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Federal Income Tax
South Texas College of Law Houston
Yamamoto, Kevin M.

Yamamoto                                          
 
SUBCHAPTER B – Computation of Taxable Income
§1c: Tax Rate for Single/Individual
§1h: Tax Rate on Net Capital Gains
 
PART I: DEFINITIONS
61: GI Defined
62: AGI Defined
63: Taxable Income Defined (Standard Deduction defined)
65: Ordinary Income Defined
67: 2% Floor for on miscellaneous itemized deductions: look to list §67a: if there 2% floor does not apply
68: overall limitation on itemized deductions
 
PART II: ITEMS SPECIFICALLY INCLUDED IN GI
71: Alimony & Separate Maintenance Payments
72: Annuities
74: Prizes and awards
82: Reimbursement for Moving expenses (except as provided in §136a6: fringe benefit for moving expenses)
 
PART III: ITEMS SPECIFICALLY EXCLUDED FROM GI
101: Certain Death Benefits: GI shall not include Insurance Benefits paid by reason of death
102: Gifts & inheritances (Deitrich case: detached and dissineterested act)
108: Income from discharge of indebtedness
109: improvements by less on lessor’s property
119: meals or lodging furnished for convenience of employer
121: Exclusion of Gain from sale of principle residence: ownership and use requirement: within 2 years
132: Fringe benefits (all seven)
 
PART V: DEDUCTIONS FOR PERSONAL EXEMPTIONS
151: Allowance for Personal Exemption
152: Defines a dependent
 
PART VI: ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
162: Trade or Business Expense deductions SHALL BE ALLOWED if ordinary and necessary
163: interest expenses are deductable
164: taxes are deductible…
165: losses are deducible…
167: Depreciation Definition: shall be allowed for reasonable allowance for exhaustion, wear and tear and obsolosence
168: ACRS
195: Start-Up expenditures
197: Amortization of goodwill and certain other tangibles (not depreciable)
 
PART VII: ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS:
212: Expenses for Production of Income: NON-business, individual profit making expenses are Deductable
213: Medical, dental expenses etc…
215: Alimony payments are deductible (payor)
217: Moving Expenses
221: Interest on educational loans
 
PART VIII: SPECIAL DEDUCTIONS FOR CORPORATIONS
 
PART IX: ITEMS NOT DEDUCTIBLE
262: Personal Family or living expenses ARE NOT DEDUCTABLE
263: Capital expenditures are not deductible
274: dissalowance of certain entertainment expenses (under §212) AND 50% for meals…§274n
280F: luxury automobile
 
 
SUBCHAPTER O: GAIN OR LOSS FOR DISPOSITION OF PROPERTY
 
PART I: DETERMINATION OF AMOUNT OF AND RECOGNITION OF GAIN OR LOSS
1001a: realized gain
1001b: amount realized
1001c: amount recognized
1011: Adjusted Basis
1012: Basis for property is cost
1014: Basis for property acquired from a decedent
1015: basis for property acquired as a gift
1016: Adjustment to basis
1017: discharge of indebtedness
 
Part II: TREATMENT OF CAPITAL LOSSES
1211: Limitation on Capital Losses (§1211b)
1212: Capital Loss carrybacks and carryovers (§1212b2 & then §1212b1)
 
Part III: GENERAL RULE DETERMINING CAPITAL GAINS AND LOSSES
1221: Capital Asset Defined
1222: Definitions of other terms relating Capital Gains and Losses
 
 
NEED TO REVIEW:
1.       Identify and outline (front of tax code) the various sections and chapters in Code
2.       -ch.2 & 6 are very important chapters.  
3.       Discharge of Indebtedness: §108b2 and election under §1017 (§108b5)
4.       Recourse and non-recourse loans: AR for seller and AB for buyer??? (Crane & Tufts cases)
·         reduction of basis: use first tax attributes, then go to reduce tax
·         normally add to amount realized!
5.       Acquisition Indebtedness 
6.       Crane Case:
7.       Tufts Case:
8.       §104: Damages and related receipts
9.       Under §212: Divorce: what can be written off under §212 (as noted, Alimony payments, and legal expenses involved in getting alimony from a payor, by the payor to the payee can be deducted under §2121 – production of income – because payee spouse can write it off) but what about legal expenses tied with the divorce itself? It can’t fall under §2123 (taxes) and I don’t see how it could fall under §2122, it does not appear to be expenses for the maintenance, management or conservation of income)????
10.  Read Harmon Case: dealing with §165 and §212… and review questions on page 473…
·         §165: regarding writing off a loss from an expense from post conversion profit (rent property)
11.  Difference between acquisition indebtedness in §163 and home equity indebtedness in §163
·         AI = improvement etc. on property
·         HEI: any reason to spend money
12.  What happens to the remaining benefits to be paid to a life insurance beneficiary, if the beneficiary was receiving (via insurance contract), annual payments and dies before reaching her life expectancy? 1.101-4c
13.  §1h: Tax on Net Capital Gains
14.  §1212b: treatment of carryovers from Net Capital Losses
 
