Income Taxation Outline

Taxation of Property Dispositions Outline

Unit I: Basis of Property

a. Basic Concepts

b. Statutory Pattern

i. §1001(a)

1. Gain/Loss = Amount Realized – Adjusted Basis

ii. §1011(a)

1. The adjusted basis is determined through §1012 and §1016

iii. §1012

1. Basis is the cost of the property

iv. §1016

1. Depreciation

c. Cost Basis

i. Cash

1. Reg. 1.1012-1(a) – cost refers to what is paid for

ii. Property Generally

1. Property Received in a Taxable Exchange

a. Philadelphia Park Amusement Co. v. United States

i. Franchise was given to Philadelphia Park to run a railway.

ii. Was extended 1934 and abandoned in 1946

iii. Issue – what is the adjusted basis in the franchise when abandoned

iv. Rule – In an arms length transaction the cost basis of property exchanged is the FMV of the property received

b. Seas Shipping Co. v. United States

i. Taxpayer exchanged 10 ships for 5.5M in cash and notes and 300K of Buyer Company non-public stock

ii. Issue – what is the basis in the stock

iii. Value of the stock is the value of the ship subtract the 5.5M

c. Problem 1: Supplemental 3

i. Seller owns a classic 1962 Morgan automobile. His basis in the car is $2,000 and its present fair market value is $10,000. Buyer is a professional artist who wants to buy the Morgan. He has no cash, but offers to paint Seller’s portrait in exchange for the car. The parties are unrelated, they agree to the transaction, and consummate it.

1. Does Seller have gain? If so, how much and how is it determined?

2. Does Buyer have gross income? If so, how much, and how is it determined?

3. What is Seller’s basis in the portrait?

4. What is Buyer’s basis in the Morgan?

2. Property Received in Compensation

a. §83

i. If property is transferred in exchange for services, then the basis in the property is calculated based on when you have no risk of forfeiture

ii. §83(b) – the TP may make an election when to count the gain, either when received or after selling

1. Example – stock received by own company

b. Reg. 1.83-4(a)

i. Holding Period – begins when you make the election

c. Reg. 1.83-4(b)

i. Any amount paid for the property plus an amount includible in the gross income of the person performing the services

d. §132 – excludes certain fringe benefits; including employee discount

e. Reg. 1.132-3(b)

i. Depends

1. Either the cost that the employee paid; or

2. The Price that the Employer actually sells the good

f. Problems 119-120

g. International Freighting Corporation v. Commissioner

i. TP transferred stock in an employee stock sharing plan to select employees

ii. AB – 16153; AR – 24859

iii. Holding – there was a proper deduction of 24859 but there was a gain of 8706 that needed to be taxed

h. Montelepre Systemed, Inc. v. Commissioner

i. Hospital was receiving services of company that held a right of first refusal that was not assignable

ii. TP was offered 1.5M to forfeit right

iii. Holding

1. Under §83, must pay tax when there is a substantial risk of forfeiture

2. Substantial Risk will exist where the TP no longer has full enjoyment of the property

i. Problem 2: Supplemental 5

j. Problem 3: Supplemental 6

iii. Property Acquired by Gift: Transferred Basis

1. General

a. Taft v. Bowers

i. Taft was given shares of appreciated stock and contended her basis was the appreciated value

ii. Rule – the donor receives the basis of the donor in gift property

b. Farid-Es-Sultaneh v. Commissioner

i. Farid received stock from a premarital settlement agreement in exchange for the release of dower rights

ii. Rule – No gift occurs for the purpose of computing the donee’s basis in property received in exchange for a promise to marry and the release of marital rights

c. § 1015

i. Basis shall be the basis in the hands of the donor

ii. Exception – except that if such basis is greater than the FMV at the time of the gift, then for purposes of determining loss basis is FMV

iii. (d)(6)

1. The increase in basis will be Gift Tax * (Net Appreciation/FMV of the gift)

d. Reg. 1.1015-1(a)(2) Example

i. If FMVDate of Gift > ABDonor + 1015