Abrams Tax 1 2015
Purple=Key Topics
Green=Arguments, Policy, and Rules
Pink=Cases
Blue= Hypo and Problems
Orange= Elements
Red= Federal Rules
STEPS FOR TAX PROBLEMS:
STEP 1: Compute Taxable Income STEP 2: Apply Tax Rate to Taxable income= Tax Liability
§1 Rate schedule (status): Individual, Individual with Children, Married Couple filling Joint, Married filling Separately.
Progressive rate=rate of tax increases with income.
Income= Consumption + Saving I = C + S
The income tax is a tax on amounts consumed plus amounts saved. (i.e. all receipts not spent on the production of current income.)
Policy: If it is fair to demand that people pay tax based on the ability to pay, then since amounts spent on consumption and savings are available for discretionary use, this definition of taxable income makes sense.
Tax Base: Amount available for consumption or ability to pay.
Taxable Income= Gross Income – Deductions Taxable income on gain (profit). Return capital if no gain/loss.
§61 (a) Gross Income = All income from whatever source derived (except as otherwise provided).
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items; (2) Gross income derived from business; (3) Gains derived from dealings in property;(4) Interest; (5) Rents; (6) Royalties; (7) Dividends (cash or property basis FMV); (8) Alimony and separate maintenance payments; (9) Annuities; (10) Income from life insurance and endowment contracts; (11) Pensions; (12) Income from discharge of indebtedness; (13) Distributive share of partnership gross income; (14) Income in respect of a decedent; and (15) Income from an interest in an estate or trust. NONEXCLUSIVE
§71-85 gross income with special treatment + some exclusions
§101-127 Receipts EXCLUDED from gross income (i.e., interest on state and local bonds, damages received on injury/sickness, interest from state and local bonds, some prizes, awards, scholarships and fellowships)
§62 Adjusted Gross Income = Gross Income – §62 Deductions
Gains from Disposition
§61(a)(3) Gross Income includes Gains derived from dealings in property
§1001(a): Gains/Losses Defined
Gain from the sale or disposition of property shall be =
1. Excess of the Amount Realized (1001(b)) [Amount Realized] (1001(b))
2. Over the Adjusted Basis (1011) – [Adjusted Basis] (1011)
= Gain if not positive excess then no gain
Loss from the disposition of property shall be =
1. Excess of Adjusted basis (in § for determine loss) [Adjusted Basis]
2. Over the Amount Realized (1001(b)) – [Amount Realized] (1001(b))
= Loss
§165 Deduction for loss.
Deduction value= Deduction x tax rate. What is deduction? First question, what is the tax rate? Deduction is worth Tax on Income. Could call it partial gov. subsidy.
§1001(b): Amount Realized: from the disposition of property shall be =
1. Sum of Any Money Received [Money Received]
2. Plus FMV of Property Received + [FMV of Property Received]
= Amount Realized (i.e. what you get)
§1001(c) If TP realizes a gain TP must pay tax unless otherwise provided.
Realization: TP has no taxable income on the mere appreciation of property. (Implied in §1001)
Realized when converted into a new form (market transaction creating potential to pay tax)
Realization and Recognition
Gain/loss is realized when there has been some change in circumstances such that the gain or loss would ordinarily be taken into account for tax purposes. Market transaction that sale or exchange makes something potentially subject to tax.
Gain/Loss is recognized when no applicable provision calls for nonrecognition, that is temporary or permanent disregard of the fact that a realization even occurred. Where there is recognition there must have been realization. General rule is that gain/loss will be recognized.
§1011 Adjusted Basis
Adjusted Basis for determining gain/loss from disposition of property shall be =
1. Basis determined per §1012 or 2. Adjusted as provided per §1016
§ 1012: Basis: of property is the COST of such property (Initial Basis/investment). Applies for taxable exhange.
