8/29/2010 11:02:00 PM
1.
E
XPLAIN SIGNIFICANCE OF THE CHARACTER OF GAIN AND LOSS
 Preferential tax rates applied to LTCG
 Limitation on the Deduction of CL
2.
I
DENTIFY
C
APITAL
A
SSETS
§1221(
A
) P
ROPERTY HELD BY
TP, BUT NOT,
 1. Stock in trade, inventory, or property held by TP primarily for sale to customers in the ordinary course of T/B
 2. T/B Real property (non-depreciable) or T/property eligible for
§167 T/B deductions
 3. Copyright, a literary/musical/artistic composition held by o TP who created the property or o IF a letter/memo TP for whom is was made or o TP who takes the same AB as the creator, gift
 4. Accounts receivable acquired in ordinary course of T/B
 5. FG publication
 6. Commodities held by commodities dealer
 7. Hedging Transactions
 8. Supplies regularly used by the TP in the ordinary course of a T/B
3.
C
HARACTERIZE GAIN OR LOSS IN ANY GIVEN SITUATION
: P
ROBLEMS
 I: What constitutes inventory, Property Held Primarily for Sale to
Customers in the Ordinary Course of the T/B
 R: Balance of factors under Bynum o Frequency and substantiality of sales o Improvements made to the land o TP’s solicitation and advertising efforts o Utilization of real estate brokers and agents
4.
R
ECOGNIZE
OI
SUBSTITUTES
,
UNDER
H
ORT
& D
AVIS
 Lease buyout, where disputed amount was essentially a substitute for rental payments which are GI; must be regarded as OI.
 N: Lottery payments too. Sale of rights to payments is OI not CG
5.
R
ECOGNIZE
C
ORN
P
RODUCTS PROPERTY
 Corn Products: TP protected self from price increases by buying
“futures” whenever the K price was favorable, treated as OI

o H: Preferential treatment of §1221 applies to transactions of property which are not the normal source of business income o N: TPs were using the holding of Corn Products to take ordinary losses on holdings that had a dual purpose: Stock assuring a source of supply AND investment
 Arkansas Best: TPs used the Corn Products doctrine to avoid characterization of stock losses as capital losses o H: Narrow Corn Products to simply a broad reading of the inventory exclusion of §1221 o S: Buying stock in companies is buying a capital asset, so its a capital loss
6.
C OMPUTE A TP’ S NET CAPITAL GAIN AND ADJUSTED NET CAPITAL GAIN
 Preferential rates only apply when TP has Net CG (§1211(11)) o Net CG: Excess of Net LTCG over Net STCL o Net LTCG = LTCG – LTCL o Net STCL = STCG – STCL
 STCG are subject to OI rates
7.
E XPLAIN THE OPERATION OF §1( H ) AND IN PARTICULAR THE VARYING MAX
RATES APPLICABLE TO THE VARIOUS COMPONENTS OF NET CAPITAL GAIN
Components of Net CG: 28%, 25%, 15% a. 28% Rate Gain: Collectibles Gain and §1202 Gain
 N: IF TP OI rate bracket is lower than 28%, the CG gets OI rate
 Collectibles gain (§1(h)(5)): gain from sale/exchange of any rug, antique, metal, gem stamp, coin, or other collectible under
§408(m), which is a capital asset held for more than one year
 §1202 gain: 50% of the gain from the sale/exchange of certain stock under §1202 b. 25% Rate Gain: Unrecaptured §1250 Gain
 Unrecaptured §1250 gain: LTCG attributable to depreciation allowed w/r/t REAL ESTATE (Buildings) held for more than 1 year. §1(h)(6)
 Any time TP sells depreciable real property at a gain, TP must determine how much of gain constitutes unrecaptured §1250 gain c. 15% Rate Gain: Adjusted Net CG
 Leftover CG
d. Qualified Dividend Income: §1(h)(11)(B)
 Included in NET CG computation, dividend income increases NET CG

 Taxed at 15% even if there is no NET CG
 Its not a CG, not gain from sale or exchange of a capital asset
 Cannot be used to offset capital losses
8.
E XPLAIN THE TAX PREFERENCE AFFORDED QUALIFIED SMALL BUSINESS STOCK
HELD MORE THAN 5 YEARS
 §1202: Partial Exclusion for Gain from Certain Small Business Stock o Exclusion from gross income of 50% of the gain from the sale or exchange of qualified small business stock held for more than five years.
9.
C OMPUTE THE AMOUNT OF CAPITAL LOSS WHICH MAY BE DEDUCTED BY A TP IN A
GIVEN TAXABLE YEAR
 STCL: First applied to reduce STCG, any net STCL is then applied to
28% net gain property, then 25% then 15%
 LTCL: First applied to property in the same category, then apply to the next highest category
 Limitation on Deduction of CL: §1211(b) To the extent that CL exceed CG, up to $3k may be deducted, offset OI. o 1211 is NOT a deduction granting provision o 165(f) permits CL to be deducted to extent of 1211 o 165(c)(2) permits deduction on loss of sale of stock as transaction entered into for profit
 §1212(b) Losses that could not be used will be carried over
10.
C
OMPUTE THE AMOUNT OF CAPITAL LOSS CARRYOVER AND DETERMINE THE
LONG OR SHORT
-
TERM CHARACTER OF THE CAPITAL LOSS CARRYOVER
 Problems
11.
A
PPLY THE
A
RROWSMITH RULE
 IF you have a transaction in this year that is related to previous transaction it is legitimate to look at the characterization of the transaction in the previous year o H: In the previous year, it would have been a capital gain/loss transaction. So deduction is going to be a capital loss
 S: Gains/losses generated as a result of a transaction covering more than one year may be characterized as CG/CL even though technically the sale/exchange requirement may not be met
12.
R: D
EDUCTION FOR CAPITAL LOSSES IS AN
ATL
DEDUCTION UNDER
§62
 AMT Implications???

13.
IMPACT OF CAPITAL GAINS AND LOSSES ON THE TAXABLE INCOME OF A TP
 Sale or exchange requirement: broad meaning o Satisfaction of a bequest with appreciated property o Abandonment of unimproved real estate subject to a nonrecourse mortgage exceeding FMV is a capital loss o Owner’s conveyance of land by quitclaim deed o §165(g)(1) IF any security which is a capital asset becomes worthless, shall be treated as sale/exchange of a capital asset o §1271(a) Amounts received on the retirement of a debt instrument shall be treated as received in exchange for that instrument o §1231 property, involuntary conversions may get sale or exchange treatment
 Holding period o LT must be held for more than one year

8/29/2010 11:02:00 PM
1.
G AINS AND LOSSES ARE CHARACTERIZED UNDER §1231, IT IS NOT A
DEDUCTION GRANTING PROVISION
 Deductions are granted under §§165, 167 and 179
 Deductions disallowed under §267
2.
T YPES OF PROPERTY AND TYPES OF DISPOSITIONS TO WHICH §1231 APPLIES
 Applies to sale or exchange or involuntary conversion of o Involuntary conversion includes theft, seizure, destruction, or threat or imminence of condemnation
 Real or depreciable property used in T/B OR o any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit
 Essentially property that is included in §1221(2), so no inventory
3.
N ETTING PROVISIONS OF §1231 AND HOW THEY ARE FAVORABLE TO THE TP
 Once TP has identified all of TP §1231 gains and losses for the year, compare total §1231 gains to total §1231 losses o If gains are greater than losses then its CG o If gains are less than losses then its ordinary loss a. The SUB Netting Process
 In the case of any involuntary conversion arising from fire, storm, shipwreck, or other casualty, or from theft, of any— o (i) property used in the T/B, or o (ii) any capital asset which is held for more than 1 year o AND is held in connection with a T/B or a transaction entered into for profit, o N: Does NOT include condemnation
 IF Gains exceed the Losses THEN put assets in the REG Netting
 IF Losses exceed the Gains THEN these assets are ordinary o TP will deduct losses as ordinary under §165 or other; and gain reported under §61 b. The REG Nettting Process
 GAINS EXCEED LOSSES – IF 1231 gains for any taxable year, exceed 1231 losses for such taxable year, THEN o such gains and losses shall be treated as LTCG or LTCL
 GAINS DO NOT EXCEED LOSSES – IF 1231 gains for any taxable year, do NOT exceed 1231 losses for such taxable year, THEN

o such gains and losses shall not be treated as LTCG or LTCL
4.
O PERATION OF §1231( C ) RELATING TO R ECAPTURE OF N ET O RDINARY L OSSES
 The net § 1231 gain for any taxable year shall be treated as OI to the extent such gain does not exceed the “non-recaptured net section 1231 losses.”
 “Non-recaptured net section 1231 losses: o EXCESS of the aggregate amount of the net section 1231 losses for the 5 most recent years beginning OVER o the portion of such losses taken into account as net 1231 gain for such preceding taxable years
 R: Only applies to taking losses first, IF TP takes gains first then
1231(c) does not apply
5.
E XPLAIN THE RELATIONSHIP BETWEEN §1231 AND §1( H )


