Pg.

63: RECEIPT OF ECONOMIC BENEFITS

1. Would the result to the taxpayer in the Cesarini case be different if instead of discovering
the money in old currency in the piano, they discovered that the piano, a Steinway, was
the first Steinway piano ever build and it is worth $500,000
i. Answer: Yes; No realization of he gain until disposition of the piano. In
Cesarini, the taxpayer found other property namely, cash, in the piano he
purchased. Here it is the piano itself that has a potential for gain.
2. Winner tatends the opening of a new department store. All persons attending are given
free raffle tickets for a watch worth $200. Disregarding any possible application of IRC
Section 74, must Winner include anything within gross income when she wins the watch
in the raffle?
i. Yes; the noncash nature raises a possible question of valuation, but not of
inclusion in income.
3. Employee has worked for Employers incorporated business for several years at a salary
of 80k/yr. Another company is attempting to hire Employee but Employer persuades
Employee to agree to stay for at least two more years by giving Employee 2% of the
companys stock, which is worth 100k, and by buying Employees spouse a new car
worth 30k. How much income does Employee realize from these transaction?
i. First: 80k * 2 = 160k
ii. 100k * 2 = 200k
iii. 30k car = 230k
1. OR for a single yr: 80k + 100k + 30k = 210k
iv. Simply indirect compensation via Old Colony Trust Co. to Employee
4. Insurance Adjuster refers clients to an autorepair firm that gives Adjuster a kickback of
10% of billings on all referrals
a. Does Adjuster have gross income? Yes compensation for services rendered.
Alternatively as kickbacks via Glenshaw Glass.
b. Even if the arrangement violates local law? Yeah homie, illegal shit is also
taxable. As the Note following Glenshaw Glass case indicates, income from
illegal sources is nonetheless taxable.
5. Owner agrees to rent Tenant her lake house for the summer for 4k?
a. How much income does Owner realize if she agrees to charge only 1k if Tenant
makes 3k worth of improvements to the house?
i. Isnt it still 4k? Yes It is 4k because the improvements were intended to
constitute rent. Regulation 1.61-8(c)
b. Is there a difference in result to Owner in (a) above if Tenant effects exactly the
same improvements but does all the labor himself and incurs a total cost of only
$500?
i. No, as long as the VALUE of the improvements is still 3k. The question is
always the value of what is received, not the cost to the purveyor.
c. Are there any tax consequences to Tenant in part b above?
i. Tenant has a gross income of 2.5k rent obligation. 3k satisfied for $500 in
cost. So T has a gross income of 2.5k, which are the services he rendered
for payment in RENT. Get it?
 6. Flyer receives frequent flyer mileage credits in the following situations. Should flyer
have cross income?
a. Flyer receives the mileage credit as a part of a purchase of ticket for a personal
trip. The credits are assignable.
i. No. This is a rebate for purchase price. Rev. Rul. 76-96
b. Flyer receives credits from Employer for business flights Flyer takes for
Employer. The credits are assignable.
i. Yes, to the extent of the fair market value of those credits assignable. But
the IRS has declared that it will not attempt to tax frequent flyer miles,
even those earned on business flights. Announcement 2002-18, 2002-1 CB
621.
c. Flyer receives the credits under the circumstances of (b) above, but they are
nonassignable.
i. Since these miles are NOT assignable, they have no fair market value. In
any case, Announcement 2002-18 applies where IRS declared it will not
attempt to tax frequent flyer miles.
d. Same as c above except flyer uses the nonassignable employer-provided credits to
take a trip.
i. No because of the applicable of Announcement 2002-18
e. Flyer opens a bank account, receives 50k thank you points from Bank, and
redeems the points for a flight valued at $650.
i. ACCORDING TO SHANKAR, these points are a premium for making
the bank deposit vs from business travel and are therefore taxable
when redeemed for the airline ticket worth $650.

Pg: 66 IMPUTED INCOME

1. Vegy grows vegetables in her garden. Does Vegy have gross income when:
a. Vegy harvest her crop?
i. No. Due to practical difficulties.
b. Vegy and her family consumes $100 worth of vegetables?
i. No. Income is not imputed within the family unit. CF Independent Life
Case.
c. Vegy sells vegetable for $100?
i. Yes Less cost basis if any.
d. Vegy exchanges $100 worth of vegetables with Charlie for $100 worth of tuna
which Charlie caught?
i. Yes Yes $100 gross income to both as barter income. Rev. Ruling 79-24
2. Doctor needs to have his income tax return prepared. Lawyer would like a general
physical check up. Doctor would normally charge $200 for the physical and Lawyer
would normally charge $200 for the income tax return preparation.
a. What tax consequences to each if they simply swap services without any money
changing hands?
i. $200 bucks. Each has $200 of income from this exchange of services.
Rev. Rul. 79-24. Value of the services received = compensation for the
services rendered.
 b. Does Lawyer realize any income when she fills out her own tax return?
i. No. Income is not imputed here.

GIFTS AND INHERITANCES: Section 102(a) and (b)

Pg. 80

1. Employer gives all of her employees, except her son, a case of wine at Christmas, worth
$120. She gives Son, who also is an employee, a case of wine, worth $700. Does Son
have gross income?
a. Son, like other employees, has gross income unless he can show that his case of
wine was received because of the family relationship rather than the employment
relationship, thereby satisfying the exclusion described in the text.
2. The congregation for whom Reveerend serves as a minister gives her a check for $5,000
on her retirement. Does reverend have gross income?
a. Probably excludible as an exception to the general treatment of employees
because of the rather special relationship of clergy to the congregation served. See
Schall and Reg. 1.102-1(f)(2)
3. Employee receives a 5k trip ton Employees 50th bday. To pay for the cost of the trip,
Employer contributed 2k and fellow employees of employee contributed 3k. Does
employee have gross income?
a. Under the rationale of Kralstein, the trip is split between the 3k provided by other
employees (which qualifies as gifts) and the other 2k from Employer. While
retirement gifts are usually considered de minimis fringe benefits under Section
132(a), including gold watches, this $2k trip probably CANNOT qualify under
this standard and will be taxable per 102(c)

Pg 89.

1. Consider whether it is likely that Section 102 applies in the following circumstances:
a. Father leaves Daughter 20k in will.
i. Yes applies as a gift under Sec. 102
b. Father dies intestate and Daughter receives 20k worth of real estate as his heir.
i. Yes bequest, devise, or inheritance. Section 102(a)
c. Father leaves several family members out of his will and Daughter and others
attack the will. As a result of settlement of the controversy, Daughter receives
20k.
i. Yes, this would apply under section 102 via Lyeth v. Hoey
d. Father leaves daughter 20k in his will stating that the amount is in appreciation of
Daughters long and devoted service to him.
i. Yes, falls under Section 102 even though this is tricky. It is a bequest
because it appears to rest on affection, rather than a compensation
arrangement. This is where analyzing the intent for giving the gift or
bequest matters.
e. Father leaves Daughter 20k pursuant to a written agreement under which
Daughter agreed to care for Father in his declining years.
 i. This would constitute more like a contract for services. As such, no
income for services rendered per Wolder case does not trigger the
application of Section 102.
f. Same agreement as in (e) except that Father died intestate and DAguhter
successfully enforced her 20k claim under the agreement against the estate.
i. Still constitutes income under Wolder. See also Cotnam.
1. What happened in Wolder again?
a. But where a bequest is made in return for services
rendered, that bequest should constitute taxable gain. It
basically arranged for Boyce to provide postponed payment
for Wolders provision of lifetime legal services. Hence,
Boyces true intention in leaving the bequest was to make
payment for services rendered by Wolder. Therefore, the
bequest constituted taxable gain to Wolder.
g. Same as f above except that Daughter settles her 20k claim for 10k payment..
i. Still it is income in exchange for services despite the familial relationship.
h. Father appointed daughter executrix of his estate and Father will provided
daughter was to receive 20k for services as executrix.
i. Again, income for services rendered as an executrix does not constitute
bequest or inheritance.
1. Note: Fathers estate however gets a deduction on its estate tax per
Section 2053.
i. Father appointed Daughter executrix of his estate and made a 20k bequest to her
in lieu of all compensation or commissions to which she would otherwise be
entitled as executrix.
i. Probably income under Glenshaw Glass. The Merriam case discussed in
Wolder holds to the contrary but is of doubtful validity today.
1. Glenshaw glass is the case related to antitrust settlement where the
punitative award was subject to tax.

