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Federal Income Tax
Villanova University School of Law
Book, Leslie M.

Intro to Federal Tax


Spring 2015

Calculation of Tax Liability

Gross Income [§61 – Defines; §1 – Imposes a Tax on GI]

– “Above The Line” Deductions [§62(a) – List of Eligible Deductions]

= Adjusted Gross Income

Standard Deduction [§63(b), (c)] + Deduction for Personal Exemptions OR

Itemized Deductions [§63(a), (d)] + Deduction for Personal Exemptions

§67(b) – ID other than the ones listed in §67(b) are allowed only to the extent they exceed 2% of TP AGI

§68 – Overall limitation on IDs for TPs w/ AGI in excess of the “applicable amount,” defined in §68(b)

GI – §61(a)

1. Compensation for Services, etc. – (1)

2. From Business – (2)

3. Dealing in Property – (3)

4. Interest – (4)

5. Dividends – (7)

6. Life Insurance – (10)

7. DOI – (12)

Miscellaneous Items – §1.61-14(a)

1. Illegal Income – §1.61-14(a)

2. Advance Payments – §1.61-8(b)

3. Punitive Damage or Settlement

4. TT

5. Unemployment over 2.9K – 85(a)

Taxable Income (§63)

I. Gross Income – §61:

a. Basic – §61, 62, & 63:

i. Roadmap to allow you to get to a mash-up of transaction

ii. Determine which of those transaction get you under §61

II. Adjusted Gross Income – §62:

a. Calculation:

i. Gross income – Certain Specified Deductions (ATL) & Exclusions = AGI

ii. Above The Line Deductions – Use §167 & §168 to determine the deprecation of property.

To Calculate AGI

Above the Line Deduction – §62(a)-(20)


1. Trade or Business Dedications [§162] – §62(a)(1);

· Use §167, 168, & 179 for deprecation of property

· Losses – §165(a); (c)(1)-(2)

· Bad Debts – §166(d)

· Interest – §163(d); (h)

2. Deduction Attributable to Rental P. [§212] – §62(a)(17)

· Allowed Depreciation – §168(e)

3. Interest on Educational Loans [§221]– §62(a)(17).

1. Sale of PR up to $250K, $500K, or

2. Gifts & Bequests – §102

3. Deposits – §1.61-8(b)

4. Life Insurance – §101(a)(1)

5. Initial Investment of Annuity – 72(b)(1)

6. Meals & Lodging (FB) – §119

7. Qualified Fringe Benefits – §132

8. Compensation for Personal Injury & Sickness – §104

Below The Line – §67

Not Subject to 2% Rule

Apply 2% Rule

Apply 10% Rule

1. Interest [§163] – §67(b)(1)

a. Post-Death Earning – 101(c); (d)(3)

b. QRI – §163(d); (h)

2. Charitable Contribution [170] – 67(b)(4)

a. Only go up to 50% of AGI

3. Un-Recovered Investment Annuity [72(b)(3)] – 67(b)(10)

1. §212 (& §183) – Expenses of Production of Income & Hobby Losses

a. Must exceed 2% GI

1. Casualty or Theft Loss [§ C -165(a); & T – (e); §165(c)(3)] – §67(b)(3)

a. Deduct $100 per claim then 10% – §165(h).

2. Medical Expenses [213] – 67(b)(5)

Personal Use Property

Never a deduction or exclusion of personal use property unless stated in other section per se §262

a. Taxable Income – §63:

i. Standard Deductions – §63(c):

a. Always entitles to take deduction for yourself + every dependent

b. 1 dependent: $7K deduction for self & dependent (if standard deduction is set at $3.5K)

c. Take SD if you don’t want to calculate your itemized deductions

d. Standard Deductions are Below The Line Deductions

ii. Itemized Deductions – §63(d)

Chapter 2

Concepts & Limitations

I. Readings:

a. IRC: §61; skim §§31, 85, 86

b. TR: §§ 1.61-1, 1.61-2(a)(1), 1.61-2(d)(1), 1.61-2(d)(2)(i), 1.61-8(a), 1.61-9(a), 1.61-11(a), 1.61-14(a)