8/29/2010 11:02:00 PM
1.
E XPLAIN THE RATIONALE FOR THE D EPRECIATION R ECAPTURE RULES OF §1245
 Recapture of excess depreciation deductions, without the deductions taken by TP there would not have been as much gain
 §1245 – Recognized recapture income is characterized as OI o Gain on the disposition of personal property that is attributable to depreciation deductions rather than economic appreciation in value is not eligible for CG treatment
2.
E XPLAIN INTERRELATIONSHIP AMONG §§1221(2), 1231, 1245, AND 1250
 So, under §1221(2) property may not be a capital asset BUT under
§1231 the gain might be characterized as gain
 §1245 – Recognized recapture income is characterized as OI
 S: §1245 overrides §1231
 §1250 Recapture – Mostly dead letter o FP: Applies to depreciable real property, except for limited categories of real property in §1245 o R: When §1250 property is disposed of at a gain, the depreciation subject to recapture (and OI) is only the depreciation in excess of SL depreciation
 SL depreciation is §168 o §168 says depreciation is only SL, so there can be no excess of SL depreciation thus no 1250 apply
3.
G
IVEN SET OF FACTS
,
DETERMINE THE AMOUNT AND THE CHARACTER OF GAIN
RECOGNIZED ON THE DISPOSITION OF
§§ 1245 & 1250
PROPERTY
4.
G
IVEN SET OF FACTS
,
DETERMINE THE AMOUNT AND CHARACTER OF GAIN
RECOGNIZED ON THE DISPOSITION OF
§179
PROPERTY
 §179 Election to Expense certain depreciable business assets o Not applicable if §1245 applies o IF property w/r/t §179 deduction was taken is converted to personal use, TP must give up the benefit of §179 deduction. o The benefit is the difference between the §179 deduction and the §168 deduction that would have been allowed for the period of business use involved o AB increase to the extent there is §179 recapture
5.
D
ISTINGUISH BETWEEN
§1245
RECAPTURE AND
§1250
RECAPTURE
 §1245 Applies to depreciable personal property, while §1250 applies to depreciable real property

 IF there is some gain that is attributable to economic appreciation
THEN that gain is characterized based on 1221 or 1231
 Recapture may result whenever §1245 property is disposed of o Sale, exchange, involuntary conversion, or other disposition
6.
R ECALL THAT §§1245 AND 1250 DO NOT APPLY TO LOSSES
7.
D ISTINGUISH CHARACTERIZATION UNDER §1239 FROM CHARACTERIZATION
UNDER §§1245 AND 1250
 §1239 provision is Characterization rule not recapture
 R: Any gain recognized on a sale/exchange of depreciable property between certain related parties be characterized as OI; none of the gain will be capital asset under §1231
 S: Between related parties, all gain will be OI
8.
P ROVIDE EXAMPLES OF DISPOSITIONS TO WHICH §§1245 AND 1250 APPLY
AND EXAMPLES OF DISPOSITIONS EXCEPTED FROM THESE PROVISIONS a. Dispositions where §1245 and §1250 apply
 §1245 property = any property which is or has been property of a character subject to the allowance for depreciation provided in section 167 and is personal property, real property, see (a)(3)
 §1250 Property = same definition but includes things not in 1245 b. Exceptions to Recapture: 1245(b); 1250(d)
 Gifts, Transfers at Death, LK exchanges, Involuntary Conversions, P property =>P, Transfer to Tax-exempt org, Timber property AND o Dispositions in which the AB of the property transferred carries over to the transferee o Limit on LK Property!
9.
I
DENTIFY
‘
UNRECAPTURED SECTION
1250
GAIN
’
AND EXPLAIN THE
SIGNIFICANCE OF THAT CHARACTERIZATION
 Recall §1(h) – 25% rate applies to unrecaptured §1250 gain
 §1(h)(6) Unrecaptured §1250 Gain: LTCG from §1250 property attributable to depreciation deductions allowed to the TP and not otherwise recaptured as OI
 §121(d)(6) Gain attributable to depreciation allowed w/r/t the residence is not excludable

8/29/2010 11:02:00 PM
1.
C RANE AND T UFTS PROVIDE THAT RECOURSE AND NONRECOURSE LIABILITIES
ARE TO BE TREATED AS EQUIVALENT FOR PURPOSES OF DETERMINING AB AND AR a. Crane Holding and FN 37
 R: Liabilities, whether recourse or nonrecourse, assumed, taken subject to or otherwise incurred in the acquisition of property are included in TP’s Basis
 IF FMV > Debt => AR includes debt assumed + FMV of other property; Debt is treated as Cash; no difference between nonrecourse and recourse debt
 H: Seller must include in AR any nonrecourse liability taken subject to by a buyer, a mortgagor, not personally liable on a debt who sell the property subject to the mortgage and for additional consideration realizes a benefit in the amount of the mortgage o FN 37: IF FMV < Debt (mortgage) a person who is not personally liable for it cannot realize a benefit = mortgage b. Tufts
 In Nonrecourse debt, IF FMV < Debt => AR includes debt assumed
+ FMV of other property; Debt is treated as Cash
 §108 does NOT apply here, only applies to relief of indebtedness not disposition of property
 In Recourse debt, IF FMV < Debt => AR includes FMV of property -
Azawha
2.
D
ETERMINE
TP’
S BASIS WHEN THE
TP
EITHER a. Uses its own money to purchase property OR
 1012 Basis b. Borrows money on a recourse or nonrecourse basis to purchase property
 Recourse
3.
D
ETERMINE
TP’
S
AR
ON THE SALE OF PROPERTY WHEN
: a. there are no liabilities assumed or taken subject to and
 §1001 b. there are liabilities assumed or taken subject to by the purchaser
 IF FMV > Debt => AR includes debt assumed + FMV of other property; Debt is treated as Cash; no difference between nonrecourse and recourse debt – Crane
 In Nonrecourse debt, IF FMV < Debt => AR includes debt assumed
+ FMV of other property; Debt is treated as Cash – Tufts

 §108 does NOT apply here, only applies to relief of indebtedness not disposition of property
4.
D ETERMINE AMOUNT OF GAIN WHICH A TP REALIZES ON THE SALE OF PROPERTY a. when the property sold is not encumbered by liabilities and
 b. when it is encumbered by liabilities

5.
R ECALL THE STANDARD ESTABLISHED IN T UFTS AND TO EXPLAIN THAT STANDARD
IN YOUR OWN WORDS

6.
C OMPUTE THE TP’ S AR WHEN LIABILITIES ASSUMED OR TAKEN SUBJECT TO BY
THE PURCHASER EXCEED THE FMV OF THE PROPERTY
 Problems
7.
I DENTIFY DEBT THAT MAY BE TOO CONTINGENT TO JUSTIFY RECOGNITION FOR
TAX PURPOSES

8.
E XPLAIN THE TAX IMPACT RESULTING FROM A FINDING THAT DEBT INCURRED IN
ACQUIRING PROPERTY IS EITHER NOT ‘ TRUE DEBT ’ OR IS CONTINGENT
 When nonrecourse purchase money debt exceeds a reasonable approximation of the property’s FMV, the debt is disregarded in its entirety for the purposes of determining depreciation and interest deductions
9.
E
XPLAIN THE TAX SIGNIFICANCE OF NONRECOURSE BORROWING
,
WHEN THE
TP’
S
AB
IN THE PROPERTY SECURING THE NONRECOURSE LOAN IS LESS THAN LOAN
PROCEEDS

10.
E
XPLAIN THE TAX CONSEQUENCES TO A
TP
WHOSE PROPERTY IS SOLD AT A
MORTGAGE FORECLOSURE SALE AND AGAINST WHOM A DEFICIENCY JUDGMENT IS
ENTERED