FRINGE BENEFITS
Pg 102 Sec. 132

1. Consider whether or to what extent the fringe benefits listed below may be excluded from
gross income and Excwhere possible support your conclusion with statutory authority.
a. Employee of a national hotel chain stays in one of the chains hotels in another
town rent-free while on vacation. The hotel has several empty rooms.
i. Excluded. Section 132(a) assuming that the policy is nondiscriminatory
OR that Employee is not a high echelon person per Sec. 132(j)(1)
b. Same as (a) above, except that the desk clerk bounces a paying guest so Employee
can stay rent-free.
i. Included. Cost incurred under Section 132(b)(2).
c. Same as (a) above except that Employee pays the bill and receives a cash rebate
from the chain.
i. Excluded, same as (a) above. Difference in mechanics is irrelevant per
cited Reg. 1.132-2(a)(2) and (5)
d. Same as (a) above, except that Employees spouse and dependent children
travelling without Employee use the room in their vacation.
i. Excluded under Section 132(h)(2)(A)
e. Same as (a) above except that Employees stays in the hotel of a rival chain under
a written recriprocal agreement under which employee pays 50% of the normal
rent.
i. Excluded. Under Section 132(i)(2)
f. Same as (a) above except that Employee is an officer in the hotel chain and rent-
free use is provided only to officers of the chain and all other employees pay 60%
of the normal rent.
i. Included in its entiretynot just the excess, because the policy is
discriminatory AND Emplooyee is an officer (assuming that this person is
a highly compensated employee)
g. Hotel chain is owned by a conglomerate which also owns a shipping line. The
facts are the same as in (a) above except that Employee works for the shipping
line.
i. Included; not in the same line of business, as required by Section
132(b)(1)
h. Same as (g) above except that Employee is comptroller of the conglomerate.
i. Excluded as long as the policy is nondiscriminatory
i. Employee sells insurance and employer Insurance company allows Employees
20% discount off the 1k cost of the policy
i. Excluded; 20% discount on services is permitted by Section 132(a)(2)(c)
j. Employee is a salesman in a home furnishings store. The prior year the store had
1,000,000 in sales and a 600,000 cost of goods sold. Employee buys a sofa for 2k
from Employer for 1k.
i. Gross margin is 40%; Employees discount on goods of $2k is limited
therefore to $800.
1. Thus, $800 is excluded.
k. Employee attends a business convention in another town. Employer picks up
Employees cost.
i. Excluded ection 132(a)(3), (d) See. McDonell case as well.
l. Employer has a bar and provides the Employee with happy hour cocktails at the
end of each weeks work.
i. The frequency and regularity of the occurrences makes this not a fringe
benefit. As such, this is included because its frequent provision precludes
it from being considered de minimis. See Reg. 1.132-6(b)(2) first
sentence.
m. Employer gives Employee a case of scoth each Christmas.
i. Not fringe benefit. This one is unclear whether a case of scotch can be
viewed deminis. But it sounds more like a gift?
1. See Reg. Holiday gift of low fair market value.
n. Employee is an officer of corporation which pays employees parking fees at a lot
one block from the corporate headquarters. Non-officer pay their own parking
feeds. Assume there is no post-2001 inflation.
 i. Excluded. Section 132(f)(5)(C). The nondiscriminatory standard of
Section 132(j)(1) does not apply to transportation fringes. There is,
however, a maximum exclusion of $175 per month, indexed for inflation.
o. Employer provides Employee with $185 worth fo vouchers each month for
commuting on a public mass transit system. Assume there is no post 2001
inflation.
i. Excluded by Section 132(f)(5)(A) up to $175 per month per Sec.
132(f)(2)(A) without regard to the de minimis working condition
provision. Sec. 132(f)(7)
p. Employer puts in a gym at the business facilities for the use of the employees and
their families.
i. Excluded under Sec. 132(j)(4).

Pg. 106, Section 119

1. Employer provides Employee and Spouse and child a residence on Employers business
premises, having rental value of 15k per year, but charging employee only 6k.
a. What results if the nature of Employees work does not require Employee to live
on the premises as a condition of employment?
i. $9,00 of income = bargain rental. Section 119 not applicable; not required
as a condition of employment.
1. NOTE: Sec. 119(a) does cover an employees spouse and children,
if applicable at all.

b. What results if Employer and Employee simply agreed to a clause in the

employment contract requiring Employee to live in the residence?
i. Same result; no substantial, non-compensatory reason for providing the
house. Therefore, not for Employers conveniences as Section 119
requires

c. What results if Employees work and contract require Employee to live on the
premises and Employer furnishes Employee and family 6k worth of groceries
during the year?
i. Section 119 would exclude the lodging from gross income, but groceries
may not be meals according to the Tax Courtsee Tougher Meals
must be ready to eat servings

d. What results if Employer transferred the residence to Employee in fee simple in

the year that Employee accepted the position and commenced work? Does the
value of the residence constitute excluded lodging?
i. Full value of the residence is income in the year received. Section 119
only applies to property in which the employer has some rights business
premises requirement.
2. Planner incorporated her motel business and the corporation purchased a piece of
residential property adjacent to the motel. The corporation by contract required Planner
to use the residence and also furnished her meals. Planner worked at the motel and was
 on call 24hrs a day. May Planner exclude the value of the residence or the meals or both
from her gross income.
a. Yes. The corporation is the employer and Planner is its Employee a requirement
of Section 119. On the other hand, Section 119 cannot apply to the self-employed
so the Service will probably question Planners arrangement since he is both sole
shareholder and employeeform vs. substance. Provided lodging and meals,
however, is a common feature of the motel business, so Planner should be alright.
i. See LindermanIf the lodging is excluded by Sec. 119, so are the meals
ipso facto.
3. State highway patrolman is required to be on duty from 8am to 5pm. At noon he eats lunc
hat various privately owned resaurants which are adjacent to the stae highway. At the end
of each month the state reimburses him for his luncheon expenses. Are such cash
reimbursements included in his gross income.
a. Yes. The Kowalski case cited held that cash reimbursements are not meals
furnished by ones employer. Congress made this decision prospective only. So
those cash reimbursement are included in his gross income.
4. Doodle, a high-tech company in Silicon Valley, hires J and his staff from an exclusive
restaurant to provide gourmet meals at its office around the clock to its employee. Doodle
believes the meals will incentivize employees to work longer hours, shorten the time
taken for meal breaks, attract new employees, and help it remain competitive with other
Silicon Valley high-tech firms. Are the employees meals excluded under Section 119?
a. Not clear. Promoting morale, creating goodwill, and attracting prospective
employees do not constitute for the convenience of the employer. But getting
employees to work longer and shorten meal breaks might.

AWARDS AND SCHOLARSHIP, Section 74

Awards Pg. 114

1. Each year national sportswriter get together and select the single most outstanding
amateur athlete in the country and award that person a check for 5k. Michael, a talented
swimmer, has been selected for this years award. The award is given with the stipulation
that the winner deliver a 15 minute acceptance speech at an awards banquet. Michael,
essentially delivering an acceptable rejection acceptance sppech, designates the Special
Olympics, a charity under Sec. 170, to receive the 5k award. The sportwriters send the
check to the Special Olympics. Will Michael be able to exclude the 5k from his gross
income?
a. Assuming that an award for athletic prowess can be considered a civic
achievement, and assuming that his 15-minute speech is not substantial future
services, Michael can exclude this award. If these assumptions are wrong, he
must include the entire amount in her gross income.

