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Federal Income Tax
University of Missouri School of Law
Hoyt, Christopher R.

INDEX TO OUTLINE:

Accident and Health Benefits . . . . . . . . . . . . 5
Accountable Plan. . . . . . . . . . . . . . . . . . . . . . . 9
Accrual Method . . . . . . . . . . . . . . . . . . . . . . . 3
Achievement Awards . . . . . . . . . . . . . . . . . . . 5
Adjusted Basis . . . . . . . . . . . . . . . . . . . . . . . . 16, 17
Adoption Assistance . . . . . . . . . . . . . . . . . . . . 5
Agents, IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Alimony . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Amount Realized . . . . . . . . . . . . . . . . . . . . . . 16, 17
Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Assets (types of) . . . . . . . . . . . . . . . . . . . . . . . 12
Athletic Facility . . . . . . . . . . . . . . . . . . . . . . . 5
Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Automobile expenses . . . . . . . . . . . . . . . . . . . 8
Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Bad Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Bonds (Municipal and State) . . . . . . . . . . . . . 4
Business Asset . . . . . . . . . . . . . . . . . . . . . . . . 11, 12
Business Expenses . . . . . . . . . . . . . . . . . . . . . 6, 17
Cafeteria Plans . . . . . . . . . . . . . . . . . . . . . . . . 5
Capital Asset . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Capital Expenditures . . . . . . . . . . . . . . . . . . . 7
Capital Gains . . . . . . . . . . . . . . . . . . . . . . . . . 19
Capital Loss . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 19
Cash Method . . . . . . . . . . . . . . . . . . . . . . . . . 2
Casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 12
Charitable Gift . . . . . . . . . . . . . . . . . . . . . . . . 14
Child/Dependent Care . . . . . . . . . . . . . . . . . 5
Child Support . . . . . . . . . . . . . . . . . . . . . . . . . 10
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 7
Condemnation . . . . . . . . . . . . . . . . . . . . . . . . 18
Conventions . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Cost Recovery . . . . . . . . . . . . . . . . . . . . . . . . . 16
Courts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Deemed Substantiation . . . . . . . . . . . . . . . . . 9
Deferred Gain . . . . . . . . . . . . . . . . . . . . . . . . . 17
De Minimis Fringe . . . . . . . . . . . . . . . . . . . . . 5
Dependent Exemption . . . . . . . . . . . . . . . . . 2
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Depreciation Recapture . . . . . . . . . . . . . . . . 19, 20
Disabled Dependent Care Credit . . . . . . . . . 16
Discharge of Indebtedness . . . . . . . . . . . . . . 6
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Divorce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Drug Dealing . . . . . . . . . . . . . . . . . . . . . . . . . 7
Earned Income Credit . . . . . . . . . . . . . . . . . . 15
Education (expenses for improving) . . . . . . 8
Education Credit . . . . . . . . . . . . . . . . . . . . . . 16
Educational Assistance Payments . . . . . . . . 5
Educational Savings Bond . . . . . . . . . . . . . . . 5
Eisner v. MacComber . . . . . . . . . . . . . . . . . . 16
Entertainment . . . . . . . . . . . . . . . . . . . . . . . . 8
Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Exclusions (generally) . . . . . . . . . . . . . . . . . . 4
Exemptions (generally) . . . . . . . . . . . . . . . . . 1
Filing Status . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Fines/Penalties . . . . . . . . . . . . . . . . . . . . . . . 7
For AGI vs. From AGI . . . . . . . . . . . . . . . . . . 13
Foreign Earned Income . . . . . . . . . . . . . . . . 5
Foreign Travel . . . . . . . . . . . . . . . . . . . . . . . . 8
Fringe Benefits (generally) . . . . . . . . . . . . . . 5
Fruit from the Tree . . . . . . . . . . . . . . . . . . . . 16
Gain from a Sale . . . . . . . . . . . . . . . . . . . . . . . 17
Gifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 17
Good Will . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Group Term Life Insurance . . . . . . . . . . . . . 4
Head of Household . . . . . . . . . . . . . . . . . . . . 1, 10
History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Hobby . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7
