Tax_outline - USC Gould School of Law by wulinqing


									     Gross income (§61)
-    Above the line deductions (§62)
     AGI (§62)
-    Standard deduction (§63) / Itemized deductions (§§63, 67, and 68)
-    Personal exemption (§151)
-    Dependency exemptions (§151)
     Taxable income (§63)
x    Tax rate 1
     Tax liability
-    Credits
     What you owe

Standard Deduction (pages 569-579), problems (579)
I. Additional standard deductions
     A. Aged = $950 (or $1200 if T is also unmarried)
     B. Blind = $950 (or $1200 if T is also unmarried)
II. Standard deduction for dependents = greater of $800 or $250 + earned income
III. Ineligibility for standard deduction – Married taxpayer can’t use standard deduction if filing
     a separate return and spouse itemizes her deductions

Itemize d Deductions
I. Qualifications
     A. Ordinary and necessary
     B. Expense vs. expenditure
II. Non-miscellaneous itemized deductions
     A. Interest
     B. Taxes
     C. See §67(b) for more examples
III. Miscellaneous itemized deductions
     A. Allowable to the extend that they exceed 2% of AGI
     B. Phaseout (§68) – If AGI exceeds applicable amount, amount of itemized deductions is
        reduced by lesser of 3% of AGI over applicable amount or 80% of miscellaneous
        itemized deductions
        1. Applicable amount = $142,700
        2. Applicable amount for married individual filing a separate return = $71,350

Personal Exe mption (565-568), problems (568)
I. Phaseout = 2% for each $2500 or fraction thereof by which AGI exceeds the threshold amount
     (see last page of handout)
II. No personal exemption if you can be claimed as a dependent

    Preferential rates on capital gains and dividends – §1(h)

III. Married taxpayer filing a separate return can claim an additional personal exemption if his
     spouse has no gross income and is not the dependent of any other taxpayer

Dependency exemption (565-568) , proble ms (568)
Requirements for “dependent” status – §152
I. Relationship: Must bear one of the relationships listed in subsection (a)
II. Support: Taxpayer claiming dependent must provide over ½ support for the person during the
     year 2
III. Gross income limitation: Person claimed as a dependent can’t have gross income in excess of
     personal exemption amount for that year except if the dependent is a child of the taxpayer
     and is either
     A. Under the age of 19 at the end of the year or
     B. Is a full- time student under 24 at the end of the year

Definition of income (48-68)
I. Cesarini
II. Old Colony Trust
III. Glenshaw Glass
IV. Independent Life Insurance Co.
V.Dean v. Commissioner
Problems, page 65
Problems, page 68

                                         Kiddie Tax: §1(g)
Applies to net unearned income (unearned income over $1000) of a child under 14; tax rate is
higher of child’s regular rate (§1) or the parents’ rate if the child’s income was included (Tax on
Residue + Allocable Parent Tax) – §1(g)(1)

Tax on Residue = (TI – net unearned income) * Joe’s tax rate
Allocable Parent Tax = (net unearned income + parents’ TI) * parents’ tax rate – parents’ TL
Net unearned income = Unearned income - $800 – greater of $800 or itemized deductions related
to unearned income

Alte rnative Minimum Tax – Page 942

    Scholarships aren’t considered as support (statute says nothing about student loans)