Scholarship, Sec. 117

Pg. 117

1. Student working towards an A.B degree is awarded a scholarship of 15k for full tuition
and for room and board during the academic year. The tuition, including the cost of
 books, is 10k, and the room and board costs 5k. As a scholarship recipient, Student is
required to do about 300 hours of research for the professor to whom he is assigned.
Nonscholarship students, if hired, receive 10/per hour for such work.
a. What tax conseuqnces to Student?
i. The scholarship seems likely to be considered taxable because it mirrors
the form of compensation more than a sort of gratuitous giving as
illustrated in Duburstein.
ii. KAPLAN ANSWER: 3k must be include ($10 x 300) as compensation for
research in any case.
iii. If that amount is attributed to the room and board payment, then the 2k of
scholarship in excess of tuition is also taxed. Otherwise, the entire 5k of
scholarship in excess of tution is taxable, in addition to the 3k of
compensation income
b. What tax consequence to Student if all students are required to do 300 hours of
research for faculty.
i. None. The answer is the same as (a)
c. What results if Student is not required to do any research but receives the 5k as an
athletic scholarship.
i. Rev. Rul. 77-263 states that athletic scholarships are taxable if the player
is REQUIRED and not merely expected to partipciate in college
sports. If participation is not required, only the excess over tuition and
books is taxable.
1. Therefore, if student is not required5k only taxable (for room
and board)
d. What tax consequence to Student if student receives only a tuition scholarship
worth 9k (no books) because Students spouse is an employee at a neighboring
educational institution and the tuition scholarship is part of a nondiscriminatory
plan between several institutions applicable to all employees of such institutions?
i. Excluded as an employee fringe benefitnondiscriminatory per Sec.
117(d)(3)
2. Secretary in a large tax law firm receives a 10k stipend from her firm to assist her while
on a leave of absence to obtain a college degree. The stipend is part of a firm plan under
which all recipients are required to return to the firm following their educational leave.
a. What tax consequences to Secretary?
i. Compensation for future services per Reg. 1.117-6(d)(2), (5) Ex. (2).
1. But Sec. 127 might apply if the requirements of 127(b)(2)-(6) are
satisfied to exclude the $5,250.
ii. As such it is not excludible because it is in expectation of future services.
b. What tax consequences to Secretary if she is not required to return to the firm
after completing her degree?
i. Compensation for past services, probably, tough Sec. 127 might apply.
1. Therefore, it would still NOT be excluded.
c. What are the tax consequences to Secretary if she is not an employee, but instead
receives the stipend as a prize in an essay contest?
i. Excluded to the extent used for tuition and books. Sec. 74(a) (introductory
clause) and Sec. 117(a). Still a scholarship.
GAINS FROM PROPERTY

Sec. 1001, 1011, 1012, and Pg. 124-25

1. Owner purchases some land for 10k and later sells it for 16k.
a. Determine the amount of Owners gain on the sale.
i. Easy. 16k amount realized basis 10k = 6k
b. What difference in results in (a) above if Owner purchased the land by paying 1k
for an option to purchase the land for an additional 9k and subsequently exercised
the option?
i. Nothing. Because the Owner in total paid 10k. Basis is 1k option plus 9k
purchase price
c. What results to Owner in (b) above if rather than ever actually acquiring the land
Owner sold the option to Investor for 1.5k?
i. Then the gain would be 500. 1.5k-1k = $500.
d. What difference results in (a) if Owner purchased the land by making a 2k cash
payment from Owners funds and an 8k payment by borrinwg 8k from the bank in
a recourse mortgage on which Owner is personally liable? Would it make any
difference if the mortgage was a nonrecourse liability (on which only the land was
security for the obligation)?
i. No difference. The amount of the mortgage is included in the basis.
e. What results in (a) above if Owner purchased the land for 10k spent 2k in clearing
the land prior to its sale, and sold it for 18k?
i. Basis 10k cost + 2k clearing expenses = 12k.
1. Section 1016(a)(1).
a. Gain is thus 6k BECAUSE. 18k-12k = 6k
f. What difference in results in (e) above if Owner had previously rented the land to
Lessee for five years for 1k per year cash rental and permitted Lessee to expend
2k clearing the property? Assume that although Owner properly reported the cash
rental payments as gross income, the 2k expenditure were properly excluded
under Sec. 109. See. Sec. 1019
i. If the 2k was excluded under Sec. 109, then Owners basis remains 10k
and his gain 8k. In effect, Owner postpones recognition of the 2k
improvement until disposition of the propertywhen there may be some
cash available. Otherwise, the improvements are taxable to the lessor upon
termination of the lease. See Brun (US 1940)
g. What difference results in (a) above if when the land had a value of 10k, Owner a
real estate salesperson received it from Employer as a bonus for putting together a
major real estate development? Owner paid 3,000 of income tax on the 10k FMV
receipt of the land.
i. No difference; gain is the same. The bonus was similar to a cash receipt of
10k followed by a purchase of the land for that price.
1. Therefore, the basis is 10k, the amount included in gross income
when received. The tax then paid is irrelevant here [Cannot be a
tax-free fringe benefit, because the employee discount provision do
not apply to real estate or investment-type property. Sec. 132(c)(4)
 h. What difference if Owner is a salesperson in an art gallaery and Owner purchases
a 10k painting from the art gallery but is required to pay only 9k for it (instead of
10k because Owner is allowed a 10% employee discount which is excluded from
gross income under Sec. 132(a)(2) and Owner later sells the painting for 16k.
i. The 1k discount is added to her basis, which then becomes 10k.
1. Thus, 16k-10k= gain is still 6k. Otherwise, the benefit of Sec.
132(a)(2) would be lost.
2. In an arms-length exchange, Sharp exchanges some land with a cost basis of 6k and a
value of 9k with Dull for some non-publicly traded stock which Dull owns and in which
Dull has a basis of 8k and is worth 10k at the time of the exchange.
a. Consider sharp and Dulls gains on the exchange and their respective cost bases in
the assets they receive.
i. Sharp: Received a value of 10k that had a basis of 6k GAIN of 6k
taxable
ii. Dull: Received a value of 9k that had a basis of 8k GAIN of 1k taxable
1. Thus, to do calculations like these you must figure out what they
have obtained minus what they original had.
b. What result in (a) above if the value of Dulls stock cannot be determined with
any reasonably certainty?
i. Use the value of Sharps land per the Philadelphia Park case!

Pg. 132 Problems

1. Donor gave Donee property under circumstances that required no payment of gift tax.
What gain or loss to Donee on the subsequent sale of the property if:
a. The property had cost Donor 20k had a 30k fair market value at the time of the
gift, and Donee sold it for:
i. 35k?
1. Amount realized 35k 20k (Basis) = 15k GAIN
ii. 15k?
1. 15k 20k = Loss of 5k (Deductible?)
iii. 25k?
1. 25k 20k = 5k GAIN
b. The property had cost Donor 30k had a 20k FMV at the time of the gift, and
Donee sold it for:
i. 35k?
1. 35k (amount realized) 30k (basis) = 5k GAIN
ii. 15k
1. 15k (amount realized) 20k FMV = 5k LOSS
a. Note: For composting losses ONLY, Donees basis is
limited to the propertys market value at the date of the
gift, if less than donors basis forecloses loss-shifting)
iii. 24k?
1. 24k (amount realized) 20k (FMV) = 4k GAIN
2. 24k (amount realized) 30k (basis) 6k LOSS
 a. Answer? No gain or loss: Bouncing basis rule. See
Reg. 1.1015-1(a)(2) Ex.
2. Father had some land that he had purchased for 100k but which had increased in value to
200k. He transferred it to Daughter for 100k in cash in a transaction properly identified as
in part a gift and in part a sale. Assume no gift tax was paid on the transfer.
a. What gain to Father and what basis to Daughter under Reg. 1.1001-1 and
1.1015-4(a)(1)?
i. Amount realized (100k) 100k (basis) = Father realized no gain or loss
(ZERO)
ii. Basis is transferred to Daughter 100k as per cited in Regulation.
iii. Essentially, Father did not realize any gain, and the basis is the purchase
price that the daughter bought.
b. Suppose the transaction were viewed as a sale of one-half of the land for full
consideration and an outright gift of the other one half. How would this affect
Fathers gain and Daguthers basis? Is it a more realistic view than that of the
Regulation?
i. Fathers Gain: 100k 50k = 50k Gain
ii. Daughters basis 100l (Sec. 1012 cost in one half) + 50 (Sec. 1015(a) gift
basis, carried over from donor) = 150k.
1. So basically, the father gain is 100k because he is selling his
property for half of his basis.
2. Daughet basis, however, will increase as a result. She pays 100k
because it is half of the FMV of 200k PLUS the 50k that is carried
over as a gift. Making it a total of 150k.

Pg. 132: Divorce Transfer on Property

1. Andrew purchased some land ten years ago for 40k cash. The property appreciated to 70k
at which time Andrew sold it to his wife Steffi for 70k cash, its fair market value.
a. What are the income tax consequences to Andre?
i. No gain recognized by Andre. 1041(a)(1).
1. This is because transfer made between spouses do not count
towards gross income.
b. What is Steffis basis in the property?
i. The basis that Andre had originally is the basis in the property Steffi now
has. Therefore, $40,000, Andre's basis.
c. What gain to Steffi if she immediately resells the property?
i. Steffi will obtain a gain of $30,000
1. i.e. the difference between the $70,000 she received and her
basis of $40,000.
d. What results in (a)-(c) above if the property had declined in value to 30k and
Andre sold it to Steffi for 30k?
i. No loss recognized by Andre, basis of $40,000 to Steffi, and a $10,000
loss to Steffi upon her sale of the property.
 e. What results (gains, losses, and bases) to Andre and Steffi if Steffi transfers other
property with a basis of 50k and value of 70k (rather than cash) to Andre in return
for his property?
i. Same as (a) and (b) as to Andre's property; as to Steffi's old property,
no gain to Steffi and a $50,000 basis for Andre.

