Federal Income Tax

Fall 2016
Lipman

Test Notes
Must cite the code, don't need to get too specific
Will not have to calculate liability, but must do more
discussion than just the math
Answer ALL the questions
Think of how loaded each word is
Each fact is important

Make sure to analyze the facts

General
Lot of deference to IRS because they are tasked with the
collection of taxes
Reference this

Substantiated via caselaw (Mayo)

Remember the procedure

Voluntary self-assessment system

o
Checked in power with tax penalties

Failure to file, failure to pay, etc.

Penalty on the tax due

Additionally, interest accrued as a result

of deficiency
This includes a deadline for filing return and refund

claim
o
Statute of Limitations

Refund claim
SOL

6511

Return Filing Due Date

3 years from Due Date

6501 Statute of Limitation for Tax

Deficiency

No SOL for no filed, fraud, willful attempt

to avoid taxes
Suit

o
Tax Court

Option when deficient

Federal Trial Court

o
Court of Federal Claims

Refund Claim

Based in D.C.

District Court
Possible Jury Trial
Not always wanting to hear tax courts
Can be helpful or harmful
Appellate Level
Court of Appeals
Will hear Tax Court and District
Court

61 Gross Income -> (This statute is grounded in the

Constitution) 16th Amendment -> Broadly Defined -> Cesarini, Old Colony
Trust, Glendale Glass
Remember this is incredibly broad

"Any item of income SHALL BE included, unless" we say

otherwise
If is an item of income

Income isn't defined

o
However, Glenshaw Glass

S.Ct. says not going to define income

Recite the quoted language

"an undeniable accession to

wealth, clearly realized"

Not mere fluctuations in

value, needs realization event

Also, NOT loan proceeds

Not undeniable

accession to wealth
Also, NOT return of capital

Cases are
Glenshaw Glass

o
See above
Old Colony Trust

o
Taxes paid by company ARE INCLUDED as
Income

Extended to include debt relief provided

by employer

If employer pays for employees child's

debt (schooling, etc.), it is EMPLOYEE's income
Cesarini

o
Treasure Trove is income

Not fluctuations in value

Think of Barry Bonds baseball example

o
o
o

JUST ANALYZE THEN MOVE ON, NO

BLACK AND WHITE WITH ALL TREAURE TROVE
Look at treasury regulations under 61
Explanations can include
Property
Services
Debt Relief
Add
74 Prizes
Not really needed, as it would be included

under 61
o

It is here because
Explains narrow prizes and awards that
may be excluded
Such as employee recognition

awards that are de minimis

Reiterates the idea of award scholarships

72 Annuities and Trusts

o
Inclusionary section. It is included except for
parts discussed below
Less
102 Gifts -> Duberstein

Inheritance/Devise -> Lyeth v.

Hurt/Wolder

102c Employee<->Employer Transfers

cannot be a gift
o
Really only restriction on 102
o
T.R. 102-1f

If there is a transfer between EE-ER to

offspring of EE allowed if EE can show that transfer
was not a result of EE's employment
Think of father employer and son

employee with gift transfer

Employee has burden of proof

People always want to fall under this

section because
o
No $ limit
o
No real requirements other than
gift/inheritance/devise/bequest requirement
Remember, not gift or estate tax.

Mention that it can be there, but not our issue

Remember only

Lifetime gift
Or
Gift through death
Duberstein
o
Everyone tries to argue that all accession to
wealth is a gift
o
The key fact to look at with 102 is

"detached and disinterested generosity"

*** "out of affection, respect, admiration, charity or
like impulses".
Lyeth v. Huey
o
Inheritance

Even if accession of wealth comes

through judgment (suing estate), it is an
inheritance
Wolder
o
Inheritance

Argues his inheritance from client for

charges came via will

Argued not compensation, it was

inheritance

Commissioner said it is compensation

because you can't have it come via will to avoid 61
income
o
This falls under 102c
These cases created group of exception
descriptions 132, 11, 107, 127
132 Employee/Employer Fringe Benefits
Excludes myriad of employee benefits
o
No additional cost service

132a
Be specific with this one

"This is a forgone revenue so

it is additional cost."

