Individual Income Tax Outline - Jrc

Individual Income Tax Outline

Chad Hallberg

INDIVIDUAL INCOME TAX OUTLINE SOURCES OF TAX LAW IRC • SCOTUS Opinions • Legislative History • 1. 2. Other Federal 3. Courts 4. 5. • • Tax Regulations (Treasury • Regulations) • • • Revenue Rulings • Revenue Procs Private Letter Rulings Etc.

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

CONSTITUTIONALITY of TAX SYSTEM th

16 Amendment

Penalties § 6673

US v. Schiff

• • • • • •

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the Several States and without regard to any census or enumeration.” There is a $25,000 penalty for bringing frivolous actions to cause delay. People are free to protest but many go to jail. Vote out your political representative if you don’t like the tax system. ∆ is a author and lecturer who is a professional tax resister. Black Letter – Good faith defenses encompasses misunderstanding of the law, not disagreement with the law.

IRS AUDIT PROCESS Types Procedure

Fall 2008

• Office Audit – A smaller audit done mostly in the IRS office. • Field Audit – A more involved audit where the agent comes to you. 1. Step 1 – Agent Files a Statutory Notice of Deficiency which states how much is owed and the taxpayer goes into default. 2. Step 2 – Taxpayer then has two courses of action: a. Taxpayer both pays the amount up front and goes to Claims Court where no jury trial 1

Individual Income Tax Outline Chad Hallberg or appeal is possible. b. Taxpayer does not pay the tax but instead fights it out with the IRS in either Tax Court, where no jury trial is available, or local Federal District Court to file a refund action, where a jury trial can be obtained. Appeals • In any of the courts Tax Court, Claims Court, or District court either party can appeal.

STATUTE OF LIMITATIONS: § 6501 • Generally

Exceptions

• • • 1. 2. 3. 4. 5. 6.

Period of limitation is the period of time in which taxpayer can amend a return to claim a credit or refund or the IRS can assess additional tax. IRS Pub. 552. General Rule: 3 year SOL begins to run on the date in which the return is filed. EX: Returns for 03, which are filed on April 15, 04 has a SOL period until the year 07 If filed before, for example on January 15, the SOL period still begins on April 15; If filed after, for example on July 15, the SOL period will begin on July 15. False Return – No SOL. Civil Fraud / Willful Attempt to Evade / No Return– No SOL Tax Evasion / Criminal Statutes – 6 years Civil Negligence – 6 years Substantial Omissions of Items on Return (25% or more) – 6 years Loss from a worthless security – 7 years

BURDEN OF PROOF •

If taxpayer cooperates and has records to support their claim then the BOP is on IRS; otherwise, it’s on taxpayer

SUBSTANCE OVER FORM DOCTRINE •

No matter how you prepare your taxes in order to make them look like the taxes are legit (form), the substance of what they really are (substance) will overrule and force you to pay taxes

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

BASIC DEFINITIONS •

Gross Income §61

Tax Deduction Above the Line Deduction AGI Fall 2008

Except as otherwise provided in this subtitle, GI means all income from whatever source derived • Lay Speak: Everything is gross income unless some other provision in Subtitle A of the Code says it is not. Expenses or losses incurred by a taxpayer that can be used to reduce the ultimate amount of the taxpayer’s taxable income. Takes that deduction amount off of your income. A term used to describe those deductions which the IRS allows a taxpayer to subtract from his or her GI as set forth in §62. GI - above the line deductions = AGI. Because these deductions are taken before AGI is calculated, they are termed "above the line." AGI = GI – Deductions. An important benchmark determining certain other allowed benefits. EX, most limitations on deductions or credits are determined based on either AGI or modified adjusted gross income (MAGI). MAGI is AGI modified by certain amounts specific to the given limitations 2

Individual Income Tax Outline Chad Hallberg A dollar amount that non-itemizers may subtract from their income and is based upon filing status. Since can’t take both itemized deducts & a stnd deduct, taxpayers generally choose the Standard deduct that results in the lesser amount of tax owed. Look for 65+ yrs old and blindness for a Deduction bigger stnd deduction Itemized Deductions

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

Exemptions

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

Tax Credit

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

SCHOLARSHIPS •

Non Taxable  If a scholarship is received without strings attached (except good GPA).  Sports Scholarships.  Does not have to do anything for the University, but has to work somewhere else e.g. § 117 community service. Rev. Ruling §1.117 • Taxable  Student has to do something like work.  Scholarship is given in exchange for student doing something for school i.e. law review. 1. Rev. Rul. 58-403 a. Facts – Taxpayer seeks advice whether son, who is in the United States Navy’s educational assistance programs qualifies as a scholarship and if π can claim minor son as a dependant. b. Black Letter – Because son is under obligation to render employment services to the Navy upon completion of his studies, the scholarship is taxable. 2. Ide v. Commissioner a. Facts – Same as above. b. Black Letter – Primary benefit of education would be to Charles in his individual Cases capacity, therefore the payment of the scholarship to Charles shouldn’t be taxed. 2. Lange v. Commissioner a. Facts – π was determined to have a $308 deficiency because he did not include $1,981 amount given to him as a financial need scholarship. He received that money for working in law school clinic. b. Black Letter – Although §117(b)(1) excludes amounts given for teaching, researching, or other services for scholarship purposes, the amount received by π was for financial need and the clinic is an integral part of the study curriculum. Similar payments were not received by entire student body. Fall 2008

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Individual Income Tax Outline

Chad Hallberg

§ 61: GROSS INCOME (The Starter § for all essays) •

Except as otherwise provided in this subtitle, GI means all income from whatever General Rule source derived §61(a) • Lay Speak: Everything is gross income unless some other provision in Subtitle A of the Code says it is not. Examples, cont. • Annuities (payments over time) • Income from Life Insurance (only sometimes) and Endowment Ks Examples The following list is NOT all-inclusive • Pensions • Compensation for services, including fees, • Income from discharge of indebtedness commissions, fringe benefits (but see §132), - EXCEPTIONS (108a1A-E) and similar benefits - Discharge from Ch 11 Bankruptcy • Gross income derived from business - “” insolvency (Liability > Assets) • Gains derived from dealings in property - “” qualified farm indebtedness - (for taxpayers other than Corps) the qualified prop is • Interest biz indebtedness • Rents, Royalties, Dividends ($ from stock) NEW §: If qualified prin residence and indebtedness • Alimony (child support is NOT income) and discharged before 1/1/2010 (response to Mtge Crisis) Separate Maintenance Payments • Distributive share of partnership gross income • Income in respect of a decedent ($paid2person post-death) • Income from an interest in an estate or trust • Prizes and awards (§74) except for §§74 or 117 (qualified scholarships) exclusions NON-GROSS INCOME EXAMPLES - Gifts (giving person taxed, not receiver) - Inheritances

GROSS INCOME TEST 1. 2. 3. 4.

See if it’s in §61a Glenshaw Glass rule: Categories of Income based on Glenshaw Glass Categories of Non-Income TREASURE TROVE • General Rule Cesarini

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Found income is taxable the year it is in the undisputed possession of the person who found the income even if the income is not cash and regardless if it is sold. T.R. § 1.61-14 Mark McGuire exception (“We won’t tax in this case”)…can argue all TTrove shouldn’t be taxed at discovery Tony Roma’s waitress case.

§ 1.61-2(d)(1) & Rev Ruling 79-24: BARTER AS INCOME General Rule

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Fall 2008

If services are paid for other than in money, the fair market value of the property or services taken in payment must be included in income. EX: In return for legal services, a lawyer gets his house painted by a house painter. Held: FMV of the services received by the lawyer and the house painter are includible in their gross incomes under § 61 of the Code. Gift: Cts will look at whether the services are a gift  Determined by whether services are a “detached and disinterested generosity”, which equates to a NON-gift 4

Individual Income Tax Outline • Samples: Samples aren’t income

Chad Hallberg

GROSS INCOME CASES 1. Facts – π received a dividend in stock (2,200 to 3,300 but still has same $ value) and IRS wanted to treat as income.

Eisner v. Macomber

2. Black Letter – Stocks, dividends, or other investments are not income unless it is cashed in or sold…until the gain is realized by the sale or exchange or such an asset, there is no assurance the gain will stay there. a. Part 1 Income may be defined as the gain derived by capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets. 1. Are back profit AND punitive damages income as defined by Macomber?

