERS TO THIS QUESTION IT MIGHT BE WRONG a. In order to make the investment. What were the tax consequences to Margaret of taking the $40.  Does not follow Janes case ± not a claim of right issue.000 into account. although she likely won¶t. In Year One. 7.000 in Year Two. Fred still has a right to the money (he had a right all along) even though the compensation was excessive. Margaret was confident that the investment would turn over with a profit within a year.000 from the retail store and hid her action by altering the store¶s books. but she was satisfied. On January 8.000 to the store as soon as she had the funds to do so. Margaret returned the $40. Margaret was charged and convicted of a crime. Margaret sold her interest in the investment for $46. Margaret was in a 30% marginal federal income tax bracket. of year 1 «  IRC § 1341 would not apply because the item was not included in a prior taxable year. On January 5. and she was fired on that date. and altered the books to explain how that $40. She was sentenced to two years in prison. Margaret took $40. Margaret discovered a very attractive investment opportunity that promised to turn over a substantial profit in a short period of time.o IRC § 1341 does not apply in this case. Without taking the repayment of $40. o If Margaret repaid the $40k to the store in Dec. Margaret had taxable income of $4. and she fully intended to repay the $40.000 suddenly appeared in the store¶s accounts.000. but she had no funds available. She is under a duty to report it. . and she could not borrow that amount. In June of Year One. Year Two.000. Year Two. Year Two. and of the return of the $40. Unfortunately for Margaret.000 from the store in year One. Margaret was employed as the manager of a retail clothing store. her actions were discovered by her employer on January 26.000 to the store.000 that she earned thereby was less than she had anticipated.000 to the store in Year Two? What effect would it have on your answer if Margaret had repaid the $40. To take advantage of that opportunity.000 to the store in December of Year One instead of in January of Year Two? o Taking the $40k  Margaret taking the $40k from the store is income. IRC § 1341(a)(1). Margaret needed to invest $40. o Returning the $40k in year 2 [CHECK THIS!]  Margaret does not qualify for the relief of IRC §1341 (she did not have an unrestricted right to the money) y KAHN SAYS o Even if you take the position that ³all this means is that the money was taken under the claim of right doctrine´ this still doesn¶t hold up. The profit of $6.

The store discovered this in year 2.  [But IRC § 165(a) says that there shall be a deduction for losses not compensated. IRC § 165(a). (e). o IRC § 165(e) says that any loss arising from theft shall be treated as sustained during the taxable year in which TP discovers such loss.o KAHN SAYS  Remember. Since Margaret repaid the embezzlement. The store can take a deduction in year 2. is this compensation?] . see IRC §165(c)(3). criminally earned income is still taxable  b. What were the tax consequences to the retail clothing store (an incorporated organization) of Margaret¶s actions? In answering this question.

PROBLEM SET # 9
In answering these questions, if a nonrecognition election is available, assume that it was or will be made. 1. Hilton purchased unimproved land. Hilton paid $40,000 cash for the land and took it subject to a $100,000 mortgage. Hilton did not assume personal liability to pay the mortgage. What is Hilton¶s basis in the land? o $140k.  When TP purchases property subject to an encumbrance, the encumbrance is treated as part of TP¶s purchase price and is included in TP¶s basis. See Kahn § 16.2200. y It does not matter whether TP has personal obligation underlying debt to pay property. o Note: IRC § 1301 does not apply because the properties are not of a like kind. 2. Smith owned Blackacre (unimproved land) which he held for investment. Smith had a basis of $200,000 in Blackacre. In each of the exchanges described below, determine the amount of gain or loss that was realized by Smith, and the amount of gain or loss that Smith recognized. Also, determine Smith¶s basis in the properties he received in the exchanges. All of the exchanges were at arms¶ length, and so it is presumed that properties of equal value were exchanged. Smith is not related to the persons with whom he exchanged properties. There were no encumbrances on Blackacre or on any of the properties Smith received in the exchanges. o KAHN SAYS  Differentiate amount realized v. gain realized. y Amount o All the money you get y Gain o Your actual gains a. Smith exchanged Blackacre for a warehouse that he then used in his business. The fair market value of the warehouse was $600,000.   Realized y Gain of $400k. o ($600k FMV factory ± $200k Blackacre basis) Recognized y $0 o No gain or loss shall be recognized on exchange of property held for productive use in trade or biz or for investment if such property is exchanged for property of a like kind held for either productive use or investment. IRC § 1031(a).

  b.

o KAHN SAYS «  Is the property like kind? y Grade or quality does not matter.  Is it held for investment or use in business? y Blackacre is in investment, warehouse is in business. They don¶t have to be matched. Reg. 1.1031. Unrecognized y $400k Basis y $200k

Smith exchanged Blackacre for a commercial franchise that had a value of $400,000. Smith used the franchise to conduct a business.   Realized y Gain of $200k o ($400k FMV franchise - $200k basis Blackacre) Recognized y $200k. o Same calculation as above o Blackacre is not the same kind of property as the franchise. Unrecognized y 0 Basis y $400k. 



c. Smith exchanged Blackacre for an office building having a value of $500,000 plus $100,000 in cash. Smith used the office building in his business.   Realized y $400k o (500 FMV + 100 cash) ± (200 basis) Recognized y $100k o IRC § 1031 applies to the exchange of the buildings o It does not apply to cash.  The cash is ³boot´ and not subject to nonrecognition. IRC § 1031(b). Unrecognized y $300k Basis y $200k. o Start with 200, increase by gain (100), reduce by cash (100) =200. 



d.

Smith exchanged Blackacre for an office building having a fair market value of $450,000 plus 1000 shares of stock of the X corporation having a value of $150,000. Smith used the office building in his business.     Realized y $400k o (450 office FMV + 150 stock FMV) ± (200 basis) Recognized y $150. o No nonrecognition for stock. IRC § 1031(a)(2). Unrecognized y $250k Basis y Look at § 1031(d). y 200k basis + 150 gain recognized ± 0 cash ± 150 noncash boot

e. Smith exchanged Blackacre for Greenacre (unimproved land) having a value of $80,000 plus 100 shares of Y stock having a value of $50,000. Smith held Greenacre and the Y stock as investments.  Realized y -$70k o (80k Greenacre Basis + 50k stock basis) ± (200 Blackacre basis) Recognized y Does not recognize any loss. IRC § 1031(c). o If you have a like kind transaction and recognized a loss on the exchange but get boot, you can¶t recognize the loss. Unrecognized y -$70k Basis y 200k original basis + 0 gain ± 0 loss ± 0 money received = 200k y Must allocate FMV to boot. o Put 50 on the boot o 150 to go on greenacre  



f. Smith exchanged Blackacre for Greenacre (unimproved land) having a value of $180,000. In addition, Smith received in the exchange $40,000 in cash and 100 shares of Z stock having a value of $60,000. Smith held Greenacre and the Z stock as investments.  Realized y $80k y (180k FMV Greenacre + 40k cash + 60k FMV stock) ± (200 Blackacre basis) Recognized 

The fair market value of Greenacre was $400. which is always recognized. Mark had a basis of $20. Mark held Greenacre as an investment.] IRC § 1031(d) y [250 basis in Redacre] ± [0 money] + [0 gain] = 250 basis.000. even if held for investment.000. Mark had a basis of $250. IRC § 1031(a)(2)(B).000 in 100 shares of stock of the X corporation. IRC § 1031(b). y Recognized the loss on the stock  Basis in Greenacre? . o Gain/Loss recognized on exchange  Gain Realized = $130k y (400 FMV of Greenacre) ± (250 basis Redacre + 20 basis stock)  Gain recognized y $0 o No boot or anything else nonrecognizable in this transaction going to mark o KAHN SAYS  Mark has 2 assets y Redacre o 395 value o 250 basis y Stock o Value 5000 o Basis 2000 y realized gain of 145k on redcare. Unrecognized y 0 Basis y 180 to the land y 60 to the boot (stock) y 3. you are only taxed on boot up to the amount of the realized gain o 40 cash is boot. The fair market value of Redacre was $395. loss of 15k on the stock. Excluded from nonrecognition.  80k ± remember. Mark and Joan are not related.000 in Redacre (unimproved land) which he held as an investment. Mark transferred Redacre and the 100 shares of X stock to Joan in exchange for which Joan transferred Greenacre (unimproved land) to Mark. o 60 is stock.000. and the fair market value of the 100 shares of X stock was $5. What basis does Mark have in Greenacre? Did Mark recognize any gain or loss on that exchange? o Mark¶s Basis in Greenacre  The basis of property acquired by TP via IRC § 1031 exchange = [basis in property transferred by him] ± [money received on exchange] +/[gain/loss recognized.

What amount of gain or loss did Lane and Scott realize and what amount of gain or loss did they recognize from the exchange? o Remember. Lane and Scott each held his building in connection with his real estate rental business. o Therefore Lane «  Realized y (1. and so those mortgages were nonrecourse debts. y Regs prohibit mortgage offsetting cash.000 and was subject to a mortgage of $370. Money is boot. Lane took the office building subject to the $370.260.000. but can recognize loss on other parts.000 in an apartment building he owned.000 Totals o Remember.000 (money from Scott) o TOTAL = 1.y y Total basis of 270k in redcare and stock .580. The office building had a fair market value of $1. and Scott accepted the apartment building from Lane subject to the $250.260 + 250 + 70) ± (800 + 370) = 1580 ± 1170 = gain of $410. Neither Lane nor Scott had any personal liability to repay the mortgage debt on their respective properties. since the mortgage accepted is GREATER than the mortgage released.000 (release of mortgage on Lane¶s apt) o 70.000 (assumption of Scott¶s apt mortgage) o TOTAL = 1.170.  Lane y y y Lane¶s gains o 1.210. the amount of the encumbrancegiven is treated as boot received by the transferor. Lane had a basis of $800.000 in an office building he owned. IRC § 1031(b).  Recognized y $70k.000 (FMV of Scott¶s apt) [nonrecognizable] o 250.000 and was subject to a mortgage of $250. Lane and Scott are not relateed.000 mortgage debt on that property. . Scott had a basis of $650.000. Lane transferred the apartment building to Scott in exchange for whichScott transferred to Lane $70.260.000 (basis in Lane¶s apt) o 370.000. Lane did not receive any boot from the mortgage.000 Less « o 800. a.000 mortgage debt thereon. 4. Land and Scott held the buildings they received in the exchange for business use.15000 loss ± 0 cash recieved 1031(c) says you can¶t have a loss on the nonrecognition property.000 cash and the office building. when property is subject to mortgage or other encumbrance is transferred in a § 1031 exchange. The apartment building had a fair market value of $1.

who is the owner of another dress shop. Paula discovers that she has an oversupply of maternity dresses. The dresses are property held primarily for sale and are excluded from § 1031. o Therefore Scott «  Realized y (1.000 in the maternity dresses that she exchanged. and the exchange takes place.210. since the mortgage accepted was LESS than the mortgage he was released from. John offers to swap20 cocktail dresses with a value of $10.000 (cash to Lane) y Totals o Remember. b. IRC § 1031(a)(2)(A). . Did Paula recognize a gain on that exchange? o Yes. the boot is 370k ± 250k = $120k.000 (release of mortgage on Scott¶s apt) y Less « o 650. and a shortage of cocktail dresses. Paula and John are not related.000 (assumption of Lane¶s apt mortgage) o 70. Through an error in buying. What basis does Lane have in the office building he acquired in the exchange. and what basis does Scott have in the apartment building? o The basis of property acquired by TP via IRC § 1031 exchange = [basis in property transferred by him] ± [money received on exchange] +/. Paula owns a dress shop.] IRC § 1031(d)  Lane y [800k (basis)] ± [70k (cash)] + [70k (gain)] = $800k y 800 ± 70 ± 250 +370 +70 gain  Scott y [650 (basis)] ± [0 (cash)] + [50 (gain)] = $700k y 650 + 70 cash paid ± 370 mortgage released + 250 mortgage assumed + 50 gain recognized = 650 5.000 for 50 maternity dresses of equal value.210 + 370) ± (650 + 250 + 70) = 1580 ± 970 = gain of 610k  Recognized y Boot = 120 (mortgage gain) ± 70 (cash paid) = $50k.000 (basis in Scott¶s apt) o 250. Paula had a basis of $6.[gain/loss recognized. Paula mentions her problem to John. Paula agrees. In this case. he has received boot. Scott y Scott¶s gains o 1.000 (FMV of Lane¶s apt) [nonrecognizable] o 370.

