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Individual Income Tax Outline Chad Hallberg


IRC • The law if the statute is unambiguous; there is no further investigation and the IRC stands.
SCOTUS Opinions • Rulings handed down by the Supreme Court are the law (carry same weight as IRC)
Legislative History • Shows Intent of Cong when enacting tax; Sen Fin Cmte & House Ways & Means Cmte
1. Full Tax Ct – Cases heard by all 19 Tax Court Justices (en banc); Full Precedential Auth
2. Tax Court Memorandum – 1 Judge rvw; Persuasive Auth
Other Federal
3. Summary Opinions – Have no authority at all.
4. Tax Courts, Courts of Claims, and District Courts – have the same authority.
5. Circuit Courts – have stronger authority.
• Regulations are the IRS’ interpretation of codes and go through extensive review.
Tax Regulations • If IRC is ambiguous, go to Treas Regs
(Treasury • TRs can be temporary for 10-12 yrs; Hot areas are usually made permanent quickly and
Regulations) seek feedback from Tax practitioners about content and form of Regulation.
• Regs are good practicably unless proven otherwise (rarely proven otherwise)
• Substantive Advisory opinions from IRS’s Nat’l Office.
• Not as much weight as an IRS regulation.
Revenue Rulings • How they work – Taxpayer wants some assurance of how the IRS will treat a particular
proposed transaction. A fee of $3,500 is also included. Taxpayer free to do what he wishes
with the ruling, but all unfavorable rulings are sent to the audit office.
Revenue Procs • Deals with procedural issues rather than substantive ones
• Taxpayer writes to the IRS and pays a fee, $1,300, telling them the facts of the case, how
Private Letter they view the law and asks IRS for their position.
Rulings • If the IRS agrees, the taxpayer is immune from action in the future on that issue.
• If IRS doesn’t agree, taxpayer may be audited in the future.
Etc. • Technical Advice Memorandums and Field Service Advice


• “The Congress shall have power to lay and collect taxes on incomes, from whatever source
16 Amendment derived, without apportionment among the Several States and without regard to any census
or enumeration.”
• There is a $25,000 penalty for bringing frivolous actions to cause delay.
Penalties § 6673 • People are free to protest but many go to jail.
• Vote out your political representative if you don’t like the tax system.
• ∆ is a author and lecturer who is a professional tax resister.
US v. Schiff • Black Letter – Good faith defenses encompasses misunderstanding of the law, not
disagreement with the law.
• Office Audit – A smaller audit done mostly in the IRS office.
• Field Audit – A more involved audit where the agent comes to you.
Procedure 1. Step 1 – Agent Files a Statutory Notice of Deficiency which states how much is owed and
the taxpayer goes into default.
2. Step 2 – Taxpayer then has two courses of action:
a. Taxpayer both pays the amount up front and goes to Claims Court where no jury trial

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Individual Income Tax Outline Chad Hallberg
or appeal is possible.
b. Taxpayer does not pay the tax but instead fights it out with the IRS in either Tax
Court, where no jury trial is available, or local Federal District Court to file a refund
action, where a jury trial can be obtained.
Appeals • In any of the courts Tax Court, Claims Court, or District court either party can appeal.
• Period of limitation is the period of time in which taxpayer can amend a return to claim a
credit or refund or the IRS can assess additional tax. IRS Pub. 552.
• General Rule: 3 year SOL begins to run on the date in which the return is filed.
• EX: Returns for 03, which are filed on April 15, 04 has a SOL period until the year 07
• If filed before, for example on January 15, the SOL period still begins on April 15; If filed
after, for example on July 15, the SOL period will begin on July 15.
1. False Return – No SOL.
2. Civil Fraud / Willful Attempt to Evade / No Return– No SOL
3. Tax Evasion / Criminal Statutes – 6 years
4. Civil Negligence – 6 years
5. Substantial Omissions of Items on Return (25% or more) – 6 years
6. Loss from a worthless security – 7 years
• If taxpayer cooperates and has records to support their claim then the BOP is on IRS; otherwise, it’s on taxpayer
• No matter how you prepare your taxes in order to make them look like the taxes are legit (form), the substance of
what they really are (substance) will overrule and force you to pay taxes

Total Income (§61) – Above the Line Deductions = AGI
AGI – Either Standard or Itemized Deduction = X
X – Exemptions = Total Taxable Income
Total Taxable Income – Credits = Y
Y + any other tax = TAX

• Except as otherwise provided in this subtitle, GI means all income from whatever
source derived
Gross Income §61
• Lay Speak: Everything is gross income unless some other provision in Subtitle A of the
Code says it is not.
Expenses or losses incurred by a taxpayer that can be used to reduce the ultimate amount of
Tax Deduction the taxpayer’s taxable income. Takes that deduction amount off of your income.

A term used to describe those deductions which the IRS allows a taxpayer to subtract from his
Above the Line
or her GI as set forth in §62. GI - above the line deductions = AGI. Because these deductions
are taken before AGI is calculated, they are termed "above the line."
AGI = GI – Deductions. An important benchmark determining certain other allowed benefits.
EX, most limitations on deductions or credits are determined based on either AGI or modified
adjusted gross income (MAGI). MAGI is AGI modified by certain amounts specific to the
given limitations
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A dollar amount that non-itemizers may subtract from their income and is based upon filing
status. Since can’t take both itemized deducts & a stnd deduct, taxpayers generally choose the
Deduction deduct that results in the lesser amount of tax owed. Look for 65+ yrs old and blindness for a
bigger stnd deduction

A list of allowable deductions that a taxpayer can take in place of the stnd deduct in deducting
Deductions an amount from their GI (along with personal exemptions).

An exemption from all or certain taxes in which part of the taxes that would normally be
collected from an indiv or an org are instead foregone. Normally a tax exemption is provided
to an indiv or org which falls within a class which the gov’t wishes to promote economically,
Exemptions such as charitable orgs. They are usually meant to either reduce the tax burden on a particular
segment of society in the interests of fairness or to promote some type of economic
activity through reducing the tax burden on those orgs or indivs involved in that activity.

It reduces the tax owed, rather than reducing taxable income like a deduction. This amount of
Tax Credit tax savings is not dependent on the rate the taxpayer pays.

• Non Taxable
 If a scholarship is received without strings attached (except good GPA).
 Sports Scholarships.
 Does not have to do anything for the University, but has to work somewhere else e.g.
§ 117
community service.
Rev. Ruling §1.117
• Taxable
 Student has to do something like work.
 Scholarship is given in exchange for student doing something for school i.e. law
1. Rev. Rul. 58-403
a. Facts – Taxpayer seeks advice whether son, who is in the United States Navy’s
educational assistance programs qualifies as a scholarship and if π can claim minor
son as a dependant.
b. Black Letter – Because son is under obligation to render employment services to the
Navy upon completion of his studies, the scholarship is taxable.
2. Ide v. Commissioner
a. Facts – Same as above.
b. Black Letter – Primary benefit of education would be to Charles in his individual
capacity, therefore the payment of the scholarship to Charles shouldn’t be taxed.
2. Lange v. Commissioner
a. Facts – π was determined to have a $308 deficiency because he did not include $1,981
amount given to him as a financial need scholarship. He received that money for
working in law school clinic.
b. Black Letter – Although §117(b)(1) excludes amounts given for teaching,
researching, or other services for scholarship purposes, the amount received by π was
for financial need and the clinic is an integral part of the study curriculum. Similar
payments were not received by entire student body.

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§ 61: GROSS INCOME (The Starter § for all essays)
• Except as otherwise provided in this subtitle, GI means all income from whatever
General Rule source derived
§61(a) • Lay Speak: Everything is gross income unless some other provision in Subtitle A of the
Code says it is not.
Examples, cont.
• Annuities (payments over time)
• Income from Life Insurance (only sometimes) and
Endowment Ks
Examples The following list is NOT all-inclusive • Pensions
• Compensation for services, including fees, • Income from discharge of indebtedness
commissions, fringe benefits (but see §132), - EXCEPTIONS (108a1A-E)
and similar benefits - Discharge from Ch 11 Bankruptcy
• Gross income derived from business - “” insolvency (Liability > Assets)
• Gains derived from dealings in property - “” qualified farm indebtedness
• Interest - (for taxpayers other than Corps) the qualified prop is
• Rents, Royalties, Dividends ($ from stock) biz indebtedness
• Alimony (child support is NOT income) and - NEW §: If qualified prin residence and indebtedness
Separate Maintenance Payments discharged before 1/1/2010 (response to Mtge Crisis)
• Distributive share of partnership gross income
• Income in respect of a decedent ($paid2person post-death)
• Income from an interest in an estate or trust
• Prizes and awards (§74) except for §§74 or 117
(qualified scholarships) exclusions
- Gifts (giving person taxed, not receiver)
- Inheritances
1. See if it’s in §61a
2. Glenshaw Glass rule:
3. Categories of Income based on Glenshaw Glass
4. Categories of Non-Income
• Found income is taxable the year it is in the undisputed possession of the person who
found the income even if the income is not cash and regardless if it is sold. T.R. § 1.61-14
General Rule
• Mark McGuire exception (“We won’t tax in this case”)…can argue all TTrove shouldn’t be
taxed at discovery
• Tony Roma’s waitress case.
§ 1.61-2(d)(1) & Rev Ruling 79-24: BARTER AS INCOME
General Rule • If services are paid for other than in money, the fair market value of the property or
services taken in payment must be included in income.
• EX: In return for legal services, a lawyer gets his house painted by a house painter.
Held: FMV of the services received by the lawyer and the house painter are includible
in their gross incomes under § 61 of the Code.
• Gift: Cts will look at whether the services are a gift  Determined by whether services
are a “detached and disinterested generosity”, which equates to a NON-gift
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• Samples: Samples aren’t income
1. Facts – π received a dividend in stock (2,200 to 3,300 but still has same $ value) and IRS wanted to treat
as income.
2. Black Letter – Stocks, dividends, or other investments are not income unless it is
cashed in or sold…until the gain is realized by the sale or exchange or such an asset,
Eisner v. Macomber there is no assurance the gain will stay there.
a. Part 1 Income may be defined as the gain derived by capital, from labor, or from
both combined, provided it be understood to include profit gained through a sale or
conversion of capital assets.
1. Are back profit AND punitive damages income as defined by Macomber?
2. Part 2 Ct says both are income (including punitive damages) b/c income is “income
Glenshaw Glass from whatever source derived” (16th A.) and § 61a is not an exhaustive list of what income is
3. Part 3 Current Defn of Income: (1) Undeniable accessions to wealth, (2) clearly
realized, and (3) over which the taxpayers have complete dominion MEMORIZE!
4. Facts – Lawyer agrees to pay $10,618.87 in taxes for a client who lost that amount due
Clark v. to the bad advice from the attorney.
Commissioner 5. Black Letter – The amount received from the attorney was compensation for a loss
which impaired petitioner’s capital.