INSURANCE PROCEEDS, Section 101

1. Insured died in the current year owning a policy of insurance that would pay Beneficiary
100k but under which several alternatives were available to Beneficiary.
a. What results if Beneficiary simply accepts the 100k in cash?
i. Nothing likely. Because no income in nothing taxable. Lets see what
Kaplan says.
ii. KAPLAN: Yep. TAX FREE BABY
b. What results in (a) above if Beneficiary instead leaves all the proceeds with the
company and they pay her 6k interest in the current year?
i. Interest of 6k is taxable income, as per Sec. 101(c)
c. What results if Insureds Daughter is Beneficiary of the policy and in accordance
with an option that she elects, the company pays her 12k in the current year?
Assume that such payments will be made annually for her life and that she has a
25-year life expectancy.
i. Pro-rate the proceeds ($100k) over Daughters life expectancy (25 years),
or $4k excluded per year under Sec.101(d). The remaining 8k (12k-4k
excluded) is taxable each year.
1. AH! Got it. So she will get 12k annually. She has a life expectancy
of 25 years. As such, 100/25=4k.
2. Then 12k-4k=8k This is now taxable income
a. Cool beans!
d. What results in (c) above if Insureds Daughter lives beyond her 25 year life
expectancy and receives 12k in the twenty sixth year?
i. Because this is an insurance proceeds, the 4k is still remains tax free.
ii. KAPLAN WORDS: The exclusion ratio (4k/12k) remains in effect, even
after the entire proceeds have been recovered tax-free.
1. Woohoo!
2. Jock agreed to play football for Pro Corporation. Pro, fearful that Jock might not survive,
acquired a $1 million insurance policy on Jocks life. If Jock dies during the term of the
policy and the proceeds of the policy are paid to Pro, what different consequences will
Pro incur under the following alternatives?
a. With Jocks consent, Pro took out and paid $20k for two year term policy on
Jocks life.
i. The 1 million received tax-free, as long as Pro has an insurable interest in
Jocks life.
b. Jock owned a paid-up two year term $1 million policy on his life which he sold to
Pro for $20k, Pro being named beneficiary of the policy.
i. Better to buy a new policy:
 1. Pro here would have taxable income to the extent of the proceeds
in excess of basis. OR
2. 1 million 20k = $980,000 taxable income!
a. This is under Section 101(a)(2)
c. Same as (b) except that Jock was a shareholder of Pro Corporation.
i. Entire amount excluded from tax under Sec. 101(a)(2)(B)
3. Insured purhcases a single premium of 100k life insurance policy on her life for a cost of
40k. Consider the income tax consueqnecse to Insured and the purchaser of the policy in
each of the following alternative situations:
a. Insured sells the policy to her Child for its 60k fair market value and on Insureds
death, the 100k of proceeds are paid to the Child.
i. In this case, 60-40=20k is amount that is taxable.
ii. At Insureds death, Child has $40,00 of income (and is likely subject to
tax) (100 proceeds 60k cost).
1. Better idea: Give the policy to Child; then Sec. 101(a)(2)(A) will
apply, and the gain is excluded under Sec. 101(a)(1).
b. Insured sells the policy to her Spouse for its 60k FMV and on Insureds death, the
100k of proceeds are paid to Spouse.
i. Under Sec. 1041, Spouses basis is Insureds basis carried over. This
carryover of basis entitles Spouse to then exclude the entire 100k of
proceed gains. Sec. 101(a)(2)(A).
1. NOTE: Spouses technically dont get taxed at all. So even if
something was sold to a spouse, the basis is the same carried over.
c. Insured is certified by her physicial as terminally ill and she sells the policy for its
80k FMV to Viatical Settlement Provider who collects the 100k of proceeds on
Insureds death.
i. 80k-40k=40k taxable gain for the Insured is ENTIRELY EXCLUDED
because she is terminally ill.
1. See Sec. 101(g)(1)(A). Terminally ill folks get special treatment,
and as such, even though she sold her policy, that gain is excluded
from tax.
ii. Viatical settlement: 100k-80k = 20k taxable gain.

ANNUITIES Problems.

Pg.170, Sec. 72

4. In the current year, T purchases a single life annuity with no refund feature for 48k.
Under the contract T is to receive 3k per year for life. T has a 24 yr life expectancy.
a. To what extent, if at all, is T taxable on the 3k received in the first year?
i. Expected receipts = 3k per year x 24 years life expectancy $72,000.
ii. Cost ratio is 48k / 72k = OR 2/3 excluded from income.
1. Thus, of each 3k received, 2k is excluded and 1k is taxable under
Sec. 72(b)
a. What is the rationale? Hmm
 b. If the law remains the same and T is still alive, how will T be taxed on the 3k
received in the 30th year of the annuity payments?
i. After the basis is recovered, the entire amount is taxable. Thus, 3k is
taxed.
c. If T dies after nine years of payments will T or Ts estate be allowed an income
deduction? How much?
i. Yes, under Sec. 72(b)(3). Nine years of 2k exclusion is 18k that is allowed
to be excluded.
1. Thus: 9 * 2 = 18k
2. 48k 18k = 30k can be deducted.
ii. Basically, the annuity cost was 48k, and because that was not fully
recovered, it can be deducted. Remember, the whole amount is not 72k.
The 72k is divided by 48k in order to determine what amount is taxable.
Thus, the cost that was originally put in, namely, 48k is the only non-
taxable recoverable item. This is why the first problem shows a tax
amount of 1/3 and 2/3 to be excluded because 48/72 = 2/3 excludible.
1. Makes sense? Yay!
d. To what extent are T and Ts spouse taxable on the 3k received in the current year
if at a cost of $76,500 they purchase a joint and survivorship annuity to pay 3k per
year as long as either lives and they have a joint life expectancy of 34 years?
i. Step one: Determine the expected return.
ii. Step two: Do the exclusion ratio
iii. Then find out what is taxable
1. 3k x 34 years = 102k expected return.
2. Exclusion ratio then is 76,500/102k = (excludible)
3. x $3,000 $2,250 excluded, and $750 taxable

DISCHARGE OF DEBT

2. Poor borrowed 10k from Rich several years ago. What tax consequence to Poor if Poor
pays off the so far undiminished debt with?
a. A settlement of 7k of cash?
i. 3k gross income = 10k debt 7k settlement. Via Kirby Lumbar case.
b. A painting with a basis and fair market value of 8k?
i. 2k gross income. 10debt 8k painting = 2k gross income.
c. A painting with a value of 8k and a basis of 5k?
i. 10k debt 8k value of painting = 2k gross income under Kirby Lumar,
plus 3k gain (8k 5k basis) =3k
d. Services, in the form of remodeling Richs office, which are worth 10k.
i. 10k income as compensation for services rendered. In effect, prepaid
service income; similar to bartering.
e. Services that are worth 8k?
i. The 8k compensation income; plus 2k gain under Kirby.
f. Same as (a) above except that Poors Employer makes the 7k payment to Rich,
renouncing any claim to repayment by Poor.
i. There is a 3k gain under Kirby Lumbar, plus 7k income under Old Colony
Trust case (payment by another of ones obligation = income)unlikely
that its a gift, since the payor is Poors employer.
CAPITAL VS ORDINARY