o Basis in the painting that she bought  5500 ± 2500 unrecognized gain. the fair market value of the painting was $5. this will work.000. Very thin requirement. a. Renee made no other purchases of paintings for the next four years. y Remember.800. so 1033 applies. To compensate Renee for the loss. it¶s elective. o She actually has to replace the property.6. The Blue Girl painting was destroyed by a fire caused by the negligence of Peter. Renee collects paintings for a hobby. At all times in the following questions. and Renee accepted the offer. How much gain (if any) did Renee recognize? o The money was used for replacement property. A month later.  1033 requirements y Involuntary conversion OK y Purchase property for purpose of replacing o If buy property and treat as replacement.800 cash to compensate her for her loss. How much gain (if any) did Renee recognize on that exchange? o Renee recognized and realized a gain of $3k. The value of the painting that Renee received from Peter was $6. Peter offered her a painting from his collection. The same facts as those stated in Question 6(b) except that Peter gave Renee $5. in this situation.  Renee is taxed on the amount of what is received. Renee does not hold the paintings as investments. b. c. Mandatory recognition.  The extra 300 will be recognized as income because money is not covered by 1033.´ and Renee had purchased that painting in Year One for $3. One of the paintings that she acquired is titled ³the Blue Girl. Renee and Peter are not related parties. y Time limit o 2 years from date of disposition of converted property o Can give legitimate excuse to district director for extension of time. Renee purchased another painting for $5. Since the painting is not used in business or for investment.000.000. How much gain (if any) did Renee recognize? o Any gain Renee would have had can be avoided by IRC § 1033.500. IRC § 1031 does not apply. basis of $3k in new painting . Renee transferred the Blue Girl painting to an unrelated art collector in exchange for a painting by a different artist having a value of $6.

d. amount reinvested was 65. Eight months later. the city of Detroit did condemn Melvin¶s building and paid him $70. Melvin telephoned the mayor who confirmed the newspaper report. Melvin owned a building in a run-down area of Detroit. condemned? o See Reg. It has to come from a gov¶t body. Melvin read an article in a local newspaper that the city planned to condemn an area that included his building. Is Melvin entitled to nonrecognition of the gain he realized on the condemnation? What is Melvin¶s basis in the land he purchased in Ann Arbor? o Recognized 5k gain based on § 1033?  Problems with 1033 y Must have bought land in AA with purpose of replacing.000 in the building. Nevertheless.000 as compensation for the condemnation. and he held that property as an investment. y The mayor would be OK. Melvin had a basis of $50. o This is deductible as a casualty loss. y Basis in ann arbor land o See 1033(b)  . so he didn¶t invest the 5k. Melvin then purchased unimproved land in Ann Arbor at a cost of $65. o Any official within applicable department = adequate. o Fact that checked on condemnation suggests that he did. y Other property was not sold yet o Land in A2 was purchased before conversion ± but was there a ³threat?´  Is the newspaper article enough? Do we have to go to the mayor? y The service ruled that an unconfirmed news article is not enough.1033(a)-2(9)  This doesn¶t help o See 1033(g)  This satisfies the like-kind standard  Gives an extra year to replace the property y Amount realized was 70k. Renee accepted that painting as full compensation.000. 7. y What kind of property did he purchase v.000. Did Renee recognize a gain or loss? o 1033 applies only to gains. 1. The same facts as those stated in Question 6(b) except that the painting that Peter gave Renee to compensate her for the loss had a value of only $2. This statute is elective and also does not apply to a loss. which he held as an investment.

Hicks wished to acquire Blackacre (an apartment house) from Leslie.000. o Hicks  Has to have held the property he transferred for investment. Hicks then deeded the lot and building to Leslie in exchange for her deeding Blackacre to Hicks.000 in Blackacre which had a fair market value of $212.000. and exchanged it for property held as an investment as a like kind. o Leslie  She would not recognize a gain because she held property as an investment. Hicks and Leslie are not related.8. KAHN SAYS that the ruling is questionable. What were the tax consequences of those transactions to Hicks and to Leslie? o IRC § 1031 would apply because they are exchanging like kind investment/business properties.000. but most allocate between land and building. He never held it for investment ± he got it to trade. but she offered to exchange Blackacre for a lot in another part of town if Hicks would purchase that lot and construct an office building on it in accordance with specifications that Leslie would provide. The service has a ruling that this qualifies for Leslie. Nonrecognition. but does not qualify for hicks on the argument that hicks purchased for exchange. and he had the building constructed according to Leslie¶s plans at a cost of $165. Leslie refused to sell the property to Hicks. not investment. Leslie had a basis of $85.  Will take basis of 85k. y There are several CoA cases which have allowed 1031 in analogous situatiins o Esp the 9th Cir. No boot. . Hicks agreed. Hicks purchased the lot at a cost of $40. case he quoted.

000. and not compensated. Compute the amount of medical deduction allowable to Mona in each of following circumstances. in answering these questions.1%.  Mona can deduct medical expenses paid.125 (expenses) / $30000 (AGI) = 7.000 = 8.  Expenses y $2.213-1(e)(iii) y $5 (toothpaste) (not deductible). In Year One. o 7. $2.1% y This is over the 7. assume that Mona itemizes her deductions. no deduction.000 (premiums) (deductible via IRC § 213(d)(1)(D))  Dependent daughter allowed via IRC § 213(a) y Dependent defined in IRC § 152 o $125 (dental work) (deductible via IRC § 213)(d)(1)(A)) y Deductions? o $2. Mona. Jones for Mona¶s daughter.213-1(e)(iii) Deductions? y $2000 + $300 + $125 = $2425 y $2.000. y Expenses o $2.5% threshold) = $175 deductible. Reg. b. In that same year. In addition to the payments noted in (a). and $5 for toothpaste. § 1.5% threshold. IRC § 213(b)) y $20 (electric toothbrush) (not deductible. Mona also paid $20 for pills providing pain relief.  . and that all of the payments described below were made in one taxable year. Mona also spent $20 for an electric toothbrush. 213)(d)(3)) y $125 (dental work) (deductible via IRC §213(d)(1)(A)) y $20 (non prescription pills) (NOT deductible). Mona paid $125 to a dentist for dental work she incurred. Mona paid $300 to purchase medicines that were prescribed by Dr. IRC § 213(a).PROBLEM SET # 10 1. a.1% does not cross the 7. in excess of 7. had adjusted gross income of $30.125 o $2. § 1. Mona paid premiums for medical insurance covering her and her 4-year old daughter whom she supports. Reg.450 / $30.250) y $2425 (total expenses) .5 % of her AGI.$2250 (7.000 (premiums) + $125 (dentist) = $2. which pills were neither prescribed nor required to be prescribed by a physician. a single mother. The premiums she paid for that year amounted to $2.000 (premiums) (deductible via IRC § 213(d)(1)(D)) y $300 (prescription medicine) (deductible via IRC § 213(b).5% threshold (in Mona¶s case.

would that cost be deductible? o RULE: Capital expenditures for betterment or improvement of property may qualify as a medical expense to the extent they increase the value of the related property. but helps establish. His doctor requires him to go on a diet of bland foods that must be specially prepared. 353-54). y Apart from that. no deduction at all if food meets nutritional needs.  If Mike can show via receipts that his bill is different. 3.2. Phil had paid $2.213-1(e)(iii). Mike¶s weekly food bill is $20 greater than it was before he went on that diet. See Kahn § 8. y Half the extra cost is deductible. Ted is advised by his doctor to join Alcohol Anonymous. Can Mike deduct the extra cost he incurs? o Tax court has held that excess cost is deductible if TP can prove that special diet is necessary for medical purposes and can prove the amount of extra cost incurred. Id. o Hard to ever get a deduction if you had to amortize thinks like this o Central air  Probably going to increase the value of the property. y Maintenance and operating is also deductible  KAHN THINKS y This deduction is allowed because of the floor. doctor doesn¶t PROVE medical purpose. are any of the payments that Phil made deductible? If instead of a window unit.  How much will be allowed? y Only the extra cost of having it specially made. Phil has an asthmatic condition that adversely affects his heart. Phil¶s doctor advised him to purchase an air conditioning system for his home. Difference between cost and value added will be deductible. 4. Probably deductible. probably deductible. the cost is a medical expense. This will be tough though. IRC § 274(n) o KAHN SAYS  Remember. As a result of his special diet. Ted joins and spends $15 per week on transportation to and from the AA meetings.600 to purchase a central air conditioning unit and have it installed in his house. o Air conditioner and installation  Probably not going to increase the value of the property ± it¶s just an air conditioner sticking out the window. Without regard to the floor on deducting medical expenses. If the value of the property was not increased. Are those costs deductible? Would those .4000 (pp. Mike has an ulcer. Phil pays $400 for an air conditioning unit and pays another $30 to have it installed in a window in his bedroom. Reg§ 1. Reg  Capital expenditures for betterment or improvement of property may qualify as a medical expense to the extent they don¶t increase the value of the related property.  Bland food is a whole lot less questionable than going to palm beach.

not general health. a. § 1. To alleviate a heart condition. Expenses for transportation are deductible. Commissioner. o KAHN SAYS  Meals and lodging are not allowed while in Tuscon. not the former. So has the 6th Circuit. and lives there for four months at which time her condition is much improved. § 1. Kelly¶s doctor advises her to leave Virginia and live temporarily in Arizona until her condition improves. 340-41) y Doctor¶s instruction can be significant factor though.´ Brown v. . IRC § 213(d)(1)(B) covers the later.1140 (pp.g. but instead Ted had joined on his own initiative? o These costs are deductible.213-1(e)(iv) c. o Only time doctor¶s opinion is necessary because of doing normal everyday thing.213-1(e)(iv). Are Kelly¶s transportation expenses of moving from her residence in Virginia to Tucson and return deductible? o This is a doctor prescribed treatment to alleviate a specific condition. Kahn § 8. o KAHN SAYS  What about incidental things? y Sleeper car on train? o Significant price difference y Meal on plane? o Too incidental y This is an open question.  Even if Ted joined of his own initiative. See e. rents an apartment there. Are Kelly¶s expenses for meals and lodging in Tucson deductible? o No. b.  Alcoholism is probably recognized as a disease if obesity and smoking are issues where people can deduct. Tax courts have held these are included though.costs be deductible if Ted had not been advised by a doctor to join AA. y Mitigates or eliminates a consequence of a disease. Kelly goes to Tucson. IRC § 213(d)(1)(B). Fits IRC § 213(d)(1)(A). could she deduct the cost of her meals and lodging incurred en route? o travel costs need to be distinguished from transportation costs. Reg. 5. these would be deductible because ³an expense need not have been incurred on advice of doctor to qualify as deductible medical expense. If Kelly traveled by car to Tucson and return. Reg. Nature of services rendered is what counts.

but is prohibited by the federal Controlled Substance Act. which includes the cost of his food and room. and she seeks the services of a Christian Science practitioner to remove her symptoms. The practitioner talks with Matilda and prays with her to remove the spiritual blight that they believe to be the source of her symptoms. Does William¶s cost of purchasing the marijuana qualify as a deductible medical expense? See Rev.000 amount deductible? IRC § 213(d)(2): if TP stays in licensed hospital. KAHN SAYS « o Even though 213(d)(1)(A) does not specify that this needs to be done by a licensed doctor. 8. no element of personal pleasure deduct $50 per night. 97-9. KAHN SAYS o If it has to come by statute. Matilda is a devout Christian Scientist.6. o 14 nights x $50 = $700 deductible. William has an illness the symptoms of which are relieved by marijuana.000. Is all of that $40. He spends two weeks in the hospital and pays a bill to the hospital of $40. and there is no statute. See Kahn § 8. § 1. Food and lodging in in-patient hospitals are deductible medical expenses. Pursuant to a physician¶s prescription.1120 (pp. Reg. William purchased marijuana at a pharmacy. 1. 338-40) A treatment need not be administered by a a licensed medical doctor to qualify There was a case where the amount paid for services rendered by an authorized Christian Science Practioncioner qualifies as a medical expense (look to factors). Rul. - 7.  The doctor¶s permission can be vital to have when the item expensed is not extraordinary to the illness. o What about the Christian Science practitioner?  Reasonable probability of success standard?  Objective factors y Motive for treatment y Linkage between disease and treatment y Proximity in time of onset of disease and treatment  The Christian scientists prevailed = why not the Lourdes visitor? - . The regulations deny a deduction for medical care expenditures that are illegal. Donald is admitted to a hospital for an operation. Matilda become ill.213-1(e)(1)(ii).2131(e)(1)(v). should there be a deduction?  It¶s open to question. The purchase and use of marijuana for medicinal purposes is permitted by the laws of the state in which William resides. Is the cost that Matilda incurred in obtaining the services of the Christian Science practitioner deductible as a medical expense? It might. This is still open to question. Reg.

