Concepts & Inclusions
“If it comes in, it’s income.”
Generally must be a transfer or
When Mark McGwire hit his 62nd
homerun, a groundskeeper retrieved the
ball. A collector offered him $1Mil. For
the ball. Is the ball taxable to the
Subsequently, the groundskeeper gave
the ball to McGwire. Should he now pay
Fruit of the tree doctrine
Not followed if spouses live apart for the entire
year, are not MFJ, do not transfer income
Alimony (review),* not including front-
end loading which must be recaptured
Property placed in trust
Partnership, LLC (1065)
Sample Test Question
11. F’s share of income from various sources is as follows
for the current year:
Source F’s share F’s Dist.
ABC Partnership after partner’s salary $ 6,000 $ 9,000
F’s salary from ABC Partnership n/a 30,000
XYZ Corporation, a C corporation 80,000 10,000
Interest from bank savings account 40,000 n/a
F’s A.G.I. (ignoring the deduction for one-half of any
self-employment tax) is how much?
Robert Lucas wins the Nobel Prize!
…and received $1Mil. In 1995.
However, when he divorced in
1988, he agreed to give his wife ½
should he win before 10/31/95.
He won 10/10/95.
The terms of the agreement are
sealed, but worst case: he’s taxed
on all, and left with….
$100,000 at a 40% state & fed rate
Income recognized under either cash or accrual
basis, as prescribed by law or by hybrid method
Cash method includes “constructive receipt.”
Payment can be made with borrowed funds:
Credit card expenses deductible when charged
Prepayments of expenses for longer than 1-year
must be amortized.
Valued at FMV of most objective side of transaction
Note receivable is consideration for cash basis
taxpayer; A/R is not.
Original Issue Discounts (OID): cash basis taxpayer
taxed same as accrual basis
Restricted property not recognized until lapse
Straddles not recognized until closed
Accrual Basis Income
Corporations must use accrual unless
less than <$5mil in gross receipts
Many exceptions that accelerate
income recognition and defer expense
Prepaid income in year of receipt if
prepaid longer than one year
Prepaid rent, generally year of receipt
Prepaid interest, generally year of receipt
All events test for deductions
Recurring expenses often allowed
Reserves (e.g. bad debts, warranties)
generally not allowed.
Accrual for sales & inventory items
Cash for all other expenses
16. T Corporation manufactures the Banana, a
clone of a popular computer. Its gross receipts for
the last several years have averaged $4 million.
Which of the following accounting methods can T
a. The cash method to account for all receipts
b. The accrual method to account for all receipts
and disbursements is the only method allowed.
c. The cash method for some items and the
accrual method for other items as it desires.
d. The cash method for some items but is
required to use the accrual method for other
Watch for Income…
That is imputed
Prizes & awards
Below market loans: Gift loans >
$10,000, employee loans, shareholder
Incident to divorce
Reba’s husband, Brock is a dentist who
divorces her to marry his pregnant dental
hygienist, leaving her with their 3
children. She gets the house in the
Describe the difference between community
property & common law states
How is alimony, if any, treated?
How is child support treated?
How is a 5-year distribution of marital property
for her share of the value of his practice
17. L purchased twenty REX Corporation bonds
on March 5 for $21,120. The bonds have a $1,000
par value and pay interest at an annual rate of 10
percent semiannually on January 1 and July 1. On
July 1, L received his first interest check of
$1,000. Immediately after he received the
interest payment, which of the following is true?
a. His basis in the bonds is $21,120.
b. His interest income is more than $1,000.
c. His interest income is less than $1,000.
d. His basis in the bonds is more than $21,120.
Below Market Loans
Gift loan first creates interest income/expense to
Then, donor gives interest back to donee (additional gift).
Compensation loan creates interest income/expense to
Then, when the employer is not pd, is “written off” as
Shareholder loan creates interest income/expense to
Then, interest income is paid back to shareholder as a
Exception: between individuals unless for tax
avoidance: loans of $100,000 or less are limited to:
$0 if borrower’s investment income is < $1,000.
Sample Test Question
18. The application of Code § 7872 to
interest-free or below-market loans has certain
tax consequences for the lender and borrower.
a. the borrower may be allowed an itemized
deduction for the interest hypothetically paid to
b. the lender is not required to report the
hypothetical payment as interest income until the
loan is repaid.
c. the borrower treats the hypothetical payment
as earned income.
d. the lender is deemed to have made a
completed gift of the loan amount.
Income less exclusions
Gifts & inheritances
Most welfare/social aid
Property transferred incident to divorce
Employee achievement awards *if* personal
property *and* for length of service or achievement
$50,000 group term life insurance coverage
1st 230 per month for carpooling and transit passes
Unemployment payments above
Some Social Security benefits:
First $25,000 S; $32,000 MFJ of AGI +
foreign income exclusion and tax-
exempt income, exempt
Amt over exemption up to $34,000S,
$44,000 MFJ: 50% benefits is taxable
Amt over above: 85% benefits taxable
McDonalds => St. Judes
One individual received the exclusive
Boardwalk ticket in the McDonalds
Coupled with an easily found Park Place,
s/he mailed the pieces to St. Judes. Tax
Exempt if: Transferred to gov’t. or
qualified NFP *and* no action to enter
contest *and* not req’d. to serve further.
Part income, part return of capital
Fixed period annuity
Annuity for life
Reconciliation to actual life
19. B, who is single and 59 years old, purchased
a single premium immediate annuity on January 1
of the current year for $12,000 that will pay him
$100 every month for life beginning on January
15. Based on actuarial tables published by the
IRS, his life expectancy multiple is 25.0. B’s
nontaxable return of capital for the current year is
Used only for long-term
Generally not home-builders
Similar to GAAP accounting:
Figure % of total costs spent to date
That much revenue should be
recognized to date; matching costs to
Cancellation of Indebtedness
Unless bankruptcy or some
In some cases, recognized over 5