v. Proportion of income
C. Bynum - Investor or T or B Hat?
i. Nursery land divided / developed for sale at
bank’s suggestion; IRS says OI, TP says CG
ii. Analysis: all or nothing problem, e.g. must
classify as either all CG or no CG
iii. Rule: only time may allocate is § 1237, real
prop subdivided for sale, whereby CG unless…
1. You are a dealer;
2. No subst. improvement to  value;
3. Prop held > 5 years
4. (b): first 5 parcels CCG, but 5% of 6th OI
5. (b)(3): can improve if held > 10 yrs, and
only those listed
6. N: if not under § 1237, argue not w/in §
1221(a)(1)
D. N: character comes from underlying asset
i. Ex: PN for non-T or B land CA
ii. Ex: PN for T or B truck NOT CA
E. N: character may change w/ new holder
i. Ex: does new holder manage investment assets?
CH. 31 - CAPITAL GAINS & LOSSES
I.
II.
III.
SIGNIFICANCE OF THE CHARACTER OF G / L
A. Preferential Tax Rates Applied To LTCG
i. CG: gain from sale of CA
ii. LTCG: taxed @ lower rate than OI, e.g. 15%
1. § 1223: LT  held > 12 months
B. Limitation on Deduction of CL
i. Deductible a/g CG for year + 3K
ii. If CL > CG + 3K, can carry forward & offset
a/g CG + 3K in that year
C. Justification For CG Treatment
i. Bunching: lumped into higher bracket, w/ gain
accruing each year; but, only realized in one
ii. Encourage Investments: if have excess
income, can invest and get preferential rates
1. Problem: applies only to new investment,
not shifting around existing
2. Fix: apply CG trtmt to only new stocks,
e.g. those generating add’l investment
3. Problem: doesn’t acct for risk element
iii. Lock In Effect: discourages un-investing /
steadies the market
iv. Inflation: many gains are inflationary
1. Tax code does bad job at treating inflation
2. Tradeoff b/t complexity and accuracy
ID CAs: §1221(a) - PROP HELD BY TP, BUT NOT…
A. (1) Stock in T, inventory, or prop held primarily for
sale in OCOB
i. Excluding normal operating profits
ii. Specially made inventory? Sold in OCOB?
B. (2) T/B real prop or T/B prop eligible for § 167 ded
i. N: §§ 1231 & 1245 may apply instead
C. (3) Copyright or artistic composition held by…
i. (A) TP who created;
ii. (B) If letter / memo, TP for whom made (AntiAgnew); OR
iii. (C) TP taking same AB as creator (gift)
D. (4) A/R acquired in OCOB (Back Stop / Anti-abuse)
i. Ex: sale car for note, can’t sale note to bank and
treat as CA
ii. Ex: can’t sale salary / rent and treat as CA
E. (5) Fed gov’t publication (anti-politician)
F. (6) Commodities held by dealer (inventory / dealer)
i. Arkansas Best
ii. Corn Products
G. (7) Hedging transactions
H. (8) Supplies regularly used in OCOB
i. Congress: § 162 ded enough!
ii. Ex: prevents airlines from selling fuel and
treating as loss
I. N: doesn’t say anything a/b LT or ST; just specific
exclusions
CHARACTERIZING GAIN OR LOSS
A. I: judicial gloss on § 1221(a)(1)
B. R: balancing factors under Bynum
i. Frequency / substantiality of sales;
ii. Improvements made to land;
iii. TP’s solicitation / advertising efforts;
iv. Utilization of RE brokers / agents;
IV.
OI SUBSTITUTES UNDER HORT & DAVIS
A. Hypo: lease buyout; disputed amt essentially
substituting rent pmts, which are GI
i. MUST treat as OI, NOT CG
ii. N: similar trtmt of lottery pmts
B. Hort
i. TP bequested comm. rental prop w/ 14 yr lease;
bank cancelled & paid off; TP claims loss (lease
value -- payoff)
ii. I: tax loss?
iii. Analysis:
1. Basis in uncollected rent zero; never paid
tax on
2. 140K is GI, b/c was rent substitute, and
rent would have been GI
C. Davis
i. TP wins lottery; sells right to receive remainder
of pmts for lump sum
ii. TP argues CA t/f CG. How diff from Hort?
1. Here, no underlying prop to f(x) as CA
2. Only a stream of income
3. Court: right to pmt is prop, but like Hort,
only a substitute for income
iii. TP next argues b/c of AK Best, should be CG
1. AK Best: shouldn’t carve out judicial
exceptions, but stick to statute
2. Ct: was limited situation
iv. Rule: if merely substitute for OI, treated as OI
V.
RECOGNIZING CORN PRODUCTS PROPERTY
A. Options: K to buy / sell at stated price, lasting
certain amt of time
i. Call option: right to force sale as specified price
ii. Put “”: “” purchase of specified goods at
specified price
iii. Ex: currency, commodities, IRs
B. Corn Products - Call Option
i. TP buys “futures” to protect a/g price 
ii. Held: § 1221 preferential trtmt applies to prop
transactions not the normal source of B income
iii. Test: intimately connected to inventory so that
really hedging B risk?
iv. N: TPs using to take ordinary losses on
holdings w/ dual purpose…
1. Stock assuring supply source; AND
2. Investment
C. Arkansas Best
i. TP buys bank stock, has loss; diff from above,
b/c not exercising right to particular asset;
ii. TP: under CP, stock losses NOT capital losses;
investment, not B purpose
iii. H: narrowed CP to simply broad reading of
inventory exclusion in § 1221(a)(1)
iv. S: buying stock in companies = CA, t/f CL trtmt
v. Too Far? Congress adjusted w/ § 1221(a)(7)
1. As soon as buy asset, must classify as
hedging / not hedging
2. Defined in (b)(2)…
a. Normal course of T or B
b. If asset ordinary, hedging risk
ordinary
c. Managing risk of price / iR 
3. Regs: can NOT use stocks as hedge for
reasons stated in Arkansas Best
VI.
VII.
COMPUTE NCG & ADJUSTED NCG
A. NCG:
i. Preferential rates require NCG. § 1211(11)
ii. § 1222: NCG = Excess of NLTCG over NSTCL
1. NLTCG = LTCG -- LTCL
2. NSTCG = STCG -- STCL
B. Adjusted NCG
i. 15% and 5% rates
1. § 1(h)(3): NCG  28% gains & unrecaptured § 1250 gain
a. Add QDI, insuring gain preserved
where no NCG or have CL
2. If in 15% bracket  5% preferential rate
a. N: wealthy still preferred more, b/c
 35% to 15%
ii. Qualified Dividend Income
1. Previously OI, h/w, Congress felt PR 
capital cost &  econ grow / jobs
2. Now, part of ANCG, taxed at 15 or 5%
rates; must be extended each year
§1(h) AND MAX RATES APPLICABLE TO
VARIOUS COMPONENTS OF NCG
A. Introduction:
i. Series of inter-locking definitions dropped into
right categories by § 1(h)
ii. Use when have more gains than losses
iii. Provides what gets preferential rates
iv. (1)(h)(1): total tax liab from each sub
paragraph, provides total tax liab
1. (A) OI
2. (B) 0%: for people in bracket < 15%
3. (C) 15%
4. (D) 25%
5. (E) 28%
B. 28% Rate Gain: Collectibles Gain and §1202 Gain
i. N: IF OI rate < 28%, CG taxed at OI rate
ii. § 1(h)(5): Collectibles Gain
1. S/E of any rug, antique, metal, gem,
stamp, coin, or other under § 408(m),
which is CA held > 1 year
iii. § 1202 Gain
1. 50% of gain from S/E of certain stock
2. PP: encourage investment in small corps;
questionable, b/c if corp fails, no benefit
C. 25% Rate Gain: Unrecaptured §1250 Gain
i. § 1(h)(6): 25% rate for LTCG from dep allowed
on RE held > 1 year; remainder gets 15%
ii. S: when sale dep RE at gain, must determine
portion of § 1250 gain
iii. PP: much RE gain caused by dep, NOT
appreciation, and generates OI deductions
iv. Davis: technical catch-up provision
D. 15% Rate Gain: Adjusted Net CG
i. Leftover CG, e.g. everything not taxed
elsewhere
E. Qualified Dividend Income: §1(h)(11)(B)
i.  NCG; taxed at 15%, even if no NCG
ii. NOT CG, b/c NOT S/E of CA
iii. Can NOT use to offset CL
VIII.
TAX PREFERENCE AFFORDED QUALIFIED
SMALL B STOCK HELD > 5 YEARS
A. § 1202
i. Exclude from GI 50% of gain from S/E of
qualified SBS held > 5 years
B. Congressional Steps
i. If 1202 stock bought w/in certain period, 75%
excluded; 1(h) only taxes 25% of gain, e.g.
effective TR only 7%
ii. Latest step: FULL exclusion, if bought w/in
certain period (began 2010, has been extended)
C. See statutory handout
IX.
MAX CL DEDUCTED IN GIVEN YR?
A. Deduct $ for $ to extent of CG; w/o/r/t LT or ST.
i. Pro TP rules
ii. Max of 3K of excess may be used to offset OI
iii. Disallowed amt carries over
iv. Although given preferential TR, div inc NOT
CG, t/f NOT part of loss calc
B. STCL: net 1st a/g STCG, then 28% NCG, then 25%,
then 15%
i. Excess netted a/g LTCG
ii. Deemed deducted 1st in OI offset part of §
1211(b)
C. Limitation on Deduction of CL
i. §1211(b): to extent CL > CG, up to 3K
deductible
1. N: 1211 NOT ded granting provision
ii. § 165
1. (f) permits CL ded to extent of 1211
2. (c)(2) permits ded on loss from stock sale
as trans entered for Π
iii. §1212(b): may carry over un-deducted losses
D. N: can NOT deduct personal type losses, unless
casualty per § 165
X.
APPLY THE ARROWSMITH RULE
A. W/ present yr trans, legit to look at characterization
of related trans taking place in previous year
B. Ex: in previous yr, would’ve been CG/CL; t/f, ded
this year is CG/CL
C. S: trans covering > 1 yr & generating CG/CL may
be characterized as CG/CL, even if S/E req not met
XI.
XII.
IMPACT OF CG & CL ON TI
A. S/E Requirement
i. Broad meaning, e.g. would cover…
1. Bequest satisfaction w/ appreciated prop
2. Abandoning unimproved RE subj to NR
mortgage > FMV
3. Owner’s conveyance of land by quit-claim
deed
ii. §165(g)(1): if CA security becomes worthless,
shall treat as S/E
iii. §1271(a): amts rec’d from debt instrument
retirement treated as rec’d from S/E
iv. §1231 property, involuntary conversions treated
as S/E
B. Holding Period: LT MUST be held > 1 year
i. § 1223(9): Bequest  treat as holding yr & day
ii. Gift  “tap,” e.g. add on donors
iii.
C. Kenan
i. Trustees get stepped basis; option to receive
prop or marketable securities (avoid TC)
ii. Analysis:
1. If paid in $, must sale assets to 3rd party &
recognize G b/c S/E trans
2. If paid in prop, NOT S/E b/c is specific
prop held for beneficiary, who then bears
risk of price 
iii. S: giving asset to satisfy obligation IS S/E
1. Judicial gloss on abandonment /
foreclosure cases
2. Voluntariness / force NOT required, so
long as satisfies debt
CAPITAL ASSET DECISION TREE FROM BYNUM
A. Property?
B. Held for sale?
C. To customers?
D. In the ordinary course?
E. In T or B?
II.
TYPES OF PROP / DISPOSITIONS TO WHICH §
1231 APPLIES
A. Applies to…
i. S/E or invol. conv. (theft, seizure, destruction,
threat / imminence of condemnation)
1. N: if can’t resale, NO S/E
ii. Of real or depreciable prop used in T or B; OR
iii. Any CA held > 1 year & in connection w/…
1. T or B; OR
2. For profit transaction
iv. *Essentially, prop included in § 1221(a)(2), t/f
NO inventory
B. Must consider both…
i. Events triggering G/L;
ii. Nature of prop involved
C. Ex: G/L from S/E or involuntary conversion of
depreciable equip used in T or B held > 1 year
III.
§ 1231 NETTING PROVISIONS & HOW FAVOR TP
A. Once ID all § 1231 G/L, §§ (a)(1) & (2) says
compare total G & L
i. G > L  CG
ii. G < L  Ordinary Loss
iii. Hotchpot Analysis: all § 1231 G/L combined in
hotchpot for characterization purposes
B. SUB Netting Process (Prelim):
i. (a)(4)(C): for any IC arising from fire, storm, or
shipwreck, or from casualty / theft, of any…
1. (i) T or B prop; OR
2. (ii) Any CA held > 1 year & in connection
w/ profit transaction
3. N: condemnation NOT included
ii. IF G > L  put assets in REG Netting
iii. IF G < L  assets are ORDINARY
1. Deduct L under § 165 or other
2. G reported under § 61
iv. IF G = L  enter REG analysis
v. See examples p. 799-800
C. REG Netting Process (Primary):
i. (a)(1): G > L  treated as LTCG or LTCL
ii. (a)(2): G < = L  NOT “”
IV.