Working for airline and getting to ride

empty seats for free
Can't push away customer to grant

employee benefit

This can't be discriminatory

This includes employee, retired

employee, widows of employee, spouses and
children of employee
Airline enhancement allows this to

include parents
o
o
o

must be in line of business

Can ride Delta while employee of

Southwest if there is an agreement between

companies
o
Qualified Employee Discount

For personal property and goods

Can sell for cost

Must pay for price which the

employee gives under cost

If percentage discount

Can't be over 20%

o
Working Condition Fringe

132d

If ER pays for bar dues, can be excluded

from 61
o
De Minimis Fringe

132e

Dont have to include drinks at company

happy hour in income
o
Qualified Moving Expenses

132g
If otherwise deductible to

employee, can be excluded

119 Meals/Lodging -> Hart
Meals must be furnished on business
premises
Lodging must be furnished on business
premises
o
Must be requirement of employment
o
Hat case

EE must be at funeral home to do funeral

stuff

Issue was requirement of employment

Since he was self-employed it was an

issue

Because phone was in home portion tied

to office, it was for benefit of employer and was a
requirement of employment and could be excluded
from Gross Income
107 Minister of the Gospel
Broad exclusion applied to a narrow
group
o
This is similar to 119 and includes utilities and
lodging

117 Scholarships/127 Employer Provided

Scholarships
117 excludes qualified scholarships

o
Only applies to tuition, fees, and related
expenses (i.e. books required for course instruction)
Caveat

o
If scholarship comes from employer it is
includable, then go to 127
127

o
Requirements

Must be non-discriminatory

Must be written plan

Must be offered and marketed broadly

o
Limited to $5,250 per year, not indexed for
inflation
101 Life Insurance
Excludes from Gross Income (think in

conjunction with 102) ALL life insurance proceeds

o
Death benefit
Exception

o
If life insurance company keeps death benefit,
and then pays plus interest, cannot exclude INTEREST
o
If life insurance company keeps death benefit,
and pays over time

Use formula to pro-rate death benefit

Anything in excess of pro-rate, is

must be included

If live past the death benefit, can exclude

more
Bad news, if you die early, not

going to be able to exclude death benefit on

final income tax return
o
Congress doesnt want people to sell death
benefits

Purchaser cannot exclude benefit, can

exclude the payment price as a return of capital
OR 72 Annuities

o
Payments received from Annuity can be
excluded to extent that it was purchased
o
Return on Capital concept

Consider it a business deal

Once capital is recouped, must pick up

the rest as gross income

If you die early, you get a deduction on final

tax return
108 Debt Relief -> Zarin, Kirby, LRAPs Rev. Rule

2008-34
Other side of loan proceeds not being a

part of an accession to wealth

Arises when debt is cancelled or forgiven

that is NOT paid by employer

Can exclude if

o
Occurs in bankruptcy
o
If insolvent
o
If it is debt discharge that is qualified principal
resident indebtedness
If a family loan is forgiven as a gift, then

it can qualify under 102

o
Factual analysis
108f

o
LRAP Provision

Student loans that are forgiven

Revenue Rule 2008-34

Zarin case
Not a legitimate debt because

gaming debt was probably illegal

104 Damage -> Physical injuries/Illness
Doesnt have to go through court, can be

a settlement
Can be excluded if

o
It is on account of personal physical injuries or
physical sickness
o
No limit
o
Even if it is measured via work

(can't make 60 million because you are

missing a leg, can exclude here)
DOESN'T include Punitive damages

If paid over time

o
Revenue Ruling 79-313

Doesnt count as interest

Can exclude all

If damages award outside of injury or

sickness
o
Origin of the Claim
o
If reimbursed for car that a lemon

Return of capital investment

If loan that wasn't given

Return of loan proceeds

106 Health Premiums Employer Provided

Employer provided accident and health

plan premiums
o
106 excludable unless you deduct them

103 State/Local Bond Interest

Excludable

911 Foreign Derived Income

If money earned from other country

(330/365 days) can exclude over $100,000 to avoid double

taxation

25A Tax Credit/Education Tax Credits

[OR] Deductions

[OR] Exclusions 529/530

o
Less 121 exclusion for Gain from Sale of Personal
Residence
o
Less Adjustments for AGD [Above the Line
Deductions]

217 Moving Expenses

No dollar amount limit

Must qualify for

Must be moving because of a job

o
Distance Requirement

Must be more than 50 miles,

o
Time Requirement

Must work 39 weeks

Must work 78 weeks if self employed

Doesnt include food

Includes lodging and moving fees for

everyone in household that is moving

Still better to have employer pay for this

Employer can exclude from gross income

under 132g if they pay for it

221 HE Interest
Above the line deduction

Capped at $2,500

Not allowed for married filing separately,

or high income individuals

222 Tuition/Fees
Not pro-rata

Maximum benefit is $4,000

o
If above threshold, $2,000
o

If above that threshold, $0

Can't get if married filing separately

67/162 Miscellaneous
Repair v. improvement

Education expense

Meals and entertainment

Where they go depends on sole

proprietorship or employee

163 Interest

164 Taxes

67 Miscellaneous/162 [Employee, Hill or

Coghlan case]
Education under 162

o
Cant prepare for new trade of business
o
Also, can't be to satisfy minimum requirement
o
Only if it exceeds 2% of gross income
o
If employer covers it, it is excludable under
132(d)
Education for Sole Proprietorship

o
If away from tax home, get meals, lodging, and
same as above
------------------------62 Adjusted Gross Income
Less personal and dependent exemptions
151/152
Phased out for higher income individuals