8/29/2010 11:02:00 PM
1.
E VALUATE WHETHER PARTICULAR PROPERTIES ARE LK
 LK = Nature/character of property, Kind/Class, NOT quality/grade
 Whether real estate is improved of unimproved is immaterial
2.
G ENERALIZE AS TO WHEN PROPERTIES WILL BE LK
 LK requirement met IF depreciable tangible personal property is exchanged for property that is either of a LK or of a like class o Depreciable tangible personal property is of like class to other depreciable tangible personal property if both are in same
General Asset Class
 Once you get into intangible properties, get into court holdings, that can be rather narrow o Copyright for book for Copyright for book ok, but not for Song
3.
R ECALL THE POLICY UNDERLYING §1031
 Exchange is a continuity of investment in a modified form; admin difficult in valuing property in LK exchange
 Nonrecognition Provision: No gain or loss is recognized when property held for productive use in T/B or for Investment is exchanged solely for property of Like Kind to held be for productive use in T/B or for Investment
 Exception: Stock in trade, property held for sale, stocks, bonds, notes, choses in action, certificates of trust
4.
E
XPLAIN THE HOLDING REQUIREMENTS
 Personal Use property excluded from §1031, one TP may qualify though while the other does not
 Two holding requirements o Property given up must be held for T/B/I o Property received must be held for T/B/I
 §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
 §1031(g) 2 Year holding period of exchanges between related persons o §1031(f) prevents swapping of basis between related parties, each will have to recognize G/L, recognize currently not past o Rev Ruling 72-151 shows that §1031(d) controls, loss preserved even if Boot received

o IF RP disposes within 2 years of first transaction, TP recognize currently
5.
C ONTRAST REAL PROPERTY AND PERSONAL PROPERTY IN TERMS OF LK RULES
 Liberal approach to real property, less so with personal property
6.
D ISTINGUISH A SALE OF PROPERTY FROM AN EXCHANGE a. Boot is nonLK property added in to even up the exchange
 TP giving but NOT receiving, cash, remains within 1031 since he receives only LK property for the property he gives up
 TP receiving boot must recognize gain to amount of boot, but not in excess of gain realized, LK exchange still permitted
 Loss recognition is NOT permitted b. Exchange in Substance Rule:
 §1031 applies when TP sells qualifying property for cash to buyer then by prearrangement immediately purchases qualifying LK property from the same person
 Can apply when TP is parent selling and sub buying
 Sale and Lease Back context – If lease is 30 yrs or more then its LK
 TP may want sale/leaseback context
7.
N ET LIABILITY RELIEF , REDUCED BY AN CASH PAID , CONSTITUTES BOOT
 Liability relief is treated under §1031 as money received, thus its a form of boot
 Reg’s: Only the net liability relief reduced by any cash paid, constitutes money received.
8.
L
OSSES ON
LK
PROPERTY ARE NOT RECOGNIZED
,
EVEN WHEN BOOT IS RECEIVED
9.
C
OMPUTE BASIS ON PROPERTY RECEIVED IN A
LK
EXCHANGE
Formula
 AB of all LK and Non-LK property given up
 + Gain recognized, liability taken on, or cash paid
 – Loss recognized, liability shed, or cash received
 = The Basis to be allocated
 R: Basis allocated first to nonLK property received to extent of FMV
 R: Remaining total Basis constituting the basis of LK property
10.
C
OMPUTE RECOGNIZED GAIN ON AN EXCHANGE
 Problems
11.
I
DENTIFY EXCHANGES ON WHICH LOSSES ARE RECOGNIZED
 Problems
12.
D
ESCRIBE A THREE
-
WAY EXCHANGE

 Not necessary to receive the LK property from the same person to whom one has transferred property
 Receipt of cash in return for one’s property, even if the proceeds are immediately invested in LK property is fatal to §1031
 Regs authorize use of a qualified intermediary in a simultaneous exchange
13.
D ETERMINE THE PARTIES IN 3WAY EXCHANGE ENTITLED TO 1031 TREATMENT
 Problems
14.
I DENTIFY THE CIRCUMSTANCES IN WHICH A 3WAY EXCHANGE WILL BE USED
 3 way trade of LK property OR
 Use of qualified intermediary, qualified escrow accounts or security or guarantee agreements
 Use of qualified intermediary is a safe harbor, if person is an agent of one of the TPs then that is not fatal
15.
C OMPUTE GAIN RECOGNIZED AND AB IN EXCHANGES INVOLVING ASSUMPTION
OF LIABILITIES , OR TAKING SUBJECT TO LIABILITIES , BY BOTH PARTIES TO THE
EXCHANGE , AND THE TRANSFER OF CASH FROM ONE PARTY TO THE OTHER
 Problems
16.
E XPLAIN THE PURPOSE OF THE ANTI -S TARKER ( DEFERRED EXCHANGE ) RULES
 Starker – TP entitled to §1031 treatment on the ultimate receipt of
LK property even though the property to be received had not been identified at the time of the transfer of the property given up, and even though TP had reserved the right for up to 5 years to get one property, several or cash o Congress did not like open ended deferral
 (a)(3) TP required to identify replacement property within 45 days of the transfer of the relinquished property AND to receive replacement property no later than 180 days after transfer or due date for TP’s tax return of that year, whichever is earlier
17.
A
PPLY THE
A
NTI
-S
TARKER
R
ULE
 TP may identify 3 replacement properties of any value OR any number of properties that in the aggregate do not exceed twice the value of the property relinquished
 IF TP identifies too much property TP is treated as identifying none
 BUT IF TP receives property within 95% of aggregate FMV then
1031 will apply

18.
E XPLAIN HOW A REVERSE -S TARKER EXCHANGE IS STRUCTURED
 Exchanges where the replacement property is acquired before the relinquished property is transferred
 Regs: 3 property, 200% or 95% rules do not apply
19.
E XPLAIN HOW §1031 IS APPLIED IN AN EXCHANGE TO WHICH §121 IS ALSO
APPLICABLE
 1031 is essentially a deferral provision, 121 is exclusion provision
 §121 must be applied to gain realized before applying §1031
 Under §121(d)(6), the §121 exclusion does not apply to depreciation deductions, but §1031 may apply to such gain
 In applying §1031, Boot received in exchange for the property used in the TP’s T/B/I is taken into account only to the extent the boot exceeds the gain excluded under §121
 In determining AB in property received, §121 excluded gain counts as to increasing AB
 §121(d)(10) IF property is acquired in LK exchange, the property must be held for at least five years before gain on its sale or exchange may be excluded under §121

8/29/2010 11:02:00 PM
1.
P OLICY UNDERLYING §1033
 BP: Relief provision affording TP the benefit of nonrecognition of gain when recognition would create severe hardship;
 Operates when TP property is “compulsorily or involuntarily converted” as a result of destruction, theft, seizure, or requisition or condemnation and TP gets new property or cash for new property
 TP gets new property – Direct conversion – 1033 mandatory
 TP gets money for new property – 1033 elective
2.
W HETHER PROPERTIES ARE SIMILAR OR RELATED IN SERVICE OR USE
 (a)(2) requires Similar or Related in Service of Use
 Liant – Standard differs when dealing w/owner-occupied v. rental
 Times when replacement property will NOT meet standard o Proceeds from unimproved condemnation used for improved o Proceeds from conversion of real property used to reduce indebtedness on leasehold o Owner of tug uses money to buy barges
 Rev Ruling: Service uses a functionality test
3.
T HE “ SIMILAR OR RELATED IN SERVICE OR USE ” IN 1033 V .
LK/1033
 §1033 is a more narrow standard than 1031
 The application of §1033(g) adopts LK/1031 standard o Condemnation held for productive use in T/B/I
 And in §1033(h) a broader standard is used o Property damaged by federally declared disasters
4.
C
OMPARE THE BASIS PROVISIONS OF
§§1033
AND
1031
 Different when proceeds received lead to replacement property
5.
C
OMPUTE THE GAIN RECOGNIZED UPON AN INVOLUNTARY CONVERSION
 Nonrecognition requirements o 2 year period to find replacement property o All of proceeds spent on new property o Property similar or related in use, if circumstances require it
 Partial Recognition of Gain o Realized gain will be recognized under §1033(a)(2) to the extent AR upon conversion > Cost of replacement property
6.
C
OMPUTE THE BASIS OF REPLACEMENT PROPERTY
– T
WO RULES
 Direct conversion to qualified replacement property o Same as AB rules of 1031