 
I. Sources of Tax Law & History:
1.        Tax Code first (part of the USC)
n       Separated into Codes
n       Title 26
n       Subtitle A (Income Tax)
n       Chapter 1 (subchapters A, B, c for corporations, K for partnerships)
2.       Case Law: Courts do the following:
n       Interpreting code and regulation
n       create judicial doctrine (can be in addition to the code)
a.       Trial Level Courts
n       United States Tax Court: Article I Court (only court that you can go into without paying your taxes up front)
(i)      no jury (only judge)
(ii)     More knowledgable about tax
n       United States Court of Federal Claims
(iii)  no jury
(iv)  refund tribunal
n       Federal District Court (published in Fsupp)
(v)    Refund Tribunal
(vi)  Jury Trials
(vii) Must pay tax and ask for it back from IRS and then go to Federal District Court
n       Supreme Court of United States
3.       Administrative: IRS & Treasury
n       Charles O. Rosadi: Commissioner of Internal Revenue
n       IRS & Treasury issue regulation: Two Kinds
a.       Interpretive Regulation: tell you how to read something in the code
b.       Legislative Regulation: Congress grants to Treasury the power to make law
(i)      example: § 1502
 
n       Both regulations are given GREAT deference by Court (very tough to get over turned) 
n       Regulations: § 1.355-2(g)
a.       “1” is an income regulation
n       IRS issues regulations and ruling
n       Regulations are in the back of tax code
n       Rulings are in cumulative bulletins
b.       Revenue Ruling: private letter ruling that service sees as being important enough to put into the IRS bulletin
c.       Private Letter Ruling: tax payer will write to service with a certain situation and request info on a tax question. (not popular enough to be put out to the IRS Bulletins

e, from whatever source derived, is GI, UNLESS explicitly excluded
2.       Three Elements to Establish GI
A.      Is it GI?
a.       To decide if it is GI – and all income is GI – must have “YES” to all of the following (Glenshaw Glass Case three part test):
(i)      AW: accession of wealth?
(ii)     CR: clearly realized accession of wealth?
·         must have some realization event (must get for free)
·         different from recognition event
(iii)  CD: over which tax payer has complete dominion over?
B.      How much?
a.       FMV?
b.       need to look into the difference between the piano case where the piano was paid for and then found money & the case of the $200 watch that was a prize case (in the former, what is claimed as GI? In the latter, all $200 is GI, but why, something to do with not paying anything for the watch, and the piano case has something to do with taxpayer paying for piano???)
C.      When?
a.       When is “income” actually received by taxpayer?
·         actual delivery of property?
 
3.       Cases: 
A.      Cesarini (Found Money in the Piano Case)
a.       Holding: Yes. § 61 states that all income shall from whatever source derived is included in gross income unless specifically excluded, here found money is not exclueded.
b.       Rule: Found money is taxable as ordinary income (GI) in the year in which taxpayer attains uncontested possession of it
c.       Found money that is not excluded from GI elsewhere is considered GI. 
d.       Plaintiffs propose three theories to get a refund on money found in piano.
1. Not includedable as GI under §61
2. §6501 three year statute of limitations.  
3. if the treasure trove money is gross income for the year, it was entitled to capital gains treatment under §1221 of Title 26
B.      Old Colony (Company pays taxes for President of Company)
a.       Holding & Rule: Rule: Yes. the payment of an employer of income taxes assessed against an employee constitutes additional taxable income to the employee (thus anytime someone pays for someone else, the party receiving the benefit would have GI, ex: payor spouse pays the cost of a divorce for payee spouse: this would not be a §212 expense for payor, but payee would have to add the monies paid by the payor to her GI, as she would have had to pay this, had the payor not paid). The taxes were paid upon a valuable consideration, namely, the services rendered by the employee and as part of the compensation therefore. 
n       Form of payment makes no difference
n       Immaterial that taxes were paid directly to Govt.
n       Taxes being paid were compensation to Woods for services rendered by him to company
Wood had an obligation to pay taxes, NOT