Mechanics of Capital Gain

Pg 755-56

1. T. a single taxpayer has a salary of 50k. T also has the following trasnactions all
involving the sale of capital assets: (1) a gain of 15k on collectible held for two years;
and (2) a gain of 20k on stock held for 15months.
a. Determine the amount of Ts net capital gain
i. 15k+20k= 35k
b. At what rate will the componenents of Ts net capital gain be taxed.
i. Note: If above salary of 37950 then capital gain tax is 15%
1. Here, T is within the 25% bracket
2. SO:
a. Collectible 15k x .25 = 3.75k
b. CG: 20k x .15 = 3k
c. Total 6.75k TAX
c. Assuming there is a flat 30% tax on ordinary income and disregarding any
deductions (including the standard deduction and personal exemption), what is
Ts tax liability in the current year?
i. 50k x .30 = 15k
ii. 15k x .25 = 3.75
iii. 20k x .15 = 3k
iv. TOTAL TAX: $21,750
2. S, a single taxpayer, is a high-income taxpayer with a salary of 500k in the current year. S
also has the following transactions involving the sale of capital assets: (1) a gain of 120k
on stocks held for 15months and (2) a loss of 20k on stock held for 3 years. Assume there
is a flat 30% tax on ordinary income and disregarding any deductions, what is Ss tax
liability under Section 1 in the current year?
a. 500k x .3 = 150k tax
b. LTCG LTCL
i. 120k 20k = 100k
ii. 100k taxable at the highest bracket. THUS
iii. 100k x .2 = 20k
iv. TOTAL: 150k + 20k = 170k TAXABLE
3. Taxpayer, who is the highest federal tax bracket in the current year has a 5k gain from
collectible and 5k gain from stock, both held long term.
a. What is TP net capital gain and how is it taxed if TP also has a 5k loss from
collectible held long term?
i. Stock: 5k x .2 = 1k
ii. Collectible: The 5k gain in collectible offset the 5k loss on collectible.
iii. Thus: only 1k taxable net capital gain
b. What results in (a) above if instead TP 5k loss is from stocks held long term?
i. Collectible 5k x .28 = $1,400 taxable
 ii. Stocks will now offset each other, leaving 0 taxable
iii. Total: 1.4k taxable
c. What results in (a) above if instead TP 5k loss is from stock held for 9months
rather than from the collectible?
i. Same as (a) because a short-term capital loss is applied first against the
highest-taxed long-term capital gain, which is the collectible gain.
1. As such, because the highest-taxed long-term capital gain is the
collectible gain the only thing that will be taxed now is the 5k on
tax.
a. Thus: 5k x .2 = 1k
d. What is Taxpayers net capital gain and how it is taxed if Taxpayer has a 5k gain
from a collectible, a 5k unrecaptured Section 1250 gain, a 5k gain from stock, and
a 10k loss from stock, all held long-term?
i. 5k collectible tax at .28
ii. 5k unrecaptured gain
iii. 5k gain from stock
iv. 10k loss from stock
1. 10k loss offset 5k gain = 5k loss
2. The remaining long term loss will be applied against the highest-
taxed long term capital gain.
3. Thus: 5k collectible gain will offset 5k loss.
4. 5k unrecaptured gain from Section 1250 is then taxed at 25%
bracket
a. 5k x .25 = 1.25k taxable!

Pg. 761

Capital vs. Ordinary

Taxable Income LTCG LTCL STCG STCL

1 $10k $2k $6k $2600 $1k
2 $10k $2k $10k $2k $4k

Year 1: Long term 2k 6k = 4k LOSS

Short term 2.6k 1k = 1.6 GAIN
Total Loss: 2.4k
Can deduct up to 3k 3k-2.4k 0 carry forward
Year 2: Long term 2k 10k = 8k LOSS
Short term 2k 4k = 2k LOSS
Total 10k loss
3k 2k = 1k additional
Thus: This wipes out all of our short term loss. And now we can use it towards longterm
Thus: 8k 1k = 7k LONG TERM LOSS
7k can carry over to the next year.
CHARACTERIZING GAINS, Section 1231

Pg. 822-24

1. Hotchpot engaged in (or encountered the following trasnactinos (or events) in the current
year. Determine separately for each part (a) through (i) how the matters indicated will be
characterized for the current year, assuming in all parts other than (g)-(i) that Section
1231 (c) is inapplicable
a. Hotchpot sells some land used in his business for four years for 20k. It had cost
him 10k. He also receives 16k when the State condemns some other land that he
had purchased for 18k three years ago which he has leased to a third person.

Sales Proceeds Basis = GAIN/LOSS

LAND I: 20k 10k = 10k GAIN

LAND II: 16k 18k 2k LOSS
i. Land I is property used in a trade or business. Section 1231(a)(3)(A)(i)
ii. Land II is a capital asset held in connection with . . . a transaction entered
into for profit, per 1231(a)(3)(A)(ii)(II)
1. A condemnation is included involuntary conversion for the main
hotchpotch, but NOT in the casualty loss subhotchpot of Section
1231(a)(4)(C)
iii. Therefore 8k is subject to Capital Gain Taxation
1. And this could be determined once we know his income bracket.
b. Same as (a) except that both pieces of land were inherited from Hotchpotch Uncle
who died three months before the dispositions. At uncles death, the business land
was worth 16k and the leased land was worth 18k.
i. For inherited property, the holding period of the property is considered
ONE YEAR. Section 1231(b)(1), 1223(11)
SALES PROCEEDS Basis = Gain/Loss

Land I: 20k 16k = 4k GAIN

Land II: 16k - 18k = 2k LOSS
ii. THUS: Because both of these possession would qualify for the capital
gain treatment 4k-2k = 2k subject to capital gain treatment.
c. Hotchpot sells a building used for several years in his business, which he
depreciated under the straight-line method. The sale price is 15k and the adjusted
basis 5k. His two year old car, used exclusively in business, is totally destroyed in
a fire. The car had a 6k adjusted basis but was worth 8k prior to the fire. He
received 4k in insurance proceeds.

RECALL: SALES PROCEEDS BASIS = Gain/Loss

i. BUILDING: 15k 5k = 10k GAIN
ii. CAR: 4k Insurance Proceeds 6k Adjusted Basis = 2k LOSS
Explanation: The building is in the main hotchpot as business realty. BUT: As to the car, a 100%
business use asset involuntary conversions (here, a fire) are capital gains ONLY if such gains
exceed losses. Here, there is only one such conversion, a loss. Accordingly, this loss is taken
outside Section 1321, where it becomes an ordinary loss.
- Note: The building would then get capital gain treatment. The loss of the car, however,
because it is subject to involuntary conversion, it can only be capital gain if the gains is
more than the loss. Because the loss is more than the gain, the loss will be deducted from
ordinary incomeremoved from the hotchpot or outside Section 1231.
d. In addition to the building and the car in (c), assume that Hotchpot had a painting
that he had purchased two years ago which was held in connection with his
business and which was also destroyed in the fire. The painting had been
purchased for 4k and he receieved 8k in insurances proceeds.
i. In this case, the SALES BASIS
1. 8k 4k = 4k GAIN
a. Because this scenario illustrates Gain exceeding LOSS
This stays in the hotchpot and therefore 4k is subject to
capital gain treatment.
ii. The painting a capital asset is an involuntary conversion here and
combines with the car loss (2k) from (c) in the sub-hotchpotwhich
moves into the main hotchpot.
1. Total gain is 10k building + 2k sub hotchpot (8k (insurance)
4k(painting) 2k (car loss) )
a. Total 12k GAIN
e. In addition to the building sale, car loss, and painting gain in (c) and (d), assume
Hotchpot sells land used for several years in his business for 30k. The land, which
he had hoped contained oil, had been purchased for 50k.
i. There was a total capital gain of 12k for all other items
ii. Building: 30k 50k = 20K LOSS
1. The total capital gain here would then be subtracted
2. 20k 12k = 8k LOSS
a. This loss, however, will become ordinary loss in its
entirety.
f. Would Hotchpot be pleased if the Commissioner successfully alleged that the
land in problem (e) above was held as an investment rather than for use in
Hotchpots business?
i. No. Because if it is an investment it is already subject to capital gain
treatment. However, there isnt a gain but a loss. As such, there is no
deduction available for capital gain loss (or caps at 3k). [my answer]
ii. KAPLAN: No; then it is outside Section 1231 as a capital asset not
involuntarily converted. Thus, it will offset the Section 1231 potential
capital gain of 12k outside of Section 1231, so that the resulting 8k net
loss is no longer ordinary loss but rather a long-term capital loss:
deductible only 3k in Year One with the rest carried over.
iii. SO I WAS RIGHT: YAY
g. What result under the facts of (d) above (building gain, car loss, and painting
gain), if four years before the fire Hotchpot had had a 5k net Section 1231 loss
 and three years before a 3k net Section 1231 loss, and he had had no other Section
1231 transactions in other years.
i. The four years qualifies under the 5 year period dedicated in the code. As
such the 5k Section 1231 loss can be deducted. The other three year before
also qualifies as it is under 5 year period.
ii. 12k 5k 3k = 4k CAPITAL GAIN TREATMENT and 8k loss
deduction.
iii. Kaplan words: From (d) there was a 12k gain. Due to the 5-year look-back
rule of Sec. 1231 (c) the first 8k (5k+3k) of this Section 1231 will be
recharacterized as ordinary income, leaving 4k in Sec. 1231 as capital
gain.
h. Same as (g) except that in addition two years before the tax year Hotchpot had a
6k net loss.
i. 4k 6k LOSS = -2k Loss.
ii. This loss, because it is two years before the tax year, still qualifies under
Sec. 1231. Therefore that 2k will be ordinary income loss.
iii. KAPLAN WORDS: Now all of the Sec. 1231 gain is recharacterized as
ordinary income. In fact, 2k of future 1231 gain over the next two year
might also be recharactized, using a first-in, first out analysis.
i. Same as (h) except that one year before tha tax year Hotchpot had had a 10k net
1231 gain.
1. KAPLAN: Last years 10k Section 1231 gain would be
characterized, using up the losses from Y-4 (5k), Y-3 (3k) and part
of Y-2 (2k).
a. 10k 5k 3k 2k = 0
b. So, 4k remains of Y-2 unrecaptured loss (6k 2k).
c. Now, in Year Y, the 12k Sect. 1231 gain per (d) is re-
characterized as ordinary income to the extent of this 4k,
but the remaining 8k is capital gain; first in, first out
illustrated.
2. Car Dealer uses some cars for demonstration purposes. Are the cars depreciable?
Disregarding Sec. 1245 if they are held long-term does gain on their sale qualify for Sec.
1231 (a) main hotchpot treatment?
a. The cited Ruling presumes that demonstrators are held primarily for sale to
customer . . . and hence are neither depreciable nor eligible for Sec. 1231. Sec.
1231(b)(1)(B).
3. Merchant who has been in business for four years sells her sole proprietorships consisting
of the following assets, all of which, except for the inventory, have been held for more
than one year.

