ITT: Federal Income Tax

(Study Tips, Dealing With Stress, Maintaining a Social Life, Financial Aid, Internships, Bar Exam, Careers in Law . . . )
User avatar
InnocuousDiatribe
Posts: 193
Joined: Thu Aug 04, 2011 10:40 pm

Re: ITT: Federal Income Tax

Postby InnocuousDiatribe » Mon Dec 09, 2013 4:34 am

brotherdarkness wrote:
captainwasabi09 wrote:Maybe this is sleep deprivation, but although I know how to figure out whether or not to capitalize an expense, I can't think of what capitalizing an expense even means.


Capitalizing an expense means you don't take an immediate deduction at the end of the year in the entire amount of the asset, but instead either depreciate (if it's a tangible asset) or amortize (if it's an intangible asset) the asset over its useful life. Taxpayers would rather not capitalize because it means waiting to recoup the cost. Tangible assets have their useful lives prescribed by the Code and intangible assets usually have a 17 year useful life (I believe).

Note: capitalizing an asset does not mean it's a capital asset!


15 years for an acquired intangible, S197.

User avatar
captainwasabi09
Posts: 161
Joined: Thu Dec 22, 2011 12:18 am

Re: ITT: Federal Income Tax

Postby captainwasabi09 » Mon Dec 09, 2013 11:49 am

brotherdarkness wrote:
captainwasabi09 wrote:Maybe this is sleep deprivation, but although I know how to figure out whether or not to capitalize an expense, I can't think of what capitalizing an expense even means.


Capitalizing an expense means you don't take an immediate deduction at the end of the year in the entire amount of the asset, but instead either depreciate (if it's a tangible asset) or amortize (if it's an intangible asset) the asset over its useful life. Taxpayers would rather not capitalize because it means waiting to recoup the cost. Tangible assets have their useful lives prescribed by the Code and intangible assets usually have a 17 year useful life (I believe).

Note: capitalizing an asset does not mean it's a capital asset!


Thank you. I got the capitalizing DNE capital asset part, but for some reason I kept getting confused because I didn't realize that if I capitalize a tangible, that means I'll depreciate it. This part makes sense now.

User avatar
brotherdarkness
Posts: 3254
Joined: Thu Nov 08, 2012 8:11 pm

Re: ITT: Federal Income Tax

Postby brotherdarkness » Mon Dec 09, 2013 12:05 pm

.
Last edited by brotherdarkness on Fri Jun 27, 2014 10:49 pm, edited 1 time in total.

overkillhsc
Posts: 20
Joined: Sat Dec 17, 2011 3:17 am

Re: ITT: Federal Income Tax

Postby overkillhsc » Mon Dec 09, 2013 1:00 pm

brotherdarkness wrote:
overkillhsc wrote:
Jsa725 wrote:^^^ yeah, use 1015 to determine the basis if the sister sells.

ETA: if the sale of 20% off is at a loss… is there a tax implication for the employer? can he deduct under §165(f)/1211


I'm guessing you're looking at the old Berkeley test. The test also provides what the boat dealer paid for the boat. Initially my reaction was that the dealer has a loss to the extent that the price the buyer paid was less than the boat dealer's basis.

Then I ran into the possibility that under the holdings of Philly Park and International Freighting Corp, it is possible that the dealer was compensated for the sale of the boat with more than simply money--that is, by the guy at the dealership not bringing a lawsuit. There is some value in not being sued, although it's hard to guess what FMV is, but since we have an arm's length transaction we should be able to presume that the value of the thing exchanged was equal to the value of what was received (the boat.)

As a result of that idea, I ended up being unsure if this was a loss or not. Any input?


Yeah, that's the test I'm looking at. I have a different professor, but he only gave us two old exams so I'm working with what I can get. Anyways, that's a good point about the possibility that the release from liability was compensation. I didn't read either of the cases you cited, but I did read one case where a woman released her husband from liability from something and the court said that there was value in the release from liability but, because they couldn't determine what the value was, they had to go with what the party's had agreed to (there was a transfer of money or property in exchange for the release from liability). So, in this case, I guess you could argue that the company valued the release from liability in an amount at least equal to $1,600?