2. Part 2 Ct says both are income (including punitive damages) b/c income is “income Glenshaw Glass

from whatever source derived” (16th A.) and § 61a is not an exhaustive list of what income is

3. Part 3 Current Defn of Income: (1) Undeniable accessions to wealth, (2) clearly

realized, and (3) over which the taxpayers have complete dominion MEMORIZE! Clark v. Commissioner

4. Facts – Lawyer agrees to pay $10,618.87 in taxes for a client who lost that amount due to the bad advice from the attorney. 5. Black Letter – The amount received from the attorney was compensation for a loss which impaired petitioner’s capital.

BASIS AND DEPRECIATION

General Rule §1001, 1014, 1016

General Rule §1101, 1012

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

FRINGE BENEFITS General Rule § 61 Fall 2008

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Fringe benefits are taxable unless qualified under IRC (below) 5

Individual Income Tax Outline Chad Hallberg • Gross income shall not include any fringe benefit which qualify as a–– 1. No-Additional Cost Service 2. Qualified Employee Discounts 3. Working Condition Fringe 4. De Minimus Fringe §1.61-21(a)(2), 5. Qualified Transportation Fringe (a)(4), (b)(1)&(2) 6. Qualified Moving Expense Reimbursement 7. Qualified Retirement Planning Services 8. Qualified Military Base • Go to more specific § in tax; it has precedent over §§ w/general terms discussion • IRS is most worried about the employer and giving “disguised compensation” Is a perk income? TEST

(1) Is the perk a condition of employment? (2) Is the perk for the convenience of the employer (not of the emp-ee)? (3) Is the perk on biz premises of the employer? (cafeteria, housing)?

FRINGE BENEFIT EXCEPTIONS • No-Additional Cost Service §132(b) • • Qualified Employee Discount §132(c)

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Working Condition Fringe §132(d) De Minimus Fringe §132(e)

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Fall 2008

Any service provided by an employer to an employee for use by such employee if: 1. Such service is offered for sale to customers in the ordinary course of the line of business the employer in which the employee is performing services; AND 2. The employer incurs no substantial additional (including forgone revenue) cost in providing such service to the employee. Example – Airline tickets & Hotels to their emp-ees; Gym giving free gym membership; Gym membership may be ok Non-taxable so long as discount does not exceed: 1. The gross profit percentage of price which the property is offered by employer to customers; OR 2. 20% of the price at which services are offered by employer to customers. Reality – Don’t differentiate on prop v services, but FOR EXAM…keep up the diff If companies give more than the 20% discount, the emp-ee pays the diff on the amt MUST be in the same line of business as the employer deals in general (i.e., shoe store) Excludes any property or services provided to an employee or employer to the extent that, if employee paid for such property or services such payment would be allowable as a deduction under §162 or §167. EX – Professors’ $2k/year from GU Law to go to CLEs General Defn: Any property or service, the value of which is so small as to make accounting for it unreasonable or administratively impracticable is excluded from tax. - But, it’s pretty minimus! Excludible Examples: §1.132-6(e)(1): 1. Occasional typing of personal letters by a company secretary. 2. Personal use of employer’s copying machine (85% must be for biz purposes). 3. Occasional cocktail parties, group meals, or picnics for employers and guests. 4. Donuts at work, cake for someone’s b-day w/low FMV 5. Employer provided transportation in certain circs: (1) Unusual circs; (2) Unsafe conditions Non-Excludible Examples: §1.132-6(d)(4)(e)(2): 1. Season tickets to sporting or theatrical events. 2. Commuting use to an employer provided car or other vehicle more than one day a month. 3. Membership in a private country club or athletic facility regardless of frequency. 6

Individual Income Tax Outline Chad Hallberg 4. Employer provided group term life insurance on the life of the spouse or child. 5. Weekend use of employer-owned/leased cabin • They’re really looking to kick out “disguised compensation” • Transportation in a commuter highway vehicle ($115 limit), transit pass ($115 limit), or qualified parking ($220 limit) and anything above is taxed to Emp-ee. Qualified Transportation • Parking doesn’t have to be onsite, but must be at least from a spot where transit can be §132(f) taken • Applies to cash so long as emp-ee provides a voucher • Any amount received from an employer as payment of reimbursement for moving expenses which would have been deductible under §217 is deductable • §217(b) – Moving of household goods and personal effects from the former residence to Qualified Moving Expense §132(g) the new residence; traveling, etc. • Meals are NOT included (§217) • §132(h) lays out a special rule for parents and air transportation. • Any retirement planning advice or information provided an employee and his spouse by Qualified Retirement Services an employer maintaining a qualified plan is deductable. §132(m) • Higher income emp-ees get this deduct only if all emp-ees get it as well Military Base Realignment • Payments when you have to change military bases or you’re realigned are deductable. §132(n) • §132(o) – Commissioner given authority within code section to proscribe certain fringe benefits. Other §132(o) • Non-Discrimination Rules – can’t just give benefits of plans to the board of directors, etc. it must apply to everyone down to the lowliest janitor. • Child care programs. Dependant Care • Gross income does not include amounts paid by an employer. Services cannot exceed Assistance §129 $5,000 or $2,500 for married filing joint. Other Fringe • Athletic Facilities – If located on the premises of the employer AND NOT used by Benefits others, then there is no additional tax for the taxpayer. §132(j)(4); §1.132-1(b)(3) • Achievement Awards - §74(c) – (1) Tangible personal prop (2) only up to certain value and (3) only in connection length of service or safety; Doesn’t work for cash bonuses, season tickets, or really expensive stuff (b/c then it’s “disguised compensation”). • Group-Term Life Insurance - §79 • Accident and Health Plans - §105 and §106 • Rental Value of Parsonages - §107 • Meals or Lodging for Convenience of the Employer - §119(d) – Must be on the premises of the business. Firefighters, Mental Illness Centers. As long as you’re required to stay there by your employer. - Meals: (1) furnished by emp-er; (2) for convenience of emp-er; (3) on biz premises of emp-er (loose interp) - Lodging Adams v US (US expat as CEO for Mobil One Jap Co): (1) furnished by emper; (2) for convenience of emp-er; (3) on the premises of the emp-er (loose interp); (4) emo-EE req’d to accept as condition of employment • Combat Pay - §112 • Qualified Tuition Reductions - §117(d) – Must be below the graduate level. • Group Legal Services Plan - §120 Fall 2008

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

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

DEDUCTIONS – SUPER DEDUCTIONS “ABOVE THE LINE” §§ 62(A)(10), 71, 215: ALIMONY PAID • • • • • •

General Rule You need to have spouse’s former SSN. Spouse receiving alimony must claim as income. Child Support is neither income nor a deduction. When assessing whether payments are alimony or child support courts look at substance of the payments i.e. where “alimony” payments last until children reach the age of 18 or 21, then it is most likely to be deemed child support rather than alimony. Spouses must live separately. Must terminate at death.

§ 217: MOVING EXPENSES General Rule Scope

Limitations § 217(c) – 3 Tests

• 1. 2. 3. 1. 2.

Moving expenses paid in connection with the commencement of work by the taxpayer as en employee or as a self-employed individual at a new principal place of work. Moving household goods and personal effects from former to new residence. Traveling expenses including lodging from former to new residence. NO meals included. (c)(1)(A) – at least 50-miles farther from his residence than was his former principal place of work; OR (c)(2)(A) – Taxpayer is full-time employee for at least 39-weeks. (c)(2)(B) – Selfemployed individuals must be there for 78-weeks of next 24-months. Don’t have to be employed, but must be soon.