Adjusted Basis Fair Market Value

Inventory 8k 16k
Goodwill (generated by Merchant) 0k 20k
Land (used in business) 30k 20k
Building (used in business) 35k 20k
Machinery & Equipment (used in business) 12k 14k
Total 85k 120k

Merchant also agrees, for an additional 20k that she will not compete in the same geographical
area during the succeeding ten years.

a. Disregarding any consideration of Sec. 1245 and 1250, which are considered in
the succeeding subchapters of the text, what are the tax consequences to Merchant
on her sale of the Business for $140,000?
i. First, the sales proceeds must be allocated among the different assets
according to their fair market value. William v. McGowan.
ii. Then, the covenant not to compete is all ordinary

b. What difference in result if Merchants business has always been incorporated,

she is the sole shareholder, and she has a 90k basis in the stock which she sells for
120k, assuming that she is again paid an additional 20k for her covenant not to
compete?

Depreciation Recaptured

To what extent does Sec. 1250 apply o real property placed in service after 1986?
- Cv b v vv
HOW MUCH INCOME IF OFFSET BY DEDUCTION?

Ordinary and Necessary

Pg. 340

1. Taxpayer is a businessman, local politician who is also an officer-director of a savings

and loan association of which he was a founder. When partially due to his
mismanagement, the savings and loan began to go under, he voluntarily donated nearly
one half a million dollars to help bail it out. Is the payment deductible under Sec. 162?
a. The Conti case cited allowed the deduction to protect and preserve the taxpayers
existing business and his earning capacity. Close question: business reputation
preservation (deductible) vs. goodwill improvement (not deductible). Directness
to the taxpayers business is also important; really a continuum type of issue.
2. Employee incurred ordinary and necessary expenses on a business trip for which she was
entitled to reimbursement upon filing a voucher. However, Employee did not file a
couvher and was not reimbursed but instead deducted her costs on her income tax return.
Is employee entitled to a Sec. 162 deduction?
a. The Heidt case cited denied the deduction on the THEORY that failure to seek
reimbursement was done to avoid cricism for subordinates a personal decision!

Pg. 368

1. Determine the deductibility under Sec. 162 and Sec. 195 of expenses incurred in the
following situations:
a. Tycoon, a doctor, unexpectedly inherited a sizeable amount of money from an
eccentric millionaire. Tycoon decided to invest a part of her fortune in the
development of industrial properties and she incurred expenses in making a
preliminary investigation.
i. Not deductible. Preliminary investigations, as per the Frank Morton case is
an illustration of a pursuit.
ii. KAPLAN: Tycoon was not in the business of developing industrial
properties when she incurred these expenses; hence, they fail under
the carrying on requirement of Sec. 162(a) Frank case. They can be
amortized, however, per Sec. 195(b)(1) if Tycoon so elects and does
enter this business.
b. The facts are the same as in a above except that Tycoon rather than having been a
doctor, was a successful developer of residential and shopping center properties.
i. Deductible under Sec. 162(a)same business, namely, real estate
development.
ii. This is because she is in the ongoing business or trade. Since it is the
same, the deduction is allowed.
c. The facts are the same as in (b) above except that Tycoon desiring to diversity her
investments, incurs expenses in investigating the possibility of purchasing a
professional sports team.
 i. Not deductiblea different business. But Sec. 195 remains a possibility if
she in fact acquires a team.
d. The facts are the same as in (c) above and Tycoon purchases a sports team.
However, after two years Tycoons fortunes turn sour and she sells the team at a
loss. What happens to the deferred investigations expenses?
i. Because she has now purchased it she is in the trade and business.
ii. KAPLAN Answer: Deducted in the year of disposition per Sec.
195(b)(2)
2. Law students Spouse completed secretarial school just prior to student entering law
school. Consider whether Spouses employment agency fees are deductible in the
following circumstances
a. Agency is unsuccessful in finding Spouse a job.
i. No; not incurred while carrying on a trade or business. Expenses to that
first job are nondeductible.
1. She didnt have the job so she was not carrying on a trade or
business. AS such, not deductible.

b. Agency is successful in finding Spouse a job.

i. No; same as a. Unclear whether Sec. 195 would apply;legislative history
does not mention employees.
c. Same as (b) abive except that Agencys fee was contingent upon its securing
employment for Spouse and the payments will not become due until Spouse has
begun working.
i. Yes; these expenses were not due or payable UNTIL Spouse was
employedthen they were incurred in CARRYING ON A BUSINESS.
Refer to Hundley case.
d. Same as (a) and (b) except that Spouse previously worked as a secretary in Old
Town and seeks employment in New Yown where student attends law school.
i. Yessame trade or business applies. There may be a discontinuity in
employment that will bar the deduction possibly. But because she
previously worked as a secretary in Old Town, it remains that she is within
the same trade or business and therefore deductible.
e. Same as (d) except that Agency is successful in finding Spouse a job in New
Town as a bank tell.
i. Not deductible this is a different trade or business
COMPENSATION, Sec. 162

Pg. 383

1. Employee is the majority shareholder (248 of 250) and president of Corp. Shortly after
Corp. was incorporated, its Director adopted a resolution establishing a contingent
compensation contract for Employee. The plan provided for Corporation to pay
Employee a nominal salary plus an annual bonus based on a percentage of Corps net
income. In the early years of the plan, payments to Employee averaged 50k annually. In
recent years, Corps profits have increased substantially and as a consequence Employee
has received payments averaging more than 200k per year.
a. What are Corporations possible alternative tax treatments for the payments?
i. Compensation (deductible under Sec. 162) vs. dividend (because he is a
shareholder) which are NOT deductible.
1. But note: Compensation must be reasonable 162(a)(1).
b. What factors should be considered in determining the proper tax treatment for the
payments?
i. No one factor is determinative. See Harolds Club case discussion.
Specially in the application of a contingent compensation. However, if this
was not contingent and there was a concern about hidden dividend, see
Exacto Spring Corp.
c. The problem assumes Employee always owned 248 of the Corp 250 shares. Might
it be important to learn that the compensation contract was made at a time when
Employee held only 10 out of the 250 outstanding share?
i. Yes. The agreement then would be upheld as reasonable, since the 4%
stock ownership is not enough to suggest that the bargain had not been
free when made, as required by Reg. Sec. 1.162-7(b)(2)