RECAPTURE OF NET ORDINARY L: § 1231(c)
A. Prob: two assets sold same year, thereby generating
LTCG and LTCL
i. If sold in diff years, would have LTCG and OL
ii. Recapture provision attempts to solve problem
B. (c)(1): Net § 1231 G treated as OI to extent does not
exceed “non-recaptured net § 1231 L”
C. Non-Recaptured Net § 1231 Losses
i. Excess of total net § 1231 L for 5 most recent
yrs OVER
ii. Portion of such Ls taken into acct as net § 1231
G for such preceding taxable yrs
D. R: applies ONLY to taking losses first
V.
§ 1239: G FROM SALE OF DEPRECIABLE PROP
B/T CERTAIN RELATED TPs
A. Hypo: TP may sale to related corp, take FMV basis,
and generate depreciation
i. TP recycling assets to regenerate basis & dep
B. § 1239: can sell to RP, but entire G taxed at OI
CH. 32 - QUASI-CAPITAL ASSETS - § 1231
I.
INTRODUCTION
A. Davis: win on upside; best possible trtmt on
downside
B. G/L characterized under § 1231 (NOT deduction
granting provision)
i. Deductions granted by §§ 165, 167, & 169
ii. “” disallowed under § 267
C. Primary Purpose of § 1231
i. Special / favorable trtmt on S, E, or involuntary
conversion of T or B real / depreciable prop
ii. Gain  CG; Loss  Ordinary Loss!
i. No longer “fun,” b/c must make tradeoff
VI.
Lesser of…
a. “Recomputed basis;” OR
b. AR (or FMV, if not S/E or IC)
iv. (a)(2)(A): Recomputed Basis = basis resulting
from AB & previous dep / amortiz, & other adj.
1. Generally, TP’s original basis, e.g. dep
getting TP back to original basis
2. N: § 179 treated as amortiz. ded
v. Remaining Gain?
1. Likely, characterized by §§ 1231 &
1221(a)(2), and may be LTCG.
2. NOT treated by § 1245
C. §1250 Recapture - Mostly Dead Letter
i. (c): applies to depreciable RP, excepting limited
categories in § 1245
ii. (a)(1)(A), (b)(1): When § 1250 prop generates
G, in general, ONLY dep taken in excess of SL
is subject to recapture / characterization as OI
1. § 168: dep only SL, so can have no excess
of SL (unless pre-1986), t/f § 1250 N/A
2. H/w, if § 1250 prop held < 1 year, all dep
IS add’l dep. (b)(1)
iii. Unrecaptured § 1250 G taxed @ 25%;
remainder @ 15%
2.
ANALYSIS FRAMEWORK
A. Authority for deduction?
i. § 165 (profit transaction) (related party
disallowance)?
B. Character of Asset?
i. Capital?
ii. § 1231?
C. Preliminary or Primary?
i. G < = L  Preliminary (involuntary)
ii. G > L  Primary
D. § 1222 Netting Process
i. NCG = LTCG -- LTCL
ii. NCG  § 1(h)
iii. Any § 1250 recapture?
E. § 1231(c) Recapture?
CH. 33 - RECAPTURE OF DEPRECIATION
I.
II.
RATIONALE FOR § 1245
A. If TP had not taken depreciation, would not have
realized as much gain
B. § 1245 - Fixing Perceived Unfairness
i. (a)(1): recognized recapture inc  OI (ordinary
deduction = OI)
ii. G on disposition of PP attributable to dep,
rather than econ appreciation, NO CG trtmt
iii. Trump Provision: to this extent, § 1245
overrides § 1231, e.g…
1. § 1221(a)  Ordinary Asset
2. § 1231  LTCG or LTCL
3. § 1245  Final Say  OI
C. Recapture Provisions, Generally
i. Mainly a/b character, h/w, also recognition
ii. Sometimes, req earlier recognition (§ 453(i))
D. Major Benefits
i. N: dep accelerated for PP reasons,
ii. TV of $; subsidizes purchase of certain assets;
defer tax pmt
1. Free Marketers: a/g direct subsidies, but in
favor of accelerated dep
2. Davis: ideological stumbling block
iii. W/ real prop, pay later, and pay less!
INTERRELATIONSHIP AMONG §§ 1221(2), 1231,
1245, & 1250
A. §1221(a)(2): prop may not be CA, t/f any G is OI…
BUT under § 1231 G might be CG
i. R: G from econ appreciation characterized by
§§ 1221 & 1231
B. §1245: rec G from sale of dep “§ 1245 prop” is OI
to extent of dep taken on such prop
i. Generally, apply § 1245 to dep PP (tangible &
intangible), and § 1250 to dep RP
1. Diff §, b/c Real Prop has good lobby, e.g.
more generous recapture provisions
2. N: § 1245 DOES apply to horticultural
structures (non-SL dep)
ii. Does NOT apply to losses
iii. (a)(1): label as OI difference b/t…
1. TP’s AB; AND
III.
§ 179 RECAPTURE
A. §179: Election to XP certain depreciable B assets
i. Trigger if prop not used predominately for B
purposes (50%)
ii. Reg. § 179-1(e)(3): N/A if § 1245 applies
iii. Rev. Rul: conversion of auto from B to
personal use is NOT “disposition”
B. (d)(10) - Owner Version of Recapture
i. If prop which § 179 deduction was taken on
converted to personal use, must give up benefit
ii. Reg. § 1.179-1(e)(1), (5)
1. Benefit = amt of add’l dep would o/w had
been entitled to w/out election.
2. Amt taxed currently as OI
iii. To reflect triggered inc,  AB to extent of § 179
recapture
1. Imp to TP “stepping into shoes”
C. N: 125K level extended; PO at 500K
D. N: off shelve computer software covered
IV.
UNRECAPTURED § 1250 GAIN
A. Recall §1(h)(1)(D): 25% rate applied to
unrecaptured § 1250 gain
i. More favorable than 28% applied to collectibles
ii. “” favorable than 15% rate applied to stock held
> 1 year
B. § 1(h)(6) - Unrecaptured §1250 Gain
i. § 1250 prop LTCG from dep allowed & not o/w
recaptured as OI
ii. Unrecaptured § 1250 G gets 25% rate, while
remaining G gets max 15% rate
C. Recall § 121 - Gain from Sale of PR
i. (d)(6): G from dep w/r/t PR NOT excludable
ii. N: see w/ home offices
V.
§ 1239 ORDINARY INCOME
A. Anti-Abuse Provision: if sell depreciable prop to
RP, depreciable in their hands, t/f ALL OI
i. G recognized by transferor treated as OI
ii. N: § 167 gives deduction; § 168 gives amount
B. RP?
i. Controlled Entities: “in this §, means corp
where > 50% owned by TP”
ii. § 267(c): Constructive Ownership Rules
1. Corporate / Family Ownership
2. Family: brothers, sisters, spouses,
ancestors, & lineal decedents
C. § 1239 is Characterization, NOT Recapture rule like
§§ 1245 and 1250
i. R: any G rec on S/E of dep prop b/t RP IS OI;
none of rec G eligible for CG trtmt under §1231
ii. S: b/t RP, ALL G will be OI
iii. Narrow, in that only applies to RP trans
iv. Broad, in that characterizes ALL G as OI
D. Ex: indiv sells depreciable pro to wholly owned
corp (RP); all G t/f OI
VI.
VII.
ii. If assume will pay unless FMV , more
conditional obligation
II.
CRANE & TUFTS
A. I: relationship b/t debt (especially NR), basis, & AR
B. R: R / NR liab treated same in calculating AB & AR
C. Crane and FN 37
i. Considerable NR debt inherited; dep based on
FMV @ decedent’s death; later sold
ii. I: gain realized on sale?
1. Basis? TP said subtract debt; IRS said no
adj for outstanding liab, including NR
2. AR? S. Ct. said NR taken subject to by
purchaser IS part of AR
iii. Rules:
1. Liab, whether R or NR, are part of basis
2. “”, are part of seller’s AR
3. IF FMV > Debt  AR includes debt
assumed + FMV of other prop
a. Debt treated as $
b. Justification: econ benefit
iv. FN 37: IF FMV < Debt, mortgagor not liab for
it can NOT realize benefit = mortgage
1. Millar, 3d Cir.: enables large dep ded
D. Aizawa - Recourse Debt
i. TP still liab on R debt after foreclosure (liab for
amt > foreclosure proceeds)
ii. R: w/ R debt, if FMV < Debt  AR includes
debt satisfied (here, was FMV). Why?
1. If pay later, get ded
2. If don’t, RoI & would be double taxed
(unless sheltered by § 108 on insolvency)
E. The Tufts Controversy
i. LLP bought housing, econ , FMV < Debt
ii. I: debt included in AB?
1. TP: NO (FMV -- AB = L)
2. IRS: YES (Debt -- AB = G) [winner]
iii. H: entire NR debt included in TP’s AR
iv. R: W/ NR debt, IF FMV < Debt  AR includes
debt assumed + FMV of other prop
v. Justifications
1. TP’s PoV: w/ NR, RoI has ended, as full
debt satisfied; using FMV not right result
2. Why does TP end up w/ gain? Dep ded.
a. Essentially dep recapture, e.g.
include in basis, although contingent
b. T/f, include in AR too balance
3. Put Option
a. R Debt: AR = Cash rec’d
b. NR Debt: AR = Debt + put option
vi. N: § 108 N/A; only applies to RoI, NOT prop
disposition
III.
NR BORROWING & § 108 INSOLVENCY
EXCLUSION
A. Recall, NOT permanent exclusion, but  basis
B. Rev. Ruling 92-53
i. I: NR Debt > FMV securing prop, & insolvency
determination in § 108
ii. H: Amt NR > FMV acct for in determining
insolvency, but only to extent NR discharged
DISPOSITIONS WHERE §§1245 & 1250 APPLY;
EXCEPTIONS
A. §1245 Prop: any that is / has been subj. to § 167 dep
AND is personal prop
i. For real prop, see (a)(3)
B. § 1250 Property: same def, but includes other
things
C. Exceptions to Recapture
i. 1245(b): mainly, dispositions where prop’s
basis carries over to transferee; preserves
recapture potential in transferee’s hands
ii. 1250(d):
iii. Gifts, death transfers, LK exchanges, ICs,
transfer to tax exempt org, Timber prop
1. Preserves taint for later recapture
2. Limit on LK property!
ANALYSIS FRAMEWORK
A. Step One: Depreciation Deductions
B. Step Two: Compute Gain (AB -- AR)
C. Step Three: Characterize Gain
i. If Personal  § 1250
1. Recovery = Excess of SL (taxed as OI)
ii. If NOT Personal  § 1245
CH. 38 - NONRECOURSE DEBT: AB & AR
REVISITED
I.
RECOURSE & NONRECOURSE DISTINGUISHED
A. Generally, turns on lender’s available remedies
B. Recourse
i. Secured: specific prop stands as loan security,
so SP can grab w/out procedural speed bumps
ii. Unsecured: can collect full debt from
borrower’s assets, unless protected
C. Nonrecourse: prop standing as security will always
satisfy debt, even if value 
i. Tipping point: prop’s FMV, e.g. once equity
gone, risk of loss shifted to lender
D. Included in Basis?
i. Must repay recourse, t/f more logical inclusion
iii. PP: ensure § 108 fresh start; should NOT tax
insolvent TP
IV.
NR BORROWING & APPRECIATED PROPERTY
A. I: does new borrowing…
i. Generate add’l basis; OR
ii. Represent RE resulting in G recognition
B. R: If new loan used in unrelated venture & doesn’t
improve underlying prop, NO basis adj. § 1016
C. Woodsam Assoc.
i. TP incurred NR debt > AB; contributed to corp,
who sold at foreclosure (same basis as TP)
ii. Corp: when TP incurred NR debt, rec G = Debt
-- AB (would  basis corp rec’d)
iii. H: TP did NOT dispose of prop, but merely 
indebtedness
iv. S: favors TPs who have high equity in prop w/
low AB, b/c can w/draw (via NR) from prop
and not be deemed to have realized G
v. GR: w/ NR, post acq borrowing NOT RE
V.