§§ 219, 408: IRA DEDUCTION • • Fall 2008

$2,000 in an IRA in Fidelity and you’re never taxed on it until you’re taxed. Lower in tax consequences when the money is pulled out. Definitely put money into the IRA so you can claim it as a tax deduction. 8

Individual Income Tax Outline Chad Hallberg • If you take it out early you have to pay tax plus a 10 percent penalty. The eligible age is 59 ½. • Exceptions to take it out early: • (72)(t) – Death, Disabled, Unemployed for at least 12-weeks, Qualified Domestic Donations Order, A lot of people have no idea until they know what is says on the penalty. • Roth IRA you can’t take a deduction but the IRA is tax free. General Rule • Penalty •

§ 221: STUDENT LOAN INTEREST DEDUCTION • General Rule Limitations Phase Out

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Deduction allowed for the taxable year an amount equal to the interest paid by the taxpayer during the taxable year on any qualified education loan. Must be a recognized institution, 5-years to pay off your student loans. $2,500 in interest per year. 221(b)(2)(B) – 1/3 of amount where AGI is in excess of $50,000 for single, $100,000 for joint.

§ 62: EDUCATOR EXPENSE General Rule

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Teachers in K-12 are allowed $250 as a deduction for educated related expenses; Teachers must keep their receipts.

§ 222: DEDUCTION FOR TUITION General Rule

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Scope

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Phase Out

In the case of an individual there shall be allowed as a deduction an amount equal to the qualified tuition and related expenses paid by taxpayer during the taxable year. Only available if the taxpayer doesn’t qualify for the Hope or Lifetime learning credit (these are much better because they’re credits $ for $). § 222(b)(2)(B) (i) AGI doesn’t exceed $65,000 ($130,000) = $4,000 (ii) AGI doesn’t exceed $80,000 ($160,000) = $2,000 (iii) Any other taxpayers the amount is 0.

§ 164(f): ½ SELF EMPLOYMENT TAX General Rule Other Related Deductions

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A taxpayer can deduct half of self-employment tax paid (15.3 %) of their income. § 162(l) – Self-employment Health Insurance deduction and Self-Employment IRA deduction.

§ 162: BUSINESS DEDUCTIONS General Rule Carrying on a Trade or Business

Fall 2008

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Business Expenses must be (1) ordinary (common, accepted) & necessary (appropriate, helpful), (2) paid or incurred (3) in the normal course of a (4) trade or business (continuity, regularity). 1. Reasonable Allowance for Salaries 2. Traveling Expenses a. Travel Away from Home b. Travel Form House to Job & Car Expenses – Not deductible because the regulations say it is not. Commuting expense is not deductible. 1.162-2(e) c. Pharmaceutical Sales Rep. – House → Hosp. → Hosp. → Hosp. → Hosp. Rev. 99-7 NON-REIMBURSED d. Going between house and temporary work location outside the metropolitan area where the taxpayer lives and normally works. 9

Individual Income Tax Outline Chad Hallberg e. If one or more regular work locations away from taxpayers residence locations expenses incurred in going between the taxpayer’s residence and a temporary work location in the same trade or business, regardless of distance. f. IF taxpayer’s principal place of business within the meaning of 280(c)(1)(A) taxpayer may deduct daily transportation expenses incurred in going between the residence and another work location in the same trade or business, regardless of distance. g. Temporary – If employment at a work location is realistically expected to last a year or less the employment. If however, the 1 year or less estimation goes over a year it is treated as temporary until the 3. What is a Home? a. Regular place of business; OR b. If no regular place of business → then regular place of abode. i. Example – Guy was a “roadie” traveled with bands and then lived with parents. 4. Rentals of other Payments 1. Bernardo a. Facts – Taking clothing worn for work as a business expense deduction. b. Holding: i. Subjective Test (From Hynes and Yeomans) – Cost of a business wardrobe required as a condition of employment is considered a non-deductible personal expense within the meaning of §262 if the purchased clothing is suitable for general or personal wear. ii. Objective Test - Objective Test – Would tax payers in general wear this particular piece of clothing: Not suitable for general wear; Required by an employer; In fact not worn as general wear. Cases from Class 2. Wills a. Holding: i. Purpose of away from home deduction is that you’re temporarily away from home and you have to incur costs that are essentially identical in two particular areas. ii. Personal Choice will not allow for the deduction it must be for business exigencies. 3. Hantzis a. Facts – Law student takes job in New York and maintains place in Boston. b. Holding - In order to be ordinary and necessary there must be business exigencies. • General Rule (§ 162(c)(2) – Illegal payments are never deductible. Exclusions 1. 162(e) Illegal Bribes to government officials or employees 2. Kickbacks, Rebates, and Bribes under Medicare and Medicaid. Substantiation of • Taxpayer must substantiate the expenditure with either a receipt, or oral testimony – Expenses Cohan; except for entertainment expenses under §274(d). Application to Actual • Red Light District: Cases 1. Facts - Author writes about Red Light District and wants to deduct expenses; 2. Held – Such relations are too inherently personal. • Ministers Prayers: 1. Facts – Minister paid by company who wasn’t doing well to say prayers in their behalf. 2. Held – Religion is too intimately private. Fall 2008

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Individual Income Tax Outline Chad Hallberg • The Who? 1. Facts – Band trashes hotel room and want deduct expenses of fixing the damage. 2. Held – Not ordinary or necessary.

§ 1.162.5: EDUCATIONAL EXPENSES

General Rule

1. Deductible IF: a. Maintains skills or improves skills required by the individual in his employment or trade or business; OR b. Meets express requirements of the employer or laws or regulations imposed as a condition of employment. • Example – LLM deductible if you’re an attorney. 2. BUT NOT DEDUCTIBLE IF: a. Expenditures are made by an individual in order to meet minimum educational requirements for qualification in his trade or business. b. Expenditures are made for education which will lead to qualifying him in a new trade or business.

ATTORNEY’S FEES General Rule Clark v. Cmsr

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In determining whether attorney’s fees are deductible as a business expense, look to the origin of the claim. 1. Facts – Women applies for job as office personnel, firm sends an employee to interview husband to see if it is okay if she works, woman rapes the interviewer and subsequent rape charges follow, attorneys fees eligible for deduction? 2. Black Letter – Yes, man was conducted his business.

§ 274: ENTERTAINMENT EXPENSES •

General Rule

§ 274(b): Gift Limitation

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Draconian Rule – No deduction for entertainment (whatever people generally consider to be entertainment), amusement, or recreation unless: 1. Directly Related to the Expense (§ 1.274-2(c): a. Taxpayer needs to connect the expense to the trade or business. b. Taxpayer must initiate the business conversation. c. Taxpayer must hit either §§ 162, 212 d. Principle Character must be business e. General Goodwill is not enough. 2. Associated with The Business (§ 1.274(d): a. Generally, the entertainment needs to proceed or follow a substantial and bona fide business discussion. $25 per gift for the entire year; mailing not included.

• § 274(d): Substantiation § 274(k): Business Meals

Fall 2008

Must substantiate the amount of the expense by: 1. Receipts 2. Written Testimony – time, date, place and what you talked about • Cohan Rule doesn’t apply which stated that credible oral testimony is good for us but not under 274(d). • Requirements in order to deduct the amount for meal expenses within the course of employment and those which are ordinary, necessary, and not too inherently personal: 1. Pass muster of §§ 162, 262, 274(d) 2. Not lavish or extravagant under the circumstances. 3. 50% of the total amount may be deducted (§ 274(n)). **NOTE – I.C. not reimbursed; Employees put this on MID of Schedule A; 2% cut right 11

Individual Income Tax Outline off the top of AGI, plus 50% limit.

Chad Hallberg

BUSINESS DEDUCTIONS Generally § 162 “Ordinary & Necessary” “In connection with”

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“A taxpayer may deduct all the (1) ordinary and necessary expenses (2) paid or incurred during the taxable year in (3) carrying on a (4) trade or a business.”

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Ordinary: Common and accepted AND Necessary: Appropriate and helpful - Necessary is pretty easy to reach Where a taxpayer is seeking employment in a new trade or biz activity, the §162(a) is appropriately denied b/c the taxpayer is not yet carrying on that biz; The indiv must already have the employment in order for the expense to be in connection with and :., deductible Involved in the activity w/Continuity and Regularity w/intent to make a profit (even if you don’t make a profit) Enough regularity to call it a biz, but not necessarily full-time (case-by-case analysis) Regular Gamblers: Must report income, but still may report 50% of the loss. Normally, personal loss is not deductible, only where Congress allows. Casinos give you a 1099 Form. Only Professional Gamblers can take full loss, so IRS wants these types of gamblers to be full-time and will be strict w/them

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“Trade or Business”

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Personal, Living Expenses § 262 Distinction Statutory Disallowances of Deductions for Public Policy

Hess v. Commissioner

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No deduction is allowed for personal, living, or family expenses. Also, when in conflict, §262 holds precedent over §162. Business expenses are those incurred in producing, or in the expectations of producing, revenues to the business, as distinguished from expenses incurred for the convenience, comfort, or economy of the individual in pursuing his business.