Henry does so. The doctor recommends that Henry take a cruise. and the justification of progressive rates is to equalize sacrifice. can¶t deduct. Henry has been working long hours for some time. Is the cost of the cruise deductible as a medical expense? No. See also Reg. o How identify?  Have a baseline which represents an ideal tax based loosely on hagesimons definition. then you might say that its legit that there be a reasonable means of addressing the illness. his doctor becomes concerned that Henry¶s run-down condition will lead to a serious medical problem for him. o Tax expenditure concept/budget  Gov¶t was required to set out a budget for tax expenditures y Tax expenditures simply an expenditure of the gov¶t via credit or deduction to carry out a congressional program. See IRC § 213(d)(1)(A). o Hypo  Individual goes to doctor. o If just for general well being. but the FDA regarded this as a fraud and the it was illegal in the US  People went to Mexico to get it. it is for his general welfare. y If you take KAHN¶s position that it is not a subsidy. Doctor says you have 6 months to live and there is nothing you can do. and he becomes lethargic. The individual flies to France and prays for a cure. and the notion of allowing expenses is an adjustment to the utility curve.o BETTER RULE  What is the purpose of allowing the medical expense? y If you believe the purpose of allowing a deduction is a subsidy the gov¶t gives. KAHN SAYS - . that progressive tax rates are built on a concept that there is a declining utility of a commodity received. there is some basis of reasonableness. Needs to be for treatment or prevention of disease.  KAHN thinks this is just a political device to make items more vulnerable. not a specific health problem.213-1(e)(ii). y This is allowed as a charitable deduction. y 9. Expense deductible? o Ruling involving scientologists  Person with gall bladder problem got audited by scientologists. The doctor tells Henry that he needs to take time off for work and go on an extended vacation. even money. § 1. Is that deductible? y Hey. Sign statement for spiritual experience and not a cure. At Henry¶s annual medical check-up. and his condition improves greatly. y Are they bona fidely done for that purpose? o Laetril example  There was a view that this would be helpful to cancer patients.

not his employer. Do the premiums for the following insurance policies qualify for medical expense deductions? a.213-1(E)(4)  This is really a wage supplement b. Peter chose to enter the program on his own initiative and was not advised to do so by a doctor. very large umbrella. Peter joined a program. Peter smoked a pack of cigarettes a day. Is any part of the $5. In order to end his craving for cigarettes. a. Blue Cross paid Gladys $5.000 in Year One.o Can you deduct annual checkup?  Techinically no. the insurer will pay a specified amount to the policyholder or his estate. In Year One. The cost of treatment for an addiction to a harmful substance is a medical care expense. Gladys is covered by a medical reimbursement insurance plan provided by Blue Cross. Gladys incurred and paid medical expenses totaling $5. Rul. y (b) is a very large exclusion. need to see specific illness  E. The program was successful. 99-28.000 to reimburse her for most of those expenses. Gladys had adjusted gross income of $64. In addition. hypertension o If Peter had insurance that he bought with his own money. The insurer will reimburse the policyholder for medical expenses incurred by the policyholder or his spouse.600. IRC § 213(d)(6) 12. and it paid for medicine or drugs that didn¶t require a prescription. Peter became concerned that his continuing to smoke would be harmful to his health. Treas. or loss of sight. Is the cost that Peter incurred to participate in the program deductible as a medical expense? See Rev. designed to break the habit of smoking. in the event of the policyholder¶s death. KAHN SAYS o For weight loss.000 reimbursement included in Gladys¶s gross income? . 10. The insurer will pay the policyholder $400 per week during a period in which the policyholder is disabled. it would be excludable. but nobody will challenge this.  For employer provided insurance see § 105. o Only the amount which is attributable to the medical care is deductible.g. 1. 11. and Peter no longer smokes. conducted by a psychologist. Gladys paid the premiums for the policy herself. o Premiums paid to provide specified amounts of payments to the insured in the event that the insured becomes disabled are not deductible as medical care expenses. Reg.

Was the employer¶s payment of one-half of the premiums included in Gladys¶s gross income? Was any part of the insurer¶s reimbursement of $5.000 from Blue Cross as reimbursement for part of the medical expenses she incurred and paid in Year One. KAHN SAYS y It is no included because it was all in the same year. WHAT? o b. The same facts as those stated above except that the premiums for the Blue Cross insurance policy were paid jointly by Gladys and her employer (each paid half of the premiums).5% floor on the deduction of medical expenses. What amount (if any) of that reimbursement is included in Gladys¶s gross income in Year Two? o $800 due to the tax benefit rule o KAHN SAYS  104(a). o 105(b) excludes the other half.  NOTE: this must be a REIMBURSELEMNT for a cost that is a medical expense. c. The same facts as those stated in Question 12(b) except that Gladys did not receive a reimbursement from the insurer in Year One. In Year Two. IRC § 213(a). Gladys claimed and was allowed a medical expense deduction of $800. The employer paid part of the premiums as a fringe benefit to Gladys. Gladys could not deduct $4. .800 of the $5. Gladys received $5.000 included in Gladys¶s gross income?  KAHN SAYS y 106(a) excludes from income employer contributions to accident and helath plans y 104(a)(3) excludes half of the payments y 105(a) says the other half is included unless 105(b)(c) apply. In her tax return for Year One. check these bitches out.  Gladys must include $5k in her gross income because it was reimbursed.600 of medical expense she paid in that year because of the 7. 105(a).

In a written separation agreement.415-1 (pp. H agreed to pay W $30. IRC §§ 71(b)(1)(A)-(D) o Payment received under instrument o No designation of payment as not includible in GI and not allowable as § 215 deduction. Did W recognize income from receiving that payment in Year One? Did H recognize income in a subsequent year because of having made that payment? o W received $30k as income. the payment is not pursuant to a divorce decree.See Reg. y Would it matter if H and W were still in same house? o Here. H also agrees to make any required mortgage payments on the house for so long as W is living.000 per year. and either spouse leaves after 1 month. H and W execute a written separation agreement under which H agrees to permit W to remain for life. See Reg§ 1.PROBLEM SET # 11 1. other than the mortgage payments during her life.000 in Year One.71-T A-3.  KAHN SAYS « y Lump sum make any difference? o No. y The terms are satisfied. o No liability to pay after death or substitute payments. rent free. there is some leeway.000 in cash one month after their divorce decree provided that W is living at that date. y Does H get a deduction for this? o Yes.71 Q9. The mortgage payments are $4. a written speration agreement and no divorce. The parties are divorced. 106-07).71-T A-6 y The payment of the mortgage is really for his benefit. See IRC § 71(a)  There is nothing to prevent a lump sum payment required by a divorce or separation agreement from qualifying as alimony if the terms of § 71 are satisfied. seealso Kahn § 2. The agreement expressly provides that H has no obligation to make any payments to W (or on her behalf) during her life or after her death. Pursuant to a divorce. not hers. The agreement expressly states that H has no liability to make any other payments to W during her life or after her death. o H and W not living in same household @ time of payment. in their former home which is owned by H alone. See IRC § 215 o H recognizes subsequent income?  IRC § 71(f) y Amount of alimony payments from year 1: $30k . § 1. Reg. it did at one time but not any more. and H made the required payment of $30. o If either spouse is preparing to leave. Does W recognize any income when H carries out the terms of that agreement after their divorce? o KAHN SAYS  Temporary regs say this is not alimony. payment can still qualify as alimony. 2. § 1.

But Kahn doesn¶t see any difference. year 2 = 0. In Year One. Might have even been a minute or two! o Service says these cases are different from tardy alimony. Two years after the divorce decree was issued.   Sum of « o Average of «  Alimony paid in year 2 (0) ± excess payments (0) = 0  Alimony paid in year 3 = 0  0+0 / 2 = 0. H and W divorce. and Ralph paid those expenses in accordance with the divorce decree. Ralph and Jane were divorced. H is not required to make any other . 4. o $15k $15k in GI in post separation year 1 will be included H¶s income in year 3. is he still liable to pay the medical expense? Does this fail to satisfy the requirement in 71(b)(1)(D).000. and the divorce decree requires H to pay the premiums on the declining term life insurance policy until the death of either H or W. A medical expense is a support payment. Ralph has no obligation to make any other payments. y 3. What were the tax consequences of that payment to Ralph and Jane? o KAHN SAYS «  The problem here is that if she dies. but after death. o In the medical reimbursement. o Year 1 = 30k. year 3 = 0. does not deprive it of being alimony. it seems even more plausible for the taxpayer. W will get a $15k nonitemized deduction in year 3. See the Webb case in the teal book.  The fact that a payment is made late. W owns a declining term life insurance policy insuring the life of H. Court ruled it did not qualify because she might have died between time signing and paying check. H and W signed agreement where H was to pay lump sum immediately after execution of agreement. this takes it out of alimony. How do you distinguish that situation from this one? y She COULD die before he paid. which in effect wipes out any deduction you got in the first year. y The whole idea is income splitting This forces income recognition in the 3rdpostseperation year. The divorce decree requires H to pay any medical bills that Jane incurs at any time after the divorce decree is issued. The position of the service is indefensible. y 3 year period for front loading. o In Webb. Jane incurred medical expenses totaling $14. not a property settlement. Because she MIGHThavedied before he paid.