The actual prompt, in case anyone's interested:

Old Exam wrote:While looking over some new speedboats for sale at "Ed Speedy's Speedboat Showroom", Taxpayer slipped and fell on some oil left on the floor; he was badly "shaken up", bruised, hurt and embarrassed but not seriously injured. Ed Speedy told Taxpayer that, if Taxpayer would refrain from suing the dealership, Taxpayer could purchase any speedboat on the lot for twenty per cent off list price. Taxpayer agreed, and he chose a medium-sized speedboat, one that had a list price of $28,000. Taxpayer wrote out a check for $22,400 and asked the dealer to transfer the 1996 to Taxpayer's sister. The dealer did so. The cost the dealer $24,000.

What are the Federal Income Tax consequences to the dealer, to Taxpayer and to taxpayer's sister?


Just asked my FITI professor about this hypo. He agreed about all the obvious stuff (102, 104, 1015.) Sister has a basis in the full normal sale price of the boat.

He also said that there was not a section 165 loss on the sale of the boat, because the dealer had received non-cash compensation of the amount of the boat's normal sale price (following the arm's-length transaction principle you discussed.) This same rule is why the sister has a basis under 1015 of the full normal sales price--the brother paid the full normal sale price of the boat, once you include the value of not suing, for the boat, and since we are valuing the settlement of lawsuit at the amount of the discount, the discount does not affect the brother's basis through Section 1012, which in turn becomes the sister's basis under 1015.

He also said the boat dealer probably has a Section 162 deduction for the expense of settling the lawsuit.

User avatar
brotherdarkness
Posts: 3254
Joined: Thu Nov 08, 2012 8:11 pm

Re: ITT: Federal Income Tax

Postby brotherdarkness » Mon Dec 09, 2013 1:17 pm

.
Last edited by brotherdarkness on Fri Jun 27, 2014 10:48 pm, edited 1 time in total.

overkillhsc
Posts: 20
Joined: Sat Dec 17, 2011 3:17 am

Re: ITT: Federal Income Tax

Postby overkillhsc » Mon Dec 09, 2013 2:11 pm

Thanks for following up. Would the §162 deduction be the difference between the dealer's cost and selling price or the FMV and selling price?[/quote]

The full difference between FMV and sale price (since the dealer "spent" more than just the difference between basis and cash received, he "spent" the full amount of the discount to the guy who slipped and fell.)

User avatar
brotherdarkness
Posts: 3254
Joined: Thu Nov 08, 2012 8:11 pm

Re: ITT: Federal Income Tax

Postby brotherdarkness » Mon Dec 09, 2013 5:57 pm

.
Last edited by brotherdarkness on Fri Jun 27, 2014 10:48 pm, edited 1 time in total.

User avatar
stillwater
Posts: 3811
Joined: Tue Jun 28, 2011 2:59 pm

Re: ITT: Federal Income Tax

Postby stillwater » Mon Dec 09, 2013 5:59 pm

brotherdarkness wrote:An employee does not have to include income for the free use of athletic facilities so long as the facilities are located on the employer's premises and are used predominately by employees (and their spouses/dependents). Does the employer get to deduct the cost of building/running/maintaining the facilities? I assume the cost of building the facility would be capitalized and depreciated?


yea, they can deduct the costs of doing so if it's on-site.

User avatar
brotherdarkness
Posts: 3254
Joined: Thu Nov 08, 2012 8:11 pm

Re: ITT: Federal Income Tax

Postby brotherdarkness » Mon Dec 09, 2013 6:06 pm

.
Last edited by brotherdarkness on Fri Jun 27, 2014 10:48 pm, edited 1 time in total.

User avatar
stillwater
Posts: 3811
Joined: Tue Jun 28, 2011 2:59 pm

Re: ITT: Federal Income Tax

Postby stillwater » Mon Dec 09, 2013 6:11 pm

brotherdarkness wrote:
stillwater wrote:
brotherdarkness wrote:An employee does not have to include income for the free use of athletic facilities so long as the facilities are located on the employer's premises and are used predominately by employees (and their spouses/dependents). Does the employer get to deduct the cost of building/running/maintaining the facilities? I assume the cost of building the facility would be capitalized and depreciated?


is running a gym ordinary and necessary?

ETA: i dont know anything.