§ 1016: Adjustments: in respect of the property shall be made: 1. (1) for expenditures, receipts, losses, or other chargeable to capital account (not taxes) 2. (2) for exhaustion, wear and tear, obsolescence, amortization, and depletion…
a. Adj for (1) Depreciation (adj down) or (2) Improvements or investments (adj up)
b. Gain recognized in property adjusts basis upward. Basis goes up with additional investment or when recognize/report income.
c. Loss recognized in property adjusts basis downward. Basis goes down when used basis against receipt. Depreciation using some cost of investment against current receipts.
Formula for Adjusted Basis: Old adjusted basis in the asset given up plus any gain recognized and minus any losses recognized.
[New Basis] = [Old basis] + [Plus Gain recognized] – [Minus Loss recognized]
Deferral: Time value money means better to push off obligations, accelerate receipts but defer taxes.
A tax liability deferred from present to future gives TP the use in interim of the amount that would otherwise have been paid presently in taxes. Advantage of deferral increases with interest rates. FV = PV(1+r)n PV=FV/(1+r)n
Non Recognition Provisions
Recognition = when realized gain is included on tax return. TP who realizes a gain/loss from disposition of prop must recognize gain or loss EXCEPT as otherwise provided.
§1001(c): Recognition of Gain or Loss
(1) Except otherwise provided, (2) Entire amount of Gain or Loss, determined by this section, (3) on sale/exchange of property (4) Shall be Recognized
Non Recognition Provision: permits realized income to NOT be recognized.
§1031: Like Kind Exchange: Non Recognition of gain or loss from Exchanges Solely In Kind May apply to both TPs of exchange. But, one disqualified does not disqualify other.
(a) 1 No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment
gift would make loopholes via family (ie. Parent makes $100k, gives $20k to kid, parent deducts, & kid taxed less)
Policy: In addition to determining taxable income and tax rate, one must determine the taxpayer. What comes into the community is a single undivided amount; thus, it makes sense that with a gift, donor is treating person as part of community. There is always once cycle of consumption. Why tax donor? Donor usually higher tax bracket; thus IRS receives more money and skips administrative hurdles of other system such as taxing donor/donee whomever is in a higher tax bracket.
§102(c) Employee gifts: Employer to Employee = Income
(1)(a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee. (never suggested friends or relative).
NOTES: Where an employer gifts to employee there is income. IRS has not pursued if employer is family/parent and gifts.
If Independent Contractor: gift needs proven as “detached & disinterested”
(2) Cross references provisions excluding certain employee achievement awards from gross income, see section 74 (c).
For provisions excluding certain de minimis fringes from gross income, see section 132 (e).
§274 Tp to deduct up to $25 of business gifts.
Basis of Gift: What if Donee sells the gift? What is his Basis?
§61(a)(3): “Gains from dealings in property” are included in Gross Income
§1001(a): Gains from property = Excess of Amount Realized (§1001(b)) Over Adjusted Basis (§1011)
§1001(b): Amount realized is sum of money and property received
§1011: Adjusted basis = Basis (§1012) that is Adjusted (§1016)
§1012: Basis = Cost of Property EXCEPT as otherwise provided. See §1015.
§1015: If Gift, then basis = same as donor (carry over for gain).
§1015: If Gift, then basis = lesser of fmv or carryover (for loss).
§1016: Adjust: After using §1015 as Basis, make adjustments for depr/etc.
§1015 Carryov er Basis Rule = Basis of Acquired Property by Gift:
(a) “If prop was acquired by Gift, basis shall be SAME as it would be in the hands of donor/last owner” If Gift, Basis = same as donor
“EXCEPT if basis is GREATER than FMV @ the time of the gift, then for purposes of determining LOSS, the basis shall be such Fair Market Value”
§1015 (a) : Carryover Basis Rule:
For Gain: CARRYOVER: Basis shall be the same as it would be in the hands of the donor
For Loss: Basis = LESSER of FMV or Carryover. If FMV @ time of gift was LESS THAN/equal to Basis, FMV must be used for Loss.
1001(a) Adj Basis – Amt Realized = Positive Loss
If BASIS > FMV @ Gift = use FMV @ Gift as Basis
If BASIS