 Proceeds received then converted to qualified replacement property o AB replacement property = Cost of replacement property –
Amount of gain realized on the conversion that is NOT recognized b/c of 1033.
7.
§1033, UNLIKE §1031, IS NOT LIMITED TO INVESTMENT PROPERTY OR T/B
P ROPERTY
 Holding period tacks if capital asset involved
8.
E LECTIVE P ROVISION
 §1033 is elective when property is converted into money or other non-similar property and is mandatory in the event of direct replacement with qualified property
9.
§1033 IS NOT APPLICABLE TO LOSSES
 This is a gain nonrecognition provision
10.
T IME L IMIT FOR ACQUIRING REPLACEMENT PROPERTY
 (a)(2)(B) Replacement property must be replaced within two years following the conversion of the property
11.
R ELATED P ARTY : N ONRECOGNITION MAY NOT APPLY WHEN REPLACEMENT
PROPERTY IS PURCHASED FROM A RELATED PARTY
 (i): Applies to individual TPs if the aggregate realized gain for the year on ALL involuntarily converted property where there is realized gain is over $100k o Rule does NOT apply if related person acquired the replacement property from an unrelated person
12.
E
XPLAIN THE APPLICATION OF
§1033
WHERE
§121
IS ALSO APPLICABLE
 121(d)(5)(B) – For 1033 purposes, AR = Proceeds of involuntary conversion – amount of gain excluded under 121
 121(d)(5)(A) – involuntary conversion permits use of 121

8/29/2010 11:02:00 PM
Overview – 453 and 453A
 Section 453 – Gain on the sale is spread over the period during which the payments are received while maintaining character
 BP: Does TP have the cash to pay the tax liability on a sale, because of the nature of the deal the TP can defer tax liability
 Exceptions, cannot use §453 with publicly traded stock or if you are a dealer in certain property
1.
C OMPUTE THE GROSS PROFIT RATIO , AND DETERMINE THE INCOME PORTION OF
AN INSTALLMENT PAYMENT , GIVEN THE NECESSARY INFORMATION ON SELLING
PRICE , BASIS , AND INDEBTEDNESS ASSUMED OR TAKEN SUBJECT TO a. Statutory Framework
 (a) Income from installment sale is to be reported under installment method, statute does NOT apply to losses
 (b)(1) Installment Sale: Disposition of property where at least one payment is to be received following the year of disposition o No requirement that payment be received in the first year
 (c) Installment method: prorates total gain on the sale over the total payments to be received o Gross profit ratio= gross profit/total K price
 Like Gain/AR o Gross profit ratio x payment = income for year b. Payments and Liabilities
 Mortgage or debt assumed is treated as tax free return of basis
 So, it is not included in gross profit, it does lower the total K price
 BUT IF liabilities exceed AB then excess is treated as payment, so total K price will go up. Gross profit ratio will be 100%
 Debt instruments as Cash – normally notes issued will not be cash/payment, see (f)(3), but instruments payable on demand or readily tradeable will be considered payment, see (f)(4),(5).
 Nonqualifying debt – does not reduce total K price
 Ex: post-acquisition taken on in contemplation of disposition, or debts taken at acquisition but related to property
2.
D
ETERMINE THE
R
ECAPTURE INCOME AND THE
G
ROSS PROFIT RATIO ON
INSTALLMENT SALES OF DEPRECIABLE PROPERTY
 (i) – Recognition in year of sale for any depreciation recapture
 Recapture of 1245 or 1250 property => OI

 Since recapture income is recognized regardless of any actual payments, the recaptured amount must be added to the seller’s AB so as to avoid over-reporting of income o S: Adjust gross profit down, since recapture increases basis
3.
D ETERMINE THE TP’ S INCOME IN THE YEAR OF SALE WHEN MAKING AN ELECTION
OUT OF INSTALLMENT REPORTING
 (d) Installment Method not mandatory, TP reports under normal method of accounting; TP must elect out
 Effect of Election Out: Use FMV of the installment obligation, regardless of whether it is a cash equivalent o AR cannot be less than FMV of property received
4.
I NSTALLMENT METHOD REPORTING IS NOT ALLOWED W / R / T PUBLICLY TRADED
PROPERTY AND IS GENERALLY NOT ALLOWED ON DEALER DISPOSITIONS
 Exclusion under 453(k)
5.
A PPLY INSTALLMENT METHOD REPORTING TO CONTINGENT PAYMENT SALES
 FP: Future payment based on rents or profits
 I: Multiple approaches to account for this o Burnett – Open transaction accounting, TP recovers tax free basis then tax gain – rare application o (j)(2): Apply basis recovery ratably over term to payments when gross profit and total K price cannot be determined
 No loss allowed until last year of payment o IF Election out, then use FMV of contingent payments, cannot be less than FMV of property sold. §1001 calculation
6.
D
ETERMINE GAIN OR LOSS RECOGNIZED ON THE DISPOSITION OF AN
INSTALLMENT OBLIGATION AND THE TRANSFEREE
’
S BASIS IN THE OBLIGATION
 §453B: When TP disposes of an installment obligation, the tax deferral ends, G/L determined by subtracting from AB either o FMV of obligation: IF TP makes note a gift, if parties are related then FMV of note is not less than face value (a) o AR on disposition: IF TP sells or exchanges note (f) o N: Divorce, rules do not apply spouse steps into shoes of FS
7.
T
AX CONSEQUENCES FOR AN INSTALLMENT METHOD SELLER WHEN A RELATED
PURCHASER DISPOSES OF THE PROPERTY ACQUIRED FROM THE SELLER
 Second Dispositions by Related TPs (e): Resale by related TP triggers recognition of gain by initial seller only to the extent that

AR from second disposition exceeds actual payments made under installment sale o So, if AR is cash, initial seller must report gain use GP ratio o Exception, If second disposition is involuntary, no apply o S: Use §1001 principles to determine gain for initial seller
8.
I NSTALLMENT METHOD REPORTING IS NOT ALLOWED ON THE SALE OF
DEPRECIABLE PROPERTY TO A CONTROLLED ENTITY
 453(g) Installment Sale NOT allowed to related persons
 Related persons §1239 o Controlled entity: a corporation more than 50 stock is owned
(directly or indirectly) by TP o §267 - The family of TP shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants
 Exception: Where tax avoidance is not the underlying purpose
9.
T HE NET PROCEEDS FROM THE PLEDGING OF CERTAIN ‘ NONDEALER INSTALLMENT
OBLIGATIONS ’ ARE TREATED AS PAYMENT
 IF a 453A installment obligation is itself pledged as security for any debt, the net proceeds of the secured debt are treated as payment on the obligation AND subsequent payments are disregarded up to aggregate amount of the deemed payment
 (a) TPs must pay interest on deferred amount unless amount obligated is less than 5M
 Sales price must exceed 150k
10.
D
ETERMINE WHETHER INTEREST IS PAYABLE ON THE DEFERRED TAX LIABILITY
W
/
R
/
T A NONDEALER INSTALLMENT OBLIGATION
,
AND IF SO IN WHAT AMOUNT
11.
D
ETERMINE
,
ON A
LK
EXCHANGE INVOLVING RECEIPT OF AN INSTALLMENT
OBLIGATION
, TP’
S BASIS IN THE
LK
PROPERTY
,
AND THE GROSS PROFIT RATIO AND
INCOME RECOGNIZED W
/
R
/
T ANY PAYMENTS
 Apply 1031 and 453, when TP gets LK property and boot
 TP should get nonrecognition treatment on LK exchange
 (f)(6) LK property is not treated as payment, total K price does not include LK property and gross profit reduced by amount of gain not recognized by 1031 exchange

8/29/2010 11:02:00 PM
O VERVIEW
 Sale of an unincorporated business, as well as sale-leasebacks
 Seller concern is the character of the gain
 Buyer concern is the basis in new property
1.
W ILLIAMS V M C G OWAN
 R: Sale of a business must be fragmented and that a separate gain or loss analysis be made from each tangible and intangible asset of the business
 Goodwill: Purchase price in excess of FMV of the tangible and intangible items of a business indicate a payment for goodwill
 Going Concern Value:
 CNC:
2.
V ALUATION OF G OODWILL AND GOING CONCERN VALUE
 §1060 – Residual method of valuation used in valuing GW and GCV in applicable assets transactions, purchase of the assets of a T/B o Residual method: Goodwill/GCV = Purchase price – aggregate
FMV of tangible and intangible (less Goodwill/GVC)
 Allocation of purchase price amongst seven classes of assets o 1. Cash and general deposit accounts o 2. Actively traded personal property (§1092)(d) o 3. Assets TP marks to market at least annually for federal income tax purposes and debt instruments o Ex: Accounts receivable o 4. Stock in trade of TP (inventory) o 5. All other assets not included above o 6. All §197 intangibles except goodwill or GCV o 7. GW and GCV
 1060(a) – Parties bound to allocation in a written agreement regarding FMV of any asset UNLESS Treasury says its inappropriate
3.
T
AX CONSEQUENCES TO
S
ELLERS AND
B
UYERS OF PURCHASE PRICE ALLOCATION
MADE TO BUSINESS INTANGIBLES SUCH AS
GW, GCV,
AND
CNC a. §197 – Amortization of Business Intangibles
 Amortization for Goodwill, CNC, and GCV
 Allow all intangible assets to be depreciable over 15 years
 Negates incentives for carve outs from Newark
 Buyers get amortization, sellers get capital asset character

