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ADVANCED TAX

Alan Davis
Consider the following examples designed to illustrate the point that you should study
the law and not problems.
General rule on income: All income is taxable unless something in the tax law says that
it is not.
General rule on deductions: Nothing is deductible unless some provision in the tax law
says that it is.
General rule on losses: The only losses that are deductible are for 1) Investment, )
!usiness, or ") #asualty.
Example #1$ !ill is in love and buys his girlfriend, %illary, an engagement ring at a cost
of &1''. (ater, she notices his roving eye and returns the ring to him and he sells it for
&)*. +hat is the tax result, -.egan and /huong)
0/ 1 )*, basis 1 1''  loss 1 2*3
The loss is not deductible because the only losses that are deductible are for investment,
business or casualty.
Example #2$ !ill is in love and buys his girlfriend, %illary, an engagement ring at a cost
of &1''. (ater, she notices his roving eye and returns the ring to him and he sells it for
&1'*. +hat is the tax result, -/huong and 4a5e)
The gain of &* is taxable because nothing says it6s not
HEAD ! H"#EH$D % The re7uirements are as follows$
1. The person must be unmarried.
. The person must a) provide at least half the cost of a household in which at
least one b) dependent c) relative lives. Note that in the case of a dependent
parent, the parent need not live with the taxpayer.
EXA&'$E #(: 4ustin is single, lives alone, and fully supports his mother who lives in a
nursing home. +hat is his filing status 8 head of household or single, -4a5e and 4ustin)
9es because the dependent who doesn6t live with the T/ is the parent.
EXA&'$E #): C*dne* is single, lives alone, and fully supports her sister who lives in a
nursing home. +hat is her filing status 8 head of household or single, -4ustin and
#ydney)
No because the dependent 8 the sister doesn6t live with the T/
1
+hat does 0ection :1 do, ;ross income is all income w< certain exceptions -doesn6t
include all the exceptions)
+hat does 0ection : do, (ist out all the deductions -A;I 1 ;I 8 certain deductions).
All three code sections contain lists 8 are the lists useful or not, The lists of 0ection :
and 0ection 11 are useful
Alimony is on both the 0ection :1 list and also on the 0ection : list.
If #ongress, in their wisdom, too5 alimony off the 0ection :1 list would it change the
law, No, still taxable unless something says it6s not.
If #ongress, in their wisdom, too5 alimony off the 0ection : list would it change the
law, 9es, it will become itemi=ed deductions.
+hat about 0ection 11,
#apital asset is all assets except for
> inventory
> depreciable property ? land used in trade<business
> artistic property held by artist A, letter produced for !, gift from A or !
> A@<N@
> #orporate bond is capital asset.
0o, are .egan6s shoes capital assets, 9es
Contrast with other jurisdictions > %ong Aong has a very narrow tax base and has "
taxes$
0alaries tax 8 tax on salaries
/rofits tax 8 tax on business profits
/roperty tax 8 tax on rental income
#olby paid 4acob, a college student who has no experience as a house painter, &1,''' to
paint his house 8 answer the following 7uestions -#olby and 4acob)
+ould this be subBect to tax under %A law, #olby is not an employee, he doesn6t have
the salaries so he6s not subBect to tax
+ould this be subBect to tax under C0 law 8 1) if the house is located in Air5sville 8 ) if
the house is located in %A but 4acob is a C0 citi=en, 1) 9es of course ) 9es because the
C0 tax its citi=en on worldwide income.
The %ong5ong laws says exactly what is taxable, the American law says exactly what is
not taxable.

+EV,E- ! CA',TA$ GA,N#
,. /A#,# +"$E#
!asis is the tax e7uivalent of boo5 value. It is determined according to how an asset is ac7uired$
If the property is ac7uired by purchase, the basis is the cost of the asset plus
improvements minus depreciation.
GENE+A$ +"$E If the property is ac7uired by gift, normally, the done pic5s up the
donors basis. Note that if the done pic5s up the donor6s basis, she also pic5s up his
holding period.
Exception to the gift rule 8 if there had been a decline in value measured at the date of
the gift use the following rules$ -.D at date of gift 2 cost) use range test E!
.D
If the selling price is above the donor6s cost, use donor6s cost.
If the selling price is below the donor6s cost, use the lower of the donor6s basis or
the mar5et value at the date of the gift.
If the selling price is between the donor6s basis and mar5et value, use the selling
price.
If the property is ac7uired by inheritance, the basis will be the mar5et value of the asset at
the decedentFs death.

0"E#T,N 1: Eavid received a number of gifts, complete the following table. -Eavid
and Thilini)
Eonor6s !asis .D at date of gift 0ales price !asis @eali=ed gain
-loss)
&1',''' &1*,''' &1,''' 1',''' ,'''
&1',''' &1*,''' &),''' 1',''' 2153
&1',''' &),''' &G,''' )5 2153
&1',''' &),''' &:,''' )5 2"53
&1',''' &),''' &),*'' ).*5 >
&1',''' &',''' &G,''' 1'5 253
+hy do we care what basis is, Eo we want a high basis or a low basis, If I have an asset that I
cannot depreciate and do not plan to sell or give away during my lifetime, do I care what my
basis is, -Thilini and 4ohn) +e want higher basis  small gain, big loss better tax result.
To determine gain<loss on the sale and determine depreciation.
0tory$ 9ou form a corporation and you have no intention of selling the stoc5  9ou have
no gain cause it ma5es you happy -pay no tax), however you have lower basis  accept
it cause you won6t sell it anyway.

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