implies that if SHE owns the policy.5k (average amount recaptured from Unrecaptured payments made in years 2 & 3 [$77. Reg. inference is that it would not be alimony. and pay the policy? y The Reg. 5. H and W lived for more than 10 years after their divorce.71-T A-6 o KAHN SAYS «  What if H owns policy.5k . H and W executed a written separation agreement under which W agreed to pay H the following amounts in the indicated years: Year One Year Two Year Three Year Four ± ± ± ± $200.000 $120. If HE owns policy. it¶s alimony.payments to or on behalf of W.5k] + $15k) = $107. after the divorce. What were the tax consequences to the parties of the payments made in Years One through Four? o Excess payments in 2nd PSY  $120k(year 2 payment) ± 85k(year 3 payment + 15k) = $35k(amount recaptured in year 3 from 2 payment) o Average Unrecaptured Payments Made in Years 2 & 3  $70k (year 3 payment) + $85k (year 2 payment [$120k] ± amount recaptured in year 3 from year 2 payment [$35k]) = $155k  $155k/2 = $77. payment is made to beneficiary. H paid the premium of $3. Premiums paid by the payor spouse for term or whole life insurance on the payor¶s life made under the terms of the DSI qualify as payments obo the payee spouse to the extent payee spouse is the owner of the policy. § 1.000 on the policy.000 and$50. and he is still alive? It would be worthwhile for someone who got the policy to pay the premium.000 $50. y Term life insurance payment for a term. The option to renew might be a valuable element if he¶s about to die and the beneficiary can cash in. All you have is on death. and no payments are to be made after H¶s death.5k o Excess Payments in 1st PSY  $200k (payment in year 1) ± $92. In Year One. no equity in a policy. o It¶s one thing if you have an equity interest in policyholder ± why should it make a difference if he or she owns it?  Suppose she dies. What was the tax consequence of that payment? o This will qualify as alimony. No other payments are to be made. W made timely payments to H of all of the payments required by the agreement.000 $70.000 for each year thereafter for the rest of H¶s life. but decree makes him name her as beneficiary.

y Because within 1 year. The trust provided Ellen an annual annuity of $25.5 (Unrecaptured payments made in years 2 & 3) = $142.5 deductible by H in year 3. Still OK if related to cessation of marriage. any assets remaining in the trust are to be distributed to Robert or to his estate.000. What was the tax consequence of Robert¶s transfer of appreciated stocks to the trust? What were the tax consequences of the annual payments of $25. Immediately after the divorce decree was issued. then go into front loading. Robert established the trust and transferred to the trustee appreciated stocks having a value of $400.000 that the trust made to Ellen? o This is an alimony trust. Id.000 to the trust. o KAHN SAYS  What if they set up trust before they got married? . y The trust pays tax on the excess. o KAHN SAYS «  Be sure to say things about alimony and deduction first. The divorce decree required Robert to establish a trust and contribute stocks having a value of $400. Robert and Ellen divorced in Year One.  Why take off excess payment for average recaptured payument in years 2. and is covered in IRC § 682  No amount is included in Robert¶s GI.  The amount is included in Ellen¶s GI if the trust pays that amount.000 for so long as she lived. made within 1 year of divorce (1041(c)). Upon Ellen¶s death. 1041 says that if the trust is transferred to a former spouse incident to a divorce. IRC § 682(a) y A transfer to a spouse/former spouse and transferee takes same basis as transferor. o If within six years. No payments were required to be made other than the settlement of the trust and the distributions from the trust. same amount included in W¶s GI. 1041 automatically applies.3? y Don¶t want to double-recapture  Don¶t design big payment late in the year to avoid finagling with the numbers 6.o Excess Alimony Payments for years 1 and 2  $35 (amount recaptured in year 3) + $107.

A storm. See Rev. but commissioner says termite damage is not deductible as a loss because it is not ³sudden.PROBLEM SET # 12 1. See IRC § 165(c)(3) KAHN SAYS « y The amount of the deduction is « o Adjusted basis. y Only the damage to the property itself suffered that this applies to.Rul. Is the cost of renting the suite at the motel deductible?  No.2210. Are the following losses deductible subject to applicable floors on the deduction for casualty and theft losses? a. . Does Mark qualify for a deduction? If the porch had become unsafe due to damage caused by termites. Mark incurred a cost to replace the porch.72-592. See Kahn § 7. Martha and her family moved into a suite at a motel for that fiveday period. No deduction is allowed for additional living expenses incurred as a consequence of the unavailability of a damaged residence. if Mark noticed the problem and reacted quickly when he first noticed the damage.´ See Kahn § 7. Commissioner.2200. in the middle of a cold winter. Kahn § 7. IRC § 165(c)(3) (specifying ³losses of property . c. and so Martha¶s home had no heat or lights for five days. Termites y Courts are divided on this issue. because rust is not swift and precipitous ± it is gradual and progressive. y If you bought a house that included trees. The front porch of Mark¶s residence became unsafe to use because of rust. the court .200. what would the basis be? o 1. this is a storm and is explicitly provided for in the statute. . Some trees and shrubs in the yard of John¶s residence were uprooted by a tornado and died. y Perhaps. In Short v. would Mark qualify for a deduction?   Rust y No. ´).165-7(b)(2).   Yes. caused a power failure in the area in which Martha and her family reside. b. We don¶t have to know the basis of the trees and shrubs ± the value of the trees and shrubs can be deducted from the entire property. No deduction for loss you had to spend not because of predictability ± it didn¶t damage the property.

1. and valuable pieces of jewelry were found to be missing. If Pat can present evidence sufficient to support an inference that the loss was due to theft. d. Pat¶s home was burglarized. There¶s another element to this ± unexecpectedness y If you drive a car in an urban neighborhood. The setting in the ring had given way. Allen was required to pay the owner of the other car an amount equal to the loss of value that the other car suffered. and is a slow. This is probably comparable to rust.2210. The same facts as those stated in Question 1(d). KAHN THINKS we ought to have a better standard than how fast termites operate. Allen did not have liability insurance. the automobile was badly damaged by a collision with another car. Is Sue¶s loss deductible?  Probably not. Theft includes burglary. g. Is Allen¶s payment deductible by him?  No. then yes. you have a reason to think this is forseeable.y acknowledged that a drought can be a casualty under the appropriate circumstances ± but not when there is a substantial period of time between the cause and the discovery of the damage. o Maybe it¶s too close to a shipwreck.615-7(a)(3)(ii). Is any of the damage to Allen¶s car deductible?   Yes. Hilda wore a valuable diamond ring. Sue stored her fur coat in a closet. A search for the diamond was to no avail.165-8(d). as long as it was not gross negligence. If there is a SUDDEN LOSS by an OUTSIDE FORCE. Moths ate holes in the coat. Reg. See Kahn § 7. and the collision was caused by Allen¶s negligence.3000. Allen owned an automobile that he used for personal. Hilda had not noticed that when it occurred. she discovered that the diamond that had been in the ring was gone.2210. but this standard has never been applied. While driving the automobile. The jewelry had been used by Pat for personal wear. Reg. e. Nothing in the statute or regs allows this. and the diamond had fallen out. We ought to be talking about the day to day deterioration that reasonably comes with an item should not be allowed because it fits into your rate schedule. Because of his negligence. nonbusiness purposes. One day. f. Is Pat¶s loss deductible?   h. and it became worthless. this is deductible. gradual deterioration of property. See Kahn § 7. See Kahn § 7. 1. Is Hilda¶s loss deductible? .

 AGI = $80k. this car reduced in value $10k. y Painting o 5.$80k x 10% = $8k  Therefore. 1. and its value after the accident was zero. Owen¶s adjusted gross income (AGI) for Year Three was $80.250 ± 0 ± 100 = 5. 1. Owen itemized his deductions for Year Three.050. In Year Three. Owen held the painting for personal use.2210.165-7(b)(1)(i). y The reg is a reasonable construction ± 165a says that you deduct a loss. o KAHN SAYS «  Before the accident. and Owen used the vehicle only for personal. You shouldn¶t be able to deduct more.900.000. Also account for the $100 rule. The other $10k was not sustained because of the accident. y Car o 20k ± 0 ± 100 = 19. What amount of deduction is Owen allowed for the damage to his car and the theft of his painting? o Net Casualty Loss Calculation  (REMEMBER: These are two separate incidents of loss.165-8(c).  Net Casualty Loss = $19. he couldn¶t deduct this because it was personal use if he sold it for $20k. 3.  Amount deductible for theft loss is [FMV immediately before loss] ± [FMV immediately after loss] . the fair market value of the automobile was $20. the loss is not going to be deductible. IRC § 165(h)(2). The same facts as those stated in Question 2 except that Owen used the automobile exclusively in his self-employed business. Owen also suffered a theft loss of $5.050 ± $8k = $17. 2. Owen purchased an automobile in Year One for $30. so the $100 rule applies to each loss.000 (his adjusted basis is the difference .)  Amount deductible for casualty loss is [FMV immediately before loss] ± [FMV immediately after loss]. deductiblecasualty loss = $25.250 when a painting was stolen from Owen¶s home. If the ring gave way because it gradually deteriorated. Should the accident afford him the $10k? No.000. the automobile was demolished and rendered worthless when a tree fell on it. y The loss must be sustained because of the accident. In Year Three. Reg. Immediately before the accident.150 =$25. non-business purposes.050 o The Net Casualty Loss must exceed 10% of AGI to be deductible.000. Owen¶s adjusted basis in the automobile immediately before the accident was $22. IRC § 165(h)(1) (loss must be more than $100 for property not used in trade/biz/income production).$100.900 + $5. (loss must be more than $100) Reg.150. See Kahn § 7. 165b says you use ³basis´ ± your investment.

]  Total casualty deduction:$15000 ± $8k (10% of AGI) = $7k o KAHN SAYS « o In this situation. If. Reg.500  [1:58 PM] Jason Mohr: the second part is 15. amount of loss = FMV. but substituting $22k (adjusted basis) as the casualty loss.$5k (FMV after casualty)= $15000 y [Remember.  so the first part is 12.  Now. What amount of deduction is allowable to Owen because of the destruction of his car? o If the property is business property and is totally destroyed. no $100 floor because this was used in a trade/biz.  So. y [No 8k deduction for this.between his original cost of $30.$100 (floor) = $14900  Total casualty deduction:$14900 ± 3k (10% of AGI) = $11900. 1.$5k (FMV after casualty) .000 and the depreciation deductions allowable to him while he held the car). in Questions 2 and 3 above. IRC § 165(c)(1).000. 4. Owen¶s automobile had not been destroyed by the accident. no 10 of AGI limitation. and uses his own car exclusively in his business as an employee « y Now it¶s an itemized deduction ± it¶s a personal loss. y He has $2000 more basis he can never recover. 1. take lesser of basis or FMV before and after.000?  [1:58 PM] Paul Kuppich: u just forgot the painting  [1:59 PM] Paul Kuppich: and that the agi was 80k  [2:00 PM] Paul Kuppich: so 14900+ 5150-8000 . if he is an employee. and if its fair market value immediately after the accident was $5.615-7(b)(1) o Question 2  Loss: $20k (FMV before casualty) . y They have essentially lapsed two different deductions into one. this is essentially the same calculation as in problem #2. but not in personal property? y Shifting the business expense deduction from the future to now. o Question 3  Loss:$20k (FMV before casualty) . the amount of loss is the adjusted basis irrespective of whether the adjusted basis was greater or lesser than the value of undamaged property prior to the casualty. What amount of deduction for the damage to the car would be allowable to Owen in Question 2 and in Question 3? o If property not destroyed.6157(b)(1)(ii). it is not a personal loss] o KAHN SAYS «  Remember. Deduct $15k. Reg. no $100 deduction on this because we are in IRC § 165(c)(1).  No 100 floor. not (c)(3).  How reconcile using the adjusted basis here.