I don't know. I couldn't decide if "ordinary and necessary" was the right question to be asking here (but I couldn't think of anything more appropriate). If you've got the E&E nearby, I'm looking at page 540 where it gives the model answer for part "d" near the top of the page. There's no reference to the Code or Regulations, but it says "[The employer] could deduct the cost of running the facility (e.g., the cost of the lights, etc.). The cost of the bike and weight machine could be capitalized and depreciated by [the employer]."


i googled it and apparently it was part of some statute passed by Congress about Health in the Workplace but dunno where it is in the Code exactly. it sounds like it should appear as some type of fringe benefit

echooo23
Posts: 265
Joined: Tue Jun 08, 2010 11:29 pm

Re: ITT: Federal Income Tax

Postby echooo23 » Mon Dec 09, 2013 9:09 pm

ITT: totally fucked 2Ls who paid no attention all semester ask 11th hour questions about Fed Tax. Help please!

From p. 486 of the E&E:

Question: In year 1, Allen purchased a vacation home on a two-acre lot in FL for $100,000. In year 3, Allen built an addition to the house at a cost of $50,000. In year 5, a hurricane destroyed the house, leaving a two-acre lot with a fair market value of $75,000 (Immediately before the hurricane, the house had a fair market value of $250,000). In year 7, Allen received $100,000 in insurance proceeds for the damage to the house. What are the federal income tax consequences to Allen in year 7?

Answer: Allen's basis in the house is $150,000. In the absence of insurance his loss would be $75,000 ($150,000 - $75,000). After the receipt of the insurance proceeds, Allen has a $25,000 gain ($100,000 - $75,000). Because his entire loss is compensated by insurance, he is not entitled to a §165 casualty loss. The gain is taxed unless converted into similar property. §1033.

WHY?! Isn't the amount of casualty loss the fair market value of the damaged property before casualty less fair market value after, with the loss not exceeding adjusted basis? If so, then fair market before = $250,000. Fair market after = $75,000. Loss is lesser of $175,000 or adjusted basis of $150,000. Loss is $150,000. Minus $100 for each casualty = $149,900. Hypo doesn't say what his AGI is, so no way to compute 10% of it. Assuming he has no income, if he gets reimbursed $100,000, then isn't he still short $49,900, which is deductible?

User avatar
Tiago Splitter
Posts: 15446
Joined: Tue Jun 28, 2011 1:20 am

Re: ITT: Federal Income Tax

Postby Tiago Splitter » Mon Dec 09, 2013 10:16 pm

echooo23 wrote:ITT: totally fucked 2Ls who paid no attention all semester ask 11th hour questions about Fed Tax. Help please!

From p. 486 of the E&E:

Question: In year 1, Allen purchased a vacation home on a two-acre lot in FL for $100,000. In year 3, Allen built an addition to the house at a cost of $50,000. In year 5, a hurricane destroyed the house, leaving a two-acre lot with a fair market value of $75,000 (Immediately before the hurricane, the house had a fair market value of $250,000). In year 7, Allen received $100,000 in insurance proceeds for the damage to the house. What are the federal income tax consequences to Allen in year 7?

Answer: Allen's basis in the house is $150,000. In the absence of insurance his loss would be $75,000 ($150,000 - $75,000). After the receipt of the insurance proceeds, Allen has a $25,000 gain ($100,000 - $75,000). Because his entire loss is compensated by insurance, he is not entitled to a §165 casualty loss. The gain is taxed unless converted into similar property. §1033.

WHY?! Isn't the amount of casualty loss the fair market value of the damaged property before casualty less fair market value after, with the loss not exceeding adjusted basis? If so, then fair market before = $250,000. Fair market after = $75,000. Loss is lesser of $175,000 or adjusted basis of $150,000. Loss is $150,000. Minus $100 for each casualty = $149,900. Hypo doesn't say what his AGI is, so no way to compute 10% of it. Assuming he has no income, if he gets reimbursed $100,000, then isn't he still short $49,900, which is deductible?

I hate to argue with a model answer but it seems you're right. His loss is the lesser of 175k or 150k.

User avatar
brotherdarkness
Posts: 3254
Joined: Thu Nov 08, 2012 8:11 pm

Re: ITT: Federal Income Tax

Postby brotherdarkness » Mon Dec 09, 2013 10:27 pm

.
Last edited by brotherdarkness on Fri Jun 27, 2014 10:48 pm, edited 1 time in total.

User avatar
Tiago Splitter
Posts: 15446
Joined: Tue Jun 28, 2011 1:20 am

Re: ITT: Federal Income Tax

Postby Tiago Splitter » Mon Dec 09, 2013 10:33 pm

brotherdarkness wrote:I had this example flagged, too, because I also got it "wrong."