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162c1 Illegal Bribes 162e Certain lobbying expenses 162f Fines paid to gov’t for violations of law 162g Treble damages payments on guilt for federal antitrust laws 280e Expenses for illegal sale of controlled substances

1. Facts – Woman tried to write off breast enlargements as a business expense. 2. Black Letter – As an exotic dancer, π’s expense of breast augmentation made them so freakishly huge and her profits went up substantially that the breasts were essential to the taxpayers business and there is no other suitable purpose for the horrendous breasts.

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

ITEMIZED DEDUCTIONS: SCHEDULE A § 213: MEDICAL DEDUCTIONS General Rule Fall 2008

•

Rule: Diagnosis, cure, mitigation, treatment or prevention of disease, or for the 12

Individual Income Tax Outline

• • • • • • • • • • • • • •

Chad Hallberg

purpose of affecting any structure or function of the body (~cosmet if ~based on disease) • Applies to unreimbursed medical expenses paid for in the taxable year AND in excess of 7.5% AGI. • EX: AGI = $100,000; 7.5% = $7,500; ME = $9,000; Deduction = $1,500 COVERED §213c NOT COVERED Transportation • Teeth Whitening Retirement / Nursing Homes (Long-Term care) • No Snow Bird Exception Birth Control, Abortions – if legal in your jurisdictions • No Cosmetic Surgery unless based on disease Only Prescription Drugs (Viagra even!) • No Meals on Wheels Smoking Cessation programs if ~ OTC (ie, patch or gum) • Babysitter in order to go to the doctor Weight loss Programs/Fat Farm: if under medical obesity • Illegal Drugs, even if legal in your jurisdiction. May cover lodging primarily for and essential to medical • Marriage counseling care $50 and no higher for each night. § 213(d)(2) Vasectomy • Sex change is before the tax court right now Psychiatric Treatment for Sexual Inadequacy Fertility Enhancement Guide Dogs Chiropractor / Massage therapy Alcoholism Treatment Vision correction • General Rule – Home modifications for medical purposes are deductible, however, aesthetic improvements are not; • Case: Ferris v. Commissioner – Amount of increase of the home’s value is subtracted Home from the deduction amount; deduction must be what the reasonable minimal cost of the Modifications structure would be. • Example: Taxpayer’s doctor prescribes a spa be put in home to help w/arthritis or some other ailment: SPA = $7k; Increase in Value of home = $5k; Medical Deduction = $2k

§ 164: TAXES PAID General Rule

Types

How To

• • • • • • • • •

Taxes paid are deductible; however tax refund must be included in gross income on the following year. NO FED TAX DEDUCTIONS State Income Taxes State Sales Taxes (for 2008-09) Local Taxes Property Taxes Personal Property Taxes Car Tabs (if the amount is determined to be an excise tax and not a registration amount) Take amount gov’t gives you and deduct it OR save all your receipts

§ 163: INTEREST PAID General Rule

• • •

Fall 2008

There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness up to $1M. Any interest on home + loans taken against home (Home Equity) even if that $ ~ used on home (h) No deduction for personal interest (i.e., Credit Cards) 13

Individual Income Tax Outline Chad Hallberg • Qualified Residences: Primary + 1 other residence (not just any rental) • Mortgage Interest and Points (can include two homes) • Home Equity loans taken out to pay off credit cards Examples • Interest for rental properties is taken on Schedule E. • NOT – Credit card interest

§ 170: CHARITABLE CONTRIBUTIONS

General Rule

Restrictions on Contributions

Hernandez

Jewish School LDS Missionary

1. Qualification – Organization must be qualified charity under 501(c)(3). 2. Amount of Contribution §170(f)(8(A) – Up to 50% of AGI can be deducted; 30% if a capital asset. • Example: If AGI = $100,000, maximum amount of deduction = $50,000. 3. Non-Cash Donations – Property, clothing, etc. can also be deducted as a charitable contribution. FMV will determine the amount of each item. 4. Filing requirements per amount contributed • $.01-250: Cancelled check, receipt, or letter from org showing date&amt of contr • $250-$499: Same as above + description of prop, FMV, basis, org.al agreement • $500-$4,999: Manner & Date of acquisition, Cost/Basis (must attach to return) • $5,000+: Must include appraisal in return, cost of which is not included in the donation; Phys condition of prop; description of prop; terms of agreement; stmt from appraiser; date of appraisal (can be appraisal penalty for bad appraisal) 5. Cookies from Scouts – Must subtract the FMV of the goods purchased and take the rest of the amount contributed as a donation. • Formula: Whole Contribution – FMV (received in return) = Net Contribution 6. Carry Over – Any contributed amount which exceeds the 50% restriction of AGI can be carried over for up to 5-years. 7. Leave Donation Programs – Notice by the IRS the amount is not deductible but the amount is not included in income. 8. Uniforms – Can be deducted if needed to work for charitable service organization. Candy striping outfits. 1. Political Campaigns/Candidates – Can’t endorse or oppose any political campaign or candidate. 2. Tuition – Tuition is not deductible. 3. Foreign Orgs – Deductions are not allowed for contributions or grants to foreign orgs 4. Control – To the extent you give something you must not hold strings back; Control must be given to the organization. 5. Services 1.170A1(g) – Service to charitable donations is not deductible. • Example – Blood donated to Red Cross during blood drive. 1. Was Scientology Church receiving Quid Pro Quo (giving something and then getting something in return?) Yes they were 2. Personality testing where people take deduction for charge of the test (a set price) 3. Ct says they’re not donations, but a quid pro quo 1. To extent payment for religious/private school tuition is paid by parents, they shouldn’t get deduction b/c can’t parse out how much $ goes to school and how much was for charitable contrib 1. Parents paying for kid’s mission as in old days, try to deduct, IRS says no 2. Now, parents pay a flat rate for everyone to Church HQ – Deduction ok b/c contrib. to Church

§ 165: CASUALTY AND THEFT LOSS Fall 2008

14

Individual Income Tax Outline

Chad Hallberg

§ 165: Casualty & Theft Biz Loss General Rule

•

Will allow a whole lot more from the loss of business rather than from personal loss.

§§ 165(c), 1.165-1: Casualty & Theft Personal Loss •

Loss actually sustained during the taxable year and not made good by insurance, which is sudden, unexpected, and unusual. General Rule • Based upon FMV before and after the incident. • Property must have actual physical damage. • Must be over $100; AND Restrictions • In excess of 10% of AGI. • AGI = $100,000; 10%= 10,000; Casualty Loss= $12,000; Deduction = $2,000 Example Loss: Example Not Loss: 1. Hurricanes, Flood 1. Animals – general rule is forget about taking the deduction. 2. Car Wreck, so long as it wasn’t intentional, 2. Termites – most cts say it is gradual so no loss deduction. and don’t forget to factor in insurance. 3. Erosion from ocean waves. 3. Property that is actually stolen and not lost; 4. Intentional Acts File a police report for verification. 5. Couple Lived Next Door to O.J. – Court said no casualty 4. Landscaping –need an appraiser to compare it because there is no physical damage; Loss on sale of a to the value of your home after casualty. home is not included as an itemized deduction. 1. Losses Incurred In a Trade or Business 2. Losses Incurred in any Transaction Entered into for Profit, not connected with trade or bus. Limitations 3. Losses arising from fire, storm, shipwreck and casualty theft. • Casualty Theft – Loss taken in year of discovery; only $ amount no interest. • General Rule (§165(d)) – Deduction granted only to the extent of your gambling winnings. • Example: Win $10,000; Lose $5,000; Deduction = $5,000; Win $1,000; Lose $5000 Deduction = $1000. • Professional Gambler – Professional gambler reports losses on Sche. C. Same rule Gambling Losses applies. • Non-professional Gambler – Losses reported on Schedule A as a Miscellaneous Itemized Deduction (MID). Subject to 2% haircut. • When Incurred – Loss taken in particular year in which the wagering took place. • How Verified – Maintain a diary or similar record including date, type of wager activity, and gambling venue, travel receipts and each slot machine should be numbered.