$250.165-9(b).000 to construct a new building on the land. consequently. or (B) any loss sustained on account of such demolition. and six months after renting the property.000 to have the building razed.000. All of those costs were incurred and paid in Year One.]  [Remember: a loss sustained on the sale of residential property owned by TP for personal use is NOT deductible under IRC § 165.000 was attributable to the land and the remaining $150. . In Year One. Bert moved out of the house and rented it to Richard for a fair amount of rent.000.000 was attributable to the building. The value of the house continued to fall.Demolition of Structures. Reg. The Regs provide for residences explicitly in Reg. five months after purchasing the property. Bert purchased a house that he used as his home. Richard offered to buy it from Bert for $110. In the case of the demolition of any structure² (1) no deduction otherwise allowable under this chapter shall be allowed to the owner or lessee of such structure for² (A) any amount expended for such demolition. Myra purchased improved commercial real estate for $400. Of the $400. what would his basis have been? y His adjusted basis at the time of the conversion.000. if less than the adjusted basis. Myra intended to use the property as the base from which to conduct her advertising business. and (2) amounts described in paragraph (1) shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located. What amount of deduction (if any) can Bert take because of that sale? o When property is converted from personal use to an income-producing use. What amount of these costs is deductible by Myra? [NOT IN BOOK!] IRC § 280B. the FMV of the property on the date of the conversion.$110k (sale price) = 20k. Bert accepted the offer and sold the house for that price. and she paid another $300. Bert paid $250. y [Remember: This is still subject to Bert¶s AGI. 1. basis or FMV? y He talked but I was on Facebook.  Deduction: $130k (FMV) .000 that Myra paid for the building. After moving into the building. The fair market value of the house at the time that Bert rented it was $130. Bert and Richard are not related. Over time. [2:01 PM] Paul Kuppich: come out to 12050 5. and consequently the value of the house fell. shall be used as the basis for determining the amount of loss.165-9(a) o KAHN SAYS «  For gain purposes. IRC § 165(h)(2). Myra discovered that it was not satisfactory for her purposes.  Justification for lesser of Adj. 6. In Year One. In Year Ten. the neighborhood in which the house was located deteriorated. 1.000 for the property. Myra paid $80.

IRC §280B(1)(A). This should not get deducted either. . this means that the $80k is not deductible. o The $300k to build a new structure is not demolition. but it is not a loss because it is the creation of an asset. o The basis in the land is not $400k and the $80k she spent tearing it down.o So.

  No.1470. 1. o This is a capital expenditure. Nick did not get an offer from any of the firms. Nick flew to New York City. Is that payment deductible? . this difference was abandoned by the Service. Can he deduct any of those expenses in the following alternative circumstances? i.1475.212-1(f).PROBLEM SET# 13 1.  Eventually. it¶s an expense under § 162. stayed at a hotel for several days while he was interviewing. KAHN SAYS « y Code doesn¶t say this. and he accepted it. o Litigation over this  Difference between SEEKING and SECURING a job. Kahn § 10. y ii. Id. and had his meals in restaurants. but the commissioner has ruled this. Nick is a recent graduate of the Chicago Law School. and are they miscellaneous itemized deductions? a. iii. y If you¶re already in the line of business. KAHN SAYS « y The reg (above) says No deduction under § 212 for seeking employment. and they agreed to interview and consider him for a position as an Associate. KAHN AGREES. Nick contacted three large New York City law firms. Is the reimbursement included in Nick¶s gross income?  The expenses are excluded from Nick¶s income.   No. Nick did not receive any job offers from those interviews. not an expense. Rul. Kahn § 10. 63-77. Nick got an offer from one of the firms. and he has passed the New York state bar examination. See Reg. Are the following expenses deductible? If so. are they itemized deductions. At his own expense. Will obtained a secretarial job through an employment agency. and Will paid the agency $600 (one week¶s salary) for securing the job. b. Nick was not reimbursed for his expenses. but one of the firms reimbursed him for his expenses. See Rev.

o The service says the uniform is deductible if «  Required by emplouer y True here  Not adapatable for general use y Meets this  Don¶t actually wear it y Meets this too. Kahn § 10. d.262-1(b)(8) o Says that a reservist can deduct cost of uniform because the reservist can¶t wear uniform outside of duty. and this says by inference that the regular army solider CAN wear his uniform off duty. See Primuth v. Helen. Can the officer deduct the cost of that uniform? Does it matter whether the officer is in the Reserves or is in the Regular Army? o Deduction  Yes. Kahn § 10.o When employees use employment agencies to find jobs within the same trade. KAHN SAYS this is probably out of date. c. Rul. either subjectively or objectively. See Rev. purchases a nurse¶s uniform. 1. 70-474. o This is an itemized deduction.1490.1490.1471. o KAHN SAYS «  This depends on if Will¶s work history. Helen is required to wear the uniform when she is on duty. 70-474. See Rev. this would be a deductible expense under IRC § 162(a)(1). An officer in the United States Army purchases a uniform. Kahn § 10.and there is no exeption in IRC § 67 to make it a miscellaneous itemized deduction. Is the cost of the uniform deductible? o Yes. y If he WAS a secretary. Rul. who works as a nurse at a hospital. Commissioner. y Uniforms are probably required for officers y Army uniforms are probably not readily adaptable to general use as regular clothing. o Reserves or regular?  KAHN SAYS « y Look at Reg. o KAHN SAYS  Why isn¶t this adaptable for general use? . thus it is not deductible. y How long was a secretary? Was there a long break in his work history? These are all facts which need to be considered. the expenses are deductible.

y Clearest case o Woman was a singer. which is necessary for the deduction.1370. this would be deductible.  KAHN SAYS « y The position taken by the service is that offering for RENT does not constitute a conversion. and Margaret works in the patient¶s home. . Can Larry deduct maintenance costs he incurred between Years Five and Seven when the house was on the market for rent or sale? o Yes. At the time of the listing. 70-474.000. The patient lives at home. Rul. [this seems to be the objective standard]. y Conductor¶s tails and tux? There are other events where this can be worn. Kahn § 10. the fair market value of the house was $380. This puts a premium on reimbursements. y Pevsner said that she cannot use a subjective standard. and had to use a community standard. y e. Id. o Keep in mind that styles do change. Larry can deduct the costs. Margaret works as a private nurse for a patient. This was deductible.000.  This means only that under normal community standards it would be peculiar. because the reimbursement will not be income to them. The employer does not require Margaret to wear a uniform. Can Larry deduct the loss he suffered on the sale in Year Seven? a. Larry moved out and listed the house with a real estate agent for rent or sale at the purchaser¶s or renter¶s option. o But if you had a costume where you were in a play. 2. and what community do you use? Town? State? Profession? This leaves open a lot of issues. but Margaret chooses to purchase a uniform and wear it when she is working.1490. If this is an employee business exepense. had to be on TV. Larry purchased a house in Year One for $350. Larry lived in the house and used it as his residence until Year Five. The employer does not require the uniform. and she bought a dress so tight she had to be picked up on carried away. The agent was not successful in renting or selling the house until Year Seven when it sold to an unrelated person for $320. Kahn § 10. See Rev. There has been a lot of litigation over uniforms. In Year Five.000.  Merely attempting to sell an unwanted prior residence will not usually qualify as a conversion to an income-producing activity. but a bona fide offering of a former residence for rent (or option for sale at purchaser¶s option) is sufficient to constitute a conversion. this is a miscleaneous itemized deduction. Is the cost of the uniform deductible? o Probably not.

Commissioner. During the period. when the house was rented. b. Thus.1370.y Offering for sale: generally no.  If we were allowed a deduction. loss basis is lower of FMV or adjusted basis. y Most 212 expenses are itemized. depreciation deductions are allowed. Newcombe v.  Usually this can¶t be deducted.  Original basis = 350k. What amount of gain or loss did Larry recognize on that sale? o Renting a property will suffice as converting a former residence to an income producing property. it can qualify as holding the property for the production of income and thus the exenses would be deductible.000. but if Larry can show that he intended to hold the property until post-conversion appreciation (which he probably can¶t here ± no indication of this). value = 280k. In Year Seven. Kahn § 10. and the fair market value of the house when Larry listed it in Year Five was $280.1370. IRC § 162(a)(4). This is one of the few that are not. gain basis = 330k.  When he lists it in year 5. The fees that Susan paid her lawyer to represent her in litigation in which Susan sought a divorce and alimony from her husband. it would be nonitemized. Are the following expenses deductible? a. while used as a residence. Years Five to Seven. o when offering for sale immediately after moving out. The same facts as those stated in Question 2 except that the real estate agent was successful in renting the house in Year Five for a fair rental. Would it matter to the determination of deductibility whether Susan was successful in that litigation? . If Larry offered the house only for sale. o KAHN SAYS  Remember. 3. no depreciation deductions allowed.000 for the house. itemized.  Might have a difference if he¶s holding it for sale for improvement. could he deduct maintenance expenses he incurred between Years Five and Seven? o Probably not. o KAHN SAYS «  Code section for maintenance expenses: IRC § 212 or IRC § 167  For a loss to be allowed. the property has to decline in value after the conversion. depreciation deductions will be based off this. and he didn¶t sell for more than that. Larry claimed and was allowed depreciation deductions totaling $20. Larry sold the house for $270.000. Kahn § 10. 4. and did not offer it for rent. and mostly misc.  $280 (loss Basis) ± 20 (depreciation) ± 270 = no gain. then almost unquestionable NO.

Randolph and Jennifer got a divorce. The same facts as those stated in Question 4(a) except that the divorce decree required Susan¶s husband to pay Susan¶s legal fees. y This expense is a misc. Should that be deductible? The origin test says this is related to marriage. See Kahn § 10. Alimony relates to the production of income. He cannot deduct his own legal fees. through their lawyers. . no deduction is allowed.262-1(b)(7). SHE can deduct it. negotiated and executed a settlement agreement. Kahn thinks this might work even if it was not alimony.1360. Rul. o KAHN SAYS  If H pays the legal fees.  Since alimony is includible in gross income. but this is so much closer to business activities that it seems totally inappropriate to say this would not be deductible. Are any of those fees deductible? o Federal Circuit says yes. See Rev. 72-545. it¶s not for the production of HIS income.  The success in this litigation would not matter ± it is still an expense relating to generation of income. c. but the portion related to alimony is. and it is deductible under IRC § 212. are those payments deductible and by whom? o These would be deductible by H as alimony so long as there was a provision saying that the payments were to terminate in the event of Susan¶s death.  Expenses related to obtaining tax advice incident to a divorce proceeding are deductible under IRC § 212(3). because it was constructively received by her. expenses of seeking alimony are a deductible expense. Randolph paid his lawyer¶s fees for tax advice he gave Randolph concerning the terms that he should seek to obtain in the settlement agreement and for drafting the agreement.  If it WAS alimony. the parties. itemized deduction. Reg. provided that there is a reasonable basis for determining the amount of the legal fee allocable to tax advice. but to make it a shibboleth you have to meet in every circumstance is strange.  KAHN SAYS y The allocation must be reasonable y Gilmore case: can this be squared with the claim for alimony? y How close is the nexus between the claim? o Example: wife makes defamatory statements to divorced husband¶s clients. The origin test can be used in some circumstances. Before the law suit was filed.o The portion of the legal fees for the divorce is not deductible. If she can¶t separate them. subject to 2% AGI floor and over all limitation imposed by IRC § 68. b. 1.

it is a misc. But. and both were wealthy. They consulted a lawyer to have him draft an antenuptial agreement. itemized deduction. 212-1(l) indicates counseling itself is deductible. Is the lawyer¶s fee deductible? o Yes. If you look at the regs.o KAHN SAYS  What about counseling/advice? Service has ruled YES. d. which they executed. Both parties had children and grandchildren from a prior marriage. Hilbert and Phyllis decided to marry. .

