Taxation outline
Week 1:
Concept gross incomeàwealther, clearly realized, and control of it.
The forms of gross income
1. “ is rebate from the manufacture of the machine a gross income of yours?”
àYes! It is just a rebate, like a discount, your total wealth doesn’t increase because of you take a discount or rebate. Simply, this discount or rebate is merely an “ incidental matter” produced by your purchasing, nothing more ! it also looks like the “fly-mile accumulation” case. The fly-mile accumulation is equal to meaning an” incidental matter” as a result of your purchasing flying ticket. You buy it ! you don’t acquire it for free. Put in this way, we can say the economic benefit of this rebate is not given to you for free, but you buy it! You does not become wealther.
2.” Is rent of office for free a gross income?”
àyes! It is a kind of economic benefit you are enjoying for “free”. Your total wealth has a “new addition”à you are wealther now!
3.” Publication company give new book to professor, hoping he can use in his course. The professor has no intend to do so. He just put the book in his shelve. Does professor has income?
à first, a “face gift” able to become compansation is result from “the gift is in fact to exchange a provision of service. Like “you have done something for me , and then I give something to you for appreciation.” Here, it is not the same situation. The book just like a product that the company delivered to you with hoping you to promote the product. You earned anyhing? No! the situation just likeà
Give me a bookà “to want me use the book to promote the book”=using the book to provide service.
V.S
Give me bookà “for appreciating that I always promote your various products.
Two different case! Two different consequence!
4. you buy a house and whole contents in it, and then you find the painting hanging on the wall has a greater worth FMV than the amount you pay for this transaction (to buy the house and whole thing in it). Gross income?
à No! you buy the whole thing including the a painting. Without further realizing of the painting, you don’t have any gross income from the value appreciation.
Just like you buy a china for $40, then you find that it in fact worth $4000000. You don’t have gross income without subsequently realizing it ( sell it or deliver to pay the debt….)
5. what if you “find” the painting in trash car? Gross income, because you are wealther now, like piano case. The finding, itself, constitutes a realize.
Now, you buy a house from your employer, he reduce the price from $25000 to $20000 in accord with your hope. Your employer passes some economic benefit to you for exchanging your provision of service. It is a gross income.
Employer make favor to you à gross incomeà wealthier now!
You just buy something with discount, you are “not wealthier!” the discount or rebate is just a price reducing nothing more. But if the rebate or discount is made particularly to you for your serviceà a economic benefit or some kind compensationà GI.
6.” Painting basis is $10000, after 3years its FMV becomes $30000, when moving it is destroyed, then insurance proceeds are $5000. Is it realized & recognizable? Yes!
Week 2:
A. the rule for basis:
a\1001(a): the gain= AR-AB and the loss=AB-AR, key question is that what is the basis, adjusted basis and amount realized?
Note: the gain can be earned from the sale or “any other kind” of disposition of property.
Disposition of property-1.calculation 2. Characterize 3. Timing
Note: Basis + capital Expenses- Depreciation=AB(adjusted basis) it will be detailed dicussed in week 6.
Note: the gain is from the sale or “any other disposition” of property, triggering calculation , it is a broad description-any kinds. This deposition may include any kind form.
1001(c) the gain shall be recognition reported.
b\1012:” the basis of property shall be the cost of such property—the basis was equal to the cost.”
ex.
TP pay $2000 to car dealer for buying a used car, what is the basis?
The basis = the cost =the FMV of the used car =$2000
Then, we need to know how to value the FMV? There is always a presumption of equal value, when we consider the FMV. See page-38 yellow book and the ex below. The FMV was used for gross income and basis.
ex.
A lawyer provides the legal service to a client, and then the client return a watch worth $500. We always assume the watch’s FMV equal to the legal service.
Note:1) Most common adjustments to basis: 1) improvements to property (add to basis) 2) recovery of cost through depreciation (subtracted from basis)
2)Improvements to property by lessee not added to basis, unless in lieu of rent – sec. 109.
1012: The basis of property acquired intaxable exchange:
The philadelphia case: the cost basis of propery received in a taxable exchange is the FMV of the property received in the exchange. See page-43 in yellow book.
The farid case: it is not a gift, because the aquesition of those stocks were a compensation for the woman’s release of her marital rights. Therefore, once the that is not a gift, the basis of the those stocks when they were realized by her is the FMV when she acquired them. But if that is a gift, the basis should be the one her husband got them before pass them to her (the carryover basis).
B. 1015. Basis of property acquired by gifts….
a) 1015(a) the basis shall be the same as it would be in the hands of donor.
Except: that if the basis of such property is greater than the FMV of the property at the time of the gift.
b)The general rule: carry over basis—the original basis in the hands of donor—apply to the property transferred as a gift unless:
1) the basis of the property in the donee’s hands is greater than the FMV of the property on the date of the gift, and
2)the done subsequently sell the property—realized.
c)The steps to deal with 1015 exception:
1. compare the FMV at the time of the gift to the donor’s AB
a. if the AB is less than the FMV, no problem, just use the donor’s AB, and report whatever gain or loss results.
b. if the AB is greater than the FMV, take step2 and 3.
2. still with the general rule, use carryover basis to compute gain or loss.
a. if the result is gain, that is stop. Report the
pt. building w/ no cash investment and non-recourse debt; took depreciation of $450K (basis thus $1.4M); property depreciated; sold property for nothing other than assumption of mortgage; Ts argued they realized $1.4M and no gain should be recognized
a. T must recognize gain of $450K b/c they realized full unpaid balance of mortgage debt
b.FMV is irrelevant to determine amount realized but highly relevant to determine “cost”
F. 74. prize and awards the exceptions to the general rule that the prize and awads be included in the gross income.
1) the recipient was selected without any action on his part.
2) the recepeient is not required to render the subsetaintial services as a condition to receive the prize. (the speech of acceptance is not a subsetaintial service)
3)the prize is transferred by the payor to the government unit or organization.
See ex.1.2. p-75 yellow book about the employee achievement awards exempt.
Scholarships and Fellowships – Sec. 117
1) Only degree candidates may receive scholarships
2) If student is required to work for scholarship, amount paid for work is included in income.
3) Scholarship must be unconditional to further education, like a gift.
4) Employees who receive scholarships conditional upon returning to employment are taxable.
5) Scholarships are tax-free only up to total of tuition and required expenses.(related to tutition and the expanses incurred in course related expanses)
6) Sec. 117(d) – Tuition reductions given to employees of colleges or universities allows employee to deduct from income the amount of tuition reduction for undergrad education of employee, spouse or child. Educational Assistance Programs – Sec. 127. Allows employer to deduct up to $5250 for undergrad tuition and related expense of employee.
Week3
Ex1.in handout, Ann’s problem: Ann’s AR:20, AB:10, the realized gain:20-10=10
AR20
AB10
10 RecGain:0-no recognized gain
1012=FMV=20,Basis=cost=FMV of the property, then
1012=FMV=20
minus10=Unrecognized Gain
The newAB:10
Ann has no gain of cash from the sale. No sale exist-> it is un fair to tax her. “ not require Ann to report her gain=1031->is not “forgiveness”, but only a “deferral”, it means that if she subsequently sale the property, then she still need to report her gain.”
“solely” for the property of like kind which is to be held either for productive.
Ex2. A and B each have 10 acres of vacant land , A’s 10 are cost her $ 20000. Both parcels have a FMV of 150000.
AR15