 N: 5 Year CNC is amortized over 15 years
 I: Buyer’s efforts to maximize allocations to depreciable assets with a short useful life (3,5,7 yr property) o B/c of recapture potential, increased allocation to such property might mean increased OI b. Exceptions to Amortized Intangibles - 197(e)
 (4) – patents, copyrights not acquired as part of acquisition of assets constituting T/B
 (3) – Certain computer software, see §167(f), depreciation here is over 36 month period using SL depreciation
 (c)(2) – Advertising expenditures o deducted in year incurred or paid
 No losses permitted on resale of intangibles, IF o IF TP still retains the other amortizable 197 intangibles o Loss allocated among remaining intangibles, increase AB c. Recapture rules
 197(f)(7) – IF the sale of 197 intangible results in a gain to the TP the gain may be subject to the recapture rules of 1245 and/or characterization under 1231
4.
P
OSSIBLE STRATEGIES EMPLOYED BY
S
ELLERS AND
B
UYERS W
/
R
/
T THE
ALLOCATION OF THE PURCHASE PRICE TO BUSINESS INTANGIBLES
 Seller’s POV: Allocation determines AR, Amount of G/L, Character
 Buyer’s POV: Allocation determines deprecation deductions, Amount of G/L & Character on later sales
5.
E
VALUATE THE TAX IMPACT OF A PROPOSED SALE ON THE
B
UYER
& S
ELLER
 See the Problems
6.
R
ECOGNIZE CIRCUMSTANCES IN WHICH A SALE
-
LEASEBACK MAY BE
RECHARACTERIZED AS AN EXCHANGE OR A FINANCING TRANSACTION a. Sale-Leaseback
 KIM: Benefits of characterizing a transaction as a sale or lease o IF Lease then TP as lessee could claim rental deductions in excess of the depreciation and interest deduction available to purchaser of the same property
 IF respected, sale-leaseback may shift tax benefits from one TP to another

o Seller-lessee gets a deduction for rent perhaps greater than deductions available to it as an owner of the property
7.
E XPLAIN TAX DIFFERENCES BETWEEN SALE LEASEBACK AND A TAX FREE
EXCHANGE OR A FINANCING TRANSACTION a. Sale-Leaseback Characterized as Financing Arrangement
 When TP sells the property to lender and then leases it back from lender with option to purchase…Service may call this a Financing
Arrangement if they disregard the sale-leaseback, it’s a mortgage
 BUT SEE Frank Lyon – not disregarded and TP got depreciation and interest deductions b. Sale-Leaseback Characterized as a Tax-Free Exchange
 Service could disregard sale-leaseback and call it a LK exchange o See 1.1031(a)-1(c) – lease with 30 or more years to run and a fee interest in real estate are LK properties o P: 1031 negates G/L in transactions where TP is in essentially the same economic position after the transaction as before
 BUT SEE Leslie – TP overcame Service challenge

8/29/2010 11:02:00 PM
1.
C OMPUTE OID, IF ANY , ON A DEBT INSTRUMENT , AND TO DETERMINE THE
AMOUNT INCLUDED IN INCOME ON A CURRENT BASIS
 Compute OID & amount included in income must know four things o Redemption Price o Maturity Date o Issue Price o Interest Rate a. OID on a debt instrument issued for cash
§1273 Determination of Amount of OID
 (a)(1) OID = Stated Redemption price – Issue Price o Stated redemption price does not include qualified stated interest, interest based on fixed IR and unconditionally payable at fixed period of one year or more
 (a)(2) Stated redemption price = all payments and unqualified stated interest
 (b)(2) Issue price is public offering price
 (a)(3) De minimus rule: OID is zero IF OID < ¼% of Stated redemption price x years to maturity b. Current Inclusion on debt instrument for cash
§1272 Current Inclusion in income of OID
 GR: Holder of instrument with OID must currently include the earned portion in income
 (a)(1) Include Daily portions of OID for each day during the taxable year on which TP held instrument o Inclusion rule does not apply to
 US Savings Bonds; Fixed terms < year; loans between natural persons less than 10k, not issued in lender’s
T/B, not for tax avoidance; between natural persons prior to 1984
 Bonds bought at premium, amount > principal amount
 (a)(3) Determine Daily Portions of OID o Yield to Maturity = Constant IR x Issue price, compounded at least annually, usually semiannually o KIM: If semiannually, ½ the IR and apply ratably per day c. Deduction of OID
§163(e)(1) Interest – OID

 P: Rules designed to match interest income and expense by putting both parties on the accrual basis w/r/t the interest
 Issuer of instrument has debt expense = to daily portions of OID d. Gain or Loss on Sale, Exchange or Retirement
 IF bond is a capital asset it generates G/L based on AR – AB
 OID is OI, and it increases AB in the capital asset
 1272(d)(2): Increase in AB of bond when OID is included in income e. Market Discount
 Included as OI, but included ratably, although election can be made to include it just like OID – 1276(b)
2.
C OMPUTE OID ON A DEBT INSTRUMENT ISSUED ON A SALE / EXCHANGE OF
PROPERTY , AND TO DETERMINE AMOUNT INCLUDED IN INCOME ON CURRENT BASIS
 Incentive for Buyer and Seller to lower interest rates
 IF adequate stated interest is not provided, it will be imputed a. Determine Issue Price: Inadequate Stated Interest
 1273(b)(3) When property is publicly traded, FMV is issue price
§1274 Determination of Issue Price when debt issued for property
 (d): Applicable Federal Rate o IR will be lower than rate used by TP, issue price will be higher and OID less o (2) Use the Test Rate: Lowest applicable federal rate in three month period
 (a): Where there is no adequate stated interest, issue price is the imputed principal amount of the note
 (b): Imputed principal amount = sum of the present values of all payments due under such debt instrument o Present value determined by discounting payments to the date of sale using compounding period and test rate
 (c): Whether this section applies: Debt instrument given up for sale/exchange of property; stated redemption price > imputed principal amount; some or all payments due after sale o (2) Stated interest: Only adequate IF the imputed principal amount of the note > Stated principal amount of note
 N: IF there is some interest and its not adequate it will serve to lower redemption price b. Determine Issue Price: Adequate Stated Interest

 When Stated Principal amount < Imputed Principal Amount there is adequate stated interest
 There will be OID, what is labeled interest is includable as OID c. Adequate Interest Charged and Paid Currently: No OID
 When adequate interest is charged & paid currently there is no OID d. Exception to 1274
 Sales of principal residence & certain farm sale not subject to 1274
 Nor sales involving Any debt instrument arising from the sale or exchange of property if the sum of the following amounts does not exceed $250,000 e. Special Rules: Cash Method Election of 1274A - $2M Rule
§1274A Special Rules where stated principal amount does not exceed $2.8M
 (c) Election to use cash method where state principal < $2M o Qualified debt instrument o Cannot be new §38 property (not tangible personal property) o Stated principal < $2M o Seller must not use accrual method o Property sold must not be dealer property o 1274 must otherwise be applicable o Seller and purchaser must jointly elect to use cash method o S: Seller takes unstated interest computed under 483 as income as payments are made; buyer gets deductions as interest is paid f. Special Rules: IR Limitation on Qualifying Sales of $2.8M or Less
 (a) In the case of any qualified debt instrument, discount rate under 1274 or 483 is limited to 9% compounded semiannually o N: Test rate is likely now lower than this, use test rate
 Qualifying Debt Instrument: Stated Principal Amount is less than
$2.8M and property is not new §38 property g: Special Rules: IR Limitation on Certain Land Transfers in Family
 In determining unstated interest on a sale of land between family members, the max discount rate is 6%, semiannually
 No apply if sales in calendar year > $500k h. Special Rules: Personal Property