Reg. o No capitalization required other than for employees. expenses related to her t/b while at the destination are deductible. Joseph teaches Japanese in a public high school. y Also see IRC §263A(h). y Check out IRC §263A(a). 1.PROBLEM SET # 14 1. She was not reimbursed. and for meals and lodging in Jordan.  Problem that arises here ± can this be treated as a capital expenditure in the production of the article. 1.  Other argument for Mary y 263A is about matching expenses with the income it produces. Seems like this might be includible. but this probably deals with R&D. it looks like most of the expenses are directly attributable to Mary¶s t/b of being a scholarly professor. Joseph traveled to Japan and spent two months there immersing . See Reg to Reg. Mary Lane is a professor of Archaeology at Holy Cross University.  The fact that she has no teaching duties during the summer should not matter. During the summer period of Year One.  Even if the trip was personal.162-2(b)(2). not in Jordan. she traveled to Jordan and conducted an expedition that uncovered archaeological data that formed the basis of a scholarly article that she subsequently wrote and published in a learned journal. not intended to cover this.162-2(d) (noting that employees going on conventions during their vacation or leave time does not necessarily prohibit the allowance of the deduction of the costs of attending the convention. Professor Lane paid for her own expenses in traveling. Reg. when Professor Lane has no teaching duties. Scholarly article of this kind does not produce any income! 2. 1. If this is a legitmate business expense. During the summer of Year Two.) o KAHN SAYS «  You can come under IRC § 162(a) even if not under (a)(2).  In this case. and they seem to be ordinary and necessary expenses.  She can also be improving her skills as an archaeologist. and just treated as her basis in the copyright she has in the article. IRC § 162(a)(2). conducting the expedition. Her home is in MA.  Whether a trip is primarily related to TP¶s t/b or personal depends on the facts of each case. y See also § 174.162-2(b)(1). she has no problem with this. (h) will probably not save her. You shouldn¶t be able to take a deduction now to create income over a number of years. Can she deduct those expenses? o Yes. when he had no teaching duties. WTF.

3232. . transportation cost of traveling from one job site to the next is a deductible business expense. There are severe limitations on the benefit. Henry drives from his residence to his workplace in Ypsilanti.3230. including meals and lodging. o If his employer reimbursed him. 63-145. Two months of each year. Kahn § 10. o KAHN SAYS «  Detroit y Cannot deduct Ann Arbor to Detroit y Cannot deduct meals. In the evenings. At the end of his workday in Ypsilanti. These expenses are deductible under IRC § 162(a). Henry drives the three blocks to his home and goes to bed. Rul. he can only deduct 50% of his meals (IRC § 274(n)) and the travel expenses will be subject to the 2% AGI floor and itemized deduction limitation. Henry resides with his family at his home in Detroit. Henry is employed by a retail firm that has its headquarters in Detroit. When his work at the warehouse is finished. and Henry lives in a hotel in Miami for those months and takes a taxi from the hotel to his office and return each workday. Can Joseph deduct his transportation and living costs? o See IRC § 274(m) ± travel is NOT a deductible form of education. Henry lives in Ann Arbor and commutes to his office in Detroit. Are any of Henry¶s transportation expenses deductible? o When TP works at several jobs during the same day. itemized deductions.3230. Henry¶s wife prepares a meal for Henry which he takes with him in a brown bag when he goes to the warehouse. Rev. Henry owns a home and resides in Ann Arbor. Henry is required by his employer to work at an office of his employer in Miami. because they are away from home. Each workday. See Kahn § 10. they would be nonitemized expenses. He works during the day at a factory in Ypsilanti. IRC §§ 67(b). for 10 months. What expenses can Henry deduct? o Henry can deduct the round trip expenses incurred in traveling to his minor post. 3. o Henry can aso deduct the cost of commuting to and from his office from his lodging if the costs are reasonable. laundr y All of these expenses are employee business expenses o Misc. Henry¶s wife and children do not accompany him when he is stationed in Miami. Kahn § 10. Rul. 68. no sleep or rest  Miami y Can deduct meals up to 50% y Can deduct hotel. 4.  If he is unreimbursed. 55-109.himself in the language and culture of the country. Henry moonlights by working as a security guard at a warehouse in Detroit that is located three blocks from Henry¶s residence. See Rev. Henry drives directly to the warehouse in Detroit. Each year.

because he is not away from home. Henry were to drive home first.   b. If you just stopped home and grabbed some food and went right back out. would any of his transportation expenses be deductible?   This seems to be a commuter expense. If. not his residence.o Driving to his first job and home from his final job is NOT deductible.62-2(e). Same reason as above. home is the location of TP¶s principal place of business. If. 1. this would be OK.3220. See Kahn § 10.3200. Any mileage diversion would not be allowed. the transportation expenses are not required to be for transportation away from home. a. KAHN SAYS y At some point. Kahn § 10. See IRC § 162(a) (which lacks an away from home requirement) The meal probably cannot be deducted. and would be deductible. it is no longer an interruption in the trip ± it is a termination of the trip. have dinner. . KAHN SAYS y You might be able to deduct it if you didn¶t go too far out of your route. would that effect his right to a deduction for his transportation expenses? Would the cost of the dinner be deductible?  If eating is a necessary/ordinary expense. Henry were to stop at a diner en route and have dinner. instead of driving directly to the warehouse. He does not require a night¶s rest. which is prohibited from deduction. Reg. and then drive from home to the warehouse. instead of driving directly to the warehouse from his job in Ypsilanti. y Remember.

000.D. and her name is also the name of the corporation. The corporation¶s business has been very profitable. While Martha professes her innocence. Pluto. 2.40% Mary . Something that builds the goodwill of the company. Can Hilda deduct the tuition she paid to Notre Dame? 5. The government has offered to settle the issue with Martha by her paying a fine of $2. and the corporation pays the fine. She decided to go to law school in order to improve her skills in her accounting work. The federal government has accused Martha of insider trading and of lying to the investigators. To terminate the bad publicity that the charges against Martha have generated and the harm that it has caused the corporation. In Question 2. Are the expenses of institutional advertising deductible? Yes. and the corporation will pay the fine. but not related to any particular product that they are selling. Hilda enrolled as a student in the Notre Dame Law school.20% . you should have to capitalize and amortize. Hilda works as a CPA for a large accounting firm. Hilda had no intention to practice law. more than a year out.PROBLEM SET # 15 1. is a corporation engaged in the retail furniture business. Martha is the president and major stockholder of a publicly held corporation. if Martha rejected the settlement offer and instead litigated the issue with the government. If there is significant future benefits. the corporation urged Martha to accept the settlement. Look at Reg. Pluto has three shareholders who hold the indicated percentages of Pluto¶s outstanding stock. degree. Martha accepts the government¶s offer. and she earned a J. Inc. Peter B 40% Paul . The value and success of the corporation¶s business rests on Martha¶s personal reputation. What are the tax consequences to Martha and to the corporation of the payment of the fine? 3.000. 1. could she deduct the legal fees she incurred in litigating the issue? 4.162-20(a)(2). the scandal has damaged the corporation¶s profitability and reduced the value of the corporation¶s stock.

Each year. Marina practiced law as an associate in a law firm in the State of New Jersey. The salary and professional opportunities in the Atlanta job are much greater than she had in New Jersey. 40% for Paul. Paul and Mary that is divided among them in the following proportions: 40% for Peter. Marina pays a fee of $100 to take the Georgia bar exam. Marina was offered a position as a partner in a law firm in Atlanta. the total amount of bonus payments made by Pluto is approximately equal to the net profit of the corporation exclusive of the bonus payments. or miscellaneous itemized deductions? . After passing the exam. Can the corporation deduct the bonus payments it makes to its three employees? 6. Marina accepts the Atlanta offer. itemized. Are any of Marina¶s expenses deductible? Are they nonitemized. and 20% for Mary. To prepare for taking the Georgia bar examination. Marina paid a fee of $200 to be admitted to the Georgia bar. Pluto declares a bonus for Peter. In December of every year. Marina pays $400 to take a bar review course on Georgia law.All three shareholders work as employees of the corporation.

200% declining balance. See Kahn p. On January 1.   100% / 5 years = 20% per year straight line rate y 200% of 20% straight line rate= 40% for 200% declining balance rate Deductions y 1971 = $30k (basis ± remember to ignore salvage value) x 40% (depreciation rate) = $12k y 1972 = $18k (adjusted basis) x 40% (depreciation rate) = $7200 d. The machine had a useful life of five years. 524 y 5 x (5+1) / 2 = 15 y 1971 = $25k (price taking salvage value into account) x (5/15) = $8.  Use the shorthand technique.   100% / 5 years = 20% per year straight line rate y 150% of 20% straight line rate = 30% for 150% declining balance rate Deductions y 1971 = $30k(basis ± remember to ignore salvage value) x 30% (depreciation rate) = $9k y 1972 = $21k (adjusted basis) x 30% (depreciation rate) = $6300 c. a. ignore IRC §§ 168(k) and 280F. he can depreciate $5k in 1972 b. The estimated salvage value of the machine at the end of its useful life was $5. John paid $30. that section is not applicable to the machine¶s purchase.334 . 150% declining balance.000.   $30k (basis) ± $5k (salvage value) = $25k to be depreciated y $25k/5 year useful life = $5k per year So. Compute the amount of depreciation deduction allowable to John for the taxable year 1972 under each of the following methods of depreciation.000 for a new(note the difference!) machine that he used in his business. Since the machine was purchased before § 168 was adopted. 1. Straight line.PROBLEM SET # 16 In answering the questions below. John did not elect to take a deduction under § 179. 1971. Sum of the years digits.

what amount of depreciation deduction is allowable to Helen for Year One. 3. o Year 1 = $2k. On February 24. Helen purchased a used (remember.y 1972 = $25k (price taking salvage value into account) x (4/15) = $6667 2.  Year 1 = $4000 y $20k x 20%  Year 2 = $6400 y $20k x 32%  Year 6 = $1. Year Two. and Helen elected to depreciate the machine on the straight line method. Helen made no other purchases that year.152 y $20k x 5. we don¶t care whether new or used under MACRS o Every class of property.76% . half year convention) o Year 2 = $4k o Year 6 = $2k  Remember. half year convention again. The machine has a 5-year recovery period. Helen did not elect to expense any of the cost of the machine under § 179. and she immediately placed it in use in her business. What amount of depreciation deduction is allowable to Helen for Year One. The same facts as those state in Question 2 except that Helen did not elect to depreciate the machine on either the straight line or the 150% declining balance method. this doesn¶t matter for MACRS) machine for use in her business at a cost of $20.  Ignore salvage value  $20k (basis) x 10% (remember.000. Year One. Assuming that Helen continued to use the machine in her business. Year Two. and Year Six? o See table 1 on Rev. except buildings. and Year Six? o Remember. has same recovery period as class. Proc.

IRC § 168(d)(4)(a) says we treat this item as if it was disposed of in the middle of the year (according to the half year convention).4. so the total is $11k. so there is a gain of $6k .000 in Year Two. Year Three.000 in Year Three? o Depreciation for year 3?  She bought this property in February in year 1. Helen miscalculated the amount of her depreciation deductions. Is any depreciation deduction allowable to Helen for Year Three? What is the amount of gain Helen recognized on the sale of the machine for $15. which is a $2000 deduction. and $6. y REMEMBER! Allowed/allowable are terms of art o Allowable: what was permissible under the method chosen o Allowed: what was taken by TP and not overturned by the IRS y In Helen¶s case « Allowed $3k $6k $0 (no deduction taken) $9k Allowable $2k (half year!) $4k $2k (half year!) $8k Which is greater? $3k $6k $2k $11k y y y We take the larger of the allowed/allowable year by year. o Is there a gain on the sale?  First. and we used the half-year convention under MACRS. and so she claimed depreciation deductions of $3. On January 1. find adjusted basis. Use IRC § 1016(a) ± reduce the basis by the greater of the amount allowable/allowed for which you got a tax benefit.000. Helendepreciates by 10% (half of 20%). Helen sold the machine for $15. the adjusted basis is $9k She sold for $15k. Therefore. The same facts as those stated in Question 2.000 in Year One. Helen did not claim any depreciation deduction for the machine for Year Three.  KAHN SAYS The incorrect deductions in previous year have no effect on year 3  In year 3.

