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Tax
University of Dayton School of Law
Searcy, E. Dale

Tax Introduction. 4
· General Introduction. 4
· Theory and Policy. 4
· Rate Structures. 5
· General Process (Ordinary Income)5
· Tax Terminology. 5
· How do we get to court8
Income. 10
· Introduction. 10
· Noncash Benefits. 10
o Introduction. 10
o Meals and Lodging (§119) (à not income if required)11
o Other Fringe Benefits (§§ 125 & 132) (à not income)12
· Imputed Income. 16
· Windfalls and Gifts (§§ 74 & 102)17
o Windfalls: Punitive Damages (not giftà income)18
o Gifts and Inheritance (§102) (à not income)18
o Prizes & Awards (§74) (à income)20
o Scholarships, fellowships (§ 117) (à not income)20
· Recovery of Capital (generally à not income)20
o Sale of Easements (à not income)21
o Life Insurance (§§ 101(a), 264(a)) (à not income)21
o Annuities and Pensions (§72(b)) (recoveryà not income)23
o Losses from Gambling (§165(d)) (recovery à not income)23
o Recovery of Loss (à not income)24
· Recoveries for Personal or Business Injuries (generally à not income)24
o Basic Rules. 24
o Compensation for Injuries (§104) (à not income)24
o Medical Expenses (Premiums & Reimbursement) (§§ 104-106, 213)25
· Loans and Indebtedness. 26
o Introduction. 26
o True Discharge of Indebtedness (à income)26
o Relief Provisions (§108) (à excluded from income (deferred))27
o Discharge of Gift Tax Liability (à income)27
· Interest on State Bonds (§103) (à not income)28
· Gain on Sale of Home (§121) (à not income)28
Income: Problems of Timing. 28
· Introduction. 28
o Key to Timing (Realization v. Recognition)29
o General Rules for Property Gain. 29
· NonRecognition of Gains and Losses from Investment in Property. 29
o Introduction. 29
o Gain From Sale of Land (§121) (à not recognized)29
o Stock Splits (§§ 305, 307) (à not recognized until sold: basis divided)30
o Losses between related persons (§267)30
o Tenant Improvements (§§ 109, 1019) (à not recognized until sale)30
o Like Kind Exchanges (§1031) (à not recognized [except to extent of “boot”])30
o Involuntary Conversions (§1033) (à not recognized)32
· Recognition of Losses (§165) (à deductible: if recognized)33
o General Rules on Gains or Losses. 33
· Open Transactions, Installment Sales, and Deferred Sales. 33
o Doctrine of Constructive Receipt33
o Open Transactions. 34
o Installment Method (§ 453) (à proportionately taxable)34
· Transfers Incident to Marriage and Divorce (§§ 71, 1041)35
o §1041: Transfer of Property between Spouses or Incident to Divorce (à not income)36
o §71: Alimony and maintenance payments (à income: except child support)36
Personal Deductions. 36
· Introduction. 36
· Personal Exemption Amount (§151) ($2,000 per taxpayer à deduction)37
· Standardized Deduction (§63(c))38
· Casualty Losses Personal Deduction (§165(c)(3): à itemized deduction)38
o Formula for Casualty Loss. 38
o Requirements for Casualty Loss. 38
· Extraordinary Medical Expenses Personal Deduction (§213)39
o Introduction. 39
· Charitable Contributions (§170) (à itemized deduction)40
o Introduction. 40
o §170: Charitable Contributions and Gifts. 40
o What is Charitable Organization. 41
o Special Rules. 41
· Interest43
Allowances (Mixed Personal and Business Outlays)43
· Business Deduction Introduction (§§ 162(a), 212)43
o Basic Business Deduction Provisions. 43
· Ordinary and Necessary Refined. 43
· Hobby Losses (§§ 162, 183) (if motivated by profit à deductible)44
o Hobby General Rules. 44
o Primary Purpose Test44
· Home Offices (§280A) (if meet exceptionsà deductible)45
· Office Decoration (§162 vs. §262)46
· Listed Property (§280F)46
· Entertainment and Travel Expenses (§274)47
o §274(a) Entertainment, Amusement, or Recreation (à no deduction; w/ exception)47
o §274(b) Gifts to Non-employees (à deductible up to $25)48
o §274(c) Certain Foreign Travel (à deductible if meet req’ts)48
o §274(e) Specific Exceptions to §274(a)48
o §274(j) Employee Awards (à deductible up to $400 or $1,600)48
o §274(k) Business Meals (à deductible if req’ts met)49
o §274(l) Entertainment Tickets (à deductible to face value)49
o §274(m): Additional Limitation on Travel Expenses. 49
o §274(n): 50% limitation on business meals and entertainment49
· Child Care Expenses (§§ 21, 129)49
o §21: Expenses for dependent care services (Employee Provided) (à tax credit)49
o §129: Dependent care assistance programs (Employer Provided) (à excluded from income)50
· Commuting Expenses (§162) (meet req’ts à deductible)50
o Three Conditions to be Traveling Expense Deduction under §162(a)(2)50
o Defining “home”. 50
· Moving Expenses (§217) (à deductible)50
· Clothing Expenses (if req’d à deductible)51
· Legal Expenses (business related à deductible)51
· Education Expenses (hone skills à deductible)52
Deduction for Cost of Earning Income. 52
· Introduction. 52
o Basic Business Deduction Provisions Again. 52
o Big Picture: Capitalize vs. Expense. 52
· Determining if Expensed or Capitalized. 53
o Capitalized Asset53
o Expensed Asset53
o General Rules (Factors) on Expense vs. Capitalize (Wohl)53
o Maintenance and Repair (à Expense)54
· How to Depreciate Capitalized Expenditures. 54
o Introduction. 54
o §167: Depreciation (for Intangible Assets)55
o §168: Accelerated Cost Recovery System (for Tangible Asset)56
o §195: Start Up Expenditures (à depreciable)57
o §1245: Recapture Rule. 58
o §1250: Gain from Certain Depreciable Realty. 58
Capital Gains and Losses. 58
· Introduction. 58
o General Process For Capital Gains and Losses. 59
· What is a Capital Asset (§1221)59
o What is property held “primarily for sale to customer”. 60
o §1222: Other terms relating to capital gains and losses. 61
o §1223: Holding Period. 61
· Treatment for Capital Gains and Losses (§1231)62
o General Process: §1231 Capital Assets. 62