1. Basis – what something costs us (Every real or tangible piece of property).
2. Adjusted Basis – Basis less allowable deductions (depreciation).
3. Stepped-Up Basis – the fair market value of property received as of date of death. IRC
4. Amount Realized – What you sell your house for.
5. Example: See Page 551 For Basis of Assets Example
a. $110,000 – Basis, Cost
b. + 10,000 – Roof (Permanent or semi-permanent change, no repairs.)
General Rule §1001,
c. $120,000 – Adjusted Basis
1014, 1016
6. Example: Inheritance or Basis
a. $100.00 – Egg 1920
b. $100,000 – Egg Present Day
c. Gift – Carryover basis – carried over from what Granny’s Basis ($100). Sell for
$999,900 of Gain. Can hold it forever, but when sold income tax will be around 1/3.
d. Inheritance – Put in a will that egg goes to me. I get stepped-up basis (see above).
7. An increase to the basis decreases the gain that a taxpayer must report.
8. Decreases to Basis – Will increase gain (these are bad).
1. Depreciation – A deduction taken on tax returns for loss of value over time. IRS will
allow depreciation for 20-years. Only be used for business or income producing pieces
of property.
General Rule §1101, 2. Example: Vacuum Salesman
1012 a. Buy Car for $30,000; Expected life is 10 years. $3,000 per year in depreciation. If
sold in 2003 for $40,000 the gain would be $19,000.
b. Accelerated –
c. Straight-line –

General Rule § 61 • Fringe benefits are taxable unless qualified under IRC (below)
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• Gross income shall not include any fringe benefit which qualify as a––
1. No-Additional Cost Service
2. Qualified Employee Discounts
3. Working Condition Fringe
4. De Minimus Fringe
§1.61-21(a)(2), 5. Qualified Transportation Fringe
(a)(4), (b)(1)&(2) 6. Qualified Moving Expense Reimbursement
7. Qualified Retirement Planning Services
8. Qualified Military Base
• Go to more specific § in tax; it has precedent over §§ w/general terms discussion
• IRS is most worried about the employer and giving “disguised compensation”
(1) Is the perk a condition of employment?
Is a perk income?
(2) Is the perk for the convenience of the employer (not of the emp-ee)?
TEST (3) Is the perk on biz premises of the employer? (cafeteria, housing)?
• Any service provided by an employer to an employee for use by such employee if:
1. Such service is offered for sale to customers in the ordinary course of the line of
business the employer in which the employee is performing services; AND
No-Additional Cost
2. The employer incurs no substantial additional (including forgone revenue) cost in
Service §132(b)
providing such service to the employee.
• Example – Airline tickets & Hotels to their emp-ees; Gym giving free gym
membership; Gym membership may be ok
• Non-taxable so long as discount does not exceed:
1. The gross profit percentage of price which the property is offered by employer to
customers; OR
Qualified Employee 2. 20% of the price at which services are offered by employer to customers.
Discount §132(c) • Reality – Don’t differentiate on prop v services, but FOR EXAM…keep up the diff
• If companies give more than the 20% discount, the emp-ee pays the diff on the amt
• MUST be in the same line of business as the employer deals in general (i.e., shoe store)
• Excludes any property or services provided to an employee or employer to the extent
Working Condition that, if employee paid for such property or services such payment would be allowable as
Fringe §132(d) a deduction under §162 or §167.
• EX – Professors’ $2k/year from GU Law to go to CLEs
De Minimus Fringe • General Defn: Any property or service, the value of which is so small as to make
§132(e) accounting for it unreasonable or administratively impracticable is excluded from tax.
- But, it’s pretty minimus!
• Excludible Examples: §1.132-6(e)(1):
1. Occasional typing of personal letters by a company secretary.
2. Personal use of employer’s copying machine (85% must be for biz purposes).
3. Occasional cocktail parties, group meals, or picnics for employers and guests.
4. Donuts at work, cake for someone’s b-day w/low FMV
5. Employer provided transportation in certain circs: (1) Unusual circs; (2) Unsafe
• Non-Excludible Examples: §1.132-6(d)(4)(e)(2):
1. Season tickets to sporting or theatrical events.
2. Commuting use to an employer provided car or other vehicle more than one day a
3. Membership in a private country club or athletic facility regardless of frequency.
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4. Employer provided group term life insurance on the life of the spouse or child.
5. Weekend use of employer-owned/leased cabin
• They’re really looking to kick out “disguised compensation”
• Transportation in a commuter highway vehicle ($115 limit), transit pass ($115 limit), or
Qualified qualified parking ($220 limit) and anything above is taxed to Emp-ee.
Transportation • Parking doesn’t have to be onsite, but must be at least from a spot where transit can be
§132(f) taken
• Applies to cash so long as emp-ee provides a voucher
• Any amount received from an employer as payment of reimbursement for moving
expenses which would have been deductible under §217 is deductable
Qualified Moving • §217(b) – Moving of household goods and personal effects from the former residence to
Expense §132(g) the new residence; traveling, etc.
• Meals are NOT included (§217)
• §132(h) lays out a special rule for parents and air transportation.
Qualified • Any retirement planning advice or information provided an employee and his spouse by
Retirement Services an employer maintaining a qualified plan is deductable.
§132(m) • Higher income emp-ees get this deduct only if all emp-ees get it as well
Military Base
Realignment • Payments when you have to change military bases or you’re realigned are deductable.
• §132(o) – Commissioner given authority within code section to proscribe certain fringe
Other §132(o)
• Non-Discrimination Rules – can’t just give benefits of plans to the board of directors, etc.
it must apply to everyone down to the lowliest janitor.
• Child care programs.
Dependant Care
• Gross income does not include amounts paid by an employer. Services cannot exceed
Assistance §129
$5,000 or $2,500 for married filing joint.
Other Fringe • Athletic Facilities – If located on the premises of the employer AND NOT used by
Benefits others, then there is no additional tax for the taxpayer. §132(j)(4); §1.132-1(b)(3)
• Achievement Awards - §74(c) – (1) Tangible personal prop (2) only up to certain value
and (3) only in connection length of service or safety; Doesn’t work for cash bonuses,
season tickets, or really expensive stuff (b/c then it’s “disguised compensation”).
• Group-Term Life Insurance - §79
• Accident and Health Plans - §105 and §106
• Rental Value of Parsonages - §107
• Meals or Lodging for Convenience of the Employer - §119(d) – Must be on the
premises of the business. Firefighters, Mental Illness Centers. As long as you’re required
to stay there by your employer.
- Meals: (1) furnished by emp-er; (2) for convenience of emp-er; (3) on biz premises
of emp-er (loose interp)
- Lodging Adams v US (US expat as CEO for Mobil One Jap Co): (1) furnished by emp-
er; (2) for convenience of emp-er; (3) on the premises of the emp-er (loose interp);
(4) emo-EE req’d to accept as condition of employment
• Combat Pay - §112
• Qualified Tuition Reductions - §117(d) – Must be below the graduate level.
• Group Legal Services Plan - §120

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• Cafeteria Plans - §125 – Should get Form 1099 (“Misc Payments”) from emp-er for $
over exclusion limit
• Military Benefits - §134
• Adoption Assistance - §137
• Educational Assistance - §127; §127(c)(1)(B) for limitations.
• Dependant Care Assistance Program - $5,000 maximum. §129
• Cash – only occasional meals or parking (w/voucher)
• Always taxed to the employee. If for example a son or daughter uses a gym facility, the
Who’s Taxed?
employee would get charged.
How Much? • The fair market value of the good or service being received by the taxpayer.