000. Pete made no other purchases in 2002. so use $10) a. and the maximum amount that section 179 allowed in that year was $24. o First. Pete Kennedy.000 in Year One. How should Pete allocate his $24.000.000 in Year Three? Allowed $1k $6k $0 $7k Allowable $2k $0 $2k $4k Which is greater? $2k $6k $2k $10k o Do the same calculations as #4. but half year. the basis for the last quarter is $26. What amount of gain did Helen recognize when she sold the machine for $15. Pete purchased a computer on October 3.5. Helen did not claim any depreciation deduction for Year Three. It says automobiles specifically. The same facts as those stated in Question 4 except that Helen claimed a depreciation deduction of $1. o USEFUL LIFE DOESN¶T MATTER IN MACRS! Class life matters. Also. look at IRC § 168(e)(3)(B). This is more than 40% of the total basis for the year. there is no limitation because of this). 2002. On February 5. Pete paid $26. purchased an automobile for $34. The automobile had a useful life in Peter¶s business of seven years. Pete elected to take the maximum deduction that was allowable by § 179 in the year 2002 for the purchase of the automobile. Pete purchased the automobile for use in his business. In 2002. so we use the mid . and it has been used exclusively for business purposes. In addition to the purchase of the automobile. Pete¶s net earnings were $376.000 for the computer. The recovery period for the computer is five years. This is 5 year property. she has a gain of $5k because she has an adjusted basis of $10k. note that IRC § 168(e)(3)(B) says computers (technological equipment) are 5 year property. 6.000 at the end of its useful life. Pete did not elect to use either the straight line or the 150% declining balance method to depreciate the computer. 2002 for use in his business.000 in Year Two. and it has a salvage value of $2. a widower. and immediately put the computer into use in his business.000 ' 179 deduction between the automobile and the computer? What is the depreciation allowable to Pete in 2002 for the use of the automobile and the computer?   First. The total basis for the year is $60k. deduct $24k bonus depreciation via IRC § 179 o Then.000(thus. Now. and it had a salvage value of $3.000. What is the maximum deduction that Peter could take in 2002 for the purchase and use of the automobile? o Look at IRC § 168(e). deduct §2k depreciation via IRC § 168 (20% depreication rate. and of $6.

Methods of depreciating y If we used the half year convention. use table 5. This looks terrible. Now we don¶t want mid quarter ± 15 and 5 is worse than 20 and 20.401 basis in a comp. We want to make it mid-year convention. Sarah purchased the assets of a going business. 14. 2002. We want mid-year.000 of the purchase price to the purchase of the goodwill of the business. Total 60K less 24K of 179 deduction = 36K. or 20% and 20%? y 35% and 5% o He¶d rather have the larger figure in the first quarter. y Suppose we used the mid quarter. which would result in more depreciation. the depreciation would be 5%. she can amortize it for 15 years via IRC § 197. it¶s 20% for the computer. The contract of sale allocated $120. b. so let¶s take the half year convention. Property put in the first quarter of the year would be depreciated 35%. . 2002 instead of on February 5. and 20% for the car. The same facts as those stated in Question 2(a) except that Pete purchased the automobile on August 10. Can Sarah take depreciation deductions for that goodwill? o Yes. it changes because we have the car in the 3rd quarter. 7. y For the computer in the fourth quarter.399 basis in the computer. There may be other considerations. How should Pete allocate his § 179 deduction for the year 2002?   Now. Which looks better to Pete? 35% and 5%.   quarter convention. 14.

and $4.500). The same facts as those stated above except that John did elect in Year One to expense $5. John elected to depreciate the computer on the straight line method. John purchased a computer for $20. John sold the computer to an unrelated party for $15.000. use allowed.3230. Consequently. In April of Year One. If TP can show amount allowed is less than allowable. . The entire $3k is ordinary income. half year convention) . we use $15k. 1. John deducted $2. John did not claim any depreciation for Year Three.500 in year one and $3. (See §1016 for basis reduction!) o Computer¶s Recomputed Basis (see IRC § 1245(a)(2)(A)  $12k (adjusted basis) + $2k (yr 1 depr allowed) + $4k (yr 2 depr allowed) =$18k y Note! Yr 3 depreciation allowed ($0) was less than depreciation allowable ($2k).$12k (adjusted basis) = $3k. or (2) the FMV of property in case of other dispositions.000.$2k (yr 3 depreciation allowable. What is the amount of John¶s gain and how is it characterized (i.  $15k (amount realized on sale) . half year convention) = $12k. On December 9. John used the computer in his business. what was the amount of John¶s gain and how is it characterized? o Computer¶s Adjusted Basis  $20k (original basis) ± $5k (via IRC §179) y $15k ± $1500 ± $3000 ± $1500 = $9k o Computer¶s Recomputed Basis  $9k + $5000+ $1500 + $3000 + 0 (3rdyear. o Gain/Loss?  TP will recognize ordinary income in the amount by which TP¶s adjusted basis is exceeded by lower of either (a) TP¶s recomputed basis ($18k). y So. John claimed no depreciation on his tax return for Year Three. When John sold the computer in December of Year Three for $15. The computer is 5-year property.000 in Year Two.000 depreciation for the computer in Year One. or (b) either (1) the amount realized by TP on sale/exchange ($15k).000.000 depreciation in Year Two. See Kahn § 19. John claimed depreciation deductions of $1. capital gain. or § 1231 gain)? o Computer¶s Adjusted Basis  $20k (original basis) ± $2k (yr 1 dep allowed.. ordinary income.PROBLEM SET # 17 In answering the questions below. Year Three.e.$4k (yr 2 dep allowed) .500 o Gain/Loss?  Use the lower of what you sold it for ($15k) or recomputed basis ($18. IRC § 1245(a)(2)(B). allowed < allowable) = $18. a. ignore § 168(k). John did not expense any of the cost of the computer under § 179.000 of the cost of the computer.

Both Sam and Paul deducted the correct amount of depreciation for the car in their returns for Years One through Four. Paul sold the car for $15.000. who used it in his business. What are the tax consequences to Bob. Bill sold the car to an unrelated person on December 2 of Year Two for $19.000. his estate. Carl used the machine in his business until December of Year Five when he sold it to an unrelated person for $95. for $60. In September of Year One. and $5. Bob purchased a tractor for use in his farming business at a cost of $30. The car cost $26.600 depreciation for the car on his Year One tax return.000 in Year One. Bill took a depreciation deduction for the use of the car of $2. and to Frances? 5. Bill purchased an automobile for use in his business at a cost of $20. Bill did not expense any of that cost under § 179.000.000 before he died several years later. Bill did not take any depreciation for the car in Year Two. What amount of depreciation is allowable for Paul to deduct in Year Three? What amount of gain did Sam recognize on making the gift to Paul? What amount of gain did Paul or Sam recognize when Paul sold the car in Year Four.$9k = $6k 2. The fair market value of the machine on April 8. Bob devised the tractor to his widow.000. and so the depreciation deduction increased Bill¶s loss to ($3. Sam gave the car to his nephew. Bill did not qualify for a carryforward or carryback of any of his Year One loss. Year Four was $90. Year Three. What is Bill¶s gain on the sale and how is it characterized? 3. On February 4 of Year One. Bob¶s executor did not elect the alternate valuation date for estate tax purposes. who promptly sold it for $15. Carl. Therefore. At the time of his death. Fred purchased a machine for use in his business.000. Sam purchased a car for use in his business. The car is 5year property. The total amount of depreciation for the machine that Fred claimed on his tax returns for the years he held the machine was $75. In Year One.200) in Year One. and the total depreciation claimed by . On that date.000. Sam deducted $2. Fred sold the machine to his nephew. Frances. $15k .000 to an unrelated person on August 12. Sam did not expense any of the cost of the car under § 179. The machine cost $110.000. Year Four. However. The value of the car at the time of that gift to Paul was $20. Fred deliberately sold the machine to Carl for less than its value because he wanted to benefit Carl. Paul. Even before taking the depreciation deduction into account.000.200). Bill had a taxable loss of ($1. On February 18. Sam elected to depreciate the car on the straight line method.250.000. the tractor had a value of $15. Bob properly took depreciation deductions for the tractor aggregating $18. and how is that gain characterized? 4.000.000.200 depreciation on his Year Two tax return. Using the straight line method.

If Fred had depreciated the machine on the straight line method. because of the cancellation of the debt. What was the tax consequence to Alan of that sale? . Pursuant to § 108(b)(2)(E).000. In Year One.000 shares of Win All. What are the income tax consequences to Fred of his Year Four sale of the machine to Carl. and what are the income tax consequences to Carl of his Year Five sale of the machine? 6. Alan¶s basis in 1. Inc. Bank cancelled a $20. You will assume that both Fred and Carl claimed and were allowed the correct amount of depreciation.000. would Carl also have been required to depreciate the machine on the straight line method.000 debt that Alan owed to the Bank. Alan was insolvent at that time. Alan sold the 1.Carl on his tax returns was $10. or could Carl have elected to use the declining balance method? 7.000. Same facts as question 5. stock (a publicly held corporation ) that he owned was reduced from $30.000 to $10.000 shares of Win All stock to an unrelated party for $18. In Year Four. and so Alan did not recognize any income from the cancellation of the debt because of § 108(a)(1)(B).

Roy has no personal liability to repay the loan. in Year Twelve. Under the terms of the loan.000 on the foreclosure sale. which then was $75. The stock was pledged to secure a $20.000.000 from Bank and mortgaged Blackacre as security for the loan. Roy borrowed $80. The outstanding balance of the debt to the Bank was $75.000. What was Roy¶s basis in Blackacre after the mortgage was effected? b. Roy ceased to make payments on the mortgage debt. the difference between the $60.000 value of the stock and the $20.000. a. If in Year Twelve.000. which debt was secured by the stock. Roy sold Blackacre for $18. the value of Blackacre had fallen to $60. and William had a basis of $36.000 in those 100 shares of stock. The property was sold for $60. and the Bank can collect only by foreclosure on Blackacre in the event of a default. did William recognize because of making the donation to the church? . if any. all of the proceeds of which went to the Bank. William claimed a deduction of $40.000 loan that William had obtained from the Friendly National Bank. At the time of the gift to the church. the fair market value of the 100 shares of X stock was $60. How much gain.000 cash and the purchaser took Blackacre subject to the outstanding balance of the mortgage debt.e. a qualified charity. did Roy recognize on the foreclosure sale? 2. In Year Four.000 encumbrance on those shares).. The church took the stock subject to the $20. Did Roy recognize any gain when he obtained the nonrecourse loan from the Bank? c.000. and so the Bank foreclosed. Roy purchased Blackacre (unimproved land) for $50. The IRS allowed the deduction. if any. Blackacre was unencumbered at that time.000 for the donation to the church (i. In Year Ten. What amount of income.000 debt owing to the Friendly National Bank. Instead. what amount of gain would Roy recognize? d.PROBLEM SET # 18 1. In Year One. William donated the 100 shares of X stock to the Zion Baptist Church. William owned 100 shares of stock of the X Corporation.

In September of Year One. it was not held as an investment or for business use). none of the depreciable assets in the Questions below had any depreciation deduction allowed or allowable. Steve sold a parcel of undeveloped land that he had held and used in his business for a $50.000) on the sale of Redacre. In January.000. although it is unrealistic. Steve owned a painting which he hung in his home and held for personal enjoyment (i. How are the gain and loss that Phil recognized characterized? 3.. Steve¶s adjusted gross income for Year One was $80. In Year One. The taxpayers in the Questions below had no relevant transactions other than the ones mentioned in the Questions. while that is unrealistic. it avoids dealing with recapture of depreciation issues.000 gain. In the years involved in Questions 1 through 8 below. Phil held Greenacre and Redacre both of which were realty that he used in his business.PROBLEM SET # 19 Unless expressly stated otherwise. assume that none of Rebecca¶s gain was recapture of depreciation. In Year One.000. Steve had a basis of $30. Rebecca purchased a machine to use in her business. How is Rebecca¶s gain characterized? 4. As noted above. Phil recognized a gain of $80. 1. Rebecca sold the machine to an unrelated person for $42. No expense deduction under § 179 was taken for any of the properties in the Questions below. Year One. and he recognized a loss of ($45. All of the years mentioned in the Questions below began after 1993.000 on the sale of Greenacre.000 for the machine. but its fair market value at the time of the theft was $24. and it was not insured.e. How are the gain and loss that Phil recognized characterized? 2. Rebecca paid $35. all properties in the Questions below were held by the taxpayer for more than one year. In Year One. Phil sold both properties to an unrelated person. How are the gain and loss that Steve recognized characterized? .000. The same facts as those stated in Question 1 except that the gain that Phil recognized from the sale of Greenacre was only $30.000. there were no Anon-recaptured net section 1231 losses.000 in the paining.@ and so the recapture provision of § 1231(c) does not apply in those Questions. the painting was stolen. Except for Question 8.