IMPACT OF CONTINGENT LIABILITIES
A. Opportunity for Abuse
i. Agree to inflated price for dep prop; finance
purchase w/ NR note to seller
ii. Would allow basis to = inflated purchase price
1. Buyer: greater dep ded than if purchased
at FMV; could claim int ded
2. Seller: report on installment basis, t/f
report gain only if / when rec’d
B. Rev. Ruling 91-31
i. IF debtor still in possession, NO RE, t/f § 1001
not triggered, t/f w/in RoI (assuming solvency)
ii. TP’s Counter:
1. Should respect econ substance, e.g. deal
was to transfer full debt
2. FMV < Debt, t/f not true debt & shouldn’t
recognize RoI
C. Tax Benefit Rule
i. I: do tax / int ( loan amt) become part of basis?
ii. R: if receive tax benefit in earlier yr, later have
recovery, must pay taxes on $ in later yr
iii. Ex: challenge prop taxes and win; recovered
previously deducted $, t/f have GI
D. Estate of Franklin
i. PP of RP > FMV, t/f TP not expected to make
investment in prop represented by NR debt
ii. T/f, ct ignored NR debt for dep / int deductions
iii. Rev. Ruling 77-110: NR too contingent for
consideration in basis, int, and dep
1. Basis includes only portion of purchase
price paid in $
E. Evaluating the Genuineness of NR Debt
i. Bergstrom: when NR PM debt > R approx. of
prop’s FMV, disregard in basis / int ded calc
ii. N: Tufts & Franklin factually distinguishable
1. Franklin: debt > FMV of security prop, t/f
NOT true debt (contingent)
2. Tufts: original debt NOT > prop value
CH. 44, PART A: TAX SHELTERS, § 465 - THE AT
RISK RULES
I.
INTRODUCTION
A. Methods
i. TVM benefit along w/ conversion of rates
ii. Funnel income to tax exempt related party
1. Ex: parent corp in no tax juris; child corp
in U.S. and pays 35%
2. Ex: LLP b/t foreign & U.S. corp; inc in
early yrs, deduct in later; foreign 99%
owner in inc yrs, U.S. in ded yrs
B. Correlation b/t AB & Depreciation
i. Cost basis of acquired prop includes portion of
purchase price financed by NR borrowing
1. TP’s basis may include borrowed funds
TP has no personal liab too
2. Tax shelter, e.g. claim ded > amt at risk
ii. I: encouraging econ unsound investment
1. Advance credit in basis given for NR
2. Utilize ded for NR to offset inc from
unrelated activities
C. Estate of Franklin
i. Hotel leaseback used to shift dep ded
ii. R: NO dep unless actually invested
iii. A: never actually invested, never going to,
purchase price extremely overstated
iv. S: pigs fed, hogs slaughtered (too abusive)
D. Congressional Response - § 465
i. PP: prevent abuse in Estate of Franklin
1. Timing (§ 465)
2. Sheltering (§ 469)
ii. GR: ded limited to amt at risk (gen, prop basis)
iii. Activities Subj to Rules
1. Covers indiv, estates, trusts, and most
closely held corps
2. § 466(c)(3)(A): ANY B or inc producing
activity (imp exception for RE activity)
II.
OPERATION OF AT RISK RULES
A. § 465 At Risk Limitations
i. Can ded up to…
1. Inc from activity; AND
2. Amt of risk (assets on the line)
ii. (d) Loss Limits: Activity Ded -- Activity Inc
1. Disallowed, unless have amt at risk or
generate more inc
2. NOT permanent, but deferral (TVM)
B. Initial Amount at Risk is the Sum of…
i. TP’s $ contrib. to activity;
ii. AB of other prop contrib.;
iii. R debt used to pay for activity;
iv. NR debt up to amt of other prop pledged;
v. Qualified NR borrowing
C. Qualified NR Financing - § 465(b)(6)
i. Applies where TP borrows $ w/r/t holding real
prop, and nobody liab for pmt
ii. Reg. 1.465-27(b)(1): Includes…
1. Amts borrowed by TP from gov’t;
2. Gov’t guarantees amt borrowed;
3. Borrowing from qualified persons, e.g.
actively / regularly in B of lending $
a. NOT seller or related person;
b. Promoter receiving fee
iii. RP: exception, if commercially R & on subst.
same terms as unrelated persons. (d)(ii)
1. CR: written / unconditional promise to
pay; R IR (considering loan’s maturity)
2. NOT CR: loan term > UL; limited right
of foreclosure / collection
III.
IV.
ADJUSTMENTS TO AMOUNT AT RISK
A. A@R adjusted yearly for income / L / w/drawls
from the activity. Reg. §. 1465-22(b) & (c)
B. R: NR loan repmt w/ $ gen. by activity does NOT
affect A@R
i. Loss > A@R disallowed, sometimes CO
ii. Reporting inc w/ NO offsetting ded  A@R
C. R:  A@R by…
i. Direct pmt of NR debt;
ii. Cash contrib. by TP;
iii. Prop “”;
D. At disposition, deduct suspended losses
E. Recapture Rule - § 465(e)
i. W/drawl > A@R triggers recapture
ii. Excess reported as GI
iii. If recapture ded taken in excess of A@R, carry
over upon recapture
ANALYSIS FRAMEWORK
A. PP: do NOT allow ded for another’s risk through
inflated prices / basis
B. Initial A@R?
i. Cash
ii. Basis of any prop
iii. R debt
iv. NR debt up to extent pledged other security
v. Qualified NR debt
C. Adjustment to A@R?
i. Income 
ii. Loss 
iii. W/drawl 
iv. Carryover 
v. Exception for NR repmt w/ activity gen. $
D. Loss deduction?
i. Limited to A@R (but up to inc). (a)(1)
ii. Remaining L disallowed / carried over
(suspended)
E. § 465(e) W/drawl Recapture?
i. Negative balance in A@R triggers
ii. Can NOT use CO to offset
iii. (1) Include excess of w/drawl over A@R in
GI; may deduct amt a/g following year activity
CH. 44, PART B: § 469 PASSIVE ACTIVITY LOSSES
& CREDITS LIMITED
I.
INTRODUCTION TO § 469
A. TP Behavior Triggers Congressional Response
i. Needed to prevent excessive sheltering, w/out
eliminating subst. all tax preferences in IRC
ii. Wanted to benefit / incentivize TPs active in Bs
preferences directed toward
iii. T/f, bar use of L from B TP does not materially
participate in to offset positive income sources
iv. Flaws in Logic: if must incentivize activities,
mkt must be failing (e.g. farmers selling ded)
1. Creates negative spillover effects
B. § 469 - In General
i. (a)(2): applies to indiv, estates, trusts, and
closely held corps (C corps NOT caught!)
ii. GR: TPs must classify: Income, L, & credits as
gen. by Passive or Non-Passive Activities
iii. PA Ded: only offset passive activities
iv. (b): L CO & suspended
1. NO limit to CO
2. SL allowed in full when interest in PA
disposed of. (g)(1)(A)
v. Result: deferral (not permanent) of excess ded
& credits gen. PA
II.
PASSIVE ACTIVITIES
A. (c)(1): PA involves conduct of any T or B TP does
NOT materially participate in
i. T or B in § 162 sense
ii. (c)(6) includes § 212 XP
iii. (c)(7) excludes real prop B
B. (h)(1): Material Participation: regular, continuous,
and subst. involvement
i. Rationale:
1. Intended TPs should rec tax preference
2. These have signif. econ. non-tax motive
C. Temp. Reg. 1.469-5T(a): MP if…
i. TP’s participation > 500 hrs per year;
ii. “” subst. all in the activity;
iii. “” > 100 hrs per year, & not less than anyone;
iv. MP in any 5 of 10 previous years;
v. MP based on all facts / circum;
vi. Personal Services Test: activities are T/B where
capital NOT material income-producing factor
1. Any three prior years?
D. Special Rule for Limited Partners
i. (h)(2): limited partner does NOT MP w/r/t his
interest in limited partnership
ii. Exception: satisfy i., iv., or vi. above
E. Rental Activities
i. (c)(2): generally, passive
1. (j)(8): any RA “where pmts principally
for use of tangible prop”
2. Exception: signif services rendered in
connection w/ rental (hotel rooms, cars)
ii. (c)(7)(B): NOT passive per se if…
1. (1) > ½ PS performed during year in RP
T/B in which TP MP; AND
2. (2) > 750 hrs “”
iii. (i): Exception for AP in Rental RE:
1. If natural party TP APs in rental RE, may
apply L / credits to max of 25K of NP inc.
(1), (2)
2. (3)(A): PO for TP’s w/ GI > 100K
3. (6): AP if own at least 10% interest.
a. N: more lenient than MP
b. See outline
F. Scope of Activity
i. Importance
1.
2.
Need to determine MP
Must know b/f apply § 469(g), e.g. ded SL
of passive activity when dispose entire int
ii. Can combine hours into one activity
1. Must be related; may create MP
2. If don’t, want separate, so sale of one
crosses over to NP
iii. Reg. § 1.469-4(c)(2):
1. Similarities / diff in types of Bs;
2. Extent of common control;
3. Geographical location;
4. Interdependence b/t activities
G. Trtmt of L & Credits
i. Must compute G / L from each passive activity
ii. L from activity 1st offset by G from that
activity; any aggregate excess carried forward
H. Portfolio Income and Expenses
i. (e)(1): excluded from passive G / L calc
ii. Why? Ordinarily gen + inc; not likely to gen L
to shelter other inc
III.
IV.
DISPOSITION OF TP’s ENTIRE INT IN PASSIVE
ACTIVITY
A. (g)(1)(A): any SL allocable to activity no longer PA
L, but are deductible a/g inc
B. (g)(1)(A), (B): must have fully taxable disposition
of TP’s interest to unrelated party
C. Consequences of a TP’s Death
i. SL allowed only to extent > amt, if any, by
which AB of prop in activity  by § 1014
ii. To extent basis  by § 1014, SL of activity
forever disallowed
D. Consequences of Gift
i. (j)(6): NOT disposition causing release of SL
ii.  donor’s AB by SL; donee takes that AB,
unless have L, whereby L disallowed
ANALYSIS FRAMEWORK
A. Divide Income & Deductions into Two Pools
i. Passive: NO MP, limited LLP int, rental
activity (w/ exceptions)
ii. Non-passive: MP, portfolio income
B. Apply Statutes
i. § 465: can deduct L up to A@R
ii. § 469: ded from activity limited to income
CH. 45 - ALTERNATIVE MINIMUM TAX - §§ 55, 56,
& 57
I.
INTRODUCTION
A. Originally designed to apply to 2 dozen extremely
wealthy indiv paying less IT than secretaries
B. Companion tax: stack too many benefits in 1 yr,
limit those; wealthy should pay some min amt
i. Add back some, subtract some
C. AMT objective: prevent abuse of exclusions, ded, &
credits to point of significant tax avoidance
i. Measures something closer to econ inc (bigger
than TI), but imposes lower rate
D. § 55(a): AMT = Tentative Min Tax -- Regular Tax
i. Adjusted by §§ 56 & 58
ii. Add back in § 57
iii. Pay regular tax liab, plus AMT
iv. Analysis Framework
1. AMTI -- Exemption = Taxable Excess
2. Apply AMT Rates to Calculate Tentative
Minimum Tax
3. Pay Regular Tax, plus [Reg Tax -- TMT =
AMT]
v. Separate AMT, b/c may be potential credit to
offset AMT; must know add’l min tax, b/c
some yrs may not owe AMT
II.
MECHANICS - § 55(b)
A. TMT = 26% of 1st 175K in “taxable excess” + 28%
thereafter (minus AMT foreign tax credit). (1)(A).
i. If part of taxable excess is NCG, separate lower
max rates from § 1(h). (3)
ii. Can keep 155 & 25% rats, but 28% gain taxed
at reg AMT rates (26 or 28%)
B. T/f, Taxable Excess = AMTI -- Exemption Amt.
(1)(A)(ii).
i. Indiv not married, not surviving spouse = 42.5K
ii. Married indiv filling separately = 31,275K
iii. PO exemption when AMTI reaches 112.5K.
(d)(3)
C. Adjust TI to calc AMTI…
III.
DETERMINING AMTI
A. AMTI = TI adj by §§ 56 & 58 &  § 57. § 55(b)(2).
B. Calc TI (GI -- ATL = AGI -- BTL = TI)
i. ATL
ii. BTL
1. Misc ID (reduced by 2% of AGI, § 67)
a. § 212 ded, e.g. attny fees & invest
XP
2. Overall limitation on ID in § 68
3. Std deduction (if > ID); AND
4. Personal exemptions
C. TI adj per §§ 56 & 58 to determine AMTI
i. Depreciation:
1. § 1250 prop (real) dep under SL, convert
to 150% declining bal
2. Tangible personal prop using 200%
declining bal adj to 150% ( adj)
ii. Limitation on IDs, SDs & PEs - § 56(b)
1. Misc ID NOT allowed. (1)(A)
2. Attny Fees: if ded under § 212 but not
162, AND not ATL under § 62(a)(4) /(20)
 not allowed
3. Med XP: amt > 10% of AGI. (1)(B)
4. SD & PE not allowed. (1)(E)
5. §68 overall limitation on ID N/A. (1)(F)
D. TI adjusted per § 57 to determine AMTI
i. Include certain tax exempt int, e.g. “specified
private activity bond.” (a)(5)
ii. Include 7% of amt excluded under § 1202 as
QSBS. (a)(7)
E. Subtract out Exemption, Note POs
i. Taxable Excess = AMT - Exemption Amt
1. PO: (AMTI -- Threshold) * 25%; if >
exemption amt, zero exemption
ii. IF NCG, use lower rates in §55(b)(3)
F.