Exam
· 30-40 question Multiple Choice
· 5 hour exam (3.5 hours to complete on average)
· Open Book (anything you want, notes, computer, books)
Tax Introduction
· General Introduction
o Tax is political science course of who will bear the burden of financing the gov’t and who will get the benefits
o Fundamental Policy Issues
§ Who bears the cost (said it many times in class)
o Tax Base:

ifically excluded from gross income
o §§ 101-127
· Must determine if income is realized vs. recognized
§ Deductions (Statutory Exclusions from Income)
· Defined
o Things that fall w/in §61(a) definition of “income,” but are nonetheless excluded
o Based on broad political or policy issues
· Examples
o Trade and business deductions
o Deductions of employees
o Losses from sale or exchange of property
o Deductions attributable to rents and royalties
o Certain deductions of life tenants and income beneficiaries of property
o Pension, profit-sharing, and annuity plans of self-employed
o Retirement savings
o Alimony
o Moving expenses
o Interest on education loans
o Higher education expenses
§ Adjusted Gross Income
· Statutory term defined by §62
o Gross Income minus statutory deductions
· Final step in defining “income”
§ Personal allowances
· Defined
o Expenditures that are used to offset the “adjusted gross income”
o Based on public policy, law, and political issues
o Fundamental concept of encouraging particular behavior, etc
· Personal Exemption
o Every person gets specific, statutorily defined exemption amount
· Personal Deductions (Standard or Itemized)
o Every taxpayer has option to take either
§ Standard deduction amount; or
§ Itemized deductions (if taxpayer qualifies)
o Standard Deduction
§ Statutorily defined amount, for each person in the house
o Itemized Deduction
§ For persons who qualify by having deductions that add up to amount more than the standard deduction
§ Taxable Income
· Amount of income subject to tax
o Gross Income – Deductions à Adjusted Gross Income
o Adjusted Gross Income – Allowances à Taxable Income
§ Allowances = Personal Exemptions + Personal Deductions (standard/itemized)
· Adjusted Gross Income – Personal Exemption(s) – Personal Deductions (standard or itemized)
· Income subject to tax at two rates
o Ordinary Income: Marginal Rate
o Capital Gains: Lower Rate
§ Tax Due
· Determined by applying the taxable income amount to the marginal tax rate table
§ Tax Credits
· Credits are used to offset the taxes due
o Subtracted from Taxes Due
o Direct dollar for dollar reduction of tax owed
· Examples
o Money already paid to gov’t through employer withholdings
· If credit is less than tax due
o Owe money
· If credit is more than tax due
o Refund
o Capital Gain
§ Defined
· Essentially corporate earnings or other profits dispersed to individual
§ How to get it