In Year Two. and so it was purchased for business use and was so used. Frank sold unimproved land that he had used in his business for a gain of $25.000) on the sale of the office building.000. Melvin owned an apartment building which he used in his business and had depreciated on the straight line method. and the insurer paid Sally $400. Melvin had a basis of $42.5.000 gain that Melvin recognized on the condemnation sale of the apartment building characterized? 6. Melvin¶s adjusted gross income for Year One was $100. The same facts as those stated in Question 5(a) except that Melvin recognized a loss of ($32. the apartment building was condemned. Frank discovered that Myra had made material misrepresentations to him when she sold him the depreciable asset. How is the $25. How is Sally¶s gain from receiving the insurance proceeds characterized? 7.000). Melvin had purchased the painting to hang in his office.000) on that sale.000 payment that Frank received in Year Four characterized? 8. In Year One.000 was a recapture of depreciation and taxable under § 1245.000 at the time of the theft. In Year One.000. Frank than made a claim against Myra. In Year Four. The painting was stolen from Melvin¶s office. Don sold realty that he used in his business for a loss of ($10. and Melvin recognized a gain of $25. Sally did not reinvest the proceeds in similar property.000 gain that Melvin recognized on the condemnation sale of the apartment building characterized? b. and Melvin sold the office building to a corporation that he controlled. How is the $25. Frank sold the depreciable asset for a loss of ($28.000). The same facts as above except that in Year One. Sally had fully insured the house. Melvin sold an office building to an unrelated person. and he recognized a loss of ($12. of which $16. Don sold depreciable equipment that he had used in his business for a gain of $22. In Year One. and she paid him $28.100 in the painting.000 for her loss. which had a value of $51.000. How is the loss that Don recognized characterized? . and Sally leased the land on which her home was situated. In Year One.000 in her home. In Year Two. How is the $28. Melvin had used the office building in his business. How are Melvin¶s gain and loss characterized? a. Frank purchased a depreciable asset from Myra for use in his business. Melvin also had a painting stolen from him.000 on the condemnation sale. Sally¶s home was completely destroyed by a fire.000 to reimburse him for the loss he suffered on the sale of that asset. Sally had a basis of $175. In Year One. and so IRC § 267(a)(1) and (b)(2) barred Melvin from taking a deduction for the loss he recognized on that sale.

In Years Two. How is Carl¶s net section 1231 gain for Year Seven characterized? 11.000) in Year Three.000. His client. Carl had a net section 1231 gain of $18. What is the correct answer to Paula¶s question? . Paula would recognize a substantial § 1231 loss from that sale. Paula tells Jerry that she has a significant amount of § 1231 gains that year. the amount of that loss will exceed her § 1231 gains. Paula. While the loss from the sale of the building would be her only § 1231 loss that year.000) and a ' 1231 gain of $30. Vicki recognized a § 1231 gain of $20. if she sells the building this year. In Year Three. Vicki recognized no § 1231 gains or losses.000 in Year Five. the loss she recognizes from that sale will have the same tax effect to her as would an ordinary loss. She asks Jerry whether. In Year One. Four and Five. Carl had a net section 1231 gain of $12. Jerry is an attorney. Carl had a net section 1231 loss of ($20.000) in Year One.000. Carl had a net section 1231 loss of ($10.000. Vicki recognized a ' 1231 gain of $36.9. comes to him in October of Year One and tells Jerry that she has received an offer to purchase a building that she holds in her business and that she would like to dispose of.000 in Year Seven. Vicki had no other ' 1231 gains or losses in that year or in the preceding five years. Vicki recognized a ' 1231 loss of ($75. In Year Six. How are the § 1231 gains that Vicki recognized in Years Three and Six characterized? 10.

Rudy assigned to his daughter all of the rights Rudy possessed in the lease of the property to the government. Larry and Ted agree that the lease will be cancelled in consideration of which Larry pays Ted $25. In the second year of the lease.000. This assignment gave the daughter the right to the rental income from the property for the next 14 years and it gave her the right to the possession of the property for any remaining term of the lease if the tenant should default. a. Larry is offered a very attractive price for the factory. The same facts as those stated in Question 1(a). Rudy constructed an office building in Year One and leased the building to the United States government on a net. In Year Three. Who is taxed on the rental income? b. The daughter did collect the rents from the lease for the next 14 years. What is the tax consequence to Ted? . Who is taxed on the rental income that the daughter collects from the government after Rudy¶s death? c.PROBLEM SET # 20 1. In the second year of the lease. but only if he can convince Ted to cancel the lease. In Year Two. The same facts as those stated in Question 1(a). Rudy conveyed the office building to his brother. who is taxed on that rental income? b. Larry sells all of his rights in the lease to Herman for $80. What is the tax consequence to Larry? When Herman collects rent from Ted. a. Who is taxed on the rents that the daughter collected from the government after that conveyance was made? 2. net lease basis for a term of 15 years. Larry owns a factory building that he leases to Ted for a six-year term.000. Rudy died in Year Four and devised the office building to his brother.

When Gertrude was informed of her right to receive that fee. Year One. Year One. Year One. and after completing her service. Win All stock that was sold ex-dividend on March 23 was selling at $201. she filed with the Probate Court a formal waiver of her right to the fee. Who is taxed on the dividend? 4. Kelli collected the dividend on May 3. and as part of that sale. Year One. George had a basis of $50 in each share of his Win All stock. Rupert devised his entire estate to the two children of his marriage to Gertrude.3. George owned 100 shares of Win All stock which had a fair market value of $200 per share immediately before the dividend was declared on March 14. and he had held the stock for more than five years. and so Gertrude received no payment for her services. to all holders of record of Win All stock on March 21.000. George sold his 100 shares for $203 per share. Year One. Rupert. Instead. On March 14. declared a dividend of $2 per share to be paid on May 3.50 per share. on March 16. and who is taxed on the dividend when it is paid? c. What was the tax consequence of Gertrude¶s waiver of the fee? . On March 15. George made a gift of his 100 shares of stock to his daughter Kelli. on March 23. Gertrude served as personal representative. Instead. George sold his 100 shares of Win All stock for $203 per share. The stock¶s value rose as a result of the declaration of the dividend. Inc. Gertrude was appointed the personal representative of the estate of her deceased husband. George agreed that the dividend to be paid on May 3 would be paid to the purchaser. How is George taxed on the sale. a. Rupert left nothing to Gertrude because she is a wealthy woman in her own right. she became entitled to a statutorily set fee of $225. Win All. How is George taxed on that sale? Who is taxed on the dividend when it is paid on May 3? b.

Hans bought 100 shares of Bilt Rite Inc. Year One.000.000.000. Nick owned 100 shares of the stock of Kewbie Corp.000. b. Hans sold the 100 shares of Bilt Rite for $6. Year Three. Will¶s basis in those 500 shares was $10. What was the tax consequence to Nick of that sale? On June 10. common stock having a fair market value of $20. Mary made a gift of the 100 shares to her son. Year Four. On September 5. and its market value was $8. Will had purchased the Blitzen shares in Year One. Steve. when the value of the stock was still $8.000. on January 18.000. On March 4. and the next day.000. Accordingly.. common stock for $30. Year Three. What was the tax consequence of Hans¶s sale of the 100 shares of Bilt Rite common stock? 3. (2) The purchase price that Mary received for the stock on the June 10 sale was $6. Year One.000 in the Blitzen shares. Nick sold the stock to his sister. On March 5. Nick¶s basis in the stock was $20. on September 5. Year Five. what was the tax consequence to Mary of that sale to her brother-in-law? (1) The purchase price that Mary received for the stock on the June 10 sale was $11. .000. Steve sold the stock to an unrelated person for $11.000 in Year One.000. for $30.000. Mary for $8. and he had a basis of $40.000.000. Year One.000. and on October 1. common stock for $5. What was the tax consequence to Steve of making that sale in Year Three? a. Will sold the 100 shares of Blitzen stock to an unrelated person for $20. Mary sold the 100 shares of Kewbie stock to her brother-in-law. Year Two. which he had purchased several years earlier. In each of the following two alternative circumstances. Instead of selling the stock. On February 14. he purchased 100 shares of Bilt-Rite common stock for $6. What were the tax consequences of the two stock sales that Will made? If Will were to sell the 100 shares of Blitzen stock on January 12. Year Four. Will desired to recognize the unrealized decline in value of the Blitzen stock so that he could offset that loss against the gain he recognized on the sale of the Prancer stock.000.PROBLEM SET # 21 1. Year Four. what would be his gain and how would it be characterized? 2. Will sold 500 shares of Prancer Corp. As of January 1.000. Will also owned 100 shares of Blitzen Corp. Will purchased 100 shares of Blitzen stock for $19.

and the two lots were virtually identical in every respect except for the slight difference in location. and Blueacre had a fair market value of $10. purchased through her broker 300 shares of Tryon's common stock for its then value of $32.4. for its fair market value of $30. John transferred Blackacre to Helen.000.000 in Blackacre. Year Five? In Year Seven. Alice had a basis of $60. Stephanie's basis in the 400 shares of Tryon stock was $100.000. Megan sold her 300 shares of Tryon stock to an unrelated person for $50. Year Five. Stephanie owned 400 shares of common stock of Tryon corporation. in exchange for Redacre and Blueacre. Year Two. What amount of gain did John recognize on that sale in Year Five? 6.000. Alice wished to recognize the unrealized loss she had in Blackacre. Megan. Year Five? In Year Eight.000. Year Five. it was Stephanie's husband. In Year Three. what was the tax consequence to Randolph of that sale? . On that same date. The same facts as those stated in Question 6 except that instead of Megan's having purchased 300 shares of Tryon's stock. The exchange qualified for nonrecognition as a like kind exchange under section 1031. but its value had fallen. Stephanie's adult daughter. On April 5.000. Robert sold Blackacre to his brother. Robert had a basis of $45. Randolph. What was the tax consequence to Stephanie of her sale of 400 shares of Tryon stock on March 12. Alice owned Blackacre (unimproved land) which she held as an investment. Blackacre had a fair market value of $30. and the shares were sold on that date for their value of $40.000. John sold Redacre to an unrelated person for its then fair market value of $60. John. Year Five. What was the tax consequence to Alice of the sale of Blackacre? 5. Redacre had a fair market value of $20. In Year Five. At the time of the exchange. an unrelated person.000. Whiteacre was an adjoining lot to Blackacre.000. On March 12. Alice purchased Whiteacre (unimproved land) for $25.000 in Blackacre.000. On March 14. What was the tax consequence to Stephanie of the sale of her 400 shares of Tryon stock on March 12. What was the tax consequence to Megan of that sale? 7. Alice sold Blackacre to an unrelated person for its value of $25.000. who purchased 300 shares of Tryon's common stock on March 14. In Year Two. Stephanie instructed her broker to sell her 400 shares of Tryon stock. Randolph sold his 300 shares of Tryon stock to an unrelated person for its then value of $25.000. which is a publicly held corporation whose stock is sold on the stock exchange market.000.

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