Total Income (§61) – Above the Line Deductions = AGI
AGI – Either Standard or Itemized Deduction = X
X – Exemptions = Total Taxable Income
Total Taxable Income – Credits = Y
Y + any other tax = TAX


§§ 62(A)(10), 71, 215: ALIMONY PAID
General Rule
• You need to have spouse’s former SSN.
• Spouse receiving alimony must claim as income.
• Child Support is neither income nor a deduction.
• When assessing whether payments are alimony or child support courts look at substance of the payments i.e.
where “alimony” payments last until children reach the age of 18 or 21, then it is most likely to be deemed
child support rather than alimony.
• Spouses must live separately.
• Must terminate at death.
• Moving expenses paid in connection with the commencement of work by the
General Rule taxpayer as en employee or as a self-employed individual at a new principal place of
1. Moving household goods and personal effects from former to new residence.
Scope 2. Traveling expenses including lodging from former to new residence.
3. NO meals included.
1. (c)(1)(A) – at least 50-miles farther from his residence than was his former principal
place of work; OR
Limitations § 217(c)
2. (c)(2)(A) – Taxpayer is full-time employee for at least 39-weeks. (c)(2)(B) – Self-
– 3 Tests
employed individuals must be there for 78-weeks of next 24-months. Don’t have to
be employed, but must be soon.
§§ 219, 408: IRA DEDUCTION
• $2,000 in an IRA in Fidelity and you’re never taxed on it until you’re taxed. Lower
in tax consequences when the money is pulled out.
• Definitely put money into the IRA so you can claim it as a tax deduction.

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• If you take it out early you have to pay tax plus a 10 percent penalty. The eligible
age is 59 ½.
• Exceptions to take it out early:
• (72)(t) – Death, Disabled, Unemployed for at least 12-weeks, Qualified Domestic
Donations Order, A lot of people have no idea until they know what is says on the
• Roth IRA you can’t take a deduction but the IRA is tax free.
General Rule •
Penalty •
• Deduction allowed for the taxable year an amount equal to the interest paid by the
General Rule taxpayer during the taxable year on any qualified education loan.
• Must be a recognized institution, 5-years to pay off your student loans.
Limitations • $2,500 in interest per year.
• 221(b)(2)(B) – 1/3 of amount where AGI is in excess of $50,000 for single,
Phase Out
$100,000 for joint.
• Teachers in K-12 are allowed $250 as a deduction for educated related expenses;
General Rule
Teachers must keep their receipts.
• In the case of an individual there shall be allowed as a deduction an amount equal to
General Rule
the qualified tuition and related expenses paid by taxpayer during the taxable year.
• Only available if the taxpayer doesn’t qualify for the Hope or Lifetime learning credit
(these are much better because they’re credits $ for $).
• § 222(b)(2)(B)
(i) AGI doesn’t exceed $65,000 ($130,000) = $4,000
Phase Out
(ii) AGI doesn’t exceed $80,000 ($160,000) = $2,000
(iii) Any other taxpayers the amount is 0.
General Rule • A taxpayer can deduct half of self-employment tax paid (15.3 %) of their income.
Other Related • § 162(l) – Self-employment Health Insurance deduction and Self-Employment IRA
Deductions deduction.


• Business Expenses must be (1) ordinary (common, accepted) & necessary
General Rule (appropriate, helpful), (2) paid or incurred (3) in the normal course of a (4) trade or
business (continuity, regularity).
Carrying on a Trade 1. Reasonable Allowance for Salaries
or Business 2. Traveling Expenses
a. Travel Away from Home
b. Travel Form House to Job & Car Expenses – Not deductible because the
regulations say it is not. Commuting expense is not deductible. 1.162-2(e)
c. Pharmaceutical Sales Rep. – House → Hosp. → Hosp. → Hosp. → Hosp. Rev.
d. Going between house and temporary work location outside the metropolitan area
where the taxpayer lives and normally works.
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e. If one or more regular work locations away from taxpayers residence locations
expenses incurred in going between the taxpayer’s residence and a temporary
work location in the same trade or business, regardless of distance.
f. IF taxpayer’s principal place of business within the meaning of 280(c)(1)(A)
taxpayer may deduct daily transportation expenses incurred in going between the
residence and another work location in the same trade or business, regardless of
g. Temporary – If employment at a work location is realistically expected to last a
year or less the employment. If however, the 1 year or less estimation goes over a
year it is treated as temporary until the
3. What is a Home?
a. Regular place of business; OR
b. If no regular place of business → then regular place of abode.
i. Example – Guy was a “roadie” traveled with bands and then lived
with parents.
4. Rentals of other Payments
1. Bernardo
a. Facts – Taking clothing worn for work as a business expense deduction.
b. Holding:
i. Subjective Test (From Hynes and Yeomans) – Cost of a business wardrobe
required as a condition of employment is considered a non-deductible
personal expense within the meaning of §262 if the purchased clothing is
suitable for general or personal wear.
ii. Objective Test - Objective Test – Would tax payers in general wear this
particular piece of clothing: Not suitable for general wear; Required by an
employer; In fact not worn as general wear.
Cases from Class 2. Wills
a. Holding:
i. Purpose of away from home deduction is that you’re temporarily away from
home and you have to incur costs that are essentially identical in two
particular areas.
ii. Personal Choice will not allow for the deduction it must be for business
3. Hantzis
a. Facts – Law student takes job in New York and maintains place in Boston.
b. Holding - In order to be ordinary and necessary there must be business
• General Rule (§ 162(c)(2) – Illegal payments are never deductible.
Exclusions 1. 162(e) Illegal Bribes to government officials or employees
2. Kickbacks, Rebates, and Bribes under Medicare and Medicaid.
Substantiation of • Taxpayer must substantiate the expenditure with either a receipt, or oral testimony –
Expenses Cohan; except for entertainment expenses under §274(d).
Application to Actual • Red Light District:
Cases 1. Facts - Author writes about Red Light District and wants to deduct expenses;
2. Held – Such relations are too inherently personal.
• Ministers Prayers:
1. Facts – Minister paid by company who wasn’t doing well to say prayers in their
2. Held – Religion is too intimately private.
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• The Who?
1. Facts – Band trashes hotel room and want deduct expenses of fixing the damage.
2. Held – Not ordinary or necessary.
1. Deductible IF:
a. Maintains skills or improves skills required by the individual in his employment
or trade or business; OR
b. Meets express requirements of the employer or laws or regulations imposed as a
condition of employment.
General Rule • Example – LLM deductible if you’re an attorney.
a. Expenditures are made by an individual in order to meet minimum educational
requirements for qualification in his trade or business.
b. Expenditures are made for education which will lead to qualifying him in a new
trade or business.
• In determining whether attorney’s fees are deductible as a business expense, look to
General Rule
the origin of the claim.
1. Facts – Women applies for job as office personnel, firm sends an employee to
interview husband to see if it is okay if she works, woman rapes the interviewer and
Clark v. Cmsr
subsequent rape charges follow, attorneys fees eligible for deduction?
2. Black Letter – Yes, man was conducted his business.
• Draconian Rule – No deduction for entertainment (whatever people generally
consider to be entertainment), amusement, or recreation unless:
1. Directly Related to the Expense (§ 1.274-2(c):
a. Taxpayer needs to connect the expense to the trade or business.
b. Taxpayer must initiate the business conversation.
General Rule c. Taxpayer must hit either §§ 162, 212
d. Principle Character must be business
e. General Goodwill is not enough.
2. Associated with The Business (§ 1.274(d):
a. Generally, the entertainment needs to proceed or follow a substantial and
bona fide business discussion.
§ 274(b): Gift • $25 per gift for the entire year; mailing not included.
• Must substantiate the amount of the expense by:
1. Receipts
§ 274(d):
2. Written Testimony – time, date, place and what you talked about
• Cohan Rule doesn’t apply which stated that credible oral testimony is good for us but
not under 274(d).
§ 274(k): Business • Requirements in order to deduct the amount for meal expenses within the course of
Meals employment and those which are ordinary, necessary, and not too inherently
1. Pass muster of §§ 162, 262, 274(d)
2. Not lavish or extravagant under the circumstances.
3. 50% of the total amount may be deducted (§ 274(n)).
**NOTE – I.C. not reimbursed; Employees put this on MID of Schedule A; 2% cut right
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off the top of AGI, plus 50% limit.