IV.
Calculate TMT
i. TMT -- Reg Tax = AMT
2. B books & records / operating systems;
3. Customer relationships;
4. Other similar items
C. Goodwill
i. Reg. §1.197-2(b)(1): value from expectancy of
continued customer patronage
ii. PP > FMV of tangible / intangible items
indicate GW
iii. Common factors…
1. Established reputation in area
2. Good location
3. Well recognized name
iv. Ex: Meyer & Rosenbaum
v. CG for seller
D. Going Concern Value
i. Where GW questionable, part of PP should be
allocated to GCV
ii. Reg. §1.197-2(b)(2)
1. Add’l value of prop d/t existence as
integral part of ongoing B activity;
2. Value d/t ability to continue functioning
& making $, even if change T/B’s owner
iii. Ex: fixtures / furniture in bar
E. Covenant Not to Compete
i. Agree not to compete in same type of B for
stated period
ii. Diff tax trtmt than GW, e.g. OI for seller
iii. Severability Test: can CNC be separated and
independently valued?
1. If CNC only to ensure GW transfer, no
part of PP allocated to it
2. If parties understand CNC to be distinct &
separate item, ct will respect R allocation
iv. Economic Reality Test: did parties intend to
allocate part of PP to CNC, & does it have
indep basis in fact or relationship to B reality
1. More common; Annabelle Candy Co.
AMT PATCH
A. Congress doesn’t index for inflation, and add more
preferences, t/f many more people getting caught
B. Rather than permanently change, patch year to year,
so don’t violate budgeting rules & have flexibility
C. Who likely to get caught…
i.  e’ee XP ded under § 212
ii. Lots of children, b/c PE & SD disallowed
iii. High property / IT states (NE, Midwest, CA)
CH. 42 - SALE OF BUSINESS & SALE-LEASEBACKS §§ 1060 & 197
I.
INTRODUCTION
A. I: Sale / purchase of unincorporated B, as well as
sale-leaseback arrangements
i. Seller concern  gain’s character
ii. Buyer concern  basis in new prop
B. Determining what is sold creates allocation problem
i. Must acct for some premium pd
ii. Buyers / sellers have diff incentives, w/ gov’t
getting whipsawed
C. § 1060: w/ sale of assets part of T/B, value prop
category-by-category (7 total classes)
i. Easier valuation assets come first, so have less
PP allocated to harder to value assets
II.
SALE OF SOLE PROPRIETORSHIP - SINGLE OR
SEPARATE ASSET?
A. Williams v. McGowan Standard
i. Π sold B after bought out partner’s int, reported
OL; IRS said B was asset, t/f CG trtmt
ii. R: when sale B, separate G or L analysis made
for each tangible & intangible asset in B
iii. H: despite functional interrelationship of B’s
assets, & fact value  if sold separately, TP
must perform separate tax analysis for each
1. Character of each asset sold, e.g. ordinary,
capital, or § 1231; AND
2. G or L recognized w/r/t its disposition by
allocating portion of PP to each asset
iv. PP: prevent distortion/abuse of tax system (e.g.
thwart LT/ST & G/L distinctions)
III.
GW, GOING CONCERN VALUE, & COVENANTS
NOT TO COMPETE
A. Valuable intangibles often part of B sale, & under
Williams, must allocate part of PP to these items…
B. Solomon Solution
i. Lists assets, say some have NO identifiable
ULs, some have very short ULs
ii. Rough justice: 15 years for all
iii. § 197 application triggered when acquire assets
by purchasing entire T/B
1. If not, in § 167, & may write off over UL
2. O/w, must use 15 yr period, w/o/r/t UL
iv. Assets Involved:
1. Workforce in place;
IV.
TAX CONSEQUENCES OF ALLOCATION OF PP
TO GW, GCV, & CNC
A. Strategic Decisions
i. Seller: determines AR, G/L, & character
ii. Buyer: determines dep ded, G/L, & character on
later sales
B. Historically
i. Until 1993, GW & CNC were assets w/ no
determinable UL, t/f NOT depreciable
ii. Buyers: carve out & treat as separate
intangibles w/ limited UL so can amortize
iii. Sellers: amts rec’d were OI, t/f preferred little
allocation to CNC
C. § 197 - Amortization of B Intangibles
i. Amortization for GW, CNC, GCV, & other B
intangibles over 15 yr period
1. Negates incentives for carve outs
2. New planning considerations…
a. Buyer  amortization
b. Seller  CA characterization
ii. N: 5 yr CNC amortized over 15 years (unless
not w/in § 197)
iii. I: buyer pushes to maximize allocation to dep
assets w/ short UL (3,5, & 7 yr prop)
B/c of recapture potential,  allocation to
such may  OI. See § 1245.
iv. N: under new framework, buyer doesn’t care
much (feather in cap), but seller does (CA v. O)
D. Exceptions to Amortized Intangibles
i. (e)(4): patents / copyrights not acquired as part
of acquisition of assets constituting T/B or
subst. portion thereof
ii. (e)(3): certain computer software (§ 167(f) - SL
dep over 36 month UL)
iii. (c)(2): certain self-created § 197 intangibles
1. Ex: ad XP deducted in yr incurred or paid
iv. No Ls permitted on resale of intangibles if TP
retains other amortizable intangibles. (f)(1)
1. L allocated to remaining intangibles, t/f
AB 
E. Recapture Rules
i. (f)(7): § 197 amortizable intangibles treated as
of character subj to dep allowance under § 167
ii. If sale such at gain, may be subj to § 1245
recapture rules, and/or § 1231 characterization
1.
V.
VALUATION OF GW, GCV, & CNC
A. IRS gen respects party’s valuation, especially where
interests adverse; t/f, should doc negotiations so that
allocation reflected in K
B. § 1060(c): req residual method of valuation for GW
& CNC when purchase assets of a T/B
i. GW/CNC = PP -- total FMV of tangible &
identifiable intangibles (other than GW/CNC)
1. Allocate GW/CNC last!
ii. Curves valuation problems / potential for abuse
C. Reg. § 1.1060-1(c)(2): allocate amongst 7 classes in
following order…
i. Class I: cash & general DAs
ii. Class II: actively traded personal prop, CoDs Y
foreign currency;
iii. Class III: assets TP marks-to-market at least
annually for FIT, & debt instruments;
1. S: w/ MtM, recognize G/L w/out RE (only
certain TPs, industries, & assets)
2. Ex: A/Rec.
3. NOT Ex: certain contingent/convertible
DIs; DIs issued by RPs
iv. Class IV: Stock in trade of TP (inventory)
v. Class V: All other assets not included above
1. Ex: equip, truck, etc. (bulk of assets)
vi. Class VI: All §197 intangibles except GW &
GCV
vii. Class VII: GW & GCV
1. Residual method: allocating whatever’s
left
D. 1060(a): Ps bound by written agreement as to FMV,
unless IRS finds inappropriate (free to challenge)
i. Both Ps must send in information report
ii. N: if have CNC, gov’t assumes some value
iii. Danielson Factors
1. Ps intent;
2. Nature of B, e.g. uniqueness, reputational
concerns
3. Likelihood seller will resume B
VI.
SALE-LEASEBACK
A. “Sometimes, a cigar is just a cigar.”
B. Sale vs. Lease?
i. Lease: lessee could report rental XP > dep & int
available to buyer of same prop
ii. Shifts tax benefits
1. Seller/Lessee: rent ded > ded if were the
owner; may raise subst. $, continue
possession / use, & pay rent lower than int
iii. Service: prevent shifting &  in revenue; t/f,
may re-characterize as sale-leaseback
C. Characterized as Financing Arrangement
i. TP sells prop to lender, then leases back w/
option to purchase
ii. Service: financing arrangement, if more like
mortgage, & disregard transaction’s form
iii. Estate of Star
1. TP needed sprinkler system; manuf
installed, sign L; gov’t contested
2. Factors:
a. LH of continued ownership;
b. Option to buy @ lease’s end;
i) FMV  lease
ii) Di minimus  sale
iii) Who controls disposition?
c. Rent is FMV vs. PP + interest
d. Title (bundle of sticks)
e. Who insures / takes risk of loss
iv. But see Frank Lyon - not disregarded
D. Characterized as a Tax-Free Exchange
i. Service disregards form & calls it LK exchange
1. 1.1031(a)-1(c): 30 or more yr term lease
& fee int in RE are LK properties
2. PP: §1031 negates G/L if TP in essentially
same position post-transaction
3. Swap or sale?
ii. But see Leslie – TP overcame IRS challenge
E. Analysis Framework
i. Really a sale or financing arrangement?
ii. Really a sale or § 1031 exchange?
VII.
FRANK LYON CO.
A. Bank entered sale-leaseback K w/ Frank Lyon Co.
B. SCOTUS: got it wrong!
i. Focus on wrong things to determine who owned
building, e.g. that 3 parties involved, terms R,
bank regulation, & downside risk
ii. Should focus on fact Frank Lyon only entered
K for dep ded, bundle of sticks, etc.
C. Gov’t: sham transaction doctrine, e.g. substance
over form (NOT ownership transaction)
D. Future TPs: if on hook for debt, & on my balance
sheet, SCOTUS said I’m the owner!
CH. 39 - LIKE KIND EXCHANGES - § 1031
I.
OVERVIEW
A. § 1001(c): generally, must recognize G/L on
sale/exchange of prop
B. H/w, under § 1031, NO G/L recognized when...
i. Prop held for productive use in T/B/I;
1. “Relinquished” prop, i.e. given up
C.
D.
E.
F.
G.
II.
III.
Intent must be present when exchange
takes place
3. Phrased in conjunctive
ii. Exchanged solely for prop of LK to be held for
productive use in T/B/I
“Non-recognition” rule: deferral, not permanent
§ 1031(a)(2): Six Exceptions
i. Provision abused by brokerage houses who
exchanged appreciated stocks w/out rec G, but
rec L when sold shitty stocks for cash
1. Exceptions curve abuse
ii. (A) Stock in trade, or other prop held primarily
for sale;
iii. Exchanges of…
1. (B) Stocks, Bonds, or Notes;
2. (C) Other securities or evidence of debt
3. (D): int in an partnership (Meyers)
4. (E) Certificates of trust or beneficial int;
5. (F) Choses in action (enforceable things
representing rights)
Overall Objective
i. Zero tax liability currently
ii. NOT complete forgiveness, but deferral
Criticisms
i. Shapes financial decisions for tax purposes
ii. May cause over investment in RE, t/f  price
N: NOT elective! But… can get out by making cash
sale.
Rev. Rul. 73-476: tenancy in common 
 fee simple int LK
2. I: natural resources (see class notes)
3. See examples in outline
B. Generalizing When Prop Are LK - § 1.1031(a)-2
i. Depreciable tangible personal prop exchanged
for prop either of a LK or a like class
ii. Like Class: both are in same general asset class.
(b)(1)
1. 13 General B Asset Classes, drawn from
Rev. Pro. 87-56, described in Regs.
a. Ex: office furniture, fixtures, &
equip all in same GBAC
2. Req also met if w/in same “Product
Class.” (b)(1)
iii. For intangibles, mainly determined by ct
holdings, which can be narrow
1. Ex: book copyright   book copyright
ok, but not for songs. 2-(c)(3)
2. Ex: GW or GCV of one B NOT LK to
same for another B. 2-(c)(2)
2.
CONTINUITY OF INTEREST
A. Exchange equivalent to cashing in one’s investment
in prop exchanged
i. § 1031 assumes prop rec’d simply continuation
of that investment in modified form
ii. TP has only technically (not effectively)
“realized” G/L, t/f tax or ded inappropriate
1. N: symmetrical trtmt of G/L
B. Policy Underlying §1031
i. Exchange as continuity of investment in
modified form
ii. Admin difficulty in valuing prop
1. Administrative convenience
2. Valuation issue
iii. Liquidity issue
C. Problems w/ Logic
i. Parties often DO know value of prop
ii. Not really liquidity prob if TP in same position
post transaction
iii. Continuation of investment assumes prop are
really LK; h/w rule so broad, not always case
THE LIKE KIND REQUIREMENT
A. Particular Properties LK?
i. Reg. § 1.1031(a)-1(b): LK = nature/character,
kind/class, NOT quality/grade
ii. Improved/unimproved nature of RE irrelevant
iii. Ex of qualifying transactions:
1. City RE   ranch or farm
2. 30 yr leasehold in RE   RE
3. Improved RE   unimproved RE
iv. Liberal approach where int in Q is in real prop
1.