I. Gifts – §102 (69-82)
     A. Duberstein
     B. Problems (82)
II. Bequests, devises, and inheritances (83-91)
     A. Problems (91)
III. Meals and Lodging – §119 (102-106)
     A. Herbert G. Hatt
     B. Kowalski
     C. Problems (106)
IV. Fringe Benefits – §132 (92-101)
     A. Nondiscrimination requirement applies to no-additional-cost services, qualified employee
        discounts, employee eating facilities, and qualified retirement and planning services
     B. Examples
        1. No-Additional-Cost Services – Must offered for sale to customers in the same line of
            business as that in which the employee is performing services, the employer incurs no
            substantial additional cost in providing the service to the employee and, in the case of
            highly compensated employees, the services are provided on a nondiscriminatory
        2. Qualified Employee Discount
            a) Services – Discount limited to 20%
            b) Property – Maximum discount is the employer’s “gross profit percentage”
                (=markup/sales price) on goods in the employee’s line of business
        3. Working Condition Fringe – exclusion for any property or services provided to an
            employee the cost of which, if the employee had paid for the property or services,
            would have been deductible by the employee as a business expense or by way of
            depreciation deductions
        4. De Minimis Fringes – Employer-operated eating facilities
        5. Qualified Transportation Fringe – Limited to $100 per month for public
            transportation or $175 per month for qualified parking
        6. Qualified Moving Expense Reimbursement
        7. Qualified Retirement Planning Services – examples: pension or profit sharing plan
        8. Athletic Facilities – must be located on the employer’s premises and operated by the
            employer, if substantially all the facility’s use is by employees, their spouses, and
            their dependent children
     C. Problems (101)
V.Prizes – §74 (107-113)
     A. Requirements for exclusion
        1. The recipient did nothing to enter the contest
        2. Is not required to do anything more to earn the award, and
        3. Never touched the award money
     B. Implication is that you have to preemptively notify the organization that you don’t want
        the money
VI. Scholarships – §117 (113-116)
     A. Exclusion applies to qualified tuition reduction for employee’s family

   B. If fellowship crosses the line and appears to be compensation, it will be treated as

                                         Business Deductions
I. Types of deductions (544-546)
     A. Trade and Business Deductions
     B. Reimbursed Employee Business Expenses
II. General requirements to qualify as a deduction
     A. Ordinary and necessary (314-319)
        1. Welch v. Helvering – Expenses to repair one’s reputation are not considered ordinary
             and therefore not deductible.
        2. Conti – Expenses to preserve one’s reputation may be considered ordinary and
             necessary, making them deductible (see Problem 1A, page 319)
        3. Problems (319)
     B. Expenses v. expenditures (319-337)
        1. Repairs are generally considered to be expenses, which are deductible
        2. Replacements or improvements are considered expenditures and are therefore not
        3. Problems (336)
     C. “Carrying on” the business (337-344)
        1. Morton Frank v. Commissioner – taxpayer must already be in the business in order
             for the expenses to qualify for §162
        2. §195 – allows recovery of startup costs over a period of at least 60 months (an
             amortization of the startup costs)
        3. Problems (344)
III. Specific business deductions
     A. “Reasonable” salaries
        1. Exacto Spring Corp. v. Commissioner – independent investor test: what would the
             independent investor think of this transaction?
        2. Harolds Club v. Commissioner
             a) Sets out the factors to determine reasonableness:
                 (1) Employee’s qualifications
                 (2) Nature, extent, and scope of employee’s duties
                 (3) Size and complexity of the business itself
                 (4) General economic conditions (supply and demand)
                 (5) Dividend paying history of the corporation. Since the purpose of the
                     corporation is to make money for the SHs, if the corporation hasn’t issued
                     dividend in years the IRS may presume that excessive payments in other areas
                     are really dividends.
             b) Bottom line is comparability: salary being paid to an executive in question
                 compared to other executives in similar situation.
     B. Travel expenses
        1. Local travel – Travel to and from your home is a commute. Travel b/w other stops
             are deductible
        2. Traveling away from home (travel mode)