• “A taxpayer may deduct all the (1) ordinary and necessary expenses (2) paid or incurred
Generally § 162
during the taxable year in (3) carrying on a (4) trade or a business.”
• Ordinary: Common and accepted AND
“Ordinary &
• Necessary: Appropriate and helpful
- Necessary is pretty easy to reach
• Where a taxpayer is seeking employment in a new trade or biz activity, the
“In connection §162(a) is appropriately denied b/c the taxpayer is not yet carrying on that
with” biz; The indiv must already have the employment in order for the expense to
be in connection with and :., deductible
• Involved in the activity w/Continuity and Regularity w/intent to make a
profit (even if you don’t make a profit)
• Enough regularity to call it a biz, but not necessarily full-time (case-by-case
“Trade or
• Regular Gamblers: Must report income, but still may report 50% of the loss.
Normally, personal loss is not deductible, only where Congress allows.
Casinos give you a 1099 Form.
• Only Professional Gamblers can take full loss, so IRS wants these types of
gamblers to be full-time and will be strict w/them
Personal, Living • No deduction is allowed for personal, living, or family expenses. Also, when in conflict,
Expenses § 262 §262 holds precedent over §162.
• Business expenses are those incurred in producing, or in the expectations of producing,
Distinction revenues to the business, as distinguished from expenses incurred for the convenience,
comfort, or economy of the individual in pursuing his business.
Statutory • 162c1 Illegal Bribes
Disallowances • 162e Certain lobbying expenses
of Deductions • 162f Fines paid to gov’t for violations of law
for Public • 162g Treble damages payments on guilt for federal antitrust laws
Policy • 280e Expenses for illegal sale of controlled substances
1. Facts – Woman tried to write off breast enlargements as a business expense.
Hess v. 2. Black Letter – As an exotic dancer, π’s expense of breast augmentation made them so
Commissioner freakishly huge and her profits went up substantially that the breasts were essential to
the taxpayers business and there is no other suitable purpose for the horrendous breasts.

Total Income (§61) – Above the Line Deductions = AGI
AGI – Either Standard or ITEMIZED DEDUCTIONS = X
X – Exemptions = Total Taxable Income
Total Taxable Income – Credits = Y
Y + any other tax = TAX


General Rule • Rule: Diagnosis, cure, mitigation, treatment or prevention of disease, or for the

Fall 2008 12
Individual Income Tax Outline Chad Hallberg
purpose of affecting any structure or function of the body (~cosmet if ~based on disease)
• Applies to unreimbursed medical expenses paid for in the taxable year AND in
excess of 7.5% AGI.
• EX: AGI = $100,000; 7.5% = $7,500; ME = $9,000; Deduction = $1,500
• Transportation • Teeth Whitening
• Retirement / Nursing Homes (Long-Term care) • No Snow Bird Exception
• Birth Control, Abortions – if legal in your jurisdictions • No Cosmetic Surgery unless based on disease
• Only Prescription Drugs (Viagra even!) • No Meals on Wheels
• Smoking Cessation programs if ~ OTC (ie, patch or gum) • Babysitter in order to go to the doctor
• Weight loss Programs/Fat Farm: if under medical obesity • Illegal Drugs, even if legal in your jurisdiction.
• May cover lodging primarily for and essential to medical • Marriage counseling
care $50 and no higher for each night. § 213(d)(2)
• Vasectomy
• Psychiatric Treatment for Sexual Inadequacy • Sex change is before the tax court right now
• Fertility Enhancement
• Guide Dogs
• Chiropractor / Massage therapy
• Alcoholism Treatment
• Vision correction
• General Rule – Home modifications for medical purposes are deductible, however,
aesthetic improvements are not;
• Case: Ferris v. Commissioner – Amount of increase of the home’s value is subtracted
Home from the deduction amount; deduction must be what the reasonable minimal cost of the
Modifications structure would be.
• Example: Taxpayer’s doctor prescribes a spa be put in home to help w/arthritis or some
other ailment: SPA = $7k; Increase in Value of home = $5k; Medical Deduction = $2k
• Taxes paid are deductible; however tax refund must be included in gross income on the
General Rule
following year.
• State Income Taxes
• State Sales Taxes (for 2008-09)
Types • Local Taxes
• Property Taxes
• Personal Property Taxes
• Car Tabs (if the amount is determined to be an excise tax and not a registration amount)
How To • Take amount gov’t gives you and deduct it OR save all your receipts
General Rule • There shall be allowed as a deduction all interest paid or accrued within the taxable year
on indebtedness up to $1M.
• Any interest on home + loans taken against home (Home Equity) even if that $ ~ used on
• (h) No deduction for personal interest (i.e., Credit Cards)

Fall 2008 13
Individual Income Tax Outline Chad Hallberg
• Qualified Residences: Primary + 1 other residence (not just any rental)
• Mortgage Interest and Points (can include two homes)
• Home Equity loans taken out to pay off credit cards
• Interest for rental properties is taken on Schedule E.
• NOT – Credit card interest
1. Qualification – Organization must be qualified charity under 501(c)(3).
2. Amount of Contribution §170(f)(8(A) – Up to 50% of AGI can be deducted; 30% if a
capital asset.
• Example: If AGI = $100,000, maximum amount of deduction = $50,000.
3. Non-Cash Donations – Property, clothing, etc. can also be deducted as a charitable
contribution. FMV will determine the amount of each item.
4. Filing requirements per amount contributed
• $.01-250: Cancelled check, receipt, or letter from org showing date&amt of contr
• $250-$499: Same as above + description of prop, FMV, basis, agreement
• $500-$4,999: Manner & Date of acquisition, Cost/Basis (must attach to return)
General Rule • $5,000+: Must include appraisal in return, cost of which is not included in the
donation; Phys condition of prop; description of prop; terms of agreement; stmt
from appraiser; date of appraisal (can be appraisal penalty for bad appraisal)
5. Cookies from Scouts – Must subtract the FMV of the goods purchased and take the rest
of the amount contributed as a donation.
• Formula: Whole Contribution – FMV (received in return) = Net Contribution
6. Carry Over – Any contributed amount which exceeds the 50% restriction of AGI can be
carried over for up to 5-years.
7. Leave Donation Programs – Notice by the IRS the amount is not deductible but the
amount is not included in income.
8. Uniforms – Can be deducted if needed to work for charitable service organization.
Candy striping outfits.
1. Political Campaigns/Candidates – Can’t endorse or oppose any political campaign or
2. Tuition – Tuition is not deductible.
Restrictions on 3. Foreign Orgs – Deductions are not allowed for contributions or grants to foreign orgs
Contributions 4. Control – To the extent you give something you must not hold strings back; Control
must be given to the organization.
5. Services 1.170A1(g) – Service to charitable donations is not deductible.
• Example – Blood donated to Red Cross during blood drive.
1. Was Scientology Church receiving Quid Pro Quo (giving something and then getting
something in return?) Yes they were
2. Personality testing where people take deduction for charge of the test (a set price)
3. Ct says they’re not donations, but a quid pro quo
1. To extent payment for religious/private school tuition is paid by parents, they shouldn’t
Jewish School get deduction b/c can’t parse out how much $ goes to school and how much was for
charitable contrib
1. Parents paying for kid’s mission as in old days, try to deduct, IRS says no
LDS Missionary 2. Now, parents pay a flat rate for everyone to Church HQ – Deduction ok b/c contrib. to
Fall 2008 14
Individual Income Tax Outline Chad Hallberg
§ 165: Casualty & Theft Biz Loss
General Rule • Will allow a whole lot more from the loss of business rather than from personal loss.
§§ 165(c), 1.165-1: Casualty & Theft Personal Loss
• Loss actually sustained during the taxable year and not made good by insurance, which
is sudden, unexpected, and unusual.
General Rule
• Based upon FMV before and after the incident.
• Property must have actual physical damage.
• Must be over $100; AND
Restrictions • In excess of 10% of AGI.
• AGI = $100,000; 10%= 10,000; Casualty Loss= $12,000; Deduction = $2,000
Example Loss: Example Not Loss:
1. Hurricanes, Flood 1. Animals – general rule is forget about taking the deduction.
2. Car Wreck, so long as it wasn’t intentional, 2. Termites – most cts say it is gradual so no loss deduction.
and don’t forget to factor in insurance. 3. Erosion from ocean waves.
3. Property that is actually stolen and not lost; 4. Intentional Acts
File a police report for verification. 5. Couple Lived Next Door to O.J. – Court said no casualty
4. Landscaping –need an appraiser to compare it because there is no physical damage; Loss on sale of a
to the value of your home after casualty. home is not included as an itemized deduction.
1. Losses Incurred In a Trade or Business
2. Losses Incurred in any Transaction Entered into for Profit, not connected with trade or
Limitations bus.
3. Losses arising from fire, storm, shipwreck and casualty theft.
• Casualty Theft – Loss taken in year of discovery; only $ amount no interest.
• General Rule (§165(d)) – Deduction granted only to the extent of your gambling
• Example: Win $10,000; Lose $5,000; Deduction = $5,000; Win $1,000; Lose
$5000 Deduction = $1000.
• Professional Gambler – Professional gambler reports losses on Sche. C. Same rule
Gambling Losses applies.
• Non-professional Gambler – Losses reported on Schedule A as a Miscellaneous
Itemized Deduction (MID). Subject to 2% haircut.
• When Incurred – Loss taken in particular year in which the wagering took place.
• How Verified – Maintain a diary or similar record including date, type of wager activity,
and gambling venue, travel receipts and each slot machine should be numbered.
• Test – Expenses must be ordinary and necessary and in the course and scope of
employment. Test same for Corps., LLPs, and trusts.
General Rules
• Meals and Entertainment § 274(n) – Limited to 50% deductible for dinner expenses.
• Self-Employed – Full deduction so long as expenses are ordinary and necessary.
• 2% Haircut – If AGI = $100,000; 2%= $2,000; Amount of expenses exceeding the
$2,000 Haircut may be taken for a deduction.
• General Rule § 68 – In the case of an individual whose AGI exceeds the applicable
amount, the amount of the itemized deductions otherwise allowable for the taxable year
Phase-Out shall be reduced by the lesser of:
(1) 3% of the excess of AGI over the applicable amount ($100,000 MFJ; $50,000); OR
(2) 80% of the amt of the itemized deducts otherwise allowable for such taxable year.
Fall 2008 15
Individual Income Tax Outline Chad Hallberg
• Working Family Tax Relief Act of 2004 – Extends the provisions that were set to expire
at the end of 2004 and has a uniform definition of child.
Class Notes
• American Jobs Creations Act 2004 – Passed on Congress on 10-11-04; Far more
incentives for businesses.