Traveling Expenses

1. Commuter owns a home in Suburb of City and drives to work in City each day. He eats
lunch in various restaurants in City.
a. May Commuter deduct his costs of transportation and/or meals?
i. Not allowed. Travel from home to business and lunch are personal
expenses.
b. Same as (a) but Commuter is an attorney and often must travel between his office
and the City Court House to file papers, try cases, etc. May Commuter deduct all
or any of his costs of transportation and meals?
i. Transit between his office and the courthouse is deductible: from one
business location to another vs. commutting. Meals, however, are not
deductible.
c. Commuter resides and works in City, but occasionally must fly to Other City on
business for his employer. He eats lunch in Other City and returns home in the
late afternoon or early evening. May he deduct all or part of his cots?
 i. Transit costs are deductible, but not the meals in Other City, because he
did not stay there overnight. Meals and lodging are deductible ONLY if
away from home. Sec. 162(a)(2)
2. Taxpayer lives with her husband and children in City and works there.
a. If her employer sends her to Metro on business for two days and one night each
week and if Taxpayer is not reimbursed for her expenses, what may she deduct?
i. Transportation, meals (50% only), and lodging while in Metro, away
from home.
b. Same as (a) above except that she works three days and spends two nights each
week in Metro and maintains an apartment there.
i. The question is where is Taxpayers principal place of business? Probably,
City; more time is spent there, plus her family is there.
ii. However, 3 out of 5 business days are in Metro. Thus, her meals and
lodging in Metro should be deductible.
iii. Transportation there also is likely deductible. But depends because she
spends 3/5days in Metro. Hmm
c. Taxpayer and Husband own a home in City and Husband works there. Taxpayer
works in Metro, maintaining an apartment there, and travels to City each weekend
to visit her husband and family. What may she deduct?
i. Nothing. Taxpayers place of business and therefore, her tax home is
Metro. So costs in Metro are not away from home. Costs going to City
are not in pursuit of a trade or business as required by Sec. 162.
3. Burly is a professional football player for the City Stomper. He and his wife own a home
in Metro where they reside during the 7-month off season.
a. If Burlys only source of income is his salary from the Stompers, may Burly
deduct any of his City living expenses which he incurs during the football
seasons?
i. No. City is Burlys tax home, his principal place of busiess. Thus, his
expnses in City are not away from home. No deduction for expenses in
Metro, because he has no trade or business there.
b. Would there be any difference in result in (a) above if during the 7-month off
season Burly worked as an insurance salesman in Metro?
i. Yes; now Metro might be his tax home if he makes MORE MONEY
therehe already spends more time there. IF so, his meals and lodging in
City become deductibleaway from Metro, his home. In any case, he
must incur duplicative expenses to have any deduction at all.
4. Temporary works for Employer in City where Temporary and his family live.
a. Employer has trouble in Branch City office in another state. She asks Temporary
to supervise the Branch City office for nine months. Temporarys family stays in
City and he rents an apartment in Branch City. Are Temp. expenses in Branch
City deductible?
i. Yes; temporary assignments definite in time and less than one year
permit deduction of meals, lodging and transportation, at least until the
assignment becomes permanent.
b. What results in (a) above if the time period is expected to be nine months, but
after eight months it is extended to fifteen months?
 i. Only from the time period up until the eight months is meals, lodging, and
transportation deductible.
1. KAPLAN: If there is a realistic expectation that the assignment
will be less than one year, it is considered temporary and expenses
are deductible. IF it turns out that the assignment will exceed a
year, the temporary period ends at that point. Thus, temporary
can deduct the first 8months of expenses.
ii. What results in (a) above, if Temporary and his family had lived in a
furnished apartment in City and he and family gave the apartment up and
moved to Branch City where they lived in a furnished apartment for the
nine months?
1. Without a home in City, Branch City becomes the tax home,
away from which no expenses are incurred. Hence, no deduction,
per the Steward case cited.
5. Traveler flies from her personal and tax home in NY to a business meeting in Florida on
Monday. The meeting ends late Wednesday and she flies home on Friday afternoon after
two days in the sunshine.
a. To what extend are Travelers transportation, meals and lodging deductible?
i. Transportation: deductible in full, since the trip was primarily for
business purposes.
ii. Meals and lodging deductible for Monday to Wednesday as attributable
to Travelers business.
iii. The other two days are not deductible per cited Regs.
b. May Traveler deduct any of her spouses expenses if he joins her on the trip?
i. Only if spouse satisfies the three tests of Sec. 274(m)(3): he must be an
employee of the taxpayer, his travel must be for a bona fide business
purpose, and his expenses must be otherwise deductible. If so, same
expenses as in (a) supra are deductible.
c. What results in (a) above if Traveler stays in Florida until Sunday afternoon?
i. Same as (a) unless the weekend days are counted and the entire trip is
recharacterized as not primarily for business purposes. If so, the
transportation costs are completely nondeductible, although the meals and
lodging on Monday to Wednesday would still be deductible.
d. What results in (a) above if Traveler takes a cruise ship leaving Florida on
Wednesday night and arriving in New York on Friday?
i. Still deductible as long as the primary purpose of the trip was business.
Costs, however, are limited to twice the highest federal per diem rate for
U.S. travel.
e. What results in (a) if Travelers trip is to Mexico City rather than Florida?
i. Cited in Sec. 274(c) does not apply to trips of less than one week, so the
result is the same as (a).
f. What results in (e) if Traveler went to Mexico City on Thursday and conducted
business on Thursday Friday, Monday, and Tuesday and returned to NY on
following Friday night?
i. Now Sec. 274(c) applies: of the 9days, the cited Reg. classifies Sat and
Sun as standby days and therefore business days, so that 6 days are
 business days. Two-third of the transportation costs, therefore, would be
deductible, plus the meals and lodging for the 6 business days.
g. What results in (e) if Travelers trip to Mexico City is to attend a business
convention?
i. Cited subsection limiting convention expenses does not apply to Mexico
Sec. 274(h)(1), (3)(A)so it is treated just like any other foreign business
trip.
Education & Entertainment

EducationPg 416-17

1. Alice, Barbara, Cathy, and Denise were college roommates who after graduating went on
to become a doctor, a dentist, an accountant CPA, and a lawyer respectively. In the
current year, after some time in practice, as an orthopedic surgeon, Alice who was often
called upon to give medical testimony in malpractice suits, decided to go to law school so
as to better understand this aspect of her medical practice. Barbara enrolled in a course of
postgraduate study in orthodontics, intending to restrict her dental school practice to that
specialty in the future. Cathy enrolled part time in law school (with eventually prospect
of attaining a degree) so as better to perform her accounting duties in areas in which law
and accounting tend to overlap. And Denise took a leave of absence from her firm to
enroll in an LLM course in taxation intending to practice exclusively in the tax area.
What if any is incurring deductible expenses?
a. Alice: No deduction new trade or business
b. Barbara: Deductible.
c. Cathy: No deduction unless perhaps she was not going to get a degree.
d. Denise: unclear; the trend has been to allow deduction for an LLM especially if
she already doing tax work.
2. Assume Denises expenses in problem 1 above are deductible. If she is a practitioner in
Seattle, Washington, who travels to Florida for a year to participate in their LLM
program, what expenses in addition to tuition and books may she deduct?
a. Per the cited reference, travel expenses, lodging and 50% of meals incurred
away from home are deductible because she is on a leave of absensce from
her firmstill in a trade or business.
3. Carl earned a bachelors degree in education and he teaches world history in a junior high
school. In the current year he contemplates a summer European tour doing thigns that
will be beneficial to his teaching efforts. He wishes to know if he may deduct his
expenses. What do you advice?
a. Fuck no bitch. You just want a vacay.
b. KAPLAN: No deduction for travel as a form of education . Sec. 274(m)(2)
4. Dentists attends a five day dental seminar at a ski resort. All of the seminar proceedings
are taped and Dentist skis on clear days and watches all of the tapes on snowy days or in
other off theslipes time prior to his return home. Are dentists travel, meal and lodging
deductible?
a. 1986 Conference Committee Report says that no deduction is available under Sec.
162 for such convention costs, because the business-related activities are
minimal and the trip is essentially a vacation. No statute on point, however.