 1274 and 483 do not apply to obligor on a deferred-payment sale of personal use property o Property not used in T/B or for income producing purposes o Deduct OID when it is paid, not as it accrues
3.
C OMPUTE THE UNSTATED INTEREST , IF ANY , ON A K FOR THE SALE OR EXCHANGE
OF PROPERTY , AND TO DETERMINE WHEN , AND IN WHAT AMOUNT , IT IS INCLUDED
IN INCOME ( AND ALLOWED AS A DEDUCTION ) a. Unstated Interest: §483, when sales less than $250k
 Imputed Interest under 483 is called unstated interest
 Unlike OID, interest included in income based on TP’s regular method of accounting, cash method TP includes upon receipt
 Determine if there is unstated interest: 483(c)(1) o 1. Is there a deferred payment?
 483 may apply to any payment on account of sale/exchange due > 6mos later, where at least 1 payment due > 1 yr after sale o 2. Is there total unstated interest under this contract
 Unstated interest = Total deferred payments due under the K – Present values of such payments and any interest payments due
 Present value determined using test rate o 3. Unstated interest earned same as OID by using test rate, but not included til maturity
 483 does NOT apply to cash for debt instrument deals
 I: First payment on loan includes interest and principal o Calculate how much is interest, rest is principal
 §483 does not apply to sales less than $3k

8/29/2010 11:02:00 PM
1.
D ETERMINE A TP’ S ALTERNATIVE MINIMUM TAXABLE INCOME AND TENTATIVE
MINIMUM TAX INCOME §55
 AMT objective: Ensure that no TP with substantial income can avoid significant tax liability by using exclusions, deductions, and credits
 AMT(a): Excess of Tentative minimum tax over regular tax a. Adjustments made to TI to come up with AMTI
 AMTI = TI, adjusted by §§56, 58 and increased by items in §57
(1). Start with TI. GI => AGI (ATL) => BTL =>TI
 Deductions: ATL, BTL, Misc Itemized Deductions (2% floor §67), overall limitation on Itemized Deductions §68, STND Deduction, and personal exemptions
(2). Make §§56 and 58 adjustments
 Depreciation: §1250 property (real property) is depreciated under
SL method, convert to 150% declining balance o N: Since ‘99, same recovery period used for regular tax and min tax purposes o Tangible personal property using 200% declining balance must be adjusted to 150%. Upward adjustment
 N: Creates need for two depreciation schedules
 Limitation on Itemized Deductions, STND Deductions and Personal
Exemptions o Misc. Itemized Deductions NOT allowed
 Upward adjustment o State and Local taxes NOT allowed o Atty fees: IF deductible under 212 and not 162 and IF not
ATL under 62(a)(4)/(20) THEN NOT allowed (misc item ded) o Medical expenses limited to excess of 10% of AGI o STND Deduction and personal exemption NOT allowed o §68 Overall limitation on itemized deduction NO apply
 Downward adjustment
(3). TI adjusted per §57
 Certain Tax exempt interest included, specified private activity bond
 Qualified Small Business Stock: 1202 Exclusion, 7% Upwards
(4). Subtract out Exemption, watch out for phaseouts
 Taxable excess = AMTI – Exemption Amount
 Exemption (2006) = 42,500 Ind TP, 62,550 married TPs

o Exemption phases out at high income levels (d)(3) o Every $4 in excess limits reduces exemption $1
 IF Net CG, use lower rates in §55(b)(3)
2.
D ETERMINE THE AMT, IF ANY , IMPOSED ON A TP
 AMTI = TI +/- adjustments under 55-57 o Subtract out exemptions, determine phaseout
 Tentative min tax: 26% 175k over regular tax, 28% the rest
 Pay regular tax liability plus (excess over Alt Min Tax liability)
 Reason we care about the distinction, in some years TP could owe
AMT or not. Timing differentials could make TP end up owing too much
 Know how much AMT paid and in later years some of it may be a credit owed to TP, broken down between permanent and timing ones

8/29/2010 11:02:00 PM
1.
G ENERAL REQUIREMENTS A PAYMENT MUST SATISFY TO CONSTITUTE ALIMONY
 §71(b): Alimony requirements o Payment in cash, not property o Made to spouse or on behalf of spouse o Received by spouse under written agreement
 divorce agreement does not designate it as not includible in GI/nor deductible o No liability after death o Spouses not living in the same house
 §71 Alimony is GI, §215 Payment of Alimony is deductible
2.
D ISTINGUISH BETWEEN 3 RD PARTY PAYMENTS ON BEHALF OF A SPOUSE AND 3 RD
PARTY PAYMENTS NOT ON BEHALF OF A SPOUSE
 Cash paid on behalf of former spouse that is rent or mortgage or utilities will qualify provided §71(b) requirements met
 BUT when TP spouse is still on lease or mortgage, such as joint tenants with right of survivorship o ½ of payment is alimony, other ½ is not o ½ is deductible, other ½ gets home mortgage interest deduction, if it were his residence, 163(h) allows it to count since he is paying on a residence where his children live
 TP buys term life insurance with FS as beneficiary o 1.71 – payments not treated as on behalf of spouse unless FS owns the policy, TP is really insuring his child support
3.
D
ISTINGUISH CHILD SUPPORT PAYMENTS FROM ALIMONY
 Obligation of noncustodial parent to take care of child, not deductible, and not includible by recipient
 Reduction in alimony that may really be child support o Presumption that this reduction is child support if reduction is within six months of age of majority. At Yr 7, kid is 18 yrs three months, and reduction is presumed, but IF after the sixth post separation year then no presumption
4.
C
OMPUTE THE AMOUNT OF AN EXCESS ALIMONY PAYMENT UNDER
§71(
F
)
AND
DESCRIBE ITS TAX EFFECT
 Excess front-loading of alimony (accelerate deductions currently)
 Ex: 60k, 48k, 18k. Yr 2-4 respectively, 1-3 post-separation year

o When post-separation year 2 and 3 have big dropoff this should be a concern
 (4) excess of 2 nd post year over (3 rd post year + 15K)
 Excess of 15, 48 over 33k, dropped too much
 (3) excess of 1 st post separation year over (treated alimony for yr 2 (33) + 3 rd year average the two)
 60k less average of 51 + 15.
 60k is more than 40,500, excess payment of
19,500 in yr 1 post separation payment
 In all excess, payment of 34,500 o Payor has been deducting, payee has been including
 71(f) reverses the treatment, payor must include it, payee must take deduction
 Recapture occurs in only yr 3
5.
D ETERMINE WHETHER A DIVORCED OR SEPARATED PARENT IS ENTITLED TO CLAIM
THE DEPENDENCY EXEMPTION FOR THE CHILD
 Custodial parent gets dependency exemption and paying on 50% of the home, unless otherwise agreed upon
6.
D ETERMINE THE FILING STATUS OF A DIVORCED OR SEPARATED PARENT
 File single or head of household
 Can give up dependency exemption and still be head of household
7.
D
ETERMINE THE TAX CONSEQUENCES OF PROPERTY TRANSFERS BETWEEN
SPOUSES OR FORMER SPOUSES
 1041(a) – No G/L Recognition, recipient steps into shoes of transferor even if there is a loss, carryover in AB
 Any time cash is received there is a realization event
8.
D
ISTINGUISH BETWEEN DEDUCTIBLE AND NONDEDUCTIBLE LEGAL EXPENSES
RELATED TO DIVORCE OR SEPARATION
 Misc Itemized Deduction for tax preparation/planning, that amount for divorce proceedings is deduction subject to 2% AGI limitation
 Bifurcate out tax advice on divorce and representation in divorce
 FS’s attorney fees – 212 expenses to generate income, tax advice
 TP paid attorney fees for FS – as long as terminates at death
 TP’s own Atty fees - Bifurcate
9.
E
XPLAIN APPLICATION OF
§121(
D
)(3)
IN THE DIVORCE CONTEXT
 Tack ownership period of former spouses

8/29/2010 11:02:00 PM
1.
D ETERMINE THOSE INDIVIDUALS TO WHOM THE KIDDIE TAX APPLIES
 §1(g) – Certain unearned income of kids taxed as if parent’s income o Applies to kids who have not attained age of 18
 §63(c)(4): Standard deduction adjusted for inflation
 §63(c)(5): Limitation on STND Deduction for Certain Dependants o Exemption for child is 500 or 250 + earned income
 §151(d)(2): Exemption Amount disallowed in case of certain dependants
2.
D ISTINGUISH BETWEEN EARNED AND UNEARNED INCOME
 Earned income is compensation given for services rendered by kid
 Unearned income is other compensation
3.
C OMPUTE NET UNEARNED INCOME ON A GIVEN SET OF FACTS
 Net Unearned income – 1(g)(4) = o Unearned income – (exemption amount (850) + greater of exemption amount (850) or child’s itemized deductions) o Assume §63(c)(5)(A) limitation on basic STND deduction adjusted for inflation is $850 o Excess is taxed at parent’s rate
4.
C OMPUTE THE ALLOCABLE PARENTAL TAX ON A GIVEN SET OF FACTS
 Problems
5.
C
OMPUTE THE CHILD
’
S SHARE OF THE ALLOCABLE PARENTAL TAX
 Problems
6.
E
XPLAIN THE RATIONALE FOR THE KIDDIE TAX
 Response to perceived abuses, parent transferring income
 Some legitimate transfers, appointing trustee to be a custodian of the property
 producing assets to child, income belong to child and taxed at kiddie rate, income splitting.