I have written that, when property appreciates in value, you take the lesser of the adjusted basis in the property or the decline in FMV (§165(h)(2)(A)). So, you'd have a loss of $150,000 if I'm not mistaken (setting aside the $100 knock-off and 10%-of-AGI shit). However, because insurance pays $75,000, doesn't he really only have a loss of $75,000? I don't see how there's a gain here...

Insurance paid 100k and the model answer thinks the loss is 150k (basis) minus 75k (FMV after disaster) for a loss of 75k which would lead to a gain. We all seem to think the loss should be 150k (lesser of 175k or 150k) so there should be no gain and in fact it seems he was undercompensated and should be able to take a $49,900 deduction if his AGI is zero.

User avatar
brotherdarkness
Posts: 3254
Joined: Thu Nov 08, 2012 8:11 pm

Re: ITT: Federal Income Tax

Postby brotherdarkness » Mon Dec 09, 2013 10:37 pm

.
Last edited by brotherdarkness on Fri Jun 27, 2014 10:49 pm, edited 1 time in total.

echooo23
Posts: 265
Joined: Tue Jun 08, 2010 11:29 pm

Re: ITT: Federal Income Tax

Postby echooo23 » Mon Dec 09, 2013 10:43 pm

brotherdarkness wrote:
Tiago Splitter wrote:
brotherdarkness wrote:I had this example flagged, too, because I also got it "wrong."

I have written that, when property appreciates in value, you take the lesser of the adjusted basis in the property or the decline in FMV (§165(h)(2)(A)). So, you'd have a loss of $150,000 if I'm not mistaken (setting aside the $100 knock-off and 10%-of-AGI shit). However, because insurance pays $75,000, doesn't he really only have a loss of $75,000? I don't see how there's a gain here...

Insurance paid 100k and the model answer thinks the loss is 150k (basis) minus 75k (FMV after disaster) for a loss of 75k which would lead to a gain. We all seem to think the loss should be 150k (lesser of 175k or 150k) so there should be no gain and in fact it seems he was undercompensated and should be able to take a $49,900 deduction if his AGI is zero.


Gotcha. Misread the insurance payout. Anyhow, yes, I agree then that his loss should be $150k and that he should be able to take the $49,900 casualty deduction (subject to the AGI threshold). Are casualty losses below-the-line (and therefore also subject to the 2%-of-AGI floor)?


IIRC, below the line itemized deductions are separated into 1) regular itemized deductions and 2) miscellaneous itemized deductions. Miscellaneous itemized deductions must in the aggregate exceed 2% of AGI. Regular itemized deductions need only meet their respective floors, if any. Casualty losses are regular itemized deductions, so are not subject to the 2% AGI floor, but are only deductible to the extent that they exceed 10% of AGI.

User avatar
Tiago Splitter
Posts: 15446
Joined: Tue Jun 28, 2011 1:20 am

Re: ITT: Federal Income Tax

Postby Tiago Splitter » Mon Dec 09, 2013 10:43 pm

brotherdarkness wrote:
Tiago Splitter wrote:
brotherdarkness wrote:I had this example flagged, too, because I also got it "wrong."

I have written that, when property appreciates in value, you take the lesser of the adjusted basis in the property or the decline in FMV (§165(h)(2)(A)). So, you'd have a loss of $150,000 if I'm not mistaken (setting aside the $100 knock-off and 10%-of-AGI shit). However, because insurance pays $75,000, doesn't he really only have a loss of $75,000? I don't see how there's a gain here...

Insurance paid 100k and the model answer thinks the loss is 150k (basis) minus 75k (FMV after disaster) for a loss of 75k which would lead to a gain. We all seem to think the loss should be 150k (lesser of 175k or 150k) so there should be no gain and in fact it seems he was undercompensated and should be able to take a $49,900 deduction if his AGI is zero.


Gotcha. Misread the insurance payout. Anyhow, yes, I agree then that his loss should be $150k and that he should be able to take the $49,900 casualty deduction (subject to the AGI threshold). Are casualty losses below-the-line (and therefore also subject to the 2%-of-AGI floor)?

They aren't subject to 67 but they have their own weird 10% floor.