Total Income (§61) – Above the Line Deductions = AGI
AGI – Either Standard or Itemized Deduction = X
X – EXEMPTIONS = Total Taxable Income
Total Taxable Income – Credits = Y
Y + any other tax = TAX

• 1 exemption each for self, spouse, and each qualifying child
• Minus on the tax return and it appears on the second number of the tax return.
• Take that number and multiply and then it is indexed for inflation.
General Rule • (b) Taxpayer exemption and Spouse exemption (Reg §1.151-1b allows for MFJ
spouse exemp)
• (c) An exemption amount for each dependant (as defined in § 152…articulated
• If you make too much $, you will be phased out proportionally of specified exempt.s
• Applies to Itemized deductions as well
Phase Out • If you’re divorced & getting phased out, take child(ren) off your return and have the
other spouse take the child even if you have done everything to take care of the child
• Phase out begins at $239,950 for couples (§151d3C)
• If you make too much $, then you will be proportionally phased out of exemptions
• 2% for every $2500 exceeding the threshold amounts.
Phase-out 1. Joint Return - $239,950
§ 151(d)(3)(C) 2. Head of Household - $199,950
3. Not Married/ Not Surviving Spouse - $159,950
4. Married Filing Separate - $119,975
§ 152: Dependency Exemptions
• A taxpayer may claim as a dependant any of the individuals listed in §152 whose
General Rule
support he or she provided during the taxable year.
1. Child or Sibling – Must be taxpayer’s Child (bio or adopted, step, eligible foster, or
descendant of any of these children) OR Sibling (bio, half, step, or descendant of
any of these siblings)
2. Age – Under 19 or 24 if full-time student
- Permanently & Totally Disabled during any part of the year meets age req’t
Qualifying Children
3. Citizenship – w/ exceptions for adoption, Must be a national or resident of the
Test (c)
U.S., Canada or Mexico not filing joint return w/a spouse (§152b3)
- Must have a U.S. SSN to qualify to prove authenticity
4. Abode – Over ½ time “aboding” w/taxpayer
5. Support – Taxpayer must provide over ½ of support (necessities of life - liberally
allowed by IRS)

Fall 2008 16
Individual Income Tax Outline Chad Hallberg
1. Income – Dependant must make less than the exemption amount ($3,500)
2. Support – Must provide over half of the support; Yes – Loans; No – Scholarships
3. Relationship to Taxpayer Test – Child (or descendant of a child) (in-law), (step)
(in-law) bro/sis, (step) (in-law) dad/ mom (or descendant of either), niece/nephew,
Qualifying Relatives aunt/uncle, and [§152d2H] anyone else that shares same primary residence &
Test (d) member of taxpayer’s household (i.e., neighbor kid)
4. Citizenship – w/ exceptions for adoption, Must be a national or resident of the
U.S., Canada or Mexico not filing joint return w/a spouse (§152b3)
- Must have a U.S. SSN to qualify to prove authenticity
5. Not Qualifying Child – of taxpayer or any other taxpayer
1. (1) General Rule – Parent with custody gets to claim the child as a dependant.
2. Joint Custody (TR 1.152-4(b)) – (2) whichever parent has physical custody for the
greater part of the calendar year. (3) If equal time, then exemption goes to parent that
Divorced Parents gives most support.
§ 152(e) • Waiver – Parent can waive right; written declaration must be attached; can be for one
year or all years. 152e2
• Practice Tip: If you are getting phased out under 151, then give the child to the ex-
spouse even if you provide all support
• Parents get dependant exemption if
Missing Child
§152f6A 1. Law enforcement presumes child kidnapped by someone other than family AND
2. Child lived w/parents before kidnapping

General Rule • Joint and Several Liability, unless an exception is at play
General Rule • If getting a divorce; OR Does not want to be jointly & liable for other spouse.
• Can Claim MFJ for 2-years after year of death of spouse if dependant living at home
General Rule
& no re-marriage for those 2 years
• Individual is not married at the close of taxable year, is not a surviving spouse; AND
• 1+ qualifying dependant/relative AND
General Rule
• Maintains over ½ of the taxable year as the principal place of abode AND
• Better than Individual rate


• (a) Gross income does not include the value of property acquired by gift, bequest, devise,
or inheritance.
General Rule • (b) Subsection (a) shall not exclude from gross income—
1. The income from any property referred to in subsection (a); OR
2. Where the gift, bequest, devise, or inheritance is of income from property, the amount
of such income.
Exceptions • Interest (§1.102-1(b)) – Interest earned on the gift or inheritance after receipt is taxable.
Fall 2008 17
Individual Income Tax Outline Chad Hallberg
• Employee/Employer (§1.102.1(f)(2)) – Any amount transferred by or for an employer to
(or for the benefit of) an employee is taxable unless they are between relatives and the gift
can be substantially attributed to the familiar relationship and not the circumstances of
their employment.
• Gifts generally not allowed in relation to employment
Reality • Gifts generally ok b/t family members
• “If it sounds too good to be true, it usually is”
1. Facts - ∆ gave business referrals to someone, so in gratitude of the referrals ∆ got a
Commissioner v.
2. What is a Gift? – Ct must look at circs to determine (1) donor’s intent (transferor); The
transfer is a gift if it is given w/a (2) detached and disinterested generosity, out of
affection, respect, admiration, charity or similar impulse
• In direct response to Duberstein, Congress passed §102(c) in 1986 and says any amount
§ 102(c)
transferred from an emp-er to an emp-ee is NOT a gift
• Giving casino dealers tips (“tokes”) and then split amongst emp-ees
Olk v US • These tips are income b/c not given in disinterested generosity; rather, by giving tokes
patrons were hoping for good luck and so they were totally interested
• Guy gives twin sisters $ for “affection” and they say it’s not income, but gifts
US v Harris
• Payments are close enough to gifts for twins to avoid tax evasion
Wolder v • Atty contracted to perform legal services for life in exchange for a gift in the client’s will
Commissioner • Just b/c it’s called a bequest, doesn’t mean it’s a gift
1. Facts – π was given $60,000 as result of a RETIREMENT PARTY.
Kralstein v.
2. Black Letter – Court looked at intent of the parties to determine if it was because of
detached and disinterested generosity. Half and Half.
1. Facts – Taxi driver said TIPS were given because of customers’ detached and disinterested
Killoran v.
2. Black Letter – Tips are taxable because they are paid in return for services rendered.
• Except as otherwise provided, gross income does not include amounts received (whether
General Rule in a single sum or otherwise) under a life insurance K, if such amounts are paid by reason
of the death of the insured.
• § 101(a)(2), § 1.101-1(b)(5) Example #1 – If the policy is sold or transferred to another,
on death of the insured, the new owner/transferee can only exclude value of
consideration paid to transferor for policy and subsequent premiums paid by new
• § 101(c) – Monthly interest payments by insurance company to the policy holder are
Exceptions taxable and included in gross income.
• § 101(g)(1) – Amounts that are treated as an amount paid by reason of the death of an
(A) Any amount received under a life insurance K on the life of an insured who is a
terminally ill individual.
(B) Any amount received under a life insurance K on the life of an insured who is a
chronically ill individual.
• Insurance Policy $100,000 on Matt
Example • Matt Transfers the policy to Mike for $60,000 and $600 in premiums until death.
• Taxable amount is the amount consideration paid (Amount for policy + premiums)
Fall 2008 18
Individual Income Tax Outline Chad Hallberg
• Gross Income Does Not Include:
(1) Amounts received under workmen’s compensation acts as compensation for P.I. or
(2) Amounts received from damages (except punitive) received by suit or agreement
General Rule and whether as lump sums or periodic payments on account of personal P.I. or
(3) Amounts received through accident or health insurance for P.I. or sickness where
insurance is paid by employer or contributed by employee.
(4) Pension annuity allowance for P.I. or sickness from active armed service.
(5) Disability income from P.I. as a direct result of military or terrorist action.
• Punitive Damages – Taxable to the plaintiff in the amount received.
Exceptions • Emotional Distress – Is not a P.I. and damages are taxable.
• Insomnia, headaches, stomach disorders are not enough for a tax exclusion.
• Π settles suit with Rodman for kicking him. As part of $200,000 π promised not to pursue
• Black Letter:
Rodman v.
Journalist 1. It is the nature and character of the claim settled, and not its validity, that determines
whether settlement payment is excludable from gross income under § 104(a)(2).
2. Look at the Intent of the Payor.
1. Look at settlement agreement and then ask what amount of settlement is for P.I.; Stink
Test Test.
2. Look at surrounding circumstances. Rev. Rul. 85-98
• Nazi Reparations are excluded from income.
Types • 9/11 – Victims of terrorism are not taxed with amounts they receive in order to
compensate for their losses.


