Can bring Code Book (& can write all you can in the Book), Calculator & IC map to exam.
Additional Study Guides – Chirelstein – Federal Inc. Taxation 9th Edition // Bankman, Griffith, Pratt – Examples & Explanations for Fed. Inc. Tax. 3rd Edition
Basic IT System:
Income – what is the authority to have IC at a federal level? Constitution says taxes must be apportioned based on pop. (odd, should go by income of such states.)
1st IC was in Civil War. 1st IC was struck down as unCon. b/c was a direct tax.
1913 – 16th amend. says Fed Gov’t can tax on income. B/f IC, fed gov’t was funded by excise tax, especially on exports.
People consider fair taxes to be taxes based on your ability to pay.
Sources of IT Law: (in decreasing authority)
Statutes – from Congress & Pres. – To overturn a statute, must find a Constitutional problem.
Regulations – from Dept. of Treasury – To overturn a reg, must show it violates the statute. Could argue interpretation violates Con., reg giving too much authority to a dept… Regs. (like statutes) are binding on gov’t & taxpayers (tps).
Revenue Rulings from IRS – are binding on gov’t, not on tps. Similar to cases. (same authority as rev. procs)
Revenue Procedures from IRS – are binding on gov’t, not binding on tps. Rev. Procs are supposed to be strictly mechanics — should not be substantive law.
Private Letter Ruling (PLR) – For the tp that requested the ruling,, the PLR is binding on gov’t, even if is wrong. Can be revoked if you did not make fair disclosure… PLR’s however are NOT precedent for other tps. — Can withdraw requests for PLR if you think you are going to get a NO on ques & want to do opposite on return. (Must include PLR w/return if get it). While not precedent, can use as evidence of IRS positions (can tell if IRS has been consistent or inconsistent) — could prove IRS is acting in a way inconsistent w/your client… or that IRS does not have a consistent position on an issue.
If Statute is changed, cannot rely on regs or cases Þ must look to Legislative History of bills. Legis history & regs usually use very similar language & Legis. are a good indication of what will be in regs.
Cases used to clarify terms. EX. Guinan p122 PPR was unclear Þ case was needed to decide what PPR is w/multiple houses.
i. Case told us what factors were important in determining PPR & defined PPR. Cases take unclear wds in statutes & give guidance (driven by statutory lang.).
ii. Cases give us Judicial Doctrine – which give us a “tax common law.” EX. assignment of income doctrine — she cannot make 100k & give 50k to spouse who is in a lower tax bracket — nothing in stats say you can’t do this, but common law has arisen from cases.
§ 1041 – Transfer of property b/w spouses or incident to divorce.
§ 121 – Exclusion of gain from sale of principal residence: – 2 main requirements: Ownership, Use (PPR)
Problem involving § 1041 & § 121 — pp. 114-124; 840-844. — Remember see last page of notes: remainder left over after § 121 falls under § 1221 & lower tax rate may apply!!
Problem #1: DIVORCE – PPR, SPOUSAL OWNERSHIP — Client bought house in 2002, she is getting divorced 6 months after purchase. As part of property settlement w/husband she get a house in MS. Settlement also gave house in Florida to Husband, divided time evenly b/w 2 places.
Answers to ques:
i. Paid 200k asking for 500k, hoping to get b/w 450k & 500k, no renovations.
ii. Purchased late August 2002.
iii. Registered to vote in MS, tax returns to FL, MS license, car tags in MS.
iv. Neither lived in house b/f purchased.
v. Title in both names when purchased summer 2004 MS house to her, FL house to him.
vi. Her Academic Yr in MS / him in FL / summer & breaks
iii. PPR largely determined by time spent in house, where job is, mail sent, drivers license, file taxes…
2. How much can exclude? Assume filing individual return, can exclude 250K under § 121(b)(1). If sell for 300k, must claim 50k as income.
3. If not divorced & sell, one spouse must own & both must reside to qualify for 500k in joint return. Here, would only qualify for 250k b/c hubby not residing.
Problem #2: PART OWNERSHIP (DIVIDED INTEREST) & PPR — Parents & 3kids. Parents own 2 homes, H1, H2, & die. The 3 kids, A,B, & C, inherit 2 homes tgh. (each owns undivided 1/3 interest in homes). A lives in H1 for more than 2 yrs., B lives in H2 for more than 2 years, C lives in his own house. 3 kids want to sell both houses Þ sell H1 for a gain of 300k (A has 100k on 1, B has 100k on 1, C has 100k on 1), H2 has a gain of 60k (each kid get 20k gain). Can any get § 121 exclusion & how much? § 121
Gain of prop. which is jointly owned, each get allocated gain in proportion to amt. owned Þ on H1, 100k each; H2, 20k each Þ 120k ttl gain.
1st ques: Is this their PPR? for A & B yes, Have lived there for more than 2 years.
Since each own 1/3, are they prevented from using § 121? NO; Look to Fed. Statute (passed by Cong. & Pres.) then to Regulations (passed by dept of treasury) Þ go to § 121 regs. (§ 1.121 p941) see 1.121-2(2) Joint owners – if jointly own, but file sep returns each may exclude up to 250k attributable to interest in prop.
A & B qualify for § 121, C does not Þ A can exclude 100k (report 20k), B can exclude 20k (report 100k), C must report full 120k gross income. **ONLY QUALIFY FOR HOUSE WHERE MEET OTHER § 121 REQUIREMENTS (Ownership, PPR).