User avatar
brotherdarkness
Posts: 3254
Joined: Thu Nov 08, 2012 8:11 pm

Re: ITT: Federal Income Tax

Postby brotherdarkness » Mon Dec 09, 2013 10:47 pm

.
Last edited by brotherdarkness on Fri Jun 27, 2014 10:49 pm, edited 1 time in total.

User avatar
Tiago Splitter
Posts: 15446
Joined: Tue Jun 28, 2011 1:20 am

Re: ITT: Federal Income Tax

Postby Tiago Splitter » Mon Dec 09, 2013 10:49 pm

brotherdarkness wrote:
Tiago Splitter wrote:They aren't subject to 67 but they have their own weird 10% floor.


Okay. So they are below-the-line but, unlike normal below the line deductions, they are not subject to the 2%-of-AGI floor (§67)? The $100 knock-off and 10%-of-AGI floor are the only restrictions (presuming the loss satisfies the criteria to be considered a casualty loss? Extraordinary medical expenses are treated the same way, too, yes?

Yep. Medical expenses under 213 are not subject to 67. Echoo explained it in a way I had never thought about but that makes a lot of sense.

Casualty losses and medical expenses are itemized though so if you go with them you lose the standard deduction.

User avatar
stillwater
Posts: 3811
Joined: Tue Jun 28, 2011 2:59 pm

Re: ITT: Federal Income Tax

Postby stillwater » Mon Dec 09, 2013 10:52 pm

brotherdarkness wrote:
Tiago Splitter wrote:They aren't subject to 67 but they have their own weird 10% floor.


Okay. So they are below-the-line but, unlike normal below the line deductions, they are not subject to the 2%-of-AGI floor (§67)? The $100 knock-off and 10%-of-AGI floor are the only restrictions (presuming the loss satisfies the criteria to be considered a casualty loss? Extraordinary medical expenses are treated the same way, too, yes?


Do medical expenses have the same knockoff? I dont remember them having the $100 stipulation. (Med expenses are 10% now right? up from 7.5%?)

User avatar
brotherdarkness
Posts: 3254
Joined: Thu Nov 08, 2012 8:11 pm

Re: ITT: Federal Income Tax

Postby brotherdarkness » Mon Dec 09, 2013 10:57 pm

.
Last edited by brotherdarkness on Fri Jun 27, 2014 10:49 pm, edited 1 time in total.

User avatar
Jsa725
Posts: 2003
Joined: Wed Feb 15, 2012 9:20 pm

Re: ITT: Federal Income Tax

Postby Jsa725 » Mon Dec 09, 2013 11:30 pm

.
Last edited by Jsa725 on Sun Oct 26, 2014 3:57 pm, edited 1 time in total.

jarak01
Posts: 25
Joined: Mon Jun 22, 2009 2:42 pm

Re: ITT: Federal Income Tax

Postby jarak01 » Tue Dec 10, 2013 11:52 am

You have to look at to what extent the house is tax-paid. He's got a basis of 150K and unrealized appreciation of 100k which leads to the 250K FMV.

Then, after the accident, he's got a house worth 75K and an insurance payout of 100K. Thats $175K of assets, to which you compare his original basis. That's where you get the $25k gain. The 100k of unrealized appreciation doesn't lead to a loss because he's never been taxed on it.

To the most recent poster-- you have to take the lesser of those two numbers, but then subtract the basis that he has leftover. Taking the 150k basis and then subtracting the 75k basis that he has leftover gives you the 75k loss. Then, after the 100k insurance payout, you've got $25k of realized gain (provided that he doesn't reinvest it, in which case it wouldn't be recognized).

User avatar
brotherdarkness
Posts: 3254
Joined: Thu Nov 08, 2012 8:11 pm

Re: ITT: Federal Income Tax

Postby brotherdarkness » Tue Dec 10, 2013 11:56 am

.
Last edited by brotherdarkness on Fri Jun 27, 2014 10:49 pm, edited 1 time in total.

jarak01
Posts: 25
Joined: Mon Jun 22, 2009 2:42 pm

Re: ITT: Federal Income Tax

Postby jarak01 » Tue Dec 10, 2013 12:33 pm

But then you'd end up with the same loss whether there is a 75k value left over (as in this case) or if the property is totally destroyed.




Return to “Forum for Law School Students”

Who is online

Users browsing this forum: dlaw7566 and 7 guests