IV.
HOLDING REQUIREMENTS
A. N: personal use property excluded from §1031; h/w,
one TP may qualify while other does not
i. Personal Residence
ii. Personal Vehicle
B. Two Holding Requirements
i. Prop given up must be held for T/B/I
ii. “” received “”
C. §1031 applies when TP exchanged real property and
then promptly transferred the real property received
to a two person partnership in return for a general
interest in the partnership
D. (f), (g): 2 yr holding period for exchanges b/t RPs
i. (f) prevents swapping of basis b/t RPs
1. Each must recognize G/L currently
2. Taken into account on later disposition
ii. Rev Ruling 72-151: shows §1031(d) controls,
L preserved even if Boot rec’d
iii. GR: if RP disposes w/in 2 yrs of 1st exchange,
TP must recognize currently
V.
BASIS CALCULATIONS
A. Deferral, NOT Permanent Exclusion
i. Unrecognized G/L preserved in LK prop rec’d
ii. Since non-LK prop is boot, winds up w/ FMV
basis in recipient’s hands
iii. In effect, TP treated as having purchased nonLK prop
B. Formula - 1031(d)
i. AB of ALL LK & Non-LK transferred;
ii. + G recognized, liab assumed, & cash paid;
iii. – L recognized, liab shed, & cash rec’d;
iv. = The Basis to be Allocated
v. Rules:
1. Basis allocated 1st to non-LK prop up to
FMV (generates gain, so makes sense)
2. Remaining is basis of LK prop (preserves
any unrecognized G/L)
C. Basic Concept
i. TP in effect receiving partial return of I, &
should t/f  basis when…
1. Money rec’d;
2. Liab relief occurs; OR
3. L recognized
ii. TP in effect  I, and t/f should  basis as a
result, when…
1. Money paid;
2. Liab taken on; OR
3. G recognized
D. Testing Answers
i. Non-LK prop rec’d should have FMV basis
ii. LK prop rec’d should have basis that preserves
unrecognized G or L in prop given up
VI.
SOLELY FOR LK PROPERTY: THE PRESENCE
OF “BOOT”
A. Boot: non-LK prop added in to even up exchange
i. Congress: “pound of flesh”
ii. Solely doesn’t really mean solely. (b)
B. If give boot, remain in § 1031(a), b/c still receiving
solely LK prop
i. Part of basis in prop acquired
C. If receive boot, NOT solely LK prop
i. Recognize G up to amt of boot, but not > G
realized; LK exchange still permitted, w/
remaining G preserved
ii. Can NOT recognize L on LK prop
D. G/L on non-LK prop NOT governed by § 1031;
recognized pursuant to § 1001(c)
VII.
TREATMENT OF LIABILITIES
A. “Cash changing hands”
B. Common to transfer subj to liab, or assume liab
i. Treated as money rec’d by TP relieved, & t/f
boot. (d)
ii. TP assuming liab gets  in basis.
C. I: both prop transferred subj to liab
i. Reg. § 1.1031(d)-2: only net liab relief,  by
any cash pd, constitutes money rec’d.
ii. See examples, p. 930
D. N: if P getting debt relief & paying $, other P should
ask to just pay off part of debt (unless wants $)
VIII.
RELATIONSHIP B/T § 267(a)(1) & § 1031
A. Preserving UR L in exchanges b/t RPs may create
apparent inconsistency b/t § 1031 & §267(a)(1)
B. § 267: disallows certain Ls b/t RPs
i. (b): members of family
1. (c)(4): bros & sis (whole or ½ blood),
spouse, ancestors, lineal decedents
C. Which applies?
i. Matters, b/c in 1031, L preserved; in 267, may
not preserve L, & have to take FMV basis
1. Not permanent, i.e. if prop appreciates,
can add basis back
ii. Rev. Rul. 72-151: § 1031 controls!
1. Counter: § 267 more specific
disallowance rule
D. See example in outline
E. Rev. Ruling 72-151
IX.
SALE OR EXCHANGE?
A. Former Reg. § 1.1002-1(d): exchange ordinarily a
“reciprocal transfer of prop, not transfer of prop for
$ consideration only.”
i. Ex: TP “sells” LK for $, immediate “purchases”
qualifying LK from same person
ii. R: if, in substance, trans. is exchange rather
than sale/purchase, § 1031 applies!
B. Exchange in Substance Rule
i. Parent selling & subsidiary buying
ii. Sale and Lease Back Context
1. Reg. § 1.1031(a)-1(c): 30 or more yr LK
X.
THREE-WAY EXCHANGES & DEFERRED
EXCHANGES
A. Three-way Exchange Defined
i. See Rev. Ruling 77-297
ii. Receiving $ for prop, even if immediately
invested in LK, fatal to § 1031 trtmt
iii. T/f, allow use of qualified intermediary in
simultaneous exchange. Reg. § 1.1031(b)-2
1. Safe harbor. Reg. § 1.1031(k)-1(d)(1).
2. (k)-1(g)(4): Must not be a “disqualified
person”
a. NOT e’ee/agent of TP in last 2 yrs
b. Exception: solely § 1031 exchange
or routine financial services
B. Simultaneous Transfer Required?
i. Starker: TP got §1031 trtmt even though…
1. Prop to be rec’d not ID when transferred
prop given up; AND
2. TP had 5 yr right to get pro, several, or $
ii. Congressional Response  (a)(3): TP req to…
1. ID replacement prop w/in 45 days of
transfer; AND
2. Receive “” w/in 180 days after transfer, or
due date of tax return, whichever earlier
C. Anti-Starker Rule
i. May ID 3 replacement properties of any value
OR any # of “” in total not exceeding twice
value of relinquished prop.
1. Name, legal st address, meets & bounds
2. Must give notice
3. See Reg. § 1.1031(k)-1(c)(4)(i).
ii. If break rule, NO § 1031 trtmt, unless receive
prop w/in 95% of total FMV
iii. N: ID as much as possible!
D. Reverse Starker Exchanges
i. Replacement acq b/f relinquished transferred
1. Reg. § 1031(k)-1: above rules N/A
2. Need QEAA, e.g. someone holds title
ii. Rev. Pro. 2000-37: provides safe harbor
1. R: exchange accommodator must hold
“qualified indicia of ownership”
E. Alt: lease prop; get $ for rent, just not for prop
(“more than one way to skin cat”)
XI.
INTERFACE OF §§ 121 & 1031
A. Overview
i. § 121: exclusion for gain realized on S/E of PR
owned & used 2 or more yrs in last 5 yrs
B.
C.
D.
E.
XII.
ii. May qualify where @ disposition holding for B
or I purposes
iii. § 1031 may also apply if exchange prop for
other LK prop
Rev. Pro. 2005-14: must apply § 121 to gain
realized first
i. § 121(d)(6): exclusion N/A to dep, but § 1031
may apply to such Gs
ii. § 1031: boot taken into account only to extent >
gain excluded under § 121;  AB by amt
§ 121(d)(10) - Prop Acquired in LK Exchange
i. Must be held for at least 5 yrs to use exclusion
ii. Extended to person whose basis in prop
determined by ref to TP’s (e.g. gifts)
See Problem 4
Framework
i. How much G realized?
1. AB?
2. AR?
ii. Apply § 121, exclude G up to AB
iii. Apply § 1031
1. Boot allocated to § 121 1st
iv. Determine basis of replacement prop
1. Adjust for § 121 exclusion
CASE LAW & SERVICE GUIDANCE
A. Rev. Ruling 77-297
i. I: prefer LK so can defer G recognition, h/w, if
can’t, should Ps still sale prop?
ii. A: three-way exchange, w/ debt on both sides
iii. Problems:
1. High transaction costs
2. One P put potentially in chain of title
(bad, if lien put on prop)
iv. Rev. Rul. 75-291: § 1031 N/A to TP acquiring
prop solely to exchange as LK
v. N: hypo is simultaneous, NOT deferred
exchange
1. Today, structure as qualified intermediary
via Reg. 1.1031(b)-2
B. Rev. Ruling 72-151
i. Prop exchanged b/t corp & sole SH
ii. § 267: NO ded for Ls from S/E b/t RPs
iii. §267(b)(2): indiv & corp which indiv owns >
50% of outstanding stock
C. Bolker - Intent to Dispose?
i. TP exchanged real prop, then promptly
transferred prop rec’d to LLP for gen int
ii. H: holding req met by lack of intent to liquidate
investment or use of personal pursuits
iii. PP: continuity of interest
D. Bell Lines, Inc. v. United States
i. Old trucks sold, new bought, then dep @ full
PP of new truck claimed
ii. H: indep sale of old equip & purchase of new
does NOT create LK exchange
iii. PP: defer G/L recognition when have direct
exchange of prop
iv. Test: mutually dependent transactions?
v. Focus: TP intent in knowledge
E. Rev. Rul. 90-34
F.
i. S: transfer may qualify for NR, even if
transferee never holds
Rev. Pro. 2000-37
i. Safe Harbor / Reverse Starker problem
ii. See Problem 3
CH. 40 - INVOLUNTARY CONVERSIONS - § 1033
I.
GENERAL POLICY
A. § 1033: relief provision; gives NR of G when would
create severed hardship
B. Ex: farm land condemned; AB much less than FMV
i. If purchase replacement, technically GR
ii. G NOT recognized; NR NOT by § 1031
II.
TRIGGER
A. Prop “compulsorily or involuntarily converted” d/t
destruction, theft, seizure, or condemnation; AND
B. TP gets…
i. (a)(1): new prop (qualified replacement) 
direct conversion  § 1033 mandatory
ii. (a)(2): $ / non-qualified & later replaced w/
qualified  § 1033 elective
C. N: unlike § 1031, L specifically exempt, & applies
to personal use prop
i. BUT… if T/B prop, see § 165 Casualty Ls!
III.
INVOLUNTARY CONVERSION EVENTS
A. “Destruction” - “casualty” analogy, e.g. result of
fire, storm, or shipwreck
i. N: no sudden, unusual, or unexpected req
B. “Seizure” - confiscation by gov’t entity w/out
compensation
i. N: does NOT have to be for public use
IV.
SIMILAR/RELATED IN SERVICE OR USE - (a)(2)
A. Reg. § 1033(a)-2(c)(9): std NOT met when…
i. (i) $ from unimproved condemnation invested
in improved RE;
ii. (ii) “” real prop conversion used to  debt on
leasehold;
iii. (iii) Requisition tug owner use $ to buy barges
B. Rev Ruling: functionality test applied
C. § 1033 vs. §1031
i. § 1033 more narrow than LK std
1. End user test: who actually uses prop?
2. Lessor test: obligations, duties, &
services provided by lessor
ii. §1033(g), Condemnation of Real Prop in T/B/I,
adopts LK/1031 std
iii. §1033(h), Damage from Federally Declared
Disasters, uses broader std
1. (1) favorable trtmt for PR & contents
2. (2) T/B/I prop gets special trtmt in service
or use test
a. Prevent B failure
b. Give relief if invest in diff B
D. Time for Replacement
i. Unlike § 1031, NO holding req
ii. (a)(2)(B): w/in 2 yrs following conversion
iii. (a)(2)(A): replacement prop must be purchased
to replace prop converted
1.
(i): If buy b/f prop converted, TP must
hold on date of disposition
2. (ii): But for (b) basis rules, unadjusted
basis must be § 1012 cost basis (e.g. NO
gifts, Reg. § 1.1033(a)-2(c)(4)).
iv. (i): if replacement acq for RP, may lose NR
1. E.g. total realized G for year on all
involuntarily converted prop > 100K
2. N/A if RP acq replacement from URP
during replacement period
v. § 1223: if CA, holding period tacks
V.
BASIC COMPUTATIONS
A. Gain Recognized
i. Nonrecognition Req
1. 2 year period to find replacement
2. All proceeds spent on new prop
3. Similar or related in use (if req)
ii. Partial Recognition of Gain
1. (a)(2): GR recognized to extent AR @
conversion > cost of replacement
B. Basis of Replacement Property
i. (b): Two Different Rules
1. (1): if direct conversion  1031 AB rules
2. (2): if $, then qualified replacement prop,
AB = Cost -- GR on conversion NOT
recognized b/c of 1033
a. Ex: ins proceeds
ii. T/f, NOT permanent exclusion, but deferral
VI.
INVOLUNTARY CONVERSION OF PR
A. § 121: max exclusion of 250K (500K for joints)
B. §1033 may apply where §121 does also
i. § 121(d)(5)(A): if IC, § 121 permitted
ii. § 121(d)(5)(B): for § 1033, AR = IC Proceeds
-- G excluded under § 121 (t/f, apply § 121 1 st)
C. See examples, p. 968-69
VII.