§ 162: EMPLOYEE BUSINESS EXPENSES • General Rules

Limitations

• • • •

Phase-Out

Fall 2008

Test – Expenses must be ordinary and necessary and in the course and scope of employment. Test same for Corps., LLPs, and trusts. Meals and Entertainment § 274(n) – Limited to 50% deductible for dinner expenses. Self-Employed – Full deduction so long as expenses are ordinary and necessary. 2% Haircut – If AGI = $100,000; 2%= $2,000; Amount of expenses exceeding the $2,000 Haircut may be taken for a deduction. General Rule § 68 – In the case of an individual whose AGI exceeds the applicable amount, the amount of the itemized deductions otherwise allowable for the taxable year shall be reduced by the lesser of: (1) 3% of the excess of AGI over the applicable amount ($100,000 MFJ; $50,000); OR (2) 80% of the amt of the itemized deducts otherwise allowable for such taxable year. 15

Individual Income Tax Outline Chad Hallberg • Working Family Tax Relief Act of 2004 – Extends the provisions that were set to expire at the end of 2004 and has a uniform definition of child. Class Notes • American Jobs Creations Act 2004 – Passed on Congress on 10-11-04; Far more incentives for businesses.

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

EXEMPTIONS § 151: ALLOWANCE FOR DEDUCTIONS

General Rule

• • • •

1 exemption each for self, spouse, and each qualifying child Minus on the tax return and it appears on the second number of the tax return. Take that number and multiply and then it is indexed for inflation. (b) Taxpayer exemption and Spouse exemption (Reg §1.151-1b allows for MFJ spouse exemp)

•

Phase Out

Phase-out § 151(d)(3)(C)

• • • • • •

(c) An exemption amount for each dependant (as defined in § 152…articulated below) If you make too much $, you will be phased out proportionally of specified exempt.s Applies to Itemized deductions as well If you’re divorced & getting phased out, take child(ren) off your return and have the other spouse take the child even if you have done everything to take care of the child Phase out begins at $239,950 for couples (§151d3C) If you make too much $, then you will be proportionally phased out of exemptions

2% for every $2500 exceeding the threshold amounts. 1. Joint Return - $239,950 2. Head of Household - $199,950 3. Not Married/ Not Surviving Spouse - $159,950 4. Married Filing Separate - $119,975

§ 152: Dependency Exemptions General Rule

• 1. 2.

Qualifying Children Test (c)

3. 4. 5.

Fall 2008

A taxpayer may claim as a dependant any of the individuals listed in §152 whose support he or she provided during the taxable year. Child or Sibling – Must be taxpayer’s Child (bio or adopted, step, eligible foster, or descendant of any of these children) OR Sibling (bio, half, step, or descendant of any of these siblings) Age – Under 19 or 24 if full-time student - Permanently & Totally Disabled during any part of the year meets age req’t Citizenship – w/ exceptions for adoption, Must be a national or resident of the U.S., Canada or Mexico not filing joint return w/a spouse (§152b3) - Must have a U.S. SSN to qualify to prove authenticity Abode – Over ½ time “aboding” w/taxpayer Support – Taxpayer must provide over ½ of support (necessities of life - liberally allowed by IRS) 16

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

FILING STATUS •

General Rule

LOOK AT THE LAST DAY OF THE YEAR TO DETERMINE FILING STATUS!!

MARRIED FILING JOINTLY •

General Rule

Joint and Several Liability, unless an exception is at play

MARRIED FILING SEPARATELY •

General Rule

If getting a divorce; OR Does not want to be jointly & sev.ly liable for other spouse.

§§ 1,2: SURVIVING SPOUSE •

General Rule

Can Claim MFJ for 2-years after year of death of spouse if dependant living at home & no re-marriage for those 2 years

§§ 1, 2: HEAD OF HOUSEHOLD • • • •

General Rule

Individual is not married at the close of taxable year, is not a surviving spouse; AND 1+ qualifying dependant/relative AND Maintains over ½ of the taxable year as the principal place of abode AND Better than Individual rate

EXCLUSIONS FROM INCOME § 102: GIFTS AND INHERITANCE • General Rule

Exceptions Fall 2008

•

•

(a) Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance. (b) Subsection (a) shall not exclude from gross income— 1. The income from any property referred to in subsection (a); OR 2. Where the gift, bequest, devise, or inheritance is of income from property, the amount of such income. Interest (§1.102-1(b)) – Interest earned on the gift or inheritance after receipt is taxable. 17

Individual Income Tax Outline Chad Hallberg • Employee/Employer (§1.102.1(f)(2)) – Any amount transferred by or for an employer to (or for the benefit of) an employee is taxable unless they are between relatives and the gift can be substantially attributed to the familiar relationship and not the circumstances of their employment. • Gifts generally not allowed in relation to employment Reality • Gifts generally ok b/t family members • “If it sounds too good to be true, it usually is” 1. Facts - ∆ gave business referrals to someone, so in gratitude of the referrals ∆ got a Commissioner v. Duberstein § 102(c) Olk v US US v Harris Wolder v Commissioner Kralstein v. Commissioner Killoran v. Commissioner

CADILLAC.

2. What is a Gift? – Ct must look at circs to determine (1) donor’s intent (transferor); The transfer is a gift if it is given w/a (2) detached and disinterested generosity, out of affection, respect, admiration, charity or similar impulse • In direct response to Duberstein, Congress passed §102(c) in 1986 and says any amount transferred from an emp-er to an emp-ee is NOT a gift •

Giving casino dealers tips (“tokes”) and then split amongst emp-ees

•

These tips are income b/c not given in disinterested generosity; rather, by giving tokes patrons were hoping for good luck and so they were totally interested

•

Guy gives twin sisters $ for “affection” and they say it’s not income, but gifts

•

Payments are close enough to gifts for twins to avoid tax evasion

•

Atty contracted to perform legal services for life in exchange for a gift in the client’s will

• Just b/c it’s called a bequest, doesn’t mean it’s a gift 1. Facts – π was given $60,000 as result of a RETIREMENT PARTY. 2. Black Letter – Court looked at intent of the parties to determine if it was because of detached and disinterested generosity. Half and Half. 1. Facts – Taxi driver said TIPS were given because of customers’ detached and disinterested generosity. 2. Black Letter – Tips are taxable because they are paid in return for services rendered.

§ 101(a): LIFE INSURANCE General Rule

• •

• Exceptions

Example

•

• • •

Except as otherwise provided, gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance K, if such amounts are paid by reason of the death of the insured. § 101(a)(2), § 1.101-1(b)(5) Example #1 – If the policy is sold or transferred to another, on death of the insured, the new owner/transferee can only exclude value of consideration paid to transferor for policy and subsequent premiums paid by new owner/transferee. § 101(c) – Monthly interest payments by insurance company to the policy holder are taxable and included in gross income. § 101(g)(1) – Amounts that are treated as an amount paid by reason of the death of an insured: (A) Any amount received under a life insurance K on the life of an insured who is a terminally ill individual. (B) Any amount received under a life insurance K on the life of an insured who is a chronically ill individual. Insurance Policy $100,000 on Matt Matt Transfers the policy to Mike for $60,000 and $600 in premiums until death. Taxable amount is the amount consideration paid (Amount for policy + premiums)

§ 104(a): PERSONAL INJURIES Fall 2008

18

Individual Income Tax Outline Chad Hallberg • Gross Income Does Not Include: (1) Amounts received under workmen’s compensation acts as compensation for P.I. or sick. (2) Amounts received from damages (except punitive) received by suit or agreement and whether as lump sums or periodic payments on account of personal P.I. or General Rule sickness. (3) Amounts received through accident or health insurance for P.I. or sickness where insurance is paid by employer or contributed by employee. (4) Pension annuity allowance for P.I. or sickness from active armed service. (5) Disability income from P.I. as a direct result of military or terrorist action. • Punitive Damages – Taxable to the plaintiff in the amount received. Exceptions • Emotional Distress – Is not a P.I. and damages are taxable. • Insomnia, headaches, stomach disorders are not enough for a tax exclusion. • Π settles suit with Rodman for kicking him. As part of $200,000 π promised not to pursue • Black Letter: Rodman v. 1. It is the nature and character of the claim settled, and not its validity, that determines Journalist whether settlement payment is excludable from gross income under § 104(a)(2). 2. Look at the Intent of the Payor. 1. Look at settlement agreement and then ask what amount of settlement is for P.I.; Stink Test Test. 2. Look at surrounding circumstances. Rev. Rul. 85-98

REPARATIONS • •

Types

Nazi Reparations are excluded from income. 9/11 – Victims of terrorism are not taxed with amounts they receive in order to compensate for their losses.