           a) Rosenspan v. United States – your home is where your principal business is
           b) Entertainment and meals while on travel mode are recognized deductible
               expenses. You don’t have to stay locked in your room. Only limit is for lavish
               and extravagant expenses.
           c) Deductions for meals and entertainment are still limited to 50%.
       3. Problems (377)
    C. Rental and other payments for continued use of the property and not for acquisition (379-
       1. Starr’s Estate v. Commissioner – excessive “rental payments” clearly amounted to a
           purchase on an installment basis; deal was structured as a lease only to generate
           deductions. The court therefore treated it as a purchase instead.
    D. Education (384-392)
       1. No deduction if:
           a) Only minimal entry skills are required to get into the business
           b) If the education qualifies the taxpayer for a new trade or business, even if the
               taxpayer has no intention of entering that trade or business. Example: MBA
               doesn’t qualify you for anything (merely improves/enhances what you have to
               offer); education expenses for the MBA are therefore deductible.
       2. Problems (392)
    E. Entertainment and meals (392-403)
       1. Requirements to qualify for a deduction
           a) “Directly related” – means we’re talking about proximity. There has to be some
               business connection; can’t just be catching up w/ one another. Principal purpose
               of the entertainment has to be business. Portion of expenses allocable to non-
               business participants is not deductible (except for spouses); can’t deduct expenses
               for your posse if they tag along. Affirmative duty of proving this is on the
           b) “Associated with” – entertainment either directly proceeds or follows the business
           c) Cannot be lavish or extravagant
       2. Problems (399)
IV. §212: Non-business deductions
    A. In the case of an individual, there shall be allowed as a deduction all the ordinary and
       necessary expenses incurred during the taxable year for the production/collection of
       income or the management, conservation, or maintenance of property held for the
       production of income. Mostly an above-the- line deduction. Still need to meet the
       requirements for a §62 deduction.
       1. Lawyers’ fees?
       2. The substantial and investment activities regarding a stock and securities portfolio
           can rise to the level of a trade or business if conducted on a significant basis
    B. Problems (464)

                                      Personal Deductions
I. Alimony is an above-the- line deduction for the payor.

II. Losses not reimbursed by insurance: §165 – There shall be allowed a below-the- line deduction
     for losses not reimbursed by insurance.
     A. Basis for determining amount of the deduction shall be the adjusted basis.
     B. Moreover, if you are an individual, the deduction is limited to losses in trade or business,
         losses from any transaction entered into for profit though not related to trade or business,
         or losses in property not connected in trade or business resulting from unexpected events
         (fire, storm, shipwreck, casualties, theft, etc.). Wagering losses are deductible only to the
         extent of wagering gains. These are below the line deductions.
     C. Personal casualty losses are limited to the extent that it exceeds $100. Net excess
         casualty loss is allowable only to the extent that it exceeds 10% of your AGI; this turns
         the section into a catastrophic casualty loss provision.

                                      Assignment of Income
I. Services
     A. Lucas v. Earl – Income taxed to the one who earned it
     B. Commissioner v. Gianninni – Income is taxed to the one who earns it, unless you act in a
        timely manner to prospectively disclaim it and do not attempt to control where the money
        will go
     C. Revenue Ruling 66-167 – Disclaimer can be made w/i a reasonable time after the money
        is awarded to you (see Problem 1C, page 254)
     D. Revenue Ruling 74-581 – As an employee, your time no longer belongs to you. Fruits of
        your labor belong to the employer. (see Problem 1D, page 254)
     E. Problems, page 254
II. Property
     A. Helvering v. Horst – Taxation follows ownership. Taxpayer that owned the bond was
        taxed on the interest income paid to the daughter. Giving a small piece of temporal
        ownership doesn’t carry tax implications.
     B. Blair v. Commissioner – Giving a small piece of permanent ownership gives rise to tax
        liability for the donees.
     C. Estate of Stranahan – Sale of fruit in order to assign income is permissible as long as it’s
        done at arm’s- length (see Problem 1F, page 274)
     D. Susie Salvatore – Can’t use a transfer of property to assign income after there has been an
        agreement to sell or receipt of a bid
     E. Problems (274)

                                    Gains and Losses: §1001
I. Gain or Loss realized and recognized = Amount realized – Adjusted basis
    A. Limits
       1. §465: Loss deductions limited to amount “at risk” (513-516)
           a) Exception for qualified non-recourse financing. Requirements:
               (1) Professional money lender
               (2) Can’t be seller
               (3) To an unrelated person (unless it’s at market rates)
           b) Problems (515)

        2. §469: Disallows losses from passive activities (523-537)
           a) Passive activity is any profit-seeking activity in which the taxpayer doesn’t
               materially participate. Material participation means:
               (1) 500 hours
               (2) You put in most of the work
               (3) 100 hours and no one does more work than you (including the hired help)
               (4) Activity is a significant participation activity and aggregate participation
                    exceeds 500 hours
               (5) You are materially active 5 out of the last 10 years (comes up in the case of
               (6) Personal activity (= professional activity) performed for any 3 years before the
                    current year
               (7) “regular, continuous, and substantial” basis
           b) Rental activity is generally passive unless
                    (a) More than half of the personal services performed in trades or businesses
                        by the taxpayer are performed in real property trades or businesses in
                        which the taxpayer materially participates and
                    (b) The taxpayer performs more than 750 hours of services during the year in
                        real property trades or businesses in which the taxpayer materially
           c) If taxpayer is both a general partner and limited partner in the same
               partnership/venture, all of his gains/losses from that partnership/venture are
               treated the same (active or passive). But even as a general partner, he must still
               materially participate in order to qualify those gains/losses as active.
           d) Exceptions to §469 disallowance
               (1) §469(i) – exception allows a $25,000 deduction for passive rental real estate
                    (a) Requires active conduct/participation (a subjective standard)
                    (b) Phaseout: reduced by 50% of AGI over $100,000
           e) If you sell off your investment, then the suspended losses are freed up completely.
           f) Problems (535)
II. Amount Realized (134-153,165-180
     A. Crane v. Commissioner: Relief/discharge of debt = A/R
        1. Regardless of whether recourse or non-recourse (Commissioner v. Tufts)
        2. But debt discharge for a recourse loan results in an ordinary income; the amount up to
           the basis of the property is treated as a sale (capital gain/loss). With non-recourse
           loans, the entire transaction is treated as a capital gain/loss.
        3. Problems (153)
     B. Use of realized property to satisfy an obligation is income (International Freighting
        Corp. v. Commissioner)
     C. Discharge of Debt (165-180)
        1. United States v. Kirby Lumber – Discharge of debt is income, with the following
           a) Insolvency exception – Taxpayer is insolvent (1000 of assets, 1200 of liabilities).
               Lender (owed 300 by taxpayer) decides to write off 100 of debt. Is there any
               income? Under the strict definition of Kirby Lumber, the answer is yes. But have

          any assets really been freed up? Under the insolvency exception, you will only
          have income from discharge of indebtedness to the extent that you have been
          made solvent (assets have been freed up) afterwards. So, if the lender writes off
          the whole 300 instead, there’s a gain of 200.
      b) Advance on inheritance – Father loans money to son. Son falls on hard times.
          Father decides to forgive the son’s debt. An alternative way to treat this
          transaction is as an advance on the son’s inheritance; we’re treating is as a gift.
      c) Renegotiation of the purchase price – Manufacturer contracts w/ buyer to sell 100
          worth of product. Buyer no longer wants that much and is willing to take only 30
          worth of the product to satisfy the contract. As long as it’s b/w the original buyer
          and original seller, we can change the terms of the deal. Doesn’t apply if the
          buyer assigns the contract to a factor (bank, etc.).
      d) Debt to equity exception – Shareholder forgives the corporation’s debt to him.
          This is treated as a recapitalization of investment in the corporation. It’s a
          conversion from debt to equity.
   2. Zarin – but income is only to the extent that the debt is valid; “discharge” of disputed
      amount is not income
   3. Problems (180)
D. Damages (182-193)
   1. §104
      a) Compensatory damages are excludable
          (1) All compensation sourced in a physical injury is excludable. Applies to lost
              wages as well (lost wages would not be taxable)
          (2) Compensation related to business is taxed or not taxed according to how the
              money would have been treated (e.g., lost profits and goodwill)
      b) Punitive damages are income, unless punitive damages are the only method of
          recovery under state law in a wrongful death action
      c) Accident and health insurance proceeds are fully excludable
      d) Problems (185)
   2. Employer’s reimbursement of employee’s medical expenses: §105
      a) Exclusion allowed only to the extent of actual reimbursement; excess is taxable
      b) Can be used in conjunction w/ §104 (see problem 2B, page 193)
      c) Problems (193)
   3. Contributions made by employer for employee’s accident or health plans are
      excludable: §106
E. Alimony, Child Support, and Property Settlements
   1. §§71 and 215: Alimony (195-208, 214-220))
      a) Definition – Problems (203)
          (1) Cash or cash equivalent (versus stuff – that is property settlement),
          (2) Received by or on behalf of written divorce instrument,
          (3) Not designated as “not alimony,”
          (4) Are not members of the same household as payments are made, and
              (a) If spouses are not yet divorced or legally separated, they can continue to
                  live in the same household
          (5) Obligations cease at death
      b) Consequences

          (1) Payor has an above-the- line deduction
          (2) Recipient has gross income
      c) Indirect payments on behalf of payee can be considered as alimony
          (1) Problems (207)
      d) Excess Alimony: §71(f)(2)
          (1) Income to payor in year 3
          (2) Payee has an above-the- line deduction in year 3
          (3) Problems (204)
   2. §71: Child-Support (212-214)
      a) If payor underpays, payment is first applied to child support. The remainder is
          applied to alimony.
      b) If support payments are reduced based on one of the contingencies below, then
          the amount of the reduction is treated as child support and the rest is alimony
          (1) Child attains a specified age,
          (2) Marries,
          (3) Dies,
          (4) Leaves school, or
          (5) Other similar contingency
      c) Tax implications of child support payments
          (1) Not income to recipient
          (2) No deduction for payor
      d) Problems (214)
   3. §1041: Property Settlement (208-212)
      a) Key issue is if the transfer is made incident to divorce.
          (1) Year 1: Irrebuttable presumption that it is incident to divorce
          (2) Years 2 to 6: Rebuttable presumption that it is incident to divorce
          (3) Years 7 and on: Rebuttable presumption that it is not incident to divorce
      b) If §1041 doesn’t apply, then it’s governed by §1015 (carry-over basis)
      c) Consequences
          (1) Not income to recipient
          (2) No deduction for payor
      d) Problems (212)
F. §72: Annuities (159-164)
   1. Need to apportion each annual payment to basis and interest
   2. If beneficiary lives longer than expected, the additional annual payments are entirely
      income. If the beneficiary dies sooner than expected, he gets to deduct the
      unrecovered basis as a loss.
   3. Problems (163)
G. Non-recognition provisions (877-897)
   1. Like kind transfers (§1031)
      a) Not elective
      b) Applies only to exchange of property held for productive use in a trade or
          business or for investment
      c) Transaction is taxable only to the extent of the boot
      d) Exceptions
          (1) Stock/property held for trade (inventory)

                (2) Stocks, bonds, or notes
                (3) Other securities or indebtedness
                (4) Interests in a partnership
                (5) Certificates of trust or beneficial interests, or
                (6) Choses in action (intangibles)
            e) May turn on applicable state law defining what type of property it is
                (Commissioner v. Crichton)
            f) Sale and leaseback may or may not be like kind (Leslie Co.; Century Electric)
            g) Non-simultaneous transfers – you must
                (1) Identify the replacement property w/i 45 days and
                (2) Complete the exchange w/i 180 days
            h) Problems (897)
       2.   §1033: Involuntary Conversions (899-908) – income is recognizable only to the
            extent that the proceeds from the involuntary conversion exceeds the cost of the
            replacement property
       3.   §121: Gain From the Sale of a Principal Residence (221-226)
            a) Taxpayer can exclude up to $250,000 in gain from the sale of a principal
            b) Requirements
                (1) Must be used for 2 out of the previous 5 years as the principal residence
                (2) Property must be owned and used by taxpayer as principal residence
                (3) If both spouses qualify, excludable amount is $500K
            c) Depreciation deductions reduce the amount of the allowable exclusion
            d) Problems (226)
       4.   §101: Life Insurance Proceeds (155-159)
            a) Life insurance proceeds are completely excluded
            b) If the payout is converted into an annuity, the interest portion of the annual
                payments are taxable as income
            c) If the beneficiary lives longer than expected, he gets to keep the same exclusion
                he had for the previous annual payments. But if the beneficiary dies sooner than
                expected, he doesn’t get to deduct an unrecovered “basis” as a loss (see Problem
                1D, page 158)
            d) Exclusion doesn’t apply when there has been a transfer for valuable consideration,
                except when:
                (1) No gain or loss is recognized (carry-over basis transaction or gift, for
                    example) or
                (2) The insurance policy is transferred to an entity which the insured is involved
                    in ((the insured, a partner of the insured, a partnership that the insured is
                    partner of, or a corporation that the insured is a shareholder of)
            e) Viatical Settlement Provider
                (1) VSP gets no exclusion
                (2) Beneficiary gets the exclusion
            f) Problems (158)
        5.  Transfers b/w spouses or incident to divorce – Problems (131)
III. Basis
     A. General rule is that basis of property shall be its cost (§1012)

      1. Philadelphia Park (118-122)
          a) AB = FMV of asset when it was received
          b) Value of what you gave = value of what you got
          c) Problems (121)
      2. Crane v. Commissioner
          a) Debt incurred in connection w/ the acquisition of the property is treated as dollars
              paid (you get basis today, regardless of whether the debt is recourse or non-
          b) Problems, page 153
              (1) For recourse debts, debt forgiveness = ordinary gain
      3. Fungible products – you can pick and choose which items were sold (you get to pick
          the basis)
   B. Carryover-basis
      1. Gifts (§1015) – Taft v. Bowers (123-129)
          a) Exception when the asset has declined in value from the time donor purchased it;
              use lesser of (only for the purpose of loss)
              (1) FMV
              (2) C/O basis
          b) Explanation
              (1) If donee’s sell price < FMV, then FMV = basis
              (2) If FMV < donee’s sell price < C/O basis, then nothing (no gain, no loss)
          c) Problems (128)
      2. §1041: Transfers b/w spouses and transfers b/w ex-spouses incident to divorce (129-
          a) Problems (131)
          b) Problems (212)
   C. Step-up basis: FMV  AB
      1. §1014: Property acquired from a decedent (131-133)
   D. Adjustments to basis
      1. Improvements
          a) Improvements made by lessor are added to AB
          b) Improvements made by lessee are not added to AB (§1019)
      2. Depreciation deductions reduce basis in that amount (403-415)

Commissioner v. Tufts – no difference b/w recourse and non-recourse debt (debt = dollars)

                                 Definition of Gross Income
Eisner v. Macomber

Glenshaw Glass – income is defined as “undeniable accessions to wealth.”
Illegal gains as income (pg. 63)
Benefit doesn’t have to be in the form of cash to be income (pgs. 66-68)

Allen J. McDonnell

Cesarini – Court follows the Glenshaw Glass holding that income is defined as “undeniable
accessions to wealth.”

Old Colony Trust – control = ownership
Helvering v. Independent Life Insurance Company – imputed income; use of building you own is
not income
Dean v. Commissioner – use of property owned by corporation you own results in income
Douglas (?) – improvements to rental property go into basis (not income)

                             Inte rest-free Loans: §7872 (480-494)
I. Gift Loans
     A. Net income to Lender
        1. Interest = Income
        2. Gift ≠ Deduction
     B. Borrower may get a net deduction
        1. No income (gifts aren’t income)
        2. Deduction? Depends on nature of the indebtedness incurred
II. Non-gift Loans
     A. Employer-Employee (compensation)
        1. No net income to Employer
            a) Interest = Income
            b) Paycheck = Deduction
        2. Employee may or may not have net income
            a) Compensation (returned interest payment) is income
            b) Deduction? Depends on nature of the indebtedness incurred
     B. Corporation-SH (dividend)
        1. Net income to Corporation
            a) Interest = Income
            b) Dividend ≠ Deduction
        2. SH may or may not have net income
            a) Dividend (returned interest payment) is income
            b) Deduction? Depends on nature of the indebtedness incurred
III. Calculating
     A. Demand loan
        1. Yearly interest = Principal x Interest Rate
        2. Gift, Compensation, or Dividend = Yearly interest
     B. Term loan
        1. Yearly interest = [NPV*(1+ Interest Rate)Current Year] – NPV – previous years’ interest
        2. Compensation or Dividend = Principal – NPV
            a) Compensation/Dividend is given to borrower entirely in year 1; no further
                compensation/dividends in subsequent years
IV. Exceptions
     A. $10,000 de minimis exception

      1. Applies to gift loans whenever the aggregate of all interest-free loans falls below
      2. For non- gift loans, exception no longer applies once the aggregate has exceeded
          $10,000; reducing the aggregate of the loans does not take taxpayer out of §7872
   B. Amount of imputed interest from borrower to lender is limited to borrower’s net
      investment income; if net investment income for the year does not exceed $1000, no
      interest is imputed

                                             Capital Gains
I. Definition – A capital gain can arise only (1) out of the sale/exchange (2) of a capital asset.
   Holding requirement (3rd requirement): time that the taxpayer has held the asset
   A. Sale/exchange
      1. Kenan – Beneficiary of a trust was entitled to $5 million at age 50. Trustee chose to
           do so by transferring $5 million worth of stocks. IRS claimed that it was a sale; it’s
           as if trustee sold the stock and gave the proceeds to the taxpayer. On the disposition
           of the assets, the trustee didn’t treat it as a taxable event. Court says that it was the
           use of appreciated property to satisfy an obligation (International Freighting).
   B. Capital asset: §1221
      1. Property held by taxpayer whether or not connected w/ his trade or business except
           the following 8 types of property:
           a) Stock in trade of the taxpayer (inventory). Includes notes and accounts
               receivable generated by the sale of inventory.
           b) Depreciable business assets or real property held for a trade/business
           c) Copyright, intellectual property, trademarks, art IF in possession of creator or
               person it was prepared for
           d) Anything that has C/O basis traceable to #3
           e) Government publications
           f) Any commodities derivative financial instrument held by a commodities dealer
           g) Hedging transactions
           h) Supplies used for business
      2. Examples of capital assets: house, stocks, bonds
           a) Malden v. Commissioner – It’s a fact-specific inquiry. Court seems to be saying
               that you can be firmly entrenched in a never-to-be-realized dream of being a cattle
               rancher and still be considered to be in a different line of business. Furthermore,
               you’re not limited to being exclusively in a single trade or business.
           b) Malat v. Riddell – Taxpayers bought property to build an apartment building. IRS
               is claiming that taxpayer became a developer as in Malden. Decision turns on one
               key word: “primarily”. What does “primarily” mean? IRS says means
               significant. IRS says that one of the key reasons for holding the property was to
               sell it for gain in the future. Taxpayer and court say primarily means principally.
               It’s possible to hold the property for multiple reaso ns, but in order for it to be
               considered inventory, it has to be held primarily for the purpose of being sold to

            c) If you buy and hold a property and don’t make any improvements, the property
                will be treated as a capital asset (assuming you’re not co nsidered a real estate
                developer). What if you do make improvements, as in Malat? We always have
                an eye to selling assets we purchase (stocks, for example). As long as you’re in
                not in the trade or business of selling that asset, you’re just an investor. But as the
                frequency of sales increases, the argument that it’s a sporadic event disappears;
                looks more and more like you’re in the trade/business. Broker can specifically
                earmark particular stocks as investments even though his trade/business is buying
                and selling stock; but if he doesn’t earmark them, they’re presumed to be
    C. Holding requirement: short term vs. long term
       1. 1 year or less = short term capital gain (treated the same as ordinary income)
       2. More than 1 year = long term capital gain
II. Tax implications
    A. Capital losses are generally not deductible, but individuals can take a deduction of up to
       $3000 for capital losses per year. Excess capital losses roll-over just like excess passive
       (not “at risk”) loss.
    B. It’s a 2-step netting process
       1. All long-term items offset long-term items; short-term offsets short-term.
       2. Then, long-term and short-term offset each other. Then, only the net bottom- line gain
            or loss is preserved.
            a) If there are both long-term and short-term capital losses, the $3000 deduction is
                applied to the short-term losses first. The rest is rolled over.

Carryover basis adjustments
+ cash given (debt assigned)
+ AB boot given
+ G recognized
- loss recognized
- cash received (debt relief)
- FMV boot received
New AB of like kind property


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