Home Mortgage Interest . . . . . . . . . . . . . . . 14
Hope Credit . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Illegal bribes and kickbacks . . . . . . . . . . . . . 7
Inaja v. Commissioner . . . . . . . . . . . . . . . . . . 16
Inclusions (generally) . . . . . . . . . . . . . . . . . . 3
Inheritances . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 17
Interest Deduction . . . . . . . . . . . . . . . . . . . . . 14
Investigating Costs (for business) . . . . . . . . 7
Investment Asset . . . . . . . . . . . . . . . . . . . . . . 11, 12
Investment Expense Deduction . . . . . . . . . . 13
Investment Interest . . . . . . . . . . . . . . . . . . . . 14
Involuntary Conversion . . . . . . . . . . . . . . . . . 18
IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Itemized Deductions (schedule A) . . . . . . . . B-10
Kiddie Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Lawsuit Settlements . . . . . . . . . . . . . . . . . . . . 6
Legal Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Life Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 4
Lifetime Learning Credit . . . . . . . . . . . . . . . . 16
Like-kind Exchanges . . . . . . . . . . . . . . . . . . . 17
Listed Property . . . . . . . . . . . . . . . . . . . . . . . . 13
Lobbying Expenses . . . . . . . . . . . . . . . . . . . . 7
Lodging and Meals . . . . . . . . . . . . . . . . . . . . 5
Long Term Capital Gain (LTCG) . . . . . . . . . 19
Loss on a Sale . . . . . . . . . . . . . . . . . . . . . . . . 17
Losses (generally) . . . . . . . . . . . . . . . . . . . . . . 11
Luxury Car . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
MACRS (accelerated depreciation) . . . . . . . 12
Material Participation . . . . . . . . . . . . . . . . . . 14
Medical Expense Deduction . . . . . . . . . . . . . 13
Medical Savings Account . . . . . . . . . . . . . . . . 5
Moving Expenses . . . . . . . . . . . . . . . . . . . . . . 9
Net Operating Loss . . . . . . . . . . . . . . . . . . . . 11
No-additional Cost Services . . . . . . . . . . . . . 5
Non-accountable Plan . . . . . . . . . . . . . . . . . . 9
Non-business deductions . . . . . . . . . . . . . . . 13
Non-refundable Tax Credit . . . . . . . . . . . . . . 15
Office in Home . . . . . . . . . . . . . . . . . . . . . . . . 6
Passive Loss Limitation . . . . . . . . . . . . . . . . . 14
Personal Expense Deduction . . . . . . . . . . . . 13
Personal Interest . . . . . . . . . . . . . . . . . . . . . . 14
Personal Use Asset . . . . . . . . . . . . . . . . . . . . . 11, 12
Political contributions . . . . . . . . . . . . . . . . . . 7
Principle Residence (sale of) . . . . . . . . . . . . . 18
Prizes . . . . . . . . . . . . . . . . . . . . . . ……. 4
Property Settlements . . . . . . . . . . . . . . . . . . . 10
Qualified Ee Discount . . . . . . . . . . . . . . . . . . 5
Qualified Moving Expense . . . . . . . . . . . . . . 5
Qualified Transportation . . . . . . . . . . . . . . . . 5
Qualified Tuition Reduction Plan . . . . . . . . 5
Qualifying Child . . . . . . . . . . . . . . . . . . . . . . . 15
Realization Principle . . . . . . . . . . . . . . . . . . . 16
Refundable Tax Credit . . . . . . . . . . . . . . . . . . 15
Rental Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Return of Capital . . . . . . . . . . . . . . . . . . . . . . 3
Roth IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Scholarships . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Social Security Benefits . . . . . . . . . . . . . . . . . 4
Stock Dividend . . . . . . . . . . . . . . . . . . . . . . . . 16
Straight Line Depreciation . . . . . . . . . . . . . . 12
Substituted Basis . . . . . . . . . . . . . . . . . . . . . . 17
Tax Benefit Rule . . . . . . . . . . . . . . . . . . . . . . 6
Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Tax Deduction (deduction for taxes) . . . . . . 13
Tax Research . . . . . . . . . . . . . . . . . . . . . . . . . 10
Theft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 12
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Transportation . . . . . . . . . . . . . . . . . . . . . . . . 8
Unemployment Compensation . . . . . . . . . . . 4
Vacation Home . . . . . . . . . . . . . . . . . . . . . . . 6
Wash Sale . . . . . . . . . . . . . . . . . . . . . . . .