152 defines

o
Qualifying child

Must satisfy test

Relationship
Kid, grandkid, brother sister, niece

nephew

Must have lived with TP for more than

half the year

Age
18 or younger (as of last day of

year)
OR full time student under 24

Disabled has no age limit

o
Qualifying Relationship

Relationship
Aunts uncles in laws. Very Broad

o
o

Doesn't have to be related,

but lives in your house the whole year

Must have provided half the support

Can't have Gross Income in excess of

exemption amount ($4,000)

Must be us citizen, resident, or resident

of us or Mexico

Must have taxpayer ID number

o
Less the greater of Standard 63 [+Aged/Blind
additional deductions] or Itemized Deduction

213 Medical
o
Very limited
o
Just know they exist
o
Only can deduct the amount in excess of 10%
of gross income

170 Charitable Contribution

o
Just know it exists

163 Interest
o
163a Deductible broadly
o
163h personal interest is not deductible unless

Qualified residence interest

Either

Acquisition indebtedness

Using loan proceeds to

purchase, build, or improve residence

Principal limited to $1

million
Irrespective of marriage status
Except married filing separately
Interest is deductible

Deductible on up to 2

residences
Boat, RV, just something inhabitable
Home equity indebtedness

In excess of acquisition

indebtedness
Must have equity
Can deduct interest on

$100,000
Can use on anything

Can put loan proceeds

back into property

IRS said can tack this onto acquisition

indebtedness so it can be $1.1 million
indebtedness
164 Taxes
State and local taxes
Typically, personal property taxes and
real property (i.e., home)
Option for states without state income tax
Can deduct state sales tax
=
63 Taxable Income

o
o

o
o

o
o
o
o
o

Tax 1(h)
1h Tax preference for LTCGs
Less tax credits (refundable/non-refundable)
25A
Education Tax Credits
[Refundable/Nonrefundable]
25A(i) American Opportunity Tax Credit

First 4 years of Higher Ed

Can't have felony

Can't be married filing separately

Per student

Only tuition and fees counts

Get 100% of 2,000

25% of next $2,000

Refundable
Lifetime Learning Tax credit

Tuition and fees

Per taxpayer

20% of

Non-refundable
Phase out for higher income

individuals
Can't be married filing separately

Tax Rates 1 and 1h

Ordinary Income
39.6
35
33
28
25

o
o

o
o
o

o
o
o
o

15
10
LTCG Collectible Income
Under 1h
28%
Unless at a lower Ordinary Income tax rate,
then taxed as Ordinary Income under 1
LTCG Non-Collectible Income
Under 1h
If under 25% tax bracket rate, it is taxed at 0%
If between 25-35% tax bracket rate, it is taxed
at 15%
If 39.6% tax bracket rate, it is taxed at 20%
Losses
165 Losses

Cannot take losses on Personal Use

Property
NLTCL, NSTCL

1211b
Limits loss to $3,000

1212b

Excess carried forward

indefinitely
Retains same holding

period
If both NLTCL AND NSTCL

1211b
Limits loss to $3,000

1212b

Excess carried forward

indefinitely
Retains same holding

period
Use the NSTCL first as an offset in

the future

1001 A/R [1001b cash, FMV property, debt relief

(Nonrecourse AND recourse debt, Tufts and Crane)]
Less 1011 Adjusted Basis

o
in property being sold or exchanged
(acting as return of capital)

1011 -> 1012 cost -> 1014

Inheritance/Death Basis -> 1015 Gift (Donor's Basis) ->
1041 Spousal
o
1011 Explains Adjusted Basis
o
Use appropriate code section
o
1012 Cost Basis
o
Most common basis determination
o
Can be dynamic
o
Example

If TP has rental property, pays 1 mil, that

is cost basis. Does improvements. Describes
improvements. Do analysis whether repair (162
excluded as expense) or improvement (capitalized> 1016 says increase cost basis)
1014 Inheritance/Death Acquisition

Basis
o
Basis is FMV at date of death
o
1014(b)(6) - If community property asset,
property gets step up in basis on holding of decedent,
TP also gets step up in basis for own half
1015 Gift as Donor's Basis

o
102 relevant gift exclusion
o
Regarding lifetime gifts
o
Duberstein

Look at facts relevant

o
102c

Can't have EE ER gift

If related, look at why the gift, as EE ER

or as relation
o
Gift basis makes the recipient step into the
donor's shoes for the basis