8/29/2010 11:02:00 PM
1.
T WO K INDS OF D EFERRED P LANS : Q UALIFIED AND U NQUALIFIED a. Unqualified deferred plans
 Ex: Promise to provide something in the future, like stock, its not includable nor deductible
 Funded deferred: Putting $ in account that cannot be touched
 §83 – transfer of property for services is gross income unless there is substantial risk of forfeiture
 (-) ER can leave them completely unfunded, EE stuck relying on GF and solvency of ER b. Qualified deferred plans: qualified retirement plan
 Get mismatch of timing and tax free buildup
 ER sets up a plan, and plan has a trust, ER makes contributions currently to trust fund, gets current deduction
 EE does not have to include in gross income until receipt
 Trust fund is tax exempt – tax free buildup
2.
R EQUIREMENTS OF A Q UALIFIED D EFERRED P LAN
 Have to have written plan, trust, exclusive benefit of EEs, cannot block EEs, cover portions of workforce and have minimum accrual and vesting standards a. Vesting Standards
 Defined Contribution Vesting o Cliff vesting – no vesting, no vesting, then after year three complete vesting o Gradual vesting – yr 1 no vesting, then 20% per year, so at yr 6 then 100% vesting o Can go faster but not slower
 Defined Benefit Vesting o Cliff is five years not three o Graduated is seven years not six b. Written plan requirement – Covered by ERISA
 ERSIA has two components o Labor regulations/statutes o Tax regulations/statutes
 IF you have a plan and terminate it, all EEs are immediately 100% vested in benefits

 ERs want maximum flexibility, so if you contribute nothing year after year, the Service will argue ER has terminated the plan and
EEs are 100% vested c. Plan must be for Exclusive Benefit of EEs
 ER cannot draw out benefits of EEs where there is turnover and forfeiture of dollars, benefit though to ER in reduced subsequent contributions
 410 Minimum participation requirements – cannot block EEs d. Additional Requirements
 Requirement: When benefits must commence
 Requirement: How benefits must be paid out
 Requirement: Benefits cannot be alienated or reassigned
 Exceptions o QDRO – qualified divorce r____ order o Cannot have beyond some limited terms such as salary or years where too much goes to one class or another o Limit on how much salary you can count: 245k (2% of salary)
3.
D EFINED C ONTRIBUTION V D EFINED B ENEFIT a. Defined benefit plans – defines what EE receives upon retirement
 Fewer and fewer exist: Expensive and complex
 Need to know what ER contribution is going to be, cause you know what EE gets
 Get actuary to calculate this
 Company bears the risk of making sure the EE gets defined benefit
 Typically underfunded but federally insured b. Defined contribution plans – Opposite approach
 ER gives set amount, tax exempt buildup, EE gets contributions made on behalf plus earnings
 Must determine how the money will be allocated
 Obligation to contribute remains even if company has bad year
4.
T
YPES OF
P
LANS
 Money purchase plans: Focus on what ER must contribute o Those plans tend to be less common, ERs want more flexibility
 Target benefit plan: Key off defined benefit, target determines contribution

 Profit sharing plan - ER flexibility
 ESOPs – Section 83 - Plans that are designed to invest in ER stock o Never about helping EEs
 401k or CODA plans - most common, popular til market crash o ER likes them as well as EE, EE elects to make contribution o Set aside % of salary pre tax in 401k o Better than IRA since contribution rates are higher o Phaseouts with deductions for EE contribution are higher than
IRA o ER likes this in order to favor high level EEs
 403(b) plans - Tax exempt institutions
 Keogh plans – self employed
 Generic IRAs
 Seps - Small ERs use these o Simplified EE pension, ER can make contribution to EE IRA
 Simples – Small ER 401K plan o

8/29/2010 11:02:00 PM
Part A. Section 465 – Deductions limited to Amount at Risk
1.
E XPLAIN PURPOSE OF AT RISK RULES OF §465
 Correlation between TP’s AB & available depreciation deductions o N: Cost basis of acquired property includes that part of the purchase price financed by nonrecourse borrowing o I: Deductions when TP is not at Risk, encourage TPs to pursue tax deferral in ventures that were unsound economically
 §465 At Risk Limitations prevent TPs from claiming artificial deductions of the type claimed in Estate of Franklin (nonrecourse) o BP: Prevent TP from deducting losses generated by certain business or income producing activities in excess of the aggregate amount w/r/t which a TP is at risk in each activity o Loss (d): Excess of the deductions attributable to the activity over income from the activity
 Rules apply to individuals, estates, trusts and closely helds o Activities subject to include real estate activities
2.
C OMPUTE A TP’ S INITIAL AMOUNT AT RISK : TP’s Initial Amt at Risk =
 TP’s cash contributions to the activity
 + AB of other property contributed by TP to activity
 + recourse debt used to pay for activity or debt is secured by TP’s property
 + Qualified Nonrecourse Borrowing o Government loans, government is guarantor of debt, borrow from qualified person (FG regulated Bank) o NOT, Seller of the property or promoter of property (person who gets a fee w/r/t TP’s investment) o BUT, Related Person borrowing is qualified if has commercially reasonable terms
 Amounts borrowed from any person with interest in activity is NOT considered, NOR is nonrecourse borrowing considered
3.
C
OMPUTE A
TP’
S AMOUNT AT RISK TAKING INTO CONSIDERATION INCOME
,
LOSS
,
AND WITHDRAWALS FROM AN ACTIVITY
 Amount at Risk adjusted annually for: Income, Loss and Withdrawal
 R: Repayment of a nonrecourse loan from cash generated by the
activity has no effect on the amount at risk
 Loss in excess of Amount at Risk is disallowed, it is carried over

 Reporting Income w/no deductions to offset increases Amt at Risk
 Increase Amount at Risk by: o Direct payment of the nonrecourse indebtedness o Additional cash contributions by TP o Additional Property contributions by TP
 At disposition, suspended losses may be deducted
4.
E XPLAIN AND APPLY THE RECAPTURE RULE OF 465( E )
 Withdrawal in excess of Amount at Risk triggers Recapture
 Withdrawal in excess must be reported as GI
 Recapture deductions taken in excess of Amount at Risk, those will be carried over upon recapture
5.
I DENTIFY FINANCING WHICH WILL BE CHARACTERIZED AS QUALIFIED
NONRECOURSE FINANCING §465( B )(6)
 Government loans, government is guarantor of debt, borrow from qualified person (FG regulated Bank)
 Related Person borrowing is qualified if has commercially reasonable terms
6.
C OMPUTE TP’ S AMOUNT AT RISK WHEN QUALIFIED NONRECOURSE FINANCING IS
INVOLVED
 Problems
Part B. Section 469 Passive Activity Losses and Credits Limited
1.
E
XPLAIN THE PURPOSE OF THE
§469
RULES IN LIMITING THE DEDUCTION OF
PASSIVE ACTIVITY LOSSES AND CREDITS
 Rules apply to individuals, estates, trusts and closely helds
 TPs must classify: Income, losses, and credits as being generated by Passive Activities or Non-passive Activities
 Passive activity deductions may only be used to offset income from passive activities; and tax credits related to passive activities may only offset tax liability of passive activities o Losses are carried over and suspended until disposition
 Result: Deferral of these deductions and credits not disallowance
2.
I
DENTIFY PASSIVE ACTIVITIES
 (c)(1) Passive = Conduct of any T/B where TP does not materially participate, excludes real property business, see (7)
 (h) Participation: Involvement is regular, continuous, and substantial; Seven Alternative Tests