EntertainmentPg. 424-425

1. Employee spends $200 taking three business clients to lunch at a local restaurant to
discuss a particular business matter. The $200 cost include $10 in tax and $ for a trip.
They each have two martinis before lunch.
a. To what extent are Employees expenses deductible?
 i. Since a particular business matter is being discussed, the meal is Directly
related to business and is therefore Deductible.
1. Query: is $200 for 4 people lavish or extravagant? If deductible,
the deduction is limited to $100. (50% of $200)
b. To what extent are the meals deductible if the lunch is merely to touch base with
the clients?
i. Not directly related to or associated with business. Thus, no
deduction.
c. What results if Employee merely sends the three clients to lunch without going
herself but picks up their $150 tab?
i. No business meal since the taxpayer is not present. Sec. 274(K)(1)(B).
Perhaps a business gift, but only $25 per client would be deductible. Sec.
274(b)(1).
d. What results in (a) if in addition, Employee incurs a $20 Uber fare to transport the
client to lunch?
i. Fully deductible.
e. What results in (a) if Employer reimburses Employee for the $200 tab?
i. Employee may deduct fully, but Employer is limited to 50%. Sec.
274(e)(3).
2. Businesspersons who is in NY on business meets with two clients and afterwards takes
them to the Broadway production of Hamilton. To what extent is the $600 cost of their
tickets deductible if the market price on the tickets is $100 each, but Businesspersons
buys them from the hotel concierge for $200 each?
a. $100 face price of the tickets x 3 people = $300 x 50% = $150 deduction allowed.
i. The expensive price by the hotel does not matter.
3. Airline Pilot incurs the following expenses in the current year.
a. $250 for the cost of a new uniform?
i. Deductible
b. $30 for dry cleaning the uniform
i. Deductible
c. $100 in newspaper ads to acquire a new job as a property manager in his spare
time.
i. No deduction; different trade or business Morton Frank Case.
d. $200 in union dues
i. Deductible
e. $50 in political contribution to his local legislator who he hopes will push
legislation beneficial to airline pilots.
i. No deduction.
f. $500 in fees to a local gym to keep in physical shape for flying
i. No deduction
Business Losses and Bad Debts [NO HW QUESTIONS]

Income-Producing Expenses, Pg. 490-91

1. Speculator buys 100 shares of Sound Company stock for 3k, paying her broker a
commission of $50 on the purchase. Fourteen months later she sells the share for 4k
paying a commission of $60 on the sale.
a. She would like to treat $110 paid as commission as Sec. 212 expenses. Why? Can
she?
i. Why? Because the commission expenses deduction will increase her
capital gain on the stock, as opposed to reducing the proceeds and
increasing the purchase price. The spreckles case cited however, requires
the deduction-from proceeds/addition-to-cost method. But dealers may
deduct these costs under Sec. 162 as a matter of conveniencealso, no
possibility of the capital-ordinary switcheroo.
b. What results in (a) if instead she sells the shares for 2.5k paying a $45
commission on the sale?
i. $2,455 3,050 basis = $595 loss per Spreckles case.
ii. Note 2,500-45 = $2,455 AND 3k + 50 (commission) 3,050
c. Speculator owned only one-tenth of one percent of the Secodn Company stock
(worth 3k) but being an eager investor during the time she owned the stock, she
incurred %500 of transportation, meals and lodging expenses in traveling 1000
miles to NYC to attend Sounds annual shareholder meeting. May she deduct her
cost under Sec. 212(2)
i. No. Its not ordinary and necessary for a .1% shareholder to incur such
high cost in relation to her investment.
d. What results in (c) above if instead Speculator owned 10% of the total
outstanding Sound stock, worth 300k?
i. Now deductible IF she can show a legimiate investment interest in going
to the meeting. Stanaham 9k of travel expenses allowed to a 20%
shareholder whose efforts netted an extra 1million on the eventual sale of
his stock.
e. What results to Speculator if she incurred the expenses in (c) above, to attend a
seminar on investment?
i. No. Sec. 274(g)(7)
f. Speculator owns 10% of Sounds stock worth 300k and she incurs 10k in legal
fees and personalcosts investigating the operations of the business after the
business has some serious setbacks. Is the 10k deductible?
i. Maybe, if the facts justify this epense as ordinary and necessary Sec.
212.
2. After reading the Fleischman case, consider in what situations:
a. Payor Spouse may deduct attorneys fees incurred in getting a divorce.
i. Generally not deductible. Sec. 262. BUT the fees that are attributable to
tax advice are deductible. See Sec. 212(3)
b. Payee Spouse may deduct attorneys fees incurred in getting a divorce.
 i. Same; Also, for Payee, deductible to the extent attributable to negotiating
alimony payments taxable under Sec. 71. Sec. 212(1)
c. Payee Spouses attorneys fees incurred in getting a divorce are deductible by
Payor if Payor pays them.
i. No deduction. Not alimony, beause the liability to Payee Spouses lawyer
does not terminate at Payee Spouses death as required by Sec.
71(b)(1)(D)
3. Planner consults his attorney with respect to his estate plan. They decide to make various
inter vivos gifts and draft his will. To what extent, if any, are Planners legal fees
deductible under Sec. 212(3). Under Sec. 212(2)?
a. The cited Ruling requires substantiation for any allocation of attorney fees. The
Merians case cited allowed 20% under Cohan-type approach in the absence of any
breakdown on the bill. But the Court of Claims was tougher, conforming more to
i. No clue what this is saying

Lowey Problems (pg. 501)

(1) Recall the Frank case in Chapter 14 at page 361 supra-

(a) Should Franks expenses have been deductible under 212 or 165(c)(2)?
No travel expenses are not transactions, therefore not losses under 165 (which allows
deducting loss in connection with transaction entered for profit). And 212 allows
expenses of existing sources of income but not new sources.

(b) If Frank had decided to buy the newspaper and incurred capital expenditures to begin
operations, but then abandoned his plans would he have been allowed a deduction?
Yes, under 165(c)(2), but not 162 or 212 because these are not expenses

(c) If Frank entered the business and elected to use 195 but ceased operations before
deducting all of his start up expenditures, to what extent could he take a 165(c) loss?
The remaining unamortized amount. 165(c)(1), 195(b)(2)

(2) Homeowners purchase their vacation residence for $180k ($20k allocable to land). When it
was worth $160k ($20k was allocable to the land) they moved out and put it up for sale, but
not rent, for $170k.
(a) May they take deductions for expenses and depreciation on the residence? If so what
types of expenses would qualify?
Trying to sell for less than cost should not, but may hurt their deductions. The result
will depend upon all the facts and circumstances that indicate t/ps intent to obtain post-
conversion profit. (Lowry). Some cases have denied deducts when t/ps put their homes
up for sale immediately after moving out b/c no post-conversion profit was possible. If
the property is held for the production of income the t/p can deduct repairs,
landscaping, utilities, insurances, as long as t/p does not live in the residence for more
than 14 days during the year of conversion (280(d)(1)(A))

(b) Assume instead they rented the property and properly took $10k of depreciation on it.
What result when they subsequently sell the property for:
 Home Basis: $160k - $10k depreciation = $150k adjusted basis
Land Basis: $20k
Total adjusted basis: $170k

But in computing losses only, if cost exceeds the propertys market value when the
property is converted that market value becomes the basis.
Reg. 1.165-9(b)(2): while computing the losses, the basis should be the less of FMV at
the time of conversion or cost.

For losses only:

Building basis ($160k-$20k) = $140k - $10k depreciation = $130k adjusted basis
Land Basis= $20k
Total adjusted basis $150k

(1) $145k $150k ($5k) loss

(2) $175k $170k $5k gain
(3) $165k $170k ($5k) loss
(3) $165k $150k $15k gain
***In (3) there is no gain or loss because the two basis amounts provide conflicting
results

(c) What result in (b)(2) if the property had been Homeowners principal residence, they
had owned and used it for 4/5 prior years and the depreciation was taken after 1997?
Gain is taxable to the extent of depreciation claimed after May 6, 1997. Here the entire
$5k, per 121(d)(6)

(3) Single purchases a principal residence after 2008 for a cost of $200k. Prior to occupying the
residence single rents the residence for one year taking $10k depreciation. Single then
occupies as a principle residence and after owning it for 5 years sells it for $400k.
(a) What tax consequences to single on the sale. $200k-$10k depreciation = $190k
adjusted basis. $400k-$190k = $210k gain.
$10k recognized because of depreciation (121(d)(6))
Of $200k 1/5 is also recognized because rented before principal residence
so $40k
$160k excluded as principal residence sale
$10k depreciation recapture taxed max 25%
$40k LTCG

(b) What tax consequences if single sold for $600k $600k-$190k = $410k
$10k recognized because of depreciation (121(d)(6))
Of $400k 1/5 is also recognized because rented before principal residence
so $80k
Of remaining $320k, $250k is excluded for principal residence sale
$10k depreciation recapture taxed max 25%
$80k LTCG
 $70k OI

(c) What consequences in (a) if S occupied the residence for four years then rented it in year
5.
No $40k exclusion so $200k gain can be fully deducted under 121 and only $10 is
recognized.

[No Interest Expense HW Question]

Office and Vacation Homes

Interest Expense