§ 108: DISCHARGE OF DEBT INCOME General Rule

• •

Exceptions

•

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

§ 121 (a): EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE General Rule 3 Requirements

Fall 2008

• •

Gross income shall not include gain from sale or exchange of property. Ownership & Use Test: During the 5 year period ending on the date of the sale or exchange the taxpayer must have owned & used the home as a primary residence for at least 2 of the 5 years 19

Individual Income Tax Outline Chad Hallberg a. Don’t have to be continuous; 730 days or 24-months. b. Short absences are ok, but 1+ year counts agst you c. Joint Returns: Either spouse has to own for 2+ years and both spouses have to use for 2+ years (If H&W each own home before marriage, both sell, for the jt return, each get what they would have gotten as single persons) Divorce: If 1 is in house, it’s as if both are in the house using it so you don’t have to report gain (if both still own it, then take year of sale and go back 5 and if at least 1 of them meets it, then they’ll both get it) • Once-Every-Two-Years Test: Taxpayer must not have made prior use of §121 exclusion within the 2-year period prior to the date of the sale • Other Good Info 1. Amount shall not exceed $250,000 per spouse ($500k if MFJ) 2. You can’t have another house that you’re using as a principal residence. 3. If you have to pay tax on the gain it is capital income (long-term if owned over 1 year) 4. You can’t take a capital loss on your home. • If 2 props used as residence, the prop used “the majority of the time” will be primary res • Factors: Place of Employment, Driver’s license, State taxes are paid in TR 1.121-1b2 Defining Primary • For the EXAM: If they meet the 730 days req’t, then they’re good. Residence • EX from TR 1.121-1c4: 7 mths in NY (primary), 5 mths in FL | 1999-2000, 2003 in VA, 2001-02 in ME (either qualifies but not both) • Taxpayers can exclude up to $500,000 of gain on the sale of their main home if: 1. Married filing a joint return for the year. 2. Either spouse owns the property for 5-years. 3. Both spouses use the property as a principal residence for 2-years or more of the 5year period. Requirements a. Disability Exception – If taxpayer became physically or mentally unable to care MFJ for himself and owned and lived in their main home for a total of one-year. b. Destroyed Home – If the home is destroyed, you can count the time of a previous home. 4. During the 2-year period ending on date of sale neither spouse excluded a gain from sale of another home. • Buying or transferee spouse must live in the home for 2-years prior to selling the property. Divorce • The divorced spouse must meet the ownership rule but not the 2-year living time requirement. Examples • Example I: 1. Husband moves out in 1997 and agrees to let wife stay in the home to raise the kids. 2. In 2004, home is sold. As long as wife is using it from 1999 through 2004 the exclusion will still be there. • Example II: 1. Anna Nicole Smith marries old guy, who has lived in house forever. 2. 18-months after marriage, he dies and she sells the home. 3. Anna still gets the exclusion up to $250,000. • Example III: 1. Unmarried couple who live together and use and own the home for 5-years. 2. Each would still get the $250,000 amount. • Example IV: Prior to marriage, husband and wife own a home, they are married, and sell their home…each would get $250,000 and after two years of ownership in their new Fall 2008 20

Individual Income Tax Outline Chad Hallberg home would get the $500,000 exclusion. • Members of the Military or Uniformed Services can choose to have the 5-year period for Members of ownership and use suspended during any period where taxpayer or spouse is on qualified Military official extended duty. This cannot last for more than 10-years. • If taxpayer doesn’t remarry before the date of sale, you are considered to have owned and Death to a Spouse lived in the property as your main home during any period of time that your spouse owned and lived in the home. • General Rule – Allows exclusion even though the taxpayer did not meet the ownership use test and the gain is reduced. Must be the primary reason for the sale. • Purpose 1. Employment – start of work with a new employer, or continuation with the same employer, or start continuation of self-employment. a. Safe Harbor Principle – change must have occurred during the period the taxpayer owned and used the property as their main home; AND new place of Reduced employment is at least 50 miles farther from home. Maximum 2. Health Reasons – Primary reason for sale is to obtain, provide, facilitate the Exclusion §121(c) diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual. a. Qualified Individual – Parents, stepparents, grandpas, children, grandchildren, stepchildren, adopted children; siblings, half siblings. 3. Unforeseen Circumstances – an event that the taxpayer does not anticipate before purchasing and occupying the residence i.e. natural or man made disasters, terrorism, divorce, death (self or family members), can no longer afford 1. Does it fit under the Safe Harbor Principle? a. Employment Calculations b. Health Reasons c. Unforeseen Circumstances 2. How Much?

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

§ 25: EDUCATIONAL CREDITS Credit: Dollar for dollar b/c subtracted from the tax you would pay rather than your gross income before tax Hope §25Ab • Duration – So long as you have a student in a freshman and sophomore year you can take two in undergrad • Can’t take Hope and Lifetime in same year • Only tuition and fees • Non-refundable (if you don’t owe tax, you don’t get it) • • Who – If you take the dependency exemption then you take the credit; If claimed as an exemption you can’t claim it is your own. • Phase Out – At higher income levels; Single 42,000; 52 Fully Phased out; Married $85,000 Fall 2008

21

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

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

§ 1031: LIKE-KIND EXCHANGE: TRADE or BUSINESS •

General Rule

• • • • • • • • •

Related Parties Exchange

• •

Fall 2008

“No gain or loss shall be recognized on the exchange of property held for productive use in a trade/business/investment if the property is exchanged solely for property of like kind which is to be held either for productive use in trade/business or for investment.” Doesn’t Apply to Stocks Property must be in the same class. Boot (Cash) – any money left over after the exchange which is taxable. Basis transfers to new property no matter what you receive in the exchange. Must be business or income producing property which is exchanged for business or income producing property. Property #1 gets the basis of Property #2 Deferred Gain Provision, all sorts of little traps and requirements. Copyright Novel → Copyright Another Novel If you get cash, then you’ll have to pay tax on that gain along with being released from a mortgage. There is a presumption if you’re related against the like-kind treatment, but if you show it is not for tax avoidance you’re okay. (Have to hold for 2+ years on each side of the exchange) You must dig deeper and cover yourselves and make sure the reasons for the exchange are 22