• If you owe $40,000 (liabilities) and settle with the creditor for $20,000, you are solvent
General Rule
and have an income of $20,000 (assets).
• Any amount which would be includible in gross income that is discharged for
indebtedness is not taxable if the debt is discharged in:
1. Title 11 Bankruptcy – Must be in federal bankruptcy court.
2. Insolvency – Excess of liabilities over the FMV of assets on the basis of the
taxpayer’s assets and liabilities immediately before the discharge. §108(d)(3).
Exceptions 3. Farm Indebtedness – Not impo for this class
4. Qualified Business Property Indebtedness – Not impo for this class
5. Student Loans §108(f) – LRAP programs allow for students to work in
underdeveloped areas and be discharged on their loan amounts.
• (E) On Dec 31, 2007, the following became effective: “The indebtedness
discharged of qualified principal residence indebtedness discharged before
1/1/2010” b/c of the foreclosure boom of 2007-08


General Rule • Gross income shall not include gain from sale or exchange of property.
3 Requirements • Ownership & Use Test: During the 5 year period ending on the date of the sale or
exchange the taxpayer must have owned & used the home as a primary residence for at
least 2 of the 5 years
Fall 2008 19
Individual Income Tax Outline Chad Hallberg
a. Don’t have to be continuous; 730 days or 24-months.
b. Short absences are ok, but 1+ year counts agst you
c. Joint Returns: Either spouse has to own for 2+ years and both spouses have to
use for 2+ years (If H&W each own home before marriage, both sell, for the jt
return, each get what they would have gotten as single persons)
Divorce: If 1 is in house, it’s as if both are in the house using it so you don’t have
to report gain (if both still own it, then take year of sale and go back 5 and if at
least 1 of them meets it, then they’ll both get it)
• Once-Every-Two-Years Test: Taxpayer must not have made prior use of §121 exclusion
within the 2-year period prior to the date of the sale
• Other Good Info
1. Amount shall not exceed $250,000 per spouse ($500k if MFJ)
2. You can’t have another house that you’re using as a principal residence.
3. If you have to pay tax on the gain it is capital income (long-term if owned over 1 year)
4. You can’t take a capital loss on your home.
• If 2 props used as residence, the prop used “the majority of the time” will be primary res
TR 1.121-1b2 • Factors: Place of Employment, Driver’s license, State taxes are paid in
Defining Primary • For the EXAM: If they meet the 730 days req’t, then they’re good.
Residence • EX from TR 1.121-1c4: 7 mths in NY (primary), 5 mths in FL | 1999-2000, 2003 in VA,
2001-02 in ME (either qualifies but not both)
• Taxpayers can exclude up to $500,000 of gain on the sale of their main home if:
1. Married filing a joint return for the year.
2. Either spouse owns the property for 5-years.
3. Both spouses use the property as a principal residence for 2-years or more of the 5-
Requirements year period.
MFJ a. Disability Exception – If taxpayer became physically or mentally unable to care
for himself and owned and lived in their main home for a total of one-year.
b. Destroyed Home – If the home is destroyed, you can count the time of a
previous home.
4. During the 2-year period ending on date of sale neither spouse excluded a gain from
sale of another home.
• Buying or transferee spouse must live in the home for 2-years prior to selling the
• The divorced spouse must meet the ownership rule but not the 2-year living time
Examples • Example I:
1. Husband moves out in 1997 and agrees to let wife stay in the home to raise the kids.
2. In 2004, home is sold. As long as wife is using it from 1999 through 2004 the
exclusion will still be there.
• Example II:
1. Anna Nicole Smith marries old guy, who has lived in house forever.
2. 18-months after marriage, he dies and she sells the home.
3. Anna still gets the exclusion up to $250,000.
• Example III:
1. Unmarried couple who live together and use and own the home for 5-years.
2. Each would still get the $250,000 amount.
• Example IV: Prior to marriage, husband and wife own a home, they are married, and sell
their home…each would get $250,000 and after two years of ownership in their new
Fall 2008 20
Individual Income Tax Outline Chad Hallberg
home would get the $500,000 exclusion.
• Members of the Military or Uniformed Services can choose to have the 5-year period for
Members of
Military ownership and use suspended during any period where taxpayer or spouse is on qualified
official extended duty. This cannot last for more than 10-years.
• If taxpayer doesn’t remarry before the date of sale, you are considered to have owned and
Death to a Spouse lived in the property as your main home during any period of time that your spouse
owned and lived in the home.
• General Rule – Allows exclusion even though the taxpayer did not meet the ownership
use test and the gain is reduced. Must be the primary reason for the sale.
• Purpose
1. Employment – start of work with a new employer, or continuation with the same
employer, or start continuation of self-employment.
a. Safe Harbor Principle – change must have occurred during the period the
Reduced taxpayer owned and used the property as their main home; AND new place of
Maximum employment is at least 50 miles farther from home.
Exclusion §121(c) 2. Health Reasons – Primary reason for sale is to obtain, provide, facilitate the
diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified
a. Qualified Individual – Parents, stepparents, grandpas, children, grandchildren,
stepchildren, adopted children; siblings, half siblings.
3. Unforeseen Circumstances – an event that the taxpayer does not anticipate before
purchasing and occupying the residence i.e. natural or man made disasters, terrorism,
divorce, death (self or family members), can no longer afford
1. Does it fit under the Safe Harbor Principle?
a. Employment
Calculations b. Health Reasons
c. Unforeseen Circumstances
2. How Much?

Total Income (§61) – Above the Line Deductions = AGI
AGI – Either Standard or Itemized Deduction = X
X – Exemptions = Total Taxable Income
Total Taxable Income – CREDITS = Y
Y + any other tax = TAX


Credit: Dollar for dollar b/c subtracted from the tax you would pay rather than your gross income before tax
Hope §25Ab • Duration – So long as you have a student in a freshman and sophomore year you can take
two in undergrad
• Can’t take Hope and Lifetime in same year
• Only tuition and fees
• Non-refundable (if you don’t owe tax, you don’t get it)

• Who – If you take the dependency exemption then you take the credit; If claimed as an
exemption you can’t claim it is your own.
• Phase Out – At higher income levels; Single 42,000; 52 Fully Phased out; Married $85,000
Fall 2008 21
Individual Income Tax Outline Chad Hallberg
and Fully Phased Out; $52,000;
• Amount - $1,500
• Amended Return – File amended returns for up to 3-years
• Not Refundable – Only credits against the amount of tax liability owed;
• Maximum Earned Income Credit – $2,600;
• Degree – Must be an actual degree
• No Felony Drug Record – Any other felony is okay.
• Earned Income Credit –
• Requirement – Recognized institution
• 1 Per Return – What a bummer
Life Time
• One or More Courses – Don’t have to be pursuing degree
Learning §25Ac
• Married filing Separately – You can claim
• Can’t Claim Both Together for Same Person – maybe take an educational deduction;
• Tuition
Great Thing • $ for $ benefit
Dependant Care Credit
Dependant • SEE NOTES
Care Credit §21
Withholding • SEE NOTES
Earned Income • SEE NOTES
Credit §32


Non-Recognition Sections (Have to pay at a later point)

• “No gain or loss shall be recognized on the exchange of property held for productive use in
a trade/business/investment if the property is exchanged solely for property of like kind
which is to be held either for productive use in trade/business or for investment.”
• Doesn’t Apply to Stocks
• Property must be in the same class.
• Boot (Cash) – any money left over after the exchange which is taxable.
• Basis transfers to new property no matter what you receive in the exchange.
General Rule
• Must be business or income producing property which is exchanged for business or
income producing property.
• Property #1 gets the basis of Property #2
• Deferred Gain Provision, all sorts of little traps and requirements.
• Copyright Novel → Copyright Another Novel
• If you get cash, then you’ll have to pay tax on that gain along with being released from a
Related Parties • There is a presumption if you’re related against the like-kind treatment, but if you show it is
Exchange not for tax avoidance you’re okay. (Have to hold for 2+ years on each side of the exchange)
• You must dig deeper and cover yourselves and make sure the reasons for the exchange are
Fall 2008 22
Individual Income Tax Outline Chad Hallberg
not for tax avoidance.
• This applies if you get rid of replacement property within 2-years.
• EX: Ann has Relinquished Property → U.S. Bank → Bernie has replacement property, Ann
would have 180 days to do this so long as there is a qualified intermediary. Bank must hold
the $ for the 180-days and can’t have any use to it Bernie cannot have any control of the
funds. If the transaction happens sooner, then Bernie can have the money. Until the
replacement property is obtained, the money cannot be touched by Bernie. (Reverse Starker
• Ann → CPA → Bernie; CPA not a qualified intermediary because they are an agent of Ann.
• No relationship can be had between the parties and the intermediary.
Intermediary • Property 1:
1. Bought for $10,000
2. Worth $90,000
3. Gain = $80,000. → no gain because it is a Starker transaction
• Buy Property 2:
a. Bought for $90,000
b. 8-years later sold for $190,000
c. Transfer basis from 1st Property to the 2nd Property total tax liability: $190,000 -
$10,000 = $180,000 sold.
• Speedy has a home in San Diego; Move to Spokane, but kept home as a rental for 10-years.
Speedy Rice • If they sold the home as a rental there would be $800,000 in gain.
Rental Property • Buy a home in Spokane and do a §1031 exchange, rent for a year and then move in to it.
• They live there 2-years and it turns into a §121 transaction.
• Like Kind – includes properties in the same general asset class (i.e. truck for a truck)
outside you’ll have problems, but for land doesn’t include international property.
• Relinquished Property – property you give up.
• Replacement Property – property you get.
• Starker – Case allowing for deferred exchange
• Reverse Starker – Buy first, sell second
Personal Prop • Tangible: Asset class for asset class
Example TR • Intangible: Goodwill is never like-kind w/another biz; Copyright on 1 novel for another
1.1031a-2 novel is ok, but novel for music is not ok
• Treated just like cash
Assumption of
• FMV of prop received – New prop mtge + old prop mtge = Total Consideration Received
• Total Consid Recvd – Basis of old prop = GAIN REALIZED
• Basis of old prop transfers to the new prop no matter what you receive in the exchange.
Basis in §1031s
• Adj Basis – Amt of $ received + Amt of gain recognized = NEW BASIS
• Unambiguously identified and sent to QI by midnight on 45th day
Identification of • 3 Prop Rule: Any 3 Props at any value
Properties • 200% Rule: Any amt of props so long as combined FMV is not over 200%
• She didn’t talk about 95% Rule
Time Frame • Property must be acquired 180 days after transfer of exchanged property.
• If missed by 1 day you must report the proceeds.
• Taxpayers must identify the property 45 days after the date on which taxpayer transfers
property relinquished in exchange.