CASE LAW & REV. RULINGS
A. Liant Record, Inc. - “Similar or Related Use”
i. Commercial T building condemned; Π used
proceeds to buy residential apartments
ii. Arguments:
1. IRS: end user test, not “similar/related”
2. Court: look at use by TP (investor test)
iii. R: where TP is investor & not user, nature of
TP’s relation to prop is determinative
1. Extent & type of TP’s mgmt activity
2. Amt & kind of services rendered by TP
3. Nature of TP’s B risks connected w/ prop
B. Rev. Ruling 64-237
i. I: meaning / application of “similar/related”
ii. H: reject functional use test for service-or-userelationship test
iii. BUT… still use functional w/ owner-users
C. Rev. Ruling 79-261
i. Cannot divide b/t some similar/related use prop;
if get back & use for two f(x)s, can’t divide
D. Rev. Ruling 89-2
i. Chemical spill; TP sells to gov’t
ii. I: involuntary conversion? YES!
iii. IRS: anything rendering prop unfit for it’s use
iv. Caveat: pmts can NOT be for damages
1. Ex: ship damaged, compensated; sell
unrepaired; NOT IC, b/c was repairable
E. Willamette Industries, Inc.
i. Π owned/processed timer, damaged from nature
1. Here, know proceeds clearly, smart to sell
2. Instead salvaged, processed, deferred G
ii. IRS: NOT IC
iii. TP: mitigating damages
iv. Ct: agreed w/ TP; critical factor was that Π was
compelled to harvest trees / extensive damage
v. Problems:
1. Often can’t separate out FMV
2. What would damaged goods o/w sale for?
CH. 41 - INSTALLMENT SALES - § 453
I.
OVERVIEW – §§ 453 & 453A
A. Problem Presented
i. G/L typically recognized at sale. § 1001(a), (c)
ii. H/w, when sale at G on deferred pmt or
installment basis, such a rule may be harsh.
1. Liquidity problems w/ bunching G in yr of
sale, when some SP not yet rec’d
B. Congressional Response
i. § 453:
1. G on sale spread over period pmts rec’d
2. Inc from prop disposition, NOT from
collection of obligation
3. N/A to Ls
ii. BP: b/c of sale’s nature, TP can defer TL!
iii. (b)(2): installment sale does NOT include...
1. Publicly traded stock; OR
2. If you are dealer in certain prop
iv. Benefit: int-free loan = tax on G from sale!
C. Statutory Framework
i. (a): inc reported under installment method; does
NOT apply to Ls
ii. (b)(1): Installment Sale Defined
1. GR: disposition where at least 1 pmt to be
rec’d following disposition yr
2. NOT req to rec pmt 1st yr; irrelevant that
large % rec’d 1st yr
iii. (c): Installment Method Defined
1. Prorate total G over total pmts to be rec’d
2. Gross Profit Ratio = [Gross Profit / Total
K Price], e.g. G / AR
3. Gross Profit Ration * Pmt = Inc for yr
II.
PAYMENTS & LIABILITIES
A. Mortgage or Debt Assumed
i. Reg. § 15A.453-1(b)(3)(i): tax free return of
basis; not included in GP;  total K price
ii. BUT… if liab > AB, excess treated as pmt, so
total K price will 
1. GP ratio will be 100%
2. Qualifying debt offsets SP only to extent
of basis. (2)(iii)
B. Debt Instruments as $ (PN)
i. GR: notes issued NOT pmt, even if guaranteed
by 3rd P. (f)(3)
ii. H/w, debt payable on demand / readily tradable
considered pmt. (f)(4),(5).
C. Nonqualifying Debt
i. NO  in total K price, t/f NO  in GP ratio.
ii. Shouldn’t treat relief as basis return for seller,
but treat as pmt, e.g. part basis return, part inc
III.
RECAPTURE INCOME
A. (i): b/c seller rec’d tax benefit via dep b/f sale, must
recognize dep recapture inc in yr of sale
i. = amt §§ 1245 & 1250 would classify as OI if
all pmts rec’d in 1st year
ii. Seller’s AB  by amt of recapture income
B. S: adj GP , since  AB (avoids over-reporting inc)
IV.
ELECTING OUT OF INSTALLMENT METHOD
A. (d): NOT mandatory; report under normal acct’g
method; must elect out, o/w automatically applied
i. Must make in timely manner
ii. May revoke w/ IRS’s consent
B. Effect of Electing Out - Reg. § 15A.453-1(d)(2)
i. (i): recognize FMV of obligation
ii. (ii): AR can NOT be < FMV of prop rec’d
C. Why?
i. Unusually low tax bracket in yr of sale, want to
accelerate inc recognition
ii. Will gen LTCG, & have huge LTCL that year,
w/ no other CGs
iii. Can argue open transaction doctrine
V.
VI.
VII.
i. (a)(1): AR, if less than face value or a S/E;
1. N: gift b/t RPs, FMV NOT < face value
ii. (a)(2): FMV at disposition, if other than S/E
iii. Ns:
1. Character of G/L determined by that of
underlying prop. (a)
2. If b/t spouses or incident to divorce,
spouse steps in transferor’s shoes. (g)
B. Basis of an Obligation
i. Face Value -- Inc if oblig fully satisfied. (b)
ii. See example in outline
C. Rev. Ruling 79-371
i. I: transferee’s basis following gift disposition
ii. § 453B(a)(2): basis  to reflect inc recognized
by transferor
VIII.
IX.
EXCLUSIONS
A. (k): certain deferred pmt sales, e.g…
i. Publicly traded prop (sufficiently liquid);
ii. Sales pursuant to a revolving credit plan
B. (b)(2)(A): “dealer dispositions,” e.g…
i. Personal prop reg sold on installment plan;
ii. Real prop held by TP for sale in OCOB.
iii. Does NOT include…
1. Farm property
2. Time shares & residential lofts
C. (b)(2)(B): dispositions of personal prop includable
in inventory
CONTINGENT PMT SALES
A. I: total amt of deferred pmt uncertain at time of sale,
e.g. contingent on future events
B. Burnett v. Logan
i. Stock sale contingent on future mining ops
ii. SCOTUS: report G on open trans approach, e.g.
basis 1st
1. Hold trans open till all pmts made
2. Here, promise of future pmts had no
ascertainable FMV
C. (j)(2): apply basis recovery ratably over term;
foreclosed Burnett approach in most cases
D. Reg. § 15A.453-1(c) - Three Rules (E&E)
E. IF elect out, then use FMV of contingent payments
i. §1001(c): AR -- AB = Gain / Loss
DISPOSITION OF INSTALLMENT OBLIG - § 453B
A. B: when oblig disposed, tax deferral ends; to
determine G/L, subtract basis from either…
SECOND DISPOSITIONS BY RELATED PERSONS
A. See TP abuse hypo in outline
B. (e) - Second Dispositions by RPs:
i. Triggers G recog by initial seller ONLY up to
AR on resale > actual pmts made under inst sale
ii. Exceptions / Limitations
1. (2)(a): unless marketable securities, only
applies to resale w/in 2 yrs of 1st sale
2. (6)(b): If resale involuntary, & 1st sale b/f
threat/imminence of conversion, N/A
iii. S: § 1001 determines G for initial seller
SALE OF DEPRECIABLE PROP TO RPs
A. GR: here, can NOT use installment method. (g)(1)
i. (g)(3): “RPs” defined by § 1239…
B. RPs - § 1239
i. (a), (b): can NOT use installment method w/
sale b/t TP and…
1. (1): controlled entity (TP owns > 50% of
stock);
2. (2): trust w/ TP or spouse as beneficiary;
3. (3): executor & beneficiary of an estate
ii. § 267: family member defined
C. PP: deter abuse whereby RP gets stepped up basis
for dep b/f seller must recognize G (recycling dep)
i. Rule N/A where FIT avoidance not a principle
purpose. (g)(2).
X.
SPECIAL RULES FOR NON-DEALERS - § 453A &
PLEDGING
A. (d)(1): If installment oblig pledged as security, loan
proceeds treated as pmt of obligation, triggering G.
B. (d)(3): later pmts disregarded up to aggregate amt of
deemed pmt.
C. (a)(1), (2): if installment pmts > 5 mil, must pay
gov’t int on tax deferred
i. Determined w/ max tax rate. (c)(3).
D. (b)(1): SP must > 150K.
XI.
INSTALLMENT OBLIG & LK EXCHANGES
A. I: LK exchange, receive installment oblig as “boot”
B. § 453(f)(6):
i. LK prop NOT treated as pmt; AND
ii. Total K price does NOT include LK prop, &
GP  amt of G not recognized by LK exchange
C. Basis Calculation
i. 1st allocate to LK prop rec’d (but not > FMV),
w/ remaining basis used to determine GP ratio
ii. See example p. 999-1000
D. TP should get nonrecognition treatment on LK
exchange
XII.
ii. (a)(1): include daily portions of OID for each
day TP held DI
iii. (a)(2): N/A to…
1. Tax exempt obligations;
2. US savings bonds;
3. DIs w/ fixed terms of 1 yr or less;
4. Oblig issued by NPs b/f 3/2/1984;
5. Outstanding loans b/t NPs < 10K, not
issued in lender’s T/B, not for tax avoid
6. 1272(a)(1)(E)
7. See Problem 2
iv. (c)(1): N/A to bonds bought at premium, amt >
principal amt
v. (a)(3): Determine Daily Portions of OID
1. Yield to Maturity = Constant IR * IP,
compounded at least annually
2. KIM: if semi annually, ½ iR & apply
ratably per day
C. Deduction of OID
i. §163(e)(1): Interest – OID
ii. PP: match int inc & XP by placing Ps on
accrual basis w/r/t int
iii. Issuer of instrument has debt expense = to daily
portions of OID
D. G/L on Sale, Exchange, or Retirement
i. GR: amts rec’d on DI retirement treated as amts
rec’d on an exchange. § 1271(a)(1)
1. If bond CA, generates G/L via AR -- AB
2. If DI held as CA, gain is GG
ii. § 1272(d)(2):  in AB of bond when OID
included in inc
iii. § 1272(a)(7): daily OID portions  to acct for
premium & eliminate built-in loss/excess OID
E. Market Discount
i. See hypo in outline
ii. § 1276(a)(1) & (b)
ANALYSIS FRAMEWORK
A. Qualify for § 453?
i. Payment past 1st year?
ii. Any exclusion?
B. Apply GP ratio to each pmt
i. GPR = GP / Total K price
1. GP = Gain
2. K Price = AR
ii. GPR * Yearly Pmt = Yearly Inclusion
iii. Ensure recovery of basis
CH. 43 - OID: §§ 1271 - 1275; § 483
I.
II.
INTRODUCTION
A. I: how to deal w/ TVM
i. IRC: impute int equivalent (OID) if debt
instrument doesn’t bear adequate int rate
ii. Such int currently included in income
B. Topical Preview
i. Calc / trtmt of OID on DIs issued for cash or
prop ( §§ 1271-1275)
ii. “” of “unstated int” on certain deferred-pmt
sales of prop (§ 483)
C. See hypo in outline
D. Compounding of Interest
i. Today: both Ps put on accrual method for OID
purposes, but reject ratable for econ accrual
ii. W/ compound int, apply int rate to sum of…
1. Amt originally loaned; PLUS
2. Any int on debt accrued but not yet paid
iii. BP: more rapidly compounded, greater total
amt of int earned
1. As compounding freq , iR must  to earn
same total int over same time period
OID: DEBT INSTRUMENTS ISSUED FOR CASH
A. Determining Amt of OID
i. Must know four things…
1. Redemption price
2. Maturity date
3. Issue price
4. Interest rate
ii. §1273: Determination of Amt of OID
1. (a)(1): OID = Stated Redemption Price –
Issue Price
2. (a)(2): SRP = all pmts & unqualified
stated interest
3. (b)(2): IP = public offering price
4. (a)(3): OID = zero, if OID < ¼ % of SRP
* yrs to maturity (de minimus rule)
a. Ex: 102 SRP, 100 IP.
iii. See examples, p. 1048-49
B. Current Inclusion of OID - § 1272
i. GR: DI holder w/ OID must currently include
earned portion
III.
OID & UNSTATED INTEREST: DIs ISSUED FOR
PROP
A. Overview
i. Incentive to  IRs
1. Seller: higher SP w/ lower iR = extra CG,
r/t int inc
2. Buyer: if prop dep, higher SP = add’l
basis to dep, r/t int XP
ii. If sell on deferred pmt basis, Ps must provide
adequate int on unpaid balance; if not, imputed,
& nominal SP adj to acc’t for unstated int
1. Statutorily set price of prop
2. “” appropriate iR
iii. N: must acc’t for int accrual AND prop
disposition
B. Determining IP Under § 1274: Inadequate Stated Int
i. (c)(1): § 1274 applies if…
1. DI given up for S/E of prop;
2. Stated RP > IPA; AND
3. Some or all pmts due > 6 mos after sale
ii. § 1273(b)(3): when publicly traded, IP = FMV;
if not publicly traded, consult § 1274…
iii. (d)(2): use Test Rate, e.g. lowest AFR in 3
month period…
1. Ending w/ month S/E occurs; OR
C.