Individual Income Tax Outline Chad Hallberg not for tax avoidance. • This applies if you get rid of replacement property within 2-years. • EX: Ann has Relinquished Property → U.S. Bank → Bernie has replacement property, Ann would have 180 days to do this so long as there is a qualified intermediary. Bank must hold the $ for the 180-days and can’t have any use to it Bernie cannot have any control of the funds. If the transaction happens sooner, then Bernie can have the money. Until the replacement property is obtained, the money cannot be touched by Bernie. (Reverse Starker Decision) • Ann → CPA → Bernie; CPA not a qualified intermediary because they are an agent of Ann. • No relationship can be had between the parties and the intermediary. Qualified • Property 1: Intermediary 1. Bought for $10,000 2. Worth $90,000 3. Gain = $80,000. → no gain because it is a Starker transaction • Buy Property 2: a. Bought for $90,000 b. 8-years later sold for $190,000 c. Transfer basis from 1st Property to the 2nd Property total tax liability: $190,000 $10,000 = $180,000 sold. • Speedy has a home in San Diego; Move to Spokane, but kept home as a rental for 10-years. • If they sold the home as a rental there would be $800,000 in gain. Speedy Rice Rental Property • Buy a home in Spokane and do a §1031 exchange, rent for a year and then move in to it. • They live there 2-years and it turns into a §121 transaction. • Like Kind – includes properties in the same general asset class (i.e. truck for a truck) outside you’ll have problems, but for land doesn’t include international property. • Relinquished Property – property you give up. Terms • Replacement Property – property you get. • Starker – Case allowing for deferred exchange • Reverse Starker – Buy first, sell second Personal Prop • Tangible: Asset class for asset class Example TR • Intangible: Goodwill is never like-kind w/another biz; Copyright on 1 novel for another 1.1031a-2 novel is ok, but novel for music is not ok • Treated just like cash Assumption of • FMV of prop received – New prop mtge + old prop mtge = Total Consideration Received Liability • Total Consid Recvd – Basis of old prop = GAIN REALIZED • Basis of old prop transfers to the new prop no matter what you receive in the exchange. Basis in §1031s • Adj Basis – Amt of $ received + Amt of gain recognized = NEW BASIS • Unambiguously identified and sent to QI by midnight on 45th day Identification of • 3 Prop Rule: Any 3 Props at any value Properties • 200% Rule: Any amt of props so long as combined FMV is not over 200% • She didn’t talk about 95% Rule Time Frame • Property must be acquired 180 days after transfer of exchanged property. • If missed by 1 day you must report the proceeds. • Taxpayers must identify the property 45 days after the date on which taxpayer transfers property relinquished in exchange. Fall 2008

23

Individual Income Tax Outline Chad Hallberg • Must be a legal identity and you can identify up to three within the forty-five days and a sale of on one of them within the 180-days. Click v. • Black Letter – When intent is not for like-kind exchange, cannot use §1031. Commissioner

§ 1033: INVOLUNTARY CONVERSIONS •

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

Collections

COLLECTIONS •

General Rule

SOL

• 1. 2. 3.

Time Frame 4.

Assessment

•

Options Available to People Who Can’t Pay: 1. Payment Plan Option – If you can’t pay it right now, you can sign up for a payment plan. And the IRS is required to do so there is an absolute right and as long as payments are made on time, then the right is maintained, afterward if a payment is missed such right is foregone. 2. Offer in Compromise: • What do you have? Give it to us. Food allowance, housing allowance and one automobile. 10-Years on collection from assessment; Can be way out there since an audit can move from 1993 to 1996; File Return 3-Years to Audit Do Audit and send a petition. 90-Day Letter + 60 Days to Assess, Then 10 Years §6502 (not always 10-years when the payments are extended past the 10-years) If you go to court, the statute of limitations on assessment is put on hold, IRS may assess after a case is lost. Then it is another 60-days from a final decision that the IRS has to assessment. There is a #300 on transcript, and it is a computer printout; Pretty much a transcript. Made at the IRS service center and taxpayer is not told of it.

§§ 6320, 6330 LIENS AND LEVIES: COLLECTION DUE PROCESS Fall 2008

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Individual Income Tax Outline Chad Hallberg 1. Notify – The IRS must notify the taxpayer, in writing, of the filing of a lien. 2. Notice Requirement: a. Given in Person b. Left at the dwelling or usual place of business of the taxpayer; OR c. Sent by certified or registered mail to such person’s last known address. 3. Time Frame – IRS must notify the taxpayer not more than 5-days after the day of § 6320(a) filing lien. Requirements of CDP 4. Terms § 6320(a)(3) – Notice must include in simple non-technical terms: a. The amount of unpaid tax. b. The right of the person to request a hearing during the 30-day period beginning on the day after the 5-day period in §6320(a). c. The Administrative appeals and procedures available to the taxpayer. d. The provisions of the title and procedures relating to the release of the lien. 1. General Rule – If the taxpayer requests a hearing under §6320(a)(3)(B), such hearing shall be held by IRS office of Appeals. § 6320(b) Right to a 2. Frequency – Taxpayer is only entitled to one hearing per tax period. Fair Hearing 3. Impartial Officer – The taxpayer is entitled to one hearing per tax period. 4. Appeals – Hearing at the collections stage may be appealed to the court. 1. Defined – Taking of assets. 2. Assessment – IRS looks at your current assets and assets you may have in the future § 6330 Levies (inheritance and future earnings). 3. Exempt Properties – There are minimum exemptions for wages, salaries and other income; Some states have homestead laws.

§ 6330(c) CDP • • Offer in Compromise • • • Payment Plans Collection Appeals Program

• • •

Pennies on the $. Tax payer must establish that: 1. Doubt as to liability; OR 2. Doubt as to collectability. If you get an offer in compromise once you’ll generally not get one again. If the taxpayer is not truthful, he gets in trouble for fraud. Right – Taxpayer has the right to an installment agreement as long as they keep their payment current. Assets – IRS will consider assets for the payment plan. Interest – is assessed. Similar to a due process hearing, but cannot appeal the decision to the court.

Criminal Taxation

CRIMINAL TAXATION General Rule

•

Collateral Estoppel

•

§ 6531: SOL

• • •

Fall 2008

Whether a taxpayer is charged civilly or criminally usually depends on the degree (severity) of the offense and who the person is; Famous People get Screwed! If a taxpayer is found guilty of tax evasion, he is also guilty of civil tax fraud. Only the amount of liability is at issue. Major Offenses have a SOL of 6-years. SOL is tolled for the period the taxpayer is out of the country if they are fighting the charges. SOL is measured from last affirmative act of evasion. 25

Individual Income Tax Outline Chad Hallberg • IRS must indict within 6-years • Every criminal has right and procedure applies to the tax arena. • As soon as the IRS agent realizes that there are possible criminal charges, they must Criminal Rights of drop the case immediately and refer the case to the Criminal Investigation Division. the Taxpayer • There is no accountant/client privilege. In 1998 Congress passed a tax preparer privilege, but this doesn’t extend to criminal proceedings and tax shelters.

§ 7201: TAX EVASION 1. 2. 3. 4. 1. 2.

Degree – Felony Sentence – 6 months to 5-years for each count; $100,000 + tax owed + interest. Amount – All you have to show for evasion is $1. BOP – Must prove intent beyond a reasonable doubt. Amount – There must be an amount due. Willfulness: a. Voluntary, intentional violation of a know legal duty, Subjective; AND b. IRS must show an attempt to evade tax. 3. Proving Willfulness a. Expenditure – IRS looks at taxpayers expenditures compared to their reported income. b. Bank Deposit – IRS looks at the bank accounts compared to their reported income; False entries, double set of books, concealment of assets, covering up sources of income. 4. Reasonable – Willfulness determination made on a case by case basis and should be judged according to ∆’s state of mind, true belief of ∆; Must prove willful tax evasion. Cheeks.

General Rule

Requirements

§ 7203: FAILURE TO PAY 1. Degree – Misdemeanor 2. IRS Burden – Must show that taxpayer: a. Did not pay; b. Knew you needed to pay; AND c. Had the ability to pay at the time the tax was due (willfulness) ** NOTE – IRS usually will not go after a taxpayer until they did not pay for 3-years (shows willfulness).

General Rule

§ 7203: FAILURE TO FILE

General Rule

Proving Willfulness

1. Degree – Misdemeanor 2. Filed Return = Something that gives enough information to the Dep. of Treasury to establish tax due. 3. IRS Burden – Must show that taxpayer: a. Did not file; b. Knew you were suppose to file; AND c. Willfulness • Willfulness is subjective; The IRS must prove a voluntary, intentional violation of a known legal duty. They look for legitimate excuses such as education level and whether they are new to the country. Lying to a tax preparer shows willfulness.

§ 7205 FRAUDUENLTY WITHHOLDING INFORMATION General Rule

1. Degree – Misdemeanor 2. Example – Claiming 99 exemptions on a W-4 form. 3. IRS Burden – Must show willfulness this established by contradictory past behavior.

§ 7205 FRAUDUENLTY WITHHOLDING INFORMATION Fall 2008

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Individual Income Tax Outline Chad Hallberg 1. Degree – Felony 2. Generally – Filing a false return; However there are many other crimes under this section. 3. IRS Burden – Must show the taxpayer: General Rule a. Willfully made false statements b. The Statements were made under penalty of perjury (signing return or in an offer of Comprise; AND c. The false statements were material. • Examples of Fraud or False Statements – Any act to mislead or conceal • Understating income, exaggerating deductions, claiming false exemptions, Examples keeping a double set of books, Making false entries, false invoices or documents, destruction of books or records.