II. Determining GI:

a. Codes & Regulations:

i. Definition of GI – §61:

a. §61(a) – Except as otherwise provide in this subtitle, GI means all income from whatever source derived, including (but not limited to) the following items:

1. Compensation for services, including fees, commissions, fringe benefits, & similar items;

2. GI derived from business;

3. Gains derived from dealing in property; – CH. 3

4. Interest;

5. Rents; – §1.61-8(a)

6. Royalties; – §1.61-8(a)

7. Dividends; – §1-61-9(a)

8. Alimony & separate maintenance payments;

9. Annuities;

10. Income from life insurance & endowment contracts;

11. Pensions; – §1.61-11

12. Income from discharge of indebtedness; – CH. 9

13. Distributive share of partnership GI;

14. Income in respect of a decedent; &

15. Income from an interest in an estate or trust.

ii. GI – Reg. §1.61-1(a):

a. When compensation is in any form other then cash, GI will be in the amount of the FMV of property or services received.

iii. Compensation for Services – Reg. §1.61-2:

a. In General:

1. §1.61-2(a)(1)

i.In general, all wages, salaries, commissions, etc. are income to the recipients.

b. In Property or Services:

1. §1.61-2(d)(1):

i.Compensation paid other than in cash; take the FMV of property or services must be included in GI.

2. §1.61-2(d)(2):

i.Property transferred to employee for compensation of services; FMV of services/property.

ii.If property transferred for less then FMV, the difference between paid and FMV is to be included.

iii.For subsequent sale à paid for + what was reported in GI = Basis

iv. Miscellaneous Items of GI – Reg. §1.61-14:

a. Includes punitive damage, treasure trove, rewards, 3rd party paying taxes, & illegal gains.

b. Explanation:

i. “GI means all income from whatever sour

xed until the amount gained is realized.

viii. Roco v. Comm’r – Rewards = GI – Reg. § 1.61-2(a)(1)

a. Issue/Fact:

1. Π received a payment of $1.5M from the gov’t in a qui tam action.

2. Π did not report the income on tax returns.

b. Holding:

1. Reward = GI

c. Rule:

1. Qui tam payments and Punitive Damages are not intended to compensate the recipient of actual damages, and thus should be included in gross income – Glenshaw Glass

Chapter 4 – Gains Derived From Dealing in Property

I. Reading:

a. IRC: §§ 61(a)(3), 1001(a), (b), & (c), 1011(a), 1012; skim §§ 1016(a)(1), (2), 1031(a)(1)

b. TR: §§ 1.61-6(a), 1.1001-1(a), 1.1001-2(a)(1), (3) & (4)(i), (ii)

II. Approach to Gains Derived From Dealing In Property:

a. Do we have a realization event (e.g. sale or disposition)?

b. If yes, calculate §1001 Gain Realized.

i. Amount Realized – Adjusted Basis = Gain Realized

c. Is the gain recognized (i.e. included in GI)?

i. Or is there application exclusion?

ii. Or is there an applicable non-recognition/partial recognition provision?

d. If gain, what is the character of the gain (ordinary? capital?)?

III. Determining Gains Derived From Dealing in Property:

a. Codes & Regulations:

i. §61(a)(3):

a. GI includes “gains derived from dealing in property.”

ii. Reg. §1.61-6(a):

a. “Gain is the excess of the amount realized over the un-recovered cost or other basis for the property sold or exchanged.”

b. “When part of a larger property is sold, the cost or other basis of the entire property shall be equitable apportioned . . . & gain/loss realized on the part of entire property sold minus basis.”

c. Ex. Buy 4-acre lot for $40K; you divided it into 4, 1-acre lots; new basis is $10K for each lot.

iii. Computation of Gain or Loss – §1001(a):

a. Defines the gain on the sale of the property as the excess of the “amount realized” on the sale over the “adjusted basis” of the property provided in section 1011 for determining gain.

b. AR – AB = Gain/Loss

iv. Amount Realized – §1001(b):

a. Defines TP’s AR on a sale as cash received by TP plus FMV of any non-cash property received.

1. Cash (+ FMV of property received) = AR