D.
E.
F.
G.
2. “” have binding written K for S/E
iv. (a): If NO adeq stated int, 0% IR surely
inadequate, IP = imputed principal amt of note
1. (b)(1): IPA = total PVs of all pmts due
under such DI
2. PV: discount pmts to sale date using
compounding period & test rate
Determining IP Under § 1274: Adequate Stated Int
i. (c)(2): stated int adeq ONLY if note’s IPA > or
= SPA
1. Here, re-characterization of principal as
int unnecessary, b/c sufficient int charged
2. N: if some int, but not adequate, will  RP
ii. BP: Ps stated int IS treated as int, but relabeled
OID, & currently included in inc. § 1272(a)
Adeq Int Charged & Paid Currently
i. Here, NO OID. § 1273(a)(1)
ii. Likely, NO adj to IP & RP.
Exceptions - (c)(3)
i. Sales of farms under 1 mil. (A)
ii. Sale of PR. (B)
iii. Sale for DI where total pmts < 250K. (C)
Unstated Interest: §483, When Sales < $250K
i. Imputed int here is called “unstated int”
ii. Unlike OID, int included in inc under TP’s
regular acct’g method
1. Ex: $ method includes upon receipt
2. N: mismatch if issuer accrual & holder $
iii. § 483(c)(1) - Unstated Int?
1. Deferred pmt, e.g. on acc’t of S/E due > 6
mos later, & at least 1 pmt due > 1 yr after
sale
2. Total unstated int under K?
a. = Total deferred pmt under K -- PV
of such pmts & any int pmts due
b. PV determined w/ test rate
iv. De minimus: N/A to sales < 3K
Special Rules
i. Cash Method Election of § 1274A - $2M Rule
1. (c)(1): may elect to apply $ method rules
2. (c)(2): election requires…
a. Qualified DI;
b. NOT new § 38 tangible personal
prop;
c. Stated principal < 2 mil;
d. Seller not on accrual method;
e. Prop sold not dealer prop;
f. § 1274 o/w applicable;
g. Seller / buyer jointly make election
3. S: seller reports unstated int under § 483
as inc as pmts made; buyer ded int as paid
ii. IR Limit on Qualifying Sales of $2.8M or Less
1. § 1274A(a): w/ any qualified DI, discount
rate limited to 9% semiannually
2. Qualified DI: SPA < 2.8 mil & prop not
new § 38 prop. § 1274A(b)
iii. IR Limit on Certain Land Transfers in Family
1. § 483(e)(1): w/ unstated int calc, max DR
is 6%, compounded semiannually
2. § 483(e)(3): rule N/A if calendar yr sales
> 500K
iv. Personal Use Property (not T/B/I)
1.
2.
IV.
§ 1274 & 483 N/A to obligor on deferred
pmt sale here
Deduct OID when paid, not when accrues
FORCED MATCHING
A. § 83: must include pmt for services currently, unless
substantial risk of forfeiture
B. Ex: signing bonus, but lose if leave w/in 2 years
i. Accrual method e’er  deduct in 1st year
ii. E’ees basis = FMV @ inclusion; may defer, but
may end up including more (if FMV ); can
elect to include earlier (smart if IPO start up)
C. Intentional Mismatching  Retirement Savings
CH. 37 - TAX CONSEQUENCES OF DIVORCE - §§ 71,
215, & 1041
I.
OVERVIEW
A. § 71: alimony rec’d included in income
B. § 215: alimony paid deductible by payor (ATL)
C. § 1041: prop transfers b/t spouses & former spouses,
incident to divorce, are nontaxable
D. PEs for dependent children of divorced parents, &
proper filing status post separation/divorce
E. I: who is proper TP, now that familial unit not intact
i. PP: b/f divorce, tax borne by single econ unit;
now, must allocate b/t Ps w/ adverse int
II.
ALIMONY: GENERAL REQUIREMENTS
A. § 71(b)(1): Any pmt in cash…
i. (A) made to spouse or on behalf of spouse;
1. Rev. Rul. 67-420: pmts to 3rd Ps may be
o.k., e.g. mtg w/ 1 spouse still living there
ii. (A), (2) rec’d by spouse under written K;
1. N: oral K not enough, need meeting of
minds / mutual assent. Ewell
iii. (B) divorce K does not say includible in GI by
payor, & not deductible by payee;
iv. (C) If legally separated, not living in same
house when pmts made;
1. PP: fight “tax divorces” to avoid
“marriage penalty”
v. (D) pmts end on payee’s death;
1. PP: prevent disguised prop settlements
2. T:
a. Unambiguous condition to terminate
b. If non, K as a whole?
B. 3rd P Pmt on Behalf of Spouse
i. Ex: rent, mtg, utilities
ii. BUT… if TP still on mtg…
1. ½ pmt alimony, other ½ not;
2. ½ deductible, other ½ gets home mtg ded
iii. Term LI with FS as beneficiary
1. Reg. 1.71: NOT alimony, unless FS owns
policy
C. Planning Considerations
i. GR: default more advantageous (payee in lower
tax bracket, better to stack inc here)
ii. H/w, Ps can agree o/w
iii. Incentives often adverse, create later problems
III.
IV.
V.
VI.
VII.
CHILD SUPPORT
A. 71(c): NOT deductible / NOT includible
i. PP: pre-existing parental support responsibility;
not terminated by divorce
B. Temp. Reg. § 1.71-T(c):  in alimony which really
is child support
i. If  w/in 6 mos of maj age, presume  is in CS
EXCESS FRONT-LOADING - § 71(f)
A. Why? Accelerate ded currently
i. Trigger: big drop off b/t post sep yrs 2 & 3
ii. Unless pmts relatively small, won’t be alimony
iii. “Excess” alimony recaptured in next yr, e.g. tax
trtmt reversed (payor includes, payee deducts)
B. § 71(f): recapture can be in 1 yr only, e.g. “3rd post
separation year,”
i. (6): Excess pmts determined in 1st, 2nd, & 3rd
post separation yrs
ii. See problem 3
C. Exceptions - § 71(f)(5)
i. Payee spouse remarries or either spouse dies
D. Analysis Framework
i. (f)(4): 2nd PS Yr Pmts -- (3rd PS Yr Pmts + 15K)
ii. (f)(3): 1st PS Yr Pmts -- [((2nd PS Yr Pmts -(f)(4) Excess) + 3rd Yr Pmts) / 2]
iii. Total excess recaptured in Yr 3
DEPENDENCY EXEMPTION - § 152
A. Parent w/ custody for > part of year ordinarily gets.
(a)(1), (c)(1)(B),(c)(4)(b)
B. (e)(1): Requirements
i. Parents satisfy divorce/ separation req
ii. Provide > ½ child’s support (days, not $)
iii. Have custody > ½ year
C. Planning Considerations
i. If non-custodial in higher bracket, may be smart
ii. Need written agreement attached to return
1. Prevents argument / gov’t whipsaw
2. Bargaining chip, e.g.  CS!
FILING STATUS
A. Either file single OR HoH
B. Determines tax rate
C. Head of Household
i. Defined in § 2(b)
1. Not married
2. Not surviving spouse
3. Principal place of abode for qualifying
child / dependent
4. Pay ½ costs
ii. N: if give up §152 exemption, do not lose status
PROPERTY TRANSFERS - § 1041
A. (a), (b): No G/L recognition; transferee assumes
transferor’s basis; L carryover in AB
i. PP: in effect, transfer w/in single econ unit, &
t/f, should not be taxed
ii. Also catches “transfers incident to divorce”
1. T: closeness in time
B. RE: any time $ rec’d
VIII.
IX.
SPECIAL RULES REGARDING PR - §121(d)(3)
A. (A): tacking ownership period allowed.
B. (B): “” use “”
C. N: exclusion amt determined by filing status
LEGAL XPs - DEDUCTIBLE?
A. T: origin of the claim (NOT consequences)
i. See Gilmore, problem 6
B. Misc ID for tax preparation/planning
i. Amt for divorce deductible subj to 2% AGI
limitation
ii. Bifurcate out tax advice & rep in divorce
C. FS’s attorney fees
i. § 212 XP to generate inc, tax advice
D. TP paid attorney fees for former spouse
i. As long as terminates at death
E. TP’s own attorney’s fees - Bifurcate
CH. 35 - THE KIDDIE TAX - §§ 1(G), 63(C)
I.
INTRODUCTION
A. Joint Returns: families share resources, e.g. split inc
i. H/w, kids file own return as separate TPs
ii. Rich parents incentivized to give kids (taxed at
lower rates) inc generating assets
B. “Kiddie Tax” - subst. eliminates benefits of incshifting to child subject to tax (“covered child”)
i. § 1(g): tax “net unearned income” of covered
child at top marginal TR of parents (unless
child in higher bracket)
1. Earned: personal services inc (still taxed
at child’s ordinary rate)
2. Unearned: inc from prop transferred by
parents, & also that from any others
(overbroad)
3. N: also catches unearned inc from assets
child acquired w/ OWN earned income
II.
KIDDIE TAX APPLIED
A. § 1(g)(2) - Applies Too…
i. (A)(i): Kids not 18 by close of tax year
ii. 2007 Amendments: also applies to child if…
1. Attained age 18 by close of tax yr, but not
yet 19, or is full-time student under 24
((A)(ii)(I) & § 152(c)(3)); AND
2. Earned inc NOT > ½ child’s support
((A)(ii)(II))
iii. Further, will NOT apply UNLESS child…
1. (B) has at least 1 living parent; AND
2. (C) NOT married filing jointly.
B. Special Provisions
i. § 63(c)(4): SD adj for inflation
ii. § 63(c)(5): for dependents whose § 151 ded
avail to another TP, SD limited to…
1. (A) $950 in 2010; OR
2. (B) $300 + earned income
iii. § 151(d)(2): if dependent’s § 151 ded avail to
another TP, dependent can NOT claim PE
C. Tax Imposed - § 1(g)
i. (1): Greater of…
1. Tax imposed w/o/r/t § 1(g); OR
2. Sum of…
Normal tax if child’s TI  by net
unearned inc; AND
b. Child’s share of “allocable parental
tax.”
ii. (4): Net Unearned Inc: UI -- sum of…
1. Limited SD ($950); AND
2. > of 2nd SD, or ID directly connected w/
UI
3. N: typically, child’s UI, minus 2 * ltd SD.
4. N: Can NOT exceed TI. (b).
iii. (3)(A)(i): Allocable Parental Tax: tax at
marginal parental rate of all NUI of all
applicable children.
1. N: if have multiple children, allocate
amongst them based on share of UI inc
a.
CH. 19 - MOVING, CHILD CARE, & LEGAL
EXPENSES - §§ 217, 21,
I.
MOVING EXPENSES
A. Contrast w/ §162
i. Here, not already in T or B, t/f 162 deduction
NOT available
B. § 217 - Moving XP
i. Preliminary Requirement
1. (a): Incurred “in connection w/
commencement of work”
2. Reg. 1-217-2(a)(3)(i): Must bear “R
proximity in both time & place”
ii. (c)(1): New work at least 50 miles further than
old residence was from work
1. PP: ensures moved for B purpose; o/w,
would cover simple moves
2. N: if don’t have commute, just 50 miles
from residence
3. N: can’t get over threshold by taking
scenic route (anti-abuse)
iii. Timing Requirement
1. (c)(2): Must be full time ee’ in gen local
of new work for > = 39 weeks during year
following move
2. (d)(1): wavier of timing req in case of…
a. Death
b. Disability
c. Involuntary separations from work
C. What’s Deductible?
i. Cost of transporting TP and other household
members and belongings
ii. R cost of lodging in route
1. Reg. 1.217-2(b)(4): all family members
NOT required to go together, but must…
a. Have been living in old house
b. Plan to live in new house
D. NOT Deductible
i. 2 month stay in hotel awaiting move
ii. House hunting XP
E. E’er Reimbursement
i. § 82: Moving XP reimbursement GI
ii. § 132(a)(6): exclusion for qualified
reimbursement XP (e.g. everything but hotel)
1. (g): exclude or deduct, but not both
II.
CHILD CARE EXPENSES
A. Personal & B Elements
i. Allows parents to not go insane, and to work
ii. H/w, still have personal obligation to children
iii. I: how do you divvy b/t two?