§ 6663: CIVIL FRAUD • •

Penalty SOL

75% of Tax Liability None

Relief, Assignment of Income, and Divorce

§ 6013(d)(3): JOINT & SEVERAL LIABILITY • •

Spouses are J&S liable for deficiencies on tax returns The IRS will collect from the one that it is easiest to get to

§ 6015: INNOCENT SPOUSE

Bad Spouse Rules

1. Notice and Opportunity §6015(e)(4) - Non-Petitioning spouse has the opportunity to get heard, the person filing the claim must file a notice to the non-petitioning spouse. 2. Settlement – If the IRS settles with one spouse, the other spouse has right to object 3. Abuse – Write potential domestic abuse case at the top of the application in order to keep the bad spouse from being given the other spouse’s address. 4. Community Property – For states w/community property deficiency, notice ~ req’d - Gov’t can still come after inno. spouse by coming after marital community’s CP 5. 3 Ways to qualify for InnSpouse: Traditional, Sep Liab & Eq Relief (3 §s below)

(1) § 6015(b): TRADITIONAL RELIEF MODIFIED General Rule

5 Requirements

Other

• Used in a jt return with an understatement of tax due, where one filer made an error 1. Joint return filed 2. There was an understatement 3. InnSpouse didn’t know, or had no reason to know of the understatement (Can’t stick head in the sand) 4. It is inequitable to hold the other indiv liable for the deficiency 6. The non-at-fault spouse elects the benefit of this section no later than 2 years after the secretary has begun collection activities 1. Must Show – The Non-Error spouse must show: a. Did not know of error; AND Had no reason to know. 2. BOP – Taxpayer 3. Scope – Only deals with understatement not underpayment 4. Policy – Inequitable to hold innocent spouse liable.

(2) § 6015(c): SEPARATE LIABILITY General Rule Fall 2008

1. Retroactive – intended to be Retroactive Married Filing Separate (refund prohibited) 2. Proof – Spouse must prove their portion of the income 27

Individual Income Tax Outline Chad Hallberg 3. Scope – Only deals with understatement, not underpayment. (1) no longer married, separated, or not living w/each other for 12+ months AND (2) no actual knowledge of the “item” that makes up the deficiency OR w/knowledge Pre-Requirements but under duress AND (3) Make election yourself w/in 2 years • Actual Knowledge of the item makes the spouse ineligible. The courts have interpreted this very narrowly. Cheshire v. Comm’r (H takes out retirement and W knows about transaction, but not that it was illegal to not pay taxes on some of retirement $)

-

Knowledge & Duress •

“Actual Knowledge” Rule: It doesn’t matter that the spouse doesn’t know that the “item” is illegal, they just need to know that the transaction happened Duress: Knowledge requirement does not apply to spouses who suffer physical or severe mental abuse.

(3) § 6015(f): EQUITABLE RELIEF General Rule

(1) Equitable relief if no relief under (b) or (c) + (2) Inequitable to hold InnSpouse liable under the circs - Decided by the IRS  Means that this rarely ever happens!

ASSIGNMENT OF INCOME • General Rule Grantor Trusts Personal Service Corporation Allen v. Commissioner (Pg. 94) Application

Bannaits v. Banks

The taxpayer who earns the income should pay taxes on it – Even if they never touch it. Income cannot be assigned. Lucas v. Earl (husband assigning money to wife; He was in 70% bracket and she had no income so, by giving it to her they were in the 40% bracket).

1. • So long as the money is given directly to the corporation of the taxpayer, which is separate and distinct from the individual it is okay to transfer funds for the purpose of reducing tax. In effect, the taxpayer gives a salary to the Corp. and is given the dividends in return upon which he is taxed. 1. Facts – Kid drafted by the Phillies; received $70,000 of which $40,000 is given to Mom. 2. Holding – Kid is taxed on entire amount because he earned the money for playing baseball, person with whom they are contracting must be taxable to the person who earns it. • Can kid take $40,000 as a business deduction? No, not in this case, but cited to the Randy Hundley case; Randy paid his dad, who was a semi-pro ball player. Mom didn’t have the professional caliber training. • $100,000 – Attorney would get $33,333 and the other person would get $66,667, because the one amount goes to the lawyer. This is an assignment of income case; Just like the court in the case we talked about it was earned by the client. Physical injury settlement was earned by the client. Still all taxable to them and they can also get a deduction for paying the attorney.

DIVORCE SETTLEMENTS § 1041: PROPERTY SETTLEMENTS General Rule Basis Fall 2008

• •

Husband → Wife; No gain or loss is recognized on a transfer of property to and from and between spouse so long as it is connection of divorce and occurs one year after marriage ceases or is related to cessation of marriage. Basis is carried over from the marriage. 28

Individual Income Tax Outline Chad Hallberg • Alimony cannot have characteristics of a property settlement i.e. $100,000 for first year and $1,000 for the rest. If alimony is actually a property settlement both spouses Alimony must amend their returns and alimony reduction needs to be recaptured. This can be rebutted. §1.1041-1T.

ATTORNEY’S FEES General Rule

•

Example

•

Not deductible unless they are connected with the production of income which is taken as a deduction under MID Schedule A along with 2% haircut. Pay attorney for the divorce and tax advice is included; It must be clearly allocated in the bill for tax purposes of the meeting with the attorney. Still subject to

Employee v. Independent Contractor Determinations

DISTINCTION BETWEEN EMPLOYEE AND I.C.

7 Factors

TEST Benefits for being I.C.

1. 2. 3. 4. 5. 6. 7. • • • •

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

Capitalization and Capital Gains and Losses; Hobby Loss

§ 263: CAPITALIZATION General Rule Principle Three Ways to Capitalize

Regulation

INDOPCO v. Commissioner “Friendly Take Over” Hostile Take Over Fall 2008

• • • •

Matching Expenses with Income No minimum cost of an asset that can be capitalized. Current deduction for sugar an Long Term assets are capitalized you match the income with the expense because if income is coming in over a two-year 1. Depreciation - Tangible assets i.e. mixer an oven 2. Amortization – Intangible assets i.e. goodwill, stocks, patents 3. Depletion – Oil, Natural Gas 1. 1.263(a)-1 – Any amount paid out for the following made to increase the value of property or estate; 2. Amounts – include to add to value to prolong life, adapt to new and different use, 3. 1.263(a)-2 – Capital Expenditure Examples a. Cost of buildings b. Furniture and Fixtures which last beyond a Holding – IRS says 2.2 million valuation fee had to expense the 2.2 million deduction over time because INDOPCO will benefit from the buy for many years after the buy-out. It is a benefit that will take place over many years and the 2.2 million was a result of that amount. • Facts – KKR looked for companies to buy out and reshape them with undervalued 29

Individual Income Tax Outline Chad Hallberg stock and make it increased. Hire a company to value stock high and spend 2.2. million to fight takeover. • Holding – Fighting takes place in one year and therefore is deducted in the year in which it occurred. Every take over you look to see if it was hostile.

§ 1221: CAPITAL GAINS AND LOSSES General Rule

•

Any property not specifically excluded in §§ 1221, 1221(a) and 1.1221-1.

§1221: CAPITAL GAINS  Rate

•

• • • § 1222(1) Short-Term • § 1222(3) Long-Term

Taxed at a lower rate than other income; To promote investment and make up for inflation. Capital Assets held longer than 1-year. Preferential taxation rates. Capital assets held 1-year or less. Doesn’t do any good. Treated as ordinary income.

§ 1221: CAPITAL LOSSES  General Rule § 1212 Roll Over Rates

• • • • •

Restrictions on how much you can deduct (up to your capital gains + $3,000 per year). Losses can rollover to the next 2-years. No Capital loss on houses. Higher Tax Brackets – Pre May: 20%; Post May: 15% Lower Tax Brackets – Pre May: 10%; Post May: 8%

§ 183: HOBBY LOSS • • General Rule

• •

9-Factors

• 1. 2. 3. 4. 5. 6. 7. 8. 9.

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

What was Murphy’s dog’s name? Snap

Fall 2008

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