a. Innocent Spouse Relief (8857) – if other spouse cheats on the taxes and if innocent spouse can show that didn’t know the return was fraudulent (physical threat always wins)

b. Or file a separate return

IV. WHEN IS INCOME? ACCOUNTING METHODS; PREPAID INCOME & EXPENSES

A. GENERAL

(1) §451(a) – General Rule for Taxable Year of Inclusion: Amount of any item of GI shall be included in GI for the taxable year in which received by TP (cash method), unless it is a different year (accrual method)

(2) §1.451-1 (Dep’t of Treasury interpretive regulation for §451)

a. “Received” = actual or constructive

b. Accrual method = (1) all events have occurred, and (2) amt can be determined with reasonable accuracy

(3) §1.1451-2 Constructive receipt

a. “Made available” = payment offered to you after earned (available but delay payment for tax purp)

b. “Substantial restrictions” = defense where funds made available are restricted

1. Check bounces – No constructive receipt; restriction

B. ACCOUNTING METHODS

(1) Cash Method (stocks/bonds) – income is recognized when cash or equivalent is received

a. Income (§ 451; 1.451-1): when received (actual or constructive)

· When made available to you UNLESS there is a substantial restriction (i.e., insufficient funds, have to drive a long distance to get money, etc.)

· Deliver to agent is delivery to principle

· Cannot refuse income

b. Prepaid Income: actual receipt

c. Deductions (§ 461): permitted in year of actual payment

1. EXC:

a. Credit Card charges

b. Mail check – post office is agent

d. Prepaid Expenses: generally, no deductions until expenses are incurred – must allocate over time; but see EXCEPTIONS!!!

· EXC: One-Year Rule – if biz expenses go one year, can deduct in current year

· EXC to One-Year Rule: prepaid interest cannot be deducted for future year(s) & must capitalize – § 461(g)

· EXC to prepaid interest: Doesn’t apply to points on principle residence – take deduction in year paid § 461(g)(2)

· Huntsman (IRS AOD #1991-02) if refinance house, points can be deducted

· Golson Doctrine – IRS thinks the court is wrong, will attempt to create split in the circuits

e. Claim of Right Doctrine: where there is an overpayment (or dispute), IRS feels you declare income now and deduct in future year

(2) Accrual Method (sale & cost of goods) income recognized in year earned; two tests:

a. Income: recognized when

(1) “All events” fix the right to receive the income (EXCEPTION: dispute occurs; resolution is “all events”)

· “Bad Debt deduction” is taken the following year for debts uncollected.

(2) Amt is reasonably determinable

· Income is recognized when you ship the good

b. Prepaid Income: Generally, even if disputed or not earned, Tax due on receipt

(1) Deferral of Advance Payment for Goods: report the sale in same manner for Taxes and financial (books)

(2) Deferral of Advance Payments for Services:

(A) Must recognize Rent or Interest in year received

(B) Long term contracts – Allocate services for part of year as reflected in books (2004) and all the rest (2005)

c. Deductions (3 part test)

(1) All Events Test: All events have occurred to determine “fact of liability” – §461(h)(4)

(2) Amount can be determined with reasonable accuracy – Undisputed amount (if amount is disputed, the disputed amount is not deductible)

(3) Economic Performance Test where the TP has either of the following obligations: §461(h)(2)

· To pay for services/property to be provided in the future