o TP hours > 500/yr o TP does substantially all the work o TP does >100 hrs/yr and not less than other person o If Materially participated in any 5 of the previous 10 yrs o All facts and circumstances o Personal Service Test
 N: TP can combine hours into one activity – Scope of Activity o Multiple undertakings if related can combine into one activity o If enough undertakings combined, may lead to Material
Participation o IF TP does not then TP wants them to be separate activities, that way sale of one crosses over to non-passive o Factors to determine scope
 Similarities and difference in types of businesses
 Extent of common control
 Geographical location
 Interdependence between activities
3.
C OMPUTE THE AMOUNT OF PASSIVE ACTIVITY LOSSES
 469 requires TP to compute the gains and losses from each passive activity
 Losses from an activity are first offset by gains from that activity.
 Excess loss is used to offset gain from other passive activities
 Excess loss in aggregate must be carried forward
4.
E
VALUATE WHETHER A
TP
IS A MATERIAL PARTICIPANT IN A RENTAL REAL
ESTATE ACTIVITY
 Rental Property is generally a passive activity (c)(2) - landlord
 BUT IF significant services are rendered in connection w/rental then it’s a non-passive activity – renting hotel rooms
 Not considered passive per se IF o More than half of the personal services the TP performs in T/B in which the TP martially participates o TP performs more than 750 hours of service during the taxable year in real property T/B in which TP materially participates
5.
E
VALUATE WHETHER A
TP
IS AN ACTIVE PARTICIPANT IN A RENTAL REAL ESTATE
ACTIVITY
– (
C
)(7)

 TP must own at least 10% interest in it
 More lenient standard than materially participate
 TP is active IF TP participates in a significant and bona fide sense in making management decisions or arranges for the provision of services such as repairs
6.
E XPLAIN AND APPLY THE SPECIAL $25 K OFFSET RULE OF §469( I )
 IF a TP, who is a natural person, actively participates in rental real estate activity, TP may apply the losses and credits from that activity against up to $25k of the TP’s nonpassive income
 Relief is phased out for TP’s with GI > 100k
7.
D ETERMINE THE AMOUNT OF DEDUCTIONS WHICH A TP MAY CLAIM WHEN A TP
DISPOSES ENTIRELY OF AN INTEREST IN A PASSIVE ACTIVITY
 IF TP disposes of the entire interest in a passive activity, any suspended losses allocable to that activity no longer are passive activity losses but are deductible against income, 469(g)(1)(A)
 Passive loss offsets passive income, then NET Passive loss offsets non-passive income
 TP must have a fully taxable disposition of TP’s interest to an unrelated party
8.
E
XPLAIN THE CONSEQUENCES UNDER
§469
OF A
TP’
S DEATH
 The suspended losses are allowed only to the extent they exceed the amount, if any, by which the AB of the property in the activity is increased by §1014, suspended losses of the activity are forever disallowed
9.
E
XPLAIN THE CONSEQUENCES UNDER
§469
OF A GIFT OF A
TP’
S INTEREST IN A
PASSIVE ACTIVITY
 Gift of part or all of TP’s interest in an activity will not cause the release of the suspended losses allocable to the activity
 Donor’s AB will be increased by suspended losses
 Donee gets that AB, except when there is a computation of a loss, then that loss is disallowed

29.08.2010 23:02:00
1.
E XPLAIN THE C ONVENIENCE OF THE ER DOCTRINE AND ID WHEN IT APPLIES
 IF EE receives benefit b/c of duty to remain on ER premises then benefit may be considered given for convenience of ER
2.
R: §119 EXCLUDES ERPROVIDED MEALS & LODGING IN CERTAIN CONDITIONS
3.
E XPLAIN REQUIREMENTS OF §119 M EALS AND L ODGING – S ECTION 119( A )
 GR: Exclusion for EE the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his ER for the convenience of the ER, but ONLY IF— o (1) in the case of meals, the meals are furnished on the business premises of the ER, or o (2) in the case of lodging, the EE is required to accept such lodging on the business premises of his ER as a condition of his employment o Reg: Condition of employment means that EE be required to accept the lodging in order to enable him property to perform the duties of his employment
 Lodging is furnished b/c the EE is required to be available for duty at all times
 (b)(1) In determining whether meals or lodging are furnished for the convenience of the ER, the provisions of an employment K or of a statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation
 S: Supper cash is NOT excludable here, benefits must be in kind
4.
P
REDICT WHETHER
ER-
PROVIDED MEALS OR LODGING WILL BE EXCLUDED
 Problems
5.
R: §132
EXCLUDES AN ARRAY OF COMMON FRINGE BENEFITS FROM
GI
 (1) no-additional-cost service,
 (2) qualified employee discount,
 (3) working condition fringe,
 (4) de minimis fringe[,]
 (5) qualified transportation fringe,
 (6) qualified moving expense reimbursement,
 (7) qualified retirement planning services
6.
A
PPLY THE EXCLUSION FOR NO
-
ADDITIONAL
-
COST SERVICE
 FP: ERs in airline, hotel and RR have excess capacity which will remain unused by customers

 Requirements: 132(b) o 1. Service is offered for sale to customers in the ordinary course of the line of business of ER o 2. Business in which EE is performing services, AND o 3. ER incurs no substantial additional cost (including forgone revenue) in providing such service to the EE (determined without regard to any amount paid by EE for such service). o 4. (j)(1) Prohibits discrimination in favor of highly compensated EEs, defined in 414(q)
 IF rule violated only highly compensated EEs subject to tax, the others are excluded o N: (i) Reciprocal agreements between ERs, must be in writing and ERs cannot incur any substantial additional costs o N: (h) EE includes spouses and dependents
 N: Flying corporate jet no good (not offered for sale to customers)
 N: Reserved EE seats no good (foregone revenue)
7.
A PPLY THE EXCLUSION FOR QUALIFIED EE DISCOUNT : 132( C )
 Exclude EE discount to the extent such discount does NOT exceed— o (A) Property, exclusion limited to ER’s gross profit %, or
 Gross profit % = (Aggregate sales price for the property sold by ER – aggregate cost of property to ER) / aggregate sales price
 Excess of EE discount over Gross profit % is GI o (B) Services, exclusion is limited to 20% of the price at which the services are being offered by ER to customers
 Qualified (c)(4): Line of business and for sale to customer reqts!
 Anti-discrimination rule applies
 Reciprocal agreement do NOT apply
 EE includes spouses and kids
8.
A
PPLY THE EXCLUSION FOR DE MINIMUS FRINGE BENEFITS
: (
E
)
 BP: Property and Services provided to all EEs is so small as to make accounting for it unreasonable or administratively impracticable
 ER Eating facility requirements o (A) facility is located on/near business premises of ER, and o (B) revenue derived from facility is NOT in the red
 Anti-discrimination rule applies

 EE-ER relationship not required
 No Cash Permitted
9.
A PPLY THE EXCLUSION FOR WORKING CONDITION FRINGE BENEFITS : ( D )
 BP: Expenditures that would be deductible as a business expense when EE pays for them
 R: any property or services provided to an EE of the ER to the extent that, if the EE paid for such property or services, such payment would be allowable as a deduction under §§ 162 or 167
 Cash payment not normally excluded UNLESS there is a prearranged qualifying activity, verify such use & excess to ER
10.
A PPLY THE EXCLUSION FOR QUALIFIED TRANSPORTATION FRINGE BENEFITS
 Requirements o A) Transportation in a commuter Hway vehicle if such transportation is in connection with travel between the EE’s residence and place of employment. o (B) Any transit pass. o (C) Qualified parking. o (D) Any qualified bicycle commuting reimbursement.
 Limits o Limits adjusted for inflation o $230 for Parking Space, $20 for bike,
11.
VALUATION OF FRINGE BENEFITS WHICH ARE NOT EXCLUDED FROM
GI
 FMV of the fringe benefit – any excludable portion of the fringe benefit and any amount paid by the recipient
12.
P
OLICY
: W
HETHER EXCLUSIONS FOR FRINGE BENEFITS LISTED IN
§132
AND
§119
ARE APPROPRIATE
,
AND TO EVALUATE WHETHER THOSE PROVISIONS ARE
ADMINISTRABLE