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Tax
Villanova University School of Law
Mullane, Joy Sabino

TAX OUTLINE
Fair market value – price willing buyer would pay willing seller w/neither under compulsion to buy or sell & both have reasonable knowledge
QUESTIONS
Kerbaugh-Empire argument – borrowed $ for venture that turned out to be a loss then DOI isn’t recognized (is this good law)
Sec. 108(e)(4) – if a person related to a debtor acquires the indebtedness, the acquisition shall be treated as an acquisition by the debtor – DOI – what does this mean?
Why would the medical expenses from the ulcer that resulted in problem #3, p.182 be excluded from income
 
 
I.                   Background Tax Structure
a.      Tax due = Tax rate x Tax base (tax base = taxable income)
b.      Taxable income = gross income – deductions
c.       TP cash method – income must be included when they actively receive it/ constructively receive it
                                                              i.      Include items in income when u actually get it in ur hands & get deduction when expense is paid
d.      TP accrual method – earliest date the item is due, earned, or paid
                                                              i.      Care about when right to income or obligation to pay becomes fixed
                                                            ii.      Constructive – available to u w/o substantial restriction
e.       Assignment of income doctrine – u can’t rid urself of income by assigning it to someone else (if u earned it, it’s yours; if it’s ur prop, it’s yours)
f.       Sec. 63 – Definition of taxable income = GI minus deductions (other than the standard deduction)
                                                              i.      If TP doesn’t itemize deductions then taxable income = adjusted GI minus the standard deduction & deduction for personal exemptions (sec. 151)
g.      Sec. 62 – Adjusted GI minus certain deductions (above the line)
                                                              i.      Available to all TPs whether or not they itemize
                                                            ii.      Doesn’t allow the deductions themselves – just permits u to subtract certain otherwise allowable deductions from GI to get to AGI
h.      Itemizers still want to know AGI b/c it plays into med expenses, charitable contributions, and some other stuff
i.        Overall approach:
                                                              i.      Determine all items of GI
1.      Look at exclusions & nonrecognition provisions
                                                            ii.      Determine all deductions
1.      Look at deduction limitations
                                                          iii.      Determine which, if any, deductions are allowable in AGI
                                                          iv.      Compute AGI
II.                INCOME
a.      Sec. 61(a) – gross income is from whatever source derived & lists examples (non-exclusive)
                                                              i.      Compensation for services, including fees, commissions, fringe benefits, and similar items
                                                            ii.      Gross income derived from business
                                                          iii.      Gains derived from dealings in prop
                                                          iv.      Interest
                                                            v.      Rents
                                                          vi.      Royalties
                                                        vii.      Dividends
                                                      viii.      Alimony & separate maintenance payments
                                                          ix.      Annuities
                                                            x.      Income from life insurance & endowment Ks
                                                          xi.      Distributive share of partnership gross income
                                                        xii.      Income in respect of a decedent
                                                      xiii.      Income from an interest in an estate or trust
b.      Widely inclusive definition, elastic, broad
c.       Gifts & bequests are not included – sec. 102
d.      Treasure trove is taxable – Cesarini
e.       Loans are not gross income – no accession to wealth – doesn’t change net worth
                                                              i.      Repayment is not deductable
                                                            ii.      Definition – funds are transferred w/an unconditional obligation w/no condition precedent on transferee to repay
f.       Claim of right – contingent repayment obligation – treated as income
                                                              i.      Possible deduction/reduction if subsequently required to refund $
                                                            ii.      When TP is just a conduit then no claim of right
g.      Illegal income – often taxable
                                                              i.      James v. US – embezzled funds are gross income
                                                            ii.      Not like a loan b/c no intention to honor obligation to repay
h.      Deposits are questionable
                                                              i.      Mere deposits with obligations to repay are not taxable
                                                            ii.      Deposits that are actually advance payments are taxable
                                                          iii.      Fact that deposits are accumulating interest or held in a s

alized – adjusted basis
c.       Basis – sec. 1011 – sec. 1023
                                                              i.      Adjusted basis is basis from sec. 1012 adjusted by sec. 1016
                                                            ii.      Sec. 1012 – basis is cost of prop (when u buy/acquire prop)
1.      As time passes basis can adjust depending on your investment in prop (additions, subtractions)
2.      Keeps you from getting taxed twice
                                                          iii.      Recognition – sec. 1001(c) – the gain or loss on sale/exchange of prop shall be recognized
                                                          iv.      Philly Park – Tax cost basis is FMV of prop received
                                                            v.      Examples:
1.      John buys a house for $250K & sells it for $1 mil – gain recognized is $750K
2.      Repaying part of a loan taken out on a mortgage does not change your basis in the property – EX: Maggie bought house for $500K and had to borrow $400K – 1 year later she has paid off $100K of the loan – still has $500K basis
3.      Continuing above EX – if Maggie borrows an additional $200K, but only puts $50K of it toward the house, the house’s new adjusted basis is $550K
4.      Look at total amount someone gave up to receive the prop they’re getting – EX: John exchanges his land which has FMV of $450K & he pays $50K to get new prop, which has a basis of $500K – take that $500K and subtract whatever John’s basis was in his original land + the cash to get his gain realized
a.      Simplify it – if I give Kevin a $5 stapler plus $5 cash for a $10 tie, I don’t realize any gain & my basis in the tie is $10
V.                Sec. 121 – gross income shall not include the first $250K of gain derived from prop (sale/exchange)
a.      3 main requirements (aggregating 2 out of 5 years before sale)
                                                              i.      Ownership
                                                            ii.      Use
                                                          iii.      Frequency (principal residence)
1.      1.121-1(b)(2) – this is determined usually by whichever prop the TP uses a majority of the time during the year, but look to these factors also: