ITT: Federal Income Tax

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overkillhsc
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Re: ITT: Federal Income Tax

Postby overkillhsc » Fri Nov 29, 2013 12:19 pm

Tiago Splitter wrote:
echooo23 wrote:1. Discharge of indebtedness is gross income - §61(a)(12)

Correct

echooo23 wrote:2. Discharge of tax liability (such as a gift tax) when property is transferred to another is gross income - Diedrich

Didn't read this case but yes if you owe a debt and someone pays it for you you have received income. Known as the Old Colony Rule. But keep in mind that discharge of indebtedness only happens if there is a lender who doesn't get paid back. If someone pays your lender for you, that isn't considered discharge of indebtedness. Regardless, it's still income.

echooo23 wrote:3. Discharge of indebtedness when property is transferred to another is gross income, even where property is subject to depreciation and even where property is valued less than the amount of debt owed - Crane/Tufts:

a. If debt is nonrecourse, 1) include amount of debt into basis, 2) adjust basis by amount of depreciation taken, if any, 3) calculate amount realized by adding amount of debt relief and any other consideration, and 4) calculate gain/loss by taking amount realized and subtracting adjusted basis. So, if A buys Blackacre for $200,000 using $50,000 cash and $150,000 nonrecourse debt, takes $70,000 of depreciation deductions, and then sells Blackacre for $10,000 and assumption of debt. Then, 1) basis equals $50,000 cash investment + $150,000 nonrecourse debt = $200,000; 2) adjusted basis = $200,000 less $70,000 depreciation = $130,000; 3) amount realized = $150,000 debt relief + $10,000 cash consideration = $160,000; 4) Gain = $160,000 amount realized less $130,000 adjusted basis = $30,000

b. If debt is recourse, use bifurcated approach. WHAT IS THE BIFURCATED APPROACH?!?!?!?!

You have nonrecourse right. Just take the amount forgiven, subtract basis, and you have your amount realized. If this is negative, the taxpayer has a nondeductible personal loss. We call that "The Real Estate Bubble."

The bifurcated approach means you have two separated transactions: A disposition of property and taxable forgiveness of debt. Example: Buy a 200k house using 50k plus 150k recourse loan. Loan gets forgiven with no payments being made, house gets sold for 225k. You have a 25k gain on the house, and 150k of income from discharge of indebtedness. This makes intuitive sense; you put in 50k and got 225k at the end, so you should be considered to have 175k of income. "Bifurcated" just makes it sound more complicated


+1. You can also check 1.1001-(2)(a)(2) (stating that amount realized on a property that secures a recourse liability does not include DoD income from 61(a)(12)).

Hutz_and_Goodman
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Re: ITT: Federal Income Tax

Postby Hutz_and_Goodman » Fri Nov 29, 2013 1:10 pm

Just want to say this thread is so useful--happy thanksgiving to everyone contributing/reading.

also, a way to remember the non-recourse/recourse debt discussion above is that it makes sense that the discharge of recourse debt is not included in a TP's income given that for recourse debt the creditor can not only seize the asset but also go after the individual.

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Re: ITT: Federal Income Tax

Postby Hutz_and_Goodman » Mon Dec 02, 2013 3:04 pm

If I buy an egg in a pawn shop because I like the looks of it, then 25 years later a friend, who is a faberge egg expert, tells me its a faberge egg worth $100,000, and I then sell the egg, is it taxed at ordinary rates or long term capital gain rates? Does the result change if I wait a year after I learn of its value before selling?

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SemperLegal
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Re: ITT: Federal Income Tax

Postby SemperLegal » Mon Dec 02, 2013 3:57 pm

Hutz_and_Goodman wrote:If I buy an egg in a pawn shop because I like the looks of it, then 25 years later a friend, who is a faberge egg expert, tells me its a faberge egg worth $100,000, and I then sell the egg, is it taxed at ordinary rates or long term capital gain rates? Does the result change if I wait a year after I learn of its value before selling?


IRS Tax Tip 2011-35, February 18, 2011 wrote:
Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.


So it looks like it would a long-term gain, since all that matters is how long you hold it. Long term capital gains are 15% and short-term capital gains are at ordinary income tax rate (but are still part of a "basket").

However, there is an important exception that might break your hypo, or is a shitty trick from your professor:


IRS-Topic 409 - Capital Gains and Losses wrote:
There are three exceptions where [long-term]capital gains may be taxed at rates greater than 15%:

-The taxable part of a gain from selling Section 1202 qualified small business stock is taxed at a maximum 28% rate.
-Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
-The portion of any unrecaptured Section 1250 gain from selling Section 1250 real property is taxed at a maximum 25% rate.


Hutz_and_Goodman
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Re: ITT: Federal Income Tax

Postby Hutz_and_Goodman » Tue Dec 03, 2013 11:06 am

Hutz_and_Goodman wrote:If I buy an egg in a pawn shop because I like the looks of it, then 25 years later a friend, who is a faberge egg expert, tells me its a faberge egg worth $100,000, and I then sell the egg, is it taxed at ordinary rates or long term capital gain rates? Does the result change if I wait a year after I learn of its value before selling?


This just doesn't make sense to me. I'd love further clarification.

Another hypo:
I go to a Broncos game. They win, and Payton Manning throws his jersey into the crowd and I catch it. He retires the next day and never plays again. The jersey has a FMV of $100k. I wait a few years, hit hard times, and sell it. You're telling me I get LTCG treatment on the sale?

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Tiago Splitter
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Re: ITT: Federal Income Tax

Postby Tiago Splitter » Tue Dec 03, 2013 11:10 am

Hutz_and_Goodman wrote:
Hutz_and_Goodman wrote:If I buy an egg in a pawn shop because I like the looks of it, then 25 years later a friend, who is a faberge egg expert, tells me its a faberge egg worth $100,000, and I then sell the egg, is it taxed at ordinary rates or long term capital gain rates? Does the result change if I wait a year after I learn of its value before selling?


This just doesn't make sense to me. I'd love further clarification.

Another hypo:
I go to a Broncos game. They win, and Payton Manning throws his jersey into the crowd and I catch it. He retires the next day and never plays again. The jersey has a FMV of $100k. I wait a few years, hit hard times, and sell it. You're telling me I get LTCG treatment on the sale?

Look at IRC 1221. The default is that all property is a capital asset. So unless it falls into one of the exceptions, gains will be taxed as capital gains.

overkillhsc
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Re: ITT: Federal Income Tax

Postby overkillhsc » Tue Dec 03, 2013 2:44 pm

Hutz_and_Goodman wrote:
Hutz_and_Goodman wrote:If I buy an egg in a pawn shop because I like the looks of it, then 25 years later a friend, who is a faberge egg expert, tells me its a faberge egg worth $100,000, and I then sell the egg, is it taxed at ordinary rates or long term capital gain rates? Does the result change if I wait a year after I learn of its value before selling?


This just doesn't make sense to me. I'd love further clarification.

Another hypo:
I go to a Broncos game. They win, and Payton Manning throws his jersey into the crowd and I catch it. He retires the next day and never plays again. The jersey has a FMV of $100k. I wait a few years, hit hard times, and sell it. You're telling me I get LTCG treatment on the sale?



Why wouldn't you?

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brotherdarkness
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Re: ITT: Federal Income Tax

Postby brotherdarkness » Tue Dec 03, 2013 3:03 pm

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Last edited by brotherdarkness on Fri Jun 27, 2014 10:05 pm, edited 1 time in total.

Hutz_and_Goodman
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Re: ITT: Federal Income Tax

Postby Hutz_and_Goodman » Tue Dec 03, 2013 3:51 pm

when you are married filing jointly, do you count as one TP or two? I'm assuming the answer is 1.

The reason I ask is that under 26 USC 21 the child care credit is phrased in terms of the taxpayer. So if A has one kid and B has two kids, and they marry, I assume they are treated as a single taxpayer with three kids. Let me know if this is wrong.

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SuperCerealBrah
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Re: ITT: Federal Income Tax

Postby SuperCerealBrah » Tue Dec 03, 2013 4:14 pm

Hutz_and_Goodman wrote:when you are married filing jointly, do you count as one TP or two? I'm assuming the answer is 1.

The reason I ask is that under 26 USC 21 the child care credit is phrased in terms of the taxpayer. So if A has one kid and B has two kids, and they marry, I assume they are treated as a single taxpayer with three kids. Let me know if this is wrong.


You file as 1 but you get to take 2 exemptions (1 for husband and 1 for wife). And as far as the kids, yea I think that is right. Also, the kids are likely dependents so you can add them as exemptions as well. I haven't looked at the child care credit recently, but I am pretty sure there is a phaseout for higher incomes as well.

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hephaestus
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Re: ITT: Federal Income Tax

Postby hephaestus » Wed Dec 04, 2013 11:05 am

Does anyone have any practice exams with multiple choice questions? All of the ones on our exam bank are only the essay portion.

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brotherdarkness
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Re: ITT: Federal Income Tax

Postby brotherdarkness » Wed Dec 04, 2013 6:07 pm

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echooo23
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Re: ITT: Federal Income Tax

Postby echooo23 » Wed Dec 04, 2013 6:23 pm

brotherdarkness wrote:
ImNoScar wrote:Does anyone have any practice exams with multiple choice questions? All of the ones on our exam bank are only the essay portion.


Nope, nothing. If you find some, though, send them this way.


Not MC, but I've found the short hypos from Law In A Flash helpful for quick 1 min drills.

Hutz_and_Goodman
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Re: ITT: Federal Income Tax

Postby Hutz_and_Goodman » Fri Dec 06, 2013 11:55 am

Can something be a capital asset under 1221 but when sold not be subject to capital gain/loss under 165?

I'm trying to understand the third issue in Hormann v. Commissioner. TP inherited a house that he lived in. He then tried to rent it, unsuccessfully. He tried to claim a long-term capital loss on the sale. The court denied this. But it seems like a house has to be a capital asset. So what gives?

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Tiago Splitter
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Re: ITT: Federal Income Tax

Postby Tiago Splitter » Fri Dec 06, 2013 12:01 pm

Hutz_and_Goodman wrote:Can something be a capital asset under 1221 but when sold not be subject to capital gain/loss under 165?

I'm trying to understand the third issue in Hormann v. Commissioner. TP inherited a house that he lived in. He then tried to rent it, unsuccessfully. He tried to claim a long-term capital loss on the sale. The court denied this. But it seems like a house has to be a capital asset. So what gives?

Reading the case brief it appears that the tax court ruled it was his personal residence when he took over the property. You can't deduct losses on personal property unless you entered into the transaction attempting to make a profit. It's a weird case because in the middle he was renting it out and was allowed depreciation deductions, but when he sold it he couldn't deduct the loss because it started out as a personal residence.

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Re: ITT: Federal Income Tax

Postby Hutz_and_Goodman » Fri Dec 06, 2013 12:39 pm

Tiago Splitter wrote:
Hutz_and_Goodman wrote:Can something be a capital asset under 1221 but when sold not be subject to capital gain/loss under 165?

I'm trying to understand the third issue in Hormann v. Commissioner. TP inherited a house that he lived in. He then tried to rent it, unsuccessfully. He tried to claim a long-term capital loss on the sale. The court denied this. But it seems like a house has to be a capital asset. So what gives?

Reading the case brief it appears that the tax court ruled it was his personal residence when he took over the property. You can't deduct losses on personal property unless you entered into the transaction attempting to make a profit. It's a weird case because in the middle he was renting it out and was allowed depreciation deductions, but when he sold it he couldn't deduct the loss because it started out as a personal residence.


Tiago thanks again. I get that but what I don't understand is that 1221 is very inclusive, and above in this thread people have said that if you go to a sports game and catch a home run ball/jersey/whatever, when you sell the item it is treated as a capital asset because none of the exclusions apply. But finding property is not entering into a transaction for profit. So what am I missing?

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Tiago Splitter
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Re: ITT: Federal Income Tax

Postby Tiago Splitter » Fri Dec 06, 2013 12:47 pm

Hutz_and_Goodman wrote:
Tiago Splitter wrote:
Hutz_and_Goodman wrote:Can something be a capital asset under 1221 but when sold not be subject to capital gain/loss under 165?

I'm trying to understand the third issue in Hormann v. Commissioner. TP inherited a house that he lived in. He then tried to rent it, unsuccessfully. He tried to claim a long-term capital loss on the sale. The court denied this. But it seems like a house has to be a capital asset. So what gives?

Reading the case brief it appears that the tax court ruled it was his personal residence when he took over the property. You can't deduct losses on personal property unless you entered into the transaction attempting to make a profit. It's a weird case because in the middle he was renting it out and was allowed depreciation deductions, but when he sold it he couldn't deduct the loss because it started out as a personal residence.


Tiago thanks again. I get that but what I don't understand is that 1221 is very inclusive, and above in this thread people have said that if you go to a sports game and catch a home run ball/jersey/whatever, when you sell the item it is treated as a capital asset because none of the exclusions apply. But finding property is not entering into a transaction for profit. So what am I missing?

So the IRS defines a home as a capital asset, but says losses related to personal-use property, such as a home or a car, are not deductible.

http://www.irs.gov/taxtopics/tc409.html

Here's a definition of personal-use property:

https://ttlc.intuit.com/questions/18992 ... e-property

Basically says things you use in your day to day life. A famous home run ball isn't really going to be used unless you are like the kid in sandlot and start actually playing with the ball autographed by Babe Ruth lol. Once you catch the ball you intend to sell it for a profit, so it's like a stock or bond you inherited with no basis. But I'll admit the distinction is a little unclear.

The other thing is that you aren't likely to have losses on baseballs and jerseys and stuff. Those items usually come with a basis of zero or close to zero. And you do have to pay capital gains tax on the gains you make. You just unfortunately can't deduct losses in the event you do have them (EDIT: If it's considered personal use property).
Last edited by Tiago Splitter on Fri Dec 06, 2013 1:31 pm, edited 1 time in total.

Hutz_and_Goodman
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Re: ITT: Federal Income Tax

Postby Hutz_and_Goodman » Fri Dec 06, 2013 1:20 pm

Thanks very much Tiago. This thread is really a great resource.

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brotherdarkness
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Re: ITT: Federal Income Tax

Postby brotherdarkness » Fri Dec 06, 2013 9:36 pm

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stillwater
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Re: ITT: Federal Income Tax

Postby stillwater » Fri Dec 06, 2013 11:27 pm

brotherdarkness wrote:Question about business travel: I have in my notes that, for business travel expenses to be deductible under §162, they must be "reasonable and appropriate." Does this prohibit an employee who is traveling on business from flying first class and staying at a five-star hotel when that employee would be able to fly coach and stay at a Motel 6? Also, my notes are all about the differences between reimbursed and un-reimbursed business expenses incurred by the employee, but what if the employer pays directly (i.e., books the flight/hotel for the employee)? In that case, I presume the business would be able to deduct the cost and, because it's for business purposes, the employee would not have any income?


I heard as for the reasonable and appropriate that it's pretty lenient. In other words, you would have to be insanely profligate to even have someone second-guess it.

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Tiago Splitter
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Re: ITT: Federal Income Tax

Postby Tiago Splitter » Sat Dec 07, 2013 12:05 am

stillwater wrote:
brotherdarkness wrote:Question about business travel: I have in my notes that, for business travel expenses to be deductible under §162, they must be "reasonable and appropriate." Does this prohibit an employee who is traveling on business from flying first class and staying at a five-star hotel when that employee would be able to fly coach and stay at a Motel 6? Also, my notes are all about the differences between reimbursed and un-reimbursed business expenses incurred by the employee, but what if the employer pays directly (i.e., books the flight/hotel for the employee)? In that case, I presume the business would be able to deduct the cost and, because it's for business purposes, the employee would not have any income?


I heard as for the reasonable and appropriate that it's pretty lenient. In other words, you would have to be insanely profligate to even have someone second-guess it.

This is right. Luxury accommodations are part of ordinary and necessary.

Will research second question.

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brotherdarkness
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Re: ITT: Federal Income Tax

Postby brotherdarkness » Sat Dec 07, 2013 12:06 am

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Last edited by brotherdarkness on Fri Jun 27, 2014 10:26 pm, edited 1 time in total.

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hephaestus
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Re: ITT: Federal Income Tax

Postby hephaestus » Sat Dec 07, 2013 12:07 am

Tiago Splitter wrote:
stillwater wrote:
brotherdarkness wrote:Question about business travel: I have in my notes that, for business travel expenses to be deductible under §162, they must be "reasonable and appropriate." Does this prohibit an employee who is traveling on business from flying first class and staying at a five-star hotel when that employee would be able to fly coach and stay at a Motel 6? Also, my notes are all about the differences between reimbursed and un-reimbursed business expenses incurred by the employee, but what if the employer pays directly (i.e., books the flight/hotel for the employee)? In that case, I presume the business would be able to deduct the cost and, because it's for business purposes, the employee would not have any income?


I heard as for the reasonable and appropriate that it's pretty lenient. In other words, you would have to be insanely profligate to even have someone second-guess it.

This is right. Luxury accommodations are part of ordinary and necessary.

Will research second question.

Reimbursements can be deducted by individuals (and corporations) as long as they get reimbursed for no greater than the amount. Taxpayers cannot deduct reimbursements if the arrangement allows the Taxpayer to keep any additional unused funds (like in the case of a flat travel stipend).

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brotherdarkness
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Re: ITT: Federal Income Tax

Postby brotherdarkness » Sat Dec 07, 2013 12:14 am

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hephaestus
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Re: ITT: Federal Income Tax

Postby hephaestus » Sat Dec 07, 2013 12:17 am

brotherdarkness wrote:
ImNoScar wrote:Reimbursements can be deducted by individuals (and corporations) as long as they get reimbursed for no greater than the amount. Taxpayers cannot deduct reimbursements if the arrangement allows the Taxpayer to keep any additional unused funds (like in the case of a flat travel stipend).


The entire reimbursement is non-deductible if any of the reimbursement is for unused funds, not just the amount that wasn't used for the travel?

In any case, my second question was not about business expenses incurred by the employee, but rather the consequences of a corporation directly paying for an employee's travel expenses (no reimbursement involved). I don't remember discussing that in class, but I saw it come up on another professor's practice exam and was curious if the corporation itself could deduct the cost as an ordinary and necessary expense, etc.

From what I recall in class, corporations can deduct it as a 162 ordinary and necessary expense. I'll check my notes for the travel stipend hypo we did.




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