Fall 2008 23
Individual Income Tax Outline Chad Hallberg
• Must be a legal identity and you can identify up to three within the forty-five days and a
sale of on one of them within the 180-days.
Click v.
• Black Letter – When intent is not for like-kind exchange, cannot use §1031.
• (a) If property (as a result of its destruction in whole or in part, theft, seizure, requisition or condemnation or
threat or imminence thereof) is compulsorily or involuntarily converted—
1. Conversion into Similar Property – Property similar or related in service or use to the property so
converted, NO GAIN shall be recognized. (will be recognized later)
2. Conversion into Money – Money or property not similar or related in service or use to the converted
property, the gain if any shall be recognized
Any gain in cash over and above basis that moves from Prop1 to Prop2 will need to be reported within
delay of time (usu. 2 yrs, but can be longer [i.e., GO Zone])
• No need to meet §1031 timing or ID rules; can convert to cash (see rules for that above)
• So long as prop is used for same use, it’ll work just fine
Property Defn • All real estate is not all real estate you must consult the code in order to determine what the
source is. Much More NARROW than Like-Kind.
Basis • Adj Basis – Amt of $ received + Amt of gain recognized = NEW BASIS
1. Whether the taxpayer has achieved a sufficient continuity of investment to justify non-
recognition of the gain. OR
Test (Davis v. 2. Whether the differences in the relationship of the taxpayer to the two investments compel
U.S.) the conclusion that he has taken advantage of the condemnation to alter the nature of his
investment for his own purpose.
*** The Exchange Should Appear to be of the Same Nature of Business if Possible.

• Options Available to People Who Can’t Pay:
1. Payment Plan Option – If you can’t pay it right now, you can sign up for a
payment plan. And the IRS is required to do so there is an absolute right and as
long as payments are made on time, then the right is maintained, afterward if a
General Rule
payment is missed such right is foregone.
2. Offer in Compromise:
• What do you have? Give it to us. Food allowance, housing allowance and
one automobile.
• 10-Years on collection from assessment; Can be way out there since an audit can
move from 1993 to 1996;
1. File Return 3-Years to Audit
2. Do Audit and send a petition.
3. 90-Day Letter + 60 Days to Assess, Then 10 Years §6502 (not always 10-years when
Time Frame the payments are extended past the 10-years)
4. If you go to court, the statute of limitations on assessment is put on hold, IRS may
assess after a case is lost. Then it is another 60-days from a final decision that the IRS
has to assessment.
• There is a #300 on transcript, and it is a computer printout; Pretty much a transcript.
Made at the IRS service center and taxpayer is not told of it.
Fall 2008 24
Individual Income Tax Outline Chad Hallberg
1. Notify – The IRS must notify the taxpayer, in writing, of the filing of a lien.
2. Notice Requirement:
a. Given in Person
b. Left at the dwelling or usual place of business of the taxpayer; OR
c. Sent by certified or registered mail to such person’s last known address.
3. Time Frame – IRS must notify the taxpayer not more than 5-days after the day of
§ 6320(a)
filing lien.
Requirements of CDP
4. Terms § 6320(a)(3) – Notice must include in simple non-technical terms:
a. The amount of unpaid tax.
b. The right of the person to request a hearing during the 30-day period beginning
on the day after the 5-day period in §6320(a).
c. The Administrative appeals and procedures available to the taxpayer.
d. The provisions of the title and procedures relating to the release of the lien.
1. General Rule – If the taxpayer requests a hearing under §6320(a)(3)(B), such
hearing shall be held by IRS office of Appeals.
§ 6320(b) Right to a
2. Frequency – Taxpayer is only entitled to one hearing per tax period.
Fair Hearing
3. Impartial Officer – The taxpayer is entitled to one hearing per tax period.
4. Appeals – Hearing at the collections stage may be appealed to the court.
1. Defined – Taking of assets.
2. Assessment – IRS looks at your current assets and assets you may have in the future
§ 6330 Levies (inheritance and future earnings).
3. Exempt Properties – There are minimum exemptions for wages, salaries and other
income; Some states have homestead laws.
§ 6330(c) CDP
• Pennies on the $.
• Tax payer must establish that:
1. Doubt as to liability; OR
Offer in Compromise
2. Doubt as to collectability.
• If you get an offer in compromise once you’ll generally not get one again.
• If the taxpayer is not truthful, he gets in trouble for fraud.
• Right – Taxpayer has the right to an installment agreement as long as they keep their
payment current.
Payment Plans
• Assets – IRS will consider assets for the payment plan.
• Interest – is assessed.
Collection Appeals • Similar to a due process hearing, but cannot appeal the decision to the court.

Criminal Taxation
• Whether a taxpayer is charged civilly or criminally usually depends on the degree
General Rule
(severity) of the offense and who the person is; Famous People get Screwed!
• If a taxpayer is found guilty of tax evasion, he is also guilty of civil tax fraud. Only
Collateral Estoppel
the amount of liability is at issue.
§ 6531: SOL • Major Offenses have a SOL of 6-years.
• SOL is tolled for the period the taxpayer is out of the country if they are fighting the
• SOL is measured from last affirmative act of evasion.
Fall 2008 25
Individual Income Tax Outline Chad Hallberg
• IRS must indict within 6-years
• Every criminal has right and procedure applies to the tax arena.
• As soon as the IRS agent realizes that there are possible criminal charges, they must
Criminal Rights of
the Taxpayer drop the case immediately and refer the case to the Criminal Investigation Division.
• There is no accountant/client privilege. In 1998 Congress passed a tax preparer
privilege, but this doesn’t extend to criminal proceedings and tax shelters.
1. Degree – Felony
2. Sentence – 6 months to 5-years for each count; $100,000 + tax owed + interest.
General Rule
3. Amount – All you have to show for evasion is $1.
4. BOP – Must prove intent beyond a reasonable doubt.
1. Amount – There must be an amount due.
2. Willfulness:
a. Voluntary, intentional violation of a know legal duty, Subjective; AND
b. IRS must show an attempt to evade tax.
3. Proving Willfulness
a. Expenditure – IRS looks at taxpayers expenditures compared to their reported
Requirements income.
b. Bank Deposit – IRS looks at the bank accounts compared to their reported
income; False entries, double set of books, concealment of assets, covering up
sources of income.
4. Reasonable – Willfulness determination made on a case by case basis and should be
judged according to ∆’s state of mind, true belief of ∆; Must prove willful tax
evasion. Cheeks.
1. Degree – Misdemeanor
2. IRS Burden – Must show that taxpayer:
a. Did not pay;
General Rule b. Knew you needed to pay; AND
c. Had the ability to pay at the time the tax was due (willfulness)
** NOTE – IRS usually will not go after a taxpayer until they did not pay for 3-years
(shows willfulness).
1. Degree – Misdemeanor
2. Filed Return = Something that gives enough information to the Dep. of Treasury to
establish tax due.
General Rule 3. IRS Burden – Must show that taxpayer:
a. Did not file;
b. Knew you were suppose to file; AND
c. Willfulness
• Willfulness is subjective; The IRS must prove a voluntary, intentional violation of a
Proving Willfulness known legal duty. They look for legitimate excuses such as education level and
whether they are new to the country. Lying to a tax preparer shows willfulness.
1. Degree – Misdemeanor
General Rule 2. Example – Claiming 99 exemptions on a W-4 form.
3. IRS Burden – Must show willfulness this established by contradictory past behavior.
Fall 2008 26
Individual Income Tax Outline Chad Hallberg
1. Degree – Felony
2. Generally – Filing a false return; However there are many other crimes under this
3. IRS Burden – Must show the taxpayer:
General Rule
a. Willfully made false statements
b. The Statements were made under penalty of perjury (signing return or in an
offer of Comprise; AND
c. The false statements were material.
• Examples of Fraud or False Statements – Any act to mislead or conceal
• Understating income, exaggerating deductions, claiming false exemptions,
keeping a double set of books, Making false entries, false invoices or
documents, destruction of books or records.
Penalty • 75% of Tax Liability
SOL • None