B. Credits in General
i. Ded: subtract from GI; value is  in overall inc
subj to TR, t/f value connected to TR
1. Up-side-down effect: > value to TP’s in
higher inc bracket
2. Solution: credit r/t deduction
ii. Credit: $ for $  of tax liab
1. NOT f(x) of TR, unless made specifically
related by code §
2. Neither progressive nor regressive, b/c
regardless of TR, get exact same benefit
iii. Refundable v. Nonrefundable Credit
1. Non-Refundable:  TL $-for-$ down to 0,
but NO refund of excess credit (e.g. § 21)
2. Refundable: “”, then get leftover as refund
C. § 21 - B / Employment Related Child Credits
i. Credit for certain CC XPs allowing parent to be
gainfully employed
1. Progressive, b/c  as GI 
2. Requires…
a. Dependent children below age 13
b. Employment related expense
3. Dollar limitations
ii. 152(a)(1): dep is qualifying child or relative
1. (C)(1): Qualifying Child
a. (A) Indiv who bears relationship w/
TP described in (2);
b. (B) Has same principal place of
abode for more than ½ of year;
c. (C) Not attained age 19, or student
not attained age 24
d. (D) Who has not provided over ½ of
their own support
e. (E) Who has NOT filed joint return
w/ spouse
2. What a/b elderly parent? Yes, if…
a. Physically / mentally incapable of
self-care; AND
b. Has same home as TP
iii. 21(b)(2): employment related XP
1. Overnight camp NOT
2. Can have outside of home if…
a. Qualified individual;
b. Spends 8 hrs a day in HH;
i) Catches those who go to
assisted living every day
c. Day care must be qualified / licensed
iv. (c): 3K max for qualifying child; 6K if have > 1
1. H/w, credit phases  as income 
a. Joint return: ltd to lesser of incomes
v. Computation
1. Qualifying XP * % available to you
2. % starts out at 35% if TP’s AGI > = 15%;
gets  by one % point for every 2K  in
AGI. 21(a)(2)
vi. Analysis Framework
1. Which children qualify?
2.
3.
4.
5.
III.
a. Age restrictions
b. NO allocation to non-qualifying
Which XPs qualify?
a. Watching kids / chores during work
b. Summer time baby sitting
c. NO wilderness outings
d. Day camp?
e. If primarily to see relatives, NOT
f. 21(e)(6): prohibits paying child
Amt limitations
Percentage exclusion?
E’er reimbursed?
LEGAL EXPENSES
A. Standard:
i. Origin of the claim; did the claim originate in a
personal XP or a T/B?
1. If personal  NO deduction
2. N: success of claim/defense NOT
relevant; use of B’s lawyer also irrelevant
3. N: if Corp brings claim, presume ONLY
has T/B persona
B. See Gilmore
C. See Problem p. 471
D. See artist w/ mental health issues hypo
E. See wreck on route to Tupelo for deposition hypo
E. N: can’t argue gift here, b/c given for past services
II.
§ 117: SCHOLARSHIPS
A. Qualified edu XP NOT included in GI up to amt of
qualified XP incurred
B. Must be candidate for degree
C. Must be amts used for qualified tuition & XP
i. Tuition & fees
1. Books / supplies
ii. Equip req for education
D. Ex: 10K scholarship, 8K QE, 2K taxed
III.
CASE LAW
A. McCoy v. Comm’r
i. E’ee gift FMV reported as GI, NOT cost to e’er
1. GR: retail rather than wholesale
ii. N: basis may be issue for fact finder
B. Bingler v. Johnson
i. Compensation for services NOT given
scholarship trtmt
C. See problems
CH. 18 - EDUCATION EXPENSES
I.
DEDUCTIBILITY OF EDUCATIONAL XPs UNDER
§ 162
A. Gen., NOT deductible b/c courts consider personal.
Carroll v. Comm’r.
B. H/w, deduction allowed if edu either…
i. Maintains or improves skills required indiv’s
T/B; OR
ii. Meets legal req imposed by law as condition of
doing work of type performed by TP
C. Clearly Deductible
i. Already lawyer, have continuing education req.
ii. If required to take 12 hrs every yr, deductible.
D. Blurry Ground
i. Maintain skills, but prepare you to enter new
T/B
ii. If incurred to meet the min req of NEW T/B,
NOT deductible. Reg. 1.162-5(a) &(b)
II.
EDUCATION TAX INCENTIVES
A. Hope Scholarship Credit - § 25A
i. NR 100% credit on 1st 1K of “qualified tuition
& related XP” & 50% credit for next 1K.
(b)(1)(A), (B)
ii.  by scholarships excluded from GI & certain
forms of educational assistance (e.g. grants).
(g)(2)
iii. Must be enrolled on at least a ½ -time basis at
qualified edu institution. (b)(2)(B), b(3), (f)(2)
iv. Can be taken only for 1st 2 years of postsecondary edu, and no more than twice by one
student. (b)(2)(A), (c)
v. Disallowed if student convicted of federal or
state drug offense. (b)(2)(D)
vi. Determined on a student by student basis.
(b)(1)
B. Lifetime Learning Credit - § 25A
i. NR credit of 20% of up to 10K of “qualified
tuition and related XP” paid by the TP. (c)(1)
CH. 7 - SCHOLARSHIPS & PRIZES - §§ 74, 117
I.
§ 74 - PRIZES & AWARDS
A. Generally, GI includes prizes and awards.
i. Issue: how much?
ii. Rule: FMV
1. Willing buyer, willing seller, each party
knowing all material facts
B. (b): Exception
i. Prizes/awards in recognition of religious,
charitable, scientific, educational, artistic,
literary, or civic achievement; AND
ii. You give the prize away to charity.
iii. N: If not in recognition of above, prize gets
taxed (but can take charitable ded)
C. (c): Exception for E’ee Achievement Awards
i. Will NOT be taxed except for amt above which
e’er can deduct.
D. § 274(j): E’ee Achievement Awards
i. (2): Deduction Limitations
1. 400 Limit if NOT qualified plan
2. 1600 Limit IF qualified plan
a. Formal, e.g. every 20 yrs, watch
b. Established / written; doesn’t
discriminate in favor of highly paid
c. E’er can deduct cost; e’ee can
exclude FMV
ii. (3)(A): tangible personal prop which is…
1. Transferred from e’er to e’ee for lengthy
service or safety;
2. Part of a meaningful presentation;
3. NOT disguised compensation.
iii. (4)(B): Length of Service Awards
1. Only allowed every 4 years
ii. Creditable edu XP  by scholarships excluded
from income & certain forms of educational
assistance (e.g. grants). (g)(2)
iii. Unlike Hope Scholarship, can take each yr of
undergrad & grad
iv. Qualified Tuition and XP does NOT included
books, R&B, student activity fees, etc.
(f)(1)(C)
v. If student dependent on parent’s tax return, they
take the credit.
vi. NOT determined on student by student basis.
(c)(1)
iii. R: NO; must be firmly established in T/B
iv. A: ongoing endeavor to be tax specialist
C. Furner v. Comm’r
i. Teacher left job to go to grad school
ii. I: deductible?
iii. R: YES; deductibility not contingent on
whether or school interrupts carrying on T/B
iv. A: must analyze XP in context of T/B in Q
v. Rev. Rul. 68-591: suspension of employment
for year or less ordinarily considered
temporary.
DEFERRED COMPENSATION
III.
IV.
DISTINGUISHING CHARACTERISTICS OF
COVERDALL & 529 PLANS 4/26
A. Tuition, books, fees, supplies, equipment, R&B w/
½ limits
B. Coverdall: college, post secondary, & pre edu (e.g.
private school)
i. Like IRA, but for education
ii. Beneficiary must be under 18, or have special
needs
iii. Limit on what can be contributed each year (2K
per beneficiary); must be in $
iv. PO: AGI over 110K if single, 220K if married;
over these amts, can’t contribute
v. Amts must be paid out when child reaches age
30
1. If use for non-edu XP, taxed on earnings,
but not on contrib. amounts; 10% penalty
2. Can roll over for another child
vi. S: MUST use if need for primary of presecondary; o/w, 529 much better
C. 529 Qualified Tuition Plans:
i. ONLY available for post-secondary
ii. Initially offered only be states
iii. Basically, tuition pre-pmt plans
iv. Two Types:
1. State plan: restricts were kids can go to
school
2. Qualified: more like Coverdall, but
specifically for higher edu
v. Benefits:
1. Don’t have Coverdall limits, e.g. no PO
a. Still, h/w, contributions not
deductible
b. Earnings are tax free
2. Can roll over for family member (broad)
CASE LAW
A. Takahashi v. Comm’r
i. Science teacher goes to Hawaii
ii. I: deductible?
iii. R: NO; O & N B XP only if education…
1. Enhances skills req by indiv in his trade;
OR
2. Meets express req of indiv’s e’er
3. TP has BoP
iv. A: trip’s content NOT rationally related to T/B
B. Wassenaar v. Comm’r
i. Attny wants deduction for LLM
ii. I: deductible as O & N if TP not yet practiced?
I.
UNQUALIFIED DEFERRED PLANS
A. Ex: promise to provide something in future, like
stock
i. NOT includable nor deductible
B. Funded deferred
i. Putting $ in account that can NOT be touched
C. § 83
i. Transfer of prope for services is GI UNLESS
there is substantial risk of forfeiture
ii. E’er can leave them completely unfunded; e’ee
stuck relying on GF & solvency of e’er
II.
TWO TYPES
A. Unfunded: promise to pay in future (no tax
consequences); no accession to wealth, RE, etc.
i. Problem: risk of non-pmt; depends on whether
e’er new start up or blue-chip
ii. E’ee taxed on receipt or constructive receipt
1. Constructive: can’t turn back on income
available, unless do b/f earned, & inc for
fixed period of time
2. Substantial risk of forfeiture: 409A
B. Funded
i. E’ee taxed when $ set aside on their behalf
1. But, $ method TP doesn’t usually have inc
until receipt
ii. Economic Benefit: there when $ set aside for
e’ee; t/f, tax when $ set aside for e’ees benefit
iii. Ex: e’er puts $ in trust, e’ee eventually gets
payout
1. E’er gets deduction in same year
2. Led to Rabbi Trusts
iv. Rabbi Trusts
1. E’er sets aside $ in trust, e’ee entitled to
everything put in, plus earnings, BUT…
subject to claims of creditors
2. TP: substantial risk of forfeiture, t/f no
inclusion when monies set aside
3. I: how significant is risk of forfeiture?
A/g, depends on e’er’s status
III.
409A - INCLUSION IN GI UNDER NQ PLANS
A. Trigger: w/ Rabbi plans, high level mgmt e’ees
quitting so get payouts b/f creditors show up
i. Solution: penalty, but better than being
unsecured creditor of e’er
B. Rule: unless meet req, current inclusion…
i. Redefines substantial risk of forfeiture
C.
D.
E.
F.
G.
IV.
ii. Also, accounts for past years inc, to extent not
included
(a)(2) Distributions: can’t distribute earlier than…
i. (i) Separation from service
1. N: special rule for certain e’ees (top hat),
who must wait 6 months after separation
ii. (ii) Disability;
iii. (iii) Death;
iv. (iv) Specified time;
v. (v) Change of ownership;
vi. (vi) Unforeseen emergency (defined narrowly)
(a)(4) Elections
i. Must defer earlier than other plans, and must
for long period of time
(3) Acceleration of Benefits
Funding
i. E’er: subject to creditors
1. But … prohibitively expensive for
creditors to grab
2. (b)(1): can no longer set aside in foreign
countries so that creditors can’t get
ii. § 83: compensation for services (prop transfer)
included by e’ee at time of transfer
1. UNLESS have substantial risk of
forfeiture
2. § 409: being subject to gen. creditors
NOT a substantial risk of forfeiture
a. Can’t just move $ out of US
b. “” make pmt so easy that not at risk
Do Rabbi Trusts still work?
i. Yes, but must meet 409A requirements
1. Can’t transfer outside of US, broadly
available at e’ee’s election, etc.
HOW DO THESE PROVISIONS FIT TOGETHER?
A. § 83 Funded: Must include, unless substantial risk
of forfeiture
i. $ very available to TP; included once SRF
lapses
ii. Options: e’er gives e’ee option to purchase
stock (no susbt. risk of forfeiture)
1. Include FMV at time of grant?
2. T: transfer of property taken place?
3. Very mobile; easy to value  “Readily
ascertainable value”
a. Rare, b/c if not publicly traded
option, harder to adjust
b. In gen., if not readily ascertainable,
transfer doesn’t happen till exercised
4. Ex: e’er grant $50 option; § 83 NOT
triggered, b/c no transfer of property
a. When exercise, FMV is 75, NOW
have a transfer of prop
b. Must include in GI 75 -- 50 = 25 OI
iii. N: Generally, does exercise of option trigger
gain?
1. NO; buying stock not recognition event;
just completing purchase
2. Basis = option price + purchase “”
3. No gain recognition until dispose
iv. N: what if sale option? GI = SP -- OP
B. “Unfunded Plans:” not taxable to e’ee until receipt,
or constructive receipt
i. Constructive receipt: 409A 
1. Unless meets these req, current inclusion
(e.g. looks pretty funded to us)
2. S: tells when e’ee includes
ii. 404(a)(5): anything NOT a qualified plan
1. Can’t deduct until e’ee includes (forced
matching)
2. S: tells when e’er deducts