Exception to that rule

If on date of gift, there is a built-in

loss (FMV below Donor's A/B) AND it is later

SOLD at a LOSS, then
Donee takes basis as FMV

o
Test Professor gives:

At the date of the gift

If Built in Loss

FMV > Basis (Cost to Donor)

AND

Later Donee sells at a loss

Then

Basis = FMV at Date of Gift

At the date of the gift
If Built in Loss

AND

Later Donee sells at a gain

Then

Basis = Donor's Basis

At the date of the gift

If Built in Loss

AND

Later Donee Sells between

Donor's Basis and FMV at Date of gift

THEN

NO GAIN NO LOSS

1016 Basis Adjustments

Can change basis
1041 Spousal Transfer Basis
Spouses operate as one taxable unit

Relevant for divorce

Think division of assets (1 gets boat and

stock, 2 gets house)
This is a NONRECOGNITION provision

No gain or loss on transfer

Similar to gift basis, on transfer, ALWAYS takes
spouses basis
Gain or Loss Realized under 1001c
"Except as otherwise provided in this subtitle,
the entire amount of the gain or loss, determined under
this section, on the sale or exchange of property shall
be RECOGNIZED"

Exception like Spousal Transfer

After 1001 Analysis
1221 Capital Gain or Not
Is it a capital asset in the hands of the party
selling the asset?
Capital assets ARE NOT inventory

Not property held by TP primarily for sale

to customers "in ordinary course of trade or
business"

Fact specific
Look at volume of trading and

selling

o
o

o
o

o
go
o

If done on isolated basis rather

than business, not capital
If not capital gain, then it is ordinary income,
to 61
If it is capital asset, continue analysis
1222 Long Term or Short Term
Definitions
Short Term
Held for one year or less

Long Term
Held for more than one year

Gain
Gain from the sale or exchange of

asset
Loss
Loss from the sale or exchange of

asset
Gains
Offset gains and losses with like 1223
like Holding Periods
Result is Net LTCG/LTCL and Net
STCG/STCL
Then Net the Nets (net the LT and ST)
Result is
NLTCG

Tax Preferred Treatment

Analysis
Is it a collectible?

(Kind of like inventory but

less volume and involves
holding)
If yes, 28%
1h
Unless at a lower tax rate,
then taxed as Ordinary
Income at 1
If non-collectible (would be taxed
as ordinary income)
Under 1h
If under 25% tax bracket
rate, it is taxed at 0%

If between 25-35% tax

bracket rate, it is taxed at
15%
If 39.6% tax bracket rate, it is
taxed at 20%
NSTCG
Treated as ordinary income,

go to directly to 61, taxed ordinarily at 1

Both NLTCG AND NSTCG
Combine and Treat as Short

Term
Taxed as Ordinary

Income at 1
Losses
165 Losses
Cannot take losses on Personal Use
Property
Boats, houses, cars

Offset gains and Losses

Net the Nets
Result is
NLTCL, NSTCL
1211b

Limits loss to $3,000

1212b

Excess carried forward

indefinitely
Retains same holding period
If both NLTCL AND NSTCL
1211b

Limits loss to $3,000

1212b

Excess carried forward

indefinitely
Retains same holding period
Use the NSTCL first as

an offset in the future

1223 Holding Period

o
Rev Rulings 66-97 and 66-7
o
Holding from date of acquisition to date of sale
o
Do NOT count date of acquisition
o
DO count date of disposition

Called the "trade date"

Do not worry about the length it takes to settle
the sale, only look at trade date
Could take time to finalize sale

1223(9)

If acquired property from decedent, then even

if sold before 1 year, it is LONG TERM
Irrespective of when decedent acquired

property

Likely not a big gain regardless because basis

of acquisition is FMV at date of death
1015 Acquisition

Recipient not only receives donors basis, but

also donors holding period

If gift has built in loss exception, then recipient

does not receive either basis OR holding period

=
Gain Realized refund a recognized [1041 or 121 OR NOT
EXCLUDED]
121

Up to 250k of gain may be excluded from gross

income if following are satisfied
If during 5-year period, the home has

been used a total of 2 years or more as principal

residence.
Joint returns allow 500k limitation instead of

250k
If

o
Either spouse meets ownership
requirement above
o
Both spouses meet the use
requirements above
o
Neither spouse is ineligible for the
benefits due to 121(b)(3)
Surviving spouses can use the 500k for 2 years

after spouses death.

o
Loss acts as Negative Gross Income for 61