Relief, Assignment of Income, and Divorce

• Spouses are J&S liable for deficiencies on tax returns
• The IRS will collect from the one that it is easiest to get to
1. Notice and Opportunity §6015(e)(4) - Non-Petitioning spouse has the opportunity
to get heard, the person filing the claim must file a notice to the non-petitioning
2. Settlement – If the IRS settles with one spouse, the other spouse has right to object
Bad Spouse Rules 3. Abuse – Write potential domestic abuse case at the top of the application in order to
keep the bad spouse from being given the other spouse’s address.
4. Community Property – For states w/community property deficiency, notice ~ req’d
- Gov’t can still come after inno. spouse by coming after marital community’s CP
5. 3 Ways to qualify for InnSpouse: Traditional, Sep Liab & Eq Relief (3 §s below)
General Rule • Used in a jt return with an understatement of tax due, where one filer made an error
1. Joint return filed
2. There was an understatement
3. InnSpouse didn’t know, or had no reason to know of the understatement (Can’t
5 Requirements stick head in the sand)
4. It is inequitable to hold the other indiv liable for the deficiency
6. The non-at-fault spouse elects the benefit of this section no later than 2 years after the
secretary has begun collection activities
1. Must Show – The Non-Error spouse must show:
a. Did not know of error; AND Had no reason to know.
Other 2. BOP – Taxpayer
3. Scope – Only deals with understatement not underpayment
4. Policy – Inequitable to hold innocent spouse liable.
General Rule 1. Retroactive – intended to be Retroactive Married Filing Separate (refund prohibited)
2. Proof – Spouse must prove their portion of the income
Fall 2008 27
Individual Income Tax Outline Chad Hallberg
3. Scope – Only deals with understatement, not underpayment.
(1) no longer married, separated, or not living w/each other for 12+ months AND
(2) no actual knowledge of the “item” that makes up the deficiency OR w/knowledge
but under duress AND
(3) Make election yourself w/in 2 years
• Actual Knowledge of the item makes the spouse ineligible. The courts have
interpreted this very narrowly. Cheshire v. Comm’r (H takes out retirement and W knows
about transaction, but not that it was illegal to not pay taxes on some of retirement $)
Knowledge & Duress - “Actual Knowledge” Rule: It doesn’t matter that the spouse doesn’t know that
the “item” is illegal, they just need to know that the transaction happened
• Duress: Knowledge requirement does not apply to spouses who suffer physical or
severe mental abuse.
(3) § 6015(f): EQUITABLE RELIEF
(1) Equitable relief if no relief under (b) or (c) +
General Rule (2) Inequitable to hold InnSpouse liable under the circs
- Decided by the IRS  Means that this rarely ever happens!

• The taxpayer who earns the income should pay taxes on it – Even if they never touch
it. Income cannot be assigned. Lucas v. Earl (husband assigning money to wife; He
General Rule
was in 70% bracket and she had no income so, by giving it to her they were in the
40% bracket).
Grantor Trusts 1.
• So long as the money is given directly to the corporation of the taxpayer, which is
Personal Service separate and distinct from the individual it is okay to transfer funds for the purpose of
Corporation reducing tax. In effect, the taxpayer gives a salary to the Corp. and is given the
dividends in return upon which he is taxed.
1. Facts – Kid drafted by the Phillies; received $70,000 of which $40,000 is given to
Allen v. Mom.
Commissioner (Pg. 2. Holding – Kid is taxed on entire amount because he earned the money for playing
94) baseball, person with whom they are contracting must be taxable to the person who
earns it.
• Can kid take $40,000 as a business deduction? No, not in this case, but cited to the
Application Randy Hundley case; Randy paid his dad, who was a semi-pro ball player. Mom
didn’t have the professional caliber training.
• $100,000 – Attorney would get $33,333 and the other person would get $66,667,
because the one amount goes to the lawyer. This is an assignment of income case;
Bannaits v. Banks Just like the court in the case we talked about it was earned by the client. Physical
injury settlement was earned by the client. Still all taxable to them and they can also
get a deduction for paying the attorney.

• Husband → Wife; No gain or loss is recognized on a transfer of property to and from
General Rule and between spouse so long as it is connection of divorce and occurs one year after
marriage ceases or is related to cessation of marriage.
Basis • Basis is carried over from the marriage.
Fall 2008 28
Individual Income Tax Outline Chad Hallberg
• Alimony cannot have characteristics of a property settlement i.e. $100,000 for first
Alimony year and $1,000 for the rest. If alimony is actually a property settlement both spouses
must amend their returns and alimony reduction needs to be recaptured. This can be
rebutted. §1.1041-1T.
• Not deductible unless they are connected with the production of income which is
General Rule
taken as a deduction under MID Schedule A along with 2% haircut.
• Pay attorney for the divorce and tax advice is included; It must be clearly allocated in
the bill for tax purposes of the meeting with the attorney. Still subject to

Employee v. Independent Contractor Determinations

1. Degree of Control Exercised by the Employer – Most important
2. Which party invests in facilities.
3. Opportunity of the Individual for profit and loss.
7 Factors 4. Whether the principle has the right to discharge
5. Whether the work is an integral part of the principal’s business.
6. Permanency of the Relationship.
7. The relationship the parties agree they’re creating.
TEST • Rev. Ruling 87-41 (HANDOUT MURPHY GAVE US).
• Employer doesn’t withhold wages and doesn’t pay roll tax.
Benefits for being • I.C. is worse status, but you get deductions on Schedule C. 100% write off. Lowers
I.C. income $ for $.
• 2% limit with misc.

Capitalization and Capital Gains and Losses; Hobby Loss

• Matching Expenses with Income
General Rule
• No minimum cost of an asset that can be capitalized.
• Current deduction for sugar an
Principle • Long Term assets are capitalized you match the income with the expense because if
income is coming in over a two-year
1. Depreciation - Tangible assets i.e. mixer an oven
Three Ways to
2. Amortization – Intangible assets i.e. goodwill, stocks, patents
3. Depletion – Oil, Natural Gas
1. 1.263(a)-1 – Any amount paid out for the following made to increase the value of
property or estate;
2. Amounts – include to add to value to prolong life, adapt to new and different use,
3. 1.263(a)-2 – Capital Expenditure Examples
a. Cost of buildings
b. Furniture and Fixtures which last beyond a
INDOPCO v. Holding – IRS says 2.2 million valuation fee had to expense the 2.2 million deduction
Commissioner over time because INDOPCO will benefit from the buy for many years after the buy-out.
“Friendly Take It is a benefit that will take place over many years and the 2.2 million was a result of that
Over” amount.
Hostile Take Over • Facts – KKR looked for companies to buy out and reshape them with undervalued

Fall 2008 29
Individual Income Tax Outline Chad Hallberg
stock and make it increased. Hire a company to value stock high and spend 2.2.
million to fight takeover.
• Holding – Fighting takes place in one year and therefore is deducted in the year in
which it occurred. Every take over you look to see if it was hostile.
General Rule • Any property not specifically excluded in §§ 1221, 1221(a) and 1.1221-1.
• Taxed at a lower rate than other income; To promote investment and make up for
• Capital Assets held longer than 1-year.
§ 1222(3) Long-Term
• Preferential taxation rates.
• Capital assets held 1-year or less.
§ 1222(1) Short-Term
• Doesn’t do any good. Treated as ordinary income.
• Restrictions on how much you can deduct (up to your capital gains + $3,000 per
General Rule
• Losses can rollover to the next 2-years.
§ 1212 Roll Over
• No Capital loss on houses.
• Higher Tax Brackets – Pre May: 20%; Post May: 15%
• Lower Tax Brackets – Pre May: 10%; Post May: 8%


• General Rule – Business losses cannot be realized unless the business has a clear
profit motive; losses can be taken until the cows come home.
• Standard – Subjective standard what the tax payer truly believes; Factually intensive
General Rule • Quote – “If it moves deduct it, if it doesn’t; depreciate it. (Punctuation provided by
K. Sullivan).
• Ratio – If you have a profit 3 out of 5 years (2 → 7 for Horse harms) you are
presumed to be in for a profit.
• Hobby – Only allowed to break even.
1. The Manner in Which the Taxpayer Carries on Activity
2. Expertise of Taxpayer
3. Time and Effort Expended by the Taxpayer in Carrying on Activity
4. Expectation that assets used in the activity may appreciate
9-Factors 5. Success of Taxpayer in Carrying on other Similar or Disimsilar Activities
6. History of Income or Loss – Most important
7. Amount of Occasional Profits
8. Financial Status of the Taxpayer
9. Elements of Personal Pleasure or Recreation are Involved

What was Murphy’s dog’s